UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
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.
(A wholly owned subsidiary of State National Bancshares, Inc.)
(Exact name of registrant as specified in its charter)
Texas 75-1717279
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
547 Chestnut Street
P.O. Box 3296
Abilene, Texas 79604
(Address of principal (Zip Code)
executive offices)
(915) 677-5550
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of
the issuer's classes of common stock at September 30, 2000.
Class: Common Stock, par value $0.25 per share
Outstanding at September 30, 2000: 2,273,647 shares
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1. Financial Statements.
<PAGE>
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(Unaudited)
Predecessor
September 30, December 31,
2000 1999
------------ -----------
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks $ 16,924,000 $ 22,985,000
Federal Funds Sold 28,478,000 15,775,000
------------ ------------
Total Cash and Cash
Equivalents 45,402,000 38,760,000
------------ ------------
Securities:
Available-for-sale 99,598,000 48,387,000
Held-to-maturity 0 60,516,000
------------ ------------
Total Securities 99,598,000 108,903,000
------------ ------------
Loans:
Total Loans 181,393,000 187,143,000
Less:
Unearned Income on
Installment Loans 175,000 517,000
Allowance for Possible
Loan Losses 5,251,000 1,833,000
------------ ------------
Net Loans 175,967,000 184,793,000
------------ ------------
Intangible Assets 38,599,000 10,158,000
Premises and Equipment 9,027,000 9,816,000
Accrued Interest Receivable 3,500,000 3,538,000
Other Real Estate and Other 278,000 272,000
Repossessed Assets
Other Assets 1,431,000 2,022,000
------------ ------------
Total Assets $373,802,000 $358,262,000
============ ============
LIABILITIES AND STOCKHOLDER'S
EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 62,285,000 $ 57,441,000
Interest-bearing Demand Deposits 97,624,000 102,573,000
Interest-bearing Time Deposits 151,402,000 158,285,000
------------ ------------
Total Deposits 311,311,000 318,299,000
Accrued Interest Payable 1,160,000 1,074,000
Other Liabilities 4,655,000 533,000
------------ ------------
Total Liabilities 317,126,000 319,906,000
------------ ------------
Guaranteed Preferred Beneficial
Interests in the Company's
Subordinated Debentures 10,901,000 13,000,000
------------ ------------
Stockholder's Equity:
Common Stock 568,000 583,000
Additional Paid-in Capital 45,539,000 15,955,000
Retained Earnings (Deficit) (702,000) 9,972,000
Unrealized Gain (Loss) on
Available-for-sale Securities 370,000 (343,000)
Treasury Stock (at Cost) 0 (669,000)
Unearned Employee Stock Ownership
Plan Stock 0 (142,000)
------------ ------------
Total Stockholder's Equity 45,775,000 25,356,000
------------ ------------
Total Liabilities and
Stockholder's Equty $373,802,000 $358,262,000
============ ============
See Accompanying Notes to Consolidated Financial Statements.
-3-
<PAGE>
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS) FOR THE PERIOD FROM AUGUST 12, 2000, THROUGH SEPTEMBER 30, 2000,
THE PERIOD FROM JULY 1, 2000, THROUGH AUGUST 11, 2000, AND THE THREE
MONTH PERIOD ENDED SEPTEMBER 30, 1999
(Unaudited)
Predecessor
-------------------------
Three-
August 12, July 1, month
2000 2000 Period
Through Through Ended
September August 11, September
30, 2000 2000 30, 1999
---------- ----------- -----------
Interest Income:
Interest and Fees on Loans $2,442,000 $ 2,033,000 $4,254,000
Interest on Securities 775,000 648,000 1,485,000
Interest on Federal Funds Sold 276,000 201,000 303,000
---------- ----------- ----------
Total Interest Income 3,493,000 2,882,000 6,042,000
---------- ----------- ----------
Interest Expense:
Interest on Deposits 1,502,000 1,220,000 2,412,000
---------- ----------- ----------
Total Interest Expense 1,502,000 1,220,000 2,412,000
---------- ----------- ----------
Net Interest Income 1,991,000 1,662,000 3,630,000
Provision for Loan Losses 408,000 1,150,000 150,000
---------- ----------- ----------
Net Interest Income After
Provision for Loan Losses 1,583,000 512,000 3,480,000
---------- ----------- ----------
Noninterest Income:
Service Charges 355,000 293,000 725,000
Trust Fees 28,000 24,000 48,000
Other Income 61,000 22,000 44,000
---------- ----------- ----------
Total Noninterest Income 444,000 339,000 817,000
---------- ----------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 751,000 859,000 1,512,000
Merger-related Expense 0 1,659,000 0
Net Occupancy Expense 213,000 177,000 360,000
Equipment Expense 151,000 221,000 277,000
Amortization of Intangible Assets 432,000 77,000 169,000
Distributions on Guaranteed
Preferred Beneficial Interests
in the Company's Subordinated
Debentures 153,000 126,000 277,000
Professional Fees 58,000 173,000 120,000
Stationery, Printing and Supplies 70,000 67,000 158,000
Expense
Net Costs Applicable to Other Real
Estate and Other Repossessed
Assets 2,000 13,000 18,000
Other Expenses 272,000 513,000 499,000
---------- ----------- ----------
Total Noninterest Expenses 2,102,000 3,885,000 3,390,000
---------- ----------- ----------
Income (Loss) Before Federal
Income Taxes (75,000) (3,034,000) 907,000
Federal Income Tax Expense
(Benefit) (73,000) (323,000) 276,000
---------- ----------- ----------
Net Income (Loss) (2,000) (2,711,000) 631,000
Other Comprehensive Income, Net of
Tax:
Unrealized Holding Gains (Losses)
on Available-for-sale Securities
Arising During the Period 370,000 2,000 (33,000)
---------- ----------- ----------
Comprehensive Income (Loss) $ 368,000 $(2,709,000) $ 598,000
========== =========== ==========
Preferred Stock Dividends $ 0 $ 0 $ 5,000
========== =========== ==========
Net Income (Loss) Available to
Common Stockholders $ (2,000) $(2,711,000) $ 626,000
========== =========== ==========
Basic Earnings (Loss) Per Common
Share Available to Common
Stockholders $ (1.20) $ 0.29
Diluted Earnings (Loss) Per Common =========== ==========
Share Available to Common
Stockholders $ (1.20) $ 0.28
=========== ==========
See Accompanying Notes to Consolidated Financial Statements.
-4-
<PAGE>
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS) FOR THE PERIOD FROM AUGUST 12, 2000, THROUGH SEPTEMBER 30, 2000,
THE PERIOD FROM JANUARY 1, 2000, THROUGH AUGUST 11, 2000, AND THE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
(Unaudited)
Predecessor
-------------------------
August 12, January 1, Nine-month
2000 2000 Period
Through Through Ended
September August 11, September
30, 2000 2000 30, 1999
---------- ----------- -----------
Interest Income:
Interest and Fees on Loans $2,442,000 $10,746,000 $12,691,000
Interest on Securities 775,000 3,705,000 4,391,000
Interest on Federal Funds Sold 276,000 822,000 1,002,000
---------- ----------- -----------
Total Interest Income 3,493,000 15,273,000 18,084,000
---------- ----------- -----------
Interest Expense:
Interest on Deposits 1,502,000 6,355,000 7,389,000
---------- ----------- -----------
Total Interest Expense 1,502,000 6,355,000 7,389,000
---------- ----------- -----------
Net Interest Income 1,991,000 8,918,000 10,695,000
Provision for Loan Losses 408,000 1,660,000 320,000
---------- ----------- -----------
Net Interest Income After
Provision for Loan Losses 1,583,000 7,258,000 10,375,000
---------- ----------- -----------
Noninterest Income:
Service Charges 355,000 1,621,000 2,164,000
Trust Fees 28,000 140,000 157,000
Other Income 61,000 142,000 172,000
---------- ----------- -----------
Total Noninterest Income 444,000 1,903,000 2,493,000
---------- ----------- -----------
Noninterest Expenses:
Salaries and Employee Benefits 751,000 3,869,000 4,541,000
Merger-related Expense 0 1,970,000 0
Net Occupancy Expense 213,000 914,000 1,066,000
Equipment Expense 151,000 809,000 796,000
Amortization of Intangible Assets 432,000 413,000 503,000
Distributions on Guaranteed
Preferred Beneficial Interests in
the Company's Subordinated
Debentures 153,000 678,000 829,000
Professional Fees 58,000 416,000 328,000
Stationery, Printing and Supplies 70,000 360,000 420,000
Expense
Net Costs Applicable to Other Real
Estate and Other Repossessed
Assets 2,000 29,000 74,000
Other Expenses 272,000 1,512,000 1,515,000
---------- ----------- -----------
Total Noninterest Expenses 2,102,000 10,970,000 10,072,000
---------- ----------- -----------
Income (Loss) Before Federal
Income Taxes (75,000) (1,809,000) 2,796,000
Federal Income Tax Expense
(Benefit) (73,000) 99,000 908,000
---------- ----------- -----------
Net Income (Loss) (2,000) (1,908,000) 1,888,000
Other Comprehensive Income, Net of
Tax:
Unrealized Holding Gains (Losses)
on Available-for-sale Securities
Arising During the Period 370,000 150,000 (373,000)
---------- ----------- -----------
Comprehensive Income (Loss) $ 368,000 $(1,758,000) $ 1,515,000
========== =========== ===========
Preferred Stock Dividends $ 0 $ 0 $ 15,000
========== =========== ===========
Net Income (Loss) Available to
Common Stockholders $ (2,000) $(1,908,000) $ 1,873,000
========== =========== ===========
Basic Earnings (Loss) Per Common
Share Available to Common
Stockholders $ (0.84) $ 0.86
=========== ===========
Diluted Earnings (Loss) Per Common
Share Available to Common
Stockholders $ (0.84) $ 0.83
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
-5-
<PAGE>
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM AUGUST 12, 2000,
THROUGH SEPTEMBER 30, 2000, THE PERIOD FROM JANUARY 1, 2000, THROUGH AUGUST
11, 2000, AND THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999
(Unaudited)
Predecessor
-------------------------
August 12, January 1, Nine-month
2000 2000 Period
Through Through Ended
September August 11, September
30, 2000 2000 30, 1999
---------- ------------ -----------
Cash Flows from Operating
Activities:
Net Income (Loss) $ (2,000) $(1,908,000) $ 1,888,000
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating
Activities:
Deferred Federal Income Tax Expense 0 0 255,000
Depreciation and Amortization 523,000 864,000 1,067,000
Provision for Loan Losses 408,000 1,660,000 320,000
Gains on Sales of Premises and
Equipment 0 0 (1,000)
Gains on Sales of Other Real Estate
and Other Repossessed Assets 0 0 (1,000)
Writedown of Other Real Estate and
Other Repossessed Assets 0 4,000 3,000
(Increase) Decrease in Accrued
Interest Receivable 33,000 6,000 (264,000)
Decrease in Other Assets 218,000 363,000 149,000
Increase (Decrease) in Accrued
Interest Payable (13,000) 99,000 (257,000)
Increase (Decrease) in Other
Liabilities (606,000) 1,227,000 247,000
----------- ----------- -----------
Net Cash Provided by Operating
Activities 561,000 2,315,000 3,406,000
----------- ----------- -----------
Cash Flows from Investing
Activities:
Proceeds from Maturities of
Available-for-sale Securities 3,319,000 12,200,000 4,707,000
Proceeds from Maturities of Held-
to- maturity Securities 0 4,724,000 33,462,000
Proceeds from Sales of Available-
for-sale Securities 39,692,000 3,000,000 0
Purchases of Available-for-sale
Securities (43,538,000) (4,891,000) (23,685,000)
Purchase of Held-to-maturity
Securities 0 (5,836,000) (27,971,000)
Net (Increase) Decrease in Loans (389,000) 3,167,000 (3,752,000)
Proceeds from Sales of Premises and
Equipment 0 0 1,000
Additions to Premises and Equipment (1,000) (82,000) (142,000)
Proceeds from Sales of Other Real
Estate and Other Repossessed
Assets 6,000 356,000 1,047,000
----------- ----------- -----------
Net Cash Provided by (Used in)
Investing Activities (911,000) 12,638,000 (16,333,000)
----------- ----------- -----------
Cash Flows from Financing
Activities:
Decrease in Deposits (26,000) (6,962,000) (12,949,000)
Repayment of Notes Payable 0 0 (1,000)
Payment of Cash Dividends (700,000) (273,000) (343,000)
Purchase of Treasury Stock 0 0 (669,000)
----------- ----------- -----------
Net Cash Used in Financing
Activities (726,000) (7,235,000) (13,962,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents (1,076,000) 7,718,000 (26,889,000)
Cash and Cash Equivalents at
Beginning of Period 46,478,000 38,760,000 64,737,000
----------- ----------- -----------
Cash and Cash Equivalents at
End of Period $45,402,000 $46,478,000 $37,848,000
=========== =========== ===========
Noncash Investing Activities:
Additions to Other Real Estate and
Other Repossessed Assets through
Foreclosures $ 56,000 $ 317,000 $ 728,000
See Accompanying Notes to Consolidated Financial Statements.
-6-
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 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, 1999, 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.
Note 2: Financial Statements
The Company believes that the disclosures contained herein are
adequate to make the information presented not misleading and reflect
all adjustments (consisting only of normal recurring adjustments) which
are necessary for a fair presentation of results of operations for such
periods. Results for interim periods may not be indicative of results
for the full year. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial
statements for the Company for the year ended December 31, 1999, and
the notes thereto.
Note 3: Acquisition of the Company
On March 1, 2000, the Company entered into an Agreement and Plan
of Reorganization (the "Agreement") with State National Bancshares,
Inc. ("State National") for a cash acquisition of the Company by State
National (the "Acquisition"). The Company and State National
consummated the Merger at the close of business August 11, 2000.
Pursuant to the terms of the Agreement, each share of common stock of
the Company was exchanged for $20.0165 in cash. Upon conclusion of the
Acquisition, State National became the sole shareholder of the Company,
owning all 2,273,647 outstanding shares of the Company's common stock.
In connection with the Acquisition, State National agreed to assume
and guarantee the outstanding Trust Preferred Securities issued by
Independent Capital Trust, a Delaware business trust controlled by
the Company.
State National accounted for its acquisition of the Company as a
purchase business combination and purchase accounting adjustments,
including goodwill, have been pushed down and reflected in the
consolidated financial statements of the Company subsequent to August
11, 2000. The consolidated financial statements of the Company for the
periods ended before August 12, 2000 (predecessor), were prepared
using the Company's historical basis of accounting. The comparability
of operating results for these periods and the periods encompassing push
down accounting are affected by the purchase accounting adjustments,
including the amortization of goodwill (straight-line method) and core
deposit intangibles (accelerated method) over a period of 20 and 10 years,
respectively.
The purchase price, including costs incurred by State National
directly associated with the Acquisition, has been preliminarily
allocated to net assets acquired. Amounts may be subsequently revised.
The following table summarizes the preliminary changes made to the
accounts of the Company as of August 11, 2000, as a result of applying
push down accounting:
Balance at Push Down
Date of Accounting Adjusted
Acquisition Adjustments Balance
----------- ----------- --------
(In thousands)
Investment securities $ 99,906 $ (1,494) $ 98,412
Loans, net of unearned
income 183,082 (1,169) 181,913
Allowance for possible
loan losses (3,343) (2,328) (5,671)
Goodwill and core
deposit intangibles 9,746 29,285 39,031
Premises and equipment 9,446 (330) 9,116
Other assets 1,659 (10) 1,649
Total assets 350,735 23,954 374,689
Other liabilities $ 1,760 $ 3,416 $ 5,176
Trust Preferred
Securities 13,000 (2,103) 10,897
Stockholder's equity 23,465 22,641 46,106
Total liabilities and
stockholder's equity 350,735 23,954 374,689
-7-
<PAGE>
Note 4: Allowance for Possible Loan Losses
An analysis of activity in the allowance for possible loan losses
is presented below. The amount charged to operating expenses is based
on management's assessment of the adequacy of the allowance based on
estimated probable losses in the portfolio.
2000 1999
------ ------
(In thousands)
Balance at January 1 $1,833 $1,842
Provision for loan
losses 1,660 320
------ ------
Net charge-offs:
Losses charged to
allowance (230) (506)
Recoveries 80 165
------ ------
Net charge-offs (150) (341)
------ ------
Balance at August 11,
2000 3,343
Purchase accounting
adjustments 2,328
Provision for loan
losses 408
------
Net charge-offs:
Losses charged to
allowance (834)
Recoveries 6
------
Net charge-offs (828)
------
Balance at
September 30 $5,251 $1,821
====== ======
For further discussion of the activity in the allowance for
possible loan losses see Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Note 5: Earnings Per Share
Basic 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. The
remainder of the Company's Series C Cumulative Convertible Preferred
Stock (the "Series C Preferred Stock") was converted into Common Stock
during the fourth quarter of 1999. Because the Company's outstanding
Series C Preferred Stock was cumulative, the dividends allocable to
such preferred stock reduced income available to common stockholders in
the basic earnings per share calculations. In computing diluted
earnings per common share for the quarter and nine-month period ended
September 30, 1999, the conversion of the Series C Preferred Stock was
assumed, as the effect was dilutive. The weighted average common shares
outstanding used in computing basic earnings per common share for the
quarter ended September 30, 2000 and 1999, was 2,263,000 and 2,158,000
shares, respectively. The weighted average common shares outstanding
used in computing diluted earnings per common share for the period July
1 through August 11, 2000, and the quarter ended September 30, 1999,
was 2,263,000 and 2,261,000 shares, respectively. The weighted average
common shares outstanding used in computing basic earnings per common
share for the period January 1 through August 11, 2000, and the nine-
month period ended September 30, 1999, were 2,262,000 and 2,174,000
shares, respectively. The weighted average common shares outstanding
used in computing diluted earnings per common share for the period
January 1 through August 11, 2000, and the nine-month period ended
September 30, 1999, were 2,262,000 and 2,280,000 shares, respectively.
Earnings per share calculations are not presented subsequent to
August 11, 2000. At the date of the Acquisition all of the outstanding
common stock of the Company was acquired by State National, rendering
the calculations not meaningful.
-8-
<PAGE>
Note 6: Accumulated Other Comprehensive Income
An analysis of accumulated other comprehensive income for the
quarters and nine-month periods ended September 30, 2000 and 1999, is
as follows:
Unrealized Gain (Loss) on
Available-for-sale Securities
-----------------------------------
Quarter Ended Nine-month Period
September 30, Ended September 30,
----------------- -------------------
2000 1999 2000 1999
-------- ------- ------- ----------
(In thousands)
Balance, beginning of
period $ (195) $ (179) $(343) $ 161
Current period change 372 (33) 520 (373)
Purchase accounting 193 0 193 0
adjustment ------ ------ ----- ------
Balance, at September
30 $ 370 $ (212) $ 370 $ (212)
====== ====== ===== ======
Note 7: Legal Proceedings
The Estate of Harry V. Howard, Deceased, filed a lawsuit against
First State Bank, National Association (the "Bank") (as successor to
First State Bank of Odessa, N.A.), (The Estate of Harry V. Howard,
Deceased v. First State Bank of Odessa, N.A., Odessa, Texas, Cause No.
1268) on July 9, 1999, in the County Court of Upton County, Texas.
This case was subsequently refiled in the 104th District Court for
Taylor County, Texas as Cause No. 22080-B. The plaintiffs' lawsuit
relates to the Bank's management of the Harry V. Howard Trust. The
lawsuit alleges that the Bank, in its capacity as trustee of this
testamentary trust, failed to adequately oversee the trust assets and
allowed waste to occur to the trust principal. Additionally, the
lawsuit alleges that the Bank made inappropriate distributions to the
current beneficiary of the trust. The lawsuit also alleges, among
other things, other general acts of mismanagement and breach of
fiduciary duty. The lawsuit seeks actual and exemplary damages in
excess of $10,000,000, as well as pre and post-judgment interest and
attorneys' fees. The Bank denies any allegations made in the petition
and intends to vigorously defend this suit.
The Bank has trust errors and omissions liability insurance to
cover certain risks associated with claims filed against the Bank as
trustee. The Bank has notified the insurance company of the complaint
filed against the Bank. The insurance company has determined
preliminarily that it appears the Bank has coverage, except for any
punitive or exemplary damages, under the policy up to $2,000,000 with
a deductible of $25,000.
Discovery in this case has been completed. The only remaining
depositions to be taken are of the Bank's and the plaintiffs' damages
experts. At this time it is not possible to predict whether the Bank
will incur any liability or to estimate the damages, or the range of
damages, if any, that the Bank might incur in connection with such
action.
The Company is involved in various other litigation proceedings
incidental to the ordinary course of business. In the opinion of
management, the ultimate liability, if any, resulting from such other
litigation would not be material in relation to the Company's financial
position or results of operations.
Note 8: Subsequent Event
During November 2000, State National contributed to the Company
its ownership of United Bank & Trust, Abilene, Texas ("UB&T"). UB&T
was merged with and into the Bank at that time.
At September 30, 2000, UB&T had total assets of $110,095,000,
total loans, net of allowance for possible loan losses, of
$67,217,000, total deposits of $91,619,000 and total stockholder's
equity of $16,686,000. In addition, UB&T had unamortized intangible
assets at September 30, 2000, of $8,479,000.
UB&T's net interest income for the period from August 12 to
September 30, 2000, was $644,000, and its net loss for the same period
was $17,000.
-9-
<PAGE>
Note 9: Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company currently
owns no derivative financial instruments and does not engage in
hedging activities. As a result, the Company does not believe that the
adoption of FAS 133 on January 1, 2001, will have a material effect on
the Company's consolidated financial position or results of operation.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q contains certain forward-
looking statements and information relating to Independent Bankshares,
Inc. (the "Company") and its subsidiaries that are based on the beliefs
of the Company's management as well as assumptions made by and
information currently available to the Company's management. When used
in this report, the words "anticipate," "believe," "estimate," "expect"
and "intend" and words or phrases of similar import, as they relate to
the Company or its subsidiaries or Company management, are intended to
identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions related to
certain factors including, without limitation, competitive factors,
general economic conditions, customer relations, the interest rate
environment, governmental regulation and supervision, nonperforming
asset levels, loan concentrations, changes in industry practices, one
time events and other factors described herein. Based upon changing
conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect,
actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company
does not intend to update these forward-looking statements.
The Company
------------
The Company is a bank holding company that, at September 30, 2000,
was a wholly owned subsidiary of State National Bancshares, Inc.,
Lubbock, Texas ("State National"). At such date, the Company owned 100%
of the common securities of Independent Capital Trust ("Independent
Capital") and 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 cities of Abilene (three
locations), Azle (two locations), Lubbock, Odessa (four locations), San
Angelo, Stamford and Winters.
Results of Operations
---------------------
General
The Company was acquired on August 11, 2000, by State National in
an all-cash transaction which was accounted for as a purchase (the
"Acquisition"). As a result of the Acquisition, the Company's assets
and liabilities were adjusted to fair value. The consolidated financial
statements of the Company for the periods ended before August 12, 2000,
were prepared using the Company's historical basis of accounting.
Although a new basis of accounting began on August 12, 2000, the
Company has presented results for the quarter and nine-month period
ended September 30, 2000, together as the Company believes presentation
of these periods to be meaningful for comparison purposes. The impact
on results of operations related to the Acquisition will be explained
when material.
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
September 30, 2000, and December 31, 1999, and results of operations
for each of the quarters and nine-month periods ended September 30,
2000 and 1999. 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
The net loss for the period July 1 through August 11, 2000 (the
date of the acquisition of the Company by State National) was
$2,711,000 ($1.20 basic and diluted loss per share). The net loss for
the period January 1 through August 11, 2000, was $1,908,000 ($0.84
basic and diluted loss per share). The net loss for the period August
12 through September 30, 2000, amounted to $2,000. Net income was
$631,000 ($0.29 basic and $0.28 diluted earnings per common share,
respectively) for the quarter ended September 30, 1999. Net income for
the nine-month period ended September 30, 1999, was $1,888,000 ($0.86
basic and $0.83 diluted earnings per common share). The net losses
recorded during the third quarter and first nine-months of 2000 were
due to expenses incurred in connection with the Acquisition and increases
in the provisions for loan losses.
Net Interest Income
Net interest income represents the amount by which interest income
on interest-earning assets, including loans and securities, exceeds
interest paid on interest-bearing liabilities, including deposits and
other borrowed funds. Net interest
-11-
<PAGE>
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 $3,653,000 for the third quarter
of 2000, an increase of $23,000, or 0.6%, from the third quarter of
1999. Net interest income for the third quarter of 1999 was
$3,630,000. Net interest income for the first nine months of 2000 was
$10,909,000, an increase of $214,000, or 2.0%, from net interest income
of $10,695,000 for the first nine months of 1999. The increases in
2000 were primarily due to increases in the net interest margin. The
net interest margin on a fully taxable-equivalent basis, was 4.76% and
4.70% for the third quarter and first nine months of 2000,
respectively, compared to 4.65% and 4.55% for the third quarter and
first nine months of 1999, respectively. The primary reason for the
increases in the net interest margin during the first nine months of
2000 is a shift within the Company's loan portfolio to more commercial
and real estate loans and away from lower-yielding indirect installment
loans.
At September 30, 2000, approximately $60,554,000, or 33.4%, of the
Company's total loans, net of unearned income, were loans with floating
interest rates. Average overall rates paid for various types of
certificates of deposit increased from the first nine months of 1999 to
the first nine months of 2000. For example, the average rate paid for
certificates of deposit less than $100,000 increased from 4.79% for the
first nine months of 1999 to 5.37% for the first nine months of 2000,
while the average rate paid by the Company for certificates of deposit
of $100,000 or more also increased from 4.91% during the first nine
months of 1999 to 5.57% during the first nine months of 2000. Rates on
other types of deposits, such as interest-bearing demand, savings and
money market deposits, however, actually decreased from an average of
2.10% during the first nine months of 1999 to an average of 2.07%
during the first nine months of 2000. These changes caused the
Company's overall cost of interest-bearing deposits to increase from
3.73% for the first nine months of 1999 to 4.10% for the first nine
months of 2000.
The following table presents the average balance sheets of the
Company for the quarters and nine-month periods ended September 30,
2000 and 1999, 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.
-12-
<PAGE>
<TABLE>
Quarter Ended September 30,
----------------------------------------------------------------------
2000 1999
----------------------------- ---------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- ------- --------- ------------ ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned
income (1) $183,345 $4,475 9.76% $184,572 $ 4,254 9.22%
Securities (2) 98,412 1,472 5.98 109,026 1,542 5.66
Federal funds sold 29,552 477 6.46 23,595 303 5.14
-------- ------ ---- -------- -------- ----
Total interest-earning
assets 311,309 6,424 8.25 317,193 6,099 7.69
-------- ------ ---- -------- -------- ----
Noninterest-earning
assets:
Cash and due from banks 18,474 18,233
Intangible assets 25,097 9,957
Premises and equipment 9,264 10,410
Accrued interest
receivable and other
assets 5,649 5,913
Allowance for possible
loan losses (3,728) (1,776)
-------- --------
Total noninterest-
earning assets 54,756 42,737
-------- --------
Total assets $366,065 $359,930
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Demand, savings and
money market deposits $ 99,219 $ 532 2.14% $105,467 $ 548 2.08%
Time deposits 151,739 2,190 5.77 155,748 1,864 4.79
-------- ------ ---- -------- -------- ----
Total interest-bearing
liabilities 250,958 2,722 4.34 261,215 2,412 3.69
-------- ------ ---- -------- -------- ----
Noninterest-bearing
liabilities:
Demand deposits 61,447 58,751
Accrued interest payable
and other liabilities 4,967 2,027
-------- --------
Total noninterest-
bearing liabilities 66,414 60,778
-------- --------
Total liabilities 317,372 321,993
Guaranteed preferred
beneficial interests in
the Company's
subordinated debentures 11,848 13,000
Stockholders' equity 36,845 24,937
-------- --------
Total liabilities
and stockholders'
equity $366,065 $359,930
======== ========
Net interest income $3,702 $ 3,687
====== ========
Interest rate spread (3) 3.91% 4.00%
==== ====
Net interest margin (4) 4.76% 4.65%
==== ====
</TABLE>
______________________________
(1) Nonaccrual loans are included in the Average Balance columns, and
income recognized on these loans, if any, is included in the Interest
Income/Expense columns. Interest income on loans includes fees on
loans, which are not material in amount.
(2) Nontaxable interest income on securities was adjusted to a taxable
yield assuming a tax rate of 34%.
(3) The interest rate spread is the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) The net interest margin is equal to net interest income, on a
fully taxable-equivalent basis, divided by average interest-earning
assets.
-13-
<PAGE>
<TABLE>
Nine-month Period Ended September 30,
-------------------------------------------------------------------
2000 1999
---------------------------------- --------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------- ----------- --------- --------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans, net of unearned
income (1) $184,772 $13,189 9.52% $183,785 $ 12,691 9.21%
Securities (2) 105,481 4,645 5.87 106,782 4,559 5.69
Federal funds sold 23,715 1,098 6.17 27,468 1,002 4.86
-------- ------- ---- -------- -------- ----
Total interest-earning
assets 313,968 18,932 8.04 318,035 18,252 7.65
-------- ------- ---- -------- -------- ----
Noninterest-earning
assets:
Cash and due from banks 19,104 19,103
Intangible assets 15,025 10,096
Premises and equipment 9,516 10,559
Accrued interest
receivable and other
assets 5,856 6,154
Allowance for possible
loan losses (2,459) (1,791)
-------- --------
Total noninterest-
earning assets 47,042 44,121
-------- --------
Total assets $361,010 $362,156
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Demand, savings and money
market deposits $101,206 $ 1,573 2.07% $107,074 $ 1,690 2.10%
Time deposits 154,231 6,284 5.43 157,380 5,699 4.83
-------- ------- ---- -------- -------- ----
Total interest-bearing 3.73
liabilities 255,437 7,857 4.10 264,454 7,389 ----
-------- ------- ---- -------- --------
Noninterest-bearing
liabilities:
Demand deposits 60,438 57,921
Accrued interest payable
and other liabilities 3,054 2,067
-------- --------
Total noninterest-
bearing liabilities 63,492 59,988
-------- --------
Total liabilities 318,929 324,442
Guaranteed preferred
beneficial interests in
the Company's
subordinated debentures 12,526 13,000
Stockholders' equity 29,555 24,714
-------- --------
Total liabilities and
stockholders' equity $361,010 $362,156
======== ========
Net interest income $11,075 $ 10,683
======= ========
Interest rate spread (3) 3.94% 3.92%
==== ====
Net interest margin (4) 4.70% 4.55%
==== ====
</TABLE>
______________________________
(1) Nonaccrual loans are included in the Average Balance columns, and
income recognized on these loans, if any, is included in the Interest
Income/Expense columns. Interest income on loans includes fees on
loans, which are not material in amount.
(2) Nontaxable interest income on securities was adjusted to a taxable
yield assuming a tax rate of 34%.
(3) The interest rate spread is the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) The net interest margin is equal to net interest income, on a
fully taxable-equivalent basis, divided by average interest-earning
assets.
-14-
<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>
Quarters Ended Nine-month Periods Ended
September 30, 2000 vs. 1999 September 30, 2000 vs. 1999
--------------------------- ------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Changes In: Changes In:
--------------------------- ------------------------------
Volume Rate Total Volume Rate Total
------- ----- -------- ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans, net of unearned
income (1) $ (28) $ 249 $ 221 $ 68 $ 430 $ 498
Securities (2) (150) 80 (70) (56) 142 86
Federal funds sold 77 97 174 (137) 233 96
----- ----- ------ ----- ----- -----
Total interest income (101) 426 325 (125) 805 680
----- ----- ------ ----- ----- -----
Interest-bearing
liabilities:
Demand, savings and money
market deposits (32) 16 (16) (93) (24) (117)
Time deposits (47) 373 326 (113) 698 585
----- ----- ------ ----- ----- -----
Total interest expense (79) 389 310 (206) 674 468
----- ----- ------ ----- ----- -----
Increase (decrease) in net
interest income $ (22) $ 37 $ 15 $ 81 $ 131 $ 212
===== ===== ====== ===== ===== =====
</TABLE>
______________________________
(1) Nonaccrual loans have been included in average assets for the
purposes of the computations, thereby reducing yields.
(2) Information with respect to tax-exempt securities is provided on a
fully taxable-equivalent basis assuming a tax rate of 34%.
Provision for Loan Losses
The amount of the provision for loan losses is based on periodic
(not less than quarterly) evaluations of the loan portfolio, especially
nonperforming and other potential problem loans. During these
evaluations, consideration is given to such factors as: management's
evaluation of specific loans; the level and composition of
nonperforming loans; historical loss experience; results of
examinations by regulatory agencies; an internal asset review process
conducted by the Company that is independent of the management of the
Bank; expectations of future economic conditions and their impact on
particular industries and individual borrowers; the market value of
collateral; the strength of available guarantees; concentrations of
credits; and other judgmental factors. The provisions for loan losses
made for the quarter and nine-month period ended September 30, 2000,
were $1,558,000 and $2,068,000, respectively, compared to $150,000 and
$320,000 for the quarter and nine-month period ended September 30,
1999, respectively. These represent increases of $1,408,000, or 938.7%,
and $1,748,000, or 546.3%. The increased provisions for the quarter
and nine-month period ended September 30, 2000, were primarily due to
increased classified loans, charged-off loans and, to a lesser extent,
increased nonperforming loans at September 30, 2000. See "Analysis of
Financial Condition-Loan Portfolio" and "-Allowance for Possible Loan
Losses" below.
Noninterest Income
Noninterest income decreased $34,000, or 4.2%, from $817,000
during the third quarter of 1999 to $783,000 during the third quarter
of 2000. Noninterest income also decreased $146,000, or 5.9%, from
$2,493,000 for the first nine months of 1999 to $2,347,000 for the
first nine months of 2000.
Service charges on deposit accounts and on other types of services
are the major source of noninterest income to the Company. This source
of income decreased from $725,000 during the third quarter of 1999 to
$648,000 during the third quarter of 2000, a 10.6% decrease, and
decreased $188,000, or 8.7%, from $2,164,000 for the first nine months
of 1999 to $1,976,000 for the first nine months of 2000. The decrease
was primarily due to an unusually high amount of charges for checks
that were drawn on insufficient funds during the first nine months of
1999.
Trust fees from the operation of the trust department of the Bank
increased $4,000, or 8.3%, from $48,000 during the third quarter of
1999 to $52,000 during the same period in 2000, and increased $11,000,
or 7.0%, from $157,000 for the first
-15-
<PAGE>
nine months of 1999 to $168,000 for the first nine months of 2000 as a
result of an overall increase in the value of assets under management
of the trust department and one-time termination fees assessed during
the first quarter of 2000.
Other income is the sum of several components of noninterest
income including check printing income, gains on sales of investment
securities, commissions earned from the sale of mutual funds and
annuities, bankcard royalty income, insurance premiums earned on
automobiles financed through the Company's installment loan program and
other sources of miscellaneous income. Other income increased $39,000,
or 88.6%, from $44,000 during the third quarter of 1999 to $83,000
during the third quarter of 2000, and increased $31,000, or 18.0%, from
$172,000 for the first nine months of 1999 to $203,000 for the
corresponding period in 2000 due to $39,000 in gains on sales of
investment securities recorded during the third quarter of 2000.
Noninterest Expenses
Noninterest expenses increased $2,597,000, or 76.6%, from
$3,390,000 during the third quarter of 1999 to $5,987,000 during the
third quarter of 2000 and increased $3,000,000, or 29.8%, from
$10,072,000 during the first nine months of 1999 to $13,072,000 during
the first nine months of 2000. Noninterest expenses for the quarter
and nine-month period ended September 30, 2000, were higher than the
same periods for 1999 primarily as a result of costs incurred in
association with the acquisition of the Company by State National as
discussed below.
Salaries and employee benefits rose $98,000, or 6.5%, from
$1,512,000 for the third quarter of 1999 to $1,610,000 for the
corresponding period of 2000, and increased $79,000, or 1.7%, from
$4,541,000 for the nine-month period ended September 30, 1999, to
$4,620,000 for the corresponding period of 2000. The increases were a
result of the final contribution to the Company's Employee Stock
Ownership/401(k) Plan and prorated bonuses paid to certain officers of
the Company and the Bank immediately prior to the Acquisition in
accordance with the Agreement and Plan of Reorganization (the
"Agreement") between the Company and State National.
Merger-related expenses totaled $1,659,000 and $1,970,000 for the
quarter and nine-month period ended September 30, 2000. These expenses
include approximately $887,000 in accrued retention agreement payments
contingently payable to certain officers of the Company and the Bank,
approximately $605,000 in payments made to the Company's investment
advisor in connection with the Acquisition, approximately $319,000 paid
for legal services to the Company involving the Acquisition,
approximately $65,000 for the purchase of tail insurance covering the
Company's former officers and directors subsequent to the acquisition
and other miscellaneous expenses related to the Acquisition.
Net occupancy expense increased $30,000, or 8.3%, from $360,000
for the third quarter of 1999 to $390,000 for the same period in 2000,
and increased $61,000, or 5.7%, from $1,066,000 for the first nine
months of 1999 to $1,127,000 for the first nine months of 2000. The
increase was primarily a result of increases in property taxes and
utility expenses during the first nine months of 2000.
Equipment expense increased from $277,000 for the third quarter of
1999 to $372,000 for the corresponding period in 2000, representing an
increase of $95,000, or 34.3%. These expenses also increased $164,000,
or 20.6%, from $796,000 for the first nine months of 1999 to $960,000
for the first nine months of 2000. The increase was due to the leasing
of additional check processing hardware for the Bank's two branches in
Azle, an increase in equipment repairs expense and the write-off of
equipment and capitalized data processing conversion costs which would
not be utilized or have any future value subsequent to the Acquisition.
Amortization of intangible assets increased $340,000, or 201.2%,
from $169,000 during the third quarter of 1999 to $509,000 during the
third quarter of 2000, and increased $342,000, or 68.0%, from $503,000
for the first nine months of 1999 to $845,000 for the first nine months
of 2000. The increases are due to the amortization of the additional
core deposit intangible and goodwill recorded as a result of the
Acquisition. The preliminary core deposit intangible of $12,598,000 is
being amortized on an accelerated basis over an estimated useful life
of ten years. The preliminary goodwill of $26,433,000 is being
amortized on a straight-line basis over an estimated useful life of
twenty years.
Distributions on guaranteed preferred beneficial interests in the
Company's subordinated debentures totaled $279,000 and $277,000 for the
quarters ended September 30, 2000 and 1999, respectively, and $831,000
and $829,000 for the nine-month periods ended September 30, 2000 and
1999, respectively.
-16-
<PAGE>
Professional fees, which include legal and accounting fees,
increased $111,000, or 92.5%, from $120,000 during the third quarter of
1999 to $231,000 during the third quarter of 2000, and increased
$146,000, or 44.5%, from $328,000 during the first nine months of 1999
to $474,000 for the corresponding period of 2000. The increase in 2000
is primarily due to an increase in legal fees associated with the
various litigation described in Note 7 to the Consolidated Financial
Statements and the settlement of one piece of litigation during the
third quarter of 2000 for $50,000.
Stationery, printing and supplies expense decreased $21,000, or
13.3%, from $158,000 for the third quarter of 1999 to $137,000 for the
third quarter of 2000, but increased $10,000, or 2.4%, from $420,000
for the first nine months of 1999 to $430,000 for the first nine months
of 2000. Increases in printed forms and check printing expenses
associated with the conversion of Azle State Bank, Azle, Texas ("Azle
State") to a branch of the Bank during 1999 was partially offset by a
decrease in supplies expense.
Net costs applicable to other real estate and other repossessed
assets consist of expenses associated with holding and maintaining
repossessed assets, the net gain or loss on the sales of such assets,
the write-down of the carrying value of the assets and any rental
income that is credited as a reduction in expense. The Company recorded
net costs of $15,000 and $31,000 for the third quarter and first nine
months of 2000, respectively, compared to net costs of $18,000 and
$74,000 for the third quarter and first nine months of 1999,
respectively. The decrease in 2000 was due to a decrease in the number
of repossessed automobiles as a result in the reduction in the number
of indirect installment loans.
Other noninterest expense includes, among many other items,
postage, due from bank account charges, data processing, advertising,
armored car and courier fees, travel and entertainment, insurance,
regulatory examinations, directors' fees, dues and subscriptions,
franchise taxes and Federal Deposit Insurance Corporation ("FDIC")
insurance expense. These expenses increased $286,000, or 57.3%, from
$499,000 during the third quarter of 1999 to $785,000 during the third
quarter of 2000, and increased $269,000, or 17.8%, from $1,515,000 for
the first nine months of 1999 to $1,784,000 for the first nine months
of 2000. The increases during the third quarter and first nine months
of 2000 were a result of approximately $132,000 in operating losses and
the write-off of approximately $109,000 of capitalized merger and
acquisition costs related to prior transactions, primarily the
acquisition and branching of Azle State, that were being amortized to
expense. These costs were determined to have no future value subsequent
to the Acquisition.
Federal Income Taxes
The Company recorded a $396,000 federal income tax benefit for the
third quarter of 2000 and accrued $276,000 in federal income taxes in
the third quarter of 1999. The Company accrued $26,000 and $908,000 in
federal income taxes for the first nine months of 2000 and 1999,
respectively. The Company recorded tax expense for the first nine
months of 2000, even though the Company incurred a loss before federal
income taxes, due to the nondeductibility of many of the above-
mentioned merger-related expenses. The effective tax rates for the
first nine months of 1999 was 32.5%. The lower effective rate for 1999
was a result of utilization of tax credit carryforwards during 1999.
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 $15,540,000, or 4.3%, from $358,262,000 at
December 31, 1999, to $373,802,000 at September 30, 2000, due to push-
down accounting adjustments, primarily an increase in intangible assets
of over $29,000,000, made as a result of the Acquisition. This
increase, accompanied by an increase in cash and cash equivalents, was
somewhat offset by decreases in securities and net loans.
-17-
<PAGE>
Cash and Cash Equivalents
The amount of cash and cash equivalents increased $6,642,000, or
17.1%, from $38,760,000 at December 31, 1999, to $45,402,000 at
September 30, 2000. Decreases in cash and due from banks, due to higher
amounts of cash on hand that were maintained at most of the Bank's
branch locations at December 31, 1999, in case of potential liquidity
problems related to Year 2000 were offset by increases in federal funds
sold during the first nine months of 2000.
Securities
Securities decreased $9,305,000, or 8.5%, from $108,903,000 at
December 31, 1999, to $99,598,000 at September 30, 2000. The decrease
in 2000 is due to maturities of securities during the first nine months
of 2000 and the investments of such funds in federal funds sold as a
result of the increased yield available on federal funds sold during
that period. In addition, the carrying value of securities was reduced
by approximately $1,494,000 as a result of the Acquisition, and all but
$1,019,000 of the Company's securities which were classified as held-
to-maturity immediately prior to the Acquisition were sold and
purchases were made of available-for-sale securities to replace such
securities.
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 seven years or less and for the
purchase of state, county and municipal agencies' securities with
maximum maturities of 15 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. All securities are classified as available-for-sale and are
carried at fair value at September 30, 2000. Available-for-sale
securities aggregating $3,000,000 were sold immediately prior to
maturity during the first half of 2000. Available-for-sale securities
aggregating $39,692,000 were sold immediately after the Acquisition and
a similar amount of available-for-sale securities were then purchased
to reposition the Company's securities portfolio. The decision to sell
securities classified as available-for-sale is based upon management's
assessment of changes in economic or financial market conditions.
Certain of the Company's securities are pledged to secure public
and trust fund deposits and for other purposes required or permitted by
law. At September 30, 2000, the book value of U.S. Treasury and other
U.S. Government agency securities so pledged amounted to $21,070,000,
or 21.1% of the total securities portfolio.
The following table summarizes the amounts and the distribution of
the Company's securities held at the dates indicated.
September 30, December 31,
2000 1999
---------------- ---------------
Amount % Amount %
------- ------- ------- ------
(Dollars in thousands)
Carrying value:
Obligations of U.S. Government
agencies and corporations $69,415 69.7% $ 75,016 68.9%
Mortgage-backed securities 17,016 17.1 7,783 7.1
Obligations of states and
political subdivisions 8,152 8.2 9,103 8.4
U.S. Treasury securities 3,996 4.0 15,982 14.7
Other securities 1,019 1.0 1,019 0.9
------- ------ ------- -----
Total carrying value of
securities $99,598 100.0% $108,903 100.0%
======= ====== ======== =====
Total fair value of securities $99,598 $107,608
======= ========
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; however, when State National acquired the Company, all existing
securities classified as held-to-maturity which were not sold were
reclassified to available-for-sale.
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at September 30, 2000. 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 restatement of the yields on tax-
exempt securities to a fully taxable-equivalent basis has been computed
assuming a tax rate of 34%.
-18-
<PAGE>
Estimated Weighted
Type of Maturity Grouping at Principal Carrying Fair Average
September 30, 2000 Amount Value Value Yield
------------------------------- --------- --------- --------- -------
(Dollars in thousands)
Obligations of U.S. Government
agencies and corporations:
Within one year $ 6,000 $ 5,996 $ 5,996 6.82%
After one but within five years 50,655 50,034 50,034 6.98
After five but within ten years 13,670 13,385 13,385 6.91
-------- ------- ------- ----
Total obligations of U.S.
Government agencies and
corporations 70,325 69,415 69,415 6.95
-------- ------- ------- ----
Mortgage-backed securities 16,998 17,016 17,016 7.39
-------- ------- ------- ----
Obligations of states and
political subdivisions:
Within one year 780 789 789 6.92
After one but within five years 4,785 4,891 4,891 7.65
After five but within ten years 2,330 2,350 2,350 7.66
After ten years 120 122 122 8.02
-------- ------- ------- ----
Total obligations of state and
political subdivisions 8,015 8,152 8,152 7.59
-------- ------- ------- ----
U.S. Treasury securities:
Within one year 3,000 2,993 2,993 6.50
After one but within five years 1,000 1,003 1,003 6.32
-------- ------- ------- ----
Total U.S. Treasury
securities 4,000 3,996 3,996 6.45
-------- ------- ------- ----
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 1,019 1,019 1,019 4.83
-------- ------- ------- ----
Total other securities 1,019 1,019 1,019 4.83
-------- ------- ------- ----
Total securities $100,357 $99,598 $99,598 7.03%
======== ======= ======= ====
Loan Portfolio
Total loans, net of unearned income, decreased $5,408,000, or
2.9%, from $186,626,000 at December 31, 1999, to $181,218,000 at
September 30, 2000. The decrease during the first nine months of 2000
was primarily a result of continued net payoffs of the Company's
indirect installment loans. These payoffs resulted in a decrease of
approximately $6.8 million in such loans. In addition, the carrying
value of fixed rate loans was reduced by approximately $1,169,000 as a
result of the Acquisition through adjusting interest rates on such
loans to fair value.
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 Bank's 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 during the early 1990's, the Bank
instituted an installment loan program whereby it began to purchase
automobile loans from automobile dealerships in its market areas. Under
this program, an automobile dealership will agree to make a loan to a
prospective customer to finance the purchase of a new or used
automobile. The different financial institutions that have a pre-
established relationship with the particular dealership review the
transaction, including the credit history of the prospective borrower,
and decide if they would agree to purchase the loan from the dealership
and, if so, at what rate of interest. The dealership selects the
financial institution to which it decides to sell the loan. The
financial institution purchasing the loan has a direct loan to the
borrower collateralized by the automobile, and the dealership realizes
a profit based on the difference between the interest rate quoted to
the buyer by the dealership and the interest rate at which the loan is
purchased by the financial institution. At September 30, 2000, the
Company had approximately $7,168,000, net of unearned income, of this
type of loan outstanding compared to approximately $14,004,000
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<PAGE>
of this type loan at December 31, 1999. The decrease is due to
management's decision to shift the loan portfolio toward more
commercial and real estate loans and less toward indirect installment
loans.
The following table presents the Company's loan balances at the
dates indicated separated by loan types.
September 30, December 31,
2000 1999
------------ -------------
(In thousands)
Real estate loans $ 70,788 $ 72,268
Commercial loans 59,483 55,270
Loans to individuals 36,224 46,748
Other loans 14,898 12,857
--------- ---------
Total loans 181,393 187,143
Less unearned income 175 517
--------- ---------
Loans, net of
unearned income $ 181,218 $186,626
========= =========
Loan concentrations are considered to exist when there are amounts
loaned to a multiple number of borrowers engaged in similar activities
that would cause them to be similarly impacted by economic or other
conditions. The Company had no concentrations of loans at September 30,
2000, except for those described in the above table. The Bank had no
loans outstanding to foreign countries or borrowers headquartered in
foreign countries at September 30, 2000.
Management of the Bank may renew loans at maturity when requested
by a customer whose financial strength appears to support such renewal
or when such renewal appears to be in the Company's best interest. The
Company requires payment of accrued interest in such instances and may
adjust the rate of interest, require a principal reduction or modify
other terms of the loan at the time of renewal.
The following table presents the distribution of the maturity of
the Company's loans and the interest rate sensitivity of those loans,
excluding loans to individuals, at September 30, 2000. The table also
presents the portion of loans that have fixed interest rates or
interest rates that fluctuate over the life of the loans in accordance
with changes in the money market environment as represented by the
prime rate.
One
Year One to Over Total
and Five Five Carrying
Less Years Years Value
------- ------ ------- --------
Real estate loans $14,896 $47,098 $ 8,794 $ 70,788
Commercial loans 37,842 18,743 2,898 59,483
Other loans 12,472 2,062 364 14,898
------- ------- ------- --------
Total loans $65,210 $67,903 $12,056 $145,169
======= ======= ======= ========
With fixed
interest rates $21,803 $55,085 $ 8,529 $ 85,417
With variable
interest rates 43,407 12,818 3,527 59,752
------- ------- ------- --------
Total loans $65,210 $67,903 $12,056 $145,169
======= ======= ======= ========
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 loss associated with the Company's
loan portfolio, additions are made to the Company's allowance for
possible loan losses (the "allowance"), as necessary.
The Company's allowance was $5,251,000, or 2.90% of loans, net of unearned
income, at September 30, 2000,compared to $1,833,000, or 0.98% of loans,
net of unearned income, at December 31, 1999.
-20-
<PAGE>
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 following table presents the activity in the allowance for
possible loan losses for the period of January 1, 2000, to August 11,
2000, the period of July 1, 2000, to August 11, 2000, the period of
August 12, 2000, to September 30, 2000, and the nine-month period ended
September 30, 1999. Additionally, presented are the average loans
outstanding at September 30, 2000 and 1999 and certain pertinent ratios
at September 30, 2000 and 1999.
<TABLE>
Nine-month
January 1 to July 1 to August 12 to Period Ended
August 11, August 11, September 30, September 30,
2000 2000 2000 1999
------------ ------------ ------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Analysis of allowance for possible
loan losses:
Balance, beginning of period $ 1,833 $ 2,203 $ 5,671 $ 1,842
Provision for loan losses 1,660 1,150 408 320
Purchase accounting adjustment 2,328 2,328 0 0
---------- ---------- --------- ---------
5,821 5,681 6,079 2,162
---------- ---------- --------- ---------
Loans charged off:
Real estate loans 0 0 0 3
Commercial loans 50 0 806 89
Loans to individuals 174 36 28 414
Other loans 6 0 0 0
---------- ---------- --------- ---------
Total charge-offs 230 36 834 506
---------- ---------- --------- ---------
Recoveries of loans previously charged
off:
Real estate loans 1 0 0 46
Commercial loans 6 0 0 27
Loans to individuals 72 26 6 92
Other loans 1 0 0 0
---------- ---------- --------- ---------
Total recoveries 80 26 6 165
---------- ---------- --------- ---------
Net loan charge-offs 150 10 828 341
---------- ---------- --------- ---------
Balance, end of period $ 5,671 $ 5,671 $ 5,251 $ 1,821
========== ========== ========= =========
Average loans outstanding, net of
unearned income, for the nine-month
period ended September 30 $ 184,772 $ 183,785
========= =========
Ratio of net loan charge-offs for the
nine-month period ended September 30 to
average loans outstanding, net of
unearned income for the nine-month
period ended September 30 (annualized) 0.71% 0.25%
========= =========
Ratio of allowance for possible loan
losses to total loans, net of unearned
income, at September 30 2.90% 0.97%
========= =========
</TABLE>
The provision for loan losses of $1,150,000 recorded for the
period of July 1, 2000, to August 11, 2000 related primarily to loans
to four borrowers. In late August 2000 management learned that one of
these borrowers had allegedly committed fraud in obtaining loans from
the Company and, as a result, management provided a reserve of $672,000
for loan amounts to this borrower in the period of July 1, 2000, to
August 11, 2000, and subsequently charged off the loan amounts in the
period of August 12, 2000, to September 30, 2000. Management has filed
a criminal referral related to this borrower. The increase in the allowance
of $2,328,000 related to purchase accounting adjustments is due primarily
to five borrowing relationships with whom predecessor management had
intended to continue to work and extend or renew the loans as
necessary. Predecessor management believed that the net carrying amount,
after considering specific reserves, was adequate to
-21-
<PAGE>
reflect the estimated carrying amount of the loans. Successor
management has determined that the Company will no longer maintain a
relationship with these borrowers, has informed the borrowers that the
borrowers will have to pay off their respective loans with the Company
and, if necessary, liquidate the collateral supporting the loans within
no later than one year of the Acquisition date. The Company has also
offered a reduction in principal to one borrower to provide an incentive
for the borrower to move its loan relationship. As these loans are
collateral dependent, the estimated losses on these loans are primarily
due to estimated collateral liquidation value shortfalls. Management has
preliminarily estimated the collateral liquidation values, pending
determination of the final valuations in applying purchase accounting.
Changes, if any, in the liquidation collateral final valuation will result
in purchase accounting adjustments. Overall, successor management has
determined that the intended method of ultimate recovery on loans from
these five borrowing relationships is demonstrably different from the plans
that had served as the basis for predecessor management's estimation of
recovery on such loans. The provision for loan losses for the period of
August 12, 2000, to September 30, 2000, relates to successor management
conforming certain predecessor loan loss methodology to its loan loss
calculation methodology. Specifically, successor management has conformed
certain charge-off factors on pools of loans to its historical loan loss
factors.
The amount of the allowance is established by management based
upon estimated risks inherent in the existing loan portfolio. The
allowance for possible loan losses is comprised of three components:
specific reserves on specific problem loans, historical loss
percentages applied to pools of loans with similar characteristics, and
an unallocated portion. 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.
The following table shows the allocations in the allowance and the
respective percentages of each loan category to total loans at
September 30, 2000, and December 31, 1999.
<TABLE>
September 30, 2000 December 31, 1999
------------------------------- -------------- ----------------
Amount of Percent of Loans Amount of Percent of Loans
Allowance by Category to Allowance by Category to
Allocated to Loans, Net of Allocated to Loans, Net of
Category Unearned Income Category Unearned Income
------------- ---------------- ------------- ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans $ 498 39.1% $ 198 38.7%
Commercial loans 2,451 32.8 254 29.6
Loans to individuals 312 19.9 672 24.8
Other loans 1,604 8.2 37 6.9
-------- -------- --------- --------
Total allocated 4,865 100.0% 1,161 100.0%
======== ========
Unallocated 386 672
-------- ---------
Total allowance for
possible loan losses $ 5,251 $ 1,833
======== =========
</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, involvement in
bankruptcy proceedings or poor financial condition, which may
jeopardize recoverability of the loan. Loans classified as "doubtful"
are those loans that have characteristics similar to substandard loans,
but also have an increased risk that a loss may occur or at least a
portion of the loan may require a charge-off if liquidated at present.
Although loans classified as substandard do not duplicate loans
classified as doubtful, both substandard and doubtful loans may include
some loans that are past due at least 90 days, are on nonaccrual status
or have been restructured. Loans classified as "loss" are those loans
that are usually in the process of being charged off. At September 30,
2000, substandard loans totaled $11,558,000, of which $1,994,000 were
loans designated as nonaccrual, 90 days past due or restructured. There
-22-
<PAGE>
was one doubtful loan in the amount of $53,000 which was designated as
nonaccrual. There were no loss loans at September 30, 2000.
Substandard, doubtful and loss loans at December 31, 1999, were
$1,765,000, $0 and $4,000, respectively. Approximately $6.2 million of
the increase in substandard loans at September 30, 2000, was due to
certain loans to borrowers with which successor management has
determined that the Company will no longer maintain a relationship for
longer than one year from the Acquisition date.
In addition to the internally classified 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
September 30, 2000, were current and paying in accordance with loan
terms; however, $82,000 of such loans were an nonaccrual, but were
guaranteed by a U.S. governmental agency. At September 30, 2000, watch
list loans totaled $897,000 (including $644,000 of loans guaranteed
by U.S. governmental agencies). At September 30, 2000, $99,000 of
loans not classified and not on the watch list were designated as
nonaccrual, 90 days past due or 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 "Other Real Estate and Other Repossessed
Assets" below.
The following table lists nonaccrual, past due and restructured
loans and other real estate and other repossessed assets at September
30, 2000, and December 31, 1999.
September 30, December 31,
2000 1999
------------ -----------
(In thousands)
Nonaccrual loans $ 247 $ 236
Accruing loans
contractually past due
over 90 days 413 203
Restructured loans 1,568 186
Other real estate and
other repossessed assets 278 272
------- -------
Total nonperforming assets $ 2,506 $ 897
======= =======
The gross interest income that would have been recorded during the
third quarter and first nine months of 2000 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 $4,000 and $12,000, respectively.
Interest income totaling $16,000 was actually recorded (received) on
loans that were on nonaccrual during the first nine months of 2000.
A potential problem loan is defined as 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
-23-
<PAGE>
Company continually monitors the level of classified loans
to determine whether any such loans should be considered for nonperforming
status.
Intangible Assets
Intangible assets increased $28,441,000, or 280.0%, from
$10,158,000 at December 31, 1999, to $38,599,000 at September 30, 2000.
This increase was due to core deposit intangibles and goodwill recorded
as a result of the Acquisition.
Premises and Equipment
Premises and equipment decreased $789,000, or 8.0%, during the
first nine months of 2000, from $9,816,000 at December 31, 1999, to
$9,027,000 at September 30, 2000. The decrease was due to depreciation
expense of $542,000, which was recorded during the first nine months of
2000 and a net decrease in premises and equipment of $330,000 as a
result of adjusting such assets to fair value at the date of the
Acquisition. These decreases were partially offset by purchases of
small amounts of equipment during the first nine months of 2000.
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
decreased $38,000, or 1.1%, from $3,538,000 at December 31, 1999, to
$3,500,000 at September 30, 2000. The decrease was primarily a result
of a decrease in securities, on which interest is collected
periodically, and an increase in federal funds sold, on which interest
is collected daily. Of the total balance at September 30, 2000,
$2,127,000, or 60.8%, was interest accrued on loans and $1,373,000, or
39.2%, was interest accrued on securities. The amounts of accrued
interest receivable and percentages attributable to loans and
securities at December 31, 1999, were $2,058,000, or 58.2%, and
$1,480,000, or 41.8%, respectively.
Other Real Estate and Other Repossessed Assets
Other real estate and other repossessed assets consist of real
property and other assets unrelated to banking premises or facilities.
Income derived from other real estate and other repossessed assets, if
any, is generally less than that which would have been earned as
interest at the original contract rates on the related loans. At
September 30, 2000, and December 31, 1999, other real estate and other
repossessed assets had an aggregate book value of $278,000 and
$272,000, respectively. Other real estate and other repossessed assets
increased $6,000, or 2.2%, during the first nine months of 2000. Of the
September 30, 2000, balance, $242,000 represented three commercial and
two residential properties and $36,000 represented six repossessed
automobiles.
Other Assets
The most significant component of other assets at September 30,
2000, is a net deferred tax asset of $575,000. The balance of other
assets decreased $591,000, or 29.2%, to $1,431,000 at September 30,
2000, from $2,022,000 at December 31, 1999, partially as a result of a
decrease in the amount of prepaid expenses during the first nine months
of 2000.
Deposits
The Bank's lending and investing activities are funded almost
entirely by core deposits, 51.4% of which are demand, savings and money
market deposits at September 30, 2000. Total deposits decreased
$6,988,000, or 2.2%, from $318,299,000 at December 31, 1999, to
$311,311,000 at September 30, 2000. The decrease was due to decreases
in interest-bearing demand and time deposits. These decreases were
partially offset by an increase in noninterest bearing demand deposits.
The Bank does not have any brokered deposits.
-24-
<PAGE>
The following table presents the average amounts of, and the
average rates paid on, deposits of the Company for the quarters ended
September 30, 2000 and 1999.
<TABLE>
Quarter Ended September 30, Nine-month Period Ended September
--------------------------------------- ---------------------------------------
2000 1999 2000 1999
------------------- ------------------ ----------------- --------------------
Average Average Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ------- --------- ------- --------- ------ -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing
deposits $ 61,447 --% $ 58,751 --% $ 60,438 --% $ 57,921 --%
Interest-bearing
demand, savings
and money market
deposits 99,219 2.14 105,467 2.08 101,206 2.07 107,074 2.10
Time deposits of
less than
$100,000 102,689 5.72 108,383 4.75 103,528 5.37 109,806 4.79
Time deposits of
$100,000 or 49,050 5.89 47,365 4.88 50,703 5.57 47,574 4.91
more -------- ---- -------- ---- -------- ---- -------- ----
Total deposits $312,405 3.48% $319,966 3.02% $315,875 3.32% $322,375 3.05%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
The maturity distribution of time deposits of $100,000 or more at
September 30, 2000, is presented below.
At September
30, 2000
--------------
(In thousands)
3 months or less $ 16,924
Over 3 through 6 months 11,033
Over 6 through 12 months 14,855
Over 12 months 4,998
---------
Total time deposits of
$100,000 or more $ 47,810
=========
The Bank experiences relatively limited reliance on time deposits
of $100,000 or more. Time deposits of $100,000 or more are a more
volatile and costly source of funds than other deposits and are most
likely to affect the Company's future earnings because of interest rate
sensitivity. At September 30, 2000, and December 31, 1999, deposits of
$100,000 or more represented approximately 15.4% and 16.8%,
respectively, of the Company's total deposits.
Accrued Interest Payable
Accrued interest payable consists of interest that has accrued on
deposits, but is not yet payable under the terms of the related
agreements. The balance of accrued interest payable increased $86,000,
or 8.0%, from $1,074,000 at December 31, 1999, to $1,160,000 at
September 30, 2000, due to an increase in interest rates being paid on
interest-bearing time deposits.
Other Liabilities
The balance of other liabilities increased $4,122,000 or 773.4%,
from $533,000 at December 31, 1999, to $4,655,000 at September 30,
2000, due to an increase in deferred taxes payable of $4,283,000 which
resulted from the recording of a $12,598,000 core deposit intangible
upon consummation of the Acquisition and increases in various accrued
expenses during the first nine months of 2000. These increases were
offset somewhat by decreases in deferred taxes payable as a result of
other purchase accounting adjustments recorded upon consummation of the
Acquisition.
Interest Rate Sensitivity
Interest rate risk arises when an interest-earning asset matures
or when its rate of interest changes in a time frame different from
that of the supporting interest-bearing liability. The Company seeks to
minimize the difference between the amount of interest-earning assets
and the amount of interest-bearing liabilities that could change
interest rates in the same time frame in an attempt to reduce the risk
of significant adverse effects on the Company's net interest income
caused by interest rate changes. The Company does not attempt to match
each interest-earning asset with a specific interest-bearing liability.
Instead, as shown in the table below, it aggregates all of its interest-
earning assets and interest-bearing liabilities to determine the
difference between the two in specific time frames. This difference is
known as the rate-sensitivity gap. A positive gap indicates that more
interest-earning assets than interest-bearing liabilities mature in a
time frame, and a negative gap indicates the opposite. Maintaining a
balanced position will reduce risk associated with interest rate
changes, but it will not guarantee a stable interest rate spread
because the various rates within a time frame may change by differing
amounts and occasionally change in different directions. Management
regularly monitors the interest sensitivity position and considers this
position in its decisions in regard to interest rates and maturities
for interest-earning assets acquired and interest-bearing liabilities
accepted.
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<PAGE>
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 71.7% at the 90-
day interval, 60.5% at the 180-day interval and 56.3% at the 365-day
interval at September 30, 2000. Currently, the Company is in a
liability-sensitive position at the three intervals. During an overall
rising interest rate environment, as was evident during the first nine
months of 2000, this position would normally produce a lower net
interest margin than in a falling interest rate environment; however,
because the Company had $97,624,000 of interest-bearing demand, savings
and money market deposits at September 30, 2000, that are somewhat less
rate-sensitive, the Company's net interest margin does not necessarily
decrease in an overall 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 97.7% at September 30, 2000. The interest sensitivity position is
presented as of a point in time and can be modified to some extent by
management as changing conditions dictate.
The following table shows the interest rate sensitivity position
of the Company at September 30, 2000.
<TABLE>
Volumes
Subject
Cumulative Volumes to
Subject to Repricing Within Repricing
----------------------------------- After
90 Days 180 Days 365 Days 1 Year Total
--------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 28,478 $ 28,478 $ 28,478 $ 0 $ 28,478
Securities 4,995 4,995 10,100 89,498 99,598
Loans, net of unearned
income 72,343 80,296 90,949 90,269 181,218
--------- -------- --------- -------- ---------
Total interest-earning
assets 105,816 113,769 129,527 179,767 309,294
--------- -------- --------- -------- ---------
Interest-bearing
liabilities:
Demand, savings and money
market deposits 97,624 97,624 97,624 0 97,624
Time deposits 49,887 90,450 132,517 18,885 151,402
--------- -------- --------- --------- ---------
Total interest-bearing
liabilities 147,511 188,074 230,141 18,885 249,026
--------- -------- --------- --------- ---------
Rate-sensitivity gap (1) $ (41,695) $(74,305) $(100,614) $ 160,882 $ 60,268
========= ======== ========= ========= =========
Rate-sensitivity ratio (2) 71.7% 60.5% 56.3%
========= ======== =========
</TABLE>
______________________________
(1) Rate-sensitive interest-earning assets less rate-sensitive
interest-bearing liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-sensitive
interest-bearing liabilities.
-26-
<PAGE>
Selected Financial Ratios
The following table presents selected financial ratios
(annualized) for the quarters and nine-month periods ended September
30, 2000 and 1999.
Quarter Ended Nine-month Period
September 30, Ended September 30,
---------------- --------------------
2000 1999 2000 1999
------- ------- -------- ----------
Net income (loss) to:
Average assets (2.96)% 0.70% (0.71)% 0.70%
Average interest-earning
assets (3.49) 0.80 (0.81) 0.79
Average stockholders'
equity (29.45) 10.12 (8.62) 10.19
Dividend payout (1) to:
Net income (loss) N/A 17.27 N/A 17.37
Average stockholders'
equity 7.60 1.75 4.39 1.77
Average stockholders'
equity to:
Average total assets 10.06 6.93 8.19 6.82
Average loans (2) 20.10 13.51 16.00 13.45
Average total deposits 11.79 7.79 9.36 7.67
Average interest-earning
assets to:
Average total assets 85.03 88.13 86.97 87.82
Average total deposits 99.65 99.13 99.40 98.65
Average total liabilities 98.08 98.51 98.44 98.03
Ratio to total average
deposits of:
Average loans (2) 58.69 57.68 58.50 57.01
Average noninterest-
bearing deposits 19.67 18.36 19.13 17.97
Average interest-bearing
deposits 80.33 81.64 80.87 82.03
Total interest expense to
total interest income 42.70 39.92 41.87 40.86
Efficiency ratio (3) 80.13 65.80 71.07 65.71
______________________________
(1) Dividends on Common Stock only.
(2) Before allowance for possible loan losses.
(3) Calculated as a noninterest expense less merger-related
expenses, distributions on guaranteed preferred beneficial
interests in the Company's subordinated debentures, amortization
of intangibles and expenses related to other 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
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 $18,474,000 and $19,104,000 during the
third quarter and first nine months of 2000, respectively, and
$18,233,000 and $19,103,000 during the third quarter and first nine
months of 1999, respectively. These amounts comprised 5.0% and 5.3% of
average total assets during the third quarter and first nine months of
2000, respectively, and 5.1% and 5.3% of average total assets during
the third quarter and first nine months of 1999, respectively.
The average level of securities and federal funds sold was
$127,964,000 and $129,196,000 during the third quarter and first nine
months of 2000, respectively, and $132,621,000 and $134,250,000 during
the third quarter and first nine months of 1999, respectively. The
decreases in average balances from of 1999 to 2000 was primarily due to
a decrease in total deposits during that time period.
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<PAGE>
A total of $39,692,000 and $42,692,000 of securities classified as
available-for-sale were sold during the quarter and nine-month period
ended September 30, 2000, respectively. No securities were sold during
the quarter or nine-month period ended September 30, 1999. At September
30, 2000, $9,778,000, or 11.8%, of the Company's securities portfolio,
excluding mortgage-backed securities, matured within one year and
$55,928,000, or 67.7%, excluding mortgage-backed securities, matured
after one but within five years. The Bank's commercial and real estate
lending activities are concentrated in loans with maturities of less
than five years with both fixed and adjustable interest rates, while
its installment lending activities are concentrated in loans with
maturities of three to five years and with primarily fixed interest
rates. The Bank's experience, however, has been that these installment
loans are paid off in an average of approximately thirty months. At
September 30, 2000, approximately $90,949,000, or 50.2%, of the
Company's loans, net of unearned income, matured within one year and/or
had adjustable interest rates. Approximately $81,555,000, or 56.2%, of
the Company's loans (excluding loans to individuals) matured within one
year and/or had adjustable interest rates. See "Analysis of Financial
Condition - Loan Portfolio" above.
On the liability side, the principal sources of liquidity are
deposits, borrowed funds and the accessibility to money and capital
markets. Customer deposits are by far the largest source of funds.
During the third quarter and first nine months of 2000, the Company's
average deposits were $312,405,000 and $315,875,000, or 85.3% and
87.5%, of average total assets, respectively, compared to $319,966,000
and $322,375,000, or 88.9% and 89.0% of average total assets,
respectively, during the third quarter and first nine months of 1999.
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 ratio of
such nonperforming assets to total assets has generally been decreasing
over the past several years. 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 comes from three
sources: (1) dividends resulting from earnings of the Bank, (2) current
tax liabilities generated by the Bank and (3) management and service
fees for services performed for the Bank.
The payment of dividends to the Company is subject to applicable
law and the scrutiny of regulatory authorities. Dividends paid by the
Bank to Independent Financial during the third quarter and first nine
months of 2000 were $2,000,000 and $2,900,000, respectively; in turn,
Independent Financial and Independent Capital Trust paid dividends to
the Company totaling $2,000,000 and $2,926,000, respectively, during
the same time periods of 2000. Dividends paid by the Bank to
Independent Financial during the third quarter and first nine months of
1999 were $400,000 and $1,275,000, respectively; in turn, Independent
Financial and Independent Capital Trust paid dividends to the Company
of $409,000 and $1,302,000, respectively, during the same time periods.
At September 30, 2000, there were approximately $72,000 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 8.0% and 1.6% respectively, of
the Company's cash flow during the third quarter of 2000. These
percentages were 25.3% and 2.4%, respectively, for the first nine
months of 2000. 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 losses, the Company may be required to refund tax liabilities
previously collected. Current tax liabilities totaling $1,096,000 were
paid by the Bank to the Company during the first nine months of 2000,
compared to a total of $1,362,000 during the first nine months of 1999.
Until the date of the Acquisition, the Bank paid management fees
to the Company for services performed. These services include, but are
not limited to, financial and accounting consultation, attendance at
the Bank's board meetings, audit and loan review services and related
expenses. The Bank paid a total of $39,000 and $102,000 in management
fees to the Company in the third quarter and first nine months of 2000,
respectively. The Bank paid a total of $25,000 and $98,000 in
management fees to the Company during the third quarter and first nine
months of 1999, 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.
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<PAGE>
Capital Resources
At September 30, 2000, stockholders' equity totaled $45,775,000,
or 12.2% of total assets, compared to $25,356,000, or 7.1% of total
assets, at December 31, 1999, due to push down accounting adjustments
that were recorded as a result of the Acquisition. See Note 3 to the
Company's Consolidated Financial Statements.
Bank regulatory authorities in the United States have risk-based
capital standards by which all bank holding companies and banks are
evaluated in terms of capital adequacy. These guidelines relate a
banking company's capital to the risk profile of its assets. The risk-
based capital standards require all banking companies to have Tier 1
capital of at least 4% and total capital (Tier 1 and Tier 2 capital) of
at least 8% of risk-weighted assets, and to be designated as well-
capitalized, the banking company must have Tier 1 and total capital
ratios of at least 6% and 10%, respectively. For the Company, Tier 1
capital includes common stockholder's equity and qualifying guaranteed
preferred beneficial interests in the Company's subordinated
debentures, reduced by intangible assets, excluding deferred taxes
related to the core deposit intangible, and deferred tax assets not
eligible for inclusion in Tier 1 capital. For the Company, Tier 2
capital is comprised of the remainder of the guaranteed preferred
beneficial interests in the Company's subordinated debentures not
qualifying for Tier 1 capital and the allowance for possible loan
losses up to 1.25% of risk-weighted assets.
Banking regulators also have 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 banking companies to have a minimum leverage ratio of at
least 4% and to be designated as well-capitalized, the banking company
must have a leverage ratio of at least 5%. The following table provides
a calculation of the Company's risk-based capital and leverage ratios
and a comparison of the Company's and the Bank's risk-based capital
ratios and leverage ratios to the minimum regulatory and well-
capitalized minimum requirements at September 30, 2000.
The Company September 30, 2000
----------- ----------------------------
Actual Pro Forma (3)
----------- --------------
(In thousands)
Tier 1 capital:
Common stockholders' equity,
excluding unrealized gain (loss)
on available-for-sale securities $ 45,405 $ 62,320
Qualifying guaranteed preferred
beneficial interests in the
Company's subordinated debentures
(1) 3,289 6,414
Intangible assets, excluding
deferred taxes related to core
deposit intangibles (34,404) (41,726)
Deferred tax asset not eligible for
inclusion in Tier 1 capital (1,131) (1,351)
---------- ---------
Total Tier 1 capital 13,159 25,657
---------- ---------
Tier 2 capital:
Guaranteed preferred beneficial
interests in the Company's
subordinated debentures (1) 7,611 4,487
Allowance for possible loan losses
(2) 2,520 3,427
---------- ---------
Total Tier 2 capital 10,131 7,914
---------- ---------
Total capital $ 23,290 $ 33,571
========== =========
Risk-weighted assets $ 201,619 $ 274,131
========== =========
Adjusted quarterly average assets $ 330,436 $ 440,740
========== =========
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<PAGE>
Actual Pro Forma
Well- Ratios at Ratios at
Regulatory capitalized September September
The Company Minimum Minimum 30, 2000 30, 2000 (3)
----------- --------- --------- ----------- -----------
Tier 1 capital to
risk-weighted assets
ratio 4.00% 6.00% 6.53% 9.36%
Total capital to risk-
weighted assets
ratio 8.00 10.00 11.55 12.25
Leverage ratio 4.00 5.00 3.98 5.82
The Bank
--------
Tier 1 capital to
risk-weighted assets
ratio 4.00% 6.00% 10.32% 11.01%
Total capital to risk-
weighted assets
ratio 8.00 10.00 11.58 12.28
Leverage ratio 4.00 5.00 6.29 6.84
___________________________
(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.
(3) Assumes the merger of UB&T with and into the Bank as of September
30, 2000.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each federal banking agency to revise its risk-
based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the
risks of non-traditional activities, as well as reflect the actual
performance and expected risk of loss on multi-family mortgages. This
law also requires each federal banking agency to specify the levels at
which an insured institution would be considered "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under the FDIC's
regulations, the Company and the Bank were both "well capitalized" at
September 30, 2000, except for the Company under the leverage ratio
regulations, under which the Company was considered slightly
"undercapitalized" at September 30, 2000; however, assuming the merger
of UB&T with and into the Bank, which occurred in November 2000 had
taken place on September 30, 2000, the Company would have been well
capitalized as of that date on a pro forma basis.
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 Federal Reserve Board.
The payment of cash dividends 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 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. The Federal
Reserve Board has promulgated a policy prohibiting bank holding
companies from paying dividends unless such bank holding company can
pay such dividends from current earnings.
During the period from January 1 to August 11, 2000, the Company
paid $273,000 in cash dividends to the holders of its Common Stock.
During the period from August 12 to September 30, 2000, the
Company paid $700,000 in cash dividends to its parent company, State
National.
-30-
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Estate of Harry V. Howard, Deceased, filed a lawsuit against
the Bank (as successor to First State Bank of Odessa, N.A.), (The
Estate of Harry V. Howard, Deceased v. First State Bank of Odessa,
N.A., Odessa, Texas, Cause No. 1268) on July 9, 1999, in the County
Court of Upton County, Texas. This case was subsequently refiled in
the 104th District Court for Taylor County, Texas as Cause No. 22080-
B. The plaintiffs' lawsuit relates to the Bank's management of the
Harry V. Howard Trust. The lawsuit alleges that the Bank, in its
capacity as trustee of this testamentary trust, failed to adequately
oversee the trust assets and allowed waste to occur to the trust
principal. Additionally, the lawsuit alleges that the Bank made
inappropriate distributions to the current beneficiary of the trust.
The lawsuit also alleges, among other things, other general acts of
mismanagement and breach of fiduciary duty. The lawsuit seeks actual
and exemplary damages in excess of $10,000,000, as well as pre and
post-judgment interest and attorneys' fees. The Bank denies any
allegations made in the petition and intends to vigorously defend this
suit.
The Bank has trust errors and omissions liability insurance to
cover certain risk associated with claims filed against the Bank as
trustee. The Bank has notified the insurance company of the complaint
filed against the Bank. The insurance company has determined
preliminarily that it appears the Bank has coverage except for any
punitive or exemplary damages under the policy up to $2,000,000 with a
deductible of $25,000.
Discovery in this case has been completed. The only remaining
depositions to be taken are of the Bank's and the plaintiffs' damages
experts. At this time it is not possible to predict whether the Bank
will incur any liability or to estimate the damages, or the range of
damages, if any, that the Bank might incur in connection with such
action.
The Company is involved in various litigation proceedings
incidental to the ordinary course of business. In the opinion of
management, the ultimate liability, if any, resulting from such
litigation would not be material in relation to the Company's
financial position or results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Special Meeting of Shareholders held on
Wednesday, July 12, 2000 (the "Special Meeting"), the shareholders of
the Company approved and adopted the Agreement and Plan of
Reorganization between State National and the Company dated as of
March 1, 2000, pursuant to which New FSB, Inc., a wholly owned
subsidiary of State National, merged with and into the Company
effective August 11, 2000, with the Company continuing as the
surviving corporation and as a wholly owned subsidiary of State
National.
Of the Company's 2,273,647 issued and outstanding shares of
common stock, 1,778,445 (78.22%) were represented at the Special
Meeting. Of the shares represented, 1,759,538 shares of the Company's
common stock (77.39% of the total shares outstanding) voted for the
merger, 5,638 shares (0.25% of the total shares outstanding) voted
against the merger and 13,269 shares (0.58% of the total shares
outstanding) abstained.
Item 5. Other Information.
None
-31-
<PAGE>
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 August 11, 2000, reporting
the consummation of the acquisition of the Company by State National
Bancshares, Inc. in an all cash merger, the resignation and
appointment of directors and certain matters regarding the Trust
Preferred Securities of Independent Capital Trust.
Current Report on Form 8-K dated September 27, 2000,
reporting changes in the Company's certifying accountants.
-32-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: November 14, 2000 Independent Bankshares, Inc.
(Registrant)
By: /s/Randal N. Crosswhite
-----------------------------
Randal N. Crosswhite
Chief Financial Officer
-33-
