UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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 September 30, 1997.
Class: Common Stock, par value $0.25 per share
Outstanding at September 30, 1997: 1,958,158 shares
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
- ------ ------------ ------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and Due from Banks $ 12,594,000 $ 11,458,000
Federal Funds Sold 13,225,000 18,500,000
------------ ------------
Total Cash and Cash Equivalents 25,819,000 29,958,000
------------ ------------
Securities:
Available-for-sale 31,353,000 27,771,000
Held-to-maturity--Market Value of $50,482,000 for
September 30, 1997, and $47,291,000 for December 31, 1996 50,478,000 47,381,000
------------ ------------
Total Securities 81,831,000 75,152,000
------------ ------------
Loans:
Total Loans 142,509,000 94,264,000
Less:
Unearned Income on Installment Loans 1,792,000 2,247,000
Allowance for Possible Loan Losses 1,290,000 793,000
------------ ------------
Net Loans 139,427,000 91,224,000
------------ ------------
Premises and Equipment 7,136,000 4,437,000
Goodwill 3,217,000 957,000
Accrued Interest Receivable 2,245,000 1,599,000
Real Estate and Other Repossessed Assets 838,000 389,000
Other Assets 2,040,000 2,252,000
------------ ------------
Total Assets $262,553,000 $205,968,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 41,523,000 $ 32,240,000
Interest-bearing Demand Deposits 76,479,000 58,676,000
Interest-bearing Time Deposits 122,277,000 98,659,000
------------ ------------
Total Deposits 240,279,000 189,575,000
Accrued Interest Payable 901,000 951,000
Notes Payable 823,000 240,000
Other Liabilities 499,000 265,000
------------ ------------
Total Liabilities 242,502,000 191,031,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 57,000 135,000
Common Stock 490,000 276,000
Additional Paid-in Capital 13,848,000 9,891,000
Retained Earnings 5,817,000 4,610,000
Unrealized Gain on Available-for-sale Securities 38,000 25,000
Unearned ESOP Shares (199,000) 0
------------ ------------
Total Stockholders' Equity 20,051,000 14,937,000
------------ ------------
Total Liabilities and Stockholders' Equity $262,553,000 $205,968,000
============ =============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Nine-month Period
Quarter Ended September 30, Ended September 30,
--------------------------- -------------------------
1997 1996 1997 1996
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $ 3,166,000 $ 2,008,000 $ 8,999,000 $ 5,894,000
Interest on Securities 1,308,000 1,247,000 4,007,000 3,341,000
Interest on Federal Funds Sold 204,000 247,000 646,000 774,000
----------- ----------- ----------- -----------
Total Interest Income 4,678,000 3,502,000 13,652,000 10,009,000
----------- ----------- ------------ -----------
Interest Expense:
Interest on Deposits 2,188,000 1,679,000 6,401,000 4,671,000
Interest on Notes Payable 16,000 14,000 52,000 51,000
----------- ----------- ----------- -----------
Total Interest Expense 2,204,000 1,693,000 6,453,000 4,722,000
----------- ----------- ----------- -----------
Net Interest Income 2,474,000 1,809,000 7,199,000 5,287,000
Provision for Loan Losses 150,000 40,000 210,000 161,000
----------- ----------- ----------- -----------
Net Interest Income After
Provision for Loan Losses 2,324,000 1,769,000 6,989,000 5,126,000
----------- ----------- ----------- -----------
Noninterest Income:
Service Charges 417,000 335,000 1,156,000 929,000
Trust Fees 51,000 48,000 145,000 144,000
Other Income 24,000 19,000 77,000 71,000
----------- ----------- ----------- -----------
Total Noninterest Income 492,000 402,000 1,378,000 1,144,000
----------- ----------- ----------- -----------
Noninterest Expenses:
Salaries and Employee Benefits 1,011,000 777,000 2,936,000 2,294,000
Net Occupancy Expense 226,000 195,000 638,000 540,000
Equipment Expense 211,000 171,000 627,000 492,000
Stationery, Printing and Supplies Expense 114,000 71,000 298,000 211,000
Professional Fees 82,000 64,000 264,000 204,000
Goodwill Amortization 59,000 17,000 160,000 29,000
Net Cost (Revenues) Applicable to Real
Estate and Other Repossessed Assets 22,000 (18,000) (19,000) (16,000)
Other Expenses 393,000 336,000 1,172,000 932,000
----------- ----------- ----------- -----------
Total Noninterest Expenses 2,118,000 1,613,000 6,076,000 4,686,000
----------- ----------- ----------- -----------
Income Before Federal Income Taxes 698,000 558,000 2,291,000 1,584,000
Federal Income Taxes 148,000 189,000 686,000 538,000
----------- ----------- ----------- -----------
Net Income $ 550,000 $ 369,000 $ 1,605,000 $ 1,046,000
=========== =========== =========== ===========
Preferred Stock Dividends $ 7,000 $ 14,000 $ 35,000 $ 48,000
=========== =========== =========== ===========
Net Income Available to Common Stockholders $ 543,000 $ 355,000 $ 1,570,000 $ 998,000
=========== =========== =========== ===========
Primary Earnings per Common Share
Available to Common Stockholders $ 0.27 $ 0.26 $ 0.86 $ 0.74
=========== =========== =========== ===========
Fully Diluted Earnings Per Common Share
Available to Common Stockholders $ 0.26 $ 0.22 $ 0.79 $ 0.62
=========== =========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,605,000 $ 1,046,000
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Deferred Federal Income Tax Expense 346,000 222,000
Depreciation and Amortization 534,000 299,000
Provision for Loan Losses 210,000 161,000
Loss on Sale of Available-for-sale Securities 0 12,000
Gain on Sale of Held-to-maturity Securities 0 (2,000)
Gains on Sale of Real Estate and Other Repossessed Assets (64,000) (42,000)
Writedown of Real Estate and Other Repossessed Assets 2,000 19,000
Increase in Accrued Interest Receivable (229,000) (119,000)
Decrease in Other Assets 470,000 213,000
Decrease in Accrued Interest Payable (228,000) (121,000)
Increase (Decrease) in Other Liabilities (77,000) 224,000
------------ ------------
Net Cash Provided by Operating Activities 2,569,000 1,912,000
------------ ------------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 6,939,000 3,572,000
Proceeds from Maturities of Held-to-maturity Securities 11,024,000 16,741,000
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) (20,594,000)
Purchases of Held-to-maturity Securities (9,055,000) (28,664,000)
Net Increase in Loans (9,054,000) (4,363,000)
Additions to Premises and Equipment (296,000) (709,000)
Proceeds from Sales of Premises and Equipment 0 94,000
Proceeds from Sales of Real Estate and Other Repossessed Assets 1,022,000 655,000
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 (6,000,000) (17,035,000)
------------ ------------
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits (2,900,000) 2,917,000
Proceeds from Notes Payable 1,300,000 0
Repayment of Notes Payable (2,806,000) (276,000)
Net Proceeds from Issuance of Equity Securities 4,004,000 0
Payment of Cash Dividends (301,000) (190,000)
Payment for Fractional Shares in Stock Dividend (5,000) 0
------------ ------------
Net Cash Provided by (Used in) Financing Activities (708,000) 2,451,000
------------ ------------
Net Decrease in Cash and Cash Equivalents (4,139,000) (12,672,000)
Cash and Cash Equivalents at Beginning of Period 29,958,000 34,759,000
------------ ------------
Cash and Cash Equivalents at End of Period $ 25,819,000 $ 22,087,000
============ ============
Cash Paid During the Period for:
Interest $ 6,681,000 $ 4,760,000
Federal Income Taxes 550,000 298,000
Noncash Investing Activities:
Additions to Real Estate and Other Repossessed Assets Through Foreclosures $ 1,050,000 $ 619,000
Sales of Real Estate and Other Repossessed Assets Financed with Loans 97,000 107,000
Increase (Decrease) in Unrealized Gain/Loss on Available-for-sale Securities,
Net of Tax 13,000 (91,000)
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
-5-
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
For information with regard to significant accounting
policies, reference is made to Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K for the
year ended December 31, 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.
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 accounting 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 $0.28
and $0.87 for the quarter and nine-month period ended September
30, 1997, respectively, and $0.26 and $0.74 for the quarter and
nine-month period ended September 30, 1996, respectively.
Diluted earnings per share would have been $0.26 and $0.79 for
the quarter and nine-month period ended September 30, 1997, and
$0.22 and $0.62 for the quarter and nine-month period ended
September 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.
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"). FAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose
financial statements. FAS 130 requires that all items that are
required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
FAS 130 does not require a specific format for the financial
statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that
financial statement. FAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes
is required.
-6-
<PAGE>
Management believes that the adoption of these pronouncements
will not have a material impact on the financial statements of the
Company.
(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 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 nine months of 1997 and 1996 totaled $346,000 and $222,000,
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>
Nine-month Period
Quarter Ended September 30, Ended September 30,
--------------------------- ---------------------
1997 1996 1997 1996
----------- ----------- ---------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net interest income $ 2,474 $ 2,422 $ 7,370 $ 7,138
Net income 550 477 1,429 1,388
Primary earnings per share 0.27 0.26 0.77 0.77
Fully diluted earnings per share 0.26 0.23 0.70 0.66
</TABLE>
The pro forma amounts for net income and primary and fully
diluted earnings per share for the nine-month period ended
September 30, 1997, are less than the amounts reported herein as
a result of certain adjustments recorded by Crown Park prior to
the acquisition.
-7-
<PAGE>
(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 September 30, 1997. The Note has 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 September 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
September 30, 1997, and December 31, 1996. The balance of the
Note was reduced to $150,000 on October 23, 1997.
The Bank also had a $500,000 note payable to one former
stockholder of Crown Park, which originated as a result of that
acquisition. The note was payable in five equal annual principal
payments of $100,000 on January 28 of each year. Interest was
payable quarterly at the 26-week Treasury Bill rate plus 2%
(7.15% at September 30, 1997), adjustable quarterly. The note
was unsecured and was able to be repaid with no penalty in whole
or in part at any time by the Bank. The note was paid off on
October 9, 1997.
In addition, at September 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
decreased the valuation allowance relating to Peoples National
and The Winters State Bank, Winters, Texas ("Winters State"),
which was acquired in 1993, by $112,000 during the third quarter
of 1997 based on the Company's trend of positive operating
results. 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 nine-month periods ended September 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 September 30, 1997 and 1996, was
1,947,000 and 1,388,000 shares, respectively. The weighted
average common shares outstanding used in computing fully diluted
earnings per common share for the quarters ended September 30,
1997 and 1996, was 2,080,000 and 1,698,000 shares, respectively.
The weighted average common shares outstanding used in computing
primary earnings per common share for the first nine months of
1997 and 1996 was 1,817,000 and 1,354,000 shares, respectively.
The weighted
-8-
<PAGE>
average common shares outstanding used in computing fully diluted
earnings per common share for the first nine months of 1997 and
1996 was 2,036,000 and 1,997,000 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 September 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 September 30,
1997, a total of $199,000, or 17,461 shares, are considered to be
unearned.
(9) Subsequent Events
Subsequent to September 30, 1997, holders of a total of 128
shares of the Company's Series C Preferred Stock converted such
shares into 2,940 shares of Common Stock. As of the date of
filing of this report, the Company had 5,590 shares of Series C
Preferred Stock and 1,961,097 shares of Common Stock issued and
outstanding.
The Bank has received regulatory approval to open four
additional full-service branches, two in Abilene and two in
Odessa, to be located in Albertson's supermarkets. One branch in
Abilene and one branch in Odessa opened during the last two weeks
in October 1997. The remaining two branches are scheduled to
open in the first half of 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, 1999.
-9-
<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 September 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"). At September
30, 1997, the Bank operated full-service banking locations in the
West Texas cities of Abilene (two locations), Lubbock, Odessa
(two 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
Bank 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.
As noted in "Note 9: Subsequent Events," in October 1997
the Bank opened two additional full-service branches, one in
Abilene and one in Odessa, located in Albertson's supermarkets,
which brings the Bank's total number of full-service banking
locations to ten.
RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition
at September 30, 1997, and December 31, 1996, and results of
operations for each of the quarters and nine-month periods ended
September 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 September 30, 1997,
amounted to $550,000 ($0.27 primary earnings per common share)
compared to net income of $369,000 ($0.26 primary earnings per
common share) for the quarter ended
-10-
<PAGE>
September 30, 1996. Net income for the nine-month period ended
September 30, 1997, was $1,605,000 ($0.86 primary earnings per
common share) compared to net income of $1,046,000 ($0.74 primary
earnings per common share) for the nine-month period ended
September 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.
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 $2,474,000 for the third
quarter of 1997, an increase of $665,000, or 36.8%, from the
third quarter of 1996. Net interest income for the third quarter
of 1996 was $1,809,000. Net interest income for the first nine
months of 1997 was $7,199,000, an increase of $1,912,000, or
36.2%, from net interest income of $5,287,000 for the first nine
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 4.16%
and 4.11% for the third quarter and first nine months of 1997,
respectively, compared to 3.88% and 3.97% for the third quarter
and first nine 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 September 30, 1997, approximately $30,799,000, or 21.9%,
of the Company's total loans, net of unearned income, were tied
to fluctuations in the prime interest rate. This amount
represents 39.7% of the Company's loans, excluding loans to
individuals which are almost exclusively fixed rate in nature.
Average rates paid for various types of deposits, particularly
certificates of deposit, remained relatively stable for the first
nine months of 1997, when compared to the first nine months of
1996. For example, the average rate paid by the Company for
certificates of deposit of $100,000 or more increased slightly
from 5.43% for the first nine months of 1996 to 5.49% for the
first nine months of 1997. The average rate paid for
certificates of deposit less than $100,000 decreased from 5.39%
during the first nine months of 1996 to 5.33% during the first
nine months of 1997. Rates on other types of deposits, such as
interest-bearing demand, savings and money market deposits,
increased from an average of 2.38% during the first nine months
of 1996 to an average of 2.67% during the first nine months 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 nine-month periods ended
September 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 September 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) $ 138,159 $ 3,166 9.17% $ 86,000 $ 2,008 9.34%
Securities (3) 85,431 1,310 6.13 82,301 1,247 6.06
Federal funds sold 14,557 204 5.61 18,261 247 5.41
--------- --------- ------ ---------- --------- ------
Total interest-earning assets 238,147 4,680 7.86 186,562 3,502 7.51
--------- --------- ------ ---------- --------- ------
Noninterest-earning assets:
Cash and due from banks 11,344 6,930
Premises and equipment 7,150 4,525
Goodwill 3,311 982
Accrued interest receivable
and other assets 4,930 4,519
Allowance for possible loan losses (1,232) (787)
--------- ----------
Total noninterest-earning assets 25,503 16,169
--------- ----------
Total assets $ 263,650 $ 202,731
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 77,794 $ 522 2.68% $ 59,097 $ 368 2.49%
Time deposits 122,419 1,666 5.44 97,574 1,311 5.37
--------- --------- ------ ---------- --------- ------
Total interest-bearing deposits 200,213 2,188 4.37 156,671 1,679 4.29
Notes payable 823 16 7.78 584 14 9.59
--------- -------- ------ ---------- --------- ------
Total interest-bearing liabilities 201,036 2,204 4.38 157,255 1,693 4.31
--------- -------- ------ ---------- --------- ------
Noninterest-bearing liabilities:
Demand deposits 40,954 29,883
Accrued interest payable and
other liabilities 1,784 1,165
--------- ----------
Total noninterest-bearing liabilities 42,738 31,048
--------- ----------
Total liabilities 243,774 188,303
Stockholders' equity 19,876 14,428
--------- ----------
Total liabilities and
stockholders' equity $ 263,650 $ 202,731
========= ==========
Net interest income $ 2,476 $ 1,809
========== =========
Interest rate spread(4) 3.48% 3.20%
====== ======
Net interest margin(5) 4.16% 3.88%
====== ======
</TABLE>
______________________________
(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 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.
-12-
<PAGE>
<TABLE>
<CAPTION>
Nine-month Period Ended September 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) $130,613 $ 8,999 9.19% $ 84,212 $ 5,894 9.33%
Securities(3) 87,563 4,010 6.11 74,134 3,341 6.01
Federal funds sold 15,731 646 5.48 19,177 774 5.38
-------- -------- ------ -------- --------- ------
Total interest-earning assets 233,907 13,655 7.78 177,523 10,009 7.52
-------- -------- ------ -------- --------- ------
Noninterest-earning assets:
Cash and due from banks 10,317 7,128
Premises and equipment 6,798 4,407
Goodwill 3,092 597
Accrued interest receivable
and other assets 5,020 4,544
Allowance for possible loan losses (1,189) (841)
-------- --------
Total noninterest-earning assets 24,038 15,835
-------- --------
Total assets $257,945 $193,358
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 75,615 $ 1,513 2.67% $ 57,147 $ 1,021 2.38%
Time deposits 121,178 4,888 5.38 90,108 3,650 5.40
-------- -------- ------ -------- --------- ------
Total interest-bearing deposits 196,793 6,401 4.34 147,255 4,671 4.23
Notes payable 847 52 8.19 662 51 10.27
-------- -------- ------ -------- --------- ------
Total interest-bearing liabilities 197,640 6,453 4.35 147,917 4,722 4.26
-------- -------- ------ -------- --------- ------
Noninterest-bearing liabilities:
Demand deposits 39,865 30,086
Accrued interest payable and
other liabilities 1,495 1,131
-------- --------
Total noninterest-bearing liabilities 41,360 31,217
-------- --------
Total liabilities 239,000 179,134
Stockholders' equity 18,945 14,224
-------- --------
Total liabilities and
stockholders' equity $257,945 $193,358
======== ========
Net interest income $ 7,202 $ 5,287
======== ========
Interest rate spread(4) 3.43% 3.26%
====== ======
Net interest margin(5) 4.11% 3.97%
====== ======
</TABLE>
______________________________
(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 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.
-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 Nine-month Periods Ended
September 30, 1997 vs. 1996 (1) September 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) $ 1,196 $ (38) $ 1,158 $ 3,194 $ (89) $ 3,105
Securities (3) 48 15 63 613 56 669
Federal funds sold (52) 9 (43) (142) 14 (128)
------- ------ -------- -------- ------ -------
Total interest income 1,192 (14) 1,178 3,665 (19) 3,646
------- ------ -------- -------- ------ -------
Interest-bearing liabilities:
Deposits:
Demand, savings and money
market deposits 124 30 154 358 134 492
Time deposits 338 17 355 1,252 (14) 1,238
------ ------- --------- -------- ------ -------
Total interest-bearing deposits 462 47 509 1,610 120 1,730
Notes payable 5 (3) 2 13 (12) 1
------ ------- --------- -------- ------ -------
Total interest expense 467 44 511 1,623 108 1,731
------ ------- --------- -------- ------ -------
Increase (decrease) in net interest income $ 725 $ (58) $ 667 $ 2,042 $ (127) $ 1,915
====== ======= ========= ======== ====== =======
</TABLE>
______________________________
(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 is
provided on a fully taxable-equivalent basis assuming a tax
rate of 34%.
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 nine-month period ended September 30, 1997,
were $150,000 and $210,000, respectively, compared to $40,000 and
$161,000 for the quarter and nine-month period ended September
30, 1996, respectively. These represent increases of $110,000 and
$49,000, respectively. The increased provision during the third
quarter of 1997 was a result of a charge-off of $50,000 on a loan
at the Bank's Lubbock branch which was in settlement of
litigation inherited from prior management at Crown Park and due
to the continued loan growth, primarily at the Bank's Lubbock and
San Angelo branches. 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 $90,000, or 22.4%, from
$402,000 during the third quarter of 1996 to $492,000 during the
third quarter of 1997. Noninterest income also increased
$234,000, or 20.5%, from $1,144,000 for the first nine months of
1996 to $1,378,000 for the first nine 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 $82,000, from $335,000
during the third quarter of 1996 to $417,000 during the third
quarter of 1997, a 24.5% increase, and increased $227,000, or
24.4%, from $929,000 for the first nine months of 1996 to
$1,156,000 for the first nine 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 $3,000, or 6.3%, from $48,000 during the third
quarter of 1996 to $51,000 during the same period in 1997, but
only increased $1,000, or 0.7%, from $144,000 for the first nine
months of 1996 to $145,000 for the first nine 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, bankcard royalty income, check printing income and
other sources of miscellaneous income. Other income increased
$5,000, or 26.3%, from $19,000 during the third quarter of 1996
to $24,000 during the third quarter of 1997, and increased
$6,000, or 8.5%, from $71,000 for the first nine months of 1996
to $77,000 for the corresponding period in 1997 due to a $7,000
positive adjustment during 1996 relating to the acquisition of
Peoples National and a recovery during 1996 of $9,000 in legal
fees previously expensed in connection with a loan participation.
These amounts were partially offset by a $16,000 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 $505,000, or 31.3%, from
$1,613,000 during the third quarter of 1996 to $2,118,000 during
the third quarter of 1997 and increased $1,390,000, or 29.7%,
from $4,686,000 during the first nine months of 1996 to
$6,076,000 during the first nine months of 1997. Noninterest
expenses for the quarter and nine-month period ended September
30, 1997, were higher than the same periods for 1996 primarily as
a result of the acquisition of Crown Park in January 1997 that
accounted for over 80% of the increase.
Salaries and employee benefits rose $234,000, or 30.1%, from
$777,000 for the third quarter of 1996 to $1,011,000 for the
corresponding period of 1997, and increased $642,000, or 28.0%,
from $2,294,000 for the nine-month period ended September 30,
1996, to $2,936,000 for the corresponding period of 1997.
Approximately 80% of the year-to-date increase was a result of
the acquisition of Crown Park in January 1997.
Net occupancy expense increased $31,000, or 15.9%, from
$195,000 for the third quarter of 1996 to $226,000 for the same
period in 1997, and increased $98,000, or 18.1%, from $540,000
for the first nine months of 1996 to $638,000 for the first nine
months of 1997. The year-to-date increase is entirely due to the
acquisition of Crown Park.
Equipment expense increased from $171,000 for the third
quarter of 1996 to $211,000 for the corresponding period in 1997,
representing an increase of $40,000, or 23.4%. These expenses
also increased $135,000, or 27.4%, from $492,000 for the first
nine months of 1996 to $627,000 for the first nine months of
1997. Approximately two-thirds of the year-to-date increase is a
result of the acquisition of Crown Park.
Stationery, printing and supplies expense increased $43,000,
or 60.6%, from $71,000 for the third quarter of 1996 to $114,000
for the third quarter of 1997, and increased $87,000, or 41.2%,
from $211,000 for the first nine months of 1996 to $298,000 for
the first nine months of 1997. Approximately 64% of the year-to-
date increase is due to the acquisition noted above.
-15-
<PAGE>
Professional fees, which include legal and accounting fees,
increased $18,000, or 28.1%, from $64,000 during the third
quarter of 1996 to $82,000 during the third quarter of 1997, and
increased $60,000, or 29.4%, from $204,000 during the first nine
months of 1996 to $264,000 for the corresponding period of 1997.
The increases were due exclusively 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 $42,000, or 247.1%, from
$17,000 for the third quarter of 1996 to $59,000 for the third
quarter of 1997, and increased $131,000, or 451.7%, from $29,000
for the first nine months of 1996 to $160,000 for the first nine
months of 1997. Amortization expense of goodwill related to the
acquisitions of Coastal Banc - San Angelo and Crown Park is
$12,000 and $41,000, 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. The Company recorded net costs of $22,000 for the third
quarter of 1997 compared to net revenues of $18,000 for the
corresponding period of 1996. The Company recorded net revenues
of $19,000 for the first nine months of 1997, compared to net
revenues of $16,000 for the first nine months of 1996. 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, which were partially
offset by increased expenses associated with repossessed
automobiles, particularly at the Lubbock branch, during the third
quarter of 1997.
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 $57,000, or 17.0%, from $336,000 during the third
quarter of 1996 to $393,000 during the third quarter of 1997, and
increased $240,000, or 25.8%, from $932,000 for the first nine
months of 1996 to $1,172,000 for the first nine months of 1997.
Approximately 64% of the year-to-date increase is due to the
acquisition of Crown Park.
Federal Income Taxes
- --------------------
The Company accrued $148,000 and $189,000 in federal income
taxes in the third quarter of 1997 and 1996, respectively, and
accrued $686,000 and $538,000 in federal income taxes for the
first nine months of 1997 and 1996, respectively. The amount of
federal income tax expense for the third quarter and first nine
months of 1997 was reduced by $112,000 as a result of a reduction
made in the Company's deferred tax valuation allowance relating
to Peoples National and Winters State based on the Company's
trend of positive operating results.
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 $56,585,000, or 27.5%, from
$205,968,000 at December 31, 1996, to $262,553,000 at September
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. As a result of a reduction in deposits at the
Bank's Lubbock branch, total assets of the Company have decreased
since the date of acquisition of Crown Park.
-16-
Cash and Cash Equivalents
- -------------------------
The amount of cash and cash equivalents decreased
$4,139,000, or 13.8%, from $29,958,000 at December 31, 1996, to
$25,819,000 at September 30, 1997, due to an increase in loan
volume and a decrease in deposits during the first nine months of
1997, both primarily at the Bank's Lubbock branch.
Securities
- ----------
Securities increased $6,679,000, or 8.9%, from $75,152,000
at December 31, 1996, to $81,831,000 at September 30, 1997. The
increase in 1997 is due to the acquisition of Crown Park, which
had $9,742,000 in securities at the date of acquisition. Such
increase was partially offset by a subsequent decrease due to
increased loan volume noted below.
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 $31,353,000 are classified as available-for-
sale and are carried at fair value at September 30, 1997.
Securities totaling $50,478,000 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 September 30, 1997, the book value of U.S.
Treasury and other U.S. Government agency securities so pledged
amounted to $11,147,000, or 13.6% 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>
September 30, 1997 December 31, 1996
------------------ ------------------
Amount % Amount %
---------- ------ ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $ 32,037 39.1% $ 35,143 46.8%
Obligations of other U.S. Government
agencies and corporations 38,589 47.2 29,928 39.8
Mortgage-backed securities 10,446 12.8 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 $ 81,831 100.0% $ 75,152 100.0%
========= ====== ========== ======
Total market value of securities $ 81,835 $ 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.
-17-
<PAGE>
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at September 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.
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at September 30, 1997 Amount Value Value Yield
- -------------------------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $ 25,000 $ 24,974 $ 24,987 5.87%
After one but within five years 7,000 7,063 7,063 5.86
--------- --------- --------- --------
Total U.S. Treasury securities 32,000 32,037 32,050 5.87
--------- --------- --------- --------
Obligations of other U.S. Government
agencies and corporations:
Within one year 500 497 497 6.94
After one but within five years 38,100 38,092 38,037 6.38
--------- -------- --------- --------
Total obligations of U.S. Government
agencies and corporations 38,600 38,589 38,534 6.39
--------- -------- --------- --------
Mortgage-backed securities 10,280 10,446 10,485 6.29
--------- -------- --------- --------
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 175 175 182 8.49
--------- -------- --------- --------
Total obligations of states and political
subdivisions 175 175 182 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 $ 81,639 $ 81,831 $ 81,835 6.16%
========= ======== ========= ========
</TABLE>
Loan Portfolio
- --------------
Total loans, net of unearned income, increased $48,700,000,
or 52.9%, from $92,017,000 at December 31, 1996, to $140,717,000
at September 30, 1997. The increase during the first nine months
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.
-18-
<PAGE>
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 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 September 30, 1997, the Company
had approximately $49,299,000, net of unearned income, of this
type of loan outstanding.
The following table presents the Company's loan balances at
the dates indicated separated by loan types.
September 30, December 31,
1997 1996
---------- ------------
(In thousands)
Loans to individuals $ 64,907 $ 43,927
Real estate loans 43,608 26,233
Commercial and industrial loans 28,403 21,478
Other loans 5,591 2,626
---------- ----------
Total loans 142,509 94,264
Less unearned income 1,792 2,247
---------- ----------
Loans, net of unearned income $ 140,717 $ 92,017
========== ==========
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 September 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 September 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 September 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
-------- ------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans $17,894 $18,181 $ 7,533 $ 43,608
Commercial and industrial loans 9,785 14,028 4,590 28,403
Other loans 1,925 2,762 904 5,591
-------- ------- ------- ---------
Total loans $29,604 $34,971 $13,027 $ 77,602
======== ======= ======= =========
With fixed interest rates $17,095 $24,298 $ 5,410 $ 46,803
With variable interest rates 12,509 10,673 7,617 30,799
------- ------- ------- ---------
Total loans $29,604 $34,971 $13,027 $ 77,602
======== ======= ======= =========
</TABLE>
-19-
<PAGE>
Allowance for Possible Loan Losses
- ----------------------------------
Implicit in the Company's lending activities is the fact
that loan losses will be experienced and that the risk of loss
will vary with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. To
reflect the currently perceived risk of loss associated with the
Company's loan portfolio, additions are made to the Company's
allowance for possible loan losses (the "allowance"). The
allowance is created by direct charges against income (the
"provision" for loan losses), and the allowance is available to
absorb possible loan losses. See "Results of Operations -
Provision for Loan Losses" above.
The amount of the allowance equals the cumulative total of
the loan loss provisions made from time to time, reduced by loan
charge-offs, and increased by recoveries of loans previously
charged off. The Company's allowance was $1,290,000, or 0.92% of
loans, net of unearned income, at September 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 $124,000 in net loan recoveries during the first quarter
of 1997. Recoveries on five previously charged off loans, the
largest of such recoveries being $108,000, accounted for
$250,000, or 83.1%, of total recoveries during the first nine
months of 1997. Recoveries during the third quarter and first
nine months of 1997 were $16,000 and $301,000, respectively.
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 $204,000 and $409,000 in loans
during the third quarter and first nine months of 1997,
respectively. Charge-offs of four loans accounted for $101,000,
or 24.7%, of total charge-offs for the first nine months of 1997.
All but $16,000 of the remaining $308,000 in charge-offs were
installment loans, the greatest majority of which were indirect
installment loans secured by automobiles.
-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 nine-month period
ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended Nine-month Period
September 30, Ended September 30,
---------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Analysis of allowance for possible loan losses:
Balance, beginning of period $ 1,328 $ 796 $ 793 $ 759
Acquisition of subsidiary bank 0 0 395 149
Provision for loan losses 150 40 210 161
---------- -------- ---------- ----------
1,478 836 1,398 1,069
---------- -------- ---------- ----------
Loans charged off:
Loans to individuals 150 40 314 150
Real estate loans 4 0 6 100
Commercial and industrial loans 50 0 85 58
Other loans 0 0 4 0
---------- -------- ---------- ----------
Total charge-offs 204 40 409 308
---------- -------- ---------- ----------
Recoveries of loans previously charged off:
Loans to individuals 16 8 48 24
Real estate loans 0 0 35 0
Commercial and industrial loans 0 2 218 21
Other loans 0 0 0 0
---------- -------- ---------- ---------
Total recoveries 16 10 301 45
---------- -------- ---------- ---------
Net loan charge-offs 188 30 108 263
---------- -------- ---------- ---------
Balance, end of period $ 1,290 $ 806 $ 1,290 $ 806
========== ======== ========== =========
Average loans outstanding, net of unearned income(1) $ 138,159 $ 86,000 $ 130,613 $ 84,212
========== ======== ========== =========
Ratio of net loan charge-offs to average loans
outstanding, net of unearned income (annualized) 0.54% 0.14% 0.11% 0.42%
==== ==== ==== ====
Ratio of allowance for possible loan losses to total
loans, net of unearned income, at September 30 0.92% 0.89% 0.92% 0.89%
==== ==== ==== ====
</TABLE>
______________________________
(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.
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 September 30, 1997, and December 31, 1996.
<TABLE>
<CAPTION>
September 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 $ 598 44.8% $ 323 45.3%
Real estate loans 51 31.0 128 28.5
Commercial and industrial loans 222 20.2 97 23.3
Other loans 35 4.0 43 2.9
------------- ------------- ------------- -------------
Total allocated 906 100.0% 591 100.0%
============= =============
Unallocated 384 202
------------- -------------
Total allowance for possible loan losses $ 1,290 $ 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 September
30, 1997, substandard loans totaled $998,000, of which $151,000
were loans designated as nonaccrual, 90 days past due or
restructured; doubtful loans totaled $15,000, and loss loans
totaled $74,000, of which $59,000 were designated as nonaccrual
or 90 days past due. Of the loans classified as loss, $50,000
represented loans involved in bankruptcies noted above and
$24,000 represented the unguaranteed portion of three (3) U.S.
Government agency guaranteed loans.
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,
-22-
<PAGE>
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 September 30,
1997, are current and paying in accordance with loan terms. At
September 30, 1997, watch list loans totaled $1,253,000
(including $677,000 of loans guaranteed by U.S. governmental
agencies). At such date, $38,000 of loans on the watch list, all
of which were guaranteed, were designated as nonaccrual loans and
$101,000 of watch list loans were designated as 90 days past due.
In addition, at September 30, 1997, $95,000 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 September 30, 1997, and December 31, 1996.
September 30, December 31,
1997 1996
------------- ------------
(In thousands)
Nonaccrual loans $ 105 $ 82
Accruing loans contractually
past due over 90 days 127 41
Restructured loans 111 73
Real estate and other repossessed
assets 838 389
------------- -----------
Total nonperforming assets $ 1,181 $ 585
============= ===========
The increase in nonperforming assets during the first nine
months of 1997 is primarily 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.
At September 30, 1997, repossessed real estate with an aggregate
book value of $513,000 was under contract to be sold on or before
December 31, 1997.
The gross interest income that would have been recorded
during the second quarter and first nine 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 $5,000 and $10,000, respectively. No interest
income was actually recorded (received) on loans that were on
nonaccrual during the first nine 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
-23-
<PAGE>
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.
Premises and Equipment
- ----------------------
Premises and equipment increased $2,699,000, or 60.8%,
during the first nine months of 1997, from $4,437,000 at
December 31, 1996, to $7,136,000 at September 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 $374,000 recorded on the Company's premises and
equipment during the first nine months of 1997.
Goodwill
- --------
Goodwill increased $2,260,000, or 236.2%, from $957,000 at
December 31, 1996, to $3,217,000 at September 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 $160,000 of goodwill amortization
expense recorded during the first nine 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 $646,000, or 40.4%, from $1,599,000 at
December 31, 1996, to $2,245,000 at September 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 September
30, 1997, $1,198,000, or 53.4%, was interest accrued on
securities and $1,047,000, or 46.6%, 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 September 30, 1997, and December 31,
1996, real estate and other repossessed assets had an aggregate
book value of $838,000 and $389,000, respectively. Real estate
and other repossessed assets increased $449,000, or 115.4%,
during the first nine 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 September 30, 1997,
balance, $391,000 represented three commercial properties,
$270,000 represented twenty-eight (28) repossessed automobiles
and $177,000 represented four residential properties. One
residential property with a book value of $156,000 was sold in
October 1997 and a loss of $6,000 was recognized on such sale.
One commercial property with a book value of $357,000 is under
contract to be sold by December 31, 1997. Based on the
contracted sales price, it is anticipated that a $40,000 gain
should be recognized on such sale.
Other Assets
- ------------
The balance of other assets decreased $212,000, or 9.4%, to
$2,040,000 at September 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 September 30, 1997, is a
net deferred tax asset of $1,401,000.
-24-
<PAGE>
Deposits
- --------
The Bank's lending and investing activities are funded
almost entirely by core deposits, 49.1% of which are demand,
savings and money market deposits at September 30, 1997. Total
deposits increased $50,704,000, or 26.7%, from $189,575,000 at
December 31, 1996, to $240,279,000 at September 30, 1997. The
increase is 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.
The following table presents the average amounts of, and the
average rates paid on, deposits of the Company for the quarters
and nine-month periods ended September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine-month Period Ended September 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 $ 40,954 --% $ 29,883 --% $ 39,865 --% $ 30,086 --%
Interest-bearing demand,
savings and money
market deposits 77,794 2.68 59,097 2.49 75,615 2.67 57,147 2.38
Time deposits of less
than $100,000 84,407 5.40 69,118 5.34 84,654 5.33 62,938 5.39
Time deposits of
$100,000 or more 38,012 5.55 28,456 5.47 36,524 5.49 27,170 5.43
-------- ----- --------- ---- --------- ----- -------- -----
Total deposits $241,167 3.63% $ 186,554 3.60% $ 236,658 3.61% $177,341 3.51%
======== ===== ========= ===== ========= ===== ======== =====
</TABLE>
______________________________
(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.
The maturity distribution of time deposits of $100,000 or
more at September 30, 1997, is presented below.
At September 30, 1997
---------------------
(In thousands)
3 months or less $ 12,641
Over 3 through 6 months 11,410
Over 6 through 12 months 11,709
Over 12 months 2,786
--------
Total time deposits of
$100,000 or more $ 38,546
========
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 September 30,
1997, deposits of $100,000 or more represented approximately
14.7% 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 $50,000, or 5.3%, from
$951,000 at December 31, 1996, to $901,000 at September 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 nine months of 1997.
-25-
<PAGE>
Notes Payable
- -------------
The Company's notes payable increased $583,000, or 242.9%,
from $240,000 at December 31, 1996, to $823,000 at September 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 balance of this note
payable was reduced to $150,000 on October 23, 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.
This note was subsequently paid off on October 9, 1997. These
increases were partially offset by the payment of the second of
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 $234,000, or 88.3%, from $265,000 at
December 31, 1996, to $499,000 at September 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
53.3% at the 90-day interval, 51.7% at the 180-day interval and
49.9% at the 365-day interval at September 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 nine months of 1997 when
compared to the first nine months of 1996, this position normally
produces a lower net interest margin than in a falling interest
rate environment. However, because the Company had $76,479,000
of interest-bearing demand, savings and money market deposits at
September 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 83.6% at September 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 September 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 $ 13,225 $ 13,225 $ 13,225 $ 0 $ 13,225
Securities 10,763 16,011 26,665 55,166 81,831
Loans, net of unearned income 37,060 42,862 54,643 86,074 140,717
----------- ---------- ---------- ---------- ----------
Total interest-earning assets 61,048 72,098 94,533 141,240 235,773
----------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Demand, savings and money market
deposits 76,479 76,479 76,479 0 76,479
Time deposits 37,445 62,146 112,297 9,980 122,277
Notes payable 701 817 819 4 823
----------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 114,625 139,442 189,595 9,984 199,579
----------- ---------- ---------- ---------- ----------
Rate-sensitivity gap(1) $ (53,577) $ (67,344) $ (95,062) $ 131,256 $ 36,194
=========== ========== ========== ========== ==========
Rate-sensitivity ratio(2) 53.3% 51.7% 49.9%
=========== ========== ==========
</TABLE>
______________________________
(1) Rate-sensitive interest-earning assets less rate-sensitive
interest-bearing liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-
sensitive interest-bearing liabilities.
Selected Financial Ratios
- -------------------------
The following table presents selected financial ratios
(annualized) for the quarters and nine-month periods ended
September 30, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended Nine-month Period
September 30, Ended September 30,
------------------------- -------------------------
1997(1) 1996(1) 1997(1) 1996(1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income to:
Average assets 0.83% 0.73% 0.83% 0.72%
Average interest-earning assets 0.92 0.79 0.91 0.79
Average stockholders' equity 11.07 10.23 11.30 9.81
Dividend payout (2) to:
Net income 17.82 14.91 16.57 13.58
Average stockholders' equity 1.97 1.52 1.87 1.33
Average stockholders' equity to:
Average total assets 7.54 7.12 7.34 7.36
Average loans (3) 14.39 16.78 14.50 16.89
Average total deposits 8.24 7.73 8.01 8.02
Average interest-earning assets to:
Average total assets 90.33 92.02 90.68 91.81
Average total deposits 98.75 100.00 98.84 100.10
Average total liabilities 97.69 99.08 97.87 99.10
Ratio to total average deposits of:
Average loans (3) 57.29 46.10 55.19 47.49
Average noninterest-bearing deposits 16.98 16.02 16.84 16.97
Average interest-bearing deposits 83.02 83.98 83.16 83.03
Total interest expense to total interest income 47.11 48.34 47.27 47.18
Efficiency ratio (4) 68.68 73.00 69.20 72.55
</TABLE>
-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.
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 $11,344,000 and
$10,317,000 during the third quarter and first nine months of
1997, respectively, and $6,930,000 and $7,128,000 during the
third quarter and first nine months of 1996, respectively. These
amounts comprised 4.3% and 4.0% of average total assets during
the third quarter and first nine months of 1997, respectively,
and 3.4% and 3.7% of average total assets during the third
quarter and first nine months of 1996, respectively. The average
level of securities and federal funds sold was $99,998,000 and
$103,294,000 during the third quarter and first nine months of
1997, respectively, and $100,562,000 and $93,311,000 during the
third quarter and first nine months of 1996, respectively. The
increases from 1996 to 1997 were primarily due to the
acquisitions of Coastal Banc - San Angelo on May 27, 1996, and
Crown Park on January 28, 1997.
The Bank sold securities classified as available-for-sale
with a book value of $193,000 during the nine-month period ended
September 30, 1997. The Bank sold securities with a book value
of $2,028,000 during the nine-month period ended September 30,
1996. At September 30, 1997, $25,471,000, or 31.1%, of the
Company's securities portfolio, excluding mortgage-backed
securities, matured within one year and $45,155,000, or 55.2%,
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 September 30, 1997,
approximately $54,643,000, or 38.8%, of the Company's loans, net
of unearned income, matured within one year and/or had adjustable
interest rates. Approximately $47,894,000, or 61.7%, 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 third quarter and first nine months of
1997, the Company's average deposits were $241,167,000, or 91.5%
of average total assets, and $236,658,000, or 91.7% of average
total assets, respectively, compared to $186,554,000, or 92.0% of
average total assets, and $177,341,000, or 91.7% of average total
assets, during the third quarter and first nine 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
third quarter and first nine months of 1997 totaled $150,000 and
$650,000, respectively; in turn, Independent Financial paid
dividends to the Company totaling $150,000 and $650,000 during
the same time periods, respectively. Dividends paid by the Bank
to Independent Financial during the third quarter and first nine
months of 1996 were $225,000 and $600,000, respectively; in turn,
Independent Financial paid dividends to the Company totaling
$225,000 and $600,000 during the same time periods of 1996,
respectively. At September 30, 1997, there were approximately
$2,449,000 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 63% and 7%,
respectively, of the Company's cash flow from the Bank during the
third quarter of 1997. These percentages were 56% and 7%,
respectively, for the first nine 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 $339,000 and $980,000 were paid by the Bank to the
Company during the third quarter and first nine months of 1997,
respectively, compared to a total of $200,000 and $642,000 during
the third quarter and the first nine months of 1996,
respectively.
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. It is anticipated that the net operating loss
carryforwards available for regular federal income tax purposes
will also expire during the fourth quarter of 1997, resulting in
the Company having to pay taxes to the federal government at the
statutory rate.
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 $39,000 and $115,000 in
management fees to the Company in the third quarter and first
nine months of 1997, respectively, compared to $41,000 and
$125,000 paid by the Bank during the third quarter and first nine
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 September 30, 1997. The Note has 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
September 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.
-29-
<PAGE>
The loan agreement also requires the Company and the Bank to meet
certain financial ratios, all of which were met at September 30,
1997, and December 31, 1996. The balance of the Note was reduced
to $150,000 on October 23, 1997.
The Bank also had a $500,000 note payable to one former
stockholder of Crown Park, which originated as a result of that
acquisition. The note was payable in five equal annual principal
payments of $100,000 on January 28 of each year. Interest was
payable quarterly at the 26-week Treasury Bill rate plus 2%
(7.15% at September 30, 1997), adjustable quarterly. The note
was unsecured and was able to be repaid with no penalty in whole
or in part at any time by the Bank. The note was paid off on
October 9, 1997.
In addition, at September 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 September 30, 1997, stockholders' equity totaled
$20,051,000, or 7.6% 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 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 September
30, 1997.
The Company September 30, 1997
----------- ----------------------
(Dollars in thousands)
Tier 1 capital:
Common stockholders' equity, excluding
unrealized gain on available-for-sale securities $ 19,772
Preferred stockholders' equity (1) 240
Goodwill (3,217)
---------
Total Tier 1 capital 16,795
---------
Tier 2 capital:
Allowance for possible loan losses (2) 1,290
---------
Total Tier 2 capital 1,290
---------
Total capital $ 18,085
=========
Risk-weighted assets $ 148,100
=========
Adjusted quarterly average assets $ 261,571
=========
-30-
<PAGE>
<TABLE>
<CAPTION>
Regulatory Well-capitalized Actual Ratios at
The Company Minimum Minimum September 30, 1997
--------------- ---------------- ------------------
<S> <C> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 8.00% 11.34%
Total capital to risk-weighted assets ratio 8.00 10.00 12.21
Leverage ratio 3.00 6.00 6.42
The Bank
Tier 1 capital to risk-weighted assets ratio 4.00% 8.00% 10.40%
Total capital to risk-weighted assets ratio 8.00 10.00 11.27
Leverage ratio 3.00 6.00 5.94
</TABLE>
___________________________
(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.
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 September 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 received approval from 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. One branch in Abilene and one branch in Odessa
opened during the last two weeks in October 1997. The remaining
two branches are scheduled to open in the first half of 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.
-31-
<PAGE>
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 October 15, 1997, the Board of Directors
approved the payment of the regular quarterly cash dividend of
$0.05 per share on November 28, 1997, to holders of shares of the
Company's Common Stock on November 14, 1997.
Subsequent to September 30, 1997, holders of a total of 128
shares of the Company's Series C Preferred Stock converted such
shares into 2,940 shares of Common Stock. As of the date of
filing of this report, the Company had 5,590 shares of Series C
Preferred Stock and 1,961,097 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: November 14, 1997 Independent Bankshares, Inc.
(Registrant)
By: /s/Randal N. Crosswhite
-----------------------------
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES, INC. FOR
THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,594,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,225,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,353,000
<INVESTMENTS-CARRYING> 81,831,000
<INVESTMENTS-MARKET> 81,835,000
<LOANS> 140,717,000<F1>
<ALLOWANCE> 1,290,000
<TOTAL-ASSETS> 262,553,000
<DEPOSITS> 240,279,000
<SHORT-TERM> 419,000
<LIABILITIES-OTHER> 1,400,000
<LONG-TERM> 404,000
0
57,000
<COMMON> 490,000
<OTHER-SE> 19,504,000
<TOTAL-LIABILITIES-AND-EQUITY> 262,553,000
<INTEREST-LOAN> 8,999,000
<INTEREST-INVEST> 4,007,000
<INTEREST-OTHER> 646,000
<INTEREST-TOTAL> 13,652,000
<INTEREST-DEPOSIT> 6,401,000
<INTEREST-EXPENSE> 6,453,000
<INTEREST-INCOME-NET> 7,199,000
<LOAN-LOSSES> 210,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,076,000
<INCOME-PRETAX> 2,291,000
<INCOME-PRE-EXTRAORDINARY> 2,291,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,605,000
<EPS-PRIMARY> .86
<EPS-DILUTED> .79
<YIELD-ACTUAL> 4.16
<LOANS-NON> 105,000
<LOANS-PAST> 127,000
<LOANS-TROUBLED> 111,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 793,000
<CHARGE-OFFS> 409,000
<RECOVERIES> 301,000
<ALLOWANCE-CLOSE> 1,290,000
<ALLOWANCE-DOMESTIC> 1,290,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 384,000
<FN>
<F1>NET OF UNEARNED INCOME ON INSTALLMENT LOANS OF 1,792,000.
</FN>
</TABLE>
