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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1995
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______________ to ______________
Commission File Number: 0-10196
INDEPENDENT BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-1717279
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
547 Chestnut Street
Abilene, Texas 79602
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (915) 677-5550
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.25 per share
Securities Registered Pursuant to Section 12(g) of the Act:
None
______________________________
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, based on the market value of such
stock on December 31, 1995, was $7,426,000. For purposes of this
computation, all executive officers, directors and 5% beneficial
owners of the Registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such executive
officers, directors and beneficial owners are, in fact, affiliates
of the Registrant. At March 18, 1996, 1,050,292 shares of the
Registrant's common stock, $0.25 par value per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
into the indicated part or parts of this report:
(1) Annual Report to Shareholders for the fiscal year ended
December 31, 1995, furnished to the Commission pursuant to
Rule 14a-3(b) - Part II and Part IV.
(2) Definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A in connection with the Annual
Meeting of Shareholders to be held April 30, 1996 - Part III.
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PART I
ITEM 1. BUSINESS
General
Independent Bankshares, Inc., a Texas corporation (the
"Company"), is a multi-bank holding company that, at December 31,
1995, owned 100% of Independent Financial Corp. ("Independent
Financial"), which, in turn, owned 100% of First State Bank,
National Association, Abilene, Texas ("First State, N.A., Abilene")
and First State Bank, National Association, Odessa, Texas ("First
State, N.A., Odessa"). First State, N.A., Abilene and First State,
N.A., Odessa are collectively referred to as the "Banks."
Effective November 1, 1994, two of the Company's then
existing subsidiary banks, The First National Bank in Stamford,
Stamford, Texas ("First National"), and The Winters State Bank,
Winters, Texas ("Winters State"), were merged with and into First
State, N.A. Abilene. As a result of the merger, the offices of
First National and Winters State became branches of First State,
N.A. Abilene. Additionally, First State, N.A., Abilene has two
separate branch office locations in Abilene, Texas. First State,
N.A. Odessa has two branches in Odessa, Texas.
The Company's primary activities are to assist the Banks in
the management and coordination of their financial resources and to
provide capital, business development, long range planning and
public relations for the Banks. Each of the Banks operates under
the day-to-day management of its own officers and board of
directors and formulates its own policies with respect to banking
matters.
At December 31, 1995, the Company had, on a consolidated
basis, total assets of $180,344,000, total deposits of
$164,704,000, total loans, net of unearned income, of $81,927,000
and total stockholders' equity of $13,818,000.
The Banks
The Company conducts substantially all of its business
through the Banks, both of which are located in the West Texas
area. Each of the Banks is an established franchise with a
significant presence in their respective service areas. First
State, N.A., Abilene was chartered in 1982 and was the third
largest commercial bank headquartered in Abilene, Texas, in terms
of total assets at December 31, 1995. First State, N.A., Odessa
was chartered in 1983 and was the fourth largest commercial bank
headquartered in Odessa, Texas, in terms of total assets at
December 31, 1995. The deposits of the Banks are insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum
extent provided by law.
The following table sets forth certain selected information
with respect to the Banks at December 31, 1995:
<TABLE>
<CAPTION>
Total Total Total Stockholder's
Name of Bank Assets Deposits Loans(1) Equity
- ------------ ------ -------- -------- -------------
<S> <C> <C> <C> <C>
First State, N.A., Abilene $119,255,000 $110,120,000 $48,571,000 $8,370,000
First State, N.A., Odessa 59,475,000 54,817,000 33,356,000 4,443,000
_________________________
<FN>
(1) Net of unearned income.
</FN>
</TABLE>
Although each Bank operates under the management of its own
directors and officers, the Banks participate as a group in
providing various financial services and extensions of credit,
which increases the ability of each Bank to provide such services
to customers who might otherwise be required to seek banking
services from larger banks. The principal services provided by the
Banks are as follows:
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Commercial Services. The Banks provide a full range of
banking services for their commercial customers. Commercial
lending activities include short-term and medium-term loans,
revolving credit arrangements, inventory and accounts receivable
financing, equipment financing and interim real estate lending.
Other services include cash management programs and federal tax
depository and night depository services.
Consumer Services. The Banks also provide a wide range of
consumer banking services, including checking, savings and money
market accounts, savings programs and installment and personal
loans. The Banks make automobile and other installment loans
directly to customers, as well as indirectly through automobile
dealers. The Banks make home improvement and real estate loans and
provide safe deposit services. As a result of sharing arrangements
with the Pulse automated teller machine system network, the Banks
provide 24-hour routine banking services through automated teller
machines ("ATMs"). The Pulse network provides ATM accessibility
throughout the United States.
Trust Services. First State, N.A., Odessa provides trust and
agency services to individuals, partnerships and corporations from
both its offices in Odessa and First State, N.A., Abilene's offices
in Abilene. The trust division also provides investment
management, administration and advisory services for agency and
trust accounts, and acts as trustee for pension and profit sharing
plans.
Acquisition of Subsidiary Banks
Winters State. In 1990, the Banks foreclosed on shares of
Winters State stock that secured a loan and acquired a 28.2%
interest in Winters State. During the third quarter of 1993, the
Company acquired this interest from the Banks and purchased
$450,000 of stock in an offering made by Winters State. As a
result of these transactions, the Company acquired control and
increased its ownership of Winters State from 28.2% to 94.3%. The
Company's equity in the net book value of Winters State was
$1,077,000 at August 31, 1993, the date of acquisition. The
acquisition was accounted for under the purchase method of
accounting and the assets and liabilities of Winters State were
recorded at their estimated fair value. Subsequent to the date of
acquisition, the Company purchased the remaining minority interests
in Winters State, and Winters State became a branch of First State,
N.A., Abilene.
Peoples National. First State, N.A., Abilene completed the
acquisition of Peoples National Bank, Winters, Texas ("Peoples
National") effective January 1, 1996, and Peoples National became
part of the Winters branch of First State, N.A., Abilene. At
December 31, 1995, Peoples National had total assets of $5,505,000,
total loans, net of unearned income, of $2,767,000, total deposits
of $4,958,000 and stockholders' equity of $525,000. These amounts
are not included in the Consolidated Balance Sheet for the Company
at December 31, 1995.
San Angelo Branch. On March 4, 1996, First State, N.A.,
Abilene entered into an agreement to assume the deposits and
certain other liabilities and to purchase the loans and certain
other assets of the San Angelo branch of Coastal Banc ssb ("Coastal
Banc") in a cash transaction. At December 31, 1995, this branch of
Coastal Banc had approximately $16,097,000 in total deposits and
$136,000 in total loans. Consummation of the purchase and
assumption is subject to certain regulatory approvals and other
conditions. If approved, the transaction would probably be
consummated during the third quarter of 1996, at which time this
branch would become a branch of First State, N.A., Abilene.
Other Subsidiaries
At the present time, the Company does not have any
subsidiaries other than Independent Financial and the Banks.
Supervision and Regulation
References in this report to applicable statutes, regulations
and policies are brief summaries thereof, do not purport to be
complete, and are qualified in their entirety by reference to such
statutes, regulations and policies.
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The Company
General
The Company is a bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and is subject to
supervision and regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board"). Federal law subjects
bank holding companies to particular restrictions on the types of
activities in which they may engage and to a range of supervisory
requirements and activities, including regulatory enforcement
actions for violations of laws and policies.
Scope of Permissible Activities
"Closely Related" to Banking. The BHCA prohibits a bank
holding company, with certain limited exceptions, from acquiring
direct or indirect ownership or control of any voting shares of any
company that is not a bank or from engaging in any activities other
than those of banking, managing or controlling banks and certain
other subsidiaries, or furnishing services to or performing
services for its banking subsidiaries. One principal exception to
these prohibitions allows the acquisition of interests in companies
whose activities are found by the Federal Reserve Board, by order
or regulation, to be so closely related to banking, managing or
controlling banks as to be a proper incident thereto. Some of the
activities that have been determined by regulation to be closely
related to banking are making or servicing loans, performing
certain data processing services, acting as an investment or
financial advisor to certain investment trusts and investment
companies and providing certain securities brokerage services. In
approving acquisitions by the Company of entities engaged in
banking-related activities, the Federal Reserve Board would
consider a number of factors, including the expected benefits to
the public, such as greater convenience and increased competition
or gains in efficiency, which would be weighed against the risk of
potential negative effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest
or unsound banking practices. The Federal Reserve Board may also
differentiate between activities commenced de novo and activities
commenced through the acquisition of a going concern. The Company
has no current plans to form or acquire any non-banking
subsidiaries.
Securities Activities. The Federal Reserve Board has
approved applications by bank holding companies to engage, through
nonbank subsidiaries, in certain securities-related activities
(underwriting of municipal revenue bonds, commercial paper,
consumer-receivable-related securities and one-to-four family
mortgage-backed securities), provided that the subsidiaries would
not be "principally engaged" in such activities for purposes of
Section 20 of the Glass-Steagall Act. In very limited situations,
holding companies may be able to use such subsidiaries to
underwrite and deal in corporate debt and equity securities. Bills
have been introduced in both the U.S. Senate and House of
Representatives that could, if enacted, remove many of the
restraints imposed by the Glass-Steagall Act.
Safe and Sound Banking Practices. Bank holding companies are
not permitted to engage in unsafe or unsound banking practices.
For example, the Federal Reserve Board's Regulation Y requires a
holding company to give the Federal Reserve Board prior notice of
any redemption or repurchase of its own equity securities, if the
consideration to be paid, together with the consideration paid for
any repurchases or redemptions in the preceding year, is equal to
10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it would constitute an
unsafe or unsound practice or would violate any law or regulation.
Additionally, a holding company may not impair the financial
soundness of a subsidiary bank by causing it to make funds
available to nonbanking subsidiaries or their customers when such
a transaction would not be prudent. The Federal Reserve Board may
exercise several administrative remedies including cease-and-desist
powers over parent holding companies and nonbanking subsidiaries
when the actions of such companies would constitute a serious
threat to the safety, soundness or stability of a subsidiary bank.
The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") expanded the Federal Reserve Board's
authority to prohibit activities of bank holding companies and
their nonbanking subsidiaries that represent unsafe and unsound
banking practices or that constitute violations of laws or
regulations. FIRREA authorizes the appropriate banking agency to
issue cease and desist orders that may, among other things, require
affirmative action to correct any harm resulting from a violation
or practice, including restitution, reimbursement, indemnification
or guarantee against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets or take
other appropriate action as determined by the ordering agency.
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FIRREA increased the amount of civil money penalties that the
Federal Reserve Board may assess for certain activities conducted
on a knowing and reckless basis, if those activities cause a
substantial loss to a depository institution. The penalties may
reach as much as $1,000,000 per day. FIRREA also expanded the
scope of individuals and entities or "institution-affiliated
parties" against which such penalties may be assessed. In
addition, FIRREA contains a "cross-guarantee" provision that makes
commonly controlled insured depository institutions liable to the
FDIC for any losses incurred, or reasonably anticipated to be
incurred, in connection with the failure of an affiliated insured
depository institution. The FDIC must present its claim within two
years of incurring such loss and may require either immediate or
installment payments.
Anti-Tying Restrictions. Bank holding companies and their
affiliates are prohibited from tying the provision of certain
services, such as extensions of credit, to certain other services
offered by a holding company or its affiliates.
Annual Reporting; Examination
The Company is required to file quarterly and annual reports
with the Federal Reserve Bank of Dallas (the "Federal Reserve
Bank") and such additional information as the Federal Reserve Bank
may require pursuant to the BHCA. The Federal Reserve Bank may
examine a bank holding company or any of its subsidiaries and
charge the examined institution for the cost of such an
examination. The Company is also subject to reporting and
disclosure requirements under state and federal securities laws.
Capital Adequacy Requirements
Standards. The Federal Reserve Board monitors the capital
adequacy of bank holding companies. The Federal Reserve Board has
adopted a system using a combination of risk-based guidelines and
leverage ratios to evaluate the capital adequacy of bank holding
companies. Under the risk-based capital guidelines, each category
of assets is assigned a different risk weight, based generally on
the perceived credit risk of the asset. These risk weights are
multiplied by corresponding asset balances to determine a "risk-
weighted" asset base. Certain off-balance sheet items, which
previously were not expressly considered in capital adequacy
computations, are added to the risk-weighted asset base by
converting them to a balance sheet equivalent and assigning to them
the appropriate risk weight. In addition, the guidelines define
the capital components. Total capital is defined as the sum of
"Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited
to 100% of "Tier 1." For bank holding companies, "Tier 1" capital
includes, with certain restrictions, common stockholders' equity
and qualifying perpetual noncumulative preferred stock and minority
interests in consolidated subsidiaries. "Tier 2" capital includes,
with certain limitations, certain other preferred stock, as well as
qualifying debt instruments and all or part of the allowance for
possible loan losses.
The guidelines require a minimum ratio of qualifying total
capital to risk-weighted assets of 8.0% (of which at least 4.0% is
required to be in the form of "Tier 1" capital elements). At
December 31, 1995, the Company's ratios of "Tier 1" and total
capital to risk-weighted assets were 15.23% and 16.08%,
respectively. At such date, both ratios exceeded regulatory
minimums.
In addition to the risk-based capital guidelines, the Federal
Reserve Board and the FDIC have adopted the use of a leverage ratio
as an additional tool to evaluate the capital adequacy of banks and
bank holding companies. The leverage ratio is defined to be a
company's "Tier 1" capital divided by its adjusted quarterly
average total assets. The leverage ratio adopted by the federal
banking agencies requires a minimum 3.0% "Tier 1" capital to
adjusted quarterly average total assets ratio for top regulatory-
rated banking organizations. All other institutions are expected
to maintain a leverage ratio of 4.0% to 5.0%. The Company's
leverage ratio at December 31, 1995, was 7.65% and exceeded the
regulatory minimum.
Consequences of Capital Deficiencies. A bank holding company
that fails to meet the applicable capital standards will be at a
disadvantage. For example, Federal Reserve Board policy
discourages the payment of dividends by a bank holding company from
borrowed funds as well as payments that would adversely affect
capital adequacy. Failure to meet the capital guidelines may
result in institution by the Federal Reserve Board of appropriate
supervisory or enforcement actions.
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Imposition of Liability for Undercapitalized Subsidiaries
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") became effective at various times through January
1994. FDICIA requires bank regulators to take "prompt corrective
action" to resolve problems associated with insured depository
institutions. In the event an institution becomes
"undercapitalized," it must submit a capital restoration plan. The
capital restoration plan will not be accepted by applicable
regulators unless each company "having control of" the
undercapitalized institution "guarantees" the subsidiary's
compliance with the capital restoration plan until it becomes
"adequately capitalized." The Company has control of the Banks for
purposes of this statute.
Under FDICIA, the aggregate liability of all companies
controlling a particular institution is generally limited to the
lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to bring the institution
into compliance with applicable capital standards. FDICIA grants
greater powers to regulatory authorities in situations where an
institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan.
For example, a bank holding company controlling such an institution
may be required to obtain prior Federal Reserve Board approval of
proposed dividends or could be required to consent to a merger or
to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies
Federal Reserve Board Approval. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve
Board before it may acquire all or substantially all of the assets
of any bank, or ownership or control of any voting shares of any
bank, if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank. In
approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial
resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be
served, and various competitive factors. The Attorney General of
the United States may, within 30 days after approval of an
acquisition by the Federal Reserve Board, bring an action
challenging such acquisition under the federal antitrust laws, in
which case the effectiveness of such approval is stayed pending a
final ruling by the courts.
Interstate Acquisitions. Currently, the Federal Reserve
Board will only allow the acquisition by a bank holding company of
an interest in any bank located in another state if the statutory
laws of the state in which the target bank is located expressly
authorize such acquisition. The Texas Banking Code permits, in
certain circumstances, out-of-state bank holding companies to
acquire certain existing banks and bank holding companies in Texas.
However, Congress has enacted and the President has signed into law
the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Interstate Act"), which permits, commencing one year after
enactment, bank holding companies to acquire banks located in any
state without regard to whether the transaction is prohibited under
any state law, except that states may establish the minimum age of
their local banks subject to interstate acquisition by out-of-state
bank holding companies. The minimum age of local banks subject to
interstate acquisition is limited to a maximum of five years.
Mergers of Banks and Thrifts. FDICIA eased restrictions on
cross-industry mergers. Members of the Bank Insurance Fund ("BIF")
and the Savings Association Insurance Fund are generally allowed to
merge, assume each other's deposits, and transfer assets in
exchange for an assumption of deposit liabilities. A formula
applies to treat insurance assessments relating to acquired
deposits as if they were still insured through the acquired
institution's insurance fund. The transaction must be approved by
the appropriate federal banking regulator. In considering such
approval, the regulators take into account applicable capital
requirements, certain interstate banking restrictions and other
factors.
Acquisitions of Troubled Institutions. The Competitive
Equality Banking Act of 1987 ("CEBA") amended the Federal Deposit
Insurance Act and certain other statutes to provide federal
regulatory agencies with expanded authority to deal with troubled
institutions. Among other things, CEBA expanded the ability of
out-of-state holding companies to acquire certain financial
institutions that are in danger of closing and permits the FDIC, in
certain circumstances, to establish a "bridge bank" to assume the
deposits or liabilities of one or more closed banks or to perform
certain other functions.
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The Banks
General
The Banks are national banking associations organized under
the National Bank Act of 1864, as amended (the "National Bank
Act"), and are subject to regulatory supervision and examination by
the Office of the Comptroller of the Currency (the "Comptroller").
Pursuant to such regulation, the Banks are subject to special
restrictions, supervisory requirements and potential enforcement
actions.
Permissible Activities for National Banks
National Bank Powers. The National Bank Act delineates the
rights, privileges and powers of national banks and defines the
activities in which national banks may engage. National banks are
authorized to engage in the following: make, arrange, purchase or
sell loans or extensions of credit secured by liens on interests in
real estate; purchase, hold and convey real estate under certain
conditions; offer certain trust services to the public; deal in
investment securities in certain circumstances; and, more broadly,
engage in the "business of banking" and activities that are
"incidental" to banking. Specifically, the following are a few of
the activities deemed incidental to the business of banking: the
borrowing and lending of money; receiving deposits, including
deposits of public funds; holding or selling stock or other
property acquired in connection with security on a loan;
discounting and negotiating evidences of debt; acting as guarantor,
if the bank has a "substantial interest in the performance of the
transaction"; issuing letters of credit to or on behalf of its
customers; operating a safe deposit business; providing check
guarantee plans; issuing credit cards; operating a loan production
office; selling loans under repurchase agreements; selling money
orders at offices other than bank branches; providing consulting
services to banks; and verifying and collecting checks.
In general, statutory restrictions on the activities of banks
are aimed at protecting the safety and soundness of such depository
institutions. Many of the statutory restrictions limit the
participation of national banks in the securities and insurance
product markets. These restrictions do not now affect the Banks,
because the Banks are not presently involved in the types of
transactions covered by the restrictions.
Branching
National banks may establish a branch anywhere in Texas
provided that the branch is approved in advance by the Comptroller,
which considers a number of factors, including financial history,
capital adequacy, earnings prospects, character of management,
needs of the community and consistency with corporate powers.
Federal law places limitations on the ability of national banks,
such as the Banks, to branch across state lines.
Restrictions on Transactions With Affiliates
Certain provisions of FDICIA applicable to the Banks enhance
safeguards against insider abuse by recodifying current law
restricting transactions among related parties. One set of
restrictions is found in Section 23A of the Federal Reserve Act,
which affects loans to and investments in "affiliates" of the
Banks. The term "affiliates" include the Company and any of its
subsidiaries. Section 23A imposes limits on the amount of such
transactions and also requires certain levels of collateral for
such loans. In addition, Section 23A limits the amount of advances
to third parties that are collateralized by the securities or
obligations of the Company or its subsidiaries.
Another set of restrictions is found in Section 23B of the
Federal Reserve Act. Among other things, Section 23B requires that
certain transactions between each Bank and its affiliates must be
on terms substantially the same, or at least as favorable to the
subject Bank, as those prevailing at the time for comparable
transactions with or involving other nonaffiliated companies. In
the absence of such comparable transactions, any transaction
between a Bank and its affiliates must be on terms and under
circumstances, including credit underwriting standards and
procedures, that in good faith would be offered to or would apply
to nonaffiliated companies. Each Bank is also subject to certain
prohibitions against advertising that suggests that the Bank is
responsible for the obligations of its affiliates.
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The restrictions on loans to insiders contained in the
Federal Reserve Act and Regulation O now apply to all insured
institutions and their subsidiaries and holding companies. The
aggregate amount of an institution's loans to insiders is limited
to the amount of its unimpaired capital and surplus, unless the
FDIC determines that a lesser amount is appropriate. Each Bank may
pay, on behalf of any executive officer or director, an amount
exceeding funds on deposit in that individual's personal account
only if there is a written, preauthorized, interest-bearing
extension of credit specifying a method of repayment and a written
preauthorized transfer of funds from another account of the
executive officer or director at that Bank. Insiders are subject
to enforcement actions for knowingly accepting loans in violation
of applicable restrictions.
Interest Rate Limits and Lending Regulations
The Banks are subject to various state and federal statutes
relating to the extension of credit and the making of loans. The
maximum legal rate of interest that the Banks may charge on a loan
depends on a variety of factors such as the type of borrower,
purpose of the loan, amount of the loan and date the loan is made.
There are several different state and federal statutes that set
maximum legal rates of interest for various lending situations. If
a loan qualifies under more than one statute, the lending
institutions may charge the highest rate for which the loan is
eligible.
Loans made by banks located in Texas are subject to numerous
other federal and state laws and regulations, including
truth-in-lending statutes, the Texas Consumer Credit Code, the
Equal Credit Opportunity Act, the Real Estate Settlement Procedures
Act and the Home Mortgage Disclosure Act. These laws provide
remedies to the borrower and penalties to the lender for failure of
the lender to comply with such laws. The scope and requirements of
these laws and regulations have expanded in recent years, and
claims by borrowers under these laws and regulations may increase.
Restrictions on Subsidiary Bank Dividends
Dividends payable by the Banks to Independent Financial are
restricted under the National Bank Act. The Banks' ability to pay
dividends is further restricted by the requirement that they
maintain adequate levels of capital in accordance with capital
adequacy guidelines promulgated from time to time by the
Comptroller. See "ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS - Dividend Policy."
Moreover, the prompt corrective provisions of FDICIA and
implementing regulations prohibit a bank from paying a dividend if,
following the payment, the bank would be in any of the three
capital categories for undercapitalized institutions. See "Capital
Adequacy Requirements" below.
Examinations
The Comptroller periodically examines and evaluates national
banks. Based upon such evaluations, the Comptroller may revalue
certain assets of an institution and require that it establish
specific reserves to compensate for the difference between the
regulatory-determined value and the book value of such assets. The
Comptroller is authorized to assess the institution an annual fee
based upon deposits for, among other things, the costs of
conducting the examinations.
Capital Adequacy Requirements
FDICIA, among other things, substantially revised existing
statutory capital standards, restricted certain powers of state
banks, gave regulators the authority to limit officer and director
compensation and required holding companies to guarantee the
capital compliance of their banks in certain instances. Among
other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" with respect to banks that do not meet
minimum capital requirements. FDICIA established five capital
tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized," as defined by regulations adopted by
the Federal Reserve Board, the FDIC and the other federal
depository institution regulatory agencies. A depository
institution is well capitalized if it significantly exceeds the
minimum level required by regulation for each relevant capital
measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure,
significantly undercapitalized if it is significantly below such
measure and critically undercapitalized if it fails to meet any
critical capital level set forth in the regulations. The critical
capital level must
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be a level of tangible equity capital equal to the greater of 2% of
total tangible assets or 65% of the minimum leverage ratio to be
prescribed by regulation. An institution may be deemed to be in a
capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory
examination rating. At December 31, 1995, each of the Banks was
well capitalized.
Banks with capital ratios below the required minimum are
subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a
temporary suspension of insurance without a hearing in the event
the institution has no tangible capital.
Corrective Measures for Capital Deficiencies
FDICIA requires the federal banking regulators to take
"prompt corrective action" with respect to capital-deficient
institutions with the overall goal to reduce losses to the
depository insurance fund. In addition to requiring the submission
of a capital restoration plan (as discussed above), FDICIA contains
broad restrictions on certain activities of undercapitalized
institutions involving asset growth, acquisitions, branch
establishment and expansion into new lines of business. With
certain exceptions, an insured depository institution is prohibited
from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons if the
institution would be undercapitalized after any such distribution
or payment.
As an institution's capital decreases, the FDIC's powers and
scrutiny become greater. A significantly under-capitalized
institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with
affiliates, removal of management, and other restrictions. Under
proposed regulations, an institution will be considered critically
undercapitalized if its tangible equity to assets ratio falls below
2%. The FDIC has only very limited discretion in dealing with a
critically undercapitalized institution and is virtually required
to appoint a receiver or conservator.
Real Estate Lending Evaluations and Appraisal Requirements
FDICIA required the federal banking regulators to adopt
uniform standards for evaluations by the regulators of loans
collateralized by real estate or made to finance improvements to
real estate. In formulating the standards, the banking agencies
were required to take into consideration the risk posed to the
insurance funds by real estate loans, the need for safe and sound
operation of insured depository institutions and the availability
of credit. FDICIA also prohibits the regulators from adversely
evaluating a real estate loan or investment solely on the grounds
that the investment involves commercial, residential or industrial
property, unless the safety and soundness of an institution may be
affected.
The federal agencies adopted a number of regulatory standards
with regard to real estate lending. These standards require
banking institutions to establish and maintain written internal
real estate lending policies. These policies must not only be
consistent with safe and sound banking practices, but must also be
appropriate to the size of the institution and the nature and scope
of its operations. The policies must establish loan portfolio
diversification standards, prudent underwriting standards,
including clear and measurable loan-to-value limits (although such
limits should not exceed specific supervisory limits), loan
administration procedures and comprehensive documentation, approval
and reporting requirements to ensure compliance with these
policies. Additionally, the institution's policies must be
reviewed and approved by that institution's Board of Directors on
at least an annual basis and such policies must be continually
monitored by the institutions to ensure compatibility with current
market conditions. In addition, banks are required to secure
appraisals for real estate-collateralized loans with a transaction
value of $250,000 or more.
Deposit Insurance Assessments
FDICIA required the FDIC to establish a risk-based deposit
insurance premium schedule. The risk-based assessment system is
used to calculate a depository institution's semi-annual deposit
insurance assessment based upon the designated reserve ratio for
the deposit insurance fund and the probability and extent to which
the deposit insurance fund will incur a loss with respect to this
institution. In addition, the FDIC can impose special assessments
to cover the cost of borrowings from the U.S. Treasury, the Federal
Financing Bank and BIF member banks.
9
<PAGE>
On September 15, 1992, the FDIC issued a rule revising its
assessment regulations from the existing flat-rate system for
deposit insurance assessments (or "premiums") to a new, risk-based
assessment system. This system became effective for the assessment
period beginning January 1, 1993. Under this system, each
depository institution will be placed in one of nine assessment
categories based on certain capital and supervisory measures.
Institutions assigned to higher-risk categories -- that is,
institutions that pose a greater risk of loss to their respective
deposit insurance funds -- pay assessments at higher rates than
would institutions that pose a lower risk. The Banks were assessed
a weighted average premium of $0.1073 per $100 of deposits for the
year ended December 31, 1995.
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") and the
regulations issued by the Comptroller to implement that law are
intended to encourage banks to help meet the credit needs of their
service area, including low and moderate income neighborhoods,
consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's
record in meeting the needs of its service area when considering
applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of
another bank. FIRREA requires federal banking agencies to make
public a rating of a bank's performance under the CRA. In the case
of a bank holding company, the CRA performance record of the banks
involved in the transaction are reviewed in connection with the
filing of an application to acquire ownership or control of shares
or assets of a bank or to merge with any other bank holding
company. An unsatisfactory record can substantially delay or block
the transaction. The bank regulatory agencies in 1995 adopted
final regulations implementing the CRA. These regulations affect
extensive changes to the existing procedures for determining
compliance with the CRA and the full effect of these new
regulations cannot be determined at this time.
Instability of Regulatory Structure
Other legislative and regulatory proposals regarding changes
in banking, and regulations of banks, thrifts and other financial
institutions, are being considered by the executive branch of the
federal government, Congress and various state governments,
including Texas. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial
services industry. The Company cannot predict accurately whether
any of these proposals will be adopted or, if adopted, how these
proposals will affect the Company or the Banks.
Expanding Enforcement Authority
One of the major additional burdens imposed on the banking
industry by FDICIA is the increased ability of banking regulators
to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board and FDIC are possessed of
extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository
institutions and other holding companies. For example, the FDIC
may terminate the deposit insurance of any institution that it
determines has engaged in an unsafe or unsound practice. The
regulatory agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions and publicly
disclose such actions. FDICIA, FIRREA and other laws have expanded
the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
Effect on Economic Environment
The policies of regulatory authorities, including the
monetary policy of the Federal Reserve Board, have a significant
effect on the operating results of bank holding companies and their
subsidiaries. Among the means available to the Federal Reserve
Board to affect the money supply are open market operations in U.S.
Government securities, control of borrowings at the "discount
window," changes in the discount rate on member bank borrowings,
changes in reserve requirements against member bank deposits and
against certain borrowings by banks and their affiliates and the
placing of limits on interest rates that member banks may pay on
time and savings deposits. These means are used in varying
combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may affect interest
rates charged on loans or paid for deposits. Federal Reserve Board
monetary policies have materially affected the operating results of
commercial banks in the past and are expected to continue to do so
in the future. The Company cannot predict the nature of future
monetary policies and the effect of such policies on the business
and earnings of the Company and the Banks.
10
<PAGE>
Employees
At March 18, 1996, the Company and the Banks had 97 full-time
equivalent employees. Employees are provided with employee
benefits, such as an employee stock ownership/401(k) plan and life,
health and long-term disability insurance plans. The Company
considers the relationship of the Banks with their employees to be
excellent.
Competition
The activities in which the Company and the Banks engage are
highly competitive. Each activity engaged in and the geographic
market served involves competition with other banks and savings and
loan associations as well as with nonbanking financial institutions
and nonfinancial enterprises. In Texas, savings and loan
associations and banks are allowed to establish statewide branch
offices. The Banks actively compete with other banks in their
efforts to obtain deposits and make loans, in the scope and type of
services offered, in interest rates paid on time deposits and
charged on loans and in other aspects of banking. In addition to
competing with other commercial banks within and without their
primary service areas, the Banks compete with other financial
institutions engaged in the business of making loans or accepting
deposits, such as savings and loan associations, credit unions,
insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, factors, certain
governmental agencies, credit card organizations and other
enterprises. Additional competition for deposits comes from
government and private issues of debt obligations and other
investment alternatives for depositors such as money market funds.
The Banks also compete with suppliers of equipment in providing
equipment financing.
ITEM 2. PROPERTIES
At December 31, 1995, the Company occupied approximately 600
square feet of space for its corporate offices at 547 Chestnut
Street, Abilene, Texas. The Central Branch of First State, N.A.,
Abilene occupies approximately 8,000 square feet at this same
facility. The following table sets forth, at December 31, 1995,
certain information with respect to the banking premises owned or
leased by the Company and the Banks. The Company considers such
premises adequate for its needs and the needs of the Banks.
<TABLE>
<CAPTION>
Approximate
Location Square Footage Ownership and Occupancy
- -------- -------------- -----------------------
<S> <C> <C>
Abilene, Texas 8,600 Owned by First State, N.A.,
Abilene and occupied by the
Central Branch of First State,
N.A., Abilene and the Company
Abilene, Texas 3,500 Owned and occupied by the Wylie
Branch of First State, N.A.,
Abilene
Stamford, Texas 14,000 Owned and occupied by the
Stamford Branch of First State,
N.A., Abilene
Winters, Texas 9,500 Owned and occupied by the
Winters Branch of First State,
N.A., Abilene
Odessa, Texas 62,400(1) Owned, occupied and leased by
the Main Bank of First State,
N.A., Odessa
Odessa, Texas 2,400 Leased and occupied by the
Winwood Branch of First State,
N.A., Odessa
_________________________
<FN>
(1) First State, N.A., Odessa occupies approximately 20,400
square feet, leases 32,900 square feet and is attempting to
lease the remaining 9,100 square feet.
</FN>
</TABLE>
11
<PAGE>
The Banks own or lease certain additional tracts of land for
parking, drive-in facilities and for future expansion or
construction of new premises. Aggregate annual rentals of the
Company and the Banks for all leased premises during the year ended
December 31, 1995, were $46,000. This amount represents rentals
paid for the lease of land by the Wylie Branch of First State,
N.A., Abilene and of banking premises by the Winwood Branch of
First State, N.A., Odessa.
ITEM 3. LEGAL PROCEEDINGS
1. In Jon F. Bergstrom, et. al. v. First United Trust
Company, et. al. and Morton J Adels, et. al. v. The First State
Bank of Abilene, et. al., Civil Action No. H-87-2757 (Consolidated
with Civil Action No. H-88-764) brought in the United States
District Court for the Southern District of Texas (Houston
Division,), the plaintiffs asserted various causes of action which
sought to impose liability on the Company and certain of the former
officers and directors of First State Bank, N.A., Abilene as a
result of the purchase of the stock of the failed bank, First State
Bank of Saginaw. Each of the 25 plaintiffs sought actual damages
in the amount of $55,000. The plaintiffs additionally claimed
violations of the Racketeer Influenced and Corrupt Organizations
Act (18 U.S.C. Section 1961 et. seq.) which imposes treble damages.
The court in this case granted the Company's motion for summary
judgment and on March 10, 1995, rendered a final judgment in favor
of the defendants.
2. Security State Bank, Big Spring, Texas, filed a lawsuit
(Security State Bank, Big Spring, Texas v. First State Bank, N.A.
d/b/a First State Bank of Wylie, N.A, Independent Bankshares, Inc.
and Bryan Stephenson, Individually - Cause No. 42475-A) on April 2,
1991, in the 157th Judicial District Court of Taylor County, Texas,
against First State, N.A., Abilene, the Company and its President,
Bryan W. Stephenson, as a result of collection efforts regarding a
loan that was participated to the plaintiff. First State, N.A.,
Abilene, released certain guarantors of the loan upon partial
payment of their guaranties based, in part, upon information as to
the value of the primary collateral, namely, the stock of First
Comanche Bankshares, a bank holding company. Shortly after the
foreclosure on First Comanche Bankshares stock, the Texas
Department of Banking closed the bank subsidiary of First Comanche
Bankshares. Security State Bank, Big Spring, as a participant in
the loan, asserts that First State, N.A., Abilene negligently
and/or fraudulently handled the loan participation. Security State
Bank, Big Spring, has also asserted causes of action for tortious
interference, breach of fiduciary duty, negligent misrepresentation
and breach of contract. The plaintiff's interest in the loan
participation was approximately $287,140 in principal amount. The
Company is vigorously contesting all of the aforementioned claims
and/or causes of action related to this litigation and considers
the lawsuit to be without merit.
3. First State, N.A., Abilene f/k/a First State Bank of
Wylie, N.A. as successor in interest of The First State Bank of
Abilene, a former bank subsidiary of the Company ("FSB Abilene")
filed a lawsuit on April 22, 1992, against O. B. Stephens, Jr.
(First State Bank, N.A. f/k/a First State Bank of Wylie, N.A. v. O.
B. Stephens, Jr., Cause No. 42849-A) in State District Court in
Taylor County, Texas, on a promissory note in the approximate
principal amount of $355,960, made by Mr. Stephens. First State,
N.A., Abilene sought actual damages of $310,425 plus interest and
attorneys' fees from Mr. Stephens. Although First State, N.A.,
Abilene is the current holder of the note, another bank owns a
45.5% participation interest in the loan and the underlying note.
In connection with this lawsuit, Mr. Stephens has filed a
general and specific denial and has asserted certain affirmative
defenses and counterclaims including misrepresentation, fraud and
bad faith. The plaintiff claims, among other things, that FSB-
Abilene agreed to offset the amount owing under the promissory note
with amounts allegedly due plaintiff under an offset agreement.
Mr. Stephens seeks actual damages in an amount not less than
$1,000,000, punitive damages in amount not less than three times
actual damages, prejudgment and post judgment interest and
attorneys fees and costs.
First State, N.A., Abilene is vigorously contesting the
affirmative defenses and counterclaims asserted by Mr. Stephens and
considers Mr. Stephens' affirmative defenses and counterclaims to
be without merit. First State, N.A., Abilene has filed a motion
for Partial Summary Judgment with regard to the various affirmative
defenses and counterclaims made by Mr. Stephens. This case was
originally set for trial in February 1996, but has been continued
by the court upon a motion by Mr. Stephens.
12
<PAGE>
4. In 1985, a former subsidiary bank of the Company
foreclosed on the stock of Texas Bank & Trust Company, Sweetwater,
Texas ("TB&T-Sweetwater"), which became a repossessed asset of the
former subsidiary. TB&T-Sweetwater subsequently failed, resulting
in a legal action being brought in federal court against the
thirteen TB&T-Sweetwater directors by the FDIC. In September 1993,
nine former directors of TB&T-Sweetwater (the "Outside Directors")
settled with the FDIC for an aggregate of $60,000. All the former
directors of TB&T-Sweetwater requested that the Company reimburse
them for their expenses and settlement costs incurred by them in
their defense of the FDIC litigation. This request was based on
their interpretation of certain indemnification provisions
contained in the Company's Articles of Incorporation.
In January 1994, the Company filed a declaratory judgment
action in state district court to petition the court to rule on
certain matters that would have precluded indemnification. Certain
of the directors filed counterclaims against the Company asserting
their right to be indemnified. A hearing occurred in July 1994,
and the court issued an order in September 1994, denying the
Company's petition and upholding the individuals' counterclaims.
In December 1994, a settlement was entered into between the
FDIC, one Outside Director and the three management directors of
TB&T-Sweetwater who were also management directors of the Company
(the "Inside Directors"), with the Inside Directors paying the FDIC
a total of $450,000. As a result of the two settlements and
indemnification requests, the Outside Directors claimed
indemnification in the amount of approximately $467,000 and the
Inside Directors claimed indemnification in the amount of
approximately $900,000. In 1994, the Company accrued $900,000 for
the potential reimbursement of the $1,367,000 in claims.
On March 7, 1995, the Company agreed to settle the
indemnification requests of the Inside Directors for $450,000 in
cash and by delivery of three promissory notes in the aggregate
principal amount of $350,000. These notes are payable in three
equal annual installments over three years and bear interest at 6%
per annum. In April and May 1995, the Company consummated this
settlement with the Inside Directors by paying them an aggregate of
$450,000 and delivering such promissory notes to them. In May and
June 1995, the Company settled with the Outside Directors by paying
them an aggregate of $252,000 in cash.
The Company is involved in various other litigation
proceedings incidental to the ordinary course of business. In the
opinion of management, however, the ultimate liability, if any,
resulting from such other litigation would not be material in
relation to the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year, no matter was
submitted by the Company to a vote of its shareholders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
Since September 12, 1995, the Company's Common Stock has
traded on the American Stock Exchange (the "AMEX") under the symbol
"IBK." Prior to September 12, 1995, the Common Stock was quoted on
Nasdaq's Small-Cap Market system under the symbol "IBKS." The
following table sets forth the high and low sales prices from
January 1, 1994, through March 18, 1996, for the Common Stock as
reported by the AMEX and by Nasdaq Small-Cap Market, as the case
may be, and the amount of dividends per share, adjusted for the 33-
1/3% stock dividend paid to stockholders in May 1995. All
quotations represent prices between dealers, without retail
mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
13
<PAGE>
<TABLE>
<CAPTION>
Cash
Dividends
High Low Per Share
----- --- ---------
<S> <C> <C> <C>
1994
----
First Quarter $ 6-3/4 $ 6 $ 0
Second Quarter 7-1/8 6-1/8 0.0225
Third Quarter 7-1/8 6-3/8 0.0225
Fourth Quarter 6-3/4 5-3/4 0.0225
1995
----
First Quarter 6 5-1/4 0.0225
Second Quarter 7-1/2 5-1/4 0.03
Third Quarter 11-1/4 7-1/4 0.03
Fourth Quarter 10-7/8 10-1/4 0.03
1996
----
First Quarter (through
March 18, 1996) 10-1/2 9-3/4 0.03
</TABLE>
Shareholders
According to the records of the Company's transfer agent,
there were approximately 1,268 holders of record of the Common
Stock at December 31, 1995.
Dividend Policy
The Company. Until 1994, the Company had not paid any cash
dividends on its Common Stock since 1985. In May 1994, the Company
reinstituted the payment of a $.03 per share cash dividend and has
paid such cash dividend through February 1996. The Company's
ability to pay cash dividends is restricted by the requirement that
it maintain a certain level of capital in accordance with
regulatory guidelines promulgated by the Federal Reserve Board.
See "ITEM 1. BUSINESS - Supervision and Regulation - The Company
- - Capital Adequacy Requirements."
The Company's loan agreement with the Amarillo Bank provides
that the Company must obtain the prior written consent of the
Amarillo Bank prior to paying cash dividends on the Common Stock if
the indebtedness to the Amarillo Bank is $1,000,000 or more. Any
future financing agreement may contain restrictions on dividends.
Holders of the Series C Cumulative Convertible Preferred
Stock ("Series C Preferred Stock") are entitled to receive, if, as
and when declared by the Company's Board of Directors, out of funds
legally available therefor, in preference to the holders of Common
Stock and any other stock ranking junior to the Series C Preferred
Stock in respect of dividends, quarterly cumulative cash dividends
at the annual rate of $4.20 per share. The aggregate annual
dividend payment on the 16,436 shares of the Series C Preferred
Stock outstanding at December 31, 1995, is approximately $69,000.
If earnings and cash flow from ordinary operations of the Company
are not sufficient to enable it to pay the full amount of the
dividend on the Series C Preferred Stock, the Company may cumulate
all or a portion of the annual dividend. The Company can cause the
mandatory conversion of the Series C Preferred Stock into Common
Stock beginning in December 1997. In March 1995, 100 shares of
Series C Preferred Stock were converted to 1,838 shares of Common
Stock, adjusted for the 33 1/3% stock dividend paid in May 1995,
and in October 1995, 132 shares of Series C Preferred Stock were
converted into 2,425 shares of Common Stock. The Series C
Preferred Stock is the Company's only outstanding preferred issue.
The Company may not, among other things, declare or pay any
cash dividend in respect of the Common Stock or any stock junior to
the Series C Preferred Stock with respect to dividends or
liquidation rights unless, on the date of payment, all accumulated
dividends in respect of the Series C Preferred Stock are paid or
set aside. Furthermore, the Company may not declare or pay any
dividends in respect of the Common Stock or purchase, redeem or
otherwise acquire shares of Common Stock if, on the record date for
such payment, or on the date of such purchase, redemption or
acquisition, such action would cause stockholders' equity
(including mandatorily
14
<PAGE>
redeemable preferred stock) of the Company, as reported in the most
recent quarterly or annual financial statements filed by the
Company with the Securities and Exchange Commission, to be less
than an amount equal to the sum of (i) 140% of the number of then
outstanding shares of Series C Preferred Stock multiplied by its
liquidation value and (ii) 140% of the number of then outstanding
shares of any stock ranking senior as to dividends to the Series C
Preferred Stock multiplied by the liquidation value of such senior
stock. Dividend payments on any other stock junior to the Series
C Preferred Stock with respect to dividends or liquidation rights
are similarly limited.
The Federal Reserve Board has a policy prohibiting bank
holding companies from paying dividends on common stock except out
of current earnings. The Federal Reserve Board has asserted that
this policy, originally only applicable to common stock, also
limits dividends on preferred stocks. As expanded, the Federal
Reserve Board policy would limit dividends on the Series C
Preferred Stock to an amount equal to current earnings. To date,
the Company's earnings have been sufficient to cover dividends on
the Common Stock and the Series C Preferred Stock.
The Board of Directors presently intends to continue the
payment of a small cash dividend on the Common Stock. The amount
and timing of any future dividend payments, however, will be
determined by the Board of Directors and will depend upon a number
of factors, including the extent of funds legally available
therefor, dividend requirements of the Series C Preferred Stock,
and the earnings, business prospects, acquisition opportunities,
cash needs, financial condition, regulatory and capital
requirements of the Company and the Banks and provisions of
existing and future loan agreements.
The Banks. The funds used by the Company to meet its
operational expenses and debt service obligations, to maintain the
necessary level of capital for itself and the Banks and to pay cash
dividends on the Common Stock and the Series C Preferred Stock will
be derived primarily from dividends, management fees and tax
liabilities paid to the Company by the Banks. See "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Liquidity." The ability of the Banks to pay
dividends is restricted by (i) the requirement that the Banks
maintain an adequate level of capital in accordance with regulatory
guidelines and (ii) statute.
The FDIC requires insured banks, such as the Banks, to
maintain certain minimum capital ratios. The FDIC is permitted to
require higher ratios if it believes that the financial condition
and operations of a particular bank mandates such a higher ratio.
The Comptroller has substantially similar requirements. See "ITEM
1. BUSINESS - Supervision and Regulation - The Banks - Capital
Adequacy Requirements" and "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Capital
Resources."
The National Bank Act provides that, prior to declaring a
dividend, a bank must transfer to its surplus account an amount
equal to or greater than 10% of the net profits earned by the bank
since its last dividend was declared, unless such transfer would
increase the surplus of the bank to an amount greater than the
bank's stated capital. Moreover, the approval of the Comptroller
is required for any dividend to a bank holding company by a
national bank if the total of all dividends, including the proposed
dividend, declared by the bank in any calendar year exceeds the
total of its net profits for such year combined with its retained
net profits for the preceding two years, less any required
transfers to surplus. In addition, the prompt corrective
provisions of FDICIA and implementing regulations prohibit a bank
from paying a dividend if, following the payment, the bank would be
in any of the three capital categories for undercapitalized
institutions. See "ITEM 1. BUSINESS - Supervision and Regulation
- - The Banks - Capital Adequacy Requirements."
In 1995, First State, N.A., Odessa was restricted in the
payment of dividends without prior regulatory approval through
September, 1995. First State, N.A., Odessa was restricted during
this period because of the statute that prohibits dividends by
banks with negative retained earnings.
Dividends paid by the Banks to Independent Financial and by
Independent Financial to the Company totaled $700,000 and $905,000,
respectively, during 1995. At December 31, 1995, there were
approximately $1,208,000 in dividends available for payment to
Independent Financial by the Banks without regulatory approval.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein
by reference from page 31 of the Company's 1995 Annual Report to
Shareholders under the caption "Selected Consolidated Financial
Information."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein
by reference from pages 33 through 55, inclusive, of the Company's
1995 Annual Report to Shareholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein
by reference from pages 9 through 30, inclusive, of the Company's
1995 Annual Report to Shareholders under the captions "Report of
Coopers & Lybrand, L.L.P., Independent Auditors," "Consolidated
Balance Sheets," "Consolidated Income Statements," "Consolidated
Statements of Changes in Stockholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial
Statements" and "Quarterly Data (Unaudited)."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required for by this item is incorporated
herein by reference from pages 6 through 9, inclusive, of the
Company's definitive proxy statement to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission relating
to its Annual Meeting of Shareholders to be held April 30, 1996
(the "Definitive Proxy Statement"), under the respective captions
"Item 1. Election of Directors" and "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein
by reference from pages 9 and 10 of the Company's Definitive Proxy
Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated
herein by reference from pages 2 through 5, inclusive, of the
Company's Definitive Proxy Statement under the caption "Voting
Securities and Principal Shareholders."
16
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated
herein by reference from pages 10 and 11 of the Company's
Definitive Proxy Statement under the caption "Executive
Compensation - Transactions with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents Filed as Part of Report.
1. Financial Statements
The following Consolidated Financial Statements of
the Company included in PART II of this report are
incorporated by reference from the Company's Annual
Report to Shareholders for the year ended December 31,
1995, furnished to the Securities and Exchange
Commission pursuant to Rule 14a-3(b):
Page
Reference of
Item Annual Report
Report of Coopers & Lybrand, L.L.P.,
Independent Auditors 9
Consolidated Balance Sheets as of
December 31, 1995 and 1994 10
Consolidated Income Statements for
the three years ended December 31, 1995 11-12
Consolidated Statements of Changes in
Stockholders' Equity for the three
years ended December 31, 1995 13
Consolidated Statements of Cash
Flows for the three years ended December 31, 1995 14
Notes to Consolidated Financial
Statements 15-30
2. Financial Statement Schedules
Report of Ernst & Young, L.L.P., predecessor
accountant
All schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission have been omitted because such
schedules are not required under the related instructions
or are inapplicable or because the information required
is included in the Company's Consolidated Financial
Statements or notes thereto.
17
<PAGE>
[Letterhead]
Board of Directors and Shareholders
Independent Bankshares, Inc.
We have audited the accompanying consolidated statements of income,
changes in stockholders' equity and cash flows of Independent
Bankshares, Inc. (the Company) for the year ended December 31,
1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated results of
operations and cash flows of Independent Bankshares, Inc. for the
year ended December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
1993 the Company changed its methods of accounting for income taxes
and changed its method of accounting for certain investments in
debt and equity securities.
/s/ Ernest & Young LLP
January 31, 1994
18
<PAGE>
3. Exhibits
The exhibits listed below are filed as part of or
incorporated by reference in this report. Where such
filing is made by incorporation by reference to a
previously filed document, such document is identified
in parenthesis. See the Index of Exhibits included with
the exhibits filed as part of this report.
No. Description
3.1 Restated Articles of Incorporation of
Independent Bankshares, Inc. (Exhibit 3.1 to
the Company's Annual Report on Form 10-K for the
year ended December 31, 1994)
3.2 Bylaws of Independent Bankshares, Inc., as
amended (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December
31, 1994)
10.1 Form of Nonqualified Option Agreement (Exhibit
10.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1992)
10.2 Loan Agreement (Renewal) dated as of April 15,
1993, by and among Independent Bankshares, Inc.
and The First National Bank of Amarillo and
related Term Note dated April 15, 1993, and
Security Agreement dated September 8, 1993
(Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the year ended December 31,
1993); Revolving Credit Note dated April 15, 1995
(filed herewith)
10.3 Master Equipment Lease Agreement, dated December
24, 1992, between Independent Bankshares, Inc.
and NCR Credit Corporation, Amendment to Master
Equipment Lease Agreement dated concurrently
therewith, and related form of Schedule and
Commencement Certificate (Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the
year ended December 31, 1993)
10.4 Asset Purchase and Account Assumption Agreement
dated March 4, 1996, between the Company and
Coastal Banc ssb (filed herewith)
13.1 Annual Report to Shareholders for the year
ended December 31, 1995 (filed herewith)
21.1 Subsidiaries of Independent Bankshares, Inc.
(Exhibit 21.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994)
23.1 Consent of Coopers & Lybrand, L.L.P. (filed
herewith)
23.2 Consent of Ernst & Young, L.L.P. (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K.
The Company did not file any Current Reports on
Form 8-K in the fourth quarter of 1995 or in
the first quarter of 1996.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
INDEPENDENT BANKSHARES, INC.
By: /s/ Bryan W. Stephenson
Bryan W. Stephenson,
President and Chief Executive
Officer
Date: March 28, 1996
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
/s/ Bryan W. Stephenson President, March 28, 1996
Bryan W. Stephenson Chief Executive
Officer and
Director
/s/ Randal N. Crosswhite Senior Vice March 28, 1996
Randal N. Crosswhite President,
Chief Financial
Officer,
Corporate
Secretary and
Director
________________________ Director March 28, 1996
Lee Caldwell
/s/ Mrs. Wm. R. (Amber) Cree Director March 28, 1996
Mrs. Wm. R. (Amber) Cree
20
<PAGE>
/s/ Louis S. Gee Director March 28, 1996
Louis S. Gee
/s/ Marshal M. Kellar Director March 28, 1996
Marshal M. Kellar
/s/ Tommy McAlister Director March 28, 1996
Tommy McAlister
/s/ Scott L. Taliaferro Director March 28, 1996
Scott L. Taliaferro
/s/ James D. Webster, M.D. Director March 28, 1996
James D. Webster, M.D.
/s/ C. G. Whitten Director March 28, 1996
C. G. Whitten
/s/ John A. Wright Director March 28, 1996
John A. Wright
21
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Restated Articles of Incorporation of
Independent Bankshares, Inc. (Exhibit
3.1 to the Company's Annual Report on
Form 10-K for the year ended December
31, 1994)
3.2 Bylaws of Independent Bankshares,
Inc., as amended (Exhibit 3.2 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1994)
10.1 Form of Nonqualified Option Agreement
(Exhibit 10.2 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1992)
10.2 Loan Agreement (Renewal) dated as of
April 15, 1993, by and among
Independent Bankshares, Inc. and The
First National Bank of Amarillo and
related Term Note dated April 15,
1993, and Security Agreement dated
September 8, 1993 (Exhibit 10.4 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1993);
Revolving Credit Note dated April 15,
1995 (filed herewith)
10.3 Master Equipment Lease Agreement,
dated December 24, 1992, between
Independent Bankshares, Inc. and NCR
Credit Corporation, Amendment to
Master Equipment Lease Agreement dated
concurrently therewith, and related
form of Schedule and Commencement
Certificate (Exhibit 10.7 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1993)
10.4 Asset Purchase and Account Assumption
Agreement dated March 4, 1996 between
the Company and Coastal Banc ssb
(filed herewith)
13.1 Annual Report to Shareholders for the
year ended December 31, 1995 (filed
herewith)
21.1 Subsidiaries of Independent
Bankshares, Inc. (Exhibit 21.1 to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1994)
23.1 Consent of Coopers & Lybrand, L.L.P.
(filed herewith)
23.2 Consent of Ernst & Young, L.L.P.
(filed herewith)
27.1 Financial Data Schedule (filed
herewith)
22
<PAGE>
Exhibit 10.2
BOATMAN'S FIRST NATIONAL BANK OF AMARILLO
8TH & TAYLOR - P.O. BOX 1331
AMARILLO, TX 79180
(Lender's Name and Address)
"You" means the lender, its successors and assigns.
INDEPENDENT BANKSHARES, INC. ACCOUNT #: 406386 DHH
P.O. BOX 3218 Loan Number 39207 DM
ABILENE, TX 79604 Date April 15, 1995
(Borrower's Name and Address) Maturity Date April 15, 1996
"I" includes each borrower above, Loan Amount $125,000.00
joint and severally. Renewal Of 39207
For value received, I promise to pay to you, or your order, at your
address listed above the PRINCIPAL sum of ONE HUNDRED TWENTY FIVE
THOUSAND AND NO/100 Dollars $125,000.00.
[ ] Single Advance: I will receive all of this principal sum on
_______. No additional advances are contemplated under this
note.
[X] Multiple Advance: The principal sum shown above is the
maximum amount of principal I can borrow under this note. On
April 15, 1995 I will receive the amount of $________ and
future principal advances are contemplated.
Conditions: The conditions for future advances are
____________________________________________.
[X] Open End Credit: You and I agree that I may borrow up to
the maximum amount of principal more than one time. This
feature is subject to all other conditions and expires on
April 15, 1996.
[ ] Closed End Credit: You and I agree that I may borrow up
to the maximum only one time (and subject to all other
conditions).
INTEREST: I agree to pay interest on the outstanding principal
balance from Apr. 15, 1995 at the rate of 10.000% per year until
FIRST CHANGE DATE.
[X] Variable Rate: This rate may then change as stated below.
[X] Index Rate: The future rate will be 1.000% OVER the
following index rate: BOATMEN'S FIRST NATIONAL BANK OF
AMARILLO'S BASE RATE AS ANNOUNCED PUBLICLY FROM TIME TO TIME
BY BOATMEN'S FIRST NATIONAL BANK OF AMARILLO.
[X] Ceiling Rate: The interest rate ceiling for this note is
STD QUARTERLY ceiling rate announced by the Credit
Commissioner from time to time.
[X] Frequency and Timing: The rate on this note may change
as often as DAILY. A change in the interest rate will take
effect ON THE SAME DAY.
[ ] Limitations: During the term of this loan, the
applicable annual interest rate will not be more than _____%
or less than _____%.
Effect of Variable Rate: A change in the interest rate will
have the following effect on the payments:
[X] The amount of each scheduled payment will change.
[X] The amount of the final payment will change.
[ ] ________________________________________________________.
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance
of this note owing after maturity, and until paid in full, as
stated below:
[X] on the same fixed or variable rate basis in effect before
maturity (as indicated above).
[ ] at a rate equal to ______________________________________.
[ ] LATE CHARGE: If a payment is made more than ___ days after it
is due, I agree to pay a late charge of _______________________.
[ ] ADDITIONAL CHARGES: In addition to interest, I agree to pay
the following charges which [ ] are [ ] are not included in the
principal amount above: _________________________________________.
PAYMENTS: I agree to pay this note as follows:
[X] Interest: I agree to pay accrued interest ON DEMAND, BUT IF
NO DEMAND IS MADE QUARTERLY BEGINNING JULY 15, 1995.
[X] Principal: I agree to pay the principal ON DEMAND, BUT IF NO
DEMAND IS MADE THEN ON APRIL 15, 1996.
[ ] Installments: I agree to pay this note in ____ payments. The
first payment will be in the amount of $__________ and will be due
__________. A payment of $__________ will be due __________
thereafter. The final payment of the entire unpaid balance of
principal and interest will be due __________.
ADDITIONAL TERMS:
"I AGREE THAT IF THE "INDEX RATE" CEASES TO EXIST, YOU MAY
SUBSTITUTE A NEW "INDEX RATE" THAT IS REASONABLY SIMILAR TO THE
PRIOR "INDEX RATE"."
THIS NOTE IS SECURED BY: STOCK MORE FULLY DESCRIBED IN SECURITY
AGREEMENT DATED 9-8-93.
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
PURPOSE: The purpose of this loan is BUSINESS: RENEWAL/HOLDING
COMPANY.
SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON
PAGE 2). I have received a copy on today's date.
Signature for Lender INDEPENDENT BANKSHARES, INC.
__________________________ By: /s/ Bryan W. Stephenson
DAVID HEMPHILL, SENIOR BRYAN W. STEPHENSON, President
VICE PRESIDENT
(page 1 of 2)
<PAGE>
APPLICABLE LAW: The law of the State of Texas will govern this
note. Any term of this note which is contrary to applicable law
will not be effective, unless the law permits you and me to agree
to such a variation. If any provision of this agreement cannot be
enforced according to its terms, this fact will not affect the
enforceability of the remainder of this agreement. No modification
of this agreement may be made without your express written consent.
Time is of the essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the
amount I owe you for charges which are neither interest nor
principal. The remainder of each payment will then reduce accrued
unpaid interest, and then unpaid principal. If you and I agree to
a different application of payments, we will describe our agreement
on this note. I may prepay a part of, or the entire balance of
this loan without penalty, unless we specify to the contrary on
this note. Any partial payment will not excuse or reduce any later
scheduled payment until this note is paid in full (unless, when I
make the prepayment, you and I agree in writing to the contrary).
INTEREST: If I receive the principal in more than one advance,
each advance will start to earn interest only when I receive the
advance. The interest rate in effect on this note at any given
time will apply to the entire principal advance at that time.
Notwithstanding anything to the contrary, I do not agree to pay and
you do not intend to charge any rate of interest that is higher
than the maximum rate of interest you could charge under applicable
law for the extension of credit that is agreed to here (either
before or after maturity). If any notice of interest accrual is
sent and is in error, we mutually agree to correct it, and if you
actually collect more interest than allowed by law and this
agreement, you agree to refund it to me.
INDEX RATE: The index will serve only as a device for setting the
rate on this note. You do not guarantee by selecting this index,
or the margin, that the rate on this note will be the same rate you
charge on any other loans or class of loans to me or other
borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this
loan will be calculated using the interest rate and accrual method
stated on page 1 of this note. For the purpose of interest
calculation, the accrual method will determine the number of days
in a "year." If no accrual method is stated, then you may use any
reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post
Maturity Rate" (shown on page 1) applies, the term "maturity" means
the date of the last scheduled payment indicated on page 1 of this
note or the date you accelerate payment on the note, whichever is
earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I
expect that you will make only one advance of principal. However,
you may add other amounts to the principal if you make any payments
described in the "PAYMENTS BY LENDER" paragraph below.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you
and I expect that you will make more than one advance of principal.
If this is closed end credit, repaying a part of the principal will
not entitle me to additional credit.
PAYMENTS BE LENDER: If you are authorized to pay, on my behalf,
charges I am obligated to pay (such as property insurance
premiums), then you may treat those payments made by you as
advances and add them to the unpaid principal under this note, or
you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable
under this note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in
your possession for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total
amount of which you are entitled to demand payment under the terms
of this note at the time you set off. This total includes any
balance the due date for which you properly accelerate under this
note.
If my right to receive money from you is also owned by someone
who has not agreed to pay this note, your right of set-off will
apply to my interest in the obligation and to any other amounts I
could withdraw on my sole request or endorsement. Your right of
set-off does not apply to an account or other obligation where my
rights are only as a representative. It also does not apply to any
Individual Retirement Account or other tax-deferred retirement
account.
You will not be liable for the dishonor of any check when the
dishonor occurs because you set off this debt against any of my
accounts. I agree to hold you harmless from any such claims
arising as a result of your exercise of your right to set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real
estate or a residence that is personal property, the existence of
a default and your remedies for such a default will be determined
by applicable law, by the terms of any separate instrument creating
the security interest and, to the extent not prohibited by law and
not contrary to the terms of the separate security instrument, by
the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default on this loan and any agreement
securing this loan if any one or more of the following occurs:
(1) I fail to perform any obligation which I have undertaken
in this note or any agreement securing this note; or
(2) you, in good faith, believe that the prospect of payment
or the prospect of my performance of any other of my
obligations under this note or any agreement securing
this note is impaired.
If any of us are in default on this note or any security
agreement, you may exercise your remedies against any or all of us.
REMEDIES: If I am in default on this note you have, but are not
limited to, the following remedies:
(1) You may demand immediate payment of my debt under this
note (principal, accrued unpaid interest and other
accrued charges).
(2) You may set off this debt against any right I have to the
payment of money from you, subject to the terms of the
"Set-Off" paragraph herein.
(3) You may demand security, additional security, or
additional parties to be obligated to pay this note as a
condition for not using any other remedy.
(4) You may refuse to make advances to me or allow purchases
on credit by me.
(5) You may use any remedy you have under state or federal
law.
By selecting any one or more of these remedies you do not give
up your right to later use any other remedy. By waiving your right
to declare an event to be a default, you do not waive your right to
later consider the event as a default if it continues or happens
again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of
collection, replevin or any other or similar type of cost if I am
in default. In addition, if you hire an attorney to collect this
note, I also agree to pay any fee you incur with such attorney plus
court costs (except where prohibited by law). To the extent
permitted by the United States Bankruptcy Code, I also agree to pay
the reasonable attorney's fees and costs you incur to collect this
debt as awarded by any court exercising jurisdiction under the
Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things,
I will not require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest);
(3) give notice that amounts due have not been paid (notice
of dishonor);
(4) give notice of intent to accelerate; or
(5) give notice of acceleration.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note
even if someone else has also agreed to pay it (by, for example,
signing this form or a separate guarantee or endorsement). You may
sue me alone, or anyone else who is obligated on this note, or any
number of us together, to collect this note. You may do so without
any notice that it has not been paid (notice of dishonor). You may
without notice release any party to this agreement without
releasing any other party. If you give up any of your rights, with
or without notice, it will not affect my duty to pay this note.
Any extension of new credit to any of us, or renewal of this note
by all or less than all of us will not release me from my duty to
pay it. (Of course, you are entitled to only one payment in full.)
I agree that you may at your option extend this note or the debt
represented by this note, or any portion of the note or debt, from
time to time without limit or notice and for any term without
affecting my liability for payment of the note. I will not assign
my obligation under this agreement without your prior written
approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit
information about me from time to time (for example, by requesting
a credit report) and to report to others your credit experience
with me (such as a credit reporting agency). I agree to provide
you, upon request, any financial statement or information you may
deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and
complete.
NOTICE: Unless otherwise required by law, any notice to me shall
be given by delivering it or by mailing it by first class mail
addressed to me at my last known address. My current address is on
page 1. I agree to inform you in writing of any change in my
address. I will give any notice to you by mailing it first class
to your address stated on page 1 of this agreement, or to any other
address that you have designated.
<TABLE>
<CAPTION>
Date of Principal Borrower's Principal Principal Interest Interest Interest
Transaction Advance Initials Payments Balance Rate Payments Paid
(not required) Through:
- ----------- --------- -------------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
__/__/__ $________ _____ $________ $________ _____% $_______ __/__/__
</TABLE>
(page 2 of 2)
_____ _____
<PAGE>
Exhibit 10.4
ASSET PURCHASE AND
ACCOUNT ASSUMPTION AGREEMENT
This Asset Purchase and Account Assumption Agreement
("Agreement"), dated as of March 4, 1996, is by and between Coastal
Banc ssb, a Texas chartered savings bank headquartered in Houston,
Texas ("Seller") and First State Bank, N.A., a national bank
headquartered in Abilene, Texas ("Buyer").
WITNESSETH:
WHEREAS, Seller owns and operates a branch office located at
4112 College Hills Boulevard, San Angelo, Texas and described in
Exhibit "A" hereto (hereinafter referred to as the "Branch
Office");
WHEREAS, Seller desires to transfer and Buyer desires to
acquire the Branch Office, including all leasehold interests of the
Seller and other contractual rights associated with the Branch
Office, certain loans, certain of the personal property located at
the Branch Office and cash on hand at the Branch Office; and
WHEREAS, Seller desires to transfer and Buyer desires to
assume the deposit accounts maintained at or for the Branch Office
and certain other liabilities pertaining to the continuing
operations thereof;
NOW THEREFORE, in consideration of the premises, the mutual
promises and covenants hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, Seller and Buyer agree as follows:
I. ASSUMPTION OF LIABILITIES
Upon the terms and subject to the conditions hereinafter set
forth, Seller agrees to assign, and Buyer agrees to assume
liability on the Closing Date for:
(a) All deposit accounts, of every kind and description,
excluding all outstanding cashier's checks and other official
checks maintained at or for the Branch Office as the same shall
exist at the close of business on the Closing Date, as defined in
Article IV hereof, together with unpaid accrued interest thereon
through the Closing Date (such deposits and interest referred to
herein as the "Deposit Liabilities"), and excluding deposits
attached in garnishment or other legal process and accounts
identified for escheatment as of the Closing Date. Notwithstanding
the foregoing, Buyer shall have the right, but not the obligation,
to assume any "out-of-area" deposits
1
<PAGE>
included within the Deposit Liabilities as of the Closing Date.
For purposes of this Agreement the term "out-of-area" deposits
shall mean those Deposit Liabilities to customers residing outside
Tom Green County and its contiguous counties. Buyer shall provide
Seller with a list of those "out-of area" Deposit Liabilities it
elects to assume at the Closing. Said Deposit Liabilities totaled
$15,924,632 as of February 26, 1996 and are more fully identified
on Exhibit B hereto, which is subject to change for additions,
deletions and modifications due to normal daily activity. Exhibit
B shall be updated within 10 business days prior to the Closing
Date and shall be delivered by Seller to Buyer on the Closing Date.
Exhibit B shall also be updated as of the Closing Date and
delivered by Seller to Buyer as promptly as possible thereafter.
In connection with the assumption by Buyer of the Deposit
Liabilities, Seller, at Buyer's request, shall transfer and deliver
to Buyer as of the Closing Date the originals, to the extent such
are in Seller's possession and reasonably capable of being
separated from other accounts and records of Seller not pertaining
to the Branch Office, of all records, documents and information
relating to the Deposit Liabilities, including such as shall be
necessary to enable Buyer to comply with any applicable tax
withholding requirements relating to the Deposit Liabilities.
(b) Leases for the Branch Office ("Leases") and other
contractual obligations including safe deposit box leases assumable
by Buyer without penalty and related to the operation of the Branch
Office and any other obligations associated with the Assets, as
defined below, and which are described on Exhibit C hereto.
Exhibit C shall also include true and complete copies of any and
all executed Leases, amendments thereto and other agreements
affecting the Branch Office. Assignment of the Leases shall be in
recordable form and by written instrument sufficient to vest and
confirm in Buyer good and marketable title to such Leases, free and
clear of any and all liens, claims, charges, security interests and
encumbrances. Exhibit C shall be updated as of the Closing Date.
Except as otherwise expressly assumed herein, Seller shall retain
all liabilities of the Branch Office not expressly assumed by the
Buyer under this Section I.
II. PURCHASE OF ASSETS
On the Closing Date, Buyer shall purchase, acquire and accept,
and Seller shall sell, transfer, convey, assign and deliver to
Buyer all of the right, title and interest of Seller, free and
clear of all liabilities, obligations, liens and encumbrances, with
the exception of those liabilities and obligations which are
associated with the Account Loans, as defined below, upon the terms
and subject to the conditions hereinafter set forth, in the
following assets (the "Assets"):
(a) All of Seller's interest in the real estate described in
Exhibit "A" ("Real Property"). The purchase price for the Real
Property shall be an amount equal to Seller's net book value for
such property on the Closing Date. For the purposes of this
Agreement, the term "net book value"
2
<PAGE>
shall mean the amount of such asset on Seller's financial
statements calculated in accordance with generally accepted
accounting principles ("GAAP").
(b) All personal property, improvements, office equipment and
fixtures located in and used in connection with the operation of
the Branch Office and which are described on Exhibit D hereto
("Operating Assets"). Exhibit D shall be updated as of the Closing
Date and delivered by Seller to Buyer on the Closing Date. The
purchase price of the Operating Assets described on Exhibit D shall
be an amount equal to Seller's net book value for such property on
the Closing Date. The Seller estimates that personal property,
except for the contents of safe deposit boxes, located at the
Branch Office that is owned by persons other than Seller and not
leased by Seller does not exceed $500 in value.
(c) All loans secured by Deposit Liabilities maintained at or
for the Branch Office ("Account Loans") and those consumer loans
which are identified on Exhibit E hereto, (collectively the
"Loans") which is subject to change for additions, deletions and
modifications due to normal daily activity; provided, however, the
term Account Loans for purposes of this Agreement shall not be
deemed to include overdrafts over $100, unless agreed to in writing
by Buyer. Exhibit E shall be updated within 10 business days prior
to the Closing Date and shall be delivered by Seller to Buyer on
the Closing Date. Exhibit E shall also be updated as of the
Closing Date and delivered by Seller to Buyer as promptly as
possible thereafter. The purchase price of the Loans shall be an
amount equal to the outstanding principal balance for the Account
Loans on the Closing Date plus accrued interest.
(d) Leases and other contractual obligations related to the
operation of the Branch Office and which are described in Exhibit
C hereto.
(e) All coinage and currency owned by Seller and held at the
Branch Office as of the close of business on the Closing Date to be
determined by an audit conducted on the Closing Date by the Seller
and Buyer.
III. PAYMENT FOR ASSETS AND ASSUMPTION OF LIABILITIES
(a) On the Closing Date, Seller shall pay to Buyer by wire
transfer in immediately available funds the amount of the Deposit
Liabilities assumed plus any security deposits or prepaid rent held
by Seller as lessor in connection with third party leases of the
Real Property or any portion thereof, plus the prorated items owed
by Seller to Buyer under Article III(c), less the sum of (i) the
amount of the purchase price of the Real Property and Operating
Assets and Account Loans determined in accordance with Article II,
(ii) the amount of any coinage and currency on hand at the Branch
Office on the Closing Date, (iii) the net amount of any prorated
items owed by Buyer to Seller under Article III(c) below, (iv) the
amount of all security or other deposits paid by Seller in
connection with any Leases or other contractual obligations, as set
forth in Exhibit C hereto, and assumed by Buyer on the Closing
Date, and (v) a premium determined in accordance with Article
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III(b) below ("Premium") (the funds being transferred from Seller
to Buyer are hereinafter referred to as the "Assumption Funds").
The Assumption Funds to be paid on the Closing Date shall be based
upon the respective balances of the Deposit Liabilities and Assets
as of the close of business on the fourth business day immediately
preceding the Closing Date, provided that the amount of the
Assumption Funds shall be subsequently adjusted pursuant to
paragraph III(d) below.
(b) The Premium shall be determined by multiplying the amount
of the Deposit Liabilities (excluding accrued interest) as of the
Closing Date, by .051.
(c) Utilities; ad valorem taxes; insurance premiums on
assumed policies salaries; taxes withheld, collected from or
payable on behalf of employees; personal property taxes assessed in
connection with the Operating Assets; and all rentals, taxes and
other amounts both payable and/or receivable and equipment, alarm,
and other service agreement costs with respect to contracts
affecting the Branch Office premises which are assumed by Buyer,
including accrued interest but excluding federal deposit insurance
or other insurance premiums, shall be prorated as of the Closing
Date and reflected on the Closing Statement as set forth below.
Any items susceptible of being prorated but which cannot be
prorated by the Closing Date shall be prorated as soon as the
requisite information is available and shall be paid promptly
thereafter by the appropriate party to the other party. The Seller
shall be liable for and shall pay when due any special assessment
levied by the Federal Deposit Insurance Corporation ("FDIC") for
the purpose of recapitalization of the Savings Association
Insurance Fund, ("the Special Assessment"), if the date used for
the calculation of the Special Assessment (the "Calculation Date")
is prior to the Closing Date, regardless of the actual date that
the United States government, including without limitation the FDIC
or Congress, makes a decision concerning the date to select as the
Calculation Date. If the Calculation Date is determined to be a
date on or after the Closing Date, Seller shall reimburse Buyer, on
demand, in an amount equal to the lesser of (a) an amount equal to
the assessment rate of the Special Assessment times the deposit
balances of the Branch as of the Calculation Date or (b) an amount
equal to the assessment rate of the Special Assessment times the
deposit balances at the Branch as of the Closing Date. Buyer shall
furnish Seller with documentation showing the deposit balances at
the Branch as of the Calculation Date if the Calculation Date is
after the Closing Date.
(d) The actual Assumption Funds will be calculated based upon
the respective balances of the Deposit Liabilities and Account
Loans on the Closing Date. Within ten (10) business days after the
Closing Date, Buyer shall advise Seller in writing of the actual
Assumption Funds amount as of the close of business on the Closing
Date (the "Post-Closing Schedule"). Buyer shall provide Seller and
its independent accountants with access to the books, records,
facilities and personnel reasonably required to enable Seller and
its independent accountants to review the Post-Closing Schedule and
the basis upon which the Post-Closing Schedule is rendered and
Buyer shall reasonably cooperate with such review.
Within five (5) business days after delivery of the Post-Closing
Schedule to Seller (the "Review Period"), Seller may dispute the
Post-Closing Schedule by giving written notice to Buyer setting
forth in reasonable detail the basis for such dispute (hereinafter
called a "Disagreement"). The
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parties shall promptly commence good faith negotiations with a view
to resolving such Disagreement. If the parties are not able to
resolve such Disagreement within thirty (30) calendar days after
delivery of the notice of Disagreement, such Disagreement shall be
referred to as a nationally recognized accounting firm for
determination of the disputed amounts in accordance with this
Agreement. If Buyer and Seller do not within five (5) calendar
days agree on the selection of a nationally recognized firm, their
respective independent public accountants shall select such
accounting firm. The determination of such firm shall be final and
binding upon the parties and the amount so determined shall be used
to complete the final Post-Closing Schedule. Such firm shall
render its determination as soon as practicable after referral of
the Disagreement, but no later than fifteen (15) calendar days
thereafter. The fees and expenses of such firm shall be paid
one-half by Buyer and one-half by Seller. The parties shall
reasonably cooperate with each other and such firm with respect to
the resolution of the Disagreement, such cooperation to include
reasonable access to books, records, facilities and personnel.
On the second business day immediately following the later of the
end of the Review Period or the final resolution of any
Disagreement (the "Final Settlement Date"), the final purchase
amount ("Final Transfer Amount") shall be calculated using the
amounts reflected in the Post-Closing Schedule, as finally
determined.
The difference between the Assumption Funds transferred on the
Closing Date and the Final Transfer Amount determined to be
actually due from Seller to Buyer or from Buyer to Seller shall be
transferred, to Seller from Buyer or to Buyer from Seller, as the
case may be, by federal wire transfer on the Final Settlement Date.
The payment of the Final Transfer Amount shall include interest on
such amount for the number of days from and including the Closing
Date to but excluding the date of payment of the Final Transfer
Amount (the "Interest Period") at the per annum rate (the "Federal
Funds Rate"), computed on the basis of a 365 day year, equal to the
arithmetic mean during the Interest Period of the average of the
high and the low bid rates for federal funds on each business day
during the Interest Period, as such bid rates are published in the
Southwest Edition of The Wall Street Journal.
(e) An appropriate adjustment to the Assumption Funds shall
be made in the event that a good faith error in calculating the
amount of the Deposit Liabilities or Account Loans is discovered
within thirty calendar (30) days after the post-closing adjustment
referred to in paragraph III(d) above.
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IV. CLOSING AND TRANSITIONAL MATTERS
(a) The closing of the transactions contemplated by this
Agreement shall take place on a Friday as agreed to by the parties
and within 30 calendar days following the date on which all of the
regulatory approvals referred to in Article VIII(a) of this
Agreement shall have been obtained and all applicable waiting
periods have expired as agreed to by the parties or on such other
date as shall be mutually agreed to by the parties hereto (the
"Closing Date").
(b) The closing shall take place at the executive offices of
Seller at 11:00 a.m., Central Time, on the date set forth above or
at such other place as shall be mutually agreed to by the parties
hereto.
(c) The amount of the Assets and Deposit Liabilities to be
transferred pursuant to this Agreement shall be determined as of
the close of business on the Closing Date, and the assumption of
the Deposit Liabilities and other liabilities and the transfer of
Account Loans and other Assets shall be deemed to take place at the
close of business on the Closing Date.
(d) The purchase prices related to the Assets to be purchased
and the amounts of the Deposit Liabilities to be assumed, shall be
set forth on a Closing Statement to be prepared and executed by the
parties effective as of the Closing Date.
(e) On the Closing Date, Seller shall transfer, assign and
deliver to Buyer such of the following records pertaining to the
Deposit Liabilities as exist and are in Seller's possession in
whatever form or medium such records are maintained by Seller on
the Closing Date: (i) signature cards, orders and contracts between
Seller and depositors, and records of similar character, (ii) all
other records of account in hard-copy form.
Buyer acknowledges and agrees that, following the Closing Date it
will preserve and safely keep, for as long as may be required by
applicable law, all of the records of account referred to above for
the joint benefit of Seller and Buyer, and that, with respect to
transactions occurring on or before the Closing Date and involving
the Deposit Liabilities, it will provide to Seller or its
designated representatives, upon request, at any reasonable time
and from time to time, information concerning the records of
account and/or extracts therefrom or copies thereof. Seller and
Buyer each acknowledge and agree that they shall provide to the
Internal Revenue Service ("IRS"), to the extent required by law,
Form 1099 with respect to each of the Deposit Liabilities for the
periods during which Seller and Buyer, respectively, administer
such Deposit Liabilities. Seller and Buyer further acknowledge and
agree that at all times each party shall preserve and maintain the
confidentiality of all such records of account and other depositor
or customer information in accordance with customary banking
practice and all applicable federal and state laws, rules and
regulations.
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(f) Seller agrees to mail or cause to be mailed, to each of
the depositors, each holder of a safe deposit box domiciled at the
Branch Office and to such other customers as may be required by
applicable law, such notice of contemplated transfer of the Assets,
the Deposit Liabilities or the operations of the Branch Office as
may be required as a condition of approval by any regulatory
authority, or as otherwise may be required by applicable law. Each
such notice shall be in a form acceptable to each party hereto,
such approval not to be unreasonably withheld.
(g) In order to reduce the continuing charge, to Seller
through the check clearing system of the banking industry which
will result from check forms and other items issued by Seller being
used after the Closing Date by depositors or holders of the Deposit
Liabilities, Buyer, at its cost and expense and without charge to
such depositors, no less than five (5) business days after the
Closing Date, shall prepare and mail, and Seller shall cooperate
with Buyer in connection therewith, to each depositor or other
holder of a Deposit Liability, as appropriate, (i) a letter
prepared by Buyer, reasonably acceptable to and subject to the
prior approval of Seller notifying each such depositor or holder of
the transfer of his or her account pursuant to this Agreement and
requesting where appropriate that effective on the Closing Date
such depositor or holder cease using any ATM card, making any ACH
debit or credit, writing checks, drafts and withdrawal orders on
forms provided by Seller and carrying its imprint (including name
and transit routing number) against any such account, and that such
depositor or holder destroy immediately unused checks and
withdrawal orders of Seller and ATM cards issued by Seller, and
(ii) as appropriate, signature cards and checks and withdrawal
order forms of Buyer with instructions to utilize the checks or
withdrawal orders of Buyer from the Closing Date forward.
(h) On or before the Closing Date, Seller and Buyer shall
cooperate and shall take all such action as is necessary to arrange
for the direct routing to Buyer through the check clearing system
of the banking industry, effective immediately after the Closing
Date, of all checks, drafts and withdrawal orders on forms provided
by Seller and carrying its imprint (including name and transit
routing number) and relating to the Deposit Liabilities. In the
event that after the Closing Date, Seller shall receive any such
checks, drafts or withdrawal orders through the check clearing
system of the banking industry, Seller shall immediately forward to
Buyer or Buyer's agent, by facsimile or other means, a schedule of
all such checks, drafts and withdrawal orders. Buyer shall notify
Seller in a like manner and within one business day whether such
items are to be paid or returned. Seller shall pay or return such
items in accordance with the instructions of Buyer. Buyer agrees
to wire payment to Seller for payment of such items by noon the
following business day after receipt from Seller of its
certification that such payment has been made and the original copy
of the properly payable check, draft, or withdrawal order signed by
such depositor. Seller will cause the original copy of checks,
drafts and withdrawal orders paid by Seller in accordance with the
instructions of Buyer to be sent to Buyer by regular overnight
courier (such as UPS). Seller will pay the cost of such courier
service and will be responsible for reconstructing any
documentation for any item lost by such courier service for a
period of one hundred twenty (120) calendar days after the Closing
Date. After the expiration of said one hundred twenty (120) day
period, Buyer shall have the
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complete responsibility for establishing and paying for any courier
service used to transmit to Buyer items relating to the Deposit
Liabilities that are received by Seller.
(i) Following the Closing Date, Buyer agrees to pay in
accordance with law and customary banking practices all properly
drawn checks and automated clearing-house debits and credits, ATM
deposits and withdrawals, drafts and withdrawal orders presented to
Buyer by mail, over the counter, through the check clearing system
of the banking industry, and/or in the manner set forth below, by
depositors or holders of the Deposit Liabilities, whether drawn on
the checks, drafts or withdrawal order forms provided by Seller or
by Buyer, and in all other respects, to discharge after the Closing
Date, in the usual course of the banking business, all duties and
obligations with respect to the balances due and owing including
accrued interest to the depositors whose deposits are assumed by
the Buyer.
(j) If any such depositors or holders, instead of accepting
the obligation of Buyer to pay the Deposit Liabilities assumed by
Buyer pursuant to this Agreement, shall demand payment from Seller
for all or any part of such assumed Deposit Liabilities, Seller
shall not be liable or responsible for making such payment except
as provided by law. Seller may refer all such depositors or
holders to Buyer in the manner and with such instructions, if any,
as shall be hereafter established by Seller and Buyer, and Buyer
shall thereupon be responsible for making such payment (if still
demanded) to such depositor or holder. If any of such depositors
or holders after the Closing Date shall present to Seller, whether
in person, by mail, or otherwise, a check, draft or withdrawal
order drawn against any of the Deposit Liabilities, Seller shall
refer such depositor or holder, or deliver such check, draft or
withdrawal order, to Buyer as set forth above. Buyer shall pay all
such properly drawn checks, drafts and withdrawal orders as set
forth above and shall reimburse Seller for all expenses paid and
charges incurred, if any, by Seller with respect to all such
properly drawn checks, drafts and withdrawal orders subject to the
provisions of Section IV(k).
In connection with the performance by Seller of the limited duties
and obligations set forth in Sections IV(h), (i) and (j), Buyer
acknowledges and agrees that Seller has not made any
representations or warranties to Buyer with respect to such checks,
drafts or withdrawal orders and any representations and warranties
implied by law are hereby disclaimed by Seller.
(k) Buyer agrees to pay promptly to Seller, in the manner
provided below, the amount of any checks, drafts, or other items
originally credited by Seller to an account acquired by Buyer prior
to the Closing Date which are charged back or otherwise returned to
Seller unpaid or for refund after the Closing Date; provided,
however, that Buyer shall not be obligated to pay to Seller for any
such item more than the collected balance credited to that deposit
account at the time of Buyer's receipt of notice of such returned
item (as such collected balance may be increased by additional
deposits subsequent to Buyer's receipt of such notice). Upon its
receipt of any such returned item, Seller shall give notice (by
telephone or in writing) to Buyer of such return and shall forward
such item to Buyer. Upon Buyer's receipt of notice from Seller of
any such returned item,
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Buyer shall place a hold for the amount of such item on the account
to which it originally was credited and, following its receipt of
the returned item from Seller, Buyer shall remit to Seller the
payment provided for above and charge such payment to the related
account.
(l) Seller shall provide all information and take all steps
required to be taken by it that are reasonably necessary for Buyer
to effect the transfer of any direct deposit arrangement affecting
any of the Deposit Liabilities and shall promptly pay to Buyer any
funds received by Seller which are intended to be credited to any
such Deposit Liability. Buyer shall complete all actions necessary
to effect the transfer of such direct deposit arrangements within
90 calendar days after the Closing Date. Seller shall have the
right to return to the payor any direct deposit item received by it
subsequent to 30 calendar days after the Closing Date.
(m) If the balance due on any Account Loan purchased pursuant
to this Agreement has been reduced by Seller as a result of a
payment by check received on or prior to the Closing Date which is
charged back or otherwise returned to Seller unpaid or for refund
after the Closing Date, the asset value represented by the Account
Loan transferred shall be increased by the amount of such payment
and an amount in cash equal to such increase shall be paid by Buyer
to Seller promptly upon demand.
(n) Seller shall cooperate with Buyer and use its best
efforts to assist in the transfer to Buyer of the Deposit
Liabilities, Loans and Leaseholds and Operating Assets, and shall
take all actions necessary to accomplish such transfer, including
but not limited to the provision of any notices required by law to
customers in respect of the Deposit Liabilities and the Account
Loans, regardless of whether such notices need to be given before
or after the Closing Date. Seller shall supply Buyer with such
information and records relating to the Deposit Liabilities and the
Loans as Buyer may reasonably request, including, but not limited
to, periodic portfolio reports and computer tapes setting forth
current account information, including ATM cardholder information
as to all of the Deposit Liabilities and the Loans in
machine-readable format and any information required for inclusion
in all applications to regulatory authorities necessary to
consummate the transactions contemplated by this Agreement.
Further, Seller shall assist on Buyer's behalf to facilitate a
smooth transfer of information from Seller's processing system to
Buyer's processing system.
(o) Prior to the Closing Date, Buyer shall designate a
successor trustee in a manner substantially similar to Exhibit "J"
which successor trustee may be Buyer ("Successor Trustee"), as to
any individual retirement account ("IRA") or Keogh plan account
constituting a Deposit Liability and the parties will cooperate
with the Successor Trustee. Seller will transfer the trusteeship
of all such IRA and Keogh plan accounts to the Successor Trustee on
the Closing Date. Seller shall be responsible for all federal,
state and local income tax reporting for such IRAs and Keogh plan
accounts for the period of time ending on the Closing Date and the
Successor Trustee shall be responsible for such reporting
thereafter.
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(p) Holds that have been placed by Seller on particular
Deposit Liabilities or on individual checks, drafts or other
instruments shall be continued by Buyer under the same terms.
Seller shall deliver to Buyer on the Closing Date a schedule of
such holds.
(q) As of 12:01 a.m. on the day following the Closing Date,
Seller will discontinue its insurance coverage maintained in
connection with the Branch Office and the activities conducted
thereon, and risks of damage to or the destruction of the Branch
Office improvements, equipment, and other tangible assets to be
purchased by Buyer will be transferred to it as of that time.
V.REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that:
(a) Seller is duly organized and validly existing under the
laws of the State of Texas; it has the corporate power and
authority to own and operate its properties and to conduct its
business as a savings bank in the manner in which it is presently
being conducted; and it has the corporate power and authority to
execute and deliver this Agreement and to carry out all of the
transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement and each of
the documents and instruments contemplated hereby have been duly
authorized by all necessary corporate action to be taken on the
part of Seller; and upon execution and delivery, this Agreement and
each of such other documents and instruments will be valid and
binding obligations of Seller, subject to bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, fraudulent
transfer or other similar laws relating to or affecting the
conservatorship or receivership of Texas Savings banks and the
enforcement of creditors' rights generally and to general
principles of equity, whether considered in a proceeding at law or
in equity.
(c) The execution and delivery of this Agreement and of the
other instruments and documents contemplated hereby, and the
performance of the transactions contemplated hereby and thereby, do
not and will not conflict with, violate, breach or cause a default
under the Charter or Bylaws of Seller, or, to the knowledge of
Seller, any agreement or other instrument to which Seller is a
party or by which it is bound and which relates to the Branch
Office, or any order, judgment, injunction, decree or award of any
court, arbitrator, government or governmental agency by which
Seller is bound and which relates to the Branch Office; or
constitute a violation by Seller of any law, ordinance, rule or
regulation of any governmental authority as such laws, ordinances,
rules or regulations relate to the Branch Office or the conduct of
Seller's business thereat.
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(d) The Deposit Liabilities are insured by the FDIC through
the SAIF to applicable limits and no action is pending or, to the
knowledge of Seller, threatened with respect to the termination of
such insurance. All of the Deposit Liabilities were originated or
purchased and are in material compliance with the documents
governing the relevant type of Deposit Liability and all applicable
federal and state laws, rules, regulations, orders, judgments,
injunctions, decrees and awards. Seller has properly accrued
interest on the Deposit Liabilities and the records respecting the
Deposit Liabilities accurately reflect such accruals of interest.
The Deposit Liabilities to be transferred hereby are deemed by the
FDIC to be SAIF deposits.
(e) The improvements and building systems comprising the Real
Estate are in good operating condition and repair giving
consideration to its age and use and subject to ordinary wear and
tear and to Seller's knowledge, without investigation, there are no
material defects in the structural components comprising the Real
Estate or in any building or mechanical systems located therein.
Except as disclosed to Buyer, no notice of any condemnation or
eminent domain proceedings, litigation, liens, or other proceedings
or actions has been received by Seller, or to the best of Seller's
knowledge, threatened with respect to the Real Estate.
(f) There are no unpaid ad valorem taxes relating to the Real
Estate or the equipment used therein and Seller is not aware of any
other unpaid taxes that could result in liens being placed against
the Assets.
(g) Seller has good, marketable and assignable title, free
and clear of all liens, claims and encumbrances, other than as set
forth on Exhibit F or disclosed in writing to Buyer, to the Real
Estate and the improvements thereon, subject, however, to the terms
of the tenant leases, true and correct copies of which will be
provided by Seller to Buyer within fifteen (15) business days
following execution of this Agreement.
(h) Seller has good and marketable title to the Operating
Assets free and clear of all liens, claims, charges, security
interests and encumbrances. Seller has not undertaken any
construction or improvements on the Real Estate which would give
rise to any mechanics or other liens which Buyer would be required
to discharge.
(i) ALL OPERATING ASSETS TO BE CONVEYED OR ASSIGNED BY SELLER
ARE CONVEYED OR ASSIGNED "AS-IS" AND WITHOUT ANY REPRESENTATION OR
WARRANTY AS TO VALUE, NATURE, CONDITION (OTHER THAN THAT ALL SUCH
OPERATING ASSETS ARE IN GOOD OPERATING CONDITION, NORMAL WEAR AND
TEAR EXCEPTED), INCOME, SUITABILITY, LEGAL COMPLIANCE,
MERCHANTABILITY, MARKETABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
OTHERWISE. SELLER AGREES TO MAINTAIN THE OPERATING ASSETS THROUGH
THE CLOSING DATE, ORDINARY WEAR AND TEAR EXCEPTED. BUYER'S CLOSING
AND CONSUMMATION OF THE
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TRANSACTIONS DESCRIBED HEREIN SHALL EVIDENCE ITS SATISFACTION WITH
THE CONDITION OF THE REAL ESTATE, THE LEASES, AND THE OPERATING
ASSETS.
(j) The Seller has received no notice from any federal,
state, or other governmental agency indicating that such agency
would oppose or not grant or issue its consent or approval, if
required, with respect to the transactions contemplated hereby.
Other than the regulatory approval described in Section VII(m),
which approval the Seller shall use its best efforts to receive on
or prior to the Closing Date, no approval, consent, authorization
or action of, filing with, any government body or other third party
is required on the part of the Seller in connection with (a) the
execution, delivery or performance by the Seller of this Agreement
and the other agreements and documents contemplated hereby or (b)
the consummation by the Seller of the transactions contemplated
hereby.
(k) As of the date of this Agreement there is no action,
suit, or proceeding or, to the knowledge of Seller, investigation
of any nature pending, or to the knowledge of the Seller,
threatened against or affecting the Seller before any court or
arbitrator or any governmental body, agency, or official that
challenges the validity or legality of the transactions
contemplated by this Agreement or which would adversely and
materially affect the Assets, the Deposit Liabilities or the Branch
Office or which could materially adversely and materially affect
the ability of the Seller to perform its obligations under this
Agreement.
(l) Seller has not retained or otherwise engaged any broker,
finder or any other person or agreed to pay any fee or commission
to any agent, broker or other person for or on account of this
Agreement or the transactions contemplated hereby.
(m) To the best of Seller's knowledge, each Loan is a legal,
valid and binding obligation of the borrower, adequately secured by
a related Deposit Liability in an amount at least equal to the
amount of the Account Loan (or other collateral if the Loan is not
an Account Loan), has been originated or purchased and serviced
materially in accordance with all applicable laws, regulations and
orders, and is authorized under applicable laws, regulations and
orders to be transferred by Seller to Buyer hereunder, and Seller
is not subject to, and Buyer will not be subject to, any liability
for violations of any applicable law, regulation or order with
respect to any such Loan arising out of actions or events occurring
prior to the Closing Date or the transfers contemplated hereby.
Seller is the sole owner of each Loan, free and clear of all liens,
claims, security interests, charges and encumbrances and has the
exclusive right to transfer each Loan to Buyer.
(n) Seller is not a party to any collective bargaining
agreement. There are no employment contracts between the Seller
and any of the Employees (as is hereinafter defined) not terminable
on 30 calendar days' notice or less after the Closing Date. The
Seller is not a party to any contract or arrangement with any union
relating to the business conducted at the Branch Office,
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and the Seller is not aware of any pending organizational efforts
at the Branch Office. To the best of its knowledge, there has been
no indication to the Seller that a union organizational effort to
labor disturbance is likely at the Branch Office prior to the
Closing Date. The Seller has not entered into any agreement or
otherwise made any commitment or representation to any of the
Employees with respect to their employment by the Buyer. To the
extent required by law, as of the Closing Date the Seller will have
provided all required notification under the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") to all former employees
of the Seller at the Branch Office after the Closing Date and to
all other persons who became "qualified beneficiaries" under COBRA
with respect to any group health plans maintained by the Seller for
its employees, and the Seller will have provided any required COBRA
coverage to all such former employees and other qualified
beneficiaries of the Seller who elect COBRA coverage within the
time period specified by COBRA and the regulations promulgated
thereunder.
(o) To the actual present knowledge of the Seller without
investigation or inquiry of any kind, all of the Properties are
free from contamination with any wastes, pollutants, chemicals,
asbestos, polychlorinated biphenyls, underground storage tanks, or
any other substance the presence of which on the property in
question is prohibited under any Environmental Law, or which under
any Environmental Law requires special handling or notification of
or reporting to any governmental entity in its generation, use,
handling, collection, treatment, storage, recycling,
transportation, recovery, removal, discharge or disposal
(collectively "Hazardous Materials"). The term "Property" or
"Properties" shall include all real property owned or leased by the
Seller relating to the Branch Office, including but not limited to
the Real Estate and all improvements, and fixtures thereon. The
term "Environmental Laws" means all laws, regulations, statutes,
ordinances, codes, rules, decisions, orders or decrees relating or
pertaining to the public health and safety or the environment, or
otherwise governing the generation, use, handling, collection,
treatment, storage, transportation, recovery, recycling, removal,
discharge or disposal of Hazardous Materials.
(p) Seller, to the best of its knowledge, is not a party to
or participant in any multi employer plan (as defined in Section
3(37) of ERISA) and has not withdrawn from any such plan or
incurred any withdrawal liability to or under any such plan.
(q) Seller, to the best of its knowledge, has received all
licenses, permits and authorizations (including, without
limitation, occupancy permits) necessary to use, occupy and operate
the Branch Office for the purpose for which it is now used,
occupied and operated, and such licenses, permits and
authorizations are now in full force and effect and are fully
transferable to the Buyer at no charge (except customary, minor
filing fees).
(r) The most recent rating received by Seller under the
Community Reinvestment Act was not less than "satisfactory."
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(s) No representation or warranty by the Seller contained in
this Agreement, or disclosure by the Seller in any certificate or
other instrument or document furnished or to be furnished by or on
behalf of the Seller pursuant to this Agreement, and no information
furnished or to be furnished by the Seller for use in applications
to various regulatory authorities contains or will contain any
untrue statement of a material fact or omits or will omit to state
any material fact which is necessary to make the statements
contained herein or therein, in light of the circumstances under
which they were or are made, not misleading in any material
respect.
(t) Between the date hereof and the Closing Date, the Seller
shall promptly advise the Buyer in writing of any fact which, if
existing or known as of the date hereof, would have made any of the
representations contained herein untrue in any material respect.
(u) Seller has provided Buyer as set forth on Exhibits B and
E attached hereto, the month-end account schedules and trial
balances, including a list of past due Account Loans, with respect
to the Assets and Deposit Liabilities of the Branch Office as of
February 26, 1996 (the "Account Schedules").
VI. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that:
(a) Buyer is a national banking association duly organized
and validly existing under the laws of the United States, it has
the corporate power and authority to own and operate its properties
and to conduct its business as a national bank in the manner in
which it is presently being conducted, and it has the corporate
power and authority to execute and deliver this Agreement and to
carry out all of the transactions contemplated by this Agreement.
(b) The execution and delivery of this Agreement and each of
the documents and instruments contemplated hereby and the
performance of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action to be
taken on the part of Buyer; and, upon execution and delivery, this
Agreement and each of such other documents and instruments will be
valid and binding obligations of Buyer, subject to bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyances,
fraudulent transfers or other similar laws relating to or affecting
the conservatorship or receivership of National banking
associations and the enforcement of creditors' rights generally and
to general principles of equity, whether considered in a proceeding
at law or in equity.
(c) The execution and delivery of this Agreement and of the
other instruments and documents contemplated hereby do not and will
not conflict with, violate, breach or cause a default under the
Articles of Association or Bylaws of Buyer, or, to the knowledge of
Buyer, any agreement or other instrument to which Buyer is a party
or by which it is bound, or any order,
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judgment, injunction, decree or award of any court, arbitrator,
government or governmental agency by which Buyer is bound; or
result in the creation of any lien, charge or encumbrance upon the
assets of Buyer or any part thereof; or constitute a violation by
Buyer of any law, ordinance, rule or regulation of any governmental
authority as such laws, ordinances, rules or regulations relate to
Buyer or the conduct of its business.
(d) The deposit accounts of Buyer are insured by the FDIC
through the Bank Insurance Fund ("BIF"), and no action is pending
or, to the knowledge of Buyer, threatened with respect to the
termination of such insurance. The Buyer has the power and
authority to acquire deposits insured by the SAIF.
(e) Buyer has not retained or otherwise engaged any broker,
finder or any other person or agreed to pay any fee or commission
to any agent, broker or other person for or on account of this
Agreement or in connection with the transactions contemplated
hereby.
(f) Buyer has received no notice from any federal, state, or
other governmental agency indicating that such agency would oppose
or not grant or issue its consent or approval, if required, with
respect to the transactions contemplated hereby. Other than the
regulatory approval described in Section VII(m), which approval the
Buyer shall use its best efforts to receive on or prior to the
Closing Date, no approval, consent, authorization or action of,
filing with, any government body or other third party is required
on the part of the Buyer in connection with (a) the execution,
delivery or performance by the Buyer of this Agreement and the
other agreements and documents contemplated hereby or (b) the
consummation by the Buyer of the transactions contemplated hereby.
(g) There is no action, suit, or proceeding or to the
knowledge of Buyer, investigation of any nature pending against
Buyer or, to the knowledge of Buyer, threatened against or
affecting Buyer before any court or arbitrator or any governmental
body, agency, or official which challenges the validity or legality
of the transactions contemplated by this Agreement or which would
adversely and materially affect the regulatory capital of Buyer or
which could materially adversely affect the ability of Buyer to
perform its obligations under this Agreement or which in any manner
questions the validity of this Agreement.
(h) Between the date hereof and the Closing Date, the Buyer
shall promptly advise the Seller in writing of any fact which, if
existing or known as of the date hereof, would have made any of the
representations contained herein untrue in any material respect.
(i) No representation or warranty by the Buyer contained in
this Agreement or disclosure by the Buyer in any certificate or
other instrument or document furnished or to be furnished by or on
behalf of Buyer for use in applications to various regulatory
authorities, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact
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which is necessary to make the statements contained herein or
therein, in light of the circumstances under which they were made,
not misleading in any material respect.
(j) The most recent rating from the Office of the Comptroller
of the Currency received by the Buyer under the Community
Reinvestment Act was not less than "satisfactory."
(k) The Buyer is in compliance with all applicable capital
standards as of the date hereof and has no reason to believe that
it will be unable to obtain the required regulatory approvals for
the transactions contemplated herein solely as a result of its
current level of regulatory capital. As of the date hereof, there
are no pending or, to the best of the Buyer's knowledge, threatened
legal or governmental proceedings against the Buyer or any
affiliate of the Buyer that would affect the Buyer's ability to
obtain the required regulatory approvals or to satisfy any of the
other conditions required to be satisfied in order to consummate
the transactions contemplated hereby.
VII. COVENANTS
(a) Each party hereto will cause all internal, non-public
financial and business information obtained by it from the other
party or otherwise to be treated confidentially (exercising the
same degree of care as it uses to preserve and safeguard its own
confidential information) and will not use such information for any
purpose other than the purposes set forth in this Agreement;
provided however, that notwithstanding the foregoing, nothing
contained herein shall prevent or restrict either party from making
such disclosure thereof as may be required by law or as may be
required in the performance of this Agreement. In the event that
a party hereto becomes legally compelled to disclose any of the
confidential information furnished to it by the other party
pursuant to applicable law or regulation or by legal process, the
party from whom the information is sought will provide to the other
party with prompt notice in order that said party may seek a
protective order or other appropriate remedy and/or waive
compliance with the provisions of this Agreement. In the event
that such protective order or other remedy is not obtained, or that
compliance with the provisions of this Agreement is waived by the
party about whom such information is sought, the party being
compelled to furnish the information will furnish only that portion
of the confidential information that is legally required based on
a written opinion of counsel to that effect and the party being
compelled to furnish the information will exercise reasonable
efforts to obtain reliable assurance that confidential treatment
will be accorded the confidential information. The disclosing
party shall not be liable for the disclosure of the confidential
information hereunder to a tribunal or governmental agency
compelling such disclosure unless such disclosure to such tribunal
or governmental agency was caused by or resulted from a previous
disclosure by said party or any of its Agents, not permitted by
this Agreement. If the transactions contemplated hereby shall not
take place, all non-public financial statements, documents and
other materials obtained by one party from the other and all copies
thereof shall be returned to the originating party and shall not
hereafter be used by the other party.
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(b) On and after the Closing Date, the Buyer shall not use
the name, tradename, servicemark, logo or other intellectual
property of the Seller in any manner in connection with the
operation of the Branch Office. Buyer acknowledges that Seller is
not transferring to Buyer any right, title, or interest in or to,
or any right or license to use, Seller's name (or any name or
initial similar thereto or of any affiliates of Seller), or any
trademark, servicemark, tradename, or symbol, in connection with
the Branch Office or otherwise. No activity conducted by the Buyer
on or after the Closing Date shall state or imply that the Seller
is in any way involved as a partner, joint venturer or otherwise in
the business of the Buyer.
(c) Upon the execution of this Agreement, Seller shall
provide Buyer, its agents, attorneys, accountants and employees
access during normal business hours and upon reasonable notice to
the premises and records of the Branch Office in order to conduct
such investigation of the business of the Branch Office and the
Assets, Deposit Liabilities and Leases to be transferred pursuant
to this Agreement, and to the collateral and documents related
thereto, that Buyer deems necessary or appropriate, provided that
such inspection shall not disrupt or unduly interfere with the
conduct of Seller's business. Seller will furnish to Buyer copies
of such documents and information with respect to the business,
properties and personnel of the Branch Office as Buyer shall from
time to time reasonably request.
(d) Buyer will not, except as otherwise set forth herein or
with the prior written consent of the Seller, communicate directly
or indirectly with the customers of the Branch Office in any manner
prior to the Closing Date.
(e) Between the date hereof and the Closing Date, Seller
shall not engage in any transaction related to the Branch Office
except in the ordinary course of business as heretofore conducted,
nor shall Seller take any action which would materially impair
Buyer's right hereunder to, or the value of, the Assets and Deposit
Liabilities to be acquired and assumed hereunder and Seller will
exercise its reasonable best efforts to maintain existing employees
and to maintain existing customers.
(f) From the date hereof until the Closing Date, Seller (i)
will use its reasonable best efforts to obtain and retain deposit
accounts and (ii) will set rates for time deposit products offered
to the customers at the Branch Office as set forth on Exhibit "M"
attached hereto.
(g) On or after the Closing Date, Buyer shall assume and
discharge, in the usual course of banking business, Seller's
obligations with respect to the safety deposit box business at the
Branch Office in accordance with the terms and conditions of
contracts or rental agreements related to such business, and Buyer
will maintain all facilities necessary for the use of such safe
deposit boxes by persons entitled to use them and safety deposit
box rental payments (not including late payment fees), collected by
Seller between the date of this Agreement and the Closing Date
shall be prorated with the Buyer as of the Closing Date. At the
Closing Date, the Seller shall pay the Buyer
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an amount equal to all key and other deposits paid by customers of
the safe deposit boxes, and the Buyer shall be obligated to pay
such key deposits to the customers in accordance with their
respective safe deposit agreements.
(h) The Buyer, in its sole discretion, may offer employment
to any employees employed by the Seller at the Branch Office at the
Closing Date (the "employees"), with base salary as determined by
the Buyer. As of the Closing Date, the employees may be treated by
the Buyer as "new hires" for all purposes, including without
limitation, to participate in the Buyer's health insurance plan,
employee stock ownership plan, and 401K plan. Nothing in this
Section is intended, nor shall it be construed, to confer any
rights or benefits upon any person other than the Buyer and the
Seller.
(i) From the date hereof through the Closing Date: (i) the
Seller shall materially comply with all laws and private covenants
and restrictions relating to the Branch Office; (ii) the Seller
shall perform all conditions to any permits or approvals necessary
to operate the Branch Office; (iii) the Seller shall maintain the
Branch Office in good working order and repair; (iv) the Seller
shall timely perform all its obligations under any contracts or
arrangements affecting the Branch Office; and (v) the Seller shall
not modify, terminate or extend any existing management, employee,
maintenance, operating, service or other contracts or arrangements,
nor enter into any new contracts or arrangements, which would
materially affect the Branch Office on or after the Closing Date,
without the prior written approval of the Buyer, which shall not be
unreasonably withheld.
(j) From the date hereof through the Closing Date, the Seller
shall cooperate and work with the Buyer to complete the tasks
required to facilitate the conversion of the Deposit Liabilities.
Such tasks include, but are not limited to, providing the Buyer
with updated tapes, reports, and other items as are necessary to
complete the conversion process and related testing procedures.
Within 30 calendar days from the date hereof, the Seller shall
provide the Buyer, at the Seller's expense, with initial computer
tapes, reports and related documentation of the Deposit
Liabilities. The Seller agrees to reasonably cooperate in
resolving any conversion-related issues arising from the conversion
of the Deposit Liabilities for a period of 90 calendar days
following the date that the conversion is completed. Conversion
will occur on the calendar day following the Closing Date.
(k) The Seller shall, at its own expense, remove exterior
signage and the lettering and/or fascia (but not the sign
structure) of all interior signs from the Branch Office depicting
the name "Coastal Banc ssb" within five 5 business days after the
Closing Date. The Seller shall not be responsible for the expenses
incurred in connection with the construction or placement of any
signs by the Buyer at the Branch Office.
(l) Within 30 calendar days from the date of this Agreement,
the Seller will provide the Buyer with copies of the forms of
signature cards, deposit account forms, Regulation E disclosures,
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Truth-in-Savings disclosures, deposit account agreements, Keogh
agreements, and IRA trust agreements and beneficiary designations,
as well as the forms of any other instruments or agreements
presently in use at the Branch Office in connection with the
Deposit Liabilities. For purposes of this paragraph, all
referenced documents shall be the forms used by the Seller as of
the date of this Agreement for new customers.
(m) As soon as practicable after the execution of this
Agreement, the parties shall, at their own respective expense,
prepare and submit for filing any and all applications, filings,
and registrations with, and notifications to, all federal and state
authorities required on the part of each respective party for the
transactions described in this Agreement to be consummated,
including without limitation applications with the Office of the
Comptroller of the Currency, the Texas Savings and Loan Department,
the FDIC and the Office of Thrift Supervision. Thereafter, the
parties shall file such supplements, amendments, and additional
information in connection therewith as may be reasonably necessary
for the transactions contemplated herein to be consummated. Each
party shall deliver to the other, prior to filing thereof, copies
of the nonconfidential portions each and all such applications,
filings, registrations, and notifications for which such party is
principally responsible and any supplement, amendment, or item of
additional information in connection therewith as may be reasonably
necessary for the transactions contemplated herein to be
consummated. Each party shall also deliver promptly to the other
a copy of the nonconfidential portions each material notice, order,
opinion, and other item of correspondence received by such party
from such federal and state authorities or from any other party
relating to such filings and shall advise the other party, at the
other party's request, of developments and progress with respect to
such matters.
(n) Within thirty (30) calendar days from the date of this
Agreement, the Seller shall deliver to the Buyer and the Buyer's
counsel a title commitment (including all documents, instruments or
agreements evidencing or creating the exceptions referenced in such
commitment) (the "Commitment") issued by a title company acceptable
to Seller and Buyer (the "Title Company") covering the Real Estate
and a copy of the survey plat currently in the possession of Seller
dated October 19, 1994 (the "Survey"). The Commitment shall
reflect that the Buyer has good and indefeasible title to the Real
Estate, subject only to (1) any shortages in area, (2) taxes for
1996 and subsequent years and subsequent assessments for prior
years due to a change in land usage or ownership, (3) existing
building and zoning ordinances, (4) utility easements, and (5)
reservations or other exceptions accepted or deemed waived by the
Buyer. Seller shall be responsible for the cost of copies of the
present survey, transfer document preparation, title insurance
policy, and costs associated with obtaining of consents for
assignment of any leases and their assignment, and other expenses
normally paid by the Seller in a commercial real estate
transaction. Buyer shall be responsible for the cost of its own
attorneys fees and expenses and recording cost and other expenses
in connection therewith normally paid by a purchaser in a
commercial real estate transaction, and the cost of an updated
survey, if Buyer elects to obtain same.
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If the Commitment contains any exceptions other than those
described in Exhibit F, the Seller shall make a good faith effort
to cure such exceptions. The Buyer may object to any remaining
uncured exceptions by providing written notice of such objection on
or before the close of business on the tenth business day after
delivery of the Commitment and the Survey to the Buyer. All
objections raised by the Buyer are referred to herein as the
"Objections". Within thirty (30) calendar days after receipt of
the Objections, the Seller shall either (i) remedy or remove all
Objections, or (ii) notify the Buyer that the Seller has elected
not to remedy or remove some or all of the objections. In the
event the Seller gives the notice set forth in the preceding
sentence of this Section VII(n), or in the event the Seller fails
to remedy or remove all Objections within said thirty (30)
calendar-day period, the Buyer may (as its sole remedy) on or
before close of business on the fifth business day after said
thirty (30) calendar-day period (or, if applicable, on or before
close of business on the fifth business day after receipt of the
Seller's notice), terminate this Agreement in its entirety by
giving the Seller written notice, whereon this Agreement shall
terminate and have no further force and effect except as set forth
in Section XV(c) hereof. If the Buyer fails to terminate within
the said five (5) business day period, the Buyer shall be deemed to
have waived its Objections.
At the Closing, the Seller shall, at its expense, cause the Title
Company to issue Texas Owner's Policy of Title Insurance, covering
the Real Estate in the amount equal to its value on the books of
the Seller as of the Closing Date. Such policy shall guarantee the
Buyer's title to the Real Estate to be good and indefeasible
subject only to the exceptions set forth in Exhibit F or waived by
Buyer as provided herein.
(o) Neither Seller nor Buyer shall voluntarily undertake any
course of action inconsistent with the satisfaction of the
requirements applicable to it in this Agreement, and each shall
promptly do all such acts and take all such measures as may be
appropriate to enable it to perform as early as practicable the
obligations herein provided to be performed by it and to cause all
the conditions precedent to consummation to be satisfied.
(p) Except as may be required by regulatory authorities, the
Seller shall not, without the prior consent of the Buyer which
shall not be unreasonably withheld: (a) transfer to the Seller's
other branches any Assets; (b) transfer to the Seller's other
branches any Deposit Liabilities (it being understood that any
deposits not being transferred pursuant hereto are not included in
such prohibition against transfer) except upon the unsolicited
request of a depositor in the ordinary course of business; (c)
except as required by the fiduciary duty of the Seller's Board of
Directors, with the advice and upon the opinion of counsel,
transfer, assign, encumber or otherwise dispose of or enter into
any contract, agreement or understanding, or negotiate with any
party with respect to entering into a contract, agreement or
understanding, to transfer, assign, encumber or otherwise dispose
of any or all of the Assets or Deposit Liabilities except in the
ordinary course of business or pursuant to this Agreement; (d)
invest in any fixed assets or improvements to the Branch Office,
expect for improvements currently in progress and except for
replacements of furniture, furnishings
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and equipment purchased or made in the ordinary course of business;
or (e) enter into any material contract, commitment, lease or other
transaction relating to the Branch Office.
(q) The Seller shall furnish the Buyer within twenty (20)
calendar days of each month end, between the date of this Agreement
and the Closing Date with month-end account schedules and trial
balances, including a list of past due loans, with respect to the
Assets and Deposit Liabilities of the Branch Office.
VIII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
The obligations of Buyer to carry out the transactions
contemplated by this Agreement are subject to the fulfillment (or
waiver in writing by Buyer), on or prior to the Closing Date, of
each of the following conditions:
(a) Buyer and Seller shall have received all required
licenses, consents and regulatory approvals, of any relevant state,
federal or other regulatory agencies necessary to permit the
parties hereto to consummate the transactions contemplated by this
Agreement, all required waiting periods shall have expired, and no
consent or approval was conditioned upon the performance by Buyer
of any additional and material act or payment of any material sum,
other than usual application and filing fees and legal costs.
(b) The representations and warranties of Seller shall be
true and correct in all material respects on the Closing Date and
Seller shall not have breached any of its covenants under this
Agreement and shall have complied with all of its obligations under
this Agreement.
(c) The Seller shall have delivered the following documents
to the Buyer:
(i) An Assignment and Assumption of Accounts Agreement
in substantially the form set forth in Exhibit H hereto.
(ii) If applicable, an Assignment and Assumption of
Contracts in substantially the form set forth in Exhibit I hereto.
(iii) An Appointment of Successor Trustee for
Individual Retirement Accounts and Keogh Accounts in substantially
the form set forth in Exhibit J hereto.
(iv) A Bill of Sale in substantially the form set forth
in Exhibit K hereto.
(v) A Special Warranty Deed in substantially the form
set forth in Exhibit L hereto.
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(vi) Such other bills of sale, assignments, and other
instruments and documents as counsel for Buyer may reasonably
require as necessary or desirable for transferring, assigning and
conveying to Buyer good and marketable title to the Assets pursuant
to this agreement.
(vii) Resolutions of Seller's Board of Directors,
certified by Seller's Secretary or Assistant Secretary, authorizing
the signing and delivery of this Agreement and the consummation of
the transactions contemplated hereby.
(viii) A certificate from the Secretary or Assistant
Secretary of Seller as to the incumbency and signature of officers.
(ix) A certificate signed by a duly authorized officer of
Seller stating that the conditions precedent to the obligations of
the Buyer pursuant to this Agreement have been fulfilled.
(x) Listings of the Deposit Liabilities as of a date not
more than ten (10) business days prior to the Closing Date (the
"Deposit Listings") on magnetic tape which Deposit Listing shall
include account number, the outstanding principal balance, and the
accrued interest.
(xi) Original documents properly endorsed for transfer,
reflecting the assignment of all notes, guarantees, security
agreements and any other agreements to inure to the benefit of the
Buyer with respect to the Loans;
(xii) A list, certified by an authorized officer of
the Seller, setting forth all garnishments, similar court orders,
tax liens and orders of any government entity received by the
Seller within the last year that are valid and enforceable on the
Closing Date with respect to the Deposit Liabilities;
(xiii) Possession of the Assets and access to and keys
for the Branch Office;
(xiv) A list, certified by an authorized officer of
the Seller, setting forth all holds which have been placed on any
assumed Deposit Liabilities that are outstanding as of the Closing
Date.
(xv) The opinion of Seller's counsel as set forth in
Section (e) to Article VIII below.
(d) No action, suit, proceeding or claim shall have been
instituted, made or threatened in writing by any person relating to
the validity, propriety or closing of the transactions contemplated
hereby and the result of which would be materially adverse to the
operation by Buyer of the Branch Office.
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(e) Buyer shall have received an opinion of Elias, Matz,
Tiernan & Herrick L.L.P., special counsel for Seller, or Linda B.
Frazier, corporate counsel to Seller, dated as of the Closing Date,
and in form and substance satisfactory to Buyer and its counsel to
the effect that:
(i) Seller is an existing Texas chartered savings bank
under the laws of the State of Texas and has all the necessary
power and authority to execute, deliver and consummate the
transactions contemplated by this Agreement.
(ii) The execution, delivery, and performance of this
Agreement, and the transactions contemplated herein, have been duly
authorized by the Board of Directors of Seller. This Agreement
constitutes the legal, valid and binding obligation of Seller
enforceable against Seller in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, fraudulent transfer, conservatorship,
receivership or other similar laws relating to or affecting
creditors rights generally or the rights of creditors of federal
insured savings institutions, laws relating to the safety and
soundness of insured depository institutions and to general
principles of equity whether considered in a preceding at law or in
equity. (Counsel for Seller need express no opinion as to the
enforceability of Seller's obligations under Article XII hereof).
(iii) All instruments of transfer to be delivered by
Seller to Buyer at the Closing have been duly authorized by proper
corporate action on the part of Seller, and have been duly executed
on behalf of Seller.
(iv) The execution, delivery, and performance of this
Agreement does not violate any provisions of the Articles of
Incorporation or By Laws of Seller, any provision of applicable law
or the regulations thereunder that would prohibit consummation of
the transactions contemplated by this Agreement in the manner
herein contemplated.
(v) To such counsel's knowledge, there are no actions,
suits, or proceedings pending or threatened against Seller to
enjoin consummation of, or to obtain other relief in connection
with, the transactions contemplated by this Agreement.
(vi) No consent, approval or authorization of or
designation, declaration or filing with any Texas or Federal
governmental agency or authority or other public persons or
entities on the part of Seller, which has not been obtained or
made, is required for the validity of the execution and delivery by
Seller of this Agreement or the consummation of the transactions
contemplated hereby by Seller.
In rendering its opinion, such counsel may rely upon opinions of
local counsel satisfactory to Buyer and as to matters of fact upon
such certificates of officers of the Seller and governmental
officials as such counsel deems appropriate.
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(f) Between the date hereof and the Closing Date, there shall
have been no material damage to or destruction or condemnation of
the Real Estate and improvements thereon; provided, however, that
Buyer may elect to purchase the Real Estate and improvements
thereon in the event of such damage, destruction or condemnation at
the purchase price determined as provided in Article II, if such
purchase price is reduced (to the extent such damage, destruction
or condemnation is not fully covered by insurance the proceeds of
which are assigned and paid to Buyer) in the amount of the
reduction in fair market value of such property attributable to
such damage, destruction or condemnation.
(g) Between the date hereof and the Closing Date, there shall
have occurred no material adverse change in the operations or
business of the Branch Office.
(h) On the Closing Date and to the extent in Seller's
possession and reasonably capable of being separated from other
accounts and records of Seller not pertaining to the Branch Office,
Seller shall deliver to Buyer originals or copies of those
financial, and operating records of Seller pertaining to the Branch
Office, the Assets, Deposit Liabilities and Seller's customer
lists, files, documents, papers, insurance policies (to the extent
assigned to Buyer), agreements, books of account, ledgers and
records of any kind or nature pertaining to the Assets, Deposit
Liabilities, and the Branch Office. In the event that certain
records are in the Seller's possession and not reasonably capable
of being separated from other accounts and records of the Seller
not pertaining to the Branch Office, the Seller agrees to provide
the Buyer with reasonable access to such records during normal
business hours as the Buyer may reasonably request, and Buyer
agrees to pay the cost thereof at the rate charged by Seller to its
customers as of the date of the research request. Buyer shall
maintain the confidentiality of all information that it obtains
that does not relate to the Branch Office and shall not use that
information for any other purpose.
(i) On the Closing Date, and by its execution and delivery to
Buyer of a duly notarized written instrument in such recordable
form as mutually shall be agreed upon by Buyer and Seller, Seller
shall create and appoint Buyer as Seller's true and lawful
attorney-in-fact, for Seller, and in Seller's name, place, and
stead and on Seller's behalf, to execute, endorse, and act on, as
necessary, any documents, notes, contracts, negotiable instruments,
security agreements, or other documents or instruments as necessary
to effect transfers of title, recordation of assignments of title
and interest, cancellation of notes and all other collateral,
discharge of liens, endorsement of negotiable instruments, and any
other act necessary to effect any of the above transactions as may
be required by the purchase, perfection, servicing, discharge, and
cancellation of the Loans by Buyer.
To aid Buyer as attorney-in-fact for Seller, Seller agrees that
Buyer may acquire and use appropriate stamps or other facsimile
instruments bearing Seller's name for each execution, endorsement,
discharge, or other act as reasonably may be necessary under this
Agreement; provided, however that nothing herein shall obligate or
authorize Buyer to use Seller's name as the
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party of record in any proceeding in any court or for any other
purpose without the express prior written authorization of Seller.
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IX. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
The obligations of Seller to carry out the transactions
contemplated by this Agreement are subject to the fulfillment (or
waiver in writing by Seller) on or prior to the Closing Date, of
each of the following conditions:
(a) Seller and Buyer shall have received all required
licenses, consents and regulatory approvals, of any relevant,
state, federal or other regulatory agencies necessary to permit the
parties hereto to consummate transactions contemplated by this
Agreement, all required waiting periods shall have expired, and no
consent or approval was conditioned upon the performance by Seller
of any additional and material act or payment of any material sum,
other than usual application and filing fees and legal costs.
(b) The representations and warranties of Buyer shall be true
and correct in all material respects on the Closing Date and Buyer
shall not have breached any of its covenants under this Agreement
and shall have complied with all of its obligations under this
Agreement.
(c) Buyer shall shave delivered the following documents to
the Seller:
(i) An Assignment and Assumption of Accounts Agreement
in substantially the form set forth in Exhibit H hereto.
(ii) If applicable, an Assignment and Assumption of
Contracts in substantially the form set forth in Exhibit I hereto.
(iii) An Appointment of Successor Trustee for
Individual Retirement Accounts and Keogh Accounts in substantially
the form set forth in Exhibit J hereto.
(iv) Resolutions of Buyer's Board of Directors, certified
by its Secretary or Assistant Secretary, authorizing the signing
and delivery of this Agreement and the consummation of the
transactions contemplated hereby.
(v) A certificate of the Secretary or Assistant
Secretary of Buyer as to the incumbency and signatures of officers.
(vi) A certificate signed by a duly authorized officer of
Buyer stating that the conditions precedent to the obligations of
Seller pursuant to this Agreement have been fulfilled.
(vii) The opinion of Buyer's counsel as set forth in
Section (e) of this Article IX.
26
<PAGE>
(d) No action, suit, proceeding, or claim shall have been
instituted, made, or threatened in writing by any person relating
to the validity, propriety or closing of the transactions
contemplated hereby and the result of which would be materially
adverse to Seller in its sale of the Branch Office.
(e) Seller shall have received an opinion of Jenkens &
Gilchrist, a Professional Corporation, counsel for Buyer, dated as
of the Closing Date, and in form and substance satisfactory to the
Seller and its counsel to the effect that:
(i) Buyer is an existing national banking association in
good standing under the laws of the United States and has all the
necessary power and authority under the laws of the United States
to execute, deliver and consummate the transactions contemplated by
this Agreement.
(ii) The execution, delivery, and performance of this
Agreement, and the transactions contemplated herein, have been duly
authorized by the Board of Directors of Buyer. This Agreement
constitutes the legal valid and binding obligations of Buyer
enforceable against Buyer in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance, fraudulent transfer, conservatorship,
receivership, or other similar laws relating to or affecting
creditors generally and to general principles of equity, whether
considered in a proceeding at law or in equity. (Counsel for Buyer
need express no opinion as to the enforceability of Buyer's
obligations under Article XII hereof).
(iii) The execution, delivery and performance of this
Agreement does not violate any provisions of the articles of
association or bylaws of Buyer, any provision of applicable law or
the regulations thereunder, that would prohibit consummation of the
transactions contemplated in this Agreement in the manner herein
contemplated.
(iv) All instruments of transfer to be delivered by Buyer
to Seller at closing have been duly authorized by proper corporate
action on the part of Buyer, and have been duly executed on behalf
of Buyer.
(v) To such counsel's knowledge, there are no actions,
suits, or proceedings pending or threatened against Buyer to enjoin
consummation of, or to obtain other relief in connection with, the
transactions contemplated by this Agreement.
(vi) No consent, approval or authorization of or
designation, declaration or filing with any Texas or Federal
governmental agency or authority on the part of Buyer, which has
not been obtained or made, is required for the validity of the
execution and delivery by Buyer of this Agreement or the
consummation of the transactions contemplated hereby by Buyer.
27
<PAGE>
In rendering its opinion, such counsel may rely as to matters of
fact upon such certificates of officers of Buyer and governmental
officials as such counsel deems appropriate.
X. FURTHER ASSURANCES
Each party will execute and deliver all additional documents
or instruments reasonably requested by the other party to further
evidence or assure the sales, transfers and assignments
contemplated by this Agreement or to be used in any application or
notice to be filed with applicable regulatory authorities. In the
event of any dispute between either party and a holder of a
liability or loan assumed or purchased by Buyer under this
Agreement, each party shall cooperate with and make its records
available to the other to the extent reasonably requested.
XI. CONDUCT OF BUSINESS AFTER CLOSING
As of the Closing Date, all of the Deposit Liabilities of
Seller described on Exhibit B and as set forth on the Closing
Statement shall become the accounts of Buyer of the same amount,
terms, rate and maturity. All other deposit accounts of Seller
shall remain accounts of Seller.
XII. INDEMNIFICATION
(a) After the consummation of the Agreement, Seller shall
indemnify and hold harmless Buyer, and its successors and assigns,
against and from any loss, liability, obligation, claim, demand,
damage or expense, including without limitation attorneys' fees and
disbursements to the extent not otherwise covered by Buyer's
insurance, which is directly or indirectly suffered or incurred by
Buyer or any of its successors or assigns, and which arises
directly or indirectly out of or by virtue of, or relates directly
or indirectly to, and of the following:
(i) For any claim made by Buyer within eighteen (18)
months after the Closing Date, for any false, misleading or
inaccurate representation or warranty made by Seller in this
Agreement or in any certificate or instrument delivered pursuant to
this Agreement, or any breach of any such representation or
warranty; provided, however, that such eighteen (18) month
limitation period shall not apply to any of Seller's
representations or warranties concerning title to and lack of any
claims, liens or encumbrances with respect to the Assets;
(ii) For any claim made by Buyer within eighteen (18)
months after the Closing Date, for any breach, violation or
nonfulfillment by Seller of, or any failure by Seller to perform,
any covenant, agreement, obligation or other provision contained in
this Agreement;
(iii) For any claim made by Buyer prior to the
expiration of the appropriate statute of limitations for any claim,
liability, obligation or penalty related to the Deposit Liabilities
transferred pursuant to this Agreement arising out of or relating
to Seller's preparation or submission of (or
28
<PAGE>
failure to prepare or submit) information, returns or reports
required by applicable federal, state, city and county laws, rules,
regulations, orders, judgments, injunctions, decrees and awards
(and interpretations thereof) (including without limitation, the
Federal Truth in Savings Act of 1991, as amended), except to the
extent that such claim, liability or obligation is caused by
Buyer's negligence;
(iv) For any claim made by Buyer within eighteen (18)
months after the Closing Date for any claim or liability arising
out of the Seller's failure to properly record accrued interest on
the Deposit Liabilities;
(v) For any claim made by Buyer within eighteen (18)
months after the Closing Date for any claim, liability, obligation
or penalty incurred or suffered by the Buyer in connection with the
Seller's operation of the Branch office on or before the Closing
Date including operation of the safe deposit business of the Branch
Office;
(vi) Any action, lawsuit or other proceeding arising from
or relating to any of the foregoing if a claim is made by Buyer
within the period set forth above; provided however, that if any
action, suit, proceeding, claim, liability, demand or assessment
shall be asserted against Buyer in respect of which Buyer proposes
to demand indemnification, Buyer shall notify the Seller thereof
within a reasonable period of time after such assertion. Subject
to rights of or duties to any insurer or other person or entity
having liability therefor and to such conditions as Buyer may
determine to be reasonably necessary for the protection of its
interests, Seller shall have the right within ten business days
after receipt of such notice to assume the control of the defense,
compromise or settlement of any such action, suit, proceeding,
claim, liability, demand or assessment, including, at its own
expense, employment of counsel, which counsel must be reasonably
acceptable to Buyer, and at any time thereafter to exercise on
behalf of Buyer any rights which may mitigate any of the foregoing;
provided, however, that if the Seller shall have exercised its
right to assume such control, Buyer (i) may, in its sole
discretion, employ counsel to represent it (in addition to counsel
employed by the Seller, and in the latter case, at Buyer's sole
expense) in any such matter, and in such event counsel selected by
the Seller shall be required to cooperate with such counsel of
Buyer in such defense, compromise or settlement for the purpose of
informing and sharing information with Buyer and (ii) will, at its
own expense, make available to Seller those employees of Buyer or
any affiliate of Buyer whose assistance, testimony or presence is
necessary to assist the Seller in evaluating and in defending any
such action, suit, proceeding, claim, liability, demand or
assessment, except that any such access shall be conducted in such
a manner as not to interfere unreasonably with the operations of
the businesses of Buyer and its affiliates. No such action, suit,
proceeding claim, liability, demand or assessment shall be settled
without the prior written consent of Buyer, which shall not
unreasonably be withheld.
(b) After the consummation of the Agreement, Buyer shall
indemnify and hold harmless Seller, and its successors and assigns,
against and from any loss, liability, obligation,
29
<PAGE>
claim, demand, damage or expense, including without limitation
attorney's fees and disbursements, to the extent not otherwise
covered by Seller's insurance which is directly or indirectly
suffered or incurred at any time by Seller or any of its successors
or assigns, and which arises directly or indirectly out of or by
virtue of, or relates directly or indirectly to, any of the
following:
SI For any claim made by Seller within eighteen (18)
months after the Closing Date, for any false, misleading or
inaccurate representation or warranty made by Buyer in this
Agreement or in any certificate or instrument delivered pursuant to
this Agreement, or any breach of any such representation or
warranty;
(ii) For any claim made by Seller within eighteen (18)
months after the Closing date, for any breach, violation or
nonfulfillment by Buyer of, or any failure by Buyer to perform, any
covenant, agreement, obligation or other provision contained in
this Agreement.
(iii) For any claim made by Seller prior to the
expiration of the appropriate statute of limitations, for any
claim, liability, obligation or penalty related to the Deposit
Liabilities transferred pursuant to this Agreement arising out of
or relating to Buyer's preparation or submission of (or failure to
prepare or submit) information, returns or reports required by
applicable federal, state, city and county laws, rules,
regulations, orders, judgment, injunctions, decrees and awards (and
interpretations thereof) (including, without limitation, the
Federal Truth in Savings Act of 1991, as amended), except to the
extent that such claim, liability or obligation is caused by the
Seller's negligence;
(iv) For any claim made by Seller within eighteen (18)
months after the Closing Date, for any claim or liability arising
out of Buyer's failure to properly record accrued interest on the
Deposit Liabilities;
(v) For any claim made by Seller within eighteen (18)
months after the Closing Date, for any claim, liability, obligation
or penalty incurred or suffered by Seller in connection with
Buyer's operation of the Branch Office after the Closing Date; or
(vi) Any action, lawsuit or other proceeding arising
from or relating to any of the foregoing if a claim is made by
Seller within the periods set forth above; provided however, that
if any action, suit, proceeding, claim, liability, demand or
assessment shall be asserted against Seller in respect of which
Seller proposes to demand indemnification, Seller shall notify the
Buyer thereof within a reasonable period of time after such
assertion. Subject to rights of or duties to any insurer or other
person or entity having liability therefor and to such conditions
as Seller may determine to be reasonably necessary for the
protection of its interests, Buyer shall have the right within ten
business days after receipt of such notice to assume the control of
the defense, compromise or settlement of any such action, suit,
proceeding, claim, liability, demand or assessment, including, at
its own expense, employment of counsel, which counsel must be
reasonably acceptable to Seller, and at any
30
<PAGE>
time thereafter to exercise on behalf of Seller any rights which
may mitigate any of the foregoing; provided, however, that if the
Buyer shall have exercised its right to assume such control, Seller
(i) may, in its sole discretion, employ counsel to represent it (in
addition to counsel employed by Buyer, and in the latter case, at
Seller's sole expense) in any such matter, and in such event
counsel selected by Buyer shall be required to cooperate with such
counsel of the Seller in such defense, compromise or settlement for
the purposes of informing and sharing information with Seller and
(ii) will, at its own expense, make available to Buyer those
employees of Seller or any affiliate of Seller whose assistance,
testimony or presence is necessary to assist the Buyer in
evaluating and in defending any such action, suit, proceeding,
claim, liability, demand or assessment, except that any such access
shall be conducted in such a manner as not to interfere
unreasonably with the operations of the businesses of Seller and
its affiliates. No such action, suit, proceeding claim, liability,
demand or assessment shall be settled without the prior written
consent of Seller, which shall not unreasonably be withheld.
(c) The representations and warranties of Seller, on the one
hand, and of Buyer, on the other hand, contained in this Agreement
or in any certificate or instrument delivered pursuant to this
Agreement shall survive the Closing Date as set forth in Section
XII(a) and (b) above.
XIII. AMENDMENT, WAIVER AND NOTICE
(a) Any duly authorized officer of Seller or Buyer may make,
execute and deliver such amendment or amendments, modifications, or
supplements to this Agreement as any one of such officers signing
any such amendment, modification or supplement on behalf of a party
may approve, as shall be conclusively evidence by his or her
signature to any such amendment, modification or supplement in such
manner as may be agreed upon by them in writing at any time.
(b) The failure of either party at any time or times require
performance at any item prior to the Closing Date of any provision
hereof shall in no manner affect such party's rights at a later
time prior to the Closing Date to enforce the same. No waiver at
any time prior to the Closing Date by either party of any
condition, or of a breach of any term, covenant, representation or
warranty of this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed to be or construed as a
further or continuing waiver of any such condition or breach or a
waiver of any other condition or the breach of any other term,
covenant, representation or warranty to this Agreement.
XIV. NON-SOLICITATION
For and in consideration of the purchase by the Buyer of the
Assets and assumption of the Deposit Liabilities, the payment of
the purchase price and the other agreements and covenants contained
in this Agreement, for a period of two (2) years following the
Closing Date, Seller and its officers, directors and employees (for
so long as they are employed by the Seller) shall not
31
<PAGE>
knowingly solicit the banking business of any customers of the
Branch Office as of the Closing Date whose Deposit Liabilities or
Account Loans are transferred to the Buyer pursuant to the terms of
this Agreement. Notwithstanding the foregoing sentence, the Seller
shall not be deemed to be in violation of this Section XIV by
virtue of (a) general advertising by it (i) in publications that
are normally distributed, or (ii) by means of radio or television
advertising over stations that broadcast, in geographic areas that
include the primary market area of the Branch Office and geographic
markets served by the locations of the Seller other than the Branch
Office, (b) mass mailings and telemarketings not exclusively
directed at residents of Tom Green County and its contiguous
counties, (c) the Seller's taking actions as may be required to
comply with applicable laws, rules or regulations. If any court of
competent jurisdiction should determine that any term or terms of
this covenant are too broad in terms of time, geographic area,
lines of commerce or otherwise, such court shall modify and revise
any such term or terms so that they comply with applicable law.
The Seller hereby acknowledges that the Buyer will be irreparably
damaged if the provisions of this Section XIV are not specifically
enforced. Accordingly, the Buyer shall be entitled to an
injunction restraining any violation of this Section XIV by the
Seller (with such bond or other security as the court may require),
or any other appropriate decree of specific performance. Such
remedy shall not be exclusive and shall be in addition to any other
remedy by the Buyer that the Buyer shall have at law or in equity.
XV. MISCELLANEOUS
(a) Except as otherwise provided in this Agreement, Buyer and
Seller shall pay their own expenses in connection with the
transaction contemplated hereby.
(b) Notwithstanding any other provision of this Agreement,
this Agreement and the transactions contemplated hereby may be
terminated at any time before the Closing Date as follows:
(1) By mutual written consent of the Boards of Directors
of Buyer and Seller.
(2) By written notice of either Buyer or Seller in the
event that the conditions precedent to their own obligations as set
forth in Article VII and IX have not been met and satisfied or
waived or shall have become impossible of fulfillment, or if the
transactions contemplated hereby are not consummated on or before
July 31, 1996, or such later date mutually acceptable to the
parties.
(3) By either Buyer or Seller upon written notification
if any representation or warranty made herein by the other party or
in any exhibit hereto or in any application, report, certificate or
financial statement furnished pursuant to the provisions hereof,
shall prove to have been false or misleading in any material
respect when made or furnished; or
32
<PAGE>
(4) The expiration of 30 business days after any
governmental agency has denied or finally refused to grant the
approvals or consents required to be obtained pursuant to this
Agreement, unless within said 30 business day period Buyer and
Seller agree to submit or resubmit an application or appeal the
decision of the regulatory authority which denied or finally
refused to grant approval thereof.
Notwithstanding anything to the contrary herein contained,
neither party hereto shall have the right to terminate this
Agreement on account of its own breach or any immaterial breach by
the other party hereto.
(c) Upon any such termination as described in Article XIV(b)
above, this Agreement shall thereupon automatically terminate and
neither Buyer nor Seller shall have any liability or obligation
hereunder to the other, except as follows:
(1) Each party will return all documents, work papers
and other materials received from the other party relating to the
transactions contemplated hereby;
(2) All information received by either party hereto with
respect to the business of the other party or its subsidiaries
(other than information which is a matter of public record or whose
disclosure may be required by applicable law) shall be held in
confidence and not disclosed to any other person or entity; and
(3) Notwithstanding Article XIV(a) above and any other
provision of this Agreement, a party which terminates this
Agreement in a manner which is not permitted by Article XIV(b)
above shall be liable for all expenses, including legal fees,
incurred by the other party in connection with the transactions
contemplated hereby, which right shall not be exclusive of the
other party's right to seek damages.
(d) All notices or other communications provided for or
required under this Agreement shall be in writing and shall be
deemed to have been duly given if delivered or mailed (registered
or certified mail, postage paid) as follows:
33
<PAGE>
If to Seller:
Coastal Banc ssb
8 Greenway Plaza, Suite 1500
Houston, Texas 77046
Attention: Catherine N. Wylie
Executive Vice President
Copy to:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
Attention: Jeffrey A. Koeppel, Esquire
If to Buyer:
First State Bank, N.A.
547 Chestnut
Abilene, Texas 79602
Attention: Bryan Stephenson
Chairman of the Board
Copy to:
Jenkens & Gilchrist, a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202-2799
Attention: Peter G. Weinstock, Esq.
(e) No party to this Agreement shall make, issue or release
any public announcement, statement or acknowledgment of the
existence of, or reveal the terms, conditions or the status of, the
transactions provided for herein without first attempting to the
extent reasonably possible and in all cases with regard to written
matter, to clear such announcement, statement, acknowledgment, or
revelation with the other party, provided that Buyer or Seller may
make any such release or announcement which in the opinion of
counsel for Seller or Buyer, as the case may be, is necessary or
appropriate to comply with applicable law. The parties hereto
agree that they will not unreasonably withhold, condition or delay
any such clearances.
(f) This Agreement may not be assigned by either Buyer or
Seller without the prior written consent of the other. Any
assignment made in violation of this provision shall be null and
void and of no effect.
34
<PAGE>
(g) This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas (without regard to
choice of law rules) and, to the extent applicable or preemptive,
the laws of the United States.
(h) If any part of this Agreement shall be adjudged by any
court of competent jurisdiction to be invalid, such judgment shall
not impair any other provision hereof.
(i) This Agreement, including all exhibits and schedules
referred to herein and made a part hereof may be executed in
counterparts, each of which shall be a valid and binding original,
but all of which taken together shall constitute one and the same
instrument.
(j) This Agreement constitutes the entire agreement between
the parties hereto pertaining to the subject matter hereof and
supersedes all prior and contemporaneous agreements and
understandings of the parties in connection therewith. No
modification or termination of this Agreement shall be binding
unless executed in writing by both parties hereto. No waiver of
any provision of this Agreement shall be deemed to be, or shall
constitute a waiver of any other provision hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above
written:
COASTAL BANC ssb
Attest: /s/_____________ By: /s/ Manuel J. Mehos
Manuel J. Mehos
Chairman of the Board/CEO
FIRST STATE BANK, N.A.
Attest: /s/ Albert C. Jordan III By: /s/ Bryan Stephenson
Senior Vice President Bryan Stephenson
and Cashier Chairman of the Board/CEO
<PAGE>
Exhibit 13.1
Annual Report 1995
[photo of State of Texas flag]
[Independent Bankshares, Inc. Logo]
<PAGE>
[photo of State of Texas indicating
banking locations in West Texas]
BANKING LOCATIONS IN WEST TEXAS
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
For the Year 1995 1994 1993
- ------------ ---- ---- ----
<S> <C> <C> <C>
Net Income $ 1,132,000 $ 450,000 $ 1,229,000
Primary Earnings
Per Common Share 1.02 0.36 1.11
Fully Diluted Earnings
Per Common Share 0.84 0.33 0.91
At Year End 1995 1994 1993
- ----------- ---- ---- ----
Assets $180,344,000 $159,860,000 $160,712,000
Loans 81,927,000 81,306,000 69,647,000
Deposits 164,704,000 146,184,000 147,785,000
Notes Payable 849,000 930,000 1,194,000
Stockholders' Equity 13,818,000 11,073,000 10,845,000
Daily Averages 1995 1994 1993
- -------------- ---- ---- ----
Assets $169,532,000 $159,982,000 $152,472,000
Loans 82,302,000 74,727,000 59,767,000
Deposits 154,547,000 146,608,000 140,428,000
Notes Payable 1,069,000 1,061,000 1,260,000
Stockholders' Equity 12,594,000 11,302,000 9,831,000
</TABLE>
STOCK TRANSFER AGENT STOCK EXCHANGE LISTING
First State Bank, N.A. American Stock Exchange
547 Chestnut (AMEX)
P.O. Box 3296
Abilene, Texas 79604
AMEX TRADING SYMBOL AMEX LISTING
IBK Ind Bnk
[Annual Report '95 Logo]
1
<PAGE>
President's Letter
To Our Shareholders
Independent Bankshares, Inc. and its shareholders enjoyed a
profitable year in 1995. The Company reported $1,132,000 in net
income for the year ended December 31, 1995, compared to $450,000
in net income for 1994. These earnings translated into primary
earnings per common share of $1.02 in 1995, up from $0.36 per share
in 1994.
In addition to increased earnings, the Company experienced its
strongest rate of growth in several years. At year-end 1995, total
assets were $180,344,000, up $20,484,000, or 12.8 percent, over
1994. This growth, all internally generated, was the result of an
improving West Texas economy, a successful marketing campaign and
a renewed focus on what we do best - giving personal attention to
individuals and small businesses.
Our improved earnings, increased growth rate and the added
visibility of an American Stock Exchange listing boosted the
Company's common stock price over 75 percent during 1995. We are
pleased with these results and look forward to the challenges of
1996.
Our focus during 1996 will be directed toward expanding our
customer base throughout West Texas. As previously mentioned,
personal attention to our customers' financial needs has proven to
be a successful means by which to expand our customer base. We
believe that this proven formula of customer service combined with
selective acquisitions will generate profitable growth.
[photo of Scott Taliaferro,
Chairman of the Board, Bryan
Stephenson, President & Chief
Executive Officer, and Randal
Crosswhite, Senior Vice
President & Chief Financial
Officer]
During the first quarter of 1996, the Company and one of its
subsidiaries, First State Bank, N.A., Abilene, Texas, completed the
acquisition of the Peoples National Bank, Winters, Texas.
Additionally, during the first quarter of 1996, the Company
announced that it had entered into a definitive agreement to
acquire a branch of a savings bank in San Angelo, Texas. The
Winters transaction and the pending San Angelo purchase, which is
subject to regulatory approval, will add approximately 11 percent
to our asset base and will position our Company in three of the
largest consumer markets in West Texas.
We appreciate your support and look forward to representing
your interests in 1996.
Sincerely,
/s/ Bryan Stephenson
Bryan W. Stephenson
President & CEO
[Independent Bankshares, Inc. Logo]
2
<PAGE>
Board of Directors
BOARD OF DIRECTORS
LEE CALDWELL
Attorney
MRS. WILLIAM R. (AMBER) CREE
Entrepreneur
RANDAL N. CROSSWHITE
Senior Vice President
& Chief Financial Officer
Independent Bankshares, Inc.
LOUIS S. GEE
Chairman of the Board
& Chief Executive Officer
Tippett & Gee, Inc., Consulting Engineers
MARSHAL M. KELLAR
Principal
West Texas Wholesale Supply Co.
TOMMY MCALISTER
President
McAlister, Inc.
BRYAN W. STEPHENSON
President & Chief Executive Officer
Independent Bankshares, Inc.
SCOTT L. TALIAFERRO
Chairman of the Board
Independent Bankshares, Inc.
President
Texas Drilling Co.
JAMES D. WEBSTER, M.D.
Physician
C. G. WHITTEN
Senior Vice President, General Counsel
and Corporate Secretary
Pittencrieff Communications, Inc.
JOHN A. WRIGHT
Banking Consultant
ADVISORY DIRECTORS
ARLAS CAVETT
Farming and Investments
L. H. MOSLEY
President
Mosley Investments, Inc.
J. E. SMITH
Investments
[Annual Report '95 Logo]
3
<PAGE>
Annual Report 1995
ABILENE, TEXAS
[photo of First State Bank,
N.A., Abilene, Main Bank]
Located in west central Texas, one hundred eighty-three miles
west of Dallas, Abilene is the center of a 22-county area some
people call the Texas Midwest. Abilene is the hub of a diversified
economy which includes manufacturing, retail trade, farming and
ranching, medical care and petroleum.
Abilene is in Taylor County, one of 254 counties in the
nation's second-largest state. Taylor County, with a current
population of 119,700, was organized in 1878. The town of Abilene
was established in March 1881 upon the completion of the Texas &
Pacific Railway.
Abilene, which in 1990 was named as one of only 10 "All
America" cities in the country, is the 179th largest city in the
nation, with a population count of 106,700, according to statistics
released from the U.S. Census Bureau.
[photo of Board of Directors,
First State Bank, N.A.,
Abilene]
Abilene is a young, vibrant community with the median age of
its citizens of just over 30 years, due partly to a major military
installation, Dyess Air Force Base, and to the city's three
institutions of higher learning: Abilene Christian University,
Hardin-Simmons University and McMurry University, which have
collectively approximately 10,000 students.
Surveys indicate that there are twenty-two counties comprising
Abilene's primary retail trade territory. Population figures set
the twenty-two county population at approximately 314,000.
[photo of Selected officers and
employees, First State Bank,
N.A., Abilene]
The trade territory served by manufacturers and wholesalers
will vary from one company to another depending on such factors as
the type of product and the method of distribution employed. The
wholesale trade territory of Abilene comprises 39 counties with a
population of more than 749,000 people and an area of 36,833 square
miles.
Population statistics portray Abilene as being a young,
growing community with a bright future.
[Independent Bankshares, Inc. Logo]
4
<PAGE>
Annual Report 1995
ODESSA, TEXAS
[photo of First State Bank,
N.A., Main Bank]
Odessa is located in Ector County, approximately midway
between Ft. Worth and El Paso and one hundred seventy miles west of
Abilene. The city covers an area of thirty-five square miles
situated in the heart of the Permian Basin, a vast oval of land
(100,000 square miles). Three of the state's major land resources
meet here - the High Plains, Trans Pecos and Edwards Plateau.
Odessa's history as a settlement can be traced to the 1881
extension of the Texas and Pacific Railway across the south plains.
By the mid-1890's, Odessa was an established cattle shipping
center.
[photo of Board of Directors,
First State Bank, N.A., Odessa]
When oil was discovered in the area in 1926, the destiny of
the community took a different course. This discovery brought
people of varied interests and occupations to the area, and the
local economy began to change from a ranching area into an
industrial one.
Odessa is the 23rd largest city in Texas, with a population of
93,900. Ector County's population is 121,200. The population of
the Metropolitan Statistical Area (MSA) - which includes Ector and
Midland counties - is 234,300.
[photo of Officers,
First State Bank, N.A., Odessa]
The median age for Odessa is 31 years.
The fortunes of the Odessa-Ector County area have historically
followed those of the oil and gas industry.
Currently, the area's economic situation has many positive
aspects. Diversification efforts are under way, although ties to
the energy sector remain very strong. In terms of output, forty-
eight percent of all local production is directly related to oil
and gas activity, while eighteen percent of the employment base is
energy dependent.
Manufacturing and industrial services comprise a vital segment
of the community's economic situation. Odessa is beginning to take
the necessary steps to diversify its industrial base.
[Annual Report '95 Logo]
5
<PAGE>
Annual Report 1995
SAN ANGELO, TEXAS
San Angelo, a city of 88,000 established in 1867, is the hub
of a 13-county area of Texas with a widely diversified economy
supported by agriculture, petroleum, medical, communications,
education, federal, military, retail, retirement and tourism. The
city is located ninety miles southwest of Abilene. Total
population of Tom Green County is 102,000.
San Angelo is located in what is known as the Concho Valley of
west central Texas between the Texas Hill Country to the southeast
and the Rolling Plains in the northwest. The city became an early
ranching center for cattle and sheep, and today the San Angelo area
is the nation's largest primary wool and mohair market and a major
livestock auction center.
San Angelo is home to Goodfellow Air Force Base and several
divisions of large manufacturing companies, including Johnson &
Johnson and Levi Strauss.
Angelo State University is a local four-year and graduate
university with a student population of 6,300. Howard College's
local campus provides academic and occupational training and
certification for a student population of 1,000.
STAMFORD, TEXAS
[photo of First State Bank,
N.A., Abilene, Stamford Banch]
[photo of First State Bank,
N.A., Abilene, Stamford
Branch officer]
Stamford, developed in 1899 as a project of the Texas Central
Railroad, is located in Jones County, forty miles north of Abilene.
The population of Stamford is 3,800, with a total county population
of 16,500. The city is the retail, banking and commercial center
for a three-county area.
[photo of First State Bank,
N.A., Stamford Branch employee assisting customer]
[Independent Bankshares, Inc. Logo]
6
<PAGE>
Annual Report 1995
Stamford is situated in a predominantly agricultural area
known as the Rolling Plains. The primary industry is farming and
ranching, with the most prevalent crop being cotton. During the
past few years, however, several new sizeable businesses have begun
operations in Stamford. Business facilities include grain
elevators, cotton gins, a clothing factory, cottonseed oil mill,
feed mill, oil well machinery and wholesale outlets.
Stamford is best known, perhaps, for its Texas Cowboy Reunion
which was started in 1930 and is unchallenged as the world's
greatest amateur rodeo.
WINTERS, TEXAS
[photo of First State Bank,
N.A., Abilene, Winters Branch]
Winters, situated in Runnels County and first settled in about
1880, is located forty-three miles south of Abilene. The county
population is 11,300, with Winters making up 2,900 of that total.
[photo of First State Bank, N.A., Abilene,
Winters Branch employee assisting customer]
The area surrounding Winters is primarily agricultural in
nature, with some petroleum-related industry. Winters is now the
commercial and distribution center for this large agricultural and
ranching area.
Winters is also home to a large manufacturing company and a
regional milling and grain company.
[photo of First State Bank,
N.A., Abilene, Winters Branch officer]
Winters, known as "The Best Little Town in Texas," is
surrounded by lakes and has abundant fishing and hunting.
[Annual Report '95 Logo]
7
<PAGE>
Subsidiary Banks
FIRST STATE BANK, N.A., ABILENE
MAIN BANK WYLIE BRANCH
547 Chestnut St. 6301 Buffalo Gap Road
Abilene, TX 79602 Abilene, TX 79606
(915) 672-2902 (915) 691-0000
STAMFORD BRANCH WINTERS BRANCH
210 S. Swenson St. 500 S. Main St.
Stamford, TX 79553 Winters, TX 79567
(915) 773-5755 (915) 754-5511
<TABLE>
<CAPTION>
December 31
-----------
1995 1994
---- ----
<S> <C> <C>
Assets $119,255,000 $107,414,000
Loans 48,571,000 47,279,000
Deposits 110,120,000 99,007,000
Stockholder's Equity 8,370,000 7,756,000
</TABLE>
FIRST STATE BANK, N.A., ODESSA
MAIN BANK WINWOOD BRANCH
1330 E. 8th St. 3898 E. 42nd St.
Odessa, TX 79761 Odessa, TX 79762
(915) 332-0141 (915) 366-5903
<TABLE>
<CAPTION>
December 31
-----------
1995 1994
---- ----
<S> <C> <C>
Assets $59,475,000 $51,929,000
Loans 33,356,000 34,028,000
Deposits 54,817,000 47,626,000
Stockholder's Equity 4,443,000 4,002,000
</TABLE>
[photo of Bank Presidents: Mike Jarrett, First State Bank, N.A.,
Odessa and Jim Fitzhugh, First State Bank, N.A., Abilene and Branch
Management: Jim Jordan, First State Bank, N.A., Winters, Jimmy
Parker, First State Bank, N.A., Stamford, and Harold Andrews, First
State Bank, N.A., Abilene]
[Independent Bankshares, Inc. Logo]
8
<PAGE>
Report of Independent Accountants
Board of Directors and Shareholders
Independent Bankshares, Inc.
Abilene, Texas
We have audited the accompanying consolidated balance sheets of
Independent Bankshares, Inc. as of December 31, 1995 and 1994, and
the related consolidated income statements, statements of
stockholders' equity and cash flows for the years ended December
31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits. The financial statements of Independent Bankshares, Inc.
for the year ended December 31, 1993, were audited by other
auditors, whose report, dated January 31, 1994 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Independent Bankshares, Inc. as of December 31, 1995
and 1994, and the consolidated results of its operations and its
cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Fort Worth, Texas
February 5, 1996
9
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
____ ____
<S> <C> <C>
Assets:
Cash and Cash Equivalents:
Cash and Due from Banks $ 8,559,000 $ 7,564,000
Federal Funds Sold 26,200,000 31,200,000
------------ ------------
Total Cash and Cash Equivalents 34,759,000 38,764,000
------------ ------------
Securities (Note 5):
Available-for-sale 16,746,000 17,078,000
Held-to-maturity - Market Value of
$39,384,000 for 1995 and
$15,913,000 for 1994 39,161,000 16,227,000
------------ ------------
Total Securities 55,907,000 33,305,000
------------ ------------
Loans (Note 6):
Total Loans 85,281,000 85,518,000
Less:
Unearned Income on Installment Loans 3,354,000 4,212,000
Allowance for Possible Loan Losses 759,000 817,000
------------ ------------
Net Loans 81,168,000 80,489,000
------------ ------------
Premises and Equipment (Note 7) 4,155,000 4,345,000
Real Estate and Other Repossessed Assets 337,000 631,000
Accrued Interest Receivable 1,494,000 945,000
Other Assets 2,524,000 1,381,000
------------ ------------
Total Assets $180,344,000 $159,860,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 8):
Noninterest-bearing Demand Deposits $ 33,267,000 $ 30,210,000
Interest-bearing Demand Deposits 52,430,000 56,520,000
Interest-bearing Time Deposits 79,007,000 59,454,000
------------ ------------
Total Deposits 164,704,000 146,184,000
Notes Payable (Note 9) 849,000 930,000
Accrued Interest Payable 882,000 408,000
Other Liabilities 91,000 1,265,000
------------ ------------
Total Liabilities 166,526,000 148,787,000
------------ ------------
Commitments and Contingent Liabilities (Notes 15 and 17)
Stockholders' Equity (Notes 11 and 18):
Preferred Stock - Par Value $10.00;
5,000,000 Shares Authorized:
Series C Preferred Stock - Stated
Value $42.00; 50,000 Shares
Designated; 16,436 and 16,668
Shares Issued at December 31,
1995 and 1994, Respectively 164,000 167,000
Common Stock - Par Value $0.25;
30,000,000 Shares Authorized;
1,050,292 and 778,081 Shares
Issued at December 31, 1995 and
1994, Respectively 263,000 195,000
Additional Paid-in Capital 9,875,000 8,241,000
Retained Earnings 3,448,000 2,570,000
Unrealized Gain (Loss) on
Available-for-sale Securities (Note 5) 68,000 (100,000)
------------ ------------
Total Stockholders' Equity 13,818,000 11,073,000
------------ ------------
Total Liabilities and
Stockholders' Equity $180,344,000 $159,860,000
============ ============
</TABLE>
See accompanying notes.
10
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Interest and Fees on Loans (Note 6) $ 7,726,000 $ 6,918,000 $5,333,000
Interest on Securities 2,389,000 2,516,000 3,588,000
Interest on Federal Funds Sold 1,847,000 697,000 300,000
----------- ----------- ----------
Total Interest Income 11,962,000 10,131,000 9,221,000
----------- ----------- ----------
Interest Expense:
Interest on Deposits 5,201,000 3,364,000 3,072,000
Interest on Notes Payable (Note 9) 108,000 88,000 104,000
----------- ----------- ----------
Total Interest Expense 5,309,000 3,452,000 3,176,000
----------- ----------- ----------
Net Interest Income 6,653,000 6,679,000 6,045,000
Provision for Loan Losses (Note 6) 206,000 147,000 154,000
----------- ----------- ----------
Net Interest Income After Provision for Loan Losses 6,447,000 6,532,000 5,891,000
----------- ----------- ----------
Noninterest Income:
Service Charges 1,167,000 1,226,000 1,081,000
Trust Fees 201,000 169,000 140,000
Gain on Sale of Subsidiary (Note 3) 0 0 286,000
Other Income 141,000 102,000 377,000
----------- ----------- ----------
Total Noninterest Income 1,509,000 1,497,000 1,884,000
----------- ----------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 2,849,000 2,838,000 2,575,000
Equipment Expense 723,000 641,000 453,000
Net Occupancy Expense 643,000 673,000 602,000
Legal Fees and Expense (Note 15) 344,000 1,207,000 288,000
Stationery, Printing and Supplies Expense 271,000 226,000 223,000
FDIC Insurance Expense 166,000 336,000 325,000
Accounting Fees 110,000 135,000 153,000
Data Processing Expense 98,000 237,000 516,000
Net Costs (Revenues) Applicable to Real Estate and
Other Repossessed Assets (7,000) (4,000) 56,000
Other Expenses 1,045,000 1,063,000 1,031,000
----------- ----------- ----------
Total Noninterest Expenses 6,242,000 7,352,000 6,222,000
----------- ----------- ----------
Income Before Federal Income Taxes and Cumulative
Effect of Accounting Change 1,714,000 677,000 1,553,000
Federal Income Taxes (Notes 2 and 10) 582,000 227,000 524,000
----------- ----------- ----------
Income Before Cumulative Effect of Accounting Change 1,132,000 450,000 1,029,000
Cumulative Effect of Change in Accounting for
Income Taxes 0 0 200,000
----------- ----------- ----------
Net Income $ 1,132,000 $ 450,000 $1,229,000
=========== =========== ==========
Preferred Stock Dividends (Note 11) $ 70,000 $ 70,000 $ 75,000
=========== =========== ==========
Net Income Available to Common Stockholders (Note 12) $ 1,062,000 $ 380,000 $1,154,000
=========== =========== ==========
</TABLE>
11
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Primary Earnings Per Common Share Available to Common
Stockholders (Note 12):
Income Before Cumulative Effect of Accounting Change $1.02 $0.36 $0.92
Cumulative Effect of Accounting Change 0.00 0.00 0.19
----- ----- -----
Net Income $1.02 $0.36 $1.11
===== ===== =====
Fully Diluted Earnings Per Common Share Available to
Common Stockholders (Note 12):
Income Before Cumulative Effect of Accounting Change $0.84 $0.33 $0.76
Cumulative Effect of Accounting Change 0.00 0.00 0.15
----- ----- -----
Net Income $0.84 $0.33 $0.91
===== ===== =====
</TABLE>
See accompanying notes.
12
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SERIES C ADDITIONAL AVAILABLE-
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED FOR-SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES
------ ------ ------ ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances--January 1, 1993 16,668 $167,000 732,955 $183,000 $6,500,000 $1,388,000 $ 0
Net Income 1,229,000
Utilization of Net
Operating Loss
Carryforward (Note 2) 493,000
Cumulative Effect of
Accounting Change 700,000
Gain on Repurchase of Series A
Preferred Stock (Note 11) 47,000
Cash Dividends (75,000)
5% Stock Dividend (Note 11) 36,415 9,000 270,000 (282,000)
Exercise of Stock
Options (Note 11) 8,390 3,000 7,000
Unrealized Gain on
Available-for-sale Securities,
Net of Tax (Note 5) 206,000
------ -------- --------- -------- ---------- ---------- --------
Balances--December 31, 1993 16,668 167,000 777,760 195,000 8,017,000 2,260,000 206,000
Net Income 450,000
Utilization of Net
Operating Loss
Carryforward (Note 2) 222,000
Cash Dividends (140,000)
Exercise of Stock
Options (Note 11) 321 2,000
Adjustment to Unrealized
Gain (Loss) on Available-
for-sale Securities, Net
of Tax (Note 5) (306,000)
------ -------- --------- -------- ---------- ---------- --------
Balances--December 31, 1994 16,668 167,000 778,081 195,000 8,241,000 2,570,000 (100,000)
Net Income 1,132,000
Reduction of Deferred
Tax Asset Valuation
Allowance 1,600,000
Cash Dividends (187,000)
33-1/3% Stock Dividend
(Note 11) 259,371 65,000 (67,000)
Exercise of Stock
Options (Note 11) 9,037 2,000 32,000
Conversion of Series C
Preferred Stock (Note 11) (232) (3,000) 3,803 1,000 2,000
Adjustment to Unrealized
Gain (Loss) on Available-
for-sale Securities, Net
of Tax (Note 5) 168,000
------ -------- --------- -------- ---------- ---------- --------
Balances--December 31, 1995 16,436 $164,000 1,050,292 $263,000 $9,875,000 $3,448,000 $ 68,000
====== ======== ========= ======== ========== ========== ========
</TABLE>
See accompanying notes.
13
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,132,000 $ 450,000 $ 1,229,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Cumulative Effect of Change in Accounting for Income Taxes 0 0 (200,000)
Deferred Federal Income Tax Expense 547,000 222,000 493,000
Depreciation and Amortization 367,000 397,000 424,000
Provision for Loan Losses 206,000 147,000 154,000
Gain on Sale of Premises and Equipment (4,000) 0 0
Losses (Gains) on Sales of Real Estate and Other
Repossessed Assets (45,000) 52,000 (16,000)
Gain on Sale of Subsidiary 0 0 (286,000)
Writedown of Real Estate and Other Repossessed Assets 32,000 27,000 81,000
Decrease (Increase) in Accrued Interest Receivable (549,000) 376,000 422,000
Decrease (Increase) in Other Assets (176,000) (41,000) (133,000)
Increase (Decrease) in Accrued Interest Payable 474,000 115,000 (40,000)
Increase (Decrease) in Other Liabilities (840,000) 670,000 4,000
----------- ----------- -----------
Net Cash Provided by Operating Activities 1,144,000 2,415,000 2,132,000
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 21,828,000 34,436,000 0
Proceeds from Maturities of Held-to-maturity Securities 12,930,000 19,428,000 46,696,000
Proceeds from Sales of Available-for-sale Securities 0 8,000 0
Purchases of Available-for-sale Securities (21,242,000) (12,873,000) 0
Purchases of Held-to-maturity Securities (35,864,000) (9,909,000) (37,173,000)
Net Increase in Loans (1,603,000) (12,361,000) (9,489,000)
Proceeds from Sales of Premises and Equipment 4,000 0 0
Additions to Premises and Equipment (177,000) (214,000) (706,000)
Proceeds from Sales of Real Estate and Other Repossessed Assets 1,025,000 569,000 729,000
Cash Consideration Paid for Net Liabilities of
Olton State Transferred on January 1, 1993 0 0 (14,002,000)
Cash and Cash Equivalents Held by Winters State on
August 31, 1993 0 0 2,853,000
----------- ----------- -----------
Net Cash Provided by (Used in) Investing Activities (23,099,000) 19,084,000 (11,092,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits 18,520,000 (1,601,000) (1,973,000)
Proceeds from Notes Payable 275,000 0 450,000
Repayment of Notes Payable (690,000) (264,000) (1,546,000)
Net Proceeds from Issuance of Equity Securities 34,000 2,000 10,000
Payment of Cash Dividends (187,000) (140,000) (75,000)
Cash Paid for Fractional Shares in Stock Dividend (2,000) 0 (3,000)
Repurchase of Series A Preferred Stock 0 0 (173,000)
----------- ----------- -----------
Net Cash Provided by (Used In) Financing Activities 17,950,000 (2,003,000) (3,310,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (4,005,000) 19,496,000 (12,270,000)
Cash and Cash Equivalents at Beginning of Year 38,764,000 19,268,000 31,538,000
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $34,759,000 $38,764,000 $19,268,000
=========== =========== ===========
</TABLE>
See accompanying notes.
14
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
The accounting and reporting policies of Independent
Bankshares, Inc. (the "Company") conform with generally accepted
accounting principles followed by the banking industry.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of
the Company and its wholly-owned subsidiary, Independent Financial
Corp. ("Independent Financial") which, in turn, owns 100% of First
State Bank, National Association, Abilene, Texas ("First State,
N.A., Abilene") and First State Bank, National Association, Odessa,
Texas ("First State, N.A., Odessa") (collectively, the "Banks").
First State, N.A., Abilene has two branches in Abilene and one each
in Stamford, Texas, and Winters, Texas. First State, N.A., Odessa,
has two branches in Odessa. All significant intercompany accounts
and transactions have been eliminated upon consolidation.
Effective November 1, 1994, two of the Company's then existing
subsidiary banks, The Winters State Bank, Winters, Texas ("Winters
State"), and The First National Bank in Stamford, Stamford, Texas
("First National"), were merged with and into First State, N.A.,
Abilene. As a result of the merger, the offices of these two banks
became branches of First State, N.A., Abilene. All references to
Winters State and First National in the Company's Consolidated
Financial Statements are to these banks prior to the merger.
The Consolidated Income Statements include the detail income
and expense accounts of Winters State from August 31, 1993 (the
date of acquisition), through December 31, 1995. The transfer of
certain assets and liabilities of Olton State Bank, Olton, Texas
("Olton State"), a former subsidiary bank of the Company, was
completed on January 1, 1993. See "Note 3: Sale of Subsidiary
Bank."
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and
sold for one-day periods.
Securities
Management determines the appropriate classification of
securities at the time of purchase. If the securities are
purchased with the positive intent and the ability to hold the
securities until maturity, they are classified as held-to-maturity
and carried at amortized historical cost. Securities to be held
for indefinite periods of time are classified as available-for-sale
and carried at fair value.
In May 1993, the Financial Accounting Standards Board (the
"FASB") issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). As
permitted under FAS 115, the Company elected to adopt the
provisions of the new standard as of December 31, 1993. The effect
at December 31, 1993, of adopting FAS 115 was an increase in
stockholders' equity of $206,000 (net of $105,000 in deferred
income taxes) to reflect the net unrealized holding gain on
available-for-sale securities. The effect for the year ended
December 31, 1994, was a decrease in stockholders' equity of
$306,000 (net of $154,000 in deferred income tax benefit) to
reflect the net unrealized holding loss on available-for-sale
securities at that date. The effect for the year ended December
31, 1995, was an increase in stockholders' equity of $168,000 (net
of $86,000 in deferred income taxes) to reflect the net unrealized
holding gain on available-for-sale securities at that date.
15
<PAGE>
Loans
Loans are stated at the principal amount outstanding.
Interest on the various types of commercial loans is accrued daily
based on the principal balances outstanding. Income on installment
loans is recognized using the interest method or other methods
under which income approximates the interest method.
The recognition of income on a loan is discontinued, and
previously accrued interest is reversed, when interest or principal
payments become ninety (90) days past due unless, in the opinion of
management, the outstanding interest remains collectible. Interest
is subsequently recognized only as received until the loan is
returned to accrual status.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a
level that, in management's opinion, is adequate to absorb possible
losses in the loan portfolio. The allowance is based on a number
of factors, including risk ratings of individual credits, current
business and economic conditions, the size and diversity of the
portfolio, collateral values and past loan loss experience.
In June 1993, the FASB issued Statement No. 114, "Accounting
by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114
requires that impaired loans (including certain nonaccrual loans
and troubled debt restructurings) be measured at the present value
of expected cash flows discounted at the loan's effective interest
rate, or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. The Company adopted FAS 114 on January 1, 1995.
At December 31, 1995, the Company had a total of $100,000 in
impaired loans. There was a related allowance for possible loan
losses of $25,000 recorded for such loans. Impaired loans are
normally placed on nonaccrual status and, as a result, interest
income is recorded only as cash is received. The average balance
of impaired loans during the year ended December 31, 1995, was
approximately $125,000. There was no interest income recognized on
such loans during the year ended December 31, 1995.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation for financial reporting purposes is
computed primarily on the straight-line method over the estimated
useful lives of five (5) to forty (40) years.
Federal Income Taxes
In February 1992, the FASB issued Statement No. 109,
"Accounting for Income Taxes" ("FAS 109"), which required companies
to adopt the liability method for computing income taxes no later
than 1993. In applying the new method in 1993, the Company
established a gross deferred tax asset of $3,190,000, a portion of
which relates to federal tax net operating loss carryforwards and
deductible temporary differences arising prior to the Company's
quasi-reorganization as of December 31, 1989. FAS 109 requires
that consideration be given to establishing a valuation allowance
against such deferred tax assets. The Company established a
valuation allowance of $2,290,000, resulting in a net deferred tax
asset of $900,000. As a result of the quasi-reorganization,
approximately $700,000 of the cumulative effect of the change in
accounting method was credited directly to additional paid-in
capital and $200,000 was credited to income during 1993 as a
cumulative effect of an accounting change. As a result of the
acquisition of Winters State, the Company increased its gross
deferred tax asset and the related valuation allowance by
approximately $972,000 during 1993. This gross deferred tax asset
arose mainly due to net operating loss carryforwards and other
future deductible temporary differences. As a result of the
utilization of a portion of its net operating loss carryforwards,
the Company reduced its gross deferred tax asset and the related
valuation allowance by $222,000 and $493,000 during the years ended
December 31, 1994 and 1993, respectively. During 1995, the Company
reduced its gross deferred tax asset by $547,000 as of a result of
the utilization of a portion of its net operating loss
carryforwards. The Company also reduced the valuation allowance
during 1995 by $1,600,000 and transferred such amount to additional
paid-in-capital due to the Company's belief, based on the Company's
recent earnings history, that it is more likely than not that
sufficient pre-tax income will be generated in the foreseeable
future to realize its net deferred tax asset. Additionally, the
Company reduced its gross deferred tax asset and related valuation
allowance by $708,000 as a result of the write-off of a portion of
the
16
<PAGE>
deferred tax asset related to the Winters State net operating loss
carryforwards which will not be utilized. The Company may reduce
or increase its valuation allowance depending on changes in the
expectation of future earnings and other circumstances.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets consist principally
of real estate properties acquired by the Company through
foreclosure. Such assets are carried at the lower of cost
(generally the outstanding loan balance) or estimated fair value,
net of estimated costs of disposal, if any. If the estimated fair
value of the collateral securing the loan is less than the amount
outstanding on the loan at the time the assets are acquired, the
difference is charged against the allowance for possible loan
losses. Subsequent declines in estimated fair value, if any, are
charged to noninterest expense.
Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures About Fair Value of
Financial Instruments" ("FAS 107"), requires disclosure of fair
value information about financial instruments, whether or not
recognized in the Consolidated Balance Sheet, for which it is
practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. FAS 107
excludes all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain 1994 and 1993 amounts have been reclassified to
conform with the consolidated financial presentation adopted in
1995 and 1994, respectively.
NOTE 2: QUASI-REORGANIZATION
In connection with the restructuring of its indebtedness to a
financial institution in Dallas, Texas (the "Dallas Bank"), the
Company effected a quasi-reorganization as of December 31, 1989.
A quasi-reorganization is an elective accounting procedure under
Generally Accepted Accounting Principles ("GAAP") in which assets
and liabilities of the Company were restated to fair value and the
Company's accumulated deficit was reduced to zero. Under GAAP,
utilization of any of the Company's net operating loss
carryforwards subsequent to the quasi-reorganization date will not
be credited to future income. For periods prior to January 1,
1995, the tax effect of the utilization of the Company's net
operating loss carryforwards was credited directly to additional
paid-in capital. For periods subsequent to December 31, 1994, the
effect of such utilization has been and will be credited against
the Company's gross deferred tax asset. The tax effect of
utilization of these net operating losses in 1995, 1994 and 1993
totaled $547,000, $222,000 and $493,000, respectively.
NOTE 3: SALE OF SUBSIDIARY BANK
The Company entered into a letter of intent to transfer the
deposits, premises and equipment and certain loans of Olton State
during the second quarter of 1992. The various regulatory
approvals necessary to complete the transfer were received during
the third and fourth quarters of 1992. The transfer of the various
assets and liabilities of Olton State was completed on January 1,
1993, and the Company recognized a gain of $286,000, which is
included in noninterest income for the year ended December 31,
1993.
17
<PAGE>
In connection with and immediately prior to the transfer of
certain assets and liabilities of Olton State, that bank was merged
with and into First National, on January 1, 1993, in a transaction
accounted for in a manner similar to a pooling of interests. As a
result of the merger, the additional paid-in capital of First
National was increased by the amount of the net equity of Olton
State, or $1,854,000. Subsequent to the merger, First National
received regulatory approval to reduce its additional paid-in
capital by $1,500,000 through a capital distribution to the Company
and a total of $1,487,000 of the distribution was used by the
Company to make principal reductions on its note payable to a
financial institution in Amarillo, Texas (the "Amarillo Bank"),
during March and April of 1993.
NOTE 4: ACQUISITION OF SUBSIDIARY BANK
In the second quarter of 1990, the Banks foreclosed on the
stock of Winters State that collateralized a loan and, as a result,
the Banks became beneficial owners of an aggregate of 28.2% of the
outstanding stock of Winters State. During the third quarter of
1993, the Company acquired the aggregate 28.2% interest in Winters
State from the Banks and agreed with Winters State to purchase the
Company's pro rata share of a $450,000 new stock offering conducted
by Winters State or to purchase the entire offering if none of the
other Winters State stockholders elected to participate in the
offering. None of the other stockholders elected to participate in
the offering, and, upon regulatory approval, the Company purchased
the entire offering for cash consideration of $450,000. As a
result of its purchase in the offering, the Company acquired
control and increased its ownership of Winters State from 28.2% to
94.3%. The Company's equity in the net book value of Winters State
was $1,077,000 at August 31, 1993, the date of acquisition. The
acquisition was accounted for under the purchase method of
accounting and the assets and liabilities of Winters State were
recorded at their estimated fair value. At August 31, 1993,
Winters State had $16,316,000 in total assets, $7,453,000 in total
loans, net of unearned income, $15,079,000 in total deposits and
stockholders' equity of $1,142,000.
In December 1993, the Company purchased an additional interest
in Winters State from one of the remaining minority stockholders.
The purchase increased the Company's ownership of Winters State to
94.9%. On October 31, 1994, the Company purchased the remaining
minority interest in Winters State.
To fund the original stock purchase the Company obtained a
$450,000 loan from the Amarillo Bank, which was paid off during
1995.
The operations of Winters State from August 31, 1993, through
December 31, 1993, are included in the Consolidated Income
Statement for the year ended December 31, 1993. Net interest
income of Winters State for the last four months of 1993 was
$233,000. Income before federal income taxes of Winters State for
that same period was $14,000.
NOTE 5: SECURITIES
The amortized cost and estimated fair value of available-for-
sale securities at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $16,042,000 $101,000 $0 $16,143,000
Mortgage-backed securities 158,000 2,000 0 160,000
Other securities 443,000 0 0 443,000
----------- -------- -- -----------
Total available-for-sale securities $16,643,000 $103,000 $0 $16,746,000
=========== ======== == ===========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $15,905,000 $ 6,000 $(162,000) $15,749,000
Obligations of U.S. Government agencies
and corporations 879,000 7,000 0 886,000
Other securities 443,000 0 0 443,000
----------- ------- --------- -----------
Total available-for-sale securities $17,227,000 $13,000 $(162,000) $17,078,000
=========== ======= ========= ===========
</TABLE>
The amortized cost and estimated fair value of held-to-
maturity securities at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $16,152,000 $ 98,000 $(5,000) $16,245,000
Obligations of U.S. Government agencies
and corporations 23,009,000 130,000 0 23,139,000
----------- -------- ------- -----------
Total held-to-maturity securities $39,161,000 $228,000 $(5,000) $39,384,000
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $15,692,000 $2,000 $(322,000) $15,372,000
Obligations of U.S. Government agencies
and corporations 268,000 2,000 0 270,000
Mortgage-backed securities 177,000 2,000 0 179,000
Obligations of states and political
subdivisions 90,000 2,000 0 92,000
----------- ------ --------- -----------
Total held-to-maturity securities $16,227,000 $8,000 $(322,000) $15,913,000
=========== ====== ========= ===========
</TABLE>
The amortized cost and estimated fair value of securities at
December 31, 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Available-for-sale Securities Cost Value
- ----------------------------- --------- ----------
<S> <C> <C>
Due in one year or less $ 8,046,000 $ 8,073,000
Due after one year through five years 8,001,000 8,075,000
Due after ten years 438,000 438,000
----------- -----------
16,485,000 16,586,000
Mortgage-backed securities 158,000 160,000
----------- -----------
Total available-for-sale securities $16,643,000 $16,746,000
=========== ===========
Estimated
Amortized Fair
Held-to-maturity Securities Cost Value
- --------------------------- --------- ---------
Due in one year or less $ 8,240,000 $ 8,247,000
Due after one year through five years 30,921,000 31,137,000
----------- -----------
Total held-to-maturity securities $39,161,000 $39,384,000
=========== ===========
</TABLE>
19
<PAGE>
At December 31, 1995, securities with an amortized cost and
estimated fair value of $6,423,000 and $6,482,000, respectively,
were pledged as collateral for public and trust fund deposits and
for other purposes required or permitted by law. At December 31,
1994, the amortized cost and estimated fair value of pledged
securities were $5,332,000 and $5,219,000, respectively.
During 1995, a transfer was made from held-to-maturity
securities to available-for-sale securities in accordance with the
Financial Accounting Standards Board's "Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The amortized cost of
the securities transferred totaled $158,000 and the unrealized gain
of $2,000 was included as a separate component of stockholders'
equity.
NOTE 6: LOANS
The composition of loans at December 31, 1995 and 1994, was as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loans to Individuals $39,868,000 $43,113,000
Real estate loans 23,265,000 22,760,000
Commercial and industrial loans 19,510,000 16,702,000
Other loans 2,638,000 2,943,000
----------- -----------
Total loans 85,281,000 85,518,000
Less unearned income 3,354,000 4,212,000
----------- -----------
Total loans, net of unearned income $81,927,000 $81,306,000
=========== ===========
</TABLE>
An analysis of nonperforming assets at December 31, 1995, 1994
and 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $204,000 $ 48,000 $1,646,000
Accruing loans past due over ninety days 23,000 26,000 293,000
Restructured loans 65,000 80,000 195,000
Real estate and other repossessed assets 337,000 631,000 803,000
-------- -------- ----------
Total nonperforming assets $629,000 $785,000 $2,937,000
======== ======== ==========
</TABLE>
The amount of interest income that would have been recorded on
nonaccrual loans for the years ended December 31, 1995, 1994 and
1993, based on the loans' original terms was $14,000, $26,000 and
$117,000, respectively. No interest was collected on such loans
and recorded as income during 1995. A total of $38,000 and $70,000
in interest on nonaccrual loans was actually collected and recorded
as income during the years ended December 31, 1994 and 1993,
respectively.
Real estate and other repossessed assets at December 31, 1994,
included $125,000 of assets classified as in-substance
repossessions.
A summary of the transactions in the allowance for possible
loan losses for the years ended December 31, 1995, 1994 and 1993,
is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $817,000 $896,000 $617,000
Provision for loan losses 206,000 147,000 154,000
Loans charged off (376,000) (378,000) (241,000)
Recoveries of loans charged off 112,000 152,000 133,000
Acquisition of subsidiary 0 0 233,000
-------- -------- --------
Balance at end of year $759,000 $817,000 $896,000
======== ======== ========
</TABLE>
20
<PAGE>
NOTE 7: PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 707,000 $ 707,000
Buildings and improvements 4,100,000 4,092,000
Furniture and equipment 1,285,000 1,332,000
---------- ----------
6,092,000 6,131,000
Less accumulated depreciation 1,937,000 1,786,000
---------- ----------
Net premises and equipment $4,155,000 $4,345,000
========== ==========
</TABLE>
NOTE 8: DEPOSITS
At December 31, 1995 and 1994, interest-bearing time deposits
of $100,000 or more were $23,808,000 and $14,588,000, respectively.
NOTE 9: NOTES PAYABLE
The Company had two notes payable to the Amarillo Bank during
1995. The term note (the "Term Note") had an outstanding principal
balance of $498,000 at December 31, 1995. The Term Note has a
maturity of April 15, 1996, and equal principal payments based on
a seven-year amortization, plus accrued interest, are due quarterly
on January 15, April 15, July 15 and October 15. The Term Note
bears interest at the Amarillo Bank's floating base rate plus 1%
(9.5% at December 31, 1995). The Term Note is collateralized by
100% of the stock of First State, N.A., Abilene, and First State,
N.A., Odessa. The second note, the proceeds from which were used
for the acquisition of Winters State (the "Acquisition Note"), had
an original principal balance of $450,000 and matured on August 30,
1994. The Company paid the Amarillo Bank $150,000 to reduce the
outstanding balance of the Acquisition Note to $300,000 and the
maturity date was extended to August 30, 1997. The Acquisition
Note was paid off during the fourth quarter of 1995. The loan
agreement between the Company and the Amarillo Bank contains
certain covenants that, among other things, restrict the ability of
the Company to incur additional debt, to create liens on its
property, to merge or to consolidate with any other person or
entity, to make certain investments, to purchase or sell assets or
to pay cash dividends on the common stock without the approval of
the Amarillo Bank if the indebtedness due to the Amarillo Bank is
$1,000,000 or greater. The loan agreement also requires the
Company and the Banks to meet certain financial ratios, all of
which were met at December 31, 1995 and 1994.
In addition, at December 31, 1995, the Company had notes
payable to one current and two former directors of the Company
aggregating $334,000. The notes have a face amount of $350,000 but
were discounted upon issuance because they bear interest at a
below-market interest rate (6%). The notes are payable in three
equal annual installments, plus accrued interest, beginning
March 1, 1996. The notes represent a portion of the final
settlement of certain litigation. See "Note 15: Commitments and
Contingent Liabilities."
First State, N.A., Abilene has a $17,000 note payable to an
individual which matures in March 1999. Principal and interest at
7.5% are payable monthly. The note is collateralized by a two-
story commercial building in Abilene, Texas.
NOTE 10: FEDERAL INCOME TAXES
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the
liability method as required by FAS 109. As permitted under FAS
109, prior years' financial statements have not been restated.
Deferred income taxes reflect the net effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes.
21
<PAGE>
Significant components of the Company's deferred tax assets
and liabilities at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $1,655,000 $2,584,000
Allowance for possible loan losses 225,000 220,000
Tax credit carryforwards 142,000 0
Director indemnification 119,000 306,000
Real estate and other repossessed assets 82,000 252,000
Unrealized loss on available-for-sale securities 0 49,000
Depreciation and amortization 0 3,000
Other, net 8,000 89,000
---------- ----------
Total gross deferred tax assets 2,231,000 3,503,000
Less valuation allowance for deferred tax assets (227,000) (2,547,000)
---------- ----------
Net deferred tax assets 2,004,000 956,000
---------- ----------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities (37,000) 0
Depreciation and amortization (30,000) 0
---------- ----------
Total gross deferred tax liabilities (67,000) 0
---------- ----------
Net deferred tax asset $1,937,000 $ 956,000
========== ==========
</TABLE>
At December 31, 1995, the Company had available net operating
loss carryforwards and tax credit carryforwards to reduce future
federal income taxes. These carryforwards expire approximately as
follows:
<TABLE>
<CAPTION>
Net
Operating
Losses Tax Credits
--------- -----------
<S> <C> <C>
1996-2000 $ 0 $ 39,000
2001-2005 1,490,000 0
2006-2010 165,000 0
No expiration 0 103,000
---------- --------
Total carryforwards $1,655,000 $142,000
========== ========
</TABLE>
Included in the $1,655,000 of net operating loss carryforwards
is approximately $447,000 acquired as part of the Winters State
acquisition. For federal income tax purposes, due to certain
change of ownership requirements of the Internal Revenue Code,
utilization of the Winters State net operating loss carryforwards
is limited to approximately $40,000 per year. If the full amount
of that limitation is not used in any year, the amount not used
increases the allowable limit in the subsequent year. These net
operating loss carryforwards, if not used, expire between 2003 and
2008.
The comprehensive provisions for federal income taxes for the
years ended December 31, 1995, 1994 and 1993, consist of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current tax provision $ 35,000 $ 5,000 $ 31,000
Deferred tax provision 547,000 222,000 493,000
-------- -------- --------
Provision for tax expense charged to
results of operations 582,000 227,000 524,000
Tax on unrealized gain(loss) on
available-for-sale securities 86,000 (154,000) 105,000
-------- -------- --------
Comprehensive provision for
federal income taxes $668,000 $ 73,000 $629,000
======== ======== ========
</TABLE>
NOTE 11: STOCKHOLDERS' EQUITY
In December 1992, the Company's board of directors approved
the granting of nonqualified stock options for certain officers of
the Company under which an original aggregate of 14,000 shares of
Common Stock, adjusted for the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders
22
<PAGE>
in May 1995, could be issued. These options were exercisable at
any time during the period January 1, 1993, to December 31, 1995,
at a price of $3.75 per share, adjusted for the 5% stock dividend
paid to stockholders in May 1993 and the 33-1/3% stock dividend
paid to stockholders in May 1995. During the years ended December
31, 1993, 1994 and 1995, after adjustments for the two stock
dividends noted above, options for 771, 428 and 9,037 shares,
respectively, were exercised and options for 1,471, 1,261 and 1,032
shares, respectively, expired.
In December 1993, the Company's board of directors approved
the granting of nonqualified stock options to certain executive
officers of the Company under which an original aggregate of 14,667
shares of Common Stock, adjusted for the 33-1/3% stock dividend
paid to stockholders in May 1995, may be issued. Options are
exercisable at any time during the period January 1, 1994, to
December 31, 1997, at a price of $6.75 per share, adjusted for the
33-1/3% stock dividend paid to stockholders in May 1995. No
options were exercised or expired during the years ended December
31, 1994 and 1995.
At December 31, 1992, the Company had 2,200 shares of its
Series A Cumulative Convertible Mandatorily Redeemable Preferred
Stock (the "Series A Preferred Stock") outstanding. The Series A
Preferred Stock had a face value of $220,000, was cumulative, paid
quarterly dividends at the annual rate of $10.00 per share, was
senior to the Company's Common Stock and the Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock") with
respect to dividends and liquidation rights, was convertible into
Common Stock at a price of $6.00 per share and had certain voting
rights. On January 20, 1993, the Company repurchased the
outstanding 2,200 shares of Series A Preferred Stock ($220,000 face
value) for $173,000. The $47,000 was credited directly to
additional paid-in capital.
The Company's Series C Preferred Stock is cumulative, pays
quarterly dividends at the annual rate of $4.20 per share, is
senior to the Common Stock with respect to dividends and
liquidation rights, is convertible into Common Stock at a price of
$2.29 per share, adjusted for the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders in May 1995, and has certain voting rights if
dividends are in arrears for three quarters. A total of 232 shares
of the Series C Preferred Stock were converted into a total of
4,263 shares of Common Stock, adjusted for the 33-1/3% stock
dividend paid to stockholders in May 1995, during 1995. The Series
C Preferred Stock is redeemable in cash and/or Common Stock at the
Company's option beginning December 12, 1997, at $42.00 per share.
An additional 36,415 shares of Common Stock were issued as a
result of the 5% stock dividend paid to stockholders in May 1993.
The stock dividend was accounted for by a $9,000 transfer from
retained earnings to common stock, representing the above number of
shares at a par value of $0.25 per share. An additional 259,371
shares of Common Stock were issued as a result of the 33-1/3% stock
dividend paid to stockholders in May 1995. The stock dividend was
accounted for by a $65,000 transfer from retained earnings to
common stock, representing the above number of shares at a par
value of $0.25 per share.
The following is a summary at December 31, 1995, of the number
of shares of Common Stock reserved for issuance upon exercise or
conversion and the related exercise or conversion price per share,
adjusted for the 5% stock dividend paid to stockholders in May 1993
and the 33-1/3% stock dividend paid to stockholders in May 1995:
<TABLE>
<CAPTION>
Exercise or
Shares Conversion
Reserved for Price
Issuance Per Share
------------ -----------
<S> <C> <C>
Unexercised stock options granted to certain executive
officers of the Company 14,667 $ 6.75
Series C Preferred Stock 302,011 2.29
------- -----------
Total shares reserved for issuance and related
exercise or conversion price per share 316,678 $2.29-$6.75
======= ===========
</TABLE>
NOTE 12: EARNINGS PER SHARE
Primary earnings per common share is computed by dividing net
income available to common stockholders by the weighted average
number of shares and share equivalents outstanding during the
period. Because the Company's outstanding preferred stock is
cumulative, the dividends allocable to such preferred stock reduces
income available to common stockholders in the earnings per share
calculations. The Series A Preferred Stock and Series C Preferred
Stock issued in December 1990 were determined not to be common
stock equivalents and, therefore, are not used to calculate primary
earnings per common share. In computing fully diluted earnings per
common share for the years ended December 31, 1995, 1994 and 1993,
the conversion of the preferred stock was assumed, as the
23
<PAGE>
effect is dilutive. As noted above, the outstanding Series A
Preferred Stock was repurchased and retired by the Company in
January 1993. The following table presents information necessary
to calculate earnings per share for the years ended December 31,
1995, 1994 and 1993 (adjusted for the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders in May 1995):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Primary Earnings Per Common Share (In thousands)
- ---------------------------------
<S> <C> <C> <C>
Shares Outstanding:
Weighted average shares outstanding 1,039 1,037 1,036
Share equivalents 8 5 5
------ ------ ------
Adjusted shares outstanding 1,047 1,042 1,041
====== ====== ======
Net Income:
Net income $1,132 $ 450 $1,229
Less-preferred stock dividends 70 70 75
------ ------ ------
Net income available to common stockholders $1,062 $ 380 $1,154
====== ====== ======
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Fully Diluted Earnings Per Common Share (In thousands)
- ---------------------------------------
Shares Outstanding:
Weighted average shares outstanding 1,039 1,037 1,036
Share equivalents 8 5 5
Conversion of Series A Preferred Stock 0 0 2
Conversion of Series C Preferred Stock 305 306 306
------ ------ ------
Adjusted shares outstanding 1,352 1,348 1,349
====== ====== ======
Net Income $1,132 $ 450 $1,229
====== ====== ======
</TABLE>
NOTE 13: BENEFIT PLANS
The Company has an employee stock ownership/401(k) plan (the
"Plan") that covers most of its officers and employees. The Plan
stipulates, among other things, that vesting in employer
contributions begins after one year of service, each participant
will become fully vested in employer contributions after seven
years of service and the determination of the level of vesting
began with the original date of current employment of each
participant. Contributions made to the employee stock ownership
portion of the Plan by the Company were $72,000, $62,000 and
$66,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. These contributions were used to make distributions
to employees who left the Company's employment in the respective
years and to purchase Common Stock of the Company. No
contributions have been made by the Company to match contributions
made by plan participants to the 401(k) portion of the Plan. The
amount of all such contributions is at the discretion of the
Company's board of directors. Employee contributions are invested
in various equity, debt and money market investments, including
Common Stock of the Company. At December 31, 1995, 55,338 shares
of Common Stock and 2,918 shares of Series C Preferred Stock of the
Company were held by the Plan.
NOTE 14: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has loans,
deposits and other transactions with its senior officers and
directors and businesses with which such persons are associated.
It is the Company's policy that all such transactions are entered
into on substantially the same terms as those prevailing at the
time for comparable transactions with unrelated third parties. The
balances of loans to all such persons were $1,053,000, $1,587,000
and $1,290,000 at December 31, 1995, 1994 and 1993, respectively.
Additions and reductions on such loans were $1,254,000 and
$1,788,000, respectively, for the year ended December 31, 1995.
The Company and its subsidiaries paid $19,000, $55,000 and
$110,000 in fees to a director-related company for services
rendered on various legal matters during 1995, 1994 and 1993,
respectively.
24
<PAGE>
During the year ended December 31, 1995, the Company
reimbursed $800,000 ($450,000 in cash and $350,000 in notes
payable) to three former directors (one of whom is also a current
director of the Company) of a bank which was a repossessed asset of
a former subsidiary bank for payment of reasonable legal fees and
expenses in connection with their defense of an action brought by
the Federal Deposit Insurance Corporation (the "FDIC"). See "Note
15: Commitments and Contingent Liabilities."
During the year ended December 31, 1993, the Company
reimbursed $200,000 to twenty-two former directors of a former
subsidiary bank (six of whom are also current directors of the
Company) for payment of reasonable legal fees and expenses in
connection with their defense of an action brought by two
plaintiffs who purchased debentures previously sold by the former
subsidiary bank. The Company had accrued and expensed such
reimbursement during the year ended December 31, 1991.
NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES
In 1985, a former subsidiary bank of the Company foreclosed on
the stock of Texas Bank & Trust Company, Sweetwater, Texas ("TB&T-
Sweetwater"), which became a repossessed asset of the former
subsidiary. TB&T-Sweetwater subsequently failed, resulting in a
legal action being brought in federal court against the thirteen
TB&T-Sweetwater directors by the FDIC. In September 1993, nine
former outside directors of TB&T-Sweetwater (the "Outside
Directors") settled with the FDIC for an aggregate of $60,000. All
former directors of TB&T-Sweetwater requested that the Company
reimburse them for their expenses and settlement costs incurred by
them in their defense of the FDIC litigation. This request was
based on their interpretation of certain indemnification provisions
contained in the Company's Articles of Incorporation.
In January 1994, the Company filed a declaratory judgment
action in state district court to petition the court to rule on
certain matters that would have precluded indemnification. Certain
of the directors filed counterclaims against the Company asserting
their right to be indemnified. A hearing occurred in July 1994,
and the court issued an order in September 1994, denying the
Company's petition and upholding the directors' counterclaims.
In December 1994, a settlement was entered into between the
FDIC, one Outside Director and the three management directors of
TB&T-Sweetwater, who were also management directors of the Company
(the "Inside Directors"), with the Inside Directors paying the FDIC
a total of $450,000. As a result of the two settlements and
indemnification requests, the Outside Directors claimed
indemnification in the amount of approximately $467,000 and the
Inside Directors claimed indemnification in the amount of
approximately $900,000. In 1994, the Company accrued $900,000 for
the potential reimbursement of the $1,367,000 in claims.
On March 7, 1995, the Company agreed to settle the
indemnification requests of the Inside Directors for $450,000 in
cash and by delivery of three promissory notes in the aggregate
principal amount of $350,000. These notes are payable in three
equal annual installments beginning March 1, 1996, and bear
interest at 6% per annum. As a result of the below-market interest
rate, the notes were originally discounted to an aggregate of
$323,000. In April and May 1995, the Company consummated this
settlement with the Inside Directors by paying them an aggregate of
$450,000 and delivering such promissory notes to them. In May and
June 1995, the Company settled with the Outside Directors by paying
them a aggregate of $252,000 in cash.
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 condition.
The Banks lease certain of their premises and equipment under
noncancellable operating leases. Rental expense under such
operating leases was approximately $290,000, $235,000 and $142,000
in 1995, 1994 and 1993, respectively.
The minimum payments due under these leases at December 31,
1995, are as follows:
<TABLE>
<S> <C>
1996 $298,000
1997 232,000
1998 87,000
1999 39,000
2000 39,000
2001-2003 61,000
--------
Total $756,000
========
</TABLE>
25
<PAGE>
NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial assets and
financial liabilities at December 31, 1995 and 1994, were as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial Assets
----------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 8,559,000 $ 8,559,000 $ 7,564,000 $ 7,564,000
Federal funds sold 26,200,000 26,200,000 31,200,000 31,200,000
Available-for-sale securities 16,746,000 16,746,000 17,078,000 17,078,000
Held-to-maturity securities 39,161,000 39,384,000 16,227,000 15,913,000
Loans, net of unearned income 81,927,000 83,857,000 81,306,000 80,761,000
Accrued interest receivable 1,494,000 1,494,000 945,000 945,000
Financial Liabilities
---------------------
Noninterest-bearing demand deposits $33,267,000 $33,267,000 $30,210,000 $30,210,000
Interest-bearing demand deposits 52,430,000 52,430,000 56,520,000 56,520,000
Interest-bearing time deposits 79,007,000 79,475,000 59,454,000 59,473,000
Notes payable 849,000 849,000 930,000 930,000
Accrued interest payable 882,000 882,000 408,000 408,000
</TABLE>
Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on
carrying values. The fair values of other loans are estimated
using discounted cash flow analyses, which utilize interest rates
currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair values of noninterest and interest-bearing demand
deposits are, by definition, equal to the amount payable on demand,
i.e., their carrying amount. The fair values of interest-bearing
time deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates of similar maturities.
The carrying amounts for cash and due from banks, federal
funds sold, accrued interest receivable, notes payable and accrued
interest payable approximate the fair values of such assets and
liabilities.
Fair values for the Company's off-balance-sheet instruments,
which consist of lending commitments and standby letters of credit,
are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. Management
believes that the fair value of these off-balance-sheet instruments
is not materially different from the commitment amount.
NOTE 17: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-
balance-sheet risk entered into in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters
of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the accompanying financial statements. The
contractual amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit and
financial guarantees is represented by the contractual amount of
those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-
balance-sheet instruments. Unless noted otherwise, the Company
does not require collateral or other security to support financial
instruments with credit risk. The Company had outstanding loan
commitments of approximately $6,162,000 and $4,715,000 and
outstanding standby letters of credit and financial guarantees of
approximately $178,000 and $152,000 at December 31, 1995 and 1994,
respectively.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination
26
<PAGE>
clauses and may require payment of a fee. Because many of the
commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate, accounts
receivable, inventory, property, plant and equipment and income-
producing commercial properties.
Standby letters of credit and financial guarantees are
conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing standby letters
of credit is essentially the same as that involved in making loans
to customers.
The Company does not expect any material losses as a result of
loan commitments, standby letters of credit and financial
guarantees that were outstanding at December 31, 1995.
In the normal course of business, the Company maintains
deposits with other financial institutions in amounts which exceed
FDIC insurance coverage limits.
NOTE 18: REGULATORY MATTERS
At December 31, 1995, retained earnings of subsidiaries
included approximately $1,208,000 that was available for payment of
dividends to the Company without prior approval of regulatory
authorities.
NOTE 19: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of the Company, parent only,
are presented below:
INDEPENDENT BANKSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets:
Cash $ 191,000 $ 241,000
Investment in subsidiaries 12,908,000 12,065,000
Premises and equipment 4,000 6,000
Other assets 1,577,000 427,000
----------- -----------
Total assets $14,680,000 $12,739,000
=========== ===========
Liabilities:
Notes payable $ 832,000 $ 909,000
Accrued interest payable and other liabilities 30,000 757,000
----------- -----------
Total liabilities 862,000 1,666,000
Stockholders' equity 13,818,000 11,073,000
----------- -----------
Total liabilities and stockholders' equity $14,680,000 $12,739,000
=========== ===========
</TABLE>
27
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends from subsidiaries (see Note 18) $ 905,000 $ 450,000 $ 510,000
Management fees from subsidiaries 177,000 158,000 164,000
Interest from subsidiaries 2,000 2,000 2,000
Other income 0 0 77,000
---------- ---------- ----------
Total income 1,084,000 610,000 753,000
---------- ---------- ----------
Expenses:
Interest 107,000 86,000 102,000
Other expenses 756,000 1,381,000 524,000
---------- ---------- ----------
Total expenses 863,000 1,467,000 626,000
---------- ---------- ----------
Income (loss) before federal income taxes, equity in
undistributed earnings of subsidiaries, and cumulative
effect of accounting change 221,000 (857,000) 127,000
Federal income tax benefit (236,000) (490,000) (76,000)
---------- ---------- ----------
Income (loss) before equity in undistributed earnings
of subsidiaries and cumulative effect of accounting change 457,000 (367,000) 51,000
Equity in undistributed earnings of subsidiaries 675,000 817,000 978,000
---------- ---------- ----------
Income before cumulative effect of accounting change 1,132,000 450,000 1,029,000
Cumulative effect of change in accounting for income
taxes 0 0 200,000
---------- ---------- ----------
Net income $1,132,000 $ 450,000 $1,229,000
========== ========== ==========
</TABLE>
28
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,132,000 $450,000 $1,229,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
for income taxes 0 0 (200,000)
Deferred federal income tax expense 547,000 222,000 493,000
Depreciation and amortization 2,000 1,000 2,000
Equity in undistributed earnings of subsidiaries (675,000) (817,000) (978,000)
Gain on sale of subsidiary 0 0 (75,000)
Decrease (increase) in other assets (97,000) 4,000 25,000
Increase (decrease) in accrued interest payable
and other liabilities (390,000) 681,000 (134,000)
---------- -------- ----------
Net cash provided by operating activities 519,000 541,000 362,000
---------- -------- ----------
Cash flows from investing activities:
Proceeds from sale of premises and equipment 0 0 1,000
Proceeds from sale of subsidiary 0 0 75,000
Acquisition of subsidiary 0 0 (650,000)
Capital distribution from subsidiary 0 0 1,500,000
---------- -------- ----------
Net cash provided by investing activities 0 0 926,000
---------- -------- ----------
Cash flows from financing activities:
Proceeds from notes payable 275,000 0 450,000
Repayment of notes payable (687,000) (261,000) (1,542,000)
Net proceeds from issuance of equity securities 34,000 2,000 10,000
Cash paid for fractional shares in stock dividend (4,000) 0 (4,000)
Repurchase of Series A Preferred Stock 0 0 (173,000)
Payment of cash dividends (187,000) (140,000) (75,000)
---------- -------- ----------
Net cash used in financing activities (569,000) (399,000) (1,334,000)
---------- -------- ----------
Net increase (decrease) in cash and cash equivalents (50,000) 142,000 (46,000)
Cash and cash equivalents at beginning of year 241,000 99,000 145,000
---------- -------- ----------
Cash and cash equivalents at end of year $ 191,000 $241,000 $ 99,000
========== ======== ==========
</TABLE>
NOTE 20: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended
December 31, 1995, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $4,835,000 $3,337,000 $3,215,000
Federal income taxes 15,000 17,000 38,000
Noncash investing activities:
Additions to real estate and other repossessed assets
during the year through foreclosures 1,039,000 424,000 457,000
Sales of real estate and other repossessed assets
financed with loans 196,000 335,000 202,000
Transfer of real estate and other repossessed assets
to loans 125,000 0 0
Increase (decrease) in unrealized gain/loss on
available-for-sale securities, net of tax 168,000 (306,000) 206,000
Other liabilities replaced with notes payable 334,000 0 0
</TABLE>
NOTE 21: SUBSEQUENT EVENT
First State, N.A., Abilene completed the acquisition of
Peoples National Bank in Winters, Texas ("Peoples National")
effective January 1, 1996. At December 31, 1995, Peoples National
had total assets of $5,505,000, total
29
<PAGE>
loans, net of unearned income, of $2,767,000, total deposits of
$4,958,000 and stockholders' equity of $525,000. These amounts are
not included in the Consolidated Balance Sheet for the Company at
December 31, 1995.
QUARTERLY DATA (UNAUDITED)
The following table presents the unaudited results of
operations for the past two years by quarter. See "Note 12:
Earnings Per Share" in the Company's Consolidated Financial
Statements.
<TABLE>
<CAPTION>
1995
----
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income $2,811 $2,971 $3,049 $3,131 $11,962
Interest expense 1,128 1,331 1,401 1,449 5,309
Net interest income 1,683 1,640 1,648 1,682 6,653
Provision for loan losses 42 30 69 65 206
Income before federal income taxes 502 277 479 456 1,714
Net income 332 182 317 301 1,132
Primary earnings per common share
available to common stockholders:
Income before federal income taxes $ 0.46 $ 0.25 $ 0.44 $ 0.42 $ 1.57
Net income 0.30 0.16 0.29 0.27 1.02
Fully diluted earnings per common share
available to common stockholders:
Income before federal income taxes $ 0.37 $ 0.20 $ 0.36 $ 0.34 $ 1.27
Net income 0.25 0.14 0.23 0.22 0.84
1994
----
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands, except per share amounts)
Interest income $2,471 $2,491 $2,506 $2,663 $10,131
Interest expense 791 821 875 965 3,452
Net interest income 1,680 1,670 1,631 1,698 6,679
Provision for loan losses 21 31 40 55 147
Income (loss) before federal income taxes 324 397 119 (163) 677
Net income (loss) 215 262 79 (106) 450
Primary earnings per common share
available to common stockholders:
Income (loss) before federal income taxes $ 0.29 $ 0.36 $ 0.10 $(0.17) $ 0.58
Net income (loss) 0.19 0.23 0.06 (0.12) 0.36
Fully diluted earnings per common share
available to common stockholders:
Income (loss) before federal income taxes $ 0.24 $ 0.29 $ 0.09 $(0.12) $ 0.50
Net income (loss) 0.16 0.19 0.06 (0.12) 0.33
</TABLE>
The above unaudited financial information reflects all
adjustments that are, in the opinion of management, necessary to
present a fair statement of the results of operations for the
interim periods presented.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected consolidated financial
information for the last five years. Such financial information
has been restated to reflect the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders in May 1995. See "Note 1: Summary of Significant
Accounting Policies-Principles of Consolidation," "Note 2: Quasi-
reorganization," "Note 3: Sale of Subsidiary Bank," "Note 4:
Acquisition of Subsidiary Bank," "Note 9: Notes Payable" and "Note
12: Earnings Per Share" in the Company's Consolidated Financial
Statements for other significant changes in financial statement
items.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance sheet information:
Assets $180,344 $159,860 $160,712 $160,554 $149,052
Loans, net of unearned income 81,927 81,306 69,647 52,967 52,545
Deposits 164,704 146,184 147,785 134,679 137,535
Notes payable 849 930 1,194 2,290 2,610
Stockholders' equity 13,818 11,073 10,845 8,238 6,380
Income statement information:
Total interest income $ 11,962 $ 10,131 $ 9,221 $ 9,715 $ 11,438
Net interest income 6,653 6,679 6,045 5,639 5,188
Income before extraordinary item and
cumulative effect of accounting change 1,132 450 1,029 839 224
Extraordinary item 0 0 0 192 0
Cumulative effect of accounting change 0 0 200 0 0
Net income 1,132 450 1,229 1,031 224
Primary earnings per common share
available to common stockholders:
Income before extraordinary item and
cumulative effective of accounting change $ 1.02 $ 0.36 $ 0.92 $ 0.72 $ 0.13
Extraordinary item 0.00 0.00 0.00 0.19 0.00
Cumulative effect of accounting change 0.00 0.00 0.19 0.00 0.00
-------- -------- -------- -------- --------
Net income $ 1.02 $ 0.36 $ 1.11 $ 0.91 $ 0.13
======== ======== ======== ======== ========
Fully diluted earnings per common share
available to common stockholders:
Income before extraordinary item and
cumulative effect of accounting change $ 0.84 $ 0.33 $ 0.76 $ 0.60 $ 0.13
Extraordinary item 0.00 0.00 0.00 0.14 0.00
Cumulative effect of accounting change 0.00 0.00 0.15 0.00 0.00
-------- -------- -------- -------- --------
Net income $ 0.84 $ 0.33 $ 0.91 $ 0.74 $ 0.13
======== ======== ======== ======== ========
Cash dividends per common share $ 0.11 $ 0.07 $ 0.00 $ 0.00 $ 0.00
======== ======== ======== ======== ========
</TABLE>
31
<PAGE>
MARKET INFORMATION
Since September 12, 1995, the Company's Common Stock has
traded on the American Stock Exchange (the "AMEX") under the symbol
"IBK." Prior to September 12, 1995, the Common Stock traded on the
Nasdaq Small-Cap Market.
The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock as quoted on the
AMEX and Nasdaq Small-Cap Market and the amount of cash dividends
paid per share, adjusted for the 33-1/3% stock dividend paid to
stockholders in May 1995.
<TABLE>
<CAPTION>
Cash
Dividends
High Low Per Share
----- --- ---------
<S> <C> <C> <C>
1994
----
First Quarter $ 6-3/4 $6 $ 0
Second Quarter 7-1/8 6-1/8 0.0225
Third Quarter 7-1/8 6-3/8 0.0225
Fourth Quarter 6-3/4 5-3/4 0.0225
1995
----
First Quarter 6 5-1/4 0.0225
Second Quarter 7-1/2 5-1/4 0.03
Third Quarter 11-1/4 7-1/4 0.03
Fourth Quarter 10-7/8 10-1/4 0.03
1996
----
First Quarter (through March 15, 1996) 10-1/2 9-3/4 0.03
</TABLE>
The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
According to the records of the Company's transfer agent,
there were 1,268 stockholders of record at December 31, 1995.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
Independent Bankshares, Inc. (the "Company") is a multi-bank
holding company that, at December 31, 1995, owned 100% of
Independent Financial Corp. ("Independent Financial") which, in
turn, owned 100% of First State Bank, National Association,
Abilene, Texas ("First State, N.A., Abilene") and First State Bank,
National Association, Odessa, Texas ("First State, N.A., Odessa")
(collectively, the "Banks"). First State, N.A., Abilene has two
branches in Abilene, one in Stamford, Texas, and one in Winters,
Texas, and First State, N.A., Odessa has two branches in Odessa.
First State, N.A., Abilene, acquired Peoples National Bank,
Winters, Texas ("Peoples National") effective January 1, 1996. The
existing location of Peoples National has subsequently been closed
and merged with and into First State, N.A., Abilene's existing
branch facility in Winters.
General
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
December 31, 1995 and 1994, and results of operations for each of
the three years in the period ended December 31, 1995, after
accounting for the sale and acquisition of the subsidiary banks
noted below and after giving effect to the quasi-reorganization of
the Company effective December 31, 1989. This discussion and
analysis should be read in conjunction with the Company's
Consolidated Financial Statements, notes thereto and other
financial information appearing elsewhere in this annual report.
Acquisition of Subsidiary Bank
During the third quarter of 1993, as a result of its purchase
of $450,000 of stock, the Company acquired control and increased
its ownership of Winters State Bank, Winters, Texas ("Winters
State") from 28.2% to 94.3%. The acquisition was accounted for
under the purchase method of accounting, and the assets and
liabilities of Winters State were recorded at their estimated fair
value. To fund the original stock purchase, the Company obtained
a $450,000 loan from a financial institution in Amarillo, Texas
(the "Amarillo Bank"), which was paid off during 1995. Subsequent
to the date of acquisition, the Company purchased the remaining
minority interests in Winters State.
The operations of Winters State from August 31, 1993 through
December 31, 1993, are included in the Company's Consolidated
Income Statement for the year ended December 31, 1993. Net
interest income of Winters State for the last four months of 1993
was $233,000. Income before federal income taxes of Winters State
for that same period was $14,000. At August 31, 1993, the date of
acquisition, Winters State had $16,316,000 in total assets,
$7,453,000 in total loans, net of unearned income, $15,079,000 in
total deposits and stockholders' equity of $1,142,000.
Results of Operations
General
Net income for the year ended December 31, 1995, amounted to
$1,132,000 ($1.02 primary earnings per common share) compared to
net income of $450,000 ($0.36 primary earnings per common share)
for the year ended December 31, 1994, and net income of $1,229,000
($1.11 primary earnings per common share) for the year ended
December 31, 1993. The results of operations for 1995 included
legal and settlement expenses of $205,000 ($135,000, net of tax),
or $0.13 primary earnings per common share, incurred as a result of
the final settlement of certain litigation. The results of
operations for 1994 were negatively impacted by the accrual of
$900,000 ($594,000, net of tax), or $0.57 primary earnings per
common share, for the reimbursement of certain legal fees,
33
<PAGE>
expenses and settlement costs in connection with the same
litigation. See "Note 15: Commitments and Contingent Liabilities"
to the Company's Consolidated Financial Statements. The results of
operations for 1993 included a $286,000 ($189,000, net of tax)
gain, or $0.18 primary earnings per common share, recognized on the
transfer of the deposits, premises and equipment and certain loans
of a former subsidiary of the Company, Olton State Bank, Olton,
Texas ("Olton State") on January 1, 1993.
The results for 1993 also included income of $200,000, or
$0.19 primary earnings per common share, from the cumulative effect
of a change in accounting for income taxes as a result of the
Company's adoption of Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" ("FAS 109"), effective
January 1, 1993. FAS 109 permits the recognition of deferred tax
assets to a greater extent than previously permitted and requires
companies to adopt the liability method for computing income taxes.
In adopting FAS 109, the Company established a gross deferred tax
asset of $3,190,000, a portion of which related to the Company's
federal tax net operating loss carryforwards and deductible
temporary differences arising prior to the Company's quasi-
reorganization as of December 31, 1989. FAS 109 requires that
consideration be given to establishing a valuation allowance
against such deferred tax assets. The Company established a
valuation allowance of $2,290,000, resulting in a net deferred tax
asset of $900,000. As a result of the quasi-reorganization,
approximately $700,000 of the cumulative effect of the change in
accounting method was credited directly to additional paid-in
capital and $200,000 was credited to income during 1993 as a
cumulative effect of an accounting change.
Two industry measures of the performance by a banking
institution are its return on average assets and return on average
stockholders' equity. Return on average assets ("ROA") measures
net income in relation to average total assets and indicates a
company's ability to employ its resources profitably. During 1995,
the Company's ROA was 0.67%, compared to 0.28% for 1994 and 0.81%
for 1993. Excluding the unusual and extraordinary items noted
above, the Company's ROA for 1995, 1994 and 1993 would have been
0.75%, 0.65% and 0.55%, respectively.
Return on average stockholders' equity ("ROE") is determined
by dividing net income by average stockholders' equity and
indicates how effectively a company can generate net income on the
capital invested by its stockholders. During 1995, the Company's
ROE was 8.99%, compared to 3.98% for 1994 and 12.50% for 1993.
Excluding the unusual and extraordinary items noted above, the
Company's ROE for 1995, 1994 and 1993 would have been 10.06%, 9.24%
and 8.54%, respectively.
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 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 $6,653,000 for 1995, a
decrease of $26,000 or 0.4% from 1994. Net interest income for
1994 was $6,679,000, an increase of $634,000, or 10.5%, from net
interest income of $6,045,000 for 1993. The small decrease in 1995
was due to an increase in average net earning assets (average
interest-earning assets minus average interest-bearing
liabilities), which was offset by a decrease in the Company's net
interest margin. The increase in 1994 was due primarily to a
significant increase in the amount of loans outstanding, which
generally earn a higher rate of interest than securities and
federal funds sold. The net interest margin on a fully taxable-
equivalent basis was 4.29% for 1995, compared to 4.62% for 1994 and
4.37% for 1993. The decrease in the net interest margin in 1995
was a result of a decrease of $7,423,000 in average noninterest-
bearing and interest-bearing demand deposits and an increase of
$15,362,000 in average interest-bearing time deposits, combined
with a rising interest rate environment on such time deposits
during most of 1995. The improvement in the net interest margin in
1994 was a result of the same reasons noted above for the increase
in net interest income.
The quoted national prime interest rate began the year at
8.50%, increased to 9.00% in February, but decreased to 8.75% in
July and to 8.50% in December 1995. At December 31, 1995,
approximately $21,360,000,
34
<PAGE>
or 26.1%, of the Company's total loans, net of unearned income,
were tied to fluctuations in the prime rate. This amount
represented 47.0% of loans, excluding loans to individuals, which
are always fixed rate in nature. Average rates paid for various
types of deposits increased in 1995. For example, the average rate
paid by the Company for certificates of deposit and other time
deposits of $100,000 or more increased to 5.61% during 1995 from
3.78% in 1994. The average rate paid for certificates of deposit
less than $100,000 also increased from 3.62% in 1994 to 5.41% in
1995. Rates on other types of deposits, such as savings accounts,
money market accounts and NOW accounts, increased slightly from an
average of 2.16% in 1994 to an average of 2.35% in 1995. Given the
fact that the Company's interest-bearing liabilities are subject to
repricing faster than its interest-earning assets in the very short
term, a rising interest rate environment normally produces a lower
net interest margin than a falling interest rate environment. As
noted under "Analysis of Financial Condition - Interest Rate
Sensitivity" below, because the Company's interest-bearing demand,
savings and money market deposits are somewhat less rate-sensitive
(as indicated above), the Company's net interest margin does not
necessarily decrease in a rising interest rate environment.
The following table presents the average balance sheets of the
Company for each of the last three fiscal years and indicates the
interest earned or paid on each major category 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 overall impact of the cost of funds
on net interest income.
35
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
ASSETS(1) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income(2) $ 82,302 $ 7,726 9.39% $ 74,727 $ 6,918 9.26% $ 59,767 $5,333 8.92%
Securities(3) 41,846 2,391 5.71 53,986 2,521 4.67 68,409 3,595 5.26
Federal funds sold 31,076 1,847 5.94 15,939 697 4.37 10,171 300 2.95
-------- ------- ----- -------- ------- ---- -------- ------ ----
Total interest-earning assets 155,224 11,964 7.71 144,652 10,136 7.01 138,347 9,228 6.67
-------- ------- ----- -------- ------- ---- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 7,066 8,060 7,138
Premises and equipment, net 4,211 4,458 4,052
Accrued interest receivable
and other assets 3,817 3,617 3,660
Allowance for possible loan
losses (786) (805) (725)
-------- -------- --------
Total noninterest-earning
assets 14,308 15,330 14,125
-------- -------- --------
Total assets $169,532 $159,982 $152,472
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 53,391 $ 1,257 2.35% $ 59,689 $ 1,288 2.16% $ 57,880 $1,237 2.14%
Time deposits 72,137 3,944 5.47 56,775 2,076 3.66 54,132 1,835 3.39
-------- ------- ----- -------- ------- ---- -------- ------ ----
Total interest-bearing deposits 125,528 5,201 4.14 116,464 3,364 2.89 112,012 3,072 2.74
Notes payable 1,069 108 10.10 1,061 88 8.29 1,260 104 8.25
-------- ------- ----- -------- ------- ---- -------- ------ ----
Total interest-bearing
liabilities 126,597 5,309 4.19 117,525 3,452 2.94 113,272 3,176 2.80
-------- ------- ----- -------- ------- ---- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 29,019 30,144 28,416
Accrued interest payable and
other liabilities 1,322 1,011 942
-------- -------- --------
Total noninterest-bearing
liabilities 30,341 31,155 29,358
-------- -------- --------
Total liabilities 156,938 148,680 142,630
-------- -------- --------
Series A preferred stock 0 0 11
Stockholders' equity 12,594 11,302 9,831
-------- -------- --------
Total liabilities and
stockholders' equity $169,532 $159,982 $152,472
======== ======== ========
Net interest income $ 6,655 $ 6,684 $6,052
======= ======= ======
Interest rate spread(4) 3.52% 4.07% 3.87%
===== ==== ====
Net interest margin(5) 4.29% 4.62% 4.37%
===== ==== ====
______________________________
<FN>
(1) The Average Balance and Interest Income/Expense columns include all
of the balance sheet and income statement accounts of Winters State
beginning August 31, 1993 (the date of acquisition of such bank).
(2) Nonaccrual loans are included in the Average Balance columns and
income recognized on these loans, if any, is included in the
Interest Income/Expense columns. Interest income on loans includes
fees on loans, which are not material in amount.
(3) Nontaxable interest income on securities was adjusted to a taxable
yield assuming a tax rate of 34%.
(4) The interest rate spread is the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(5) The net interest margin is equal to net interest income, on a fully
taxable-equivalent basis, divided by average interest-earning
assets.
</FN>
</TABLE>
36
<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 volume and rate in the table have been
allocated to volume or rate change in proportion to the absolute
amounts of the change in each.
<TABLE>
<CAPTION>
1995 vs 1994 1994 vs 1993 (1)
------------ ----------------
Increase (Decrease) Due To Increase (Decrease) Due To
Changes In: Changes In:
-------------------------- ---------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income $710 $ 98 $ 808 $1,376 $ 209 $1,585
Securities (2) (629) 499 (130) (702) (372) (1,074)
Federal funds sold 834 316 1,150 268 129 397
---- ------ ------ ------ ----- ------
Total interest income 915 913 1,828 942 (34) 908
---- ------ ------ ------ ----- ------
Interest-bearing liabilities:
Deposits:
Demand, savings and money
market deposits (140) 109 (31) 39 12 51
Time deposits 660 1,208 1,868 92 149 241
---- ------ ------ ------ ----- ------
Total deposits 520 1,317 1,837 131 161 292
Notes payable 1 19 20 (17) 1 (16)
---- ------ ------ ------ ----- ------
Total interest expense 521 1,336 1,857 114 162 276
---- ------ ------ ------ ----- ------
Increase (decrease) in net
interest income $394 $ (423) $ (29) $ 828 $(196) $ 632
==== ====== ====== ====== ===== ======
______________________________
<FN>
(1) Income statement items include all of the income statement accounts
of Winters State beginning August 31, 1993 (the date of acquisition of
such bank).
(2) Information with respect to interest income on tax-exempt securities
is provided on a fully taxable-equivalent basis assuming a tax rate of 34%.
</FN>
</TABLE>
Provision for Loan Losses
The amount of the provision for loan losses is based on
periodic (not less than quarterly) evaluations of the loan
portfolio, especially nonperforming and other potential problem
loans. During these evaluations, consideration is given to such
factors as: management's evaluation of specific loans; the level
and composition of nonperforming loans; historical loss experience;
results of examinations by regulatory agencies; an internal asset
review process conducted by the Company that is independent of the
management of the Banks; 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 provision for loan losses for the year ended December
31, 1995, was $206,000, compared to $147,000 for the year ended
December 31, 1994, which represents an increase of $59,000, or
40.1%. The increase in the provision for loan losses during 1995
was a result of increased repossessions and associated charge-offs
relating to the Company's indirect installment lending program.
The provision for loan losses for the year ended December 31, 1993,
was $154,000. The reduced provisions over the past several years
reflect the general stabilization of the economic conditions in the
Company's primary service area. In addition, the overall quality
of the Company's loan portfolio has improved during that same
period of time, necessitating generally lower provisions.
Noninterest Income
Noninterest income increased $12,000, or 0.8%, from $1,497,000
in 1994 to $1,509,000 in 1995. The amount for 1994 decreased
$387,000, or 20.5%, from $1,884,000 in 1993.
37
<PAGE>
Service charges on deposit accounts and charges for other
types of services are the major source of noninterest income to the
Company. Service charge income decreased $59,000, or 4.8%, from
$1,226,000 in 1994 to $1,167,000 in 1995, primarily due to a
reclassification of income received in relation to printed checks
from service charges to other income. This source of income
increased $145,000, or 13.4%, from $1,081,000 in 1993 to $1,226,000
in 1994. The 1994 increase was a result of an increase in the
average amount of demand deposits at the Banks and the fact that
the operations of Winters State were included in the Consolidated
Income Statement for all of 1994, but only for the last four months
of 1993.
Trust fees from the operation of the trust department of First
State, N.A., Odessa increased $32,000, or 18.9%, from $169,000
during 1994 to $201,000 during 1995 and increased $29,000, or
20.7%, from $140,000 in 1993, to $169,000 in 1994. The respective
increases are due to the growth in assets under management by the
trust department in 1995 and 1994 and to a one-time fee of $24,000
received in 1995 for services performed as executor of an estate.
As noted above, the Company recorded a gain of $286,000 on the
transfer of the various assets and liabilities of Olton State in
January 1993. There were no sales of securities during 1993 or
1995 and $8,000 of securities were sold during 1994. The
securities portfolio had an average maturity of approximately 1.46
years at December 31, 1995, compared to approximately 1.02 years at
December 31, 1994.
Other income is the sum of several small components of other
operating income including safe deposit box rental income and other
sources of miscellaneous income. Other income increased $39,000,
or 38.2% from $102,000 in 1994 to $141,000 in 1995, as a result of
the reclassification of income relating to printed checks noted
above. This increase was offset somewhat by a reduction in
insurance premium income from the sale of single interest insurance
on automobiles securing indirect installment loans. The reduction
in other income in 1994 was primarily due to the reclassification
of certain other charges from other income to service charges in
1994.
Noninterest Expenses
Noninterest expenses decreased $1,110,000, or 15.1%, from
$7,352,000 in 1994 to $6,242,000 in 1995. The amount for 1994 was
up $1,130,000, or 18.2%, from $6,222,000 in 1993. The decrease
from 1994 to 1995 and the increase from 1993 to 1994 was primarily
due to the accrual during 1994 of $900,000 for the reimbursement of
certain legal fees, expenses and settlement costs in connection
with certain litigation. See "Note 15: Commitments and Contingent
Liabilities" to the Company's Consolidated Financial Statements and
"Item 3. Legal Proceedings" in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
Salaries and employee benefits increased $11,000, or 0.4%,
from $2,838,000 in 1994 to $2,849,000 in 1995. Despite overall
salary increases effective January 1, 1995, salaries and benefits
have been stable due to the ecomonies of scale achieved as a result
of the branching of The First National Bank in Stamford, Stamford,
Texas ("First National"), and Winters State with and into First
State, N.A., Abilene during the fourth quarter of 1994. The amount
for 1994 increased $263,000, or 10.2%, from $2,575,000 in 1993 to
$2,838,000 in 1994. Approximately $195,000, or 74.1%, of the
increase in 1994 was due to the fact that a full year of operations
for Winters State is included in the 1994 amount while only four
months of operations for that bank is included in the 1993 amount.
Equipment expense increased from $641,000 in 1994 to $723,000
in 1995, an increase of $82,000, or 12.8%, and increased $188,000,
or 41.5%, from $453,000 in 1993 to $641,000 in 1994. Equipment
leased to enable the Banks to do their own data processing
internally was the primary cause of the increase. First National
was converted to the new data processing system during the fourth
quarter of 1993 and First State, N.A., Abilene and First State,
N.A., Odessa were converted during the first quarter of 1994. The
Company's third-party data processing contracts expired during the
first five months of 1994. In addition, Winters State performed
its own data processing prior to conversion to the new system in
February 1995.
Net occupancy expense decreased $30,000, or 4.5%, from
$673,000 in 1994 to $643,000 in 1995, primarily due to lower
amounts of depreciation expense as a result of certain fixed assets
whose estimated useful lives have expired. Net occupancy expense
increased $71,000, or 11.8%, from $602,000 in 1993 to $673,000 in
38
<PAGE>
1994. Approximately two-thirds of the increase in 1994 was a
result of the operations of Winters State being included for a full
year in the Company's 1994 Consolidated Income Statement.
Legal fees and expense decreased $863,000, or 71.5%, from
$1,207,000 in 1994 to $344,000 in 1995, and increased $919,000, or
319.1%, from $288,000 in 1993 to the 1994 amount as a result of the
$900,000 accrual in 1994 noted above.
Stationery, printing and supplies expense increased $45,000,
or 19.9%, from $226,000 in 1994 to $271,000 in 1995 due primarily
to an increase in paper costs. Accounting fees decreased $25,000,
or 18.5%, from $135,000 in 1994 to $110,000 in 1995, as a result of
the change in independent public accountants, which was made in
1994. Data processing expense decreased $139,000, or 58.6%, from
$237,000 in 1994 to $98,000 in 1995, directly as a result of the
conversion to an in-house data processing system as noted above.
The Company expects to continue significant savings in the future
in the area of data processing expense.
Federal Deposit Insurance Corporation ("FDIC") insurance
expense decreased $170,000, or 50.6%, from $336,000 in 1994 to
$166,000 in 1995 as a result of a reduction by the FDIC of deposit
insurance rates for banks, which became effective June 1, 1995.
The deposit insurance rate that the Banks pay decreased from $0.23
per $100 of deposits to $0.04 per $100 of deposits.
Net costs applicable to real estate and other repossessed
assets consists of expenses associated with holding and maintaining
various 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 on such assets that is credited as a reduction in
such expenses. These expenses decreased $3,000, from $4,000 in net
income in 1994 to $7,000 net income in 1995, as a result of gains
on sales of, and rental income received on, such assets. The
amount of the Company's real estate and other repossessed assets
has continued to decline over the past few years.
Other noninterest expense includes, among many other items,
postage, advertising, insurance, directors' fees, dues and
subscriptions, regulatory examinations, franchise taxes, travel and
entertainment and due from bank account charges. These expenses
decreased $18,000, or 1.7%, from $1,063,000 in 1994 to $1,045,000
in 1995. The decrease was primarily due to savings achieved as a
result of the merger of Winters State and First National into First
State, N.A., Abilene in November 1994.
All of the major categories of noninterest expense, with the
exception of accounting fees, data processing expense and net costs
applicable to real estate and other repossessed assets, increased
from 1993 to 1994, primarily due to the inclusion of a full year's
results of operations of Winters State in the Company's 1994
Consolidated Income Statement.
Federal Income Taxes
The Company effected a quasi-reorganization as of December 31,
1989. A quasi-reorganization is an elective accounting procedure
under Generally Accepted Accounting Principles ("GAAP") in which
assets and liabilities of the Company were restated to fair value
and the Company's accumulated deficit was reduced to zero. As a
result of this transaction, the Company's net operating loss
carryforwards existing at December 31, 1989, and utilized
subsequent to the quasi-reorganization date will not be credited to
future income. For periods prior to January 1, 1995, the tax
effect of the utilization of the Company's net operating loss
carryforwards was credited directly to additional paid-in capital.
For periods subsequent to December 31, 1994, the tax effect of such
utilization has been and will be credited against the Company's
gross deferred tax asset. The Company accrued $582,000, $227,000
and $524,000 in federal income taxes in 1995, 1994 and 1993,
respectively, and all of these amounts but $35,000 in 1995, $5,000
in 1994 and $31,000 in 1993 were transferred from federal income
taxes payable to reduce the Company's deferred tax asset in 1995
and to increase additional paid-in capital in 1994 and 1993.
Accordingly, the tax effect of utilization of these net operating
losses in 1995, 1994 and 1993 totaled $547,000, $222,000 and
$493,000, respectively. The $35,000, $5,000 and $31,000 not
transferred from federal income taxes payable represents
alternative minimum taxes accrued by the Company for 1995, 1994 and
1993, respectively.
39
<PAGE>
Cumulative Effect of Change in Accounting for Income Taxes
Effective January 1, 1993, the Company adopted FAS 109. FAS
109 permits the recognition of deferred tax assets to a greater
extent than previously permitted and requires companies to adopt
the liability method for computing income taxes. In adopting FAS
109, the Company established a gross deferred tax asset of
$3,190,000, a portion of which relates to the Company's federal tax
net operating loss carryforwards and deductible temporary
differences arising prior to the Company's quasi-reorganization as
of December 31, 1989. FAS 109 requires that consideration be given
to establishing a valuation allowance against such deferred tax
assets. The Company established a valuation allowance of
$2,290,000, resulting in a net deferred tax asset of $900,000. As
a result of the quasi-reorganization, approximately $700,000 of the
cumulative effect of the change in accounting method was credited
directly to additional paid-in capital and $200,000 was credited to
income during 1993 as a cumulative effect of an accounting change.
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 attempts 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 $20,484,000, or 12.8%, from
$159,860,000 at December 31, 1994, to $180,344,000 at December 31,
1995, primarily due to the growth in deposits at the Banks in 1995.
Total assets of the Company decreased $852,000, or 0.5%, from
$160,712,000 at December 31, 1993, to $159,860,000 at December 31,
1994. The slight decrease during 1994 was due to a decrease in
deposits at the Company's Stamford and Winters branch locations,
which was partially offset by deposit growth at the Abilene and
Odessa locations.
Cash and Cash Equivalents
At December 31, 1995, cash and cash equivalents were
$34,759,000, a decrease of $4,005,000, or 10.3%, from the December
31, 1994, balance of $38,764,000, which represented an increase of
$19,496,000, or 101.2%, over the December 31, 1993, balance of
$19,268,000. At December 31, 1995, the Company had $26,200,000 in
federal funds sold, down from $31,200,000 at December 31, 1994, due
to an increased amount of funds being invested in investment
securities. Cash and cash equivalents averaged $38,142,000,
$23,999,000 and $17,309,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
Securities
Securities increased $22,602,000, or 67.9%, from $33,305,000
at December 31, 1994, to $55,907,000 at December 31, 1995. The
increase in 1995 was due primarily to an increase in deposits,
which were used to purchase investment securities. The December
31, 1994, balance decreased $31,396,000, or 48.5%, from the
December 31, 1993, balance of $64,701,000. The decline in 1994 was
attributed to the fact that the Banks had collectively increased
the amount of loans outstanding and the Company had decided to
invest temporarily in federal funds sold.
The board of directors of each Bank reviews all securities
transactions monthly and the securities portfolio periodically.
The Company's current investment policy provides for the purchase
of U.S. Treasury securities and federal agency securities having
maturities of five years or less and for the purchase of state,
county and municipal agency's securities with maximum maturities of
10 years. The Company's policy is to maintain a securities
portfolio with a mixture of securities classified as held-to-
maturity and available-for-sale with staggered maturities to meet
its overall liquidity needs. Municipal securities must be rated A
or better. Certain school district issues,
40
<PAGE>
however, are acceptable with a Baa rating. Securities totaling
$16,746,000 are classified as available-for-sale and are carried at
fair value at December 31, 1995. Securities totaling $39,161,000
are classified as held-to-maturity and are carried at amortized
cost. During the fourth quarter of 1995, the Company transferred
$160,000 of mortgage-backed securities from held-to-maturity
securities to available-for-sale securities. 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 December 31, 1995, the book value of U.S.
Government and other securities so pledged amounted to $6,423,000,
or 11.5% of the total securities portfolio.
The following table summarizes the amounts and the
distribution of the Company's investment securities held at the
dates indicated:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $32,297 57.8% $31,441 94.4% $55,664 86.0%
Obligations of other U.S.
Government agencies and
corporations 23,021 41.2 1,154 3.5 8,179 12.6
Mortgage-backed securities 146 0.2 177 0.5 300 0.5
Obligations of states and
political subdivisions 0 -- 90 0.3 130 0.2
Other securities 443 0.8 443 1.3 428 0.7
------- ----- ------- ----- ------- -----
Total securities $55,907 100.0% $33,305 100.0% $64,701 100.0%
======= ===== ======= ===== ======= =====
Total market value $56,132 $32,991 $64,856
======= ======= =======
</TABLE>
The market value of held-to-maturity securities is usually
different from the reported carrying value of such securities due
to interest rate fluctuations that cause market valuations to
change.
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at December 31, 1995. The yield has been computed by
relating the forward income stream on the securities, plus or minus
the anticipated amortization of premium or accretion of discount,
to the book value of the securities. The book value of available-
for-sale securities is their fair value. The book value of held-
to-maturity securities is their cost, adjusted for previous
amortization or accretion. The restatement of the yields on tax-
exempt securities to a fully taxable-equivalent basis has been
computed assuming a tax rate of 34%.
41
<PAGE>
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at December 31, 1995 Amount Value Value Yield
- -------------------------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $16,250 $16,313 $16,320 5.59%
After one but within five years 16,000 15,984 16,068 5.95
------- ------- ------- ----
Total U.S. Treasury securities 32,250 32,297 32,388 5.77
------- ------- ------- ----
Obligations of other U.S. Government
agencies and corporations:
After one but within five years 23,000 23,007 23,139 6.60
------- ------- ------- ----
Total obligations of other U.S.
government agencies and corporations 23,000 23,007 23,139 6.60
------- ------- ------- ----
Mortgage-backed securities 158 160 160 9.40
------- ------- ------- ----
Other securities:
After one but within five years 5 5 5 5.50
After ten years 438 438 438 3.56
------- ------- ------- ----
Total other securities 443 443 443 3.59
------- ------- ------- ----
Total securities $55,851 $55,907 $56,130 6.10%
======= ======= ======= ====
</TABLE>
Loan Portfolio
Total loans, net of unearned income, increased $621,000, or
0.8%, from $81,306,000 at December 31, 1994, to $81,927,000 at
December 31, 1995. The December 31, 1994, amount is an increase of
$11,659,000, or 16.7%, from $69,647,000 at December 31, 1993. The
increase during 1995 was a result of an increase in commercial and
industrial loans, which was partially offset by decreases in loans
to individuals and other loans. The increase in 1994 was due to
primarily to an increase in loans to individuals, principally in
indirect installment loans.
The Banks primarily make installment loans to individuals and
commercial loans to small to medium-sized businesses and
professionals. The Banks offer a variety of commercial lending
products including revolving lines of credit, letters of credit,
working capital loans and loans to finance accounts receivable,
inventory and equipment. Typically, the Banks' commercial loans
have floating rates of interest, are for varying terms (generally
not exceeding five years), are personally guaranteed by the
borrower and are collateralized by accounts receivable, inventory
or other business assets.
Due to diminished loan demand in most areas, during the second
quarter of 1992, First State, N.A., Odessa instituted an
installment loan program whereby it began to purchase automobile
loans from automobile dealerships in the Abilene and
Odessa/Midland, Texas areas. Under this program, an automobile
dealership will agree to make a loan to a prospective customer to
finance the purchase of a new or used automobile. The different
financial institutions that have a pre-established relationship
with the particular dealership review the transaction, including
the credit history of the prospective borrower, and decide if they
would agree to purchase the loan from the dealership and, if so, at
what rate of interest. The dealership selects the financial
institution to which it decides to sell the loan. The financial
institution purchasing the loan has a direct loan to the borrower
collateralized by the automobile, and the dealership realizes a
profit based on the difference between the interest rate quoted to
the buyer by the dealership and the interest rate at which the loan
is purchased by the financial institution. During the second
quarter of 1993, First State, N.A., Abilene began a similar
indirect installment loan program. At December 31, 1995 and 1994,
the Company had approximately $30,206,000 and $29,402,000 net of
unearned income, respectively, of this type of loan outstanding.
42
<PAGE>
The following table presents the Company's loan balances at
the dates indicated separated by loan type:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993 1992(1) 1991
---- ---- ---- ------- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans to individuals $39,868 $43,113 $28,538 $17,718 $12,729
Real estate loans 23,265 22,760 22,658 16,535 16,690
Commercial and industrial loans 19,510 16,702 16,723 16,221 17,533
Other loans 2,638 2,943 4,322 3,767 5,878
------- ------- ------- ------- -------
Total loans 85,281 85,518 72,241 54,241 52,830
Less unearned income 3,354 4,212 2,594 1,274 285
------- ------- ------- ------- -------
Loans, net of unearned income $81,927 $81,306 $69,647 $52,967 $52,545
======= ======= ======= ======= =======
______________________________
<FN>
(1) Balances at December 31, 1992, do not include the loans of
Olton State sold as of January 1, 1993.
</FN>
</TABLE>
Loan concentrations are considered to exist when there are
amounts loaned to a multiple number of borrowers engaged in similar
activities that would cause them to be similarly impacted by
economic or other conditions. The Company had no concentrations of
loans at December 31, 1995, except for those described above. The
Banks had no loans outstanding to foreign countries or borrowers
headquartered in foreign countries at December 31, 1995.
Management of each Bank may renew loans at maturity when
requested by a customer whose financial strength appears to support
such renewal or when such renewal appears to be in the Company's
best interest. The Company requires payment of accrued interest in
such instances and may adjust the rate of interest, require a
principal reduction or modify other terms of the loan at the time
of renewal.
The following table presents the distribution of the maturity
of the Company's loans and the interest rate sensitivity of those
loans, excluding loans to individuals, at December 31, 1995. 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 interest rate environment as
represented by the prime rate.
<TABLE>
<CAPTION>
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
-------- ------ ----- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans $ 2,324 $15,916 $5,025 $23,265
Commercial and industrial loans 6,683 10,415 2,412 19,510
Other loans 1,742 314 582 2,638
------- ------- ------ -------
Total loans $10,749 $26,645 $8,019 $45,413
======= ======= ====== =======
With fixed interest rates $ 2,004 $17,497 $4,552 $24,053
With variable interest rates 8,745 9,148 3,467 21,360
------- ------- ------ -------
Total loans $10,749 $26,645 $8,019 $45,413
======= ======= ====== =======
</TABLE>
Allowance for Possible Loan Losses
Implicit in the Company's lending activities is the fact that
loan losses will be experienced and that the risk of loss will vary
with the type of loan being made and the creditworthiness of the
borrower over the term of the loan. To reflect the currently
perceived risk of loss associated with the Company's loan
portfolio, additions are made to the Company's allowance for
possible loan losses (the "allowance"). The allowance is created
by direct charges against income (the "provision" for loan losses),
and the allowance is available to absorb possible loan losses. See
"Results of Operations - Provision for Loan Losses" above.
43
<PAGE>
The amount of the allowance equals the cumulative total of the
provisions made from time to time, reduced by loan charge-offs and
increased by recoveries of loans previously charged off. The
Company's allowance was $759,000, or 0.93% of loans, net of
unearned income, at December 31, 1995, compared to $817,000, or
1.00% of loans, net of unearned income, at December 31, 1994, and
$896,000, or 1.29% of loans, net of unearned income, at December
31, 1993. The reduction in the allowance is primarily due to the
improvement in the overall credit quality of the Company's loan
portfolio.
Credit and loan decisions are made by management and the board
of directors of each Bank in conformity with loan policies
established by the board of directors of the Company. The
Company's practice is to charge off any loan or portion of a loan
when the loan is determined by management to be uncollectible due
to the borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation
of the underlying collateral, the loan's classification as a loss
by regulatory examiners or for other reasons. The Company charged
off $376,000 in loans during 1995. Charge-offs for 1995 were
concentrated in the following categories: loans to individuals -
$297,000, or 79.0%, and real estate - $72,000, or 19.1%. Charge-
offs on three loans totaled $57,000, or 15.2%, of total charge-
offs. The remainder of loan charge-offs were spread among numerous
loans, and no other charge-off to any one single borrower during
1995 exceeded $8,000. Recoveries during 1995 were $112,000 and
were concentrated in the following categories: commercial and
industrial - $52,000, or 46.4%, and loans to individuals - $43,000,
or 38.4%. Recoveries of $49,000 on six commercial and industrial
loans, $7,000 on one loan to an individual and $15,000 on one other
loan accounted for 63.4% of total recoveries during 1995.
The following table presents the provisions, loans charged off
and recoveries of loans previously charged off, the amount of the
allowance, average loans outstanding and certain pertinent ratios
for the last five years.
<TABLE>
<CAPTION>
1995 1994 1993(1) 1992(1) 1991(1)
---- ---- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Analysis of allowance for
possible loan losses:
Balance at January 1 $ 817 $ 896 $ 617 $ 669 $ 1,317
Provision for loan losses 206 147 154 185 139
Acquisition of subsidiary 0 0 233 0 0
------- ------- ------- ------- -------
1,023 1,043 1,004 854 1,456
------- ------- ------- ------- -------
Loans charged off:
Loans to individuals 297 150 88 40 94
Real estate loans 72 119 68 179 44
Commercial and industrial loans 7 32 69 114 800
Other loans 0 77 16 311 28
------- ------- ------- ------- -------
Total charge-offs 376 378 241 644 966
------- ------- ------- ------- -------
Recoveries of loans previously
charged off:
Loans to individuals 43 45 28 11 25
Real estate loans 2 0 4 56 46
Commercial and industrial loans 52 48 84 59 90
Other loans 15 59 17 281 18
------- ------- ------- ------- -------
Total recoveries 112 152 133 407 179
------- ------- ------- ------- -------
Net loans charged off 264 226 108 237 787
------- ------- ------- ------- -------
Balance at December 31 $ 759 $ 817 $ 896 $ 617 $ 669
======= ======= ======= ======= =======
Average loans outstanding,
net of unearned income $82,302 $74,727 $59,767 $50,507 $55,091
======= ======= ======= ======= =======
44
<PAGE>
Ratio of net loan charge-offs
to average loans, net of
unearned income 0.32% 0.30% 0.18% 0.47% 1.43%
Ratio of allowance for possible
loan losses to total loans,
net of unearned income, at
December 31 0.93 1.00 1.29 1.16 1.27
______________________________
<FN>
(1) Average loans, net of unearned income, for 1993, 1992 and 1991
include the average loans, net of unearned income, of Winters
State from August 31, 1993, through December 31, 1993, and of
Olton State from January 1, 1991, through June 30, 1992.
</FN>
</TABLE>
In the latter half of the 1980's, there was a downward trend
in the market value of collateral securing real estate loans and
commercial and industrial loans. Foreclosures on defaulted loans
resulted in the Company acquiring real estate and other repossessed
assets. Foreclosures have continued to occur, although recently at
a lower rate, and the amount of real estate and other repossessed
assets being carried on the Company's books, although decreasing,
is still significant. Accordingly, the Company incurs other
expenses, specifically net costs applicable to real estate and
other repossessed assets, in maintaining, insuring and selling such
assets. The Banks attempt to convert nonperforming loans into
interest-earning assets, although usually at a lower dollar amount
than the face value of such loans, either through liquidation of
the collateral securing the loan or through intensified collection
efforts.
As the economy has recovered and stabilized, there has been a
steady reduction in total loan losses and in the amount of the
provision necessary to maintain an adequate balance in the
allowance. This reflects not only the loan loss trend, but
management's assessment of the continued reduction of credit risks
associated with the loan portfolio.
The amount of the allowance is established by management based
upon estimated risks inherent in the existing loan portfolio.
Management reviews the loan portfolio on a continuing basis to
evaluate potential problems. This review encompasses management's
estimate of current economic conditions and the potential impact on
various industries, prior loan loss experience and financial
conditions of individual borrowers. Loans that have been
specifically identified as nonperforming or potential problem 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 of all
loans.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("FAS 114"). In accordance with FAS 114, any
change in the present value of such loans will be recognized as an
adjustment to the Company's allowance.
45
<PAGE>
The following table shows the allocations in the allowance and
the respective percentages of each loan category to total loans at
year-end for each of the past five years.
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993
---- ---- ----
Percent of Percent of Percent of
Amount of Loans by Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category to Allowance Category to
Allocated Loans, Net Allocated Loans, Net Allocated Loans, Net
to of Unearned to of Unearned to of Unearned
Category Income Category Income Category Income
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals $136 44.6% $207 47.8% $178 37.3%
Real estate loans 197 28.4 165 28.0 272 32.5
Commercial and industrial loans 96 23.8 122 20.5 212 24.0
Other loans 59 3.2 68 3.7 108 6.2
---- ----- ---- ----- ---- -----
Total allocated 488 100.0% 562 100.0% 770 100.0%
===== ===== =====
Unallocated 271 255 126
---- ---- ----
Total allowance for possible
loan losses $759 $817 $896
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1992(1) 1991
------- ----
Percent of Percent of
Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category to
Allocated Loans, Net Allocated Loans, Net
to of Unearned to of Unearned
Category Income Category Income
--------- ------------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans to individuals $101 31.0% $ 18 23.7%
Real estate loans 142 31.2 123 31.8
Commercial and industrial loans 142 30.7 170 33.4
Other loans 53 7.1 27 11.1
---- ----- ---- -----
Total allocated 438 100.0% 338 100.0%
===== =====
Unallocated 179 331
---- ----
Total allowance for possible
loan losses $617 $669
==== ====
______________________________
<FN>
(1) The categories of loans at December 31, 1992, do not include the
loans of Olton State transferred on January 1, 1993.
</FN>
</TABLE>
Loan Review Process
The Company follows a loan review program to evaluate the credit
risk in its loan portfolio. Through the loan review process, the
Banks maintain an internally classified loan list that, along with
the list of nonperforming loans discussed below, helps management
assess the overall quality of the loan portfolio and the adequacy
of the allowance. Loans classified as "substandard" are those
loans with clear and defined weaknesses such as highly leveraged
positions, unfavorable financial ratios, uncertain repayment
sources or poor financial condition, which may jeopardize
recoverability of the loan. Loans classified as "doubtful" are
those loans that have characteristics similar to substandard loans,
but also have an increased risk that a loss may occur or at least
a portion of the loan may require a charge-off if liquidated at
present. Although loans classified as substandard do not duplicate
loans classified as doubtful, both substandard and doubtful loans
may include some loans that are past due at least 90 days, are on
nonaccrual status or have been restructured. Loans classified as
"loss" are those loans that are in the process of being charged
off. At December 31, 1995, substandard loans totaled $1,640,000,
of which $223,000 were loans designated as nonaccrual or 90 days
past due, and there were no doubtful or loss loans.
In addition to the internally classified loans, each Bank also
has a "watch list" of loans that further assists each Bank in
monitoring its loan portfolio. A loan is included on the watch
list if it demonstrates one or more
46
<PAGE>
deficiencies requiring attention in the near term or if the loan's
ratios have weakened to a point where more frequent monitoring is
warranted. These loans do not have all the characteristics of a
classified loan (substandard, doubtful or loss), but do have
weakened elements as compared with those of a satisfactory credit.
The Banks review these loans to assist in assessing the adequacy of
the allowance. Substantially all of the loans on the watch list as
of December 31, 1995, are current and paying in accordance with
loan terms. At December 31, 1995, watch list loans totaled
$779,000 (including $179,000 of loans guaranteed by U.S.
governmental agencies). At such date, none of the watch list loans
were designated as nonaccrual, past due or restructured loans. At
such date, $70,000 of loans not classified and not on the watch
list were designated as 90 days past due or restructured. See
"Nonperforming Assets" below.
Nonperforming Assets
Nonperforming loans consist of nonaccrual, past due and
restructured loans. A past due loan is an accruing loan that is
contractually past due 90 days or more as to principal or interest
payments. Loans on which management does not expect to collect
interest in the normal course of business are placed on nonaccrual
or are restructured. When a loan is placed on nonaccrual, any
interest previously accrued but not yet collected is reversed
against current income unless, in the opinion of management, the
outstanding interest remains collectible. Thereafter, interest is
included in income only to the extent of cash received. A loan is
restored to accrual status when all interest and principal payments
are current and the borrower has demonstrated to management the
ability to make payments of principal and interest as scheduled.
A "troubled debt restructuring" is a restructured loan upon
which interest accrues at a below market rate or upon which certain
principal has been forgiven so as to aid the borrower in the final
repayment of the loan, with any interest previously accrued, but
not yet collected, being reversed against current income. Interest
is accrued based upon the new loan terms.
Nonperforming loans are fully or substantially collateralized
by assets, with any excess of loan balances over collateral values
allocated in the allowance. Assets acquired through foreclosure
are carried at the lower of cost or estimated fair value, net of
estimated costs of disposal, if any. See "Real Estate and Other
Repossessed Assets" below.
The following table lists nonaccrual, past due and
restructured loans and real estate and other repossessed assets at
year-end for each of the past five years.
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993 1992(1) 1991
---- ---- ---- ------- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $204 $ 48 $1,646 $ 773 $2,167
Accruing loans contractually
past due over 90 days 23 26 293 17 20
Restructured loans 65 80 195 295 517
Real estate and other repossessed
assets 337 631 803 849 1,140
---- ---- ------ ------ ------
Total nonperforming assets $629 $785 $2,937 $1,934 $3,844
==== ==== ====== ====== ======
_______________________________
<FN>
(1) Balances at December 31, 1992, do not include the assets of Olton
State that were sold on January 1, 1993.
</FN>
</TABLE>
The gross interest income that would have been recorded in
1995 on the Company's nonaccrual loans if such loans had been
current, in accordance with the original terms thereof and had been
outstanding throughout the period or, if shorter, since
origination, was approximately $14,000. No interest was collected
on such loans and recorded as income during 1995.
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
47
<PAGE>
asset categories. The Company does not believe it has any
potential problem loans other than these reported in the above
table.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets consist of real
property and other assets unrelated to banking premises or
facilities. Income derived from real estate and other repossessed
assets, if any, is generally less than that which would have been
earned as interest at the original contract rates on the related
loans. At December 31, 1995, 1994 and 1993, real estate and other
repossessed assets had an aggregate book value of $337,000,
$631,000 and $803,000, respectively. Real estate and other
repossessed assets declined $294,000, or 46.6%, during 1995 to
$337,000 at December 31, 1995, primarily as a result of sales of
certain of these assets. Of the December 31, 1995, balance,
$184,000 represents twenty repossessed automobiles, $73,000
represents four commercial buildings and lots and $43,000
represents unimproved lots in a residential subdivision. The
December 31, 1994, balance of $631,000 represented a decrease of
$172,000, or 21.4%, from the December 31, 1993, balance of
$803,000.
Premises and Equipment
Premises and equipment decreased $190,000, or 4.4%, from
$4,345,000 at December 31, 1994, to $4,155,000 at December 31,
1995. The decrease was due to $177,000 in additions made during
1995, which were offset by depreciation expense of $367,000
recorded for 1995. Premises and equipment decreased $183,000, or
4.0%, during 1994, from $4,528,000 at December 31, 1993, to
$4,345,000 at December 31, 1994. The decrease was due to $256,000
in additions made during 1994, primarily in leasehold improvements
at First State, N.A., Odessa, which were offset by depreciation
expense of $397,000 recorded for 1994.
Accrued Interest Receivable
Accrued interest receivable consists of interest that has
accrued on securities and loans, but is not yet payable under the
terms of the related agreements. The balance of accrued interest
receivable increased $549,000, or 58.1%, from $945,000 at December
31, 1994, to $1,494,000 at December 31, 1995. The increase during
1995 was a result of additional funds being invested in securities
on which interest is collected semi-annually, as opposed to federal
funds sold on which interest is collected daily. Of the total
balance at December 31, 1995, $920,000, or 61.6%, was interest
accrued on securities and $574,000, or 38.4%, was interest accrued
on loans. The amounts of accrued interest receivable and
percentages attributable to securities and loans at December 31,
1994, were $385,000, or 40.7%, and $560,000, or 59.3%,
respectively. Total accrued interest receivable declined $376,000,
or 28.5%, from $1,321,000 at December 31, 1993, to $945,000 at
December 31, 1994. The decrease was a result of additional funds
being invested at December 31, 1994, in federal funds sold on which
interest is collected daily.
Other Assets
The most significant component of other assets at December 31,
1995 and 1994, is a net deferred tax asset of $1,937,000 and
$956,000, respectively. The balance of other assets increased
$1,143,000, or 82.8%, to $2,524,000 at December 31, 1995, from
$1,381,000 at December 31, 1994, as a result of a $1,600,000
decrease in the Company's valuation allowance on its deferred tax
asset, which was partially offset by a $547,000 decrease in the
gross deferred tax asset due to the utilization of a portion of the
Company's net operating loss carryforwards. Other assets increased
$41,000, or 3.1%, in 1994, from the December 31, 1993, balance of
$1,340,000. See "Results of Operations - Cumulative Effect of
Change in Accounting for Income Taxes" above.
Deposits
The Banks' lending and investing activities are funded almost
entirely by core deposits, approximately 52.0% of which are demand,
savings and money market deposits at December 31, 1995. Total
deposits increased $18,520,000, or 12.7%, from $146,184,000 at
December 31, 1994, to $164,704,000 at December 31, 1995. The
increase is due to an increase in interest-bearing time deposits at
the Banks, primarily as a result of an increase in rates paid on
such deposits. Total deposits at December 31, 1994, were
$1,601,000, or 1.1%, lower than the $147,785,000 balance at
December 31, 1993. The decrease was due to a decrease in deposits
at the Company's
48
<PAGE>
Stamford and Winters branch locations, which was partially offset
by deposit growth at the Abilene and Odessa locations. The Banks
do not accept brokered deposits.
The following table presents the average amounts of and the
average rate paid on deposits of the Company for each of the last
three years:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993(1)
---- ---- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 29,019 --% $ 30,144 --% $ 28,416 --%
Interest-bearing demand, savings
and money market deposits 53,391 2.35 59,689 2.16 57,880 2.14
Time deposits of less
than $100,000 52,452 5.41 43,158 3.62 41,776 3.39
Time deposits of $100,000
or more 19,685 5.61 13,617 3.78 12,356 3.38
-------- ---- -------- ---- -------- ----
Total deposits $154,547 3.36% $146,608 2.29% $140,428 2.19%
======== ==== ======== ==== ======== ====
______________________
<FN>
(1) The average amounts and average rates paid on deposits for the year ended
December 31, 1993, include the averages of Winters State from August 31 (the
date of acquisition) through December 31, 1993.
</FN>
</TABLE>
The maturity distribution of time deposits of $100,000 or more
at December 31, 1995, is presented below:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
(In thousands)
<S> <C>
3 months or less $ 9,220
Over 3 through 6 months 5,983
Over 6 through 12 months 4,925
Over 12 months 3,680
-------
Total time deposits of $100,000 or more $23,808
=======
</TABLE>
The Banks experience 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 December 31, 1995, deposits of
$100,000 or more represented 13.2% of the Company's total assets,
compared to 9.1% of the Company's total assets at December 31,
1994.
Notes Payable
The Company's notes payable decreased $81,000, or 8.7%, from
$930,000 at December 31, 1994, to $849,000 at December 31, 1995.
The decrease was a result of regular quarterly principal payments
made on the Term Note (as defined below) and the payoff of the
Acquisition Note (as defined below) during 1995, which were
partially offset by an increase in debt incurred as a result of the
final settlement of certain litigation. See "Note 15: Commitments
and Contingent Liabilities" to the Company's Consolidated Financial
Statements. The December 31, 1994, balance was $264,000, or 22.1%,
less than the December 31, 1993, balance of $1,194,000. The 1994
decrease represents principal payments made by the Company during
1994.
In March 1992, First State, N.A., Abilene purchased a two-
story commercial building across the street from its downtown
facility for a note payable in the amount of $30,000. The balance
of this note, on which principal and interest is payable monthly,
was $17,000 at December 31, 1995.
49
<PAGE>
Accrued Interest Payable
Accrued interest payable consists of interest that has accrued
on deposits and notes payable, but is not yet payable under the
terms of the related agreements. The balance of accrued interest
payable increased $474,000, or 116.2%, from $408,000 at December
31, 1994, to $882,000 at December 31, 1995. The increase was a
result of an increase in the amount of outstanding certificates of
deposit and the rising interest rate environment on certificates of
deposit during the last year. Accrued interest payable increased
$115,000, or 39.2%, from $293,000 at December 31, 1993, to $408,000
at December 31, 1994. The increase during 1994 was a result of a
rising interest rate environment, particularly during the last
quarter of 1994.
Other Liabilities
The most significant components of other liabilities are
amounts accrued for various types of expenses. The balance of
other liabilities decreased $1,174,000, or 92.8%, from $1,265,000
at December 31, 1994, to $91,000 at December 31, 1995. The 1994
balance represented an increase of $670,000, or 112.6%, from the
December 31, 1993, balance of $595,000. The reason for the high
balance at December 31, 1994, was that the Company had accrued
$900,000 for the potential reimbursement of legal fees, expenses
and settlement costs for certain litigation. See "Note 15:
Commitments and Contingent Liabilities" to the Company's
Consolidated Financial Statements.
Interest Rate Sensitivity
Interest rate risk arises when an interest-earning asset
matures or when such asset's 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 on which interest rates could change 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 the risk associated with interest rate changes, but it will
not guarantee a stable interest rate spread since various rates
within a particular time frame may change by differing amounts and
in different directions. Management regularly monitors the
interest sensitivity position and considers this position in its
decisions with regards to interest rates and maturities for
interest-earning assets acquired and interest-bearing liabilities
accepted.
The Company's objective is to maintain a ratio of interest-
sensitive assets to interest-sensitive liabilities that is as
balanced as possible. The following tables show that ratio to be
72.0% at the 90-day interval, 69.0% at the 180-day interval and
62.5% at the 365-day interval at December 31, 1995. Currently, the
Company is in a liability-sensitive position at the three
intervals. During a rising interest rate environment, this
position normally produces a lower net interest margin than in a
falling interest rate environment; however, because the Company had
$52,430,000 of interest-bearing demand, savings and money market
deposits at December 31, 1995, that are somewhat less rate-
sensitive, the Company's net interest margin does not necessarily
decrease in a rising interest rate environment. 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.
50
<PAGE>
The following table shows the interest rate sensitivity
position of the Company at December 31, 1995:
<TABLE>
<CAPTION>
Volumes
Cumulative Volumes Subject to Subject to
Repricing Within Repricing
90 Days 180 Days 365 Days After 1 Year Total
------- ------- -------- ----------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 26,200 $ 26,200 $ 26,200 $ 0 $ 26,200
Securities 6,244 10,548 16,313 39,594 55,907
Loans, net of unearned income 23,888 26,382 31,447 50,480 81,927
-------- -------- -------- ------- --------
Total interest-earning assets 56,332 63,130 73,960 90,074 164,034
-------- -------- -------- ------- --------
Interest-bearing liabilities:
Demand, savings and money market
deposits 52,430 52,430 52,430 0 52,430
Time deposits 25,242 38,453 65,275 13,732 79,007
Notes payable 614 615 616 233 849
-------- -------- -------- ------- --------
Total interest-bearing liabilities 78,286 91,498 118,321 13,965 132,286
-------- -------- -------- ------- --------
Rate-sensitivity gap(1) $(21,954) $(28,368) $(44,361) $76,109 $ 31,748
======== ======== ======== ======= ========
Rate-sensitivity ratio (2) 72.0% 69.0% 62.5%
==== ==== ====
______________________________
<FN>
(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.
</FN>
</TABLE>
Selected Financial Ratios
The following table presents selected financial ratios for
each of the last three fiscal years:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993(1)
---- ---- -------
<S> <C> <C> <C>
Net income to:
Average assets 0.67% 0.28% 0.81%
Average interest-earning assets 0.73 0.31 0.89
Average stockholders' equity (2) 8.99 3.98 12.50
Dividend payout (3) to:
Net income 10.34 15.56 N/A
Average stockholders' equity 0.93 0.62 N/A
Average stockholders' equity to:
Average total assets (2) 7.43 7.06 6.45
Average loans (4) 15.30 15.12 16.48
Average total deposits 8.15 7.71 7.00
Average interest-earning assets to:
Average total assets 91.56 90.42 90.74
Average total deposits 100.44 98.67 98.52
Average total liabilities 98.91 97.29 97.00
Ratio to total average deposits of:
Average loans (4) 53.25 50.97 42.56
Average noninterest-bearing deposits 18.78 20.56 20.24
Average interest-bearing deposits 81.22 79.44 79.76
Total interest expense to total
interest income 44.38 34.07 34.44
_________________________
<FN>
(1) Averages and income items for 1993 include average balance sheet and
income statement items of Winters State for the period August 31 (the
date of acquisition) through December 31, 1993.
51
<PAGE>
(2) If the Series A Cumulative Convertible Mandatorily Redeemable
Preferred Stock (the "Series A Preferred Stock") had been included
in average stockholders' equity, net income to average stockholders'
equity for the year ended December 31, 1993, would have been 12.49% and
average stockholders' equity to average total assets for the year ended
December 31, 1993, would have been 6.46%.
(3) Dividends for Common Stock only.
(4) Before allowance for possible loan losses.
</FN>
</TABLE>
Liquidity
The Banks
Liquidity with respect to a financial institution is the ability
to meet its short-term needs for cash without suffering an
unfavorable impact on its on-going operations. The need for the
Banks to maintain funds on hand arises principally from maturities
of short-term money market borrowings, deposit withdrawals,
customers' borrowing needs and the maintenance of reserve
requirements. Liquidity with respect to a financial institution
can be met from either assets or liabilities. On the asset side,
the primary sources of liquidity are cash and due from banks,
federal funds sold, maturities of securities and scheduled
repayments and maturities of loans. The Banks maintain adequate
levels of cash and near-cash investments to meet their day-to-day
needs. Cash and due from banks averaged $7,066,000 in 1995 and
$8,060,000 in 1994. These amounts comprised 4.2% and 5.0% of
average total assets during 1995 and 1994, respectively. The
average level of securities and federal funds sold was $72,922,000
during 1995 and $69,925,000 during 1994. Loan demand has increased
over the past two years in the market areas served by First State,
N.A., Abilene and First State, N.A., Odessa. As a result, more
funds have been invested in the lending area. Due to the increase
in deposits in 1995, the level of funds invested in federal funds
sold and investment securities also increased.
No sales of securities were made during 1995 or 1993. During
1994, the Banks sold Federal Reserve Bank stock with a book value
of $8,000 and realized no gain or loss. At December 31, 1995,
$16,313,000, or 29.2%, of the Company's securities portfolio
matured within one year and $39,156,000, or 70.0%, matured after
one but within five years. The Banks' commercial lending
activities are concentrated in loans with maturities of less than
five years and with adjustable interest rates, while their
installment lending activities are concentrated in loans with
maturities of three to five years with fixed interest rates. At
December 31, 1995, approximately $31,447,000, or 38.4%, of the
Company's loan portfolio matured within one year and/or had
adjustable interest rates. See "Analysis of Financial Condition -
Interest Rate Sensitivity" 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.
In 1995, the Company's average deposits were $154,547,000, or
91.2%, of average total assets, compared to $146,608,000, or 91.6%
of average total assets, in 1994. The Company attracts its
deposits primarily from individuals and businesses located within
the market areas served by the Banks. See "Analysis of Financial
Condition - Deposits" above.
The 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
impact of nonperforming assets was minimal during 1995 and 1994.
In order to improve liquidity, the Banks implemented various cost-
cutting and revenue-generating measures and extended efforts to
reduce nonperforming assets. The liquidity ratios for the Banks at
December 31, 1995, ranged from 46.1% to 63.8%.
The Company
The Company depends on the Banks for liquidity in the form of
cash flow, primarily to meet debt service and dividend requirements
and to cover other operating expenses. This cash flow from
subsidiaries comes from three sources: (1) dividends resulting from
earnings of the Banks, (2) current tax liabilities generated by the
Banks and (3) management and service fees for services performed
for the Banks.
The payment of dividends from the Banks is subject to applicable
law and the scrutiny of regulatory authorities. Dividends paid by
the Banks to Independent Financial in 1995 aggregated $700,000; in
turn, Independent Financial paid dividends to the Company totaling
$905,000 during 1995. Dividends paid by the Banks to Independent
52
<PAGE>
Financial and by Independent Financial to the Company totaled
$625,000 and $450,000, respectively, during 1994. At December 31,
1995, there were approximately $1,208,000 in dividends available
for payment to Independent Financial by the Banks without prior
regulatory approval.
The payment of current tax liabilities generated by the Banks and
management and service fees constituted approximately 40% and 7%,
respectively, of the Company's cash flow during 1995. Pursuant to
a tax-sharing agreement, the Banks pay to the Company an amount
equal to their individual tax liabilities on the accrual method of
federal income tax reporting. The accrual method generates more
timely payments of current tax liabilities by the Banks to the
Company, increasing the regularity of cash flow and shifting the
time value of such funds to the Company. In the event that the
Banks incur losses, the Company may be required to refund tax
liabilities previously collected. Current tax liabilities totaling
$930,000 were paid by the Banks to the Company during 1995,
compared to a total of $676,000 in 1994.
The Banks pay management fees to the Company for services
performed. These services include, but are not limited to,
financial and accounting consultation, attendance at the Banks'
board meetings, audit and loan review services and related
expenses. The Banks paid a total of $175,000 in management fees to
the Company in 1995, compared to $158,000 in 1994. The Company's
fees must be reasonable in relation to the management services
rendered, and each Bank is prohibited from paying management fees
to the Company if the Bank would be undercapitalized after any such
distribution or payment.
The Company had two notes payable to the Amarillo Bank during
1995. The term note (the "Term Note") had an outstanding principal
balance of $498,000 at December 31, 1995. The Term Note has a
maturity of April 15, 1996, and equal principal payments based on
a seven-year amortization, plus accrued interest, are due quarterly
on January 15, April 15, July 15 and October 15. The Term Note
bears interest at the Amarillo Bank's floating base rate plus 1%
(9.5% at December 31, 1995). The Term Note is collateralized by
100% of the stock of First State, N.A., Abilene, and First State,
N.A., Odessa. The second note, which was used for the acquisition
of Winters State (the "Acquisition Note"), had an original
principal balance of $450,000 and matured on August 30, 1994. The
Company paid the Amarillo Bank $150,000 to reduce the outstanding
balance of the Acquisition Note to $300,000 and the maturity date
was extended to August 30, 1997. The Acquisition Note was paid off
during the fourth quarter of 1995. The loan agreement between the
Company and the Amarillo Bank contains certain covenants that,
among other things, restrict the ability of the Company to incur
additional debt, to create liens on its property, to merge or to
consolidate with any other person or entity, to make certain
investments, to purchase or sell assets or to pay cash dividends on
the common stock without the approval of the Amarillo Bank if the
indebtedness due to the Amarillo Bank is $1,000,000 or greater.
The loan agreement also requires the Company and the Banks to meet
certain financial ratios, all of which were met at December 31,
1995 and 1994.
In addition, at December 31, 1995, the Company had notes payable
to one current and two former directors of the Company aggregating
$334,000. The notes have a face amount of $350,000, but were
discounted upon issuance because they bear interest at a below-
market interest rate (6%). The notes are payable in three equal
annual installments beginning March 1, 1996. The notes represent
a portion of the final settlement of certain litigation. See "Note
15: Commitments and Contingent Liabilities" to the Company's
Consolidated Financial Statements.
First State, N.A., Abilene has a $17,000 note payable to an
individual which matures in March 1999. Principal and interest at
7.5% are payable monthly. The note is collateralized by a two-
story commercial building in Abilene, Texas.
Capital Resources
At December 31, 1995, stockholders' equity totaled $13,818,000,
or 7.7% of total assets, compared to $11,073,000, or 6.9% of total
assets, at December 31, 1994.
Bank regulatory authorities in the United States have issued
risk-based capital standards by which all bank holding companies
and banks are evaluated in terms of capital adequacy. These
guidelines relate a banking company's capital to the risk profile
of its assets. The risk-based capital standards require all banks
to have Tier 1 capital of at least 4%, and total capital (Tier 1
and Tier 2) of at least 8%, of risk-weighted assets. Tier 1
capital
53
<PAGE>
includes common stockholders' equity, qualifying perpetual
preferred stock and minority interests in unconsolidated
subsidiaries, reduced by goodwill and net deferred tax assets in
excess of regulatory capital limits. Tier 2 capital may be
comprised of certain other preferred stock, qualifying debt
instruments and all or part of the allowance for possible loan
losses.
Banking regulators have also issued leverage ratio requirements.
The leverage ratio requirement is measured as the ratio of Tier 1
capital to adjusted quarterly average assets. The following table
provides a calculation of the Company's risk-based capital and
leverage ratios and a comparison of the Company's and the Banks'
risk-based capital ratios and leverage ratios to the minimum
regulatory requirements at December 31, 1995.
<TABLE>
<CAPTION>
The Company December 31, 1995
----------- -----------------
(Dollars in thousands)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized
gain on available-for-sale securities $ 13,060
Preferred stockholders' equity (1) 690
Net deferred tax asset in excess of regulatory
capital limits (2) (171)
--------
Total Tier 1 capital 13,579
--------
Tier 2 capital:
Allowance for possible loan losses (3) 759
--------
Total Tier 2 capital 759
--------
Total capital $ 14,338
========
Risk-weighted assets $ 89,172
========
Adjusted quarterly average assets $177,445
========
</TABLE>
<TABLE>
<CAPTION>
Minimum Actual
Regulatory Ratios for
The Company Requirement(4) December 31, 1995
- ----------- -------------- -----------------
<S> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 15.23%
Total capital to risk-weighted assets ratio 8.00 16.08
Leverage ratio 3.00 7.65
The Banks
- ---------
Tier 1 capital to risk-weighted assets ratio 4.00% 12.42 - 16.04%
Total capital to risk-weighted assets ratio 8.00 13.27 - 16.91
Leverage ratio 3.00 7.10 - 7.57
_______________________________
<FN>
(1) Limited to 25% of total Tier 1 capital, with any remainder
qualifying as Tier 2 capital.
(2) The amount of the net deferred tax asset in excess of the lesser of
(i) 10% of Tier 1 capital or (ii) the amount of the tax benefit from
utilization of net operating loss carryforwards expected to be
realized within one year.
(3) Limited to 1.25% of risk-weighted assets.
(4) For top-rated banking organizations.
</FN>
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each federal banking agency to revise its risk-
based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities, as well as
reflect the actual performance and expected risk of loss on multi-
family mortgages. The 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,
54
<PAGE>
the Company, First State, N.A., Abilene and First State, N.A.,
Odessa were all "well capitalized" at December 31, 1995.
The Company's ability to generate capital internally through
retention of earnings and access to capital markets is essential
for satisfying the capital guidelines for bank holding companies as
prescribed by the Board of Governors of the Federal Reserve System.
The payment of dividends on the Common Stock and the Series C
Cumulative Convertible Preferred Stock (the "Series C Preferred
Stock") is determined by the Company's board of directors in light
of circumstances and conditions then existing, including the
earnings of the Company and the Banks, funding requirements and
financial condition, applicable loan covenants and applicable laws
and regulations. The Company's ability to pay cash dividends is
restricted by the requirement that it maintain a certain level of
capital as discussed above in accordance with regulatory guidelines
and by the terms of its loan agreement with the Amarillo Bank.
Holders of the Series C Preferred Stock are entitled to receive,
if, as and when declared by the Company's board of directors, out
of funds legally available therefor, quarterly cumulative cash
dividends at the annual rate of 10%. The Federal Reserve Board has
promulgated a policy prohibiting bank holding companies from paying
dividends on common stock unless such bank holding company can pay
such dividends from current earnings. The Federal Reserve Board
has asserted that this policy is also applicable to payment of
dividends on preferred stock. Such an interpretation may limit the
ability of the Company to pay dividends on the Series C Preferred
Stock.
The Company began paying quarterly cash dividends of $0.03 per
share on its Common Stock during the second quarter of 1994. Cash
dividends of $0.03 per share have been paid quarterly since that
time. The Company also paid a 33-1/3% stock dividend on May 31,
1995.
Subsequent Event
First State, N.A., Abilene completed the acquisition of Peoples
National effective January 1, 1996. At December 31, 1995, Peoples
National had total assets of $5,505,000, total loans, net of
unearned income, of $2,767,000, total deposits of $4,958,000 and
stockholders' equity of $525,000. These amounts are not included
in the Consolidated Balance Sheet for the Company at December 31,
1995.
55
<PAGE>
[Independent Bankshares, Inc. Logo]
<PAGE>
[Independent Bankshares, Inc. Logo]
P.O. Box 3296
Abilene, Texas 79604
915-677-5550
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Independent Bankshares, Inc. on Form S-8 (File No. 33-
83112) of our report dated February 5, 1996, on our audit of the
consolidated financial statements of Independent Bankshares, Inc.
as of December 31, 1995 and 1994, and for the years ended December
31, 1995 and 1994, which report is incorporated by reference in
this Annual Report on Form 10-K
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
March 27, 1996
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-83112) pertaining to the Independent
Bankshares, Inc. Employee Stock Option/401(k) Plan of our report
dated January 31, 1994, with respect to the 1993 consolidated
financial statements of Independent Bankshares, Inc. incorporated
by reference in the Annual Report (Form 10-K) for the year ended
December 31, 1995.
/s/ Ernst & Young LLP
Fort Worth, Texas
March 21, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES, INC. AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 8,559,000
<INT-BEARING-DEPOSITS> 131,437,000
<FED-FUNDS-SOLD> 26,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,746,000
<INVESTMENTS-CARRYING> 55,907,000<F1>
<INVESTMENTS-MARKET> 56,130,000<F1>
<LOANS> 81,927,000<F2>
<ALLOWANCE> 759,000
<TOTAL-ASSETS> 180,344,000
<DEPOSITS> 164,704,000
<SHORT-TERM> 614,000
<LIABILITIES-OTHER> 973,000
<LONG-TERM> 235,000
0
164,000
<COMMON> 263,000
<OTHER-SE> 13,391,000
<TOTAL-LIABILITIES-AND-EQUITY> 180,344,000
<INTEREST-LOAN> 7,726,000
<INTEREST-INVEST> 2,389,000
<INTEREST-OTHER> 1,847,000
<INTEREST-TOTAL> 11,962,000
<INTEREST-DEPOSIT> 5,201,000
<INTEREST-EXPENSE> 5,309,000
<INTEREST-INCOME-NET> 6,653,000
<LOAN-LOSSES> 206,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,242,000
<INCOME-PRETAX> 1,714,000
<INCOME-PRE-EXTRAORDINARY> 1,714,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,132,000
<EPS-PRIMARY> 1.02
<EPS-DILUTED> .84
<YIELD-ACTUAL> 4.29
<LOANS-NON> 204,000
<LOANS-PAST> 23,000
<LOANS-TROUBLED> 65,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 817,000
<CHARGE-OFFS> 376,000
<RECOVERIES> 112,000
<ALLOWANCE-CLOSE> 759,000
<ALLOWANCE-DOMESTIC> 759,000<F3>
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 271,000
<FN>
<F1>Includes investments held for sale.
<F2>Net of unearned income on installment loans of $3,354,000.
<F3>Includes unallocated portion of the allowance.
</FN>
</TABLE>
