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: March 31, 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 March 31, 1997.
Class: Common Stock, par value $0.25 per share
Outstanding at March 31, 1997: 1,420,894 shares
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
-2-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Cash and Cash Equivalents:
Cash and Due from Banks $ 12,650,000 $ 11,458,000
Federal Funds Sold 15,600,000 18,500,000
------------ ------------
Total Cash and Cash Equivalents 28,250,000 29,958,000
------------ ------------
Securities:
Available-for-sale 38,178,000 27,771,000
Held-to-maturity--Market Value of $53,080,000 for
March 31, 1997, and $47,291,000 for December 31, 1996 53,578,000 47,381,000
------------ ------------
Total Securities 91,756,000 75,152,000
------------ ------------
Loans:
Total Loans 134,644,000 94,264,000
Less:
Unearned Income on Installment Loans 2,316,000 2,247,000
Allowance for Possible Loan Losses 1,312,000 793,000
------------ ------------
Net Loans 131,016,000 91,224,000
------------ ------------
Premises and Equipment 7,126,000 4,437,000
Goodwill 3,399,000 957,000
Accrued Interest Receivable 2,178,000 1,599,000
Real Estate and Other Repossessed Assets 849,000 389,000
Other Assets 2,244,000 2,252,000
------------ ------------
Total Assets $266,818,000 $205,968,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 40,134,000 $ 32,240,000
Interest-bearing Demand Deposits 80,277,000 58,676,000
Interest-bearing Time Deposits 125,054,000 98,659,000
------------ ------------
Total Deposits 245,465,000 189,575,000
Accrued Interest Payable 933,000 951,000
Notes Payable 824,000 240,000
Other Liabilities 543,000 265,000
------------ ------------
Total Liabilities 247,765,000 191,031,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 135,000 135,000
Common Stock 355,000 276,000
Additional Paid-in Capital 13,793,000 9,891,000
Retained Earnings 5,019,000 4,610,000
Unrealized Gain (Loss) on Available-for-sale Securities (39,000) 25,000
Unearned ESOP Shares (210,000) 0
------------ ------------
Total Stockholders' Equity 19,053,000 14,937,000
------------ ------------
Total Liabilities and Stockholders' Equity $266,818,000 $205,968,000
============ ============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
-3-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
QUARTERS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans $ 2,731,000 $ 1,960,000
Interest on Securities 1,310,000 971,000
Interest on Federal Funds Sold 255,000 292,000
------------ ------------
Total Interest Income 4,296,000 3,223,000
------------ ------------
Interest Expense:
Interest on Deposits 2,036,000 1,463,000
Interest on Notes Payable 20,000 22,000
------------ ------------
Total Interest Expense 2,056,000 1,485,000
------------ ------------
Net Interest Income 2,240,000 1,738,000
Provision for Loan Losses 0 50,000
------------ ------------
Net Interest Income After Provision for Loan Losses 2,240,000 1,688,000
------------ ------------
Noninterest Income:
Service Charges 346,000 292,000
Trust Fees 46,000 53,000
Other Income 30,000 18,000
------------ ------------
Total Noninterest Income 422,000 363,000
------------ ------------
Noninterest Expenses:
Salaries and Employee Benefits 919,000 758,000
Equipment Expense 202,000 160,000
Net Occupancy Expense 195,000 168,000
Professional Fees 90,000 58,000
Stationery, Printing and Supplies Expense 86,000 63,000
Net Cost Applicable to Real Estate and Other Repossessed Assets 5,000 5,000
Other Expenses 393,000 292,000
------------ ------------
Total Noninterest Expenses 1,890,000 1,504,000
------------ ------------
Income Before Federal Income Taxes 772,000 547,000
Federal Income Taxes 279,000 186,000
------------ ------------
Net Income $ 493,000 $ 361,000
============ ============
Preferred Stock Dividends $ 14,000 $ 17,000
============ ============
Net Income Available to Common Stockholders $ 479,000 $ 344,000
============ ============
Primary Earnings per Common Share Available to Common Stockholders $ 0.36 $ 0.33
============ ============
Fully Diluted Earnings Per Common Share Available to Common Stockholders $ 0.32 $ 0.27
============ ============
See Accompanying Notes to Consolidated Financial Statements.
</TABLE>
-4-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 493,000 $ 361,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Deferred Federal Income Tax Expense 115,000 77,000
Depreciation and Amortization 157,000 100,000
Provision for Loan Losses 0 50,000
Loss on Sale of Investment Securities 0 11,000
Gains on Sales of Real Estate and Other Repossessed Assets (1,000) (11,000)
Writedown of Real Estate and Other Repossessed Assets 2,000 12,000
(Increase) Decrease in Accrued Interest Receivable (162,000) 127,000
(Increase) Decrease in Other Assets 266,000 (164,000)
Decrease in Accrued Interest Payable (196,000) (62,000)
Increase (Decrease) in Other Liabilities (33,000) 68,000
------------ -----------
Net Cash Provided by Operating Activities 641,000 569,000
------------ -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 209,000 23,000
Proceeds from Maturities of Held-to-maturity Securities 6,889,000 10,115,000
Proceeds from Sales of Available-for-sale Securities 0 30,000
Purchases of Available-for-sale Securities (6,046,000) (5,976,000)
Purchases of Held-to-maturity Securities (8,021,000) (14,989,000)
Net Decrease in Loans 372,000 2,001,000
Additions to Premises and Equipment (25,000) (34,000)
Proceeds from Sales of Real Estate and Other Repossessed Assets 332,000 175,000
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 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 (7,026,000) (8,071,000)
----------- -----------
Cash Flows from Financing Activities:
Increase in Deposits 2,286,000 1,408,000
Proceeds from Notes Payable 1,300,000 0
Repayment of Notes Payable (2,805,000) (145,000)
Net Proceeds from Issuance of Equity Securities 3,981,000 0
Payment of Cash Dividends (85,000) (49,000)
----------- -----------
Net Cash Provided by Financing Activities 4,677,000 1,214,000
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (1,708,000) (6,288,000)
Cash and Cash Equivalents at Beginning of Period 29,958,000 34,759,000
----------- -----------
Cash and Cash Equivalents at End of Period $28,250,000 $28,471,000
=========== ===========
Cash Paid During the Quarter for:
Interest $ 2,252,000 $ 1,529,000
Federal Income Taxes 100,000 35,000
Noncash Investing Activities:
Additions to Real Estate and Other Repossessed Assets
Through Foreclosures $ 391,000 $ 270,000
Sales of Real Estate and Other Repossessed Assets Financed with Loans 54,000 32,000
Increase (Decrease) in Unrealized Gain/Loss on Available-for-sale
Securities, Net of Tax (64,000) (99,000)
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. Management of the Company does not
anticipate the adoption of FAS 125 will have a material impact on
the Company's financial position or results of operations.
In March 1997, the FASB issued Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"),
which establishes standards for computing and presenting earnings
per share for entities with publicly held common stock or potential
common stock. FAS 128 simplifies the standards for computing
earnings per share previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share," and makes them comparable to
international earnings per share standards. It replaces the
presentation of primary earnings per share with a presentation of
basic earnings per share, which excludes dilution. It also
requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all entities with complex
capital structures. FAS 128 is effective for fiscal years ending
after December 15, 1997, and early adoption is not permitted. Had
FAS 128 been adopted on December 31, 1995, basic earnings per share
would have been $0.37 for the three months ended March 31, 1997, and
$0.33 for the three months ended March 31, 1996. Diluted earnings
per share would have been $0.32 for the three months ended March 31,
1997, and $0.27 for the three months ended March 31, 1996.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("FAS 129"), which establishes standards for
disclosing information about an entity's capital structure. FAS
129 continues the existing requirements to disclose the pertinent
rights and privileges of all securities other than ordinary common
stock, but expands the number of companies subject to portions of
its requirements. FAS 129 is effective for fiscal years ending
after December 15, 1997. Management of the Company does not
anticipate the adoption of FAS 129 will have a material impact on
the Company's financial statements or results of operations.
(3) QUASI-REORGANIZATION
In connection with the restructuring of its indebtedness to a
financial institution in Dallas, Texas, the Company effected a
quasi-reorganization as of December 31, 1989. A quasi-
reorganization is an elective accounting procedure under Generally
Accepted Accounting Principles ("GAAP") in which assets and
liabilities of the Company were restated to fair value and the
Company's accumulated deficit was reduced to zero. Under GAAP,
utilization of any of the Company's net
-6-
<PAGE>
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
three months of 1997 and 1996 totaled $115,000 and $77,000,
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.
Quarter ended March 31,
--------------------------
1997 1996
-------- --------
(In thousands,
except per share amounts)
Net interest income $ 2,411 $ 2,307
Net income 317 437
Primary earnings per share 0.23 0.40
Fully diluted earnings per share 0.20 0.32
The pro forma amounts for net income and primary and fully
diluted earnings per share are less than the amounts reported
herein as a result of certain adjustments recorded by Crown
Park prior to the acquisition.
(5) NOTES PAYABLE
The Company has a note payable to the Amarillo Bank noted
above. This note had an outstanding principal balance of $200,000
at March 31, 1997. This note payable (the "Note") had a maturity
of April 23, 1997. On April 23, 1997, the maturity date was
extended to July 23, 1997. The Note bears interest at the Amarillo
Bank's floating base rate plus 1/2% (9.00% at March 31, 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 March 31, 1997, and December 31, 1996.
The Bank also has a $500,000 note payable to one former
stockholder of Crown Park, which originated as a result of that
acquisition. The note is payable in five equal annual principal
payments of $100,000 on January 28 of each year. Interest is
payable quarterly at the 26-week Treasury Bill rate plus 2% (7.12%
at March 31, 1997), adjustable quarterly. The note is unsecured
and may be repaid with no penalty in whole or in part at any time
by the Bank.
-7-
<PAGE>
In addition, at March 31, 1997, the Company had notes payable
to one current and two former directors of the Company aggregating
$113,000. These notes had an original face amount of $350,000 but
were discounted upon issuance because they bear interest at a
below-market interest rate (6%). The notes are payable in three
equal annual installments, plus accrued interest. The first two
annual installments of $117,000 were made on March 1, 1996 and
1997, respectively. The notes represent a portion of the final
settlement of certain litigation.
(6) FEDERAL INCOME TAXES
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), which required companies to adopt the liability method for
computing income taxes. As a result of the acquisition of Peoples
National Bank, Winters, Texas ("Peoples National") in 1996, the
Company increased its gross deferred tax asset and related valuation
allowance by $162,000. The Company may reduce or increase its valuation
allowance depending on changes in the expectation of future earnings and
other circumstances. Deferred income taxes reflect the net effects of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes.
As a result of the recording of $2,746,000 in goodwill from the
Peoples National and Crown Park acquisitions which is not deductible for
federal income tax purposes, the Company's effective tax rate increased
from approximately 34% during the first quarter of 1996 to approximately
36% during the first quarter of 1997.
(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 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
ended March 31, 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 March 31,
1997 and 1996, was 1,312,000 and 1,055,000 shares, respectively.
The weighted average common shares outstanding used in computing
fully diluted earnings per common share for the quarters ended
March 31, 1997 and 1996, was 1,560,000 and 1,357,000 shares,
respectively.
(8) UNEARNED ESOP SHARES
The Company's Employee Stock Ownership/401(k) Plan (the
"ESOP") purchased 15,000 shares 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 March 31, 1997). The note is secured 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 March 31, 1997, a total
of $210,000, or 14,737 shares, are considered to be unearned.
(9) SUBSEQUENT EVENTS
At its meeting on April 23, 1997, the Board of Directors of
the Company approved a 25% stock dividend on the Common Stock. The
Board of Directors also approved the payment of the regular
quarterly cash dividend of $0.05 per share on the Common Stock.
Both dividends are payable May 31, 1997, to shareholders of record
on May 15, 1997. The cash dividend will be payable on the newly
issued dividend shares.
-8-
<PAGE>
Subsequent to March 31, 1997, holders of a total of 7,230
shares of the Company's Series C Preferred Stock converted such
shares into 132,845 shares of the Common Stock. As of the date of
filing of this report, the Company had 6,248 shares of Series C
Preferred Stock and 1,557,072 shares of the Common Stock issued and
outstanding.
-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 March 31, 1997,
owned 100% of Independent Financial Corp. ("Independent Financial")
which, in turn, owned 100% of First State Bank, National
Association, Abilene, Texas (the "Bank"). The Bank currently
operates full-service banking locations in the West Texas cities of
Abilene (two locations), Lubbock, Odessa (2 locations), San Angelo,
Stamford and Winters. The Bank acquired its two branches in
Stamford and Winters when two of the Company's former subsidiary
banks, The First National Bank in Stamford, Stamford, Texas ("First
National"), and The Winters State Bank, Winters, Texas ("Winters
State"), were merged into the Bank, effective November 1, 1994.
The Bank acquired Peoples National Bank, Winters, Texas
("Peoples National") effective January 1, 1996. The existing
location of Peoples National was subsequently closed, the land and
building were sold and Peoples National was merged with and into
the 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"). Coastal Banc - San Angelo was
merged with and into and became a branch of the Bank.
As noted in "Note 4: Acquisition of Subsidiary Bank," the
Company acquired Crown Park Bancshares, Inc. ("Crown Park") and its
wholly owned subsidiary bank, Western National Bank, Lubbock, Texas
("Western National"), on January 28, 1997. Western National was
merged with and into and became a branch of the Bank.
RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
March 31, 1997, and December 31, 1996, and results of operations
for each of the quarters ended March 31, 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 March 31, 1997, amounted to
$493,000 ($0.36 primary earnings per common share) compared to net
income of $361,000 ($0.33 primary earnings per common share) for
the quarter ended March 31, 1996.
-10-
<PAGE>
Net Interest Income
- -------------------
Net interest income represents the amount by which interest
income on interest-earning assets, including securities and loans,
exceeds interest paid on interest-bearing liabilities, including
deposits and notes payable. Net interest income is the principal
source of the Company's earnings. Interest rate fluctuations, as
well as changes in the amount and type of interest-earning assets
and interest-bearing liabilities, combine to affect net interest
income.
Net interest income amounted to $2,240,000 for the first
quarter of 1997, an increase of $502,000, or 28.9%, from the first
quarter of 1996. Net interest income for the first quarter of 1996
was $1,738,000. Approximately $387,000, or 77.1%, of the increase
in 1997 was due to the acquisition of Crown Park in January 1997.
The net interest margin on a fully taxable-equivalent basis,
declined from 4.11% for the first quarter of 1996, to 4.00% for the
first quarter of 1997, which was an increase from the 3.89%
recorded during the fourth quarter of 1996.
At March 31, 1997, approximately $30,469,000, or 23.0%, of the
Company's total loans, net of unearned income, were tied to
fluctuations in the prime interest rate. Average overall rates
paid for various types of certificates of deposit decreased from
March 31, 1996, to March 31, 1997. For example, the average rate
paid for certificates of deposit less than $100,000 decreased from
5.65% in the first quarter of 1996 to 5.29% in the first quarter of
1997; however, the average rate paid by the Company for
certificates of deposit of $100,000 or more increased to 5.47%
during the first quarter of 1997 from 5.18% during the first
quarter of 1996. Rates on other types of deposits, such as
interest-bearing demand, savings and money market deposits, also
increased from an average of 2.32% during the first quarter of 1996
to an average of 2.65% during the first quarter of 1997. These
increases caused the Company's overall cost of interest-bearing
deposits to increase from 4.23% for the first three months of 1996
to 4.31% for the first three 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, a
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 a rising interest rate environment.
The following table presents the average balance sheets of the
Company for the quarters ended March 31, 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>
<TABLE>
<CAPTION>
Quarter Ended March 31,
----------------------------------------------------------
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) $118,161 $ 2,731 9.25% $ 83,511 $ 1,960 9.39%
Securities (3) 86,561 1,311 6.06 64,010 971 6.07
Federal funds sold 19,164 255 5.32 21,527 292 5.43
-------- -------- ----- -------- -------- -----
Total interest-earning assets 223,886 4,297 7.68 169,048 3,223 7.63
-------- -------- ----- -------- -------- -----
Noninterest-earning assets:
Cash and due from banks 9,237 7,594
Premises and equipment 6,097 4,313
Accrued interest receivable
and other assets 7,686 4,891
Allowance for possible loan losses (1,040) (875)
-------- -------
Total noninterest-earning assets 21,980 15,923
-------- -------
Total assets $245,866 $184,971
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 71,905 $ 477 2.65% $ 55,021 $ 319 2.32%
Time deposits 116,909 1,559 5.33 83,288 1,144 5.49
-------- -------- ----- -------- -------- -----
Total interest-bearing deposits 188,814 2,036 4.31 138,309 1,463 4.23
Notes payable 898 20 8.91 785 22 11.21
-------- -------- ----- -------- -------- -----
Total interest-bearing liabilities 189,712 2,056 4.34 139,094 1,485 4.27
-------- -------- ----- -------- -------- -----
Noninterest-bearing liabilities:
Demand deposits 37,356 30,577
Accrued interest payable and
other liabilities 1,215 1,215
-------- --------
Total noninterest-bearing liabilities 38,571 31,792
-------- --------
Total liabilities 228,283 170,886
Stockholders' equity 17,583 14,085
-------- --------
Total liabilities and
stockholders' equity $245,866 $184,971
======== ========
Net interest income $ 2,241 $ 1,738
======== ========
Interest rate spread (4) 3.34% 3.36%
===== =====
Net interest margin (5) 4.00% 4.11%
===== =====
______________________________
(1) The Average Balance and Interest Income/Expense columns
include the balance sheet and income statement accounts of
Crown Park from January 28, 1997, the date of acquisition of
such company.
(2) Nonaccrual loans are included in the Average Balance columns,
and income recognized on these loans, if any, is included in
the Interest Income/Expense columns. Interest income on loans
includes fees on loans, which are not material in amount.
(3) Nontaxable interest income on securities for 1997 was adjusted
to a taxable yield assuming a tax rate of 34%.
(4) The interest rate spread is the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(5) The net interest margin is equal to net interest income, on a
fully taxable-equivalent basis, divided by average interest-
earning assets.
</TABLE>
-12-
<PAGE>
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>
March 31, 1997(1) vs 1996
Increase (Decrease) Due To
Changes In
--------------------------
Volume Rate Total
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (2) $ 801 $ (30) $ 771
Securities (3) 342 (2) 340
Federal funds sold (32) (5) (37)
------ ----- ------
Total interest income 1,111 (37) 1,074
------ ----- ------
Interest-bearing liabilities:
Deposits:
Demand, savings and money market deposits 108 50 158
Time deposits 449 (34) 415
------ ----- ------
Total interest-bearing deposits 557 16 573
Notes payable 3 (5) (2)
------ ----- ------
Total interest expense 560 11 571
------ ----- ------
Increase (decrease) in net interest income $ 551 $ (48) $ 503
====== ===== ======
______________________________
(1) Income statement items include the income statement accounts
of Crown Park beginning January 28, 1997, the date of
acquisition of such company.
(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%.
</TABLE>
Provision for Loan Losses
- -------------------------
The amount of the provision for loan losses is based on
periodic (not less than quarterly) evaluations of the loan
portfolio, especially nonperforming and other potential problem
loans. During these evaluations, consideration is given to such
factors as: management's evaluation of specific loans; the level
and composition of nonperforming loans; historical loss experience;
results of examinations by regulatory agencies; an internal asset
review process conducted by the Company that is independent of the
management of each Bank; expectations of future economic conditions
and their impact on particular industries and individual borrowers;
the market value of collateral; the strength of available
guarantees; concentrations of credits; and other judgmental
factors. There was no provision for loan losses made for the
quarter ended March 31, 1997, compared to $50,000 for the quarter
ended March 31, 1996. No provision for loan losses was made during
the first quarter of 1997 due to the fact that the Company had net
recoveries of previously charged off loans of $124,000 during that
period. In the past few years, the overall quality of the
Company's loan portfolio has improved, necessitating generally
lower provisions.
Noninterest Income
- ------------------
Noninterest income increased $59,000, or 16.3%, from $363,000
during the first quarter of 1996 to $422,000 during the first
quarter of 1997.
-13-
<PAGE>
Service charges on deposit accounts and on other types of
services are the major source of noninterest income to the Company.
This source of income increased from $292,000 during the first
three months of 1996 to $346,000 during the first three months of
1997, a $54,000, or 18.5%, increase. Over 80% of the increase was
due to the acquisition of Crown Park during the first quarter of
1997.
Trust fees from the operation of the trust department of the
Bank decreased $7,000, or 13.2%, from $53,000 during the first
three months of 1996 to $46,000 during the same period in 1997,
primarily 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 check printing income, insurance
premiums earned on automobiles financed through the Company's
indirect installment loan program and other sources of
miscellaneous income. Other income increased $12,000, or 66.7%,
from $18,000 during the first quarter of 1996 to $30,000 during the
first quarter of 1997, primarily due to an $11,000 loss on the sale
of available-for-sale securities during 1996.
Noninterest Expenses
- --------------------
Noninterest expenses increased $386,000, or 25.7%, from
$1,504,000 during the first quarter of 1996 to $1,890,000 during
the first quarter of 1997. The increase from 1996 to 1997 was due
primarily to the acquisition of Crown Park effective January 28,
1997.
Salaries and employee benefits increased $161,000, or 21.2%,
from $758,000 for the first quarter of 1996 to $919,000 for the
corresponding period of 1997. The increase was a result of the
acquisitions of Coastal Banc - San Angelo (20% of the increase)
effective May 27, 1996, and Crown Park (80% of the increase)
effective January 28, 1997.
Equipment expense increased from $160,000 for the first
quarter of 1996 to $202,000 for the corresponding period in 1997,
representing an increase of $42,000, or 26.3%. A total of $27,000,
or 64%, of the increase was due to the acquisitions of Crown Park
and Coastal Banc - San Angelo.
Net occupancy expense was $195,000 for the first three months
of 1997, an increase of $27,000, or 16.1%, from the $168,000 in
expense recorded during the first three months of 1996. A $23,000
increase was a result of the Crown Park acquisition and a $6,000
increase resulted from the Coastal Banc - San Angelo acquisition.
Professional fees, which include legal and accounting fees,
increased $32,000, or 55.2%, from $58,000 during the first quarter
of 1996 to $90,000 during the same period of 1997. A total of
$21,000, or 65.6%, of the increase was a result of the acquisitions
of Coastal Banc - San Angelo and Crown Park. The remainder of the
increase was a result of legal fees incurred that were related to
settlement of litigation which result in a recovery of
approximately $108,000 of a previously charged off loan.
Stationery, printing and supplies expense increased $23,000,
or 36.5%, from $63,000 for the first three months of 1996 to
$86,000 for the first three months of 1997. A total of $15,000,
or 65%, of the increase was a result of the two acquisitions noted
above.
Net costs 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 cost of $5,000 during both the first quarter
of 1997 and the first quarter of 1996.
Other noninterest expense includes, among many other items,
goodwill amortization, 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 $101,000, or 34.6%,
from $292,000 for the first quarter of 1996 to $393,000 for the
first quarter of 1997. All of the increase was due to the
acquisitions of Coastal Banc - San Angelo and Crown Park.
-14-
<PAGE>
Federal Income Taxes
- --------------------
The Company accrued $279,000 and $186,000 in federal income
taxes in the first quarter of 1997 and 1996, respectively. As a
result of the recording of $2,746,000 in goodwill from the Peoples
National and Crown Park acquisitions which is not deductible for
federal income tax purposes, the Company's effective tax rate
increased from approximately 34% during the first quarter of 1996
to approximately 36% during the first quarter of 1997.
Impact of Inflation
- -------------------
The effects of inflation on the local economy and on the
Company's operating results have been relatively modest for the
past several years. Because substantially all of the Company's
assets and liabilities are monetary in nature, such as cash,
securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The
Company tries to control the impact of interest rate fluctuations
by managing the relationship between its interest rate-sensitive
assets and liabilities. See "Analysis of Financial Condition -
Interest Rate Sensitivity" below.
ANALYSIS OF FINANCIAL CONDITION
Assets
- ------
Total assets increased $60,850,000, or 29.5%, from
$205,968,000 at December 31, 1996, to $266,818,000 at
March 31, 1997, primarily due to the acquisition of Crown Park,
which had total assets of $60,420,000 at January 28, 1997, the date
of acquisition.
Cash and Cash Equivalents
- -------------------------
The amount of cash and cash equivalents decreased $1,708,000,
or 5.7%, from $29,958,000 at December 31, 1996, to $28,250,000 at
March 31, 1997, due to a decrease in federal funds sold at
March 31, 1997.
Securities
- ----------
Securities increased $16,604,000, or 22.1%, from $75,152,000
at December 31, 1996, to $91,756,000 at March 31, 1997. The
increase in 1997 is primarily due to the acquisition of Crown Park,
which had $9,742,000 in securities at the date of acquisition.
The board of directors of the Bank reviews all securities
transactions monthly and the securities portfolio periodically.
The Company's current investment policy provides for the purchase
of U.S. Treasury securities, federal agency securities and
mortgage-backed securities having maturities of five years or less
and for the purchase of state, county and municipal agencies'
securities with maximum maturities of 10 years. The Company's
policy is to maintain a securities portfolio with staggered
maturities to meet its overall liquidity needs. Municipal
securities must be rated A or better. Certain school district
issues, however, are acceptable with a Baa rating. Securities
totaling $38,178,000 are classified as available-for-sale and are
carried at fair value at March 31, 1997. Securities totaling
$53,578,000 are classified as held-to-maturity and are carried at
amortized cost. The decision to sell securities classified as
available-for-sale is based upon management's assessment of changes
in economic or financial market conditions. During the first
quarter of 1996, the Company sold investments in certain mutual
funds obtained in the acquisition of Peoples National because they
did not meet the Company's investment criteria. A loss of $11,000
was recorded on the sale of such investments.
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 March 31, 1997, the book value of U.S.
Treasury and other U.S. Government agency securities so pledged
amounted to $11,216,000, or 12.2% of the total securities
portfolio.
-15-
<PAGE>
The following table summarizes the amounts and the
distribution of the Company's securities held at the dates
indicated.
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
---------------- ------------------
Amount % Amount %
--------- ----- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $ 40,511 44.1% $ 35,143 46.8%
Obligations of other U.S. Government
agencies and corporations 38,501 42.0 29,928 39.8
Mortgage-backed securities 11,824 12.9 9,438 12.6
Obligations of states and political subdivisions 175 0.2 200 0.2
Other securities 745 0.8 443 0.6
-------- ----- -------- -------
Total carrying value of securities $ 91,756 100.0% $ 75,152 100.0%
======== ===== ======== =======
Total market value of securities $ 91,258 $ 75,062
======== ========
</TABLE>
The market value of securities classified as held-to-maturity
is usually different from the reported carrying value of such
securities due to interest rate fluctuations that cause market
valuations to change.
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at March 31, 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.
-16-
<PAGE>
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at March 31, 1997 Amount Value Value Yield
- --------------------------- --------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $ 27,350 $ 27,311 $ 27,315 5.87%
After one but within five years 13,250 13,200 13,198 5.86
--------- --------- --------- --------
Total U.S. Treasury securities 40,600 40,511 40,513 5.87
--------- --------- --------- --------
Obligations of other U.S. Government
agencies and corporations:
Within one year 0 0 0 --
After one but within five years 35,000 34,923 34,589 6.43
After five but within ten years 3,600 3,578 3,568 6.03
--------- --------- --------- --------
Total obligations of U.S. Government
agencies and corporations 38,600 38,501 38,157 6.40
--------- --------- --------- --------
Mortgage-backed securities 11,551 11,824 11,663 6.35
--------- --------- --------- --------
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 175 175 180 8.49
--------- --------- --------- --------
Total obligations of states and political
subdivisions 175 175 180 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 745 745 745 2.87
--------- --------- --------- --------
Total other securities 745 745 745 2.87
--------- --------- --------- --------
Total securities $ 91,671 $ 91,756 $ 91,258 6.13%
========= ========= ========= ========
</TABLE>
Loan Portfolio
- --------------
Total loans, net of unearned income, increased $40,311,000, or
43.8%, from $92,017,000 at December 31, 1996, to $132,328,000 at
March 31, 1997. The increase during the first quarter 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. This increase was partially offset by net loan
reductions at the Bank's Lubbock location of $1,399,000 between
January 28, 1997, and March 31, 1997.
The Bank primarily makes installment loans to individuals and
commercial and real estate loans to small to medium-sized
businesses and professionals. The Bank offers a variety of
commercial lending products including revolving lines of credit,
letters of credit, working capital loans and loans to finance
accounts receivable, inventory and equipment. Typically, the
Banks' commercial loans have floating rates of interest, are for
varying terms (generally not exceeding five years), are personally
guaranteed by the borrower and are collateralized by accounts
receivable, inventory or other business assets.
Due to diminished loan demand in most areas, the Bank's Odessa
branch instituted an installment loan program whereby it began to
purchase automobile loans from automobile dealerships in the
Abilene and Odessa/Midland, Texas areas. Under this program, an
automobile dealership will agree to make a loan to a prospective
customer to finance the purchase of a new or used automobile. The
different financial institutions that have a pre-established
relationship with the particular dealership review the transaction,
including the credit history of the
-17-
<PAGE>
prospective borrower, and decide if they would agree to purchase
the loan from the dealership and, if so, at what rate of interest.
The dealership selects the financial institution to which it
decides to sell the loan. The financial institution purchasing the
loan has a direct loan to the borrower collateralized by the
automobile, and the dealership realizes a profit based on the
difference between the interest rate quoted to the buyer by the
dealership and the interest rate at which the loan is purchased by
the financial institution. At March 31, 1997, the Company had
approximately $45,810,000, 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.
March 31, December 31,
1997 1996
------------ -----------
(In thousands)
Loans to individuals $ 62,138 $ 43,927
Real estate loans 43,484 26,233
Commercial and industrial loans 25,854 21,478
Other loans 3,168 2,626
----------- -----------
Total loans 134,644 94,264
Less unearned income 2,316 2,247
----------- -----------
Loans, net of unearned income $ 132,328 $ 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 March 31, 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 March 31, 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 March 31, 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 $ 9,852 $ 24,681 $ 8,951 $ 43,484
Commercial and industrial loans 11,209 10,694 3,951 25,854
Other loans 586 2,420 162 3,168
-------- -------- -------- --------
Total loans $ 21,647 $ 37,795 $ 13,064 $ 72,506
======== ======== ======== ========
With fixed interest rates $ 8,658 $ 25,293 $ 8,086 $ 42,037
With variable interest rates 12,989 12,502 4,978 30,469
-------- -------- -------- --------
Total loans $ 21,647 $ 37,795 $ 13,064 $ 72,506
======== ======== ======== ========
</TABLE>
Allowance for Possible Loan Losses
- ----------------------------------
Implicit in the Company's lending activities is the fact that
loan losses will be experienced and that the risk of loss will vary
with the type of loan being made and the creditworthiness of the
borrower over the term of the loan. To reflect the currently
perceived risk of loss associated with the Company's loan
portfolio, additions are made to the Company's allowance for
possible loan losses (the "allowance"). The allowance is created
by direct charges against
-18-
<PAGE>
income (the "provision" for loan losses), and the allowance is
available to absorb possible loan losses. See "Results of
Operations - Provision for Loan Losses" above.
The amount of the allowance equals the cumulative total of the
loan loss provisions made from time to time, reduced by loan
charge-offs, and increased by recoveries of loans previously
charged off. The Company's allowance was $1,312,000, or 0.99% of
loans, net of unearned income, at March 31, 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 four previously charged off loans, the largest of such
recoveries being $108,000, accounted for $225,000, or 93.8% of
total recoveries during the first quarter of 1997.
Credit and loan decisions are made by management and the board
of directors of the Bank in conformity with loan policies
established by the board of directors of the Company. The
Company's practice is to charge off any loan or portion of a loan
when it is determined by management to be uncollectible due to the
borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation
of the underlying collateral, the loan's classification as a loss
by regulatory examiners or for other reasons. The Company charged
off $116,000 in loans during the first quarter of 1997. Recoveries
during the first quarter of 1997 were $240,000.
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 ended March 31, 1997 and
1996.
<TABLE>
<CAPTION>
March 31,
------------------------
1997(1) 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Analysis of allowance for possible loan losses:
Balance, at January 1 $ 793 $ 759
Acquisition of subsidiary bank 395 149
Provision for loan losses 0 50
-------- --------
1,188 958
-------- --------
Loans charged off:
Loans to individuals 77 46
Real estate loans 0 0
Commercial and industrial loans 35 40
Other loans 4 0
-------- --------
Total charge-offs 116 86
-------- --------
Recoveries of loans previously charged off:
Loans to individuals 13 8
Real estate loans 33 0
Commercial and industrial loans 194 14
Other loans 0 0
-------- --------
Total recoveries 240 22
-------- --------
Net loans charge-offs (recoveries) (124) 64
-------- --------
Balance, at March 31 $ 1,312 $ 894
======== ========
Average loans outstanding, net of unearned income $118,161 $ 83,511
======== ========
Ratio of net loan charge-offs (recoveries) to average loans
outstanding, net of unearned income (annualized) (0.42)% 0.31%
======== ========
Ratio of allowance for possible loan losses to total loans,
net of unearned income, at March 31 0.99% 1.08%
======== ========
______________________________
(1) Average loans, net of unearned income, for 1997 include the
average loans, net of unearned income, of Crown Park from
January 28, 1997, the date of acquisition of such company.
</TABLE>
-19-
<PAGE>
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 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
March 31, 1997, and December 31, 1996.
<TABLE>
<CAPTION>
March 31, 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 $ 478 45.2% $ 323 45.3%
Real estate loans 58 32.9 128 28.5
Commercial and industrial loans 230 19.5 97 23.3
Other loans 33 2.4 43 2.9
----------- ------------- ------------ -------------
Total allocated 799 100.0% 591 100.0%
============= =============
Unallocated 513 202
----------- ------------
Total allowance for possible loan losses $ 1,312 $ 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
-20-
<PAGE>
recoverability of the loan. Loans classified as "doubtful" are those
loans that have characteristics similar to substandard loans, but
also have an increased risk that a loss may occur or at least a
portion of the loan may require a charge-off if liquidated at
present. Although loans classified as substandard do not duplicate
loans classified as doubtful, both substandard and doubtful loans may
include some loans that are past due at least 90 days, are on
nonaccrual status or have been restructured. Loans classified as
"loss" are those loans that are in the process of being charged off.
At March 31, 1997, substandard loans totaled $1,419,000 (including
$50,000 of loans guaranteed by U.S. governmental agencies), of which
$150,000 were loans designated as nonaccrual, 90 days past due or
restructured, and doubtful loans totaled $59,000, $51,000 of which
were designated as nonaccrual or 90 days past due. There were no
loans classified as loss at March 31, 1997.
In addition to the internally classified and nonperforming
loans, the Bank also has a "watch list" of loans that further assists
the Bank in monitoring its loan portfolio. A loan is included on the
watch list if it demonstrates one or more deficiencies requiring
attention in the near term or if the loan's ratios have weakened to
a point where more frequent monitoring is warranted. These loans do
not have all the characteristics of a classified loan (substandard,
doubtful or loss), but do have weakened elements as compared with
those of a satisfactory credit. Management of the Bank reviews these
loans in assessing the adequacy of the allowance. Substantially all
of the loans on the watch list at March 31, 1997, are current and
paying in accordance with loan terms. At March 31, 1997, watch list
loans totaled $939,000 (including $528,000 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 90 days
past due loans. In addition, at March 31, 1997, $67,000 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 March 31, 1997,
and December 31, 1996.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(In thousands)
<S> <C> <C>
Nonaccrual loans $ 105 $ 82
Accruing loans contractually past due over 90 days 117 41
Restructured loans 84 73
Real estate and other repossessed assets 849 389
------------ ------------
Total nonperforming assets $ 1,155 $ 585
============ ============
</TABLE>
-21-
<PAGE>
The gross interest income that would have been recorded during
the first quarter 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 $2,000. No interest income was
actually recorded (received) on loans that were on nonaccrual during
the first quarter of 1997.
A potential problem loan is a loan where information about
possible credit problems of the borrower is known, causing management
to have serious doubts as to the ability of the borrower to comply
with the present loan repayment terms and which may result in the
inclusion of such loan in one of the nonperforming asset categories.
The Company does not believe it has any potential problem loans other
than those reported in the above table.
Premises and Equipment
- ----------------------
Premises and equipment increased $2,689,000, or 60.6%, during
the first quarter of 1997, from $4,437,000 at December 31, 1996, to
$7,126,000 at March 31, 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 $113,000 recorded on the Company's
premises and equipment during the first quarter of 1997.
Goodwill
- --------
Goodwill increased $2,442,000, or 255.2%, from $957,000 at
December 31, 1996, to $3,399,000 at March 31, 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 $44,000 of goodwill amortization expense recorded
during the first quarter 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 $579,000, or 36.2%, from $1,599,000 at December
31, 1996, to $2,178,000 at March 31, 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 March 31, 1997, $1,298,000, or
59.6%, was interest accrued on securities and $880,000, or 40.4%, was
interest accrued on loans. The amounts of accrued interest
receivable and percentages attributable to securities and loans at
December 31, 1996, were $943,000, or 59.0%, and $656,000, or 41.0%,
respectively.
Real Estate and Other Repossessed Assets
- ----------------------------------------
Real estate and other repossessed assets consist of real
property and other assets unrelated to banking premises or
facilities. Income derived from real estate and other repossessed
assets, if any, is generally less than that which would have been
earned as interest at the original contract rates on the related
loans. At March 31, 1997, and December 31, 1996, real estate and
other repossessed assets had an aggregate book value of $849,000 and
$389,000, respectively. Real estate and other repossessed assets
increased $460,000, or 118.3%, during the first three 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 March 31, 1997, balance,
$391,000 represented three commercial properties, $274,000
represented thirty (30) repossessed automobiles and $184,000
represented three residential properties.
Other Assets
- ------------
The most significant component of other assets at March 31,
1997, is a net deferred tax asset of $1,528,000. The balance of
other assets decreased $8,000, or 0.4%, to $2,244,000 at March 31,
1997, from $2,252,000 at December
-22-
<PAGE>
31, 1996, as a result of the utilization of a portion of the Company's
net operating loss carryforwards, which was offset by the increase
recorded as a result of the acquisition of Crown Park.
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 March 31, 1997. Total deposits increased
$55,890,000, or 29.5%, from $189,575,000 at December 31, 1996, to
$245,465,000 at March 31, 1997. The increase is primarily due to the
acquisition of Crown Park, which had total deposits of $53,604,000 at
January 28, 1997. The Bank does not have any brokered deposits.
The following table presents the average amounts of, and the
average rates paid on, deposits of the Company for the quarters ended
March 31, 1997 and 1996.
<TABLE>
<CAPTION>
Quarter Ended March 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
Average Average Average Average
Amount Rate Amount Rate
--------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 37,356 --% $ 30,577 --%
Interest-bearing demand, savings and
money market deposits 71,905 2.65 55,021 2.32
Time deposits of less than $ 100,000 82,608 5.29 55,975 5.65
Time deposits of $100,000 or more 34,301 5.47 27,313 5.18
--------- ------ --------- ------
Total deposits $ 226,170 3.60% $ 168,886 3.47%
========= ====== ========= ======
______________________________
(1) The average amounts of, and average rates paid on, deposits for
the quarter ended March 31, 1997, include the averages for Crown
Park from January 28, 1997, the date of acquisition of such
company.
</TABLE>
The maturity distribution of time deposits of $100,000 or more
at March 31, 1997, is presented below.
At March 31, 1997
-----------------
(In thousands)
3 months or less $ 11,037
Over 3 through 6 months 14,968
Over 6 through 12 months 8,437
Over 12 months 1,943
-----------------
Total time deposits of $100,000 or more $ 36,385
=================
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 March 31, 1997, deposits of $100,000
or more represented approximately 13.6% 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 $18,000, or 1.9%, from $951,000 at December 31, 1996, to
$933,000 at March 31, 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
-23-
<PAGE>
in accrued interest payable on certificates of deposit at the Bank's
Abilene locations which had a significant amount of time deposits of
$100,000 or more that matured in the first quarter of 1997.
Notes Payable
- -------------
The Company's notes payable increased $584,000, or 243.3%, from
$240,000 at December 31, 1996, to $824,000 at March 31, 1997. The
Company borrowed $800,000 from a financial institution in Amarillo,
Texas (the "Amarillo Bank") to finance a portion of the cost of
acquiring Crown Park. The $800,000 of borrowings was reduced to
$200,000 by March 31, 1997. The Bank also has a $500,000 note
payable to one former stockholder of Crown Park, which originated as
a result of that acquisition. These increases were partially offset
by the payment of the second of 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 $278,000, or 104.9%, from $265,000 at December
31, 1996, to $543,000 at March 31, 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.
Interest Rate Sensitivity
- -------------------------
Interest rate risk arises when an interest-earning asset matures
or when its rate of interest changes in a time frame different from
that of the supporting interest-bearing liability. The Company seeks
to minimize the difference between the amount of interest-earning
assets and the amount of interest-bearing liabilities that could
change interest rates in the same time frame in an attempt to reduce
the risk of significant adverse effects on the Company's net interest
income caused by interest rate changes. The Company does not attempt
to match each interest-earning asset with a specific interest-bearing
liability. Instead, as shown in the table below, it aggregates all
of its interest-earning assets and interest-bearing liabilities to
determine the difference between the two in specific time frames.
This difference is known as the rate-sensitivity gap. A positive gap
indicates that more interest-earning assets than interest-bearing
liabilities mature in a time frame, and a negative gap indicates the
opposite. Maintaining a balanced position will reduce risk
associated with interest rate changes, but it will not guarantee a
stable interest rate spread because the various rates within a time
frame may change by differing amounts and occasionally change in
different directions. Management regularly monitors the interest
sensitivity position and considers this position in its decisions in
regard to interest rates and maturities for interest-earning assets
acquired and interest-bearing liabilities accepted.
The Company's objective is to maintain a ratio of interest-
sensitive assets to interest-sensitive liabilities that is as
balanced as possible. The following table shows that ratio to be
47.9% at the 90-day interval, 48.9% at the 180-day interval and 50.4%
at the 365-day interval at March 31, 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 quarter of 1997, this position normally produces a
lower net interest margin than in a falling interest rate
environment. However, because the Company had $80,277,000 of
interest-bearing demand, savings and money market deposits at
March 31, 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 85.9% at
March 31, 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.
-24-
<PAGE>
The following table shows the interest rate sensitivity
position of the Company at March 31, 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 $ 15,600 $ 15,600 $ 15,600 $ 0 $ 15,600
Securities 2,617 10,967 28,729 63,027 91,756
Loans, net of unearned income 39,021 43,878 53,740 78,588 132,328
----------- ----------- ----------- ---------- -----------
Total interest-earning assets 57,238 70,445 98,069 141,615 239,684
----------- ----------- ----------- ---------- -----------
Interest-bearing liabilities:
Demand, savings and money market
deposits 80,277 80,277 80,277 0 80,277
Time deposits 38,424 63,131 113,295 11,759 125,054
Notes payable 701 702 817 7 824
----------- ----------- ----------- ---------- -----------
Total interest-bearing liabilities 119,402 144,110 194,389 11,766 206,155
----------- ----------- ----------- ---------- -----------
Rate-sensitivity gap(1) $ (62,164) $ (73,665) $ (96,320) $ 129,849 $ 33,529
=========== =========== =========== ========== ===========
Rate-sensitivity ratio(2) 47.9% 48.9% 50.4%
______________________________
(1) Rate-sensitive interest-earning assets less rate-sensitive
interest-bearing liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-
sensitive interest-bearing liabilities.
</TABLE>
Selected Financial Ratios
- -------------------------
The following table presents selected financial ratios
(annualized) for the quarters ended March 31, 1997 and 1996.
Quarter Ended
March 31,
---------------
1997(1) 1996
------- -----
Net income to:
Average assets 0.80% 0.78%
Average interest-earning assets 0.88 0.85
Average stockholders' equity 11.22 10.25
Dividend payout (2) to:
Net income 14.40 8.73
Average stockholders' equity 1.62 0.89
Average stockholders' equity to:
Average total assets 7.15 7.61
Average loans (3) 14.88 16.87
Average total deposits 7.77 8.34
Average interest-earning assets to:
Average total assets 91.06 91.39
Average total deposits 98.99 100.10
Average total liabilities 98.07 98.92
Ratio to total average deposits of:
Average loans (3) 52.24 49.45
Average noninterest-bearing deposits 16.52 18.11
Average interest-bearing deposits 83.48 81.89
Total interest expense to total interest income 47.86 46.08
Efficiency ratio (4) 69.16 70.79
-25-
<PAGE>
_________________________
(1) Average balance sheet and income statement items for 1997
include the averages for Crown Park from January 28, 1997, the
date of acquisition of such company.
(2) Dividends on Common Stock only.
(3) Before allowance for possible loan losses.
(4) Calculated as a noninterest expense less amortization of
intangibles and expenses 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 $9,237,000 during the
first quarter of 1997 and $7,594,000 during the first quarter of
1996. These amounts comprised 3.8% and 4.1% of average total
assets during the first three months of 1997 and 1996,
respectively. The average level of securities and federal funds
sold was $105,725,000 during the first quarter of 1997 and
$85,537,000 during the first quarter of 1996. The increase from
the first quarter of 1996 to the first quarter of 1997 was due to
the acquisitions of Coastal Banc - San Angelo on May 27, 1996, and
Crown Park on January 28, 1997.
The Bank sold $30,000 of securities during the quarter ended
March 31, 1996. There were no sales of securities during the
quarter ended March 31, 1997. At March 31, 1997, $27,311,000, or
29.8%, of the Company's securities portfolio, excluding mortgage-
backed securities, matured within one year and $48,123,000, or
52.4%, 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 March 31, 1997,
approximately $53,740,000, or 40.6%, of the Company's loans, net of
unearned income, matured within one year and/or had adjustable
interest rates. Approximately $39,127,000, or 54.0%, 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 first quarter of 1997, the Company's average deposits
were $226,170,000, or 92.0% of average total assets, compared to
$168,886,000, or 91.3% of average total assets, during the first
quarter of 1996. 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 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.
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
-26-
<PAGE>
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
first quarter of 1997 totaled $200,000; in turn, Independent
Financial paid dividends to the Company totaling $200,000 during
the same time period. Dividends paid by the Bank to Independent
Financial during the first quarter of 1996 were $225,000; in turn,
Independent Financial paid dividends to the Company totaling
$225,000 during the same time period of 1996. At March 31, 1997,
there were approximately $1,764,000 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 54% and 8%,
respectively, of the Company's cash flow from the Bank during the
first quarter 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 loss, the Company may
be required to refund tax liabilities previously collected.
Current tax liabilities totaling $294,000 were paid by the Bank to
the Company during the first three months of 1997, compared to a
total of $220,000 during the first three months of 1996.
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 $42,000 and $43,000 in
management fees to the Company in the first quarter of 1997 and
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.
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 tax purposes had been fully utilized. As a result,
the Company began paying federal income taxes at the effective tax
rate of approximately 20% during the first quarter of 1996. The
Company still has net operating carryforwards available for regular
federal income tax purposes.
The Company has a note payable to the Amarillo Bank noted
above. This note had an outstanding principal balance of $200,000
at March 31, 1997. The Note had a maturity of April 23, 1997. On
April 23, 1997, the maturity date was extended to July 23, 1997.
The Note bears interest at the Amarillo Bank's floating base rate
plus 1/2% (9.00% at March 31, 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 March 31, 1997, and
December 31, 1996.
The Bank also has a $500,000 note payable to one former
stockholder of Crown Park, which originated as a result of that
acquisition. The note is payable in five equal annual principal
payments of $100,000 on January 28 of each year. Interest is
payable quarterly at the 26-week Treasury Bill rate plus 2% (7.12%
at March 31, 1997), adjustable quarterly. The note is unsecured
and may be repaid with no penalty in whole or in part at any time
by the Bank.
In addition, at March 31, 1997, the Company had notes payable
to one current and two former directors of the Company aggregating
$113,000. These notes had an original face amount of $350,000 but
were discounted upon
-27-
<PAGE>
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 March 31, 1997, stockholders' equity totaled $19,053,000,
or 7.1% of total assets, compared to $14,937,000, or 7.3% of total
assets, at December 31, 1996.
Bank regulatory authorities in the United States have issued
risk-based capital standards by which all bank holding companies
and banks are evaluated in terms of capital adequacy. These
guidelines relate a banking company's capital to the risk profile
of its assets. The risk-based capital standards require all banks
to have Tier 1 capital of at least 4% and total capital (Tier 1 and
Tier 2) of at least 8%, of risk-weighted assets and to be
designated as well-capitalized, the bank must have Tier 1 and total
capital ratios of 8% and 10%, respectively. Tier 1 capital
includes common stockholders' equity, qualifying perpetual
preferred stock and minority interests in unconsolidated
subsidiaries, reduced by goodwill and net deferred tax assets in
excess of regulatory capital limits. Tier 2 capital may be
comprised of certain other preferred stock, qualifying debt
instruments and all or a part of the allowance for possible loan
losses.
Banking regulators have also issued leverage ratio
requirements. The leverage ratio requirement is measured as the
ratio of Tier 1 capital to adjusted quarterly average assets. The
leverage ratio standards require all banks to have a minimum
leverage ratio of 3% and to be designated as well-capitalized, the
bank must have a leverage ratio of 6%. The following table
provides a calculation of the Company's risk-based capital and
leverage ratios and a comparison of the Company's and the Bank's
risk-based capital ratios and leverage ratios to the minimum
regulatory and well-capitalized minimum requirements at March 31,
1997.
-28-
<PAGE>
The Company March 31, 1997
----------- ----------------------
(Dollars in thousands)
Tier 1 capital:
Common stockholders' equity, excluding
unrealized loss on available-for-sale
securities $ 18,526
Preferred stockholders' equity (1) 566
Goodwill (3,399)
---------
Total Tier 1 capital 15,693
---------
Tier 2 capital:
Allowance for possible loan losses (2) 1,312
Subordinated debt (2) 500
---------
Total Tier 2 capital 1,812
---------
Total capital $ 17,505
=========
Risk-weighted assets $ 142,448
=========
Adjusted quarterly average assets $ 243,269
=========
<TABLE>
<CAPTION>
Regulatory Well-capitalized Actual Ratios at
The Company Minimum Minimum March 31, 1997
- ----------- ---------- ---------------- ----------------
<S> <C> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 8.00% 11.02%
Total capital to risk-weighted assets ratio 8.00 10.00 12.29
Leverage ratio 3.00 6.00 6.45
The Bank
Tier 1 capital to risk-weighted assets ratio 4.00% 8.00% 10.12%
Total capital to risk-weighted assets ratio 8.00 10.00 11.37
Leverage ratio 3.00 6.00 6.04
___________________________
(1) Limited to 25% of total Tier 1 capital, with any remainder
qualifying as Tier 2 capital.
(2) Limited to 1.25% of risk-weighted assets.
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") requires each federal banking agency to revise its
risk-based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities, as well as
reflect the actual performance and expected risk of loss on multi-
family mortgages. This law also requires each federal banking
agency to specify the levels at which an insured institution would
be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Under the FDIC's regulations, the
Company and the Bank were both "well capitalized" at
March 31, 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 payment of dividends on the Common Stock and Series C
Preferred Stock is determined by the Company's board of directors
in light of circumstances and conditions then existing, including
the earnings of the Company and the 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
-29-
<PAGE>
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.
At its meeting on April 23, 1997, the Board of Directors of
the Company approved a 25% stock dividend on the Common Stock. The
Board of Directors also approved the payment of the regular
quarterly cash dividend of $0.05 per share on the Common Stock.
Both dividends are payable May 31, 1997, to shareholders of record
on May 15, 1997. The cash dividend will be payable on the newly
issued dividend shares.
Subsequent to March 31, 1997, holders of a total of 7,230
shares of the Company's Series C Preferred Stock converted such
shares into 132,845 shares of Common Stock. As of the date of
filing of this report, the Company had 6,248 shares of Series C
Preferred Stock and 1,557,072 shares of the Common Stock issued and
outstanding.
-30-
<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.
At the Company's Annual Meeting of Stockholders held on
Tuesday, April 29, 1997, the following members were elected to the
Board of Directors:
Votes For Votes Withheld
---------- --------------
Lee Caldwell 1,115,167 68,003
Randal N. Crosswhite 1,147,567 35,603
Louis S. Gee 1,147,567 35,603
Marshal M. Kellar 1,115,167 68,003
Continuing directors not standing for re-election until the
1998 and 1999 Annual Meetings of Shareholders are Bryan W.
Stephenson (1998), Scott L. Taliaferro (1998), C.G. Whitten (1998),
Mrs. Wm. R. (Amber) Cree (1999), Tommy McAlister (1999), James D.
Webster, M.D. (1999) and John A. Wright (1999).
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
Current Report on Form 8-K, dated February 10, 1997,
relating to the acquisition of Crown Park Bancshares,
Inc. and its subsidiary, Western National Bank, Lubbock,
Texas.
-31-
<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: May 15, 1997 Independent Bankshares, Inc.
(Registrant)
By: /s/ Randal N. Crosswhite
-------------------------
Randal N. Crosswhite
Senior Vice President and
Chief Financial Officer
-32-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES, INC. FOR THE THREE
MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 12,650,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,178,000
<INVESTMENTS-CARRYING> 91,756,000
<INVESTMENTS-MARKET> 91,258,000
<LOANS> 132,328,000<F1>
<ALLOWANCE> 1,312,000
<TOTAL-ASSETS> 266,818,000
<DEPOSITS> 245,465,000
<SHORT-TERM> 817,000
<LIABILITIES-OTHER> 1,476,000
<LONG-TERM> 7,000
135,000
135,000
<COMMON> 355,000
<OTHER-SE> 18,563,000
<TOTAL-LIABILITIES-AND-EQUITY> 266,818,000
<INTEREST-LOAN> 2,731,000
<INTEREST-INVEST> 1,310,000
<INTEREST-OTHER> 255,000
<INTEREST-TOTAL> 4,296,000
<INTEREST-DEPOSIT> 2,036,000
<INTEREST-EXPENSE> 2,056,000
<INTEREST-INCOME-NET> 2,240,000
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,890,000
<INCOME-PRETAX> 772,000
<INCOME-PRE-EXTRAORDINARY> 772,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 493,000
<EPS-PRIMARY> .36
<EPS-DILUTED> .32
<YIELD-ACTUAL> 4.00
<LOANS-NON> 105,000
<LOANS-PAST> 117,000
<LOANS-TROUBLED> 84,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 793,000
<CHARGE-OFFS> 116,000
<RECOVERIES> 240,000
<ALLOWANCE-CLOSE> 1,312,000
<ALLOWANCE-DOMESTIC> 1,312,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 513,000
<FN>
<F1>Net of unearned income on installment loans of 2,316,000.
</FN>
</TABLE>
