<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1996
REGISTRATION NO. 333-______
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
INDEPENDENT BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 6025 75-1717279
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
547 CHESTNUT STREET
ABILENE, TEXAS 79602
--------------------
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
RANDAL N. CROSSWHITE
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INDEPENDENT BANKSHARES, INC.
547 CHESTNUT STREET
ABILENE, TEXAS 79602
TEL: 915-677-5550
FAX: 915-677-5943
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
JOSEPH A. HOFFMAN, ESQ. WILLIAM T. LUEDKE IV, ESQ.
ARTER & HADDEN BRACEWELL & PATTERSON, L.L.P.
1717 MAIN STREET, SUITE 4100 711 LOUISIANA STREET, SUITE 2900
DALLAS, TEXAS 75201 HOUSTON, TEXAS 77002
TEL: 214-761-4779 TEL: 713-223-2900
FAX: 214-741-7139 FAX: 713-221-1212
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act") check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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Proposed Maximum Proposed Maximum
Title of Securities to be Amount to be Offering Price Aggregate Amount of
Registered Registered(1) Per Share(2) Offering Price(3) Registration Fee
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<S> <C> <C> <C> <C>
Common Stock 345,000 Shares $13.875 $4,786,875 $1,450.57
($.25 par value)
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</TABLE>
(1) Includes 45,000 shares subject to an over-allotment option granted by
the registrant to the Underwriter.
(2) Based on the closing price on the American Stock Exchange on November
14, 1996.
(3) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 19, 1996
300,000 SHARES
[LOGO]
INDEPENDENT BANKSHARES, INC.
COMMON STOCK
All 300,000 shares of common stock, par value $.25 per share (the "Common
Stock"), of Independent Bankshares, Inc. (the "Company") offered hereby (this
"Offering") are being sold by the Company. At the request of the Company, the
Underwriter has reserved up to 30,000 shares of Common Stock for sale to
directors, executive officers and other affiliates of the Company who have
expressed an interest in purchasing shares of Common Stock in this Offering.
The Common Stock is traded on the American Stock Exchange ("AMEX") under the
symbol "IBK." See "Market For Common Stock." On November 14, 1996, the last
sale price of the Common Stock as reported on AMEX was $13.875.
The Company will use approximately $3,000,000 of the net proceeds of this
Offering to fund a portion of the cost of acquiring Crown Park Bancshares, Inc.,
a bank holding company that owns Western National Bank, Lubbock, Texas, and the
balance, if any, for working capital and general corporate purposes. See "The
Acquisition" and "Use of Proceeds."
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
SEE "INVESTMENT CONSIDERATIONS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share............ $ $ $
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Total(3)............. $ $ $
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(1) For information concerning indemnification of the Underwriter, see
"Underwriting."
(2) Before deducting estimated expenses of $155,000 payable by the Company.
(3) The Underwriter has been granted a 30-day over-allotment option to purchase
up to 45,000 additional shares from the Company. If all such shares are
purchased, the total Price to Public, Underwriting Discount and Commissions
and Proceeds to Company will be $_____________, $_________ and $__________,
respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, subject to
its right to reject any order in whole or in part, and subject to certain other
conditions. It is expected that delivery of the Common Stock will be made on or
about January __, 1997 in Dallas, Texas.
HOEFER & ARNETT
INCORPORATED
--------------------
THE DATE OF THIS PROSPECTUS IS ______________, 1996.
<PAGE>
Map of the State of Texas describing banking locations of the Company
before and after the Acquisition. Before the Acquisition, First State Bank,
N.A., Abilene had a main office in Abilene, Texas and branch offices in
Wylie, Stamford, Winters and San Angelo, Texas, and First State Bank, N.A.,
Odessa had a main office in Odessa, Texas and a branch office in Winwood,
Texas. After the Acquisition, First State Bank, N.A., Abilene will have one
branch in Lubbock, Texas.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
-2-
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS
THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" MEANS INDEPENDENT
BANKSHARES, INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE
INFORMATION CONTAINED IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE
UNDERWRITER'S OVER-ALLOTMENT OPTION AND (II) REFLECTS THE 5% COMMON STOCK
DIVIDEND PAID TO SHAREHOLDERS IN MAY 1993 AND THE 33 1/3% COMMON STOCK
DIVIDEND PAID TO SHAREHOLDERS IN MAY 1995. INVESTORS SHOULD CAREFULLY
CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET FORTH UNDER "INVESTMENT
CONSIDERATIONS."
THE COMPANY
The Company is a bank holding company headquartered in Abilene, Texas,
located approximately 180 miles west of Dallas. The Company, which is a
Texas corporation, indirectly owns through a Delaware subsidiary corporation
100% of the stock 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"). The
Banks currently operate full-service banking locations in the Texas cities of
Abilene (2 locations), San Angelo, Stamford, Winters and Odessa (2 locations).
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. Although each Bank operates under the management
of its own officers and directors, 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 a larger bank. In
connection with its proposed acquisition (the "Acquisition") of Crown Park
Bancshares, Inc. ("Crown Park") and its subsidiary Western National Bank
("Western National"), the Company is seeking the approval of the Office of
the Comptroller of the Currency (the "Comptroller") to merge First State,
N.A., Odessa with and into First State, N.A., Abilene in order to recognize
certain cost savings and to utilize the Banks' capital more effectively than
on a stand alone basis. Following the anticipated merger of First State,
N.A., Odessa with and into First State, N.A., Abilene, the Company will
continue its decentralized approach to banking with senior management at the
main banking offices in Abilene and Odessa exercising substantial autonomy
over credit and pricing decisions.
Each of the Banks is an established franchise with a significant presence
in its respective service area. First State, N.A., Abilene was chartered in
1982 and was the third largest of four commercial banks headquartered in
Abilene, Texas, in terms of total assets at December 31, 1995, and was the
fifth largest of ten banks in Abilene in terms of total branch assets at that
same time. The branches in Stamford and Winters were the largest bank
branches in those cities in terms of total assets at December 31, 1995. The
branch in San Angelo was the ninth largest of ten banks in terms of total
branch assets in that city at December 31, 1995. First State, N.A., Odessa
was chartered in 1983 and was the third largest of four commercial banks
headquartered in Odessa, Texas, in terms of total assets at December 31,
1995, and was the sixth largest of seven banks in Odessa in terms of total
branch assets at that same date. The Banks operate as community banks that
focus on long-term relationships with customers and provide individualized,
quality service. Reflecting its community banking heritage, the Company has
a stable deposit base from customers located within its West Texas market
area. Its recent financial performance is characterized by consistent core
earnings, an increasingly diversified loan portfolio and strong asset quality.
At September 30, 1996, the Company had, on a consolidated basis, total
assets of $203,801,000, total deposits of $187,474,000, total loans, net of
unearned income, of $90,115,000 and total stockholders' equity of
$14,582,000. The Company's net income has grown from $224,000 in 1991 to
$1,132,000 in 1995. Net income was $1,046,000 for the nine-month period ended
September 30, 1996. Additionally, since 1991, the Company's total loans have
grown at a 12.0% average annual rate resulting from a combination of internal
growth and the Company's acquisition of community banks.
The Company's complete mailing address and telephone number is 547
Chestnut Street, Abilene Texas 79602, (915) 677-5550.
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<PAGE>
BUSINESS STRATEGY
The Company's strategic plan contemplates an increase in profitability
and shareholder value through the building of a valuable West Texas banking
franchise consisting of low cost core deposits as a funding base to support
local consumer and commercial lending programs.
The Company's acquisition activity has been designed to augment this
franchise by increasing market share and expanding into contiguous markets
demographically similar to its current service areas. Following the
acquisition of Crown Park and its subsidiary Western National, the Company
will have locations in four of the fastest growing consumer markets in West
Texas. Management believes that it can increase the profitability of the
Company through increased operating efficiencies, an increase in the loan to
deposit ratio and cross-selling a more expansive product line to newly
acquired customers.
The Company's operating strategy is to provide customers with the
business sophistication and breadth of products of a regional financial
services company, while retaining the special attention to personal service
and the local appeal of a community bank. Decentralized decision making
authority vested in the presidents and senior officers of the Banks allows
for rapid response time and flexibility in dealing with customer requests and
credit needs. The Company believes that following the merger of First State,
N.A., Odessa with and into First State, N.A., Abilene the rapid response time
and flexibility in dealing with customer requests and credit needs will
continue through the substantial autonomy of senior management at the main
banking offices in Odessa and Abilene. The participation of the Company's
directors, officers and employees in area civic and service organizations
demonstrates the Company's continuing commitment to the communities it
serves. Management believes that these qualities distinguish the Company
from its competitors and will allow the Company to compete successfully in
its market against larger regional and out-of-state institutions.
THE ACQUISITION
The Company intends to acquire Crown Park and its subsidiary, Western
National. The Company and Crown Park have entered into an Agreement and Plan
of Reorganization dated July 11, 1996 (the "Reorganization Agreement").
Under the Reorganization Agreement, Crown Park will be merged with and into a
subsidiary of the Company to be formed and Western National will be merged
with and into First State, N.A., Abilene, and the shareholders of Crown Park
will receive merger consideration consisting of cash and/or promissory notes
in the amount of $7,425,000 subject to adjustment as set forth below. The
maximum amount of the merger consideration that the holders of Crown Park
common stock may elect to have paid pursuant to promissory notes is
$3,000,000. The merger consideration will (i) increase by the amount of
interest earned on the merger consideration from December 1, 1996 through the
closing date at a rate equal to the 26-week United States Treasury Bill rate
plus 2%, (ii) decrease by the amount of $142,779 to be paid to Crown Park's
financial advisor, (iii) decrease by the cost of certain director and officer
insurance that the Company may elect to purchase in the event Western
National fails to purchase such insurance, and (iv) decrease by the amount by
which Western National's shareholders' equity, at the effective time of the
merger, is less than $5,400,000 and shall be further reduced by the amount by
which the shareholders' equity of Crown Park at the effective time is less
than $4,000,000, provided that in the event both Western National and Crown
Park's shareholders' equity are below the required amounts, then the amount
by which those equity accounts are below such required amounts will be
deducted only once and further provided that the merger consideration shall
not be reduced in the event that Western National's shareholders' equity is
less than $5,400,000 or Crown Park's shareholders' equity is less than
$4,000,000 for any reason other than the payment of a dividend or
distribution. See "The Acquisition."
Management of the Company believes that the Acquisition presents an
excellent opportunity for increased earnings. Crown Park, a Texas corporation
located in Lubbock, Texas, engages in no significant activities other than
owning and managing Western National. At September 30, 1996, Crown Park had
total assets of $57,525,000, total loans, net of unearned income, of
$38,619,000, total deposits of $50,702,000, and stockholders' equity of
$4,318,000.
Western National is a community bank that offers interest and
noninterest-bearing depository accounts, and makes consumer and commercial
loans. The Company intends to increase the profitability of Western National
by expanding its loan portfolio and deposit base. The Company believes
enhanced marketing efforts, expanded loan and deposit products and increased
employee training and personal attention to customers will fuel this growth.
The Company also believes that savings can be realized in the area of
noninterest expenses through consolidation of operations. See "Business and
Properties of the Company - Business Strategy."
-4-
<PAGE>
In addition to the immediate increase in asset size and the potential for
improved future profitability, the Acquisition will allow the Company to
expand its market area into what it believes are desirable banking locations.
This expansion will increase the geographic diversity of the Company's loan
portfolio which is expected to decrease the Company's overall lending risks.
The closing of this Offering is contingent upon the simultaneous closing
of the Acquisition, and if for any reason the Acquisition is not completed,
this Offering will not be consummated. There can be no assurance that the
Acquisition will be completed.
THE OFFERING
Securities Offered...................... 300,000 shares of Common Stock
Common Stock Outstanding
After the Offering.................... 1,404,644 shares are expected to be
outstanding after this Offering. See
"Capitalization."(1)
Use of Proceeds......................... The Company will use approximately
$3,000,000 of the net proceeds from
this Offering to fund a portion of
the cost of acquiring Crown Park,
and the balance, if any, for working
capital and general corporate
purposes.
AMEX Symbol............................. IBK
_____________________
(1) Based on the number of shares of Common Stock issued and outstanding at
October 31, 1996, and excludes 262,324 shares of Common Stock reserved for
issuance upon the exercise of certain employee stock options and upon
conversion of the Company's $10.00 Series C Cumulative Convertible
Preferred Stock ("Series C Preferred Stock").
INVESTMENT CONSIDERATIONS
See "Investment Considerations" for a discussion of certain
considerations relevant to an investment in the Common Stock offered hereby.
-5-
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical consolidated financial
information and other data of the Company. Such financial information has
been restated to reflect the 5% stock dividend paid to shareholders in May
1993 and the 33-1/3% stock dividend paid to shareholders in May 1995. The
following summary of historical consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto appearing elsewhere in this Prospectus and the information
contained in "Management's Discussions and Analysis of Financial Condition
and Results of Operations of the Company." The summary historical
consolidated financial data as of and for the five years in the period ended
December 31, 1995, is derived from the Company's consolidated financial
statements which have been audited by independent public accountants. The
summary historical consolidated financial data as of and for the nine-month
periods ended September 30, 1996, and September 30, 1995, is unaudited. In
the opinion of management of the Company, the information presented reflects
all adjustments considered necessary for fair presentation of the results for
such periods.
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $ 10,009 $ 8,831 $ 11,962 $ 10,131 $ 9,221 $ 9,715 $ 11,438
Net interest income 5,287 4,971 6,653 6,679 6,045 5,639 5,188
Income before extraordinary item
and cumulative effect of
accounting change 1,046 831 1,132 450 1,029 839 224
Extraordinary item 0 0 0 0 0 192(1) 0
Cumulative effect of
accounting change 0 0 0 0 200(2) 0 0
Net income 1,046 831 1,132 450 1,229 1,031 224
COMMON SHARE DATA:
Earnings per share:
Primary $ 0.92 $ 0.75 $ 1.02 $ 0.36 $ 1.11 $ 0.91 $ 0.13
Fully diluted 0.77 0.62 0.84 0.33 0.91 0.74 0.13
Cash dividends 0.13 0.08 0.11 0.07 0.00 0.00 0.00
Dividend payout ratio 13.58% 10.23% 10.34% 15.56% N/A N/A N/A
Book value per share:
Common stock $ 12.69 $ 12.31 $ 12.46 $ 10.02 $ 9.78 $ 7.34 $ 5.59
Fully diluted 10.73 10.04 10.11 8.26 8.07 6.05 4.74
Period end shares outstanding 1,105 1,039 1,050 1,037 1,037 1,026 1,015
Weighted average shares
outstanding (in thousands):
Primary 1,083 1,045 1,047 1,042 1,041 1,041 1,031
Fully diluted 1,358 1,350 1,352 1,348 1,349 1,349 1,388
BALANCE SHEET DATA:
Assets $203,801 $174,065 $180,344 $159,860 $160,712 $160,554 $149,052
Loans, net of unearned income 90,115 82,559 81,927 81,306 69,647 52,967 52,545
Deposits 187,474 158,414 164,704 146,184 147,785 134,679 137,535
Notes payable 578 1,074 849 930 1,194 2,290 2,610
Stockholders' equity 14,582 13,488 13,818 11,073 10,845 8,238 6,380
PERFORMANCE DATA (RETURNS ANNUALIZED
FOR INTERIM PERIODS):
Return on average total assets 0.72% 0.66% 0.67% 0.28% 0.81% 0.72% 0.16%
Return on average stockholders'
equity 9.81 9.06 8.99 3.98 12.50 14.39 3.54
Net interest margin(3) 3.97 4.33 4.29 4.62 4.37 4.33 4.03
Ratios to total average deposits
of average loans, net of
unearned income(4) 47.49 54.27 53.25 50.97 42.56(5) 38.01 42.01
Efficiency ratio(6) 72.55 77.38 76.56 89.97 77.77 78.15 91.29
</TABLE>
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<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
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ASSET QUALITY RATIOS:
Nonperforming assets to total
assets 0.28% 0.41% 0.35% 0.49% 1.83% 1.20%(7) 2.58%
Nonperforming loans to total
loans, net of unearned income 0.40 0.33 0.36 0.19 3.06 2.05(7) 5.15
Net loan charge-offs to average
loans, net of unearned income
(annualized for interim periods) 0.42 0.31 0.32 0.30 0.18(8) 0.47(8) 1.43(8)
Allowance for loan losses to total
loans, net of unearned income 0.89 0.93 0.93 1.00 1.29 1.16(7) 1.27
Allowance for loan losses
to nonperforming loans 224.51 284.39 259.93 530.52 41.99 56.87(7) 24.74
CAPITAL RATIOS:
Average equity to average total
assets 7.36% 7.32% 7.43% 7.06% 6.45%(8) 4.97% 4.45%
Total capital to risk-weighted
assets 14.66 15.84 16.08 13.97 16.54 14.92 12.35
Leverage ratio 6.68 7.61 7.65 7.03 7.23 5.71 4.46
</TABLE>
__________________
(1) Gain on extinguishment of debt.
(2) Cumulative effect of the change in accounting for income taxes.
(3) Fully taxable-equivalent basis.
(4) Before allowance for possible loan losses.
(5) Includes average balance sheet items of The Winters State Bank, Winters,
Texas ("Winters State") for the period August 31, 1993 (the date of the
acquisition) through December 31, 1993.
(6) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding securities gains and losses.
(7) Balances at December 31, 1992, do not include the assets of Olton State
Bank, Olton, Texas ("Olton State") that were sold on January 1, 1993.
(8) 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.
SUMMARY PRO FORMA COMBINED INFORMATION
The following table presents summary pro forma combined financial
information and other data for the Company as if consummation of the
Acquisition and this Offering had occurred, in the case of the statements of
operations data, as of January 1, 1995, and in the case of the balance sheet
data, as of September 30, 1996. The pro forma combined financial data do not
purport to be indicative of the Company's financial condition and results of
operations at any future date or for any future period. The financial data
should be read in conjunction with the Company's and Crown Park's
consolidated financial statements, the notes thereto, the pro forma combined
financial statements of the Company, the notes thereto and the other
financial information, included elsewhere herein. In the opinion of
management of the Company, the data presented reflect all adjustments
considered necessary for a fair presentation of the results for such periods.
PRO FORMA
THE COMPANY CROWN PARK COMBINED
----------- ---------- --------
(Dollars in thousands, except per share data)
Income Statement Data:
Total interest income $ 10,009 $ 3,330 $ 13,275
Net interest income 5,287 1,851 6,968
Net income 1,046 342 1,291
Common Share Data:
Earnings per share:
Primary $ 0.92 $ 1.80 $ 0.90(1)
Fully diluted 0.77 N/A 0.78(1)
Adjusted shares outstanding
(in thousands):
Primary 1,083 190 1,383
Fully diluted 1,358 N/A 1,658
Balance Sheet Data:
Assets $203,801 $57,525 $262,845
Loans, net of unearned income 90,115 38,619 128,734
Deposits 187,474 50,702 238,176
Notes payable 578 2,094 4,778
Stockholders' equity 14,582 4,318 18,313
Capital Ratios:
Total capital to risk-
weighted assets 14.66% 9.16% 11.74%
Leverage ratio 6.68 7.62 5.78
________________
(1) Had Crown Park not incurred approximately $80,000 ($53,000 net of tax)
of expenses in the nine-month period ended September 30, 1996, related
to the proposed acquisiton of Crown Park, primary and fully diluted
earnings per share would have been $0.94 and $0.81, respectively.
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<PAGE>
INVESTMENT CONSIDERATIONS
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS
DISCUSSED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. IN ADDITION TO
OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS COULD
CONTRIBUTE TO SUCH DIFFERENCES. PROSPECTIVE INVESTORS SHOULD CAREFULLY
CONSIDER THE FOLLOWING FACTORS AND CAUTIONARY STATEMENTS IN DETERMINING
WHETHER TO PURCHASE SHARES OF COMMON STOCK IN THIS OFFERING. ALL FACTORS
SHOULD BE CONSIDERED IN CONJUNCTION WITH THE OTHER INFORMATION AND FINANCIAL
DATA APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS."
POTENTIAL NEGATIVE IMPACT ON EARNINGS FROM INTEGRATION OF THE
ACQUISITION. As a result of the Acquisition, the Company's asset size will
substantially increase. The Company has not recently consummated an
acquisition on the same scale as the Acquisition. The future prospects of
the Company will depend, in significant part, on a number of factors,
including, without limitation, the Company's ability to integrate the
Acquisition; its ability to compete effectively in the Lubbock, Texas market
area; its success in retaining earning assets, including loans, acquired in
the Acquisition; its ability to generate new earning assets; and its ability
to attract and retain qualified management and other appropriate personnel.
No assurance can be given with respect to the Company's ability to accomplish
any of the foregoing or that the Company will be able to achieve results in
the future similar to those achieved in the past or that the Company will be
able to manage effectively the growth resulting from the Acquisition.
In addition, as a result of the Acquisition, the Company's management
must successfully integrate the operations of Western National with those of
the Banks. The operational areas requiring significant integration include
the consolidation of data processing operations among all of the Banks and
Western National, the combination of employee benefit plans, the creation of
joint account and lending products, the development of unified marketing
plans and other related issues. Accomplishment of these goals will require
additional expenditures by the Company that could negatively impact the
Company's net income. Completion of these tasks could divert management's
attention from other important issues. In addition, there can be no
assurance that management of the Company and Crown Park/Western National will
be compatible, and the process of combining the Banks and Western National
could cause the interruption of, or the disruption in, the activities of
either or both the Banks' and Western National's businesses, which could have
an adverse effect on their combined operations. The Company may also incur
additional unexpected costs in connection with integration of the Acquisition
that could negatively impact the Company's net income. See "The Acquisition."
POTENTIAL CREDIT QUALITY ISSUES IN CONNECTION WITH THE ACQUISITION. In
connection with the Acquisition, the Company and its representatives reviewed
the loan portfolio of Western National. The Company's review was made using
criteria, analyses and collateral evaluations that the Company has
traditionally used in the review of its existing business. Nonperforming
loans (including nonaccrual loans, restructured loans and loans 90 days or
more past due) at September 30, 1996 and December 31, 1995, totaled
approximately $331,000 and $525,000, respectively, at Western National. At
September 30, 1996, the Company's allowance for loan losses of $806,000 was
0.89% of total loans, net of unearned income while on a pro forma basis
assuming consummation of the Acquisition, the Company's allowance for loan
losses would have been $1,336,000 or 1.04% of total loans, net of unearned
income at September 30, 1996.
ADDITIONAL FINANCING. The Company has in the past expanded through
acquisitions, and has financed its recent acquisitions primarily through
borrowings and, with respect to the Acquisition, through borrowings and an
offering of the Common Stock. There can be no assurance that the Company
will continue to make acquisitions. However, if the Company attempts
additional acquisitions, it is likely to finance the acquisitions through a
combination of borrowings and offerings of its securities. There is no
assurance that the Company will be able to obtain debt financing on terms
satisfactory to it or at all. Furthermore, if the Company does sell
additional securities to raise funds in the future, the terms and conditions
of the issuances may have a dilutive effect or otherwise adversely impact
existing shareholders.
DIVIDEND HISTORY. While the Company has paid cash dividends on the
Common Stock since May 1994, there is no assurance that the Company will
continue to pay dividends in the future. The payment of any cash dividends
by the Company in the future will depend to a large extent on the payment of
dividends from the Banks. The ability of the Banks to pay dividends is
dependent upon the Banks' earnings and financial condition. The payment of
cash dividends by the Banks to Independent Financial Corp., an intermediate
holding company for the Banks ("Independent Financial"), by Independent
Financial to the Company and by the Company to its shareholders
-8-
<PAGE>
are all subject to certain statutory and regulatory restrictions and may be
restricted by provisions of future financing arrangements. Moreover, holders
of the Series C Preferred Stock are entitled to receive dividends before
dividends may be paid on the Common Stock. See "Dividend Policy" and
"Regulation and Supervision."
RELIANCE ON KEY PERSONNEL. The Company and the Banks are dependent upon
their executive officers and key employees. Specifically, the Company
considers the services of Bryan W. Stephenson, President and Chief Executive
Officer, Randal N. Crosswhite, Senior Vice President and Chief Financial
Officer, and other senior officers of the Banks to be important to the
success of the Company. The unexpected loss of the services of any of these
individuals could have a detrimental effect on the Company and the Banks.
COMPETITION. There is significant competition among banks and bank
holding companies, many of which have far greater assets and resources than
the Company, in the areas in which the Company operates. The Company also
encounters intense competition in its commercial banking business from
savings and loan associations, credit unions, factors, insurance companies,
commercial and captive finance companies, and certain other types of
financial institutions located in other major metropolitan areas in the
United States, many of which are larger in terms of capital, resources and
personnel than the Company. Additionally, federal legislation regarding
interstate branching and banking may increase competition in the future from
large out-of-state banks. See "Regulation and Supervision - The Banks -
Branching" and "Business and Properties of the Company - Competition."
REGULATION AND SUPERVISION. The Company and the Banks are subject to
extensive federal and state regulation and supervision, which is intended
primarily for the protection of insured depositors and consumers. In
addition, the Company and the Banks are subject to changes in federal and
state law, as well as changes in regulations, governmental policies and
accounting principles. The effects of any such potential changes cannot be
predicted, but could adversely affect the business and operations of the
Company and the Banks. See "Regulation and Supervision."
REGULATION AND CONTROL. Individuals, alone or acting in concert with
others, seeking to acquire more than 10% of any class of voting securities of
the Company must comply with the Change in Bank Control Act. Entities
seeking to acquire 5% or more of any class of voting securities of, or
otherwise to control, the Company must comply with the Bank Holding Company
Act of 1956, as amended (the "BHCA"). Accordingly, prospective investors
need to be aware of and to comply with these requirements, if applicable, in
connection with any purchase of shares of the Common Stock offered hereby.
GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income
and net income of the Company depend to a substantial extent on "rate
differentials," i.e., the differences between the income the Company receives
from loans, securities and other earning assets, and the interest expense it
pays to obtain deposits and other liabilities. These rates are highly
sensitive to many factors that are beyond the control of the Company,
including general economic conditions, rapid changes in interest rates,
decline in real estate market values and the monetary and fiscal policies of
various governmental and regulatory authorities. For example, in an
expanding economy, loan demand usually increases and the interest rates
charged on loans increase. Increases in the discount rate by the Federal
Reserve System usually lead to rising interest rates, which affect the
Company's interest income, interest expense and investment portfolio. Also,
governmental policies such as the creation of a tax deduction for individual
retirement accounts can increase savings and affect the cost of funds.
TRADING MARKET FOR THE COMMON STOCK. Although the Common Stock is listed
for trading on the American Stock Exchange, the trading market in the
Company's Common Stock on such exchange historically has been less active
than the average trading market for companies listed on such exchange. A
public trading market having the desired characteristics of depth, liquidity
and orderliness depends upon the presence in the marketplace of willing
buyers and sellers of the Common Stock at any given time, which presence is
dependent upon the individual decisions of investors and general economic and
market conditions over which the Company has no control. Consequently,
although the Company believes that this Offering will improve the liquidity
of the market for the Common Stock, no assurance can be given that this
Offering will increase the volume of trading in the Common Stock. See
"Market for Common Stock."
ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors are classified
into three classes, each of which has a staggered, three-year term. Moreover,
the Restated Articles of Incorporation of the Company require the affirmative
vote of the holders of at least 80% of the voting stock of the Company to
approve any merger or certain other business combinations involving any person
beneficially owning 5% or more of any class of voting stock of the Company. In
addition, the Board of Directors is able to issue various series of the
Company's preferred stock and to determine certain characteristics of such
preferred stock, such as voting rights, without the
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<PAGE>
approval of the holders of the Common Stock or, in some cases, the holders of
the Series C Preferred Stock. The Articles of Incorporation and Bylaws of the
Company also contain certain procedural restrictions relating to nomination
and removal of directors and amendments to Bylaws. Each of these factors may
impede or inhibit an investor from attempting to acquire control of the
Company and may have certain other anti-takeover effects. See "Description
of Capital Stock - Certain Provisions of the Restated Articles of
Incorporation and the Bylaws."
SHARES ELIGIBLE FOR FUTURE SALE. The Company will have approximately
1,404,644 shares of Common Stock outstanding following this Offering
(assuming 300,000 shares are issued in this Offering and no exercise of
existing employee stock options to purchase Common Stock, and further
assuming that none of the outstanding shares of Series C Preferred Stock are
converted into Common Stock). The Company's management believes that 366,921
(26.1%) of these shares will be held by "affiliates" of the Company,
including the shares offered for sale in this Offering which are reserved for
sale to certain persons. In addition, 42,359 shares of the Company's
outstanding Common Stock are "restricted securities" and may not be sold
unless they are sold pursuant to an exemption from registration, including
the exemption contained in Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"), or are registered under the Securities Act.
Sales of substantial amounts of Common Stock in the public market pursuant to
registration under the Securities Act, Rule 144 or otherwise, or even the
potential for such sales, could adversely affect the prevailing market prices
for the Common Stock and impair the Company's ability to raise additional
capital through the sale of its equity securities. See "Security Ownership
of Management and Certain Beneficial Owners" and "Shares Eligible for Future
Sale."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") that are based on the
current beliefs of the Company's management as well as assumptions made by
and information currently available to the Company's management. All
statements other than statements of historical facts included in this
Prospectus, including without limitation, statements under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company" and "Business and
Properties of the Company" regarding the Company's financial position,
business strategy and plans and objectives of management of the Company for
future operations, are forward-looking statements. When used in this report,
the words "anticipate," "believe," "estimate," "expect" and "intend" and
words or phrases of similar import, as they related to the Company or its
subsidiaries or Company management, are intended to identify forward-looking
statements. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the Company's
expectations ("cautionary statements") are disclosed under "Investment
Considerations" and elsewhere in this Prospectus, including, without
limitation, in conjunction with the forward-looking statements included in
this Prospectus. Based upon changing conditions, should any one or more of
these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended.
The Company does not intend to update these forward-looking statements. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the applicable cautionary statements.
-10-
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $3,731,000 ($4,311,000 if the Underwriter's
over-allotment option is fully exercised) after deducting estimated
underwriting discounts and commissions and offering expenses assuming an
offering price of $13.875 per share in this Offering. The Company will use
approximately $3,000,000 of the net proceeds from this Offering to fund a
portion of the cost of acquiring Crown Park, and the balance, if any, for
working capital and general corporate purposes. See "The Acquisition."
MARKET FOR COMMON STOCK
Since September 12, 1995, the Common Stock has traded on 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.
Cash
Dividends
High Low Per Share
---- --- ---------
Calendar Year Ended December 31,
1994
First Quarter............... $ 6-3/4 $ 6 $ .00
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
Calendar Year Ended December 31,
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
Calendar Year Ended December 31,
1996
First Quarter............... $ 10-1/2 $ 9-3/4 $ 0.03
Second Quarter.............. 11 9 0.05
Third Quarter............... 12 10-7/8 0.05
Fourth Quarter (through
November 14, 1996)......... 14-1/8 12-1/8 0.05(1)
__________________
(1) This cash dividend is payable November 29, 1996 to shareholders of record
on November 15, 1996.
The Nasdaq Small-Cap Market 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, the Company had
approximately 1,307 holders of record of the Common Stock at October 31,
1996. The high and low sales price for the Common Stock was $13.875 on
November 14, 1996.
DIVIDEND POLICY
THE COMPANY. In May 1994, the Company instituted the payment of a $.03
per share quarterly cash dividend, which was raised to $0.05 per share in May
1996. The Board of Directors presently intends to continue the payment of a
small cash dividend on the Common Stock. The continued payment of dividends
and 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 future loan or financing agreements.
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<PAGE>
The Company's ability to pay cash dividends is restricted by the
requirement that it and the Banks maintain certain levels of capital in
accordance with regulatory guidelines promulgated by, in the case of the
Company, the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") and, in the case of the Banks, the Comptroller. See
"Regulation and Supervision - The Company - Capital Adequacy Requirements."
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, 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 13,478 shares of the
Series C Preferred Stock outstanding at October 31, 1996, is approximately
$57,000. 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. 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 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 would be 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 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
Independent Financial and to Independent Financial by the Banks. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity." The ability of the Banks to pay dividends is
restricted by the requirement that the Banks maintain an adequate level of
capital in accordance with regulatory guidelines and by statute.
The Federal Deposit Insurance Corporation ("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 "Regulation and
Supervision - The Banks - Capital Adequacy Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Company - Capital Resources."
The National Bank Act of 1864, as amended (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
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and
implementing regulations prohibit a bank from paying a dividend if, following
the payment, the bank would be in any of the three
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capital categories for undercapitalized institutions. See "Regulation and
Supervision - The Banks - Capital Adequacy Requirements."
THE ACQUISITION
The Company intends to acquire Crown Park and its subsidiary, Western
National. The Company and Crown Park have entered into the Reorganization
Agreement pursuant to which Crown Park will be merged with and into a
subsidiary of the Company to be formed and Western National will be merged
with and into First State, N.A., Abilene, and the shareholders of Crown Park
will receive merger consideration consisting of cash and/or promissory notes
in the amount of $7,425,000 subject to adjustment as set forth below. The
maximum amount of the merger consideration that the holders of Crown Park
common stock may elect to have paid pursuant to promissory notes is
$3,000,000.The merger consideration will (i) increase by the amount of
interest earned on the merger consideration from December 1, 1996 through the
closing date at a rate equal to the 26-week United States Treasury Bill rate
plus 2%, (ii) decrease by the amount of $142,779 to be paid to Crown Park's
financial advisor, (iii) decrease by the cost of certain director and officer
insurance that the Company may elect to purchase in the event Western
National fails to purchase such insurance, and (iv) decrease by the amount by
which Western National's shareholders' equity, at the effective time of the
merger, is less than $5,400,000 and shall be further reduced by the amount by
which the shareholders' equity of Crown Park at the effective time is less
than $4,000,000, provided that in the event both Western National and Crown
Park's shareholders' equity are below the required amounts, then the amount
by which those equity accounts are below such required amounts will be
deducted only once and further provided that the merger consideration shall
not be reduced in the event that Western National's shareholders' equity is
less than $5,400,000 or Crown Park's shareholders' equity is less than
$4,000,000 for any reason other than the payment of a dividend or
distribution.
The holders of Crown Park common stock will have the option to elect to
receive (part or all) of their portion of the merger consideration in the
form of promissory notes payable in equal annual principal payments over a
period of five years at a rate of interest equal to the 26-week United States
Treasury Bill rate plus 2%, with such rate adjusted quarterly. The
promissory notes will provide that interest will be paid quarterly and that
principal will be paid annually. If the holders of Crown Park common stock
elect to receive a portion of the merger consideration in the form of
promissory notes in excess of $3,000,000 or if the aggregate amount of debt
assumed and incurred by the Company and its subsidiaries (including the
promissory notes to be issued as part of the merger consideration) exceeds
$4,000,000, then the merger consideration payable in the form of promissory
notes will be reduced pro rata.
Management of the Company believes that the Acquisition presents an
excellent opportunity for increased earnings. Crown Park, a Texas corporation
located in Lubbock, Texas, engages in no significant activities other than
owning and managing Western National. At September 30, 1996, Crown Park had
total assets of $57,525,000, total loans, net of unearned income, of
$38,619,000, total deposits of $50,702,000, and stockholders' equity of
$4,318,000. Holders of at least two-thirds of the outstanding shares of
Crown Park have executed a voting agreement whereby such shareholders have
agreed that they will vote their Crown Park shares in favor of the
Acquisition, and such shareholders have given an irrevocable proxy naming
Bryan Stephenson, President and Chief Executive Officer of the Company, proxy
to vote their shares.
Western National is a community bank that offers interest and
noninterest-bearing depository accounts, and makes consumer and commercial
loans. At September 30, 1996, Western National's loan portfolio consisted
primarily of $17,844,000 of real estate loans (46.6% of the total loan
portfolio), $15,115,000 of loans to individuals (39.5% of the total loan
portfolio), and $4,866,000 of commercial loans (12.7% of the total loan
portfolio). At September 30, 1996, Western National's total nonperforming
loans were $331,000 (0.9% of the total loan portfolio). The allowance for
possible loan losses was $330,000, or 98.7% of total nonperforming loans, and
0.86% of the total loan portfolio. Real estate and other repossessed assets
of Western National was $310,000 at September 30, 1996. Western National
reported net income after taxes of $710,000 for 1994, $621,000 for 1995 and
$457,000 for the nine-month period ended September 30, 1996. See the
consolidated financial statements of Crown Park included elsewhere in this
Prospectus. At October 31, 1996, Western National had 28 full-time equivalent
employees, 10 of which were officers. The Company intends to increase the
profitability of Western National by expanding its loan portfolio and deposit
base. The Company believes enhanced marketing efforts, expanded loan and
deposit products and increased employee training and personal attention to
customers will fuel this growth. The Company also believes that savings can
be realized in the area of noninterest expenses through consolidation of
operations. See "Business and Properties of the Company - Business Strategy."
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<PAGE>
In addition to the immediate increase in asset size and the potential for
improved future profitability, the Acquisition will allow the Company to
expand its market area into what it believes are desirable banking locations.
This expansion will increase the geographic diversity of the Company's loan
portfolio which is expected to decrease the Company's overall lending risks.
The obligations of the parties to complete the Acquisition are subject to
certain conditions, including the conditions that (i) all approvals of any
regulatory authority having jurisdiction have been received and all
applicable statutory waiting periods have expired and (ii) at the closing
date, no action or litigation is pending or threatened that would adversely
affect certain aspects of the Acquisition. In addition, the Company is not
obligated to complete the Acquisition unless certain conditions have been
satisfied or waived by the Company, including that (i) the shareholders of
Crown Park shall have approved the transactions contemplated under the
Reorganization Agreement, (ii) neither Crown Park nor Western National shall
have suffered any material adverse change in their financial condition,
assets, properties, liabilities, reserves, business, or results of operations
or prospects, (iii) holders of no more than 10% of the outstanding shares of
Crown Park have dissented from the merger of Crown Park and the Company's
subsidiary, and (iv) all accounting and tax treatment, entries and adjustment
for the Acquisition are satisfactory to the Company. Crown Park is not
obligated to complete the transaction if certain conditions are not met,
including the condition that the Company has approved the merger of Crown
Park and the Company's subsidiary. The Company has filed an application with
the Comptroller and has received conditional approval for the merger.
Additionally, to enable the Company to recognize certain cost savings and to
utilize the Banks' capital more effectively than on a stand-alone basis, the
application filed with the Comptroller seeks approval to merge First State,
N.A., Odessa with and into First State, N.A., Abilene.
Certain shareholders of Crown Park have agreed to indemnify the Company
from liabilities arising out of any misrepresentation or act of fraud
resulting from actions or omissions of any of Crown Park, Western National or
any of their respective officers, directors or shareholders taken or not
taken prior to the closing and for certain other matters.
The closing date of the Acquisition will be selected by mutual agreement
of the parties to the Reorganization Agreement following the satisfaction of
all conditions to closing. As of the date of this Prospectus, conditional
approval of the Comptroller has been obtained. A meeting of the shareholders
of Crown Park to vote on the merger is expected to be held in December of
1996. Based on the executed voting agreement, the Company has the ability to
cause the merger to be approved by Crown Park shareholders. The closing of
this Offering is contingent upon the simultaneous closing of the Acquisition,
and if for any reason the Acquisition is not completed, this Offering will
not be consummated. There can be no assurance that the foregoing conditions
will be satisfied or that the Acquisition will be completed.
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<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma combined financial statements set forth the pro
forma combined balance sheet at September 30, 1996, and pro forma combined
income statements for the nine-month period ended September 30, 1996, and for
the year ended December 31, 1995, for the Company as if the consummation of
the Acquisition and this Offering had occurred, in the case of the statements
of operations data, as of January 1, 1995, and in the case of the balance
sheet data, as of September 30, 1996. The pro forma financial data do not
purport to be indicative of the Company's financial condition and results of
operations at any future date or for any future period. The financial data
should be read in conjunction with the Company's and Crown Park's
consolidated financial statements, the notes thereto and the other financial
information, included elsewhere herein. In the opinion of management of the
Company, the data presented reflect all adjustments considered necessary for
a fair presentation of the results for such periods.
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996 (unaudited)
<TABLE>
PRO FORMA ADJUSTMENTS
--------------------- PRO FORMA
THE COMPANY CROWN PARK DEBITS CREDITS COMBINED
----------- ---------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 9,987,000 $ 2,832,000 $ 3,731,000(A) $ 4,425,000(B) $ 13,325,000
1,200,000(A)
Federal Funds Sold 12,100,000 1,375,000 2,094,000(C) 11,381,000
------------ ----------- ----------- ----------- ------------
Total Cash and Cash
Equivalents 22,087,000 4,207,000 4,931,000 6,519,000 24,706,000
------------ ----------- ----------- ----------- ------------
Securities:
Available-for-sale 33,590,000 6,424,000 10,000(D) 40,004,000
Held-to-maturity 49,087,000 5,243,000 11,000(E) 54,319,000
------------ ----------- ----------- ----------- ------------
Total Securities 82,677,000 11,667,000 21,000 94,323,000
------------ ----------- ----------- ----------- ------------
Loans:
Total Loans 92,626,000 39,062,000 131,688,000
Unearned Income on
Installment Loans 2,511,000 443,000 2,954,000
Allowance for Possible
Loan Losses 806,000 330,000 200,000(E) 1,336,000
------------ ----------- ----------- ----------- ------------
Net Loans 89,309,000 38,289,000 200,000 127,398,000
------------ ----------- ----------- ----------- ------------
Premises and Equipment 4,501,000 2,373,000 431,000(E) 7,305,000
Real Estate and Other
Repossessed Assets 218,000 290,000 550,000(E) 1,058,000
Investment in Crown Park
Bancshares 0 0 7,425,000(B) 4,308,000(D) 0
3,117,000(E)
Goodwill 974,000 0 2,347,000(E) 3,321,000
Accrued Interest Receivable 1,701,000 491,000 2,192,000
Other Assets 2,334,000 208,000 2,542,000
------------ ----------- ----------- ----------- ------------
Total Assets $203,801,000 $57,525,000 $15,684,000 $14,165,000 $262,845,000
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $187,474,000 $50,702,000 $ $ $238,176,000
Notes Payable 578,000 2,094,000 2,094,000(C) 3,000,000(B) 4,778,000
1,200,000(A)
Accrued Interest Payable 844,000 146,000 990,000
Other Liabilities 323,000 265,000 588,000
------------ ----------- ----------- ----------- ------------
Total Liabilities 189,219,000 53,207,000 2,094,000 4,200,000 244,532,000
------------ ----------- ----------- ----------- ------------
Stockholders' Equity:
Series C Preferred Stock 135,000 0 135,000
Common Stock 276,000 952,000 952,000(D) 75,000(A) 351,000
Additional Paid-in Capital 9,890,000 965,000 965,000(D) 3,656,000(A) 13,546,000
Retained Earnings 4,304,000 2,407,000 2,407,000(D) 4,304,000
Unrealized Loss on
Available-for-sale Securities (23,000) (6,000) 6,000(D) (23,000)
------------ ----------- ----------- ----------- ------------
Total Stockholders'
Equity 14,582,000 4,318,000 4,324,000 3,737,000 18,313,000
------------ ----------- ----------- ----------- ------------
Total Liabilities
and Stockholders'
Equity $203,801,000 $57,525,000 $ 6,418,000 $ 7,937,000 $262,845,000
------------ ----------- ----------- ----------- ------------
------------ ----------- ----------- ----------- ------------
</TABLE>
__________________
(A) This adjustment represents the sale of $3,731,000 in Common Stock
(net) and the borrowing of $1,200,000 and the injection of $4,200,000
into First State, N.A., Abilene as additional capital.
-15-
<PAGE>
(B) This adjustment represents the purchase of 100% of the outstanding
shares of stock of Crown Park for $4,425,000 in cash and $3,000,000
in notes payable.
(C) This adjustment represents the retirement of $1,094,000 in debt owed
to Crown Park's lender which is collateralized by an interest in the Western
National building and the retirement of $1,000,000 in debt owed to
existing shareholders of Crown Park which is collateralized by the stock of
Western National.
(D) This adjustment represents the elimination of the capital of Crown
Park against the investment in that bank holding company by First
State, N.A., Abilene.
(E) This adjustment represents the purchase price adjustments to mark
Crown Park's assets and liabilities to fair value upon the acquisition
and results in recording of $2,347,000 in goodwill.
-16-
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------- PRO FORMA
THE COMPANY CROWN PARK DEBITS CREDITS COMBINED
----------- ---------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $ 5,894,000 $2,528,000 $ $ $8,422,000
Interest on Securities 3,341,000 663,000 4,004,000
Interest on Federal Funds Sold 774,000 139,000 84,000(A) 20,000(B) 849,000
----------- ---------- -------- -------- -----------
Total Interest Income 10,009,000 3,330,000 84,000 20,000 13,275,000
----------- ---------- -------- -------- -----------
Interest Expense:
Interest on Deposits 4,671,000 1,343,000 6,014,000
Interest on Notes Payable 51,000 136,000 159,000(C) 136,000(E) 293,000
83,000(D)
----------- ---------- -------- -------- -----------
Total Interest Expense 4,722,000 1,479,000 242,000 136,000 6,307,000
----------- ---------- -------- -------- -----------
Net Interest Income 5,287,000 1,851,000 326,000 156,000 6,968,000
Provision for Loan Losses 161,000 135,000 296,000
----------- ---------- -------- -------- -----------
Net Interest Income After
Provision for Loan Losses 5,126,000 1,716,000 326,000 156,000 6,672,000
----------- ---------- -------- -------- -----------
Noninterest Income:
Service Charges 929,000 220,000 1,149,000
Other Income 215,000 139,000 354,000
----------- ---------- -------- -------- -----------
Total Noninterest Income 1,144,000 359,000 1,503,000
----------- ---------- -------- -------- -----------
Noninterest Expense:
Salaries and Employee Benefits 2,294,000 719,000 135,000(F) 2,878,000
Net Occupancy Expense 540,000 110,000 11,000(G) 661,000
Other Expenses 1,852,000 745,000 117,000(H) 75,000(I) 2,639,000
----------- ---------- -------- -------- -----------
Total Noninterest Expenses 4,686,000 1,574,000 128,000 210,000 6,178,000
----------- ---------- -------- -------- -----------
Income Before Federal Income Taxes 1,584,000 501,000 454,000 366,000 1,997,000
Federal Income Taxes 538,000 115,000 115,000(J) 124,000(J) 706,000
----------- ---------- -------- -------- -----------
Net Income $ 1,046,000 $ 342,000 $339,000 $242,000 $1,291,000
----------- ---------- -------- -------- -----------
----------- ---------- -------- -------- -----------
Earnings Per Share:
Primary Earnings Per Share:
Net Income Per Share $ 0.92 $ 0.90(K)
----------- ----------
----------- ----------
Adjusted Shares Outstanding 1,083,000 1,383,000
----------- ----------
----------- ----------
Fully Diluted Earnings Per Share:
Net Income Per Share $ 0.77 $ 0.78(K)
----------- ----------
----------- ----------
Adjusted Shares Outstanding 1,358,000 1,658,000
----------- ----------
----------- ----------
</TABLE>
- -------------------
(A) This adjustment represents interest income on federal funds sold
that would have been lost as a result of the use of funds for the
repayment of the xeisting $2,094,000 of Crown Park debt at an average
federal funds rate of 5.38% for the nine-month period ended
September 30, 1996.
(B) This adjustment represents interest income that would have been earned
on the total net funds raised ($4,931,000) in excess of the estimated
cash payments to be made to the Crown Park shareholders ($4,425,000)
at 5.38%.
(C) This adjustment represents interest expense which would have been
incurred on $3,000,000 of notes payable to existing Crown Park
shareholders at the rate of the six-month U.S. Treasury Bill plus 2%
(7.07% at November 15, 1996).
(D) This adjustment represents interest that would have been incurred on
the additional $1,200,000 which will be borrowed by the Company and
injected into First State, N.A., Abilene at prime plus 1% (9.28% for
the nine-month period ended September 30, 1996).
(E) This adjustment represents interest expense that would have been
eliminated when the $1,094,000 owed to Crown Park's lender and the
$1,000,000 owed to existing shareholders of Crown Park (average cost
of 8.63% for the nine-month period ended September 30, 1996).
(F) This adjustment represents savings that would have been achieved by
elimination of duplication of job responsibilities.
(G) This adjustment represents the additional depreciation that would
have been recorded as a result of the write-up of premises and
equipment by $431,000 with an estimated remaining useful life of
thirty (30) years.
(H) This adjustment represents the amortization of $2,347,000 in
goodwill generated in the transaction over a period of 15 years.
(I) This adjustment represents savings that would have been achieved in
the areas of accounting fees, directors fees, Comptroller assessments,
insurance expense, etc.
(J) This adjustment represents the tax effect of the above adjustments.
(K) Had Crown Park not incurred approximately $80,000 ($53,000 net of
tax) of expenses in the nine-month period ended September 30, 1996,
related to the proposed acquisition of Crown Park, primary and fully
diluted earnings per share would have been $0.94 and $0.81,
respectively.
-17-
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
(Unaudited)
<TABLE>
PRO FORMA ADJUSTMENTS
--------------------- PRO FORMA
THE COMPANY CROWN PARK DEBITS CREDITS COMBINED
----------- ---------- ------ ------- --------
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $ 7,726,000 $3,211,000 $ $ $10,937,000
Interest on Securities 2,389,000 971,000 3,360,000
Interest on Federal Funds Sold 1,847,000 321,000 124,000(A) 30,000(B) 2,074,000
----------- ---------- -------- -------- -----------
Total Interest Income 11,962,000 4,503,000 124,000 30,000 16,371,000
----------- ---------- -------- -------- -----------
Interest Expense:
Interest on Deposits 5,201,000 1,770,000 6,971,000
Interest on Notes Payable 108,000 198,000 212,000(C) 186,000(E) 450,000
118,000(D)
----------- ---------- -------- -------- -----------
Total Interest Expense 5,309,000 1,968,000 330,000 186,000 7,421,000
----------- ---------- -------- -------- -----------
Net Interest Income 6,653,000 2,535,000 454,000 216,000 8,950,000
Provision for Loan Losses 206,000 261,000 467,000
----------- ---------- -------- -------- -----------
Net Interest Income After
Provision for Loan Losses 6,447,000 2,274,000 454,000 216,000 8,483,000
----------- ---------- -------- -------- -----------
Noninterest Income:
Service Charges 1,167,000 304,000 1,471,000
Other Income 342,000 245,000 587,000
----------- ---------- -------- -------- -----------
Total Noninterest Income 1,509,000 549,000 2,058,000
----------- ---------- -------- -------- -----------
Noninterest Expense:
Salaries and Employee Benefits 2,849,000 989,000 180,000(F) 3,658,000
Net Occupancy Expense 723,000 133,000 13,000(G) 869,000
Other Expenses 2,670,000 936,000 156,000(H) 100,000(I) 3,662,000
----------- ---------- -------- -------- -----------
Total Noninterest Expenses 6,242,000 2,058,000 169,000 280,000 8,189,000
----------- ---------- -------- -------- -----------
Income Before Federal Income Taxes 1,714,000 765,000 623,000 496,000 2,352,000
Federal Income Taxes 582,000 232,000 169,000(J) 159,000(J) 824,000
----------- ---------- -------- -------- -----------
Net Income $ 1,132,000 $ 533,000 $792,000 $655,000 $ 1,528,000
----------- ---------- -------- -------- -----------
----------- ---------- -------- -------- -----------
Earnings Per Share:
Primary Earnings Per Share:
Net Income Per Share $ 1.02 $ 1.08
----------- -----------
----------- -----------
Adjusted Shares Outstanding 1,047,000 1,347,000
----------- -----------
----------- -----------
Fully Diluted Earnings Per Share:
Net Income Per Share $ 0.84 $ 0.92
----------- -----------
----------- -----------
Adjusted Shares Outstanding 1,352,000 1,652,000
----------- -----------
----------- -----------
</TABLE>
- -------------------
(A) This adjustment represents interest income on federal funds sold that
would have been lost as a result of the use of funds for the repayment
of the existing $2,094,000 of Crown Park debt at an average federal
funds rate of 5.94% for the year ended December 31, 1995.
(B) This adjustment represents interest income that would have been
earned on the total net funds raised ($4,931,000) in excess of the
estimated cash payments to be made to the Crown Park shareholders
($4,425,000) at 5.94%.
(C) This adjustment represents interest expense which that would have
been incurred on $3,000,000 of notes payable to existing Crown Park
shareholders at the rate of the six-month U.S. Treasury Bill plus 2%
(7.07% at November 15, 1996).
(D) This adjustment represents interest that would have been incurred on
the additional $1,200,000 which will be borrowed by the Company and
injected into First State, N.A., Abilene at prime plus 1% (9.80% for
the year ended December 31, 1995).
(E) This adjustment represents interest expense that would have been
eliminated when the $1,094,000 owed to Crown Park's lender and the
$1,000,000 owed to existing shareholders of Crown Park (average cost
of 8.90% for the year ended December 31, 1995).
(F) This adjustment represents savings that would have been achieved by
elimination of duplication of job responsibilities.
(G) This adjustment represents the additional depreciation which would
have been recorded as a result of the write-up of premises and
equipment by $431,000 with an estimated remaining useful life of
thirty (30) years.
(H) This adjustment represents the amortization of $2,347,000 in
goodwill generated in the transaction over a period of 15 years.
(I) This adjustment represents savings that would have been achieved in
the areas of accounting fees, directors fees, Comptroller assessments,
insurance expense, etc.
(J) This adjustment represents the tax effect of the above adjustments.
-18-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as
of September 30, 1996 and (ii) on a pro forma basis as of September 30, 1996,
to give effect to the Acquisition and the sale of 300,000 shares of Common
Stock in this Offering and the application of the net proceeds therefrom as
if such transactions had occurred on September 30, 1996, assuming a $13.875
per share public offering price in this Offering. See "Use of Proceeds,"
"The Acquisition," Pro Forma Consolidated Financial Statements and notes
thereto and the Company's and Crown Park's consolidated financial statements
and notes thereto appearing elsewhere in this Prospectus.
SEPTEMBER 30, 1996
------------------------
ACTUAL PRO FORMA
------- ---------
NOTES PAYABLE(1) $ 578,000 $ 4,778,000
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, $10.00 par value;
5,000,000 shares authorized Series C
Preferred Stock -- $42.00 stated value;
50,000 shares designated; 13,478 shares
issued at September 30, 1996.................. 135,000 135,000
Common Stock, $.25 par value; 30,000,000
shares authorized; 1,104,644 shares issued
and outstanding at September 30, 1996;
1,404,644 shares pro forma(2)................ 276,000 351,000
Additional paid-in capital..................... 9,890,000 13,546,000
Retained earnings.............................. 4,304,000 4,304,000
Unrealized loss on available-for-sale
securities.................................. (23,000) (23,000)
----------- -----------
Total stockholders' equity.................. 14,582,000 18,313,000
----------- -----------
Total capitalization...................... $15,160,000 $23,091,000
----------- -----------
----------- -----------
- -------------------
(1) See Note 3 of the notes to the Company's unaudited nine-month consolidated
financial statements and Note 9 of the notes to the Company's audited
year-end consolidated financial statements included elsewhere herein
for additional information relating to notes payable.
(2) Excludes an aggregate of 262,324 shares of Common Stock that are reserved
for issuance upon exercise of existing employee stock options and upon
conversion of outstanding shares of Series C Preferred Stock.
-19-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
information and other data of the Company. Such financial information has
been restated to reflect the 5% stock dividend paid to shareholders in May
1993 and the 33-1/3% stock dividend paid to shareholders in May 1995. The
following selected historical consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto appearing elsewhere in this Prospectus and the information
contained in "Management's Discussions and Analysis of Financial Condition
and Results of Operations of the Company." The selected historical
consolidated financial data as of and for the five years in the period ended
December 31, 1995, are derived from the Company's consolidated financial
statements which have been audited by independent public accountants. The
selected historical consolidated financial data as of and for the nine-month
periods ended September 30, 1996, and September 30, 1995, is unaudited. In
the opinion of management of the Company, the information presented reflects
all adjustments considered necessary for fair presentation of the results for
such periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $ 10,009 $ 8,831 $ 11,962 $ 10,131 $ 9,221 $ 9,715 $ 11,438
Net interest income 5,287 4,971 6,653 6,679 6,045 5,639 5,188
Income before extraordinary item
and cumulative effect of
accounting change 1,046 831 1,132 450 1,029 839 224
Extraordinary item 0 0 0 0 0 192(1) 0
Cumulative effect of accounting change 0 0 0 0 200(2) 0 0
Net income 1,046 831 1,132 450 1,229 1,031 224
COMMON SHARE DATA:
Earnings per share:
Primary $ 0.92 $ 0.75 $ 1.02 $ 0.36 $ 1.11 $ 0.91 $ 0.13
Fully diluted 0.77 0.62 0.84 0.33 0.91 0.74 0.13
Cash dividends 0.13 0.08 0.11 0.07 0.00 0.00 0.00
Dividend payout ratio 13.58% 10.23 10.34% 15.56% N/A N/A N/A
Book value per share:
Common stock $ 12.69 $ 12.31 $ 12.46 $ 10.02 $ 9.78 $ 7.34 $ 5.59
Fully diluted 10.73 10.04 10.11 8.26 8.07 6.05 4.74
Period end shares outstanding 1,105 1,039 1,050 1,037 1,037 1,026 1,015
Weighted average shares
outstanding (in thousands):
Primary 1,083 1,045 1,047 1,042 1,041 1,041 1,031
Fully diluted 1,358 1,350 1,352 1,348 1,349 1,349 1,388
BALANCE SHEET DATA:
Assets $203,801 $174,065 $180,344 $159,860 $160,712 $ 160,554 $149,052
Loans, net of unearned income 90,115 82,559 81,927 81,306 69,647 52,967 52,545
Deposits 187,474 158,414 164,704 146,184 147,785 134,679 137,535
Notes payable 578 1,074 849 930 1,194 2,290 2,610
Stockholders' equity 14,582 13,488 13,818 11,073 10,845 8,238 6,380
PERFORMANCE DATA (RETURNS ANNUALIZED FOR
INTERIM PERIODS):
Return on average total assets 0.72% 0.66% 0.67% 0.28% 0.81% 0.72% 0.16%
Return on average stockholders'
equity 9.81 9.06 8.99 3.98 12.50 14.39 3.54
Net interest margin(3) 3.97 4.33 4.29 4.62 4.37 4.33 4.03
Ratios to total average deposits
of average loans net of
unearned income(4) 47.49 54.27 53.25 50.97 42.56(5) 38.01 42.01
Efficiency ratio(6) 72.55 77.38 76.56 89.97 77.77 78.15 91.29
</TABLE>
-20-
<PAGE>
<TABLE>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSET QUALITY RATIOS:
Nonperforming assets to total assets 0.28% 0.41% 0.35% 0.49% 1.83% 1.20%(7) 2.58%
Nonperforming loans to total loans,
net of unearned income (annualized
for interim periods) 0.40 0.33 0.36 0.19 3.06 2.05(7) 5.15
Net loan charge-offs to average loans,
net of unearned income 0.42 0.31 0.32 0.30 0.18(8) 0.47(8) 1.43(8)
Allowance for loan losses to total
loans, net of unearned income 0.89 0.93 0.93 1.00 1.29 1.16(7) 1.27
Allowance for loan losses
to nonperforming loans 224.51 284.39 259.93 530.52 41.99 56.87(7) 24.74
CAPITAL RATIOS:
Average equity to average total assets 7.36% 7.32% 7.43% 7.06% 6.45%(5) 4.97% 4.45%
Total capital to risk-weighted assets 14.66 15.84 16.08 13.97 16.54 14.92 12.35
Leverage ratio 6.68 7.61 7.65 7.03 7.23 5.71 4.46
</TABLE>
- ---------------------
(1) Gain on extinguishment of debt.
(2) Cumulative effect of the change in accounting for income taxes.
(3) Fully taxable-equivalent basis.
(4) Before allowance for possible loan losses.
(5) Includes average balance sheet items of Winters State for the period August
31, 1993 (the date of the acquisition) through December 31, 1993.
(6) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding escurities gains and losses.
(7) Balances at December 31, 1992, do not include the assets of Olton State
that were sold on January 1, 1993.
(8) 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.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
GENERAL
The following discussion and analysis presents the more significant
factors affecting the Company's financial condition at September 30, 1996,
and at December 31, 1995 and 1994, and results of operations for the
nine-month periods ended September 30, 1996 and 1995, and 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 Prospectus.
ACQUISITION ACTIVITIES
Effective May 27, 1996, First State, N.A., Abilene assumed the deposits
and certain other liabilities and purchased the loans and certain other
assets of the San Angelo, Texas branch of Coastal Banc ssb ("Coastal Banc -
San Angelo") in a cash transaction. On the date of the acquisition, Coastal
Banc - San Angelo had approximately $155,000 in loans and $14,895,000 in
deposits. This acquisition was accounted for using the purchase method of
accounting, and the assets and liabilities of this branch were recorded at
their estimated fair value. A total of $743,000 of goodwill was recorded as
a result of the acquisition.
First State, N.A., Abilene acquired 100% of the outstanding shares of
Peoples National Bank, Winters, Texas ("Peoples National") effective January
1, 1996, in a cash transaction. At that date, 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. This
acquisition was accounted for using the purchase method of accounting, and
the assets and liabilities of Peoples National were recorded at their
estimated fair value. A total of $260,000 of goodwill was recorded as a
result of this acquisition. Peoples National was merged with and into First
State, N.A., Abilene.
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 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. 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 nine-month period ended September 30, 1996, was
$1,046,000 ($0.92 primary earnings per common share) compared to net income
of $831,000 ($0.75 primary earnings per common share) for the nine-month
period ended September 30, 1995. The results of operations for the
nine-month period ended September 30, 1995, included legal and settlement
expenses of $135,000 (net of tax expense of $70,000), or $0.13 primary
earnings per common share, as a result of the final settlement of certain
litigation.
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 $594,000 (net of tax expense of
$306,000), for the reimbursement of certain legal fees, expenses and
settlement costs in connection with the same litigation. See "Note 15:
Commitments and Contingent Liabilities" to the Company's audited year-end
consolidated financial statements. The results of operations for 1993
included a $189,000 (net of tax expense
- 22 -
<PAGE>
of $97,000) gain, or $0.18 primary earnings per common share, recognized on
the transfer of the deposits, premises and equipment and certain loans of
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 the nine-month period ended September 30, 1996, the Company's ROA was
0.72%, compared to 0.67% for 1995, 0.28% for 1994 and 0.81% for 1993.
Excluding the unusual and extraordinary items noted above, the Company's ROA
for the nine-month period ended September 30, 1996, and for 1995, 1994 and
1993 would have been 0.72%, 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 the nine-month period ended September 30, 1996, the Company's ROE was
9.81%, compared to 8.99% for 1995, 3.98% for 1994 and 12.50% for 1993.
Excluding the unusual and extraordinary items noted above, the Company's ROE
for the nine-month period ended September 30, 1996, and for 1995, 1994 and
1993 would have been 9.81%, 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 for the first nine months of 1996 was $5,287,000, an
increase of $316,000, or 6.4%, from net interest income of $4,971,000 for the
first nine months of 1995. The increase in 1996 was due to the acquisitions
of Peoples National effective January 1, 1996, and Coastal Banc - San Angelo
effective May 27, 1996. The net interest margin on a fully
taxable-equivalent basis was 3.97% for the first nine months of 1996,
compared to 4.33% for the first nine months of 1995. The primary reason for
the decreases in the net interest margin during 1996 is the fact that in the
acquisitions of Peoples National and Coastal Banc - San Angelo, the Company
acquired $19,853,000 in deposits and only $2,922,000 in loans. As a result,
a significant amount of the increased funds has been invested in investment
securities and federal funds sold, which yield a lower rate of interest than
loans and, therefore, have had a negative impact on the Company's net
interest margin.
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.
- 23 -
<PAGE>
At September 30, 1996, approximately $24,669,000, or 27.4%, of the
Company's total loans, net of unearned income, were loans with floating
interest rates. This amount represented 49.8% of loans, excluding loans to
individuals, which are exclusively fixed rate in nature. Overall average
rates paid for various types of deposits increased in 1995. 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. Average rates paid for
various types of deposits, particularly certificates of deposit, increased in
the first nine months of 1996, compared to the first nine months of 1995.
The average rate paid by the Company for certificates of deposit of $100,000
or more decreased slightly from 5.57% for the first nine months of 1995 to
5.43% for the first nine months of 1996. The average rate paid for
certificates of deposit less than $100,000 increased to 5.39% during the
first nine months of 1996 from 5.32% during the first nine months of 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. Rates on other types of deposits, such
as interest-bearing demand, savings and money market deposits, increased
slightly from an average of 2.35% during the first nine months of 1995 to an
average of 2.38% during the first nine months of 1996. 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 tables present the average balance sheets of the Company
for the nine month periods ended September 30, 1996 and 1995, and for each of
the last three fiscal years and indicate 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.
- 24 -
<PAGE>
<TABLE>
Nine-month Period Ended September 30,
---------------------------------------------------------------------------
1996 1995
------------------------------------ ----------------------------------
Interest Annualized Interest Annualized
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (Dollars in thousands)
Interest-earning assets:
Federal funds sold $ 19,177 $ 774 5.38% $ 33,936 $1,519 5.97%
Securities (1) 74,134 3,341 6.01 36,460 1,520 5.56
Loans, net of unearned income (2) 84,212 5,894 9.33 82,737 5,795 9.34
-------- ------- ----- -------- ------ -----
Total interest-earning assets 177,523 10,009 7.52 153,133 8,834 7.69
-------- ------- ----- -------- ------ -----
Noninterest-earning assets:
Cash and due from banks 7,128 7,031
Premises and equipment 4,407 4,225
Accrued interest receivable and other assets 5,141 3,554
Allowance for possible loan losses (841) (801)
-------- --------
Total noninterest-earning assets 15,835 14,009
-------- --------
Total assets $193,358 $167,142
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money market deposits $ 57,147 $ 1,021 2.38% $ 53,486 $ 944 2.35%
Time deposits 90,108 3,650 5.40 70,104 2,831 5.38
-------- ------- ----- -------- ------ -----
Total interest-bearing deposits 147,255 4,671 4.23 123,590 3,775 4.07
Notes payable 662 51 10.27 1,119 85 10.13
-------- ------- ----- -------- ------ -----
Total interest-bearing liabilities 147,917 4,722 4.26 124,709 3,860 4.13
-------- ------- ----- -------- ------ -----
Noninterest-bearing liabilities:
Demand deposits 30,086 28,866
Accrued interest payable and other liabilities 1,131 1,337
-------- --------
Total noninterest-bearing liabilities 31,217 30,203
-------- --------
Total liabilities 179,134 154,912
Stockholders' equity 14,224 12,230
-------- --------
Total liabilities and stockholders' equity $193,358 $167,142
-------- --------
-------- --------
Net interest income $ 5,287 $4,974
------- ------
------- ------
Interest rate spread (3) 3.26% 3.56%
----- -----
----- -----
Net interest margin (4) 3.97% 4.33%
----- -----
----- -----
</TABLE>
- -----------------------------
(1) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.
(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) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) The net interest margin is equal to net interest income, on a fully
taxable-equivalent basis, divided by average interest-earning assets.
- 25 -
<PAGE>
<TABLE>
Year Ended December 31,
------------------------------------------------------------
1995 1994
--------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS (1) (Dollars in thousands)
Interest-earning assets:
Federal funds sold 31,076 1,847 5.94% $ 15,939 $ 697 4.37%
Securities (2) 41,846 2,391 5.71 53,986 2,521 4.67
Loans, net of unearned income (3) 82,302 7,726 9.39 74,727 6,918 9.26
-------- ------- ----- -------- ------- ----
Total interest-earning assets 155,224 11,964 7.71 144,652 10,136 7.01
-------- ------- ----- -------- ------- ----
Noninterest-earning assets:
Cash and due from banks 7,066 8,060
Premises and equipment, net 4,211 4,458
Accrued interest receivable
and other assets 3,817 3,617
Allowance for possible loan losses (786) (805)
-------- --------
Total noninterest-earning assets 14,308 15,330
-------- --------
Total assets $169,532 $159,982
-------- --------
-------- --------
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%
Time deposits 72,137 3,944 5.47 56,775 2,076 3.66
-------- ------- ----- -------- ------- ----
Total interest-bearing deposits 125,528 5,201 4.14 116,464 3,364 2.89
Notes payable 1,069 108 10.10 1,061 88 8.29
-------- ------- ----- -------- ------- ----
Total interest-bearing liabilities 126,597 5,309 4.19 117,525 3,452 2.94
-------- ------- ----- -------- ------- ----
Noninterest-bearing liabilities:
Demand deposits 29,019 30,144
Accrued interest payable and
other liabilities 1,322 1,011
-------- --------
Total noninterest-bearing liabilities 30,341 31,155
-------- --------
Total liabilities 156,938 148,680
Series A preferred stock 0 0
Stockholders' equity 12,594 11,302
-------- --------
Total liabilities and
stockholders' equity $169,532 $159,982
-------- --------
-------- --------
Net interest income $ 6,655 $ 6,684
------- -------
------- -------
Interest rate spread (4) 3.52% 4.07%
----- ----
----- ----
Net interest margin (5) 4.29% 4.62%
----- ----
----- ----
</TABLE>
<TABLE>
Year Ended December 31,
----------------------------
1993
----------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
-------- -------- ------
<S> <C> <C> <C>
ASSETS (1) (Dollars in thousands)
Interest-earning assets:
Federal funds sold $ 10,171 $ 300 2.95%
Securities (2) 68,409 3,595 5.26
Loans, net of unearned income (3) 59,767 5,333 8.92
-------- ------- ----
Total interest-earning assets 138,347 9,228 6.67
-------- ------- ----
Noninterest-earning assets:
Cash and due from banks 7,138
Premises and equipment, net 4,052
Accrued interest receivable
and other assets 3,660
Allowance for possible loan losses (725)
--------
Total noninterest-earning assets 14,125
--------
Total assets $152,472
--------
--------
LIABILITIES AND STOCKHOLDERS' EQUITY (1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 57,880 $ 1,237 2.14%
Time deposits 54,132 1,835 3.39
-------- ------- ----
Total interest-bearing deposits 112,012 3,072 2.74
Notes payable 1,260 104 8.25
-------- ------- ----
Total interest-bearing liabilities 113,272 3,176 2.80
-------- ------- ----
Noninterest-bearing liabilities:
Demand deposits 28,416
Accrued interest payable and
other liabilities 942
--------
Total noninterest-bearing liabilities 29,358
--------
Total liabilities 142,630
Series A preferred stock 11
Stockholders' equity 9,831
--------
Total liabilities and
stockholders' equity $152,472
--------
--------
Net interest income $ 6,052
-------
-------
Interest rate spread (4) 3.87%
----
----
Net interest margin (5) 4.37%
----
----
</TABLE>
- -----------------------------
(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) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.
(3) 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.
- 26 -
<PAGE>
(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.
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>
Nine-month Period Ended
September 30, 1996 vs 1995 1995 vs 1994 1994 vs 1993 (1)
-------------------------- -------------------------- --------------------------
Increase (Decrease) Due To Increase (Decrease) Due To Increase (Decrease) Due To
Changes In: Changes In: Changes In:
-------------------------- -------------------------- --------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------ ----- ------ ------ ------ ------ ------ ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ (607) $(138) $ (745) $ 834 $ 316 $1,150 $ 268 $ 129 $ 397
Securities (2) 1,689 132 1,821 (629) 499 (130) (702) (372) (1,074)
Loans, net of
unearned income (3) 105 (6) 99 710 98 808 1,376 209 1,585
------ ----- ------ ----- ------ ------ ------ ----- -------
Total interest income 1,187 (12) 1,175 915 913 1,828 942 (34) 908
------ ----- ------ ----- ------ ------ ------ ----- -------
Interest-bearing liabilities:
Deposits:
Demand, savings and
money market deposits 65 12 77 (140) 109 (31) 39 12 51
Time deposits 807 11 818 660 1,208 1,868 92 149 241
------ ----- ------ ----- ------ ------ ------ ----- -------
Total interest-
bearing deposits 872 23 895 520 1,317 1,837 131 161 292
Notes payable (36) 3 (33) 1 19 20 (17) 1 (16)
------ ----- ------ ----- ------ ------ ------ ----- -------
Total interest expense 836 26 862 521 1,336 1,857 114 162 276
------ ----- ------ ----- ------ ------ ------ ----- -------
Increase (decrease) in net
interest income $ 351 $ (38) $ 313 $ 394 $ (423) $ (29) $ 828 $(196) $ 632
------ ----- ------ ----- ------ ------ ------ ----- -------
------ ----- ------ ----- ------ ------ ------ ----- -------
</TABLE>
- -----------------------------
(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%.
(3) Nonaccrual loans have been included in average assets for the purposes
of the computations, thereby reducing yields.
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 nine-month period ended
September 30, 1996, was $161,000 compared to $141,000 for the nine-month
period ended September 30, 1995. This represents an increase of
$20,000. The increased provision in 1996 was primarily a result of the
charge-off of the remaining balance of $100,000 on a loan collateralized
by real estate that had been on nonaccrual for several years because the
borrower was in bankruptcy. Collection of a significant portion of the
loan is now considered to be very unlikely. The provision for loan
losses
- 27 -
<PAGE>
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 an increase in loan volume as well as 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 decreased $12,000, or 1.0%, from $1,156,000 for
the nine-month period ended September 30, 1995, to $1,144,000 for the
nine-month period ended September 30, 1996. 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.
Service charges on deposit accounts and charges for other types of
services are the major source of noninterest income to the Company.
This source of income increased $48,000, or 5.4%, from $881,000 for the
first nine months of 1995 to $929,000 for the first nine months of 1996.
The increase is due to the overall growth in deposits during the past
year, primarily as a result of acquisitions, and a recent increase in
charges on insufficient fund checks. 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 decreased $10,000, or 6.5%, from $154,000 for the
first nine months of 1995, to $144,000 for the first nine months of 1996
as a result of a one-time $24,000 fee received for services performed as
executor of an estate during 1995, which was partially offset in the
1996 period by increased fees collected due to an increased amount of
assets under management. 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 same reasons noted above.
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. There was no gain or loss recorded
on the sale in 1994.
Other income is the sum of several small components of other
noninterest income including insurance premiums earned on automobiles
financed through the Company's internal installment loan program, income
and other sources of miscellaneous income. Other income decreased
$50,000, or 41.3%, from $121,000 for the first nine months of 1995 to
$71,000 for the corresponding period in 1996, primarily due to a $37,000
decrease in insurance premium income as a result of less dramatic
increases in activity in that area and a net loss of $10,000 on sales of
securities during the first nine months of 1996. 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 $43,000, or 0.9%, from $4,729,000
during the first nine months of 1995 to $4,686,000 during the first nine
months of 1996. Noninterest expenses for the nine-month period ended
September 30, 1995, were higher than normal due to the payment of
$205,000 in legal fees and settlement expenses on the final settlement
of certain litigation. 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.
- 28 -
<PAGE>
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 audited year-end consolidated
financial statements.
Salaries and employee benefits rose $167,000, or 7.9%, from
$2,127,000 for the nine-month period ended September 30, 1995, to
$2,294,000 for the corresponding period of 1996. The increase was a
result of the acquisitions of Peoples National effective January 1,
1996, and Coastal Banc - San Angelo effective May 27, 1996, and overall
salary increases effective January 1, 1996. 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 economies 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 decreased $41,000, or 7.7%, from $533,000 for the
first nine months of 1995 to $492,000 for the first nine months of 1996.
This decrease is a result of a significant amount of furniture,
fixtures and equipment at First State N.A., Odessa that became fully
depreciated during the latter part of 1995 and the first quarter of
1996, thereby decreasing depreciation expense associated with such
assets. 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 increased $48,000, or 9.8%, from $492,000 for
the first nine months of 1995 to $540,000 for the first nine months of
1996. The increase is due primarily to a reduction in rental income
received in 1996 as a result of the loss of two tenants in the building
owned by First State, N.A., Odessa and the additional occupancy expense
of the San Angelo branch of First State, N.A., Abilene acquired in May
1996. 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 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.
Professional fees, which include legal and accounting fees,
decreased $182,000, or 47.2%, from $386,000 during the first nine months
of 1995 to $204,000 for the corresponding period of 1996. The decrease
during 1996 was due to the settlement of litigation noted above during
1995. Professional fees decreased $888,000, or 66.2%, from $1,342,000
in 1994 to $454,000 in 1995, and increased $901,000, or 204.3%, from
$441,000 in 1993 to the 1994 amount as a result of the $900,000 accrual
in 1994 noted above.
Stationery, printing and supplies expense increased $21,000, or
11.1%, from $190,000 for the first nine months of 1995 to $211,000 for
the first nine months of 1996, primarily due to the acquisitions of
Peoples National and Coastal Banc - San Angelo effective January 1,
1996, and May 27, 1996, respectively. 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. 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.
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.
- 29 -
<PAGE>
Net costs (revenues) applicable to real estate and other repossessed
assets consists of expenses associated with holding and maintaining
repossessed assets, the net gain or loss on the sales of such assets,
the write-down of the carrying value of the assets and any rental income
on such assets that is credited as a reduction in such expenses. The
Company recorded net revenues of $12,000 for the first nine months of
1995, compared to net revenues of $16,000 for the first nine months of
1996. These expenses decreased $3,000, from $4,000 in net revenues in
1994 to $7,000 net revenues 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, notwithstanding the bank acquisitions made in 1993
and 1996.
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 $52,000, or
5.1%, from $1,013,000 for the first nine months of 1995 to $961,000 for
the first nine months of 1996. FDIC insurance premiums decreased
$140,000 during the past year, including a net credit of $7,000 during
the third quarter of 1995, as a result of a reduction by the FDIC of
deposit insurance rates for banks. This decrease was partially offset
by an increase in other expenses as a result of the acquisitions of
Peoples National and Coastal Banc - San Angelo. Other noninterest
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 $538,000 and $426,000 in
federal income taxes in the first nine months of 1996 and 1995,
respectively. Of these amounts, $222,000 and $401,000 were offset
against the Company's gross deferred tax asset during the first nine
months of 1996 and 1995, respectively. 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.
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.
- 30 -
<PAGE>
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.
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 53.2% at the
90-day interval, 48.4% at the 180-day interval and 42.9% at the 365-day
interval at September 30, 1996. Currently, the Company is in a
liability-sensitive position at the three intervals. During a slowly
rising interest rate environment, especially on time deposits, as was
the case during most of the first nine months of 1996, this position
normally produces a lower net interest margin than in a falling interest
rate environment. The Company also had $60,411,000 of interest-bearing
demand, savings and money market deposits at September 30, 1996, that
are somewhat less rate-sensitive. Excluding these deposits, the
Company's interest-sensitive ratio would have been 72.6% at the 365-day
interval at September 30, 1996. 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.
- 31 -
<PAGE>
The following table shows the interest rate sensitivity position of the
Company at September 30, 1996:
<TABLE>
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 $ 12,100 $ 12,100 $ 12,100 $ 0 $ 12,100
Securities 5,914 9,811 17,722 64,955 82,677
Loans, net of unearned income 27,339 29,431 33,677 56,438 90,115
-------- -------- -------- -------- --------
Total interest-earning assets 45,353 51,342 63,499 121,393 184,892
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Demand, savings and money market
deposits 60,411 60,411 60,411 0 60,411
Time deposits 24,525 45,147 87,015 10,563 97,578
Notes payable 341 454 456 122 578
-------- -------- -------- -------- --------
Total interest-bearing liabilities 85,277 106,012 147,882 10,685 158,567
-------- -------- -------- -------- --------
Rate-sensitivity gap(1) $(39,924) $(54,670) $(84,383) $110,708 $ 26,325
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Rate-sensitivity ratio (2) 53.2% 48.4% 42.9%
-------- -------- --------
-------- -------- --------
</TABLE>
- -----------------------------
(1) Rate-sensitive interest-earning assets less rate-sensitive interest-bearing
liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-sensitive
interest-bearing liabilities.
ANALYSIS OF FINANCIAL CONDITION
ASSETS
Total assets increased $23,457,000, or 13.0%, from $180,344,000 at
December 31, 1995, to $203,801,000 at September 30, 1996, primarily due to
the acquisitions of Peoples National and Coastal Banc - San Angelo, which had
aggregate total assets of approximately $20,400,000 at their respective dates
of acquisition. 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.
LOAN PORTFOLIO
Total loans, net of unearned income, increased $8,188,000, or 10.0%, from
$81,927,000 at December 31, 1995, to $90,115,000 at September 30, 1996. The
increase during the first nine months of 1996 was partially due to the
purchase of Peoples National effective January 1, 1996, but primarily due to
increased loan activity due to improved economic conditions in the Banks'
market areas, principally Abilene and Odessa. 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
- 32 -
<PAGE>
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. During the third
quarter of 1996, the Company instituted this program in the San Angelo, Texas
market. At September 30, 1996 and at December 31, 1995 and 1994, the Company
had approximately $31,790,000, $30,206,000 and $29,402,000, net of unearned
income, respectively, of this type of loan outstanding.
The following table presents the Company's loan balances at the dates
indicated separated by loan type:
<TABLE>
September 30, December 31,
------------ -----------------------------------------------
1996 1995 1994 1993 1992(1) 1991
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals $43,058 $39,868 $43,113 $28,538 $17,718 $12,729
Real estate loans 25,798 23,265 22,760 22,658 16,535 16,690
Commercial and industrial loans 21,225 19,510 16,702 16,723 16,221 17,533
Other loans 2,545 2,638 2,943 4,322 3,767 5,878
------- ------- ------- ------- ------- -------
Total loans 92,626 85,281 85,518 72,241 54,241 52,830
Less unearned income 2,511 3,354 4,212 2,594 1,274 285
------- ------- ------- ------- ------- -------
Loans, net of unearned income $90,115 $81,927 $81,306 $69,647 $52,967 $52,545
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
- -----------------------------
(1) Balances at December 31, 1992, do not include the loans of Olton State sold
as of January 1, 1993.
Loan concentrations are considered to exist when there are amounts loaned
to a multiple number of borrowers engaged in similar activities that would
cause them to be similarly impacted by economic or other conditions. The
Company had no concentrations of loans at September 30, 1996, except for
those described above. The Banks had no loans outstanding to foreign
countries or borrowers headquartered in foreign countries at September 30,
1996.
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.
- 33 -
<PAGE>
The following table presents the distribution of the maturity of the
Company's loans and the interest rate sensitivity of those loans, excluding
loans to individuals, at September 30, 1996. 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.
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
-------- ----- ----- --------
(In thousands)
Real estate loans $ 4,658 $14,463 $ 6,677 $25,798
Commercial and industrial loans 9,722 6,905 4,598 21,225
Other loans 1,084 781 680 2,545
------- ------- ------- --------
Total loans $15,464 $22,149 $11,955 $49,568
------- ------- ------- --------
------- ------- ------- --------
With fixed interest rates $ 5,491 $14,465 $ 4,943 $24,899
With variable interest rates 9,973 7,684 7,012 24,669
------- ------- ------- --------
Total loans $15,464 $22,149 $11,955 $49,568
------- ------- ------- --------
------- ------- ------- --------
NONPERFORMING ASSETS
Nonperforming loans consist of past due, nonaccrual and restructured
loans. A past due loan is an accruing loan that is contractually past due 90
days or more as to principal or interest payments. Loans on which management
does not expect to collect interest in the normal course of business are
placed on nonaccrual or are restructured. When a loan is placed on
nonaccrual, any interest previously accrued but not yet collected is reversed
against current income unless, in the opinion of management, the outstanding
interest remains collectible. Thereafter, interest is included in income
only to the extent of cash received. A loan is restored to accrual status
when all interest and principal payments are current and the borrower has
demonstrated to management the ability to make payments of principal and
interest as scheduled.
A "troubled debt restructuring" is a restructured loan upon which
interest accrues at a below market rate or upon which certain principal has
been forgiven so as to aid the borrower in the final repayment of the loan,
with any interest previously accrued, but not yet collected, being reversed
against current income. Interest is accrued based upon the new loan terms.
Nonperforming loans are fully or substantially collateralized by assets,
with any excess of loan balances over collateral values allocated in the
allowance. Assets acquired through foreclosure are carried at the lower of
cost or estimated fair value, net of estimated costs of disposal, if any.
See "Real Estate and Other Repossessed Assets" below.
The following table lists nonaccrual, past due and restructured loans and
real estate and other repossessed assets at September 30, 1996, and at
year-end for each of the past five years.
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------------------
1996 1995 1994 1993 1992(1) 1991
---- ---- ---- ---- ------- ----
(In thousands)
Nonaccrual loans $ 88 $204 $ 48 $1,646 $ 773 $2,167
Accruing loans contractually
past due over 90 days 194 23 26 293 17 20
Restructured loans 77 65 80 195 295 517
Real estate and other repossessed
assets 218 337 631 803 849 1,140
---- ---- ---- ------ ------ ------
Total nonperforming assets $577 $629 $785 $2,937 $1,934 $3,844
---- ---- ---- ------ ------ ------
---- ---- ---- ------ ------ ------
- --------------------
(1) Balances at December 31, 1992, do not include the assets of Olton State
that were sold on January 1, 1993.
- 34 -
<PAGE>
The gross interest income that would have been recorded in the first nine
months of 1996 and 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 $15,000 and $13,000, respectively. No interest was actually
recorded (received) on loans that were on nonaccrual during the first nine
months of 1996 or 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 asset categories. The Company is not aware of any
potential problem loans other than these reported in the above table.
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 September 30,
1996, substandard loans totaled $1,751,000, of which $224,000 were loans
designated as nonaccrual or 90 days past due. There were no loans classified
as doubtful or loss at September 30, 1996. At December 31, 1995, substandard
loans totaled $1,640,000, of which $227,000 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 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 in
assessing the adequacy of the allowance. Substantially all of the loans on
the watch list as of September 30, 1996, and December 31, 1995, were current
and paying in accordance with loan terms. At September 30, 1996, watch list
loans totaled $946,000 (including $703,000 of loans guaranteed by U.S.
governmental agencies). At such date, no watch list loans were designated as
nonaccrual, 90 days past due or restructured. At September 30, 1996, there
were $116,000 in loans designated as 90 days past due or restructured that
were not on the watch list or classified as substandard. 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.
REAL ESTATE AND OTHER REPOSSESSED ASSETS
Real estate and other repossessed assets consist of real property and
other assets unrelated to banking premises or facilities. Income derived
from real estate and other repossessed assets, if any, is generally less than
that which would have been earned as interest at the original contract rates
on the related loans. At September 30, 1996, real estate and other
repossessed assets had an aggregate book value of $218,000. Real estate and
other repossessed assets decreased $119,000, or 35.3%, during the first nine
months of 1996, notwithstanding the acquisition of Peoples National effective
January 1, 1996, due to the sale of several parcels of other real estate
during that time period. Of the September 30, 1996 balance, $105,000
represents nine repossessed automobiles, $59,000 represents various
residential properties and $54,000 represents various commercial properties.
None of the individual parcels of real estate are carried at more than
$36,000. 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,
- 35 -
<PAGE>
1995, primarily as a result of sales of certain of these assets. 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.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Implicit in the Company's lending activities is the fact that loan losses
will be experienced and that the risk of loss will vary with the type of loan
being made and the creditworthiness of the borrower over the term of the
loan. To reflect the currently perceived risk of loss associated with the
Company's loan portfolio, additions are made to the Company's allowance for
possible loan losses (the "allowance"). The allowance is created by direct
charges against income (the "provision" for loan losses), and the allowance
is available to absorb possible loan losses. See "Results of Operations -
Provision for Loan Losses" above.
The amount of the allowance equals the cumulative total of the 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
$806,000, or 0.89% of loans, net of unearned income, at September 30, 1996,
compared to $759,000, or 0.93% of loans, net of unearned income, at December
31, 1995. 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
$308,000 in loans during the first nine months of 1996. These charge-offs
were concentrated in the following categories: loans to individuals -
$150,000, or 48.7%, real estate loans - $100,000, or 32.5%, and commercial
and industrial loans - $58,000, or 18.8%. Recoveries during the first nine
months of 1996 were $45,000 and consisted primarily of loans to individuals
$24,000, or 53.5%, and commercial and industrial loans - $21,000, or 46.7%.
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.
- 36 -
<PAGE>
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 nine-month
period ended September 30, 1996, and for the last five years.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------------------------------------
1996 1995 1994 1993(1) 1992(1) 1991(1)
-------- ------ ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Analysis of allowance for
possible loan losses:
Balance at beginning of period $ 759 $ 817 $ 896 $ 617 $ 669 $ 1,317
Provision for loan losses 161 206 147 154 185 139
Acquisition of subsidiary 149 0 0 233 0 0
------- ------- ------- ------- ------- -------
1,069 1,023 1,043 1,004 854 1,456
------- ------- ------- ------- ------- -------
Loans charged off:
Loans to individuals 150 297 150 88 40 94
Real estate loans 100 72 119 68 179 44
Commercial and industrial loans 58 7 32 69 114 800
Other loans 0 0 77 16 311 28
------- ------- ------- ------- ------- -------
Total charge-offs 308 376 378 241 644 966
------- ------- ------- ------- ------- -------
Recoveries of loans previously
charged off:
Loans to individuals 24 43 45 28 11 25
Real estate loans 0 2 0 4 56 46
Commercial and industrial loans 21 52 48 84 59 90
Other loans 0 15 59 17 281 18
------- ------- ------- ------- ------- -------
Total recoveries 45 112 152 133 407 179
------- ------- ------- ------- ------- -------
Net loans charged off 263 264 226 108 237 787
------- ------- ------- ------- ------- -------
Balance at period end $ 806 $ 759 $ 817 $ 896 $ 617 $ 669
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Average loans outstanding,
net of unearned income $84,212 $82,302 $74,727 $59,767 $50,507 $55,091
------- ------ ------- ------- ------- -------
------- ------ ------- ------- ------- -------
Ratio of net loan charge-offs
to average loans, net of
unearned income (annualized
for 1996) 0.42% 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
period end 0.89 0.93 1.00 1.29 1.16 1.27
</TABLE>
- --------------------
(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.
Foreclosures on defaulted loans have resulted in the Company acquiring
real estate and other repossessed assets; however, the amount of real estate
and other repossessed assets being carried on the Company's books is
decreasing. Accordingly, the Company incurs other expenses, specifically net
costs applicable to real estate and other repossessed assets, in maintaining,
insuring and selling such assets. The 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.
- 37 -
<PAGE>
As the economies of the Banks' market areas over the past several years
have 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 problem loans.
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 problem or nonperforming loans are reviewed on at
least a quarterly basis, and management critically evaluates the prospect of
ultimate losses arising from such loans, based on the borrower's financial
condition and the value of available collateral. When a risk can be
specifically quantified for a loan, that amount is specifically allocated in
the allowance. In addition, the Company allocates the allowance based upon
the historical loan loss experience of the different types of loans. Despite
such allocation, both the allocated and unallocated 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.
The following table shows the allocations in the allowance and the
respective percentages of each loan category to total loans at September 30,
1996, and at year-end for each of the past five years.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------- ---------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount of Loans by Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category 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 $314 45.0% $136 44.6% $207 47.8%
Real estate loans 136 28.6 197 28.4 165 28.0
Commercial and industrial
loans 104 23.6 96 23.8 122 20.5
Other loans 41 2.8 59 3.2 68 3.7
---- ----- ---- ----- ---- -----
Total allocated 595 100.0% 488 100.0% 562 100.0%
----- ----- -----
----- ----- -----
Unallocated 211 271 255
---- ---- ----
Total allowance for
possible loan losses $806 $759 $817
---- ---- ----
---- ---- ----
DECEMBER 31,
---------------------------------------------------------------------
1993 1992(1) 1991
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount of Loans by Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category 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)
Loans to individuals $178 37.3% $101 31.0% $ 18 23.7%
Real estate loans 272 32.5 142 31.2 123 31.8
Commercial and industrial loans 212 24.0 142 30.7 170 33.4
Other loans 108 6.2 53 7.1 27 11.1
---- ----- ---- ----- ---- -----
Total allocated 770 100.0% 438 100.0% 338 100.0%
----- ----- -----
----- ----- -----
Unallocated 126 179 331
---- ---- ----
Total allowance for possible
loan losses $896 $617 $669
---- ---- ----
---- ---- ----
</TABLE>
- --------------------
- 38 -
<PAGE>
(1) The categories of loans at December 31, 1992, do not include the loans of
Olton State transferred on January 1, 1993.
CASH AND CASH EQUIVALENTS
The amount of cash and cash equivalents decreased $12,672,000, or 36.5%,
from $34,759,000 at December 31, 1995, to $22,087,000 at September 30, 1996,
due to the investment of additional funds in securities at September 30,
1996. 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 $26,305,000 and
$40,967,000 for the nine-month periods ended September 30, 1996 and 1995,
respectively, and $38,142,000, $23,999,000 and $17,309,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
SECURITIES
Securities increased $26,770,000, or 47.9%, from $55,907,000 at December
31, 1995, to $82,677,000 at September 30, 1996. The increase in 1996 is
primarily due to the reduction in federal funds sold noted above and the
investment in securities of the net proceeds received from the assumption of
the deposits in the Coastal Banc - San Angelo acquisition. 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 weighted average maturity of the Company's
securities portfolio at September 30, 1996, was 2.48 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, however, are acceptable
with a Baa rating. Securities totaling $33,590,000 are classified as
available-for-sale and are carried at fair value at September 30, 1996.
Securities totaling $49,087,000 are classified as held-to-maturity and are
carried at amortized cost. 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. During the first quarter of 1996, the
Company sold investments in certain mutual funds obtained in the acquisition
of Peoples National with a book value of $30,000 because they did not meet
the Company's investment criteria. A loss of $12,000 was recorded on the
sale of such investments. During the second quarter of 1996, the Company
sold investments classified as held-to-maturity with a book value of
$1,998,000 approximately 30 days prior to their scheduled maturity and
recorded a $2,000 gain on such sale. 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
September 30, 1996, the book value of U.S. Government and other securities so
pledged amounted to $10,314,000, or 12.5% of the total securities portfolio.
- 39 -
<PAGE>
The following table summarizes the amounts and the distribution of the
Company's investment securities held at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ------ ------- ------ ------ ------ ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $40,964 49.6% $32,295 57.8% $31,441 94.4% $55,664 86.0%
Obligations of other U.S.
Government agencies and
corporations 35,473 42.9 23,009 41.2 1,154 3.5 8,179 12.6
Mortgage-backed
securities 5,597 6.8 160 0.2 177 0.5 300 0.5
Obligations of states and
political subdivisions 200 0.2 0 -- 90 0.3 130 0.2
Other securities 443 0.5 443 0.8 443 1.3 428 0.7
------- ----- ------- ----- ------- ----- ------- -----
Total securities $82,677 100.0% $55,907 100.0% $33,305 100.0% $64,701 100.0%
------- ----- ------- ----- ------- ----- ------- -----
------- ----- ------- ----- ------- ----- ------- -----
Total market value $82,306 $56,130 $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
September 30, 1996. 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%.
- 40 -
<PAGE>
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at September 30, 1996 Amount Value Value Yield
- -------------------------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $15,600 $15,569 $15,630 5.95%
After one but within five years 25,500 25,395 25,344 5.81
------- ------- ------- ----
Total U.S. Treasury securities 41,100 40,964 40,974 5.86
------- ------- ------- ----
Obligations of other U.S. Government
agencies and corporations:
Within one year 2,000 1,999 2,001 6.00
After one but within five years 30,500 30,420 30,213 6.44
After five but within ten years 3,000 3,054 2,976 6.43
------- ------- ------- ----
Total obligations of U.S. Government
agencies and corporations 35,500 35,473 35,190 6.41
------- ------- ------- ----
Mortgage-backed securities 5,469 5,597 5,494 6.12
------- ------- ------- ----
Obligations of states and political subdivisions:
Within one year 0 0 0 --
After one but within five years 0 0 0 --
After five but within ten years 200 200 205 8.49
------- ------- ------- ----
Total obligations of states and
political subdivisions 200 200 205 8.49
------- ------- ------- ----
Other securities:
Within one year 5 5 5 5.49
After one but within five years 0 0 0 --
After five but within ten years 0 0 0 --
After ten years 438 438 438 3.56
------- ------- ------- ----
Total other securities 443 443 443 3.59
------- ------- ------- ----
Total securities $82,712 $82,677 $82,306 6.11%
------- ------- ------- ----
------- ------- ------- ----
</TABLE>
GOODWILL
Goodwill increased to $974,000 at September 30, 1996, as a result of the
recording of $260,000 in goodwill from the Peoples National acquisition and
$743,000 in goodwill from the Coastal Banc - San Angelo acquisition. A total
of $29,000 in goodwill amortization expense was recorded during the first
nine months of 1996.
OTHER ASSETS
The most significant component of other assets at September 30, 1996, and
December 31, 1995 and 1994, is a net deferred tax asset of $1,731,000,
$1,937,000 and $956,000, respectively. The balance of other assets decreased
$190,000, or 7.5%, to $2,334,000 at September 30, 1996, from $2,524,000 at
December 31, 1995, primarily as a result of the utilization of $222,000 of
the Company's net operating loss carryforwards. 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.
- 41 -
<PAGE>
DEPOSITS
The Banks' lending and investing activities are funded to a large extent
by core deposits, 48.0% of which are demand, savings and money market
deposits at September 30, 1996. Total deposits increased $22,770,000, or
13.8%, from $164,704,000 at December 31, 1995, to $187,474,000 at September
30, 1996. The increase is due primarily to the acquisitions of Peoples
National and Coastal Banc - San Angelo, which had aggregate total deposits of
$19,853,000 at their respective dates of acquisition. 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
Stamford and Winters branch locations, which was partially offset by deposit
growth at the Abilene and Odessa locations. The Banks do not have any
brokered deposits.
The following table presents the average amounts of and the average rate
paid on deposits of the Company for the nine-month period ended September 30,
1996, and each of the last three years:
<TABLE>
<CAPTION>
Year Ended December 31,
Nine-month Period Ended -----------------------------------------------------
September 30, 1996 1995 1994 1993(1)
----------------------- ---------------- ---------------- ----------------
Average Average Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 30,086 --% $ 29,019 --% $ 30,144 --% $ 28,416 --%
Interest-bearing demand,
savings and money
market deposits 57,147 2.38 53,391 2.35 59,689 2.16 57,880 2.14
Time deposits of less
than $100,000 62,938 5.39 52,452 5.41 43,158 3.62 41,776 3.39
Time deposits of $100,000
or more 27,170 5.43 19,685 5.61 13,617 3.78 12,356 3.38
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits $177,341 3.51% $154,547 3.36% $146,608 2.29% $140,428 2.19%
-------- ---- -------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ---- -------- ----
</TABLE>
- --------------------
(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.
The maturity distribution of time deposits of $100,000 or more at
September 30, 1996, and December 31, 1995, is presented below:
September 30, 1996 December 31, 1995
------------------ -----------------
(In thousands)
3 months or less $ 8,831 $ 9,220
Over 3 through 6 months 10,567 5,983
Over 6 through 12 months 7,731 4,925
Over 12 months 1,820 3,680
------- -------
Total time deposits of $100,000 or more $28,949 $23,808
------- -------
------- -------
The Banks experience some reliance on time deposits of $100,000 or more.
Time deposits of $100,000 or more are a more volatile and costly source of
funds than other deposits and are most likely to affect the Company's future
earnings because of interest rate sensitivity. At September 30, 1996,
deposits of $100,000 or more represented approximately 14.2% of the Company's
total assets. 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.
- 42 -
<PAGE>
SELECTED FINANCIAL RATIOS
The following table presents selected financial ratios for the nine-month
periods ended September 30, 1996 and 1995 (annualized), and for each of the
last three fiscal years:
Nine-month Period Year Ended
Ended September 30, December 31,
------------------- --------------------
1996 1995 1995 1994 1993(1)
----- ------ ------ ----- -------
Net income to:
Average assets 0.72% 0.66% 0.67% 0.28% 0.81%
Average interest-earning assets 0.79 0.72 0.73 0.31 0.89
Average stockholders' equity (2) 9.81 9.06 8.99 3.98 12.50
Dividend payout (3) to:
Net income 13.58 10.23 10.34 15.56 N/A
Average stockholders' equity 1.33 0.93 0.93 0.62 N/A
Average stockholders' equity to:
Average total assets (2) 7.36 7.32 7.43 7.06 6.45
Average loans (4) 16.89 14.78 15.30 15.12 16.45
Average total deposits 8.02 8.02 8.15 7.71 7.00
Average interest-earning assets to:
Average total assets 91.81 91.62 91.56 90.42 90.74
Average total deposits 100.10 100.44 100.44 98.67 98.52
Average total liabilities 99.10 98.85 98.91 97.29 97.00
Ratio to total average deposits of:
Average loans (4) 47.49 54.27 53.25 50.97 42.56
Average noninterest-bearing deposits 16.97 18.93 18.78 20.56 20.24
Average interest-bearing deposits 83.03 81.07 81.22 79.44 79.76
Total interest expense to total
interest income 47.18 43.71 44.38 34.07 34.44
- -----------------------
(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.
(2) If the then outstanding 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) Net of unearned income and before allowance for possible loan losses.
LIQUIDITY
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 during the first nine months of 1996 totaled $600,000.
Dividends paid by Independent Financial to the Company during the first nine
months of 1996 were $600,000. At September 30, 1996, there were
approximately $1,490,000 in dividends available for payment to Independent
Financial by the Banks without regulatory approval. 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 Financial and by
Independent Financial to the Company totaled $625,000 and $450,000,
respectively, during 1994.
- 43 -
<PAGE>
The payment of current tax liabilities generated by the Banks and
management and service fees constituted 47% and 9%, respectively, of the
Company's cash flows during the first nine months of 1996 and 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 $642,000
were paid by the Banks to the Company during the first nine months of 1996.
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. Of the amount
paid in 1995, $81,000 represented the final settlement of tax liabilities
between the Company and the Banks for the year ended December 31, 1993.
From January 1, 1989 through December 31, 1995, the Company collected
federal income taxes from the Banks based on an effective tax rate of
approximately 34% and paid taxes to the federal government at the rate of
approximately 2% as a result of the utilization of the Company's net
operating loss carryforwards for both regular tax and alternative minimum tax
purposes. As of December 31, 1995, the Company's net operating loss
carryforwards for alternative tax purposes had been fully utilized. As a
result, the Company began paying federal income taxes at the effective tax
rate of approximately 20% during the first quarter of 1996. The Company
still has net operating carryforwards available for regular federal income
tax purposes.
The 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 $125,000 in
management fees to the Company during the first nine months of 1996. 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.
At September 30, 1996, the Company had a note payable to a financial
institution in Amarillo, Texas (the "Amarillo Bank"). This note (the "Term
Note") had a maturity of April 15, 1996. On April 15, 1996, the Company paid
the Amarillo Bank $100,000 to reduce the outstanding principal balance to
$371,000 and the maturity date was extended to April 15, 1999. Equal
principal payments of $31,000, plus accrued interest, were due quarterly on
January 15, April 15, July 15 and October 15. The Term Note bore interest at
the Amarillo Bank's floating base rate plus 1% (9.25% at September 30, 1996)
and was collateralized by 100% of the stock of First State, N.A., Abilene,
and First State, N.A., Odessa. The loan agreement between the Company and
the Amarillo Bank contained certain covenants that, among other things,
restricted 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 was $1,000,000 or greater. The
loan agreement also required the Company and the Banks to meet certain
financial ratios, all of which were met at September 30, 1996, and December
31, 1995. The remaining principal balance of the Term Note was paid on
October 15, 1996.
In addition, at September 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $226,000. 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 interest. The first
annual principal installment of $117,000 was made on 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 audited
year end consolidated financial statements.
At September 30, 1996, First State, N.A., Abilene had a $14,000 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.
- 44 -
<PAGE>
CAPITAL RESOURCES
At September 30, 1996, stockholders' equity totaled $14,582,000, or 7.2%,
of total assets. 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
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.
- 45 -
<PAGE>
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 September 30, 1996,
and December 31, 1995.
<TABLE>
<CAPTION>
Pro Forma
At At At
The Company September 30, 1996 December 31, 1995 September 30, 1996
----------- ------------------ ----------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized
loss on available-for-sale securities $ 14,039 $ 13,060 $ 17,770
Preferred stockholders' equity (1) 566 690 566
Goodwill (974) 0 (3,321)
Net deferred tax asset in excess of regulatory
capital limits (2) (28) (171) (28)
-------- -------- --------
Total Tier 1 capital 13,603 13,579 14,987
-------- -------- --------
Tier 2 capital:
Allowance for possible loan losses (3) 806 759 1,336
-------- -------- --------
Total Tier 2 capital 806 759 1,336
-------- -------- --------
Total capital $ 14,409 $ 14,338 $ 16,323
-------- -------- --------
-------- -------- --------
Risk-weighted assets $ 98,260 $ 89,172 $139,914
-------- -------- --------
-------- -------- --------
Adjusted quarterly average assets $203,518 $177,445 $260,188
-------- -------- --------
-------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Minimum Actual Ratios at
Regulatory --------------------------------- Pro Forma at
The Company Requirement(4) September 30, 1996 December 31, 1995 September 30, 1996
----------- -------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Tier 1 capital to risk-weighted
assets ratio 4.00% 13.84% 15.23% 10.71%
Total capital to risk-weighted
assets ratio 8.00 14.66 16.08 11.67
Leverage ratio 3.00 6.68 7.65 5.76
The Banks
---------
Tier 1 capital to risk-weighted
assets ratio 4.00% 12.07 - 13.38% 12.42 - 16.04% 8.91 - 12.07%
Total capital to risk-weighted
assets ratio 8.00 12.85 - 14.25 13.27 - 16.91 10.15 - 12.85
Leverage ratio 3.00 5.63 - 7.25 7.10 - 7.57 4.96 - 7.10
</TABLE>
- --------------------
(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.
- 46 -
<PAGE>
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, the Company, First State,
N.A., Abilene and First State, N.A., Odessa were all "well capitalized" at
September 30, 1996.
The Company's ability to generate capital internally through retention of
earnings and access to capital markets is essential for satisfying the
capital guidelines for bank holding companies as prescribed by the Federal
Reserve Board.
The payment of dividends on the Common Stock and 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. The Company also paid a
33-1/3% stock dividend on May 31, 1995. The Company's Board of Directors
increased the Company's quarterly Common Stock cash dividend to $0.05 per
share effective for the cash dividend payable on May 31, 1996. The Company's
Board of Directors declared $0.05 per share cash dividends on July 17, 1996,
which was paid on August 30, 1996, to holders of the Common Stock on August
15, 1996, and on October 16, 1996, payable on November 29, 1996, to holders
of the Common Stock on November 15, 1996.
Upon consummation of the sale of shares offered pursuant to this
Prospectus, the Company will use approximately $3,000,000 of the net proceeds
to fund a portion of the cost of acquiring Crown Park. The remaining
proceeds will be added to working capital and will be used for general
corporate purposes. See "Capitalization."
ACCOUNTING MATTERS
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation". This Statement defines a fair value based method
of accounting for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all employee
stock compensation plans. However, it also allows an entity to continue to
measure compensation cost for those plans using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Entities electing to continue to use the method of
accounting specified in Opinion 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value method
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of accounting defined in this Statement had been applied. This Statement is
effective for fiscal years beginning after December 15, 1995.
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This Statement provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This Statement requires that after a
transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996.
Management believes that the adoption of these pronouncements will not
have a material impact on the financial statements of the Company.
BUSINESS AND PROPERTIES OF THE COMPANY
THE COMPANY
The Company is a bank holding company for First State, N.A., Abilene and
First State, N.A., Odessa. First State, N.A., Abilene has two separate
branch office locations in Abilene, Texas, and one each in San Angelo,
Stamford and Winters, 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. 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 a larger bank. In
connection with the acquisition of Crown Park and its subsidiary Western
National, the Company is seeking the approval of the Comptroller to merge
First State, N.A., Odessa with and into First State, N.A., Abilene in order
to recognize certain cost savings and to utilize the Banks' capital more
effectively. Following the anticipated merger of First State, N.A., Odessa
with and into First State, N.A., Abilene, the Company will continue its
decentralized approach to banking with senior management at the main banking
offices in Abilene and Odessa exercising substantial autonomy over credit and
pricing decisions.
The Company's principal executive offices are located at 547 Chestnut
Street, Abilene, Texas 79602. At September 30, 1996, the Company had, on a
consolidated basis, total assets of $203,801,000, total deposits of
$187,474,000, total loans, net of unearned income, of $90,115,000 and total
stockholders' equity of $14,582,000.
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 its respective service
area. First State, N.A., Abilene was chartered in 1982 and was the third
largest of four commercial banks headquartered in Abilene, Texas, in terms of
total assets at December 31, 1995, and was the fifth largest of ten banks in
Abilene in terms of total branch assets at that same time. The branches in
Stamford and Winters were the largest bank branches in those cities in terms
of total assets at December 31, 1995. The branch in San Angelo was the ninth
largest of ten banks in terms of total branch assets in that city at December
31, 1995. First State, N.A., Odessa was chartered in 1983 and was the third
largest of four commercial banks headquartered in Odessa, Texas, in terms of
total assets at December 31, 1995, and was the sixth largest of seven banks
in Odessa in terms of total branch assets at that same date. The deposits of
the Banks are insured by the FDIC to the maximum extent provided by law.
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The following table sets forth certain selected information with respect
to the Banks at September 30, 1996:
Stock-
Total Total Total holder's
Name of Bank Assets Deposits Loans(1) Equity
------------ ------ -------- -------- --------
First State, N.A., Abilene $137,841,000 $128,238,000 $52,658,000 $8,689,000
First State, N.A., Odessa 64,457,000 59,486,000 37,458,000 4,691,000
- ------------------------
(1) Net of unearned income.
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:
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 and
permanent 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 the Company'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 ACTIVITIES
SAN ANGELO BRANCH. On May 27, 1996, First State, N.A., Abilene assumed
the deposits and certain other liabilities and purchased the loans and
certain other assets of Coastal Banc - San Angelo in a cash transaction. On
the date of the acquisition, Coastal Banc - San Angelo had approximately
$14,895,000 in total deposits and $155,000 in total loans. The acquisition
was accounted for under the purchase method of accounting, and the assets and
liabilities of this branch were recorded at their estimated fair value.
Coastal Banc - San Angelo became a branch of First State, N.A., Abilene.
PEOPLES NATIONAL. First State, N.A., Abilene completed the acquisition
of 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. The
acquisition was accounted for under the purchase method of accounting, and
the assets and liabilities of Peoples National were recorded at their
estimated fair value.
WINTERS STATE. In 1990, the Banks foreclosed on shares of stock of
Winters State that secured a loan and acquired a 28.2% interest in Winters
State. During the third quarter of 1993, the Company acquired this interest
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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.
BUSINESS STRATEGY
The Company's strategic plan contemplates an increase in profitability
and shareholder value through the building of a valuable West Texas banking
franchise consisting of low cost core deposits as a funding base to support
local consumer and commercial lending programs.
The Company's acquisition activity has been designed to augment this
franchise by increasing market share and expanding into contiguous markets
demographically similar to its current service areas. Following the
acquisition of Crown Park and its subsidiary Western National, the Company
will have locations in four of the fastest growing consumer markets in West
Texas. Management believes that it can increase the profitability of the
Company through increased operating efficiencies, an increase in the loan to
deposit ratio and cross-selling a more expansive product line to newly
acquired customers.
The Company's operating strategy is to provide customers with the
business sophistication and breadth of products of a regional financial
services company, while retaining the special attention to personal service
and the local appeal of a community bank. Decentralized decision making
authority vested in the presidents and senior officers of the Banks allows
for rapid response time and flexibility in dealing with customer requests and
credit needs. The Company believes that following the merger of First State,
N.A., Odessa with and into First State, N.A., Abilene the rapid response time
and flexibility in dealing with customer requests and credit needs will
continue through the substantial autonomy of senior management at the main
banking offices in Odessa and Abilene. The participation of the Company's
directors, officers and employees in area civic and service organizations
demonstrates the Company's continuing commitment to the communities it
serves. Management believes that these qualities distinguish the Company
from its competitors and will allow the Company to compete successfully in
its market against larger regional and out-of-state institutions.
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.
EMPLOYEES
At October 31, 1996, the Company and the Banks had 101 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.
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PROPERTIES
At October 31, 1996, 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
October 31, 1996, 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.
Approximate
Location Square Footage Ownership and Occupancy
-------- -------------- -----------------------
Abilene, Texas 8,600 Owned by First State, N.A., Abilene and
occupied by the Main Bank 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
- ------------------------
(1) First State, N.A., Odessa occupies approximately 20,400 square feet,
leases 23,500 square feet and is attempting to lease the remaining
18,500 square feet.
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, and the nine-month period ended
September 30, 1996 were $46,000 and $30,000, respectively. These amounts
represent 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.
LEGAL PROCEEDINGS
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. Mr.
Stephens' claims, among other things, that FSB-Abilene agreed to offset the
amount owing under the promissory note with amounts allegedly due him 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, pre-judgment 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.
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In CONNIE POLLARD V. FIRST STATE BANK, N.A., ODESSA, TEXAS (Cause No.
A-100,846) brought in the 70th District Court of Ector County, Texas, the
plaintiff, the former Senior Vice President, Manager of Trust Operations of
First State, N.A., Odessa, alleges, among other things, that she was
discriminated against on the basis of her sex, she was repeatedly passed over
for promotion to the Trust Department Manager, she was paid less than male
employees and that she was constructively discharged. The plaintiff alleges
damages for past and future wages, emotional distress and constructive
discharge, actual damages, exemplary damages, attorneys' fees, reinstatement
and promotion and pre-judgment and post-judgment interest. The Company
believes the plaintiff's claims to be without merit and intends to vigorously
defend this action.
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.
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REGULATION AND SUPERVISION
THE COMPANY
GENERAL
The Company is a multi-bank holding company registered with, and subject
to regulation by, the Federal Reserve Board under the BHCA. 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
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. 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 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.
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 certain
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 from time to time have been introduced in both the
U.S. Senate and House of Representatives that would, if enacted, remove many
of the restraints imposed by the Glass-Steagall Act, although no
comprehensive bill has been enacted to date.
On March 26, 1996 the U.S. Supreme Court ruled that Section 92 of the
National Bank Act preempts state insurance laws which prevent banks from
exercising insurance powers granted under those laws. Section 92 grants
national banks located and doing business in a place with a population not
exceeding 5,000 inhabitants the authority to act as insurance agent for any
insurance company authorized to do business in a state where the bank is
located. In response to this decision, on June 20, 1996, the Texas
Department of Insurance ("TDI") issued its "Interim Procedures for Banks
Selling Insurance" which contain licensing and consumer protection guidance
that apply to banks and savings associations located in Texas. The TDI has
stressed that these are only interim guidelines intended to be in effect
until the Texas Legislature or Congress resolves some remaining issues which
serve as impediments to the ability of the banks to take full advantage of
this activity. In addition, the Comptroller has issued an advisory letter
which provides guidance to national banks regarding insurance and annuity
sales activities.
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 twelve-month period, 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
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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.
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.
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.
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
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
total 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 September 30, 1996, the
Company's ratios of "Tier 1" and total capital to risk-weighted assets were
13.84% and 14.66%, 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
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are expected to maintain a leverage ratio of 4.0% to 5.0%. The Company's
leverage ratio at September 30, 1996, was 6.68% and exceeded the regulatory
minimum.
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.
IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES
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
Subject to certain exceptions, 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.
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 Act permits, in certain
circumstances, out-of-state bank holding companies to acquire certain
existing banks and bank holding companies in Texas. However, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"),
permits 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.
FDICIA eased restrictions on cross-industry mergers. Members of the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF")
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.
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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.
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 Comptroller. Pursuant to such
regulation, the Banks are subject to special restrictions, supervisory
requirements and potential enforcement actions.
PERMISSIBLE ACTIVITIES FOR NATIONAL BANKS
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. The Interstate Banking Act, which expands the authority of
bank holding companies and banks to engage in interstate bank acquisitions
and interstate banking, allows each state the option of "opting out" of the
interstate branching (but not banking) provisions. The Texas Legislature
opted out of the interstate branching provisions during its 1995 Session.
Interstate banking was effective on September 29, 1995, and interstate
branching would have become effective in Texas in June of 1997, if Texas had
not elected to "opt out." The Texas Legislature "opt-out" legislation
prohibiting interstate branching is effective until September of 1999.
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.
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<PAGE>
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.
The restrictions on loans to insiders contained in the Federal Reserve
Act and Regulation O of the Federal Reserve Board 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. Texas statutes establish maximum legal rates of
interest for various lending situations.
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 "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,"
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<PAGE>
"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 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
September 30, 1996, 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
The FDIC is required by the Federal Deposit Insurance Act to assess all
banks in order to adequately fund the BIF so as to resolve any insured
institution that is declared insolvent by its primary regulator. 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.
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<PAGE>
DEPOSIT INSURANCE ASSESSMENTS
The FDIC is required by the Federal Deposit Insurance Act to assess all
banks in order to adequately fund the BIF so as to resolve any insured
institution that is declared insolvent by its primary regulator. 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.
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.
On August 8, 1995, the FDIC amended its regulations to change the range
of deposit insurance assessments charged to members of the BIF from the
then-prevailing range of .23% to .31% of deposits, to a range of 0.4% to .31%
of deposits. On November 14, 1995, the FDIC further reduced the deposit
insurance assessments for BIF-member institutions, such that the range of BIF
assessments is currently between 0% and .27% of deposits. BIF-member
institutions which qualify for the 0% assessment category will, however,
still have to pay the $1,000 minimum semi-annual assessment required by
federal statute.
In connection with the new rate schedule, the FDIC established a process
for raising or lowering all rates for BIF-insured institutions semi-annually
if conditions warrant a change. Under this new system, the FDIC will have
the flexibility to adjust the entire BIF assessment rate schedule twice a
year without seeking public comment first, but only within a range of five
cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for
public comment.
On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the SAIF and to assure
the payment of the Financing Corporation's ("FICO") bond obligations. Under
this new act, banks insured under the BIF are required to pay a portion of
the interest due on bonds that were issued by FICO to help shore up the
ailing Federal Savings and Loan Insurance Corporation ("FSLIC") in 1987. The
amount of FICO debt service to be paid by all BIF-insured institutions is
currently estimated to be approximately $320,343,000 per year, or $0.128 per
$100 of deposits from 1997 until the year 2000, when the obligation of
BIF-insured institutions increases to approximately $598,500,000 or $0.240
per $100 of deposits per year through the year 2019.
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.
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<PAGE>
CHANGING 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.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the
directors and executive officers of the Company and the Banks as of the date
hereof:
Year First
Became a
Director of Principal Occupation
Name and Age the Company During Last Five Years
- ------------ ----------- ----------------------
Scott L. Taliaferro (74) 1980 Chairman of the Board of the
Company and President of Texas
Drilling Co.
(oil and gas drilling)
Bryan W. Stephenson (46) 1989 President and Chief Executive
Officer of the Company
Randal N. Crosswhite (42) 1995 Senior Vice President, Chief
Financial Officer and Corporate
Secretary of the Company
Jim Fitzhugh (47) N/A President of First State,
N.A., Abilene
Mike Jarrett (47) N/A President of First State, N.A.,
Odessa
Lee Caldwell (62) 1985 Attorney at Law
Mrs. Wm. R. (Amber) Cree (65) 1982 Entrepreneur
Louis S. Gee (74) 1981 Chairman of the Board and
Chief Executive Officer of
Tippett & Gee, Inc. (mechanical
engineering)
Marshal M. Kellar (64) 1981 A principal of West Texas
Wholesale Supply Company
(hardware)
Tommy McAlister (47) 1985 President of McAlister, Inc.
(investments)
James D. Webster, M.D. (56) 1988 Physician
C.G. Whitten (71) 1980 Senior Vice President, General
Counsel and Corporate Secretary
of Pittencrieff Communications,
Inc. (telecommunications)
John A. Wright (77) 1980 Bank Consultant
In addition, Messrs. Stephenson and Crosswhite serve as directors of each
of the Banks, Mr. Fitzhugh serves as a director of First State, N.A., Abilene
and Mr. Jarrett serves as a director of First State, N.A., Odessa.
BOARD OF DIRECTORS; ELECTION OF OFFICERS
The Company has a classified Board of Directors currently comprised of
eleven members (exclusive of advisory directors), with directors serving
staggered three-year terms. One class is elected at each annual meeting of
the Company's shareholders. The terms of Messrs. Caldwell, Crosswhite, Gee
and Kellar expire in 1997; the terms of Messrs. Stephenson, Taliaferro and
Whitten expire in 1998; and the terms of Madame Cree and Messrs. McAlister,
Webster and Wright expire in 1999.
All directors hold office until their successors are duly elected and
qualified. Any vacancy occurring in the Board of Directors may be filled by
the affirmative vote of a majority of the remaining directors though less
than a quorum except that any vacancy on the Board of Directors resulting
from the removal of a director by the
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<PAGE>
shareholders shall be filled only by the shareholders entitled to vote at an
annual or special meeting called for that purpose. A director elected to
fill a vacancy shall be elected for the unexpired term of his predecessor in
office. Any directorship to be filled by reason of an increase in the number
of directors shall be filled by election at an annual meeting or at a special
meeting of the shareholders entitled to vote called for that purpose.
The Bylaws of the Company provide for advisory directors. The following
individuals currently serve as advisory directors of the Company: Arlas
Cavett, L. H. Mosley and J. E. Smith.
Executive officers of the Company are elected by the Board of Directors
at its annual meeting and hold office until the next annual meeting of the
Board of Directors or until their respective successors are duly elected and
have qualified. The Presidents of the Banks are elected by the board of
directors of the respective Banks at their annual meetings and hold office
until the next annual meeting of such board of directors or until their
respective successors are duly elected and have qualified.
COMPENSATION OF DIRECTORS
In 1995, each non-employee director and advisory director was paid $150
for each regular and special directors' meeting of the Company attended and
$50 for each meeting of the Executive Committee and Audit Committee attended.
The Board of Directors has set director and committee fees for 1996 at $150
per meeting of the Board and $50 per meeting of the Executive Committee and
the Audit Committee.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors conducts its business through meetings of the
Board of Directors and through its committees. In accordance with the Bylaws
of the Company, the Board of Directors has established an Executive
Committee, an Audit Committee and an Employee Stock Ownership/401(k) Plan
Committee. Louis S. Gee, Bryan W. Stephenson, Scott L. Taliaferro, C.G.
Whitten and John A. Wright are members of the Executive Committee. Lee
Caldwell, Marshal M. Kellar, Tommy McAlister and James D. Webster, M.D. are
the members of the Audit Committee. Mrs. Wm. R. (Amber) Cree and Scott L.
Taliaferro are members of the Employee Stock Ownership/401(k) Plan Committee.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's
Chief Executive Officer in all capacities. No other executive officer of the
Company received total salary and bonus compensation for services rendered to
the Company the last three fiscal years in excess of $100,000.
<TABLE>
<CAPTION> LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION OTHER ANNUAL ---------------------
NAME AND PRINCIPAL FISCAL ---------------------- COMPENSATION SECURITIES UNDERLYING
POSITION YEAR SALARY BONUS($) ($)(1) OPTIONS
- ------------------ ------ ------ -------- ------------ ---------------------
<S> <C> <C> <C> <C> <C>
Bryan W. Stephenson 1995 $126,000 $20,000 $ 6,500 0
PRESIDENT, CHIEF 1994 120,000 20,000 10,200 0
EXECUTIVE OFFICER 1993 92,000 8,000 8,000 9,333
</TABLE>
______________________
(1) Directors fees paid by the Banks.
STOCK OPTION GRANTS IN FISCAL 1995
No stock options were granted to the Chief Executive Officer during
fiscal 1995. The Company has never granted stock appreciation rights.
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1995 AND FISCAL YEAR END OPTION
VALUES
The following table provides information related to stock options
exercised by the Chief Executive Officer during fiscal 1995 and the number
and value of stock options held at fiscal year end.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE(2) OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT YEAR-END(#) AT YEAR END($)
UPON EXERCISE REALIZED ---------------------------- --------------------------
NAME EXERCISE(#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bryan W. Stephenson 0 $0 9,333 0 $28,000 $0
</TABLE>
________________________
(1) Market value of the underlying securities at exercise date, minus the
exercise price.
(2) Market value of the underlying securities at December 31, 1995, minus the
exercise price.
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SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table and notes thereto set forth certain information as of
October 31, 1996, and as adjusted to reflect the Acquisition and the sale of the
Common Stock offered by this Prospectus with respect to the shares of Common
Stock beneficially owned by (i) each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each director and
advisory director and (iii) all current directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED
OWNED BEFORE THE OFFERING(1) AFTER THE OFFERING(1)
---------------------------- -------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(2) NUMBER PERCENT(3)
- ------------------------------------ ------ ---------- ------ ----------
5% STOCKHOLDERS
- ---------------
<S> <C> <C> <C> <C>
Independent Bankshares, Inc. .............. 112,472 10.18% 127,472 9.08%
Employee Stock Ownership/401(k) Plan
P.O. Box 3296
Abilene, Texas 79604
Scott L. Taliaferro, Jr.................... 86,651(4) 7.84 86,651(4) 6.17
P.O. Box 240
Abilene, Texas 79604
Bryan W. Stephenson........................ 79,462(5) 7.08 79,462(5) 5.59
547 Chestnut
Abilene, Texas 79602
John A. Wright............................. 71,480(6) 6.30 71,480(6) 4.98
1102 Sayles Boulevard
Abilene, Texas 79605
Scott L. Taliaferro........................ 59,969(7) 5.28 59,969(7) 4.17
P.O. Box 240
Abilene, Texas 79604
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Lee Caldwell............................... 13,165(8) 1.18 13,165(8) 0.93
Arlas Cavett*.............................. 24,594(9) 2.21 24,594(9) 1.74
Mrs. Wm. R. (Amber) Cree................... 2,622 0.24 2,622 0.19
Randal N. Crosswhite....................... 19,487(10) 1.76 19,487(10) 1.38
Louis S. Gee............................... 36,026(11) 3.23 36,026(11) 2.55
Marshal M. Kellar.......................... 1,545(12) 0.14 1,545(12) 0.11
Tommy McAlister............................ 3,288(13) 0.30 3,288(13) 0.23
L.H. Mosley*............................... 44,300(14) 4.01 44,300(14) 3.15
J.E. Smith*................................ 2,394(15) 0.22 2,394(15) 0.17
Bryan W. Stephenson........................ 79,462(5) 7.08 79,462(5) 5.59
Scott L. Taliaferro........................ 59,969(7) 5.28 59,969(7) 4.17
James D. Webster, M.D...................... 708 0.06 708 0.05
C.G. Whitten............................... 4,739(16) 0.43 4,739(16) 0.34
John A. Wright............................. 71,480(6) 6.30 71,480(6) 4.98
All executive officers and directors as a
group (16 individuals, including the
executive officers and directors listed
above)..................................... 376,774(17) 30.98% 391,774(17) 25.84%
</TABLE>
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<PAGE>
* Advisory Director.
(1) Beneficial ownership as reported in the above table has been determined in
accordance with Rule 13d-3 under the Exchange Act. Unless as otherwise
indicated, all shares are owned directly, and each person has sole voting
and investment power with respect to the shares reported.
(2) The percentage of Common Stock indicated is based on 1,104,644 shares of
Common Stock issued and outstanding at October 31, 1996.
(3) The percentage of Common Stock indicated is based on 1,404,644 shares of
Common Stock issued and outstanding upon consummation of the offering made
hereby.
(4) Includes 53,281 shares held by Farmers and Merchants Company, Abilene,
Texas, as trustee for Mr. Taliaferro. Also includes 33,074 shares that
could be acquired within 60 days through the conversion of Series C
Preferred Stock, which is held by Farmers and Merchants Company, Abilene,
Texas, as trustee for Mr. Taliaferro.
(5) Includes 4,716 shares owned by Mr. Stephenson's wife and minor children and
7,644 shares that could be acquired within 60 days through the conversion
of Series C Preferred Stock owned by Mr. Stephenson's wife. Also includes
Mr. Stephenson's beneficial ownership of 8,787 shares held by the Company's
Employee Stock Ownership/401(k) Plan. Also includes 9,333 shares that Mr.
Stephenson has the right to acquire within 60 days pursuant to the
exercise of stock options.
(6) Includes 30,649 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock.
(7) Includes 992 shares owned by Mr. Taliaferro's wife. Also includes 31,935
shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock.
(8) Includes 7,350 shares that could be acquired within 60 days through the
conversion of the Company's Series C Preferred Stock.
(9) Includes 14,365 shares owned by Cavett & Frost, a general partnership in
which Mr. Cavett is a 50% partner, and 777 shares owned by Cavett, Inc. Mr.
Cavett is President and a 50% shareholder of Cavett, Inc. Also includes
8,268 shares that could be acquired within 60 days through the conversion
of Series C Preferred Stock owned by Cavett & Frost.
(10) Includes Mr. Crosswhite's beneficial ownership of 8,292 shares held by the
Company's Employee Stock Ownership/401(k) Plan. Also includes 3,333 shares
that Mr. Crosswhite has the right to acquire within 60 days pursuant to the
exercise of stock options.
(11) Includes 11,574 shares owned by Tippett & Gee, Inc. Mr. Gee is the Chairman
of the Board and majority shareholder of Tippett & Gee, Inc. Also includes
9,187 shares that could be acquired within 60 days through the conversion
of Series C Preferred Stock.
(12) Includes 1,545 shares owned by M & G Kellar Investment Limited Partnership,
a partnership in which Mr. Kellar is a general partner.
(13) Includes 2,588 shares owned by McAlister Oil Co., Inc. Mr. McAlister is
President and sole shareholder of McAlister Oil Co., Inc. Also includes 551
shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock owned by McAlister Oil Co., Inc.
(14) Includes 367 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock.
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<PAGE>
(15) Includes 732 shares owned by Mr. Smith's wife.
(16) Includes 735 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock.
(17) Includes 96,686 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock. Also includes such executive
officers' beneficial ownership of 25,973 shares held by the Company's
Employee Stock Ownership/401(k) Plan. Also includes 14,666 shares that
such executive officers have the right to acquire within 60 days pursuant
to the exercise of stock options.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Banks had, during the period from January 1, 1995, to October 31,
1996, and expect to have in the future, loan transactions with officers and
directors of the Company and the Banks and their respective associates, which
includes any immediate family member or any corporation or firm of which such
person is an executive officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities or any
trusts of which such person serves as trustee or in which he or she has a
substantial beneficial interest. These loan transactions have been made in
the ordinary course of such Banks' business and have been and will continue
to be on substantially the same terms, including interest rates, collateral
and repayment, as those prevailing at the time for comparable transactions
with unaffiliated persons and did not involve more than the normal risk of
collectibility or present other unfavorable features. All loans made to
officers, directors and nominees for director of the Company and their
respective associates are believed to be in compliance with the Financial
Institutions Regulatory and Interest Rate Control Act of 1978.
During the fiscal years ended December 31, 1995, 1994 and 1993, the
Company and its subsidiaries paid approximately $19,000, $55,000 and $110,000
to the law firm of Whitten & Young, P.C., for legal services. C. G. Whitten,
a director, is Of Counsel to such law firm.
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, including John A.
Wright, a director of the Company, 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 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 individuals, including Mr.
Wright, 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 (the "Inside Directors") with the Inside Directors, including
Mr. Wright, 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.
Of this latter amount, Mr. Wright claimed approximately $340,000 in
indemnification expense. In March 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. In connection
with this settlement, Mr. Wright received $150,000 cash and a promissory note
in the original principal amount of $152,250. The first principal payment of
$50,750, plus accrued interest of $9,135, was paid to Mr. Wright on March 1,
1996.
During 1989, the Company advanced $77,000 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
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connection with their defense of an action brought by two plaintiffs who
purchased debentures previously sold by the bank. In addition, in 1991 the
Company accrued $214,000 to provide reimbursement to the former directors for
the payment of legal fees and expenses incurred in connection with this
lawsuit. The Company reimbursed $200,000 to such former directors during the
year ended December 31, 1993.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock of
which 1,104,644 shares were issued and outstanding at October 31, 1996.
Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors from funds legally available therefor. Each
share of Common Stock entitles the holder thereof to one vote upon matters voted
upon by the shareholders. Cumulative voting for the election of directors is
not permitted, which means that the holders of a majority of shares voting for
the election of directors can elect all members of each class of the Board.
Except as otherwise required by applicable Texas law and under the Fair Price
provision described below, a two-thirds vote is sufficient for any action that
requires the vote or concurrence of shareholders, except that a plurality vote
is sufficient to elect directors.
The holders of Common Stock do not have any preemptive, subscription,
redemption or conversion rights or privileges. Upon liquidation or dissolution
of the Company, the holders of Common Stock are entitled to share ratably in the
net assets of the Company remaining after payment of liabilities and liquidation
preferences of any outstanding shares of preferred stock. All shares of Common
Stock now outstanding are fully paid and non-assessable. Each share of Common
Stock has the same rights, privileges and preferences as every other share.
POTENTIAL LIMITS OR QUALIFICATIONS FROM PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock, par
value $10.00 per share (the "Preferred Stock"), which the Board of Directors may
designate and issue from time to time in one or more series. With respect to
each series of the Preferred Stock, the Board of Directors is authorized to fix
and determine by the resolution or resolutions providing for the issuance of the
series the number of shares to constitute the series and the designation of the
series and any one or more of the following rights and preferences: (i) the
rate of dividend; (ii) the price at and terms and conditions on which shares may
be redeemed; (iii) the amount payable for shares in the event of involuntary or
voluntary liquidation; (iv) sinking funds provisions (if any) for the redemption
or repurchase of the shares; (v) the terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion; and (vi) voting rights (including the number of votes per share, the
matters on which the shares can vote and the contingencies that make voting
rights effective). The shares of each series of the Preferred Stock may vary
from the shares of any other series of Preferred Stock in any or all of the
foregoing respects.
Pursuant to action of the Board, up to 50,000 shares of Series C Preferred
Stock have been designated as a single series of preferred stock, and 13,478
shares of Series C Preferred Stock were issued and outstanding at October 31,
1996. Holders of Series C Preferred Stock are entitled to receive, if, as and
when declared by the Board of Directors, out of funds legally available
therefore, in preference to the holders of Common Stock and of any other stock
ranking junior to the Series C Preferred Stock in respect of dividends, annual
cumulative cash dividends at the per share rate of $4.20 payable quarterly, in
arrears. The Company may not (i) declare or pay any dividend in respect of the
Common Stock or any stock junior to the Series C Preferred Stock with respect to
dividend and liquidation rights unless, on the date of payment, all accumulated
dividends in respect of the Series C Preferred Stock are paid or (ii) purchase,
redeem or otherwise acquire, or set aside monies or create a sinking fund for
the purchase, redemption or acquisition of, Common Stock or any such junior
preferred stock generally if the Company has failed to declare and pay (or set
aside monies for the payment of) dividends in respect of the Series C Preferred
Stock. Furthermore, the Company may not declare or pay any dividend in respect
of the Common Stock or purchase or otherwise acquire shares of Common Stock if,
on the record date for such payment, or the date of such purchase or
acquisition, such action would cause stockholders' equity of the Company, as
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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 product of the number of then
outstanding shares of Series C Preferred Stock multiplied by $42.00 and (ii)
140% of the product of the number of then outstanding shares of stock senior
to the Series C Preferred Stock with respect to dividends multiplied by the
liquidation amount thereof.
Whenever dividends on the Series C Preferred Stock, or any other class or
series of stock of the Company ranking PARI PASSU with the Series C Preferred
Stock as to dividends, have not been paid in an aggregate amount equal to at
least three quarterly dividends (regardless of whether consecutive), the
holders of Series C Preferred Stock shall be entitled to vote on all
corporate matters on the basis of 105 votes for each share of Series C
Preferred Stock held of record. Such voting rights will terminate when all
such dividends accrued and in default have been paid in full or set aside for
payment. Without the affirmative vote or consent of the holders of at least
two-thirds of the total number of shares of Series C Preferred Stock of the
Company at the time outstanding, voting as a class, the Company may not (i)
amend, alter or repeal any of the rights, preferences or powers of the
holders of the Series C Preferred Stock so as to affect adversely any such
rights, preferences or powers or (ii) authorize, issue or increase the
authorized amount of any class or series of stock ranking senior to, or PARI
PASSU with, the Series C Preferred Stock as to dividends or upon liquidation,
dissolution or winding up of the Company. The Texas Business Corporation Act
provides that the holders of the outstanding shares of a class shall be
entitled to vote as a class upon a proposed amendment, and the holders of the
outstanding shares of a series shall be entitled to vote as a class upon a
proposed amendment, whether or not entitled to vote thereon by the provisions
of the articles of incorporation if the amendment would: (i) increase or
decrease the aggregate number of authorized shares of such class or series;
(ii) increase or decrease the par value of the shares of such class,
including changing shares having a par value into shares without par value;
(iii) effect an exchange, reclassification or cancellation of all or part of
the shares of such class or series; (iv) effect an exchange, or create a
right of exchange, of all or any part of the shares of another class into the
shares of such class or series; (v) change the designations, preferences,
limitations or relative rights of the shares of such class or series; (vi)
changes the shares of such class or series into the same or different number
of shares, either with or without par value, of the same class or series or
another class or series; (vii) create a new class or series of shares having
rights and preferences equal, prior or superior to the shares of such class
or series, or increase the rights and preferences of any class or series
having rights and preferences equal, prior or superior to the shares of such
class or series, or increase the rights and preferences of any class or
series having rights or preferences later or inferior to the series of such
class or series in a manner as to become equal, prior, or superior to the
shares of such class or series; (viii) divide the shares of such class into
series and fix and determine the designation of such series and the
variations in the relative rights and preferences between the shares of such
series; (ix) limit or deny the existing preemptive rights of the shares of
such class or series; or (x) cancel or otherwise effect the dividends on the
shares of such class or series which had accrued but had not been declared.
As of October 31, 1996, each share of Series C Preferred Stock was
convertible into Common Stock at a conversion rate of 18.375 shares of Common
Stock per share of Series C Preferred Stock. No fractional shares will be
issued upon conversion and cash will be paid in lieu thereof. The conversion
rate is subject to adjustment in certain events. Beginning December 12, 1997,
or on any anniversary thereafter, the Company may redeem all or any part of the
outstanding Series C Preferred Stock by paying a redemption price per share of
$42.00 in cash plus, in each case, accumulated and unpaid dividends to the
redemption date. In certain cases, the Company may elect to pay all or a
portion of the redemption price in shares of its Common Stock.
In the event of any liquidation of the Company, after payment or provision
for payment of the debts and other liabilities of the Company, the holders of
Series C Preferred Stock will be entitled to receive, out of the remaining net
assets of the Company available for distribution to shareholders, the amount of
$42.00 per share, plus an amount equal to the amount of all dividends accrued
and unpaid on each such share (regardless of whether declared) to the date fixed
for distribution, before any distribution is made to holders of the Common Stock
or any other stock that ranks junior to the Series C Preferred Stock.
CERTAIN PROVISIONS OF THE RESTATED ARTICLES OF INCORPORATION AND THE BYLAWS
Certain provisions in the Restated Articles of Incorporation (the
"Articles") and Restated Bylaws ("Bylaws") could make more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types of
coercive takeover practices and inadequate takeover
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bids and to encourage persons seeking to acquire control of the Company to
first negotiate with the Company. The Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
the Company outweigh the disadvantages of discouraging such proposals
because, among other things, negotiations of such proposals could result in
an improvement of their terms.
RESTATED ARTICLES OF INCORPORATION
CLASSIFIED BOARD OF DIRECTORS. The Articles provide that the Board of
Directors is divided into three classes of directors, with the term of each
class expiring in a different year. The Bylaws provide that the number of
directors will be fixed from time to time exclusively by the Board of Directors
but shall consist of not more than 30 nor less than 7 directors. A majority of
the Board of Directors then in office has the sole authority to fill any
vacancies on the Board of Directors, except that any vacancy in the Board of
Directors resulting from the removal of a director by the shareholders shall be
filled only by the shareholders entitled to vote at the annual meeting or a
special meeting called for that purpose.
PREFERRED STOCK. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of the Company or may
materially affect the rights evidenced by, or amounts payable with respect to,
the shares of Common Stock. The voting and conversion rights of any class or
series of preferred stock issued by the Company could adversely affect, among
other things, the voting rights of existing shareholders.
FAIR PRICE PROVISION. The Company's Articles contain a Fair Price
provision that, among other things, requires the approval by the holders of 80%
of the voting power of the then outstanding shares of capital stock of the
Company entitled to vote generally in the election of directors (the "Voting
Stock") as a condition for mergers and certain other business combinations
(collectively, "Business Combinations"), which term also includes with respect
to the Company or its subsidiaries, the sale or disposition of assets, the
issuance or transfer of stock or other securities, any plan or liquidation or
dissolution, any reclassification of securities, or recapitalization, merger or
consolidation that increases the proportionate shares of outstanding stock)
involving the Company and any person or group holding 5% or more of such voting
power (an "Interested Shareholder") unless the transaction is either approved by
a majority of the members of the Board of Directors who are unaffiliated with
the Interested Shareholder and who were directors before the Interested
Shareholder became an Interested Shareholder (the "Disinterested Directors") or
certain minimum price and procedural requirements are met. The 80% vote
requirement is in addition to, and not in lieu of, the vote of any other class
of voting securities that may be entitled to vote on Business Combinations, such
as outstanding issues of preferred stock.
The Company believes that the Fair Price provision helps assure that all of
the holders of the Company's Voting Stock will be treated similarly if a
Business Combination is effected. Further, the Fair Price provision does not
limit the ability of a third party who owns, or can obtain the affirmative votes
of, at least 80% of the voting power of the Voting Stock to effect a Business
Combination involving the Company in which the equity interest of the minority
stockholders is eliminated. The Fair Price provision, however, makes it more
difficult to accomplish certain transactions that are opposed by the incumbent
Board and that may be beneficial to shareholders.
AMENDMENT TO BYLAWS. In addition to being altered, amended or repealed
by the Board of Directors, the Articles provide that the Company's Bylaws may
be altered, amended or repealed at any meeting of the shareholders, at which
a quorum is present, by the affirmative vote of the holders of two-thirds of
the Common Stock of the Company present, in person or by proxy, at such
meeting, provided that notice of the proposed alteration, amendment or repeal
is contained in the notice of the meeting sent to shareholders. This
provision makes it more difficult for a shareholder controlling a majority of
the shares of the Common Stock to avoid the requirements of the Bylaws by
simply repealing them.
BYLAWS
CONDUCT OF MEETINGS. The Bylaws provide that the Chairman of any meeting
of shareholders may prescribe rules that will govern the orderly conduct of such
meeting. The Chairman's determination and interpretations of the rules will be
in his reasonable discretion and will be final, unless the Company's Articles or
Bylaws, resolution of the Board, or applicable law establishes rules governing a
particular matter, in which case such provision will be dispositive, or in the
event that a majority of the shareholders present in person at the meeting
request that there
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be a shareholder vote on the Chairman's ruling, then the Chairman's ruling
may be overruled by the affirmative vote of the holders of two-thirds of the
issued and outstanding capital stock of the Company entitled to vote on such
matters at the meeting and present at the meeting in person or by proxy.
By virtue of such two-thirds vote requirement, this provision gives
authority to the Chairman to prescribe rules that may be opposed by a majority
of the holders of capital stock present at the meeting.
NOMINATIONS OF DIRECTORS. The Bylaws also provide that nominations for the
election of directors may be made by the Board or by any shareholder entitled to
vote for the election of directors, pursuant to procedures that require advance
notice in writing of shareholder nominations for directors. Shareholders
intending to nominate director candidates for election must deliver written
notice to the Secretary of the Company at least 30 days, but not more than 50
days, prior to the shareholders' meeting called for the election of directors.
The notice must set forth certain information concerning the nominee, including
his or her name, address, description of qualifications, the number of shares of
stock he or she beneficially owns and a covenant to provide such other
information as the Company may reasonably request. The Chairman of the meeting
may refuse to acknowledge the nomination of any person not made in compliance
with such procedure.
This requirement affords the Board of Directors the opportunity to consider
the qualifications of the proposed nominee(s) and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders about
such qualifications. Although this Bylaw provision does not give the Board of
Directors the power to approve or disapprove shareholder nominations for
election of directors, it may have the effect of precluding a contest for the
election of directors if the procedures established by it are not followed and
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors, without regard to whether this might be
harmful or beneficial to the Company and its shareholders.
REMOVAL OF DIRECTORS. The Bylaws further provide that any director may be
removed from the Board of Directors at any time, but only for cause, at any
special or annual meeting of the shareholders. "Cause" is defined to mean
conviction of a felony, an adjudication of negligence or misconduct, inability
or incapacity to perform the material duties required of a director or failure
to attend at least six consecutive or 50% of the regular or special meetings of
the Board of Directors during any one calendar year. By virtue of the defined
criteria of cause, this amendment may have the effect of making it more
difficult and time consuming to remove management.
AMENDMENT OF BYLAWS. In addition, the Bylaws provide that, in addition
to being repealed or changed by the Board of Directors, the Bylaws may be
repealed or changed by the affirmative vote of the holders of two-thirds of
the stock of the Company entitled to vote and present at any meeting of
shareholders. The requirement of an increased shareholder vote essentially
parallels the requirement in the Company's Articles of Incorporation.
LIMITATIONS ON LIABILITY
As authorized by Article 1301-7.06 of the Texas Miscellaneous Corporation
Laws Act (the "TMCLA"), the Company's Articles of Incorporation provide that to
the fullest extent, now or hereafter permitted by Texas law, the Company's
directors will have no personal liability to the Company or its shareholders for
monetary damages for breach or alleged breach of the directors' duty of care.
This provision in the Articles of Incorporation will not eliminate directors'
liability resulting from suits by third parties, and does not affect the Company
or its shareholders' ability to obtain equitable remedies such as an injunction
or a rescission of an agreement or transaction deemed improper. Furthermore,
each director will continue to be subject to liability for (1) a breach of a
director's duty of loyalty to the Company or its shareholders, (2) an act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of the law, (3) a transaction from which a director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office, (4) an act or omission for which the
liability of a director is expressly provided for by statute, or (5) an act
related to an unlawful share repurchase or payment of a dividend.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
1,404,644 shares of Common Stock (assuming 300,000 shares are issued and no
exercise of existing employee stock options to purchase Common Stock, and
further assuming that none of the outstanding shares of Series C Preferred
Stock are converted into Common Stock). Of these shares, 1,037,723 shares
will be freely tradeable without restriction or registration under the
Securities Act. The Company's management believes that 366,921 (26.1%) of the
outstanding shares will be held by "affiliates" of the Company, including the
shares offered for sale in this Offering which are reserved for certain
persons. Of the affiliate owned shares, 42,359 are "restricted securities" as
defined in Rule 144 under the Securities Act, and may be sold only pursuant
to Rule 144 or another exemption from registration under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including persons who may be deemed "affiliates" of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of the average weekly trading volume during the four calendar
weeks preceding such sale or 1% of the then outstanding shares of Common Stock.
A person who is deemed not to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned such shares
for at least three years, would be entitled to sell such shares under Rule 144
without regard to the volume limitations described above. Sales pursuant to
Rule 144 are also subject to certain requirements relating to the manner of
sale, notice and availability of public information about the Company.
In addition, at October 31, 1996, employee stock options exercisable for
14,666 shares of Common Stock were outstanding. Shares of Common Stock issued
upon exercise of these options would also be restricted securities. Also, at
October 31, 1996, 247,658 shares of Common Stock were subject to issuance upon
the conversion of the Company's outstanding shares of Series C Preferred Stock.
For information regarding the agreements of the directors and officers of
the Company not to sell their shares of Common Stock for a certain period, see
"Underwriting."
No prediction can be made regarding the effect, if any, that eventual
market sales of Restricted Shares will have on the market price of the Common
Stock prevailing from time to time. There is a possibility that substantial
amounts of Restricted Shares may be resold in the public market and that such
shares may adversely effect the prevailing market price of the Common Stock and
could impair the Company's ability to raise additional capital through the sale
of its equity securities.
TRANSFER AGENT
The Transfer Agent and Registrar for the Company's Common Stock is First
State Bank, N.A., Odessa, Texas.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter, the Underwriter has agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriter, 300,000 shares
of Common Stock.
The Underwriting Agreement provides that the obligations of the
Underwriter thereunder are subject to the satisfaction of certain conditions
precedent. The Underwriter is committed to purchase and pay for all 300,000
shares of Common Stock if any are purchased. The Company has been advised
that the Underwriter proposes to offer the shares of Common Stock directly to
the public at the public offering price set forth on the cover page of this
Prospectus, and to certain securities dealers at such price less a concession
not in excess of $_____ per share, and that the Underwriter and such dealers
may allow to other dealers including any underwriter, a discount not in
excess of $_____ per share. After commencement of this Offering, the offering
price and concession and discounts may be changed by the Underwriter.
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The Underwriter has informed the Company that it does not expect sales to
any accounts over which it exercises discretionary authority to exceed _____%
of the total number of shares of Common Stock offered hereby.
The Underwriter has obtained an option from the Company exercisable for a
period of 30 days following the offering date, under which the Underwriter
may purchase up to 15% of the total number of shares of Common Stock offered
at the same price per share which the Company will receive for the shares
offered herein. The Underwriter may exercise such option only once to cover
over-allotments.
The Company and its executive officers and directors, as well as the
Company's 5% shareholders, have agreed not to offer, sell, contract or
otherwise dispose of any Common Stock for at least 120 days after this
Offering, without the written consent of the Underwriter.
The Company and the Underwriter have agreed to indemnify, or to
contribute to payments made by, each other against certain civil liabilities,
including certain civil liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Arter & Hadden, Dallas, Texas. Joseph A. Hoffman, a partner
of Arter & Hadden, beneficially owns 7,399 shares of Common Stock. Certain
matters relating to the offering made hereby will be passed upon for the
Underwriter by Bracewell & Patterson, L.L.P., Houston, Texas.
EXPERTS
The consolidated balance sheets as of December 31, 1995 and 1994, and the
consolidated income statements, statements of changes in stockholders'
equity, and cash flows for the years ended December 31, 1995 and 1994,
included in this Prospectus, have been included herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The consolidated income statement and statements of changes in
stockholders' equity and cash flows of the Company for the year ended December
31, 1993, included in this Prospectus, have been included herein in reliance
on the report of Ernst & Young, L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The audited financial statements of Crown Park included in this
Prospectus have been audited by Elaine McNair, Inc., independent
accountants, for the period set forth in their report thereupon appearing
elsewhere herein and are included in reliance upon such report given upon
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on
Form S-1 (as amended and together with all exhibits and schedules thereto,
the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered by this Prospectus. As permitted by the rules
and regulations of the Commission, this Prospectus does not contain all of
the information set forth in the Registration Statement. For further
information with respect to the Company and the Common Stock offered,
reference is made to the Registration Statement. Statements contained in
this Prospectus concerning the provisions of any contract, agreement or other
document are not necessarily complete. With respect to each contract,
agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for the complete contents of the
exhibit, and each statement concerning its provisions is qualified in its
entirety by such reference.
The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements
and other information with the Commission. Such reports, proxy
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statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following regional offices of the
Commission: Chicago Regional Office, Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material may also be obtained by mail at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. In addition, such materials filed
electronically by the Company with the Commission are available at the
Commissions' World Wide Web site at http://www.sec.gov. The Common Stock is
quoted on the AMEX, and reports and other information concerning the Company
may be inspected and copied at the offices of AMEX at 86 Trinity Place, New
York, New York 10006.
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INDEX TO FINANCIAL STATEMENTS
INDEPENDENT BANKSHARES, INC. PAGE
----
Consolidated Balance Sheets at September 30, 1996 and December 31,
1995 (unaudited)..................................................... F-2
Consolidated Income Statements for the Nine-month Periods ended
September 30, 1996 and 1995 (unaudited).............................. F-3
Consolidated Statements of Cash Flows for the Nine-month Periods ended
September 30, 1996 and 1995 (unaudited).............................. F-4
Notes to Consolidated Financial Statements (unaudited)................. F-6
Reports of Independent Accountants..................................... F-9
Consolidated Balance Sheets at December 31, 1995 and 1994.............. F-11
Consolidated Income Statements for the Years ended December 31, 1995,
1994 and 1993........................................................ F-12
Consolidated Statements of Changes in Stockholders' Equity for the
Years ended December 31, 1995, 1994 and 1993......................... F-14
Consolidated Statements of Cash Flows for the Years ended December 31,
1995, 1994 and 1993.................................................. F-15
Notes to Consolidated Financial Statements............................. F-16
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheet at September 30, 1996 and December 31, 1995
(unaudited).......................................................... F-32
Consolidated Statements of Earnings for the Nine-month Periods ended
September 30, 1996 and 1995 (unaudited).............................. F-33
Consolidated Statements of Cash Flows for the Nine-month Periods ended
September 30, 1996 and 1995 (unaudited).............................. F-34
Notes to Consolidated Financial Statements (unaudited)................. F-35
Independent Auditor's Report........................................... F-36
Consolidated Balance Sheets at December 31, 1995 and 1994.............. F-37
Consolidated Statements of Earnings for the Years ended December 31,
1995, 1994 and 1993.................................................. F-38
Consolidated Statements of Changes in Stockholders' Equity for the
Years ended December 31, 1995, 1994 and 1993......................... F-39
Consolidated Statements of Cash Flows for the Years ended December 31,
1995, 1994 and 1993.................................................. F-40
Notes to Consolidated Financial Statements............................. F-41
F-1
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1996 1995
- ----- ------------- ------------
Cash and Cash Equivalents:
Cash and Due from Banks $ 9,987,000 $ 8,559,000
Federal Funds Sold 12,100,000 26,200,000
------------ ------------
Total Cash and Cash Equivalents 22,087,000 34,759,000
------------ ------------
Securities:
Available-for-sale 33,590,000 16,746,000
Held-to-maturity--Market Value of $48,716,000 at
September 30, 1996, and $39,384,000 at
December 31, 1995 49,087,000 39,161,000
------------ ------------
Total Securities 82,677,000 55,907,000
------------ ------------
Loans:
Total Loans 92,626,000 85,281,000
Less:
Unearned Income on Installment Loans 2,511,000 3,354,000
Allowance for Possible Loan Losses 806,000 759,000
------------ ------------
Net Loans 89,309,000 81,168,000
------------ ------------
Premises and Equipment 4,501,000 4,155,000
Real Estate and Other Repossessed Assets 218,000 337,000
Accrued Interest Receivable 1,701,000 1,494,000
Goodwill 974,000 0
Other Assets 2,334,000 2,524,000
------------ ------------
Total Assets $203,801,000 $180,344,000
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 29,485,000 $ 33,267,000
Interest-bearing Demand Deposits 60,411,000 52,430,000
Interest-bearing Time Deposits 97,578,000 79,007,000
------------ ------------
Total Deposits 187,474,000 164,704,000
Notes Payable 578,000 849,000
Accrued Interest Payable 844,000 882,000
Other Liabilities 323,000 91,000
------------ ------------
Total Liabilities 189,219,000 166,526,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 135,000 164,000
Common Stock 276,000 263,000
Additional Paid-in Capital 9,890,000 9,875,000
Retained Earnings 4,304,000 3,448,000
Unrealized Gain (Loss) on Available-for-sale
Securities (23,000) 68,000
------------ ------------
Total Stockholders' Equity 14,582,000 13,818,000
------------ ------------
Total Liabilities and
Stockholders' Equity $203,801,000 $180,344,000
------------ ------------
------------ ------------
See Accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NINE MONTH PERIODS
ENDED SEPTEMBER 30,
-------------------------
1996 1995
Interest Income: ----------- ----------
Interest and Fees on Loans $ 5,894,000 $5,795,000
Interest on Securities 3,341,000 1,517,000
Interest on Federal Funds Sold 774,000 1,519,000
----------- ----------
Total Interest Income 10,009,000 8,831,000
----------- ----------
Interest Expense:
Interest on Deposits 4,671,000 3,775,000
Interest on Notes Payable 51,000 85,000
----------- ----------
Total Interest Expense 4,722,000 3,860,000
----------- ----------
Net Interest Income 5,287,000 4,971,000
Provision for Loan Losses 161,000 141,000
----------- ----------
Net Interest Income After
Provision for Loan Losses 5,126,000 4,830,000
----------- ----------
Noninterest Income:
Service Charges 929,000 881,000
Trust Fees 144,000 154,000
Other Income 71,000 121,000
----------- ----------
Total Noninterest Income 1,144,000 1,156,000
----------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 2,294,000 2,127,000
Net Occupancy Expense 540,000 492,000
Equipment Expense 492,000 533,000
Stationery, Printing and Supplies Expense 211,000 190,000
Professional Fees 204,000 386,000
Net Revenues Applicable to Real Estate and Other
Repossessed Assets (16,000) (12,000)
Other Expenses 961,000 1,013,000
----------- ----------
Total Noninterest Expenses 4,686,000 4,729,000
----------- ----------
Income Before Federal Income Taxes 1,584,000 1,257,000
Federal Income Taxes 538,000 426,000
----------- ----------
Net Income $ 1,046,000 $ 831,000
----------- ----------
----------- ----------
Preferred Stock Dividends $ 48,000 $ 52,000
----------- ----------
----------- ----------
Net Income Available to Common Stockholders $ 998,000 $ 779,000
----------- ----------
----------- ----------
Primary Earnings per Common Share Available to
Common Stockholders $ 0.92 $ 0.75
----------- ----------
----------- ----------
Fully Diluted Earnings Per Common Share Available to
Common Stockholders $ 0.77 $ 0.62
----------- ----------
----------- ----------
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
1996 1995
----------- ------------
Cash Flows from Operating Activities:
Net Income $ 1,046,000 $ 831,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Deferred Federal Income Tax Expense 222,000 401,000
Depreciation and Amortization 299,000 290,000
Provision for Loan Losses 161,000 141,000
Gain on Sales of Investment Securities (10,000) 0
Gain on Sales of Premises and Equipment 0 (3,000)
Gain on Sales of Real Estate and Other
Repossessed Assets (42,000) (39,000)
Writedown of Real Estate and Other
Repossessed Assets 19,000 24,000
Increase in Accrued Interest Receivable (207,000) (336,000)
Increase in Goodwill (1,003,000) 0
Decrease in Other Assets 190,000 265,000
Increase (Decrease) in Accrued Interest Payable (38,000) 366,000
Increase (Decrease) in Other Liabilities 232,000 (626,000)
----------- ------------
Net Cash Provided by Operating Activities 869,000 1,314,000
----------- ------------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale
Securities 3,572,000 11,937,000
Proceeds from Maturities of Held-to-maturity
Securities 16,741,000 5,653,000
Proceeds from Sale of Available-for-sale
Securities 30,000 0
Proceeds from Sale of Held-to-maturity
Securities 2,000,000 0
Purchases of Available-for-sale Securities (20,594,000) (16,000,000)
Purchases of Held-to-maturity Securities (28,664,000) (27,000,000)
Net Increase in Loans (10,289,000) (2,423,000)
Additions to Premises and Equipment (709,000) (134,000)
Proceeds from Sales of Premises and Equipment 94,000 3,000
Proceeds from Sales of Real Estate and
Other Repossessed Assets 655,000 625,000
Cash and Cash Equivalents Held by Peoples
National Bank, Winters, Texas, on
January 1, 1996 (Date of Acquisition) 1,265,000 0
Cash and Cash Equivalents Held by Coastal
Banc ssb, San Angelo, Texas, on
May 27, 1996 (Date of Acquisition) 54,000 0
----------- ------------
Net Cash Used in Investing Activities (35,845,000) (27,339,000)
----------- ------------
Cash Flows from Financing Activities:
Increase in Deposits 22,770,000 12,230,000
Proceeds from Notes Payable 0 275,000
Repayment of Notes Payable (276,000) (458,000)
Payment of Cash Dividends (190,000) (138,000)
Payment for Fractional Shares in Stock Dividend 0 (3,000)
----------- ------------
Net Cash Provided by Financing Activities 22,304,000 11,906,000
----------- ------------
Net Decrease in Cash and Cash Equivalents (12,672,000) (14,119,000)
Cash and Cash Equivalents at Beginning of Period 34,759,000 38,764,000
----------- ------------
Cash and Cash Equivalents at End of Period $22,087,000 $ 24,645,000
----------- ------------
----------- ------------
F-4
<PAGE>
Cash Paid During the Period for:
Interest $ 4,760,000 $ 3,494,000
Federal Income Taxes 298,000 15,000
Noncash Investing Activities:
Additions to Real Estate and Other
Repossessed Assets Through Foreclosures $ 619,000 $ 734,000
Sales of Real Estate and Other Repossessed
Assets Financed with Loans 107,000 183,000
Transfer of Real Estate and Other Repossessed
Assets to Loans 0 125,000
Increase (Decrease) in Unrealized Gain/Loss
on Available-for-sale Securities, Net of Tax (91,000) 125,000
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For information with regard to significant accounting policies, reference
is made to Notes to Consolidated Financial Statements included elsewhere in
this prospectus.
The accompanying financial statements reflect all adjustments that are,
in the opinion of management of the Company, necessary to present a fair
statement of the results for the interim periods presented, and all
adjustments are of a normal recurring nature.
(2) QUASI-REORGANIZATION
In connection with the restructuring of its indebtedness to a financial
institution in Dallas, Texas, the Company effected a quasi-reorganization as
of December 31, 1989. A quasi-reorganization is an elective accounting
procedure under Generally Accepted Accounting Principles ("GAAP") in which
assets and liabilities of the Company were restated to fair value and the
Company's accumulated deficit was reduced to zero. Under GAAP, utilization
of any of the Company's net operating loss carryforwards subsequent to the
quasi-reorganization date will not be credited to future income. For periods
subsequent to December 31, 1994, the tax effect of the utilization of the
Company's net operating loss carryforwards has been and will be credited
against the Company's gross deferred tax asset. The reduction in the
Company's deferred tax asset during the first nine months of 1996 and 1995
totaled approximately $222,000 and $401,000, respectively.
(3) NOTES PAYABLE
The Company had a note payable to a financial institution in Amarillo,
Texas (the "Amarillo Bank"). This note (the "Term Note") had a maturity of
April 15, 1996. On April 15, 1996, the Company paid the Amarillo Bank
$100,000 to reduce the outstanding principal balance to $371,000 and the
maturity date was extended to April 15, 1999. Equal principal payments of
$31,000, plus accrued interest, were due quarterly on January 15, April 15,
July 15 and October 15. The Term Note bore interest at the Amarillo Bank's
floating base rate plus 1% (9.25% at September 30, 1996) and was
collateralized by 100% of the stock of First State Bank, N.A., Abilene, Texas
("First State, N.A., Abilene") and First State Bank, N.A., Odessa, Texas
("First State, N.A., Odessa") (collectively, the "Banks"). The loan
agreement between the Company and the Amarillo Bank contained certain
covenants that, among other things, restricted 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 was $1,000,000 or greater. The loan agreement also required the Company
and the Banks to meet certain financial ratios, all of which were met at
September 30, 1996, and December 31, 1995. On October 15, 1996, the Company
paid off the remaining principal balance of the Term Note.
In addition, at September 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $226,000. These
notes had an original face amount of $350,000 but were discounted upon
issuance because they bear interest at a below-market interest rate (6%).
The notes are payable in three equal annual installments, plus accrued
interest. The first annual installment of $117,000 was made on March 1,
1996. The notes represent a portion of the final settlement of certain
litigation.
(4) 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
F-6
<PAGE>
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. Initially, 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 acquisition of Winters State Bank, Winters, Texas
("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. The Company 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, during 1995, 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 deferred tax asset
related to the Winters State net operating loss carryforwards that will not
be utilized.
(5) 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 Series C Preferred Stock is cumulative, the dividends allocable
to such Series C Preferred Stock reduces income available to common
stockholders in the earnings per share calculations. The Series C Preferred
Stock issued in December 1990 was determined not to be a common stock
equivalent and, therefore, is not used to calculate primary earnings per
common share. In computing fully diluted earnings per common share for the
nine-month periods ended September 30, 1996 and 1995, the conversion of the
Series C Preferred Stock was assumed, as the effect is dilutive. The
weighted average common shares outstanding used in computing primary earnings
per common share for the first nine months of 1996 and 1995 was 1,083,000 and
1,045,000 shares, respectively. The weighted average common shares
outstanding used in computing fully diluted earnings per common share for the
first nine months of 1996 and 1995 was 1,358,000 and 1,350,000 shares,
respectively.
(6) ACQUISITIONS
First State, N.A., Abilene acquired 100% of the outstanding shares of
Peoples National Bank, Winters, Texas ("Peoples National") effective January
1, 1996, in a cash transaction. At that date, 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. This
acquisition was accounted for using the purchase method of accounting. A
total of $260,000 of goodwill was recorded as a result of this acquisition.
Peoples National was merged with and into First State, N.A., Abilene.
First State, N.A., Abilene also acquired the San Angelo, Texas branch of
Coastal Banc ssb effective May 27, 1996, in a cash transaction. First State,
N.A., Abilene purchased $155,000 in loans and assumed $14,895,000 in deposits
in the transaction. This acquisition was accounted for using the purchase
method of accounting. A total of $743,000 of goodwill was recorded as a
result of the acquisition.
The goodwill that resulted from the above-noted acquisitions is being
amortized on a straight-line basis over a 15-year period. Management assesses
the recoverability of goodwill by comparing the goodwill to the undiscounted
cash flows expected to be generated by the acquired banks during the
anticipated period of benefit.
(7) PENDING ACQUISITION
On July 11, 1996, the Company and First State, N.A., Abilene entered into
a definitive agreement to acquire Crown Park Bancshares, Inc. ("Crown Park")
for approximately $7,425,000 and to merge Crown Park's subsidiary bank,
Western National Bank, Lubbock, Texas ("Western National"), with and into
First State, N.A., Abilene. At September 30, 1996, Western National had
total assets of $56,598,000, total loans, net of unearned income, of
$38,619,000, total deposits of $50,802,000, and stockholders' equity of
$5,385,000.
Consummation of the acquisition is subject to various regulatory approvals
and other conditions. The Company has filed an application with the Office of
the Comptroller of the Currency (the "Comptroller") for approval of the merger.
Additionally, to recognize certain cost savings and to utilize the Banks'
capital more effectively than on a stand-alone basis, the application filed with
the Comptroller seeks approval to merge First State, N.A., Odessa with and into
First State, N.A. Abilene. If the approvals are received and the conditions
F-7
<PAGE>
satisfied, the transaction would probably be consummated during the first
quarter of 1997, at which time Western National would become a branch of
First State, N.A., Abilene.
(8) SUBSEQUENT EVENTS
On November __, 1996, the Company filed a registration statement with the
Securities and Exchange Commission relating to an offering of 300,000 shares of
common stock to be sold by the company. Upon consummation of this offering, the
Company intends to use approximately $3,000,000 of the net proceeds to fund a
portion of the cost of acquiring Crown Park, and the balance, if any, for
working caital and general corporate purposes.
F-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 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.
/s/ COOPERS & LYBRAND L.L.P
- -------------------------------
Fort Worth, Texas
February 5, 1996
F-9
<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 method of accounting for income taxes and changed its
method of accounting for certain investments in debt and equity securities.
/s/ ERNST & YOUNG LLP
January 31, 1994
F-10
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
ASSETS
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.
F-11
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
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>
F-12
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
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.
F-13
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
UNREALIZED
GAIN (LOSS)
SERIES C ON
PREFERRED STOCK COMMON STOCK ADDITIONAL AVAILABLE-
----------------- ------------------- 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.
F-14
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
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.
F-15
<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.
F-16
<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
F-17
<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.
F-18
<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>
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>
F-19
<PAGE>
<TABLE>
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>
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>
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.
Estimated
Amortized Fair
Available-for-sale Securities Cost Value
- ----------------------------- ----------- -----------
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
----------- -----------
----------- -----------
F-20
<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:
1995 1994
----------- -----------
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
----------- -----------
----------- -----------
An analysis of nonperforming assets at December 31, 1995, 1994 and 1993, is
as follows:
<TABLE>
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>
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>
F-21
<PAGE>
NOTE 7: PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1995
and 1994:
1995 1994
---------- ----------
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
---------- ----------
---------- ----------
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.
F-22
<PAGE>
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1995 and 1994, were as follows:
<TABLE>
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>
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:
1995 1994 1993
-------- --------- --------
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
-------- --------- --------
-------- --------- --------
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
F-23
<PAGE>
for the 5% stock dividend paid to stockholders in May 1993 and the 33-1/3%
stock dividend paid to stockholders 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:
Exercise or
Shares Conversion
Reserved for Price
Issuance Per Share
------------ -----------
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
------- -----------
------- -----------
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
F-24
<PAGE>
for the years ended December 31, 1995, 1994 and 1993, the conversion of the
preferred stock was assumed, as the 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):
Year Ended December 31,
----------------------------
1995 1994 1993
------ ------ ------
Primary Earnings Per Common Share (In thousands)
- ---------------------------------
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
------ ------ ------
------ ------ ------
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.
F-25
<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:
1996 $298,000
1997 232,000
1998 87,000
1999 39,000
2000 39,000
2001-2003 61,000
--------
Total $756,000
--------
--------
F-26
<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
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
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.
F-27
<PAGE>
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
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
1995 1994
----------- -----------
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
----------- -----------
----------- -----------
F-28
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
---------- ---------- ----------
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
---------- ---------- ----------
---------- ---------- ----------
F-29
<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:
1995 1994 1993
---------- ---------- ----------
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
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
F-30
<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.
F-31
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Unaudited)
September 30, December 31,
ASSETS 1996 1995
------ ------------- ------------
Cash and due from banks $ 2,832,000 $ 2,693,000
Federal funds sold 1,375,000 7,275,000
Investment securities 0
Securities held to maturity, fair value of
$6,413,000 at September 30, 1996, and
$9,974,000 at December 31, 1995 6,424,000 9,968,000
Securities available for sale, at fair value 5,243,000 4,325,000
Loans, net 38,289,000 32,515,000
Accrued interest receivable 491,000 508,000
Bank premises and equipment, net 2,373,000 2,358,000
Other real estate owned 290,000 335,000
Other assets 208,000 208,000
----------- -----------
TOTAL ASSETS $57,525,000 $60,185,000
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES
Noninterest bearing demand deposits $ 9,194,000 $11,045,000
Interest bearing deposits 41,508,000 42,721,000
----------- -----------
Total deposits 50,702,000 53,766,000
Accounts payable and accrued liabilities 244,000 210,000
Notes payable 2,094,000 2,111,000
Deferred federal income tax 167,000 83,000
----------- -----------
Total liabilities 53,207,000 56,170,000
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 952,000 952,000
Capital surplus 965,000 965,000
Retained earnings 2,407,000 2,073,000
Unrealized gain (loss) on investment
securities available for sale, net
of applicable deferred federal
income taxes (6,000) 25,000
----------- -----------
Total stockholders' equity 4,318,000 4,015,000
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $57,525,000 $60,185,000
----------- -----------
----------- -----------
F-32
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
Nine-month Period
Ended September 30,
--------------------------
1996 1995
---------- ----------
INTEREST INCOME
Interest and fees on loans $2,528,000 $2,396,000
Interest on investment securities 613,000 639,000
Interest on federal funds sold 139,000 211,000
---------- ----------
Total interest income 3,280,000 3,246,000
---------- ----------
INTEREST EXPENSE
Interest on deposits 1,343,000 1,287,000
Interest on long-term debt 136,000 149,000
---------- ----------
Total interest expense 1,479,000 1,436,000
---------- ----------
NET INTEREST INCOME 1,801,000 1,810,000
Provision for loan losses 135,000 202,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,666,000 1,608,000
---------- ----------
OTHER INCOME
Service charges 220,000 248,000
Other operating income 139,000 175,000
---------- ----------
Total other income 359,000 423,000
---------- ----------
OTHER EXPENSE
Salaries and benefits 719,000 741,000
Net occupancy expense of bank premises 110,000 100,000
Equipment expense 101,000 99,000
FDIC assessments 2,000 65,000
Other operating expenses 592,000 455,000
---------- ----------
Total other expense 1,524,000 1,460,000
---------- ----------
EARNINGS BEFORE INCOME TAXES 501,000 571,000
Provision for income taxes 159,000 187,000
---------- ----------
NET EARNINGS $ 342,000 $ 384,000
---------- ----------
---------- ----------
F-33
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 342,000 $ 384,000
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 107,000 114,000
Provision for losses on loans 135,000 202,000
Writedown of other real estate owned 8,000 0
Amortization of investment securities,
net of accretion 41,000 95,000
Loss on sale of investment securities 2,000 0
Increase in accounts payable and
accrued liabilities 34,000 22,000
(Increase) decrease in accrued interest
receivable 17,000 (103,000)
Increase in other assets 0 (6,000)
----------- -----------
Net cash provided by operating activities 686,000 708,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of bank premises and equipment (142,000) (12,000)
Proceeds from sale of bank premises and
equipment 20,000 0
Purchases of securities held to maturity (500,000) (680,000)
Proceeds from maturities of securities held
to maturity 3,108,000 500,000
Proceeds from sales of securities held to
maturity 998,000 0
Purchases of securities available for sale (3,523,000) (2,081,000)
Proceeds from maturities of securities
available for sale 2,453,000 3,300,000
Net change in loans to customers (5,788,000) (2,324,000)
Net change in federal funds sold 5,900,000 1,325,000
Proceeds from sale of other real estate owned 8,000 0
----------- -----------
Net cash provided by investing activities 2,534,000 28,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (3,064,000) (686,000)
Payment of notes payable (17,000) (18,000)
----------- -----------
Net cash used by financing activities (3,081,000) (704,000)
----------- -----------
NET INCREASE IN CASH AND DUE FROM BANKS 139,000 32,000
Cash and due from banks at beginning of period 2,693,000 2,702,000
----------- -----------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 2,832,000 $ 2,734,000
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,495,000 $ 1,378,000
Income taxes paid 128,000 220,000
Increase (decrease) in unrealized gain
(loss) on securities available for sale (31,000) 89,000
F-34
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
For information with regard to significant accounting policies,
reference is made to Notes to Consolidated Financial Statements
included in the Company's Consolidated Financial Statements together
with Independent Auditor's Report for the year ended December 31,
1995.
- --------------------------------------------------------------------------------
NOTE 2: LOANS
The Company's total loans, net of unearned income, increased from
$33,032,000 at December 31, 1995, to $38,619,000 at September 30,
1996. The increase is primarily due to the increased activity in
the area of indirect installment loans, collateralized principally
by automobiles.
- --------------------------------------------------------------------------------
NOTE 3: PENDING SALE
On July 11, 1996, the stockholders of the Company entered into a
definitive agreement to sell a super majority of the shares of the
Company to Independent Bankshares, Inc. An application was filed
with the appropriate regulatory authorities for approval of the
transaction and such approval, conditioned on Independent
Bankshares, Inc. injecting additional capital into the combined bank
after the effect of the transaction, has been received. If such
condition is satisfied, it is anticipated that the transaction will
be consummated during the first quarter of 1997.
- --------------------------------------------------------------------------------
NOTE 4: EXPENSES RELATED TO ACQUISITION
The Company incurred approximately $80,000 ($53,000 net of tax) of
expenses in the nine-month period ended September 30, 1996 related
to the proposed acquisition of the Company.
F-35
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
Crown Park Bancshares, Inc. and Subsidiary
Lubbock, Texas
We have audited the accompanying consolidated balance sheets of Crown Park
Bancshares, Inc. and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for the years ended December 31, 1995, 1994 and 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
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 consolidated financial statements are
free of significant misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Crown Park
Bancshares, Inc. and Subsidiary at December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years ended December 31, 1995,
1994 and 1993, in conformity with generally accepted accounting principles.
/s/ Elaine McNair, Inc.
- ---------------------------
September 20, 1996
F-36
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
------------ ------------
Cash and due from banks $ 2,692,737 $ 2,701,755
Interest bearing deposits in financial institutions - 100,000
Federal funds sold 7,275,000 5,550,000
Investment securities
Securities held to maturity, fair value of
$9,974,106 in 1995 and $8,707,903 in 1994 9,967,964 9,041,386
Securities available for sale, at fair value 4,325,046 7,375,266
Loans, net 32,514,676 29,658,348
Accrued interest receivable 508,476 445,885
Bank premises and equipment, net 2,358,113 2,497,864
Other real estate owned 334,722 334,722
Other assets 207,938 122,629
------------ ------------
TOTAL ASSETS $ 60,184,672 $ 57,827,855
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest bearing demand deposits $ 11,044,966 $ 11,717,355
Interest bearing deposits 42,721,261 40,249,921
------------ ------------
Total deposits 53,766,227 51,967,276
Accounts payable and accrued liabilities 209,637 173,449
Notes payable 2,110,763 2,235,231
Deferred federal income tax 82,902 63,733
------------ ------------
Total liabilities 56,169,529 54,439,689
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 1,000,000 shares
authorized, 190,372 shares issued and outstanding 951,860 951,860
Capital surplus 965,196 965,196
Retained earnings 2,073,451 1,540,505
Unrealized gain (loss) on investment securities
available for sale, net of applicable deferred
federal income taxes 24,636 (69,395)
------------ ------------
Total stockholders' equity 4,015,143 3,388,166
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 60,184,672 $ 57,827,855
------------ ------------
------------ ------------
The accompanying notes are an integral part
of these consolidated financial statements.
F-37
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
INTEREST INCOME
Interest and fees on loans $ 3,210,829 $ 3,090,371 $ 2,881,882
Interest on investment securities 971,106 1,045,190 1,088,255
Interest on federal
funds sold and deposits in banks 321,141 226,989 140,078
----------- ----------- -----------
Total interest income 4,503,076 4,362,550 4,110,215
INTEREST EXPENSE
Interest on deposits 1,769,856 1,407,836 1,322,525
Interest on short-term borrowings - 312 968
Interest on long-term debt 198,128 194,199 200,092
----------- ----------- -----------
Total interest expense 1,967,984 1,602,347 1,523,585
NET INTEREST INCOME 2,535,092 2,760,203 2,586,630
Provision for loan losses 261,383 394,056 515,176
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,273,709 2,366,147 2,071,454
OTHER INCOME
Service charges 304,314 429,795 475,405
Other operating income 245,270 196,349 251,780
----------- ----------- -----------
Total other income 549,584 626,144 727,185
OTHER EXPENSE
Salaries and benefits 989,506 914,827 850,854
Net occupancy expense of bank premise 132,988 141,599 143,451
Equipment expense 132,812 144,006 139,599
FDIC assessments 69,757 118,377 113,932
Other operating expenses 733,255 863,287 795,079
----------- ----------- -----------
Total other expense 2,058,318 2,182,096 2,042,915
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 764,975 810,195 755,724
Provision for income taxes 232,029 252,016 256,946
----------- ----------- -----------
NET EARNINGS $ 532,946 $ 558,179 $ 498,778
----------- ----------- -----------
----------- ----------- -----------
NET EARNINGS PER SHARE $ 2.80 $ 2.93 $ 2.62
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part
of these consolidated financial statements.
F-38
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
Unrealized
Gain (Loss)
Common Stock on Securities Total
----------------- Capital Retained Treasury Available Stockholders'
Shares Amount Surplus Earnings Stock For Sale Equity
------ ------ ------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992 190,372 $ 951,860 $ 965,196 $ 483,548 $ (24,046) $ - $ 2,376,558
Sale of treasury stock - - - - 16,500 - 16,500
Net earnings - - - 498,778 - - 498,778
------- --------- --------- ----------- --------- ---------- -----------
BALANCE AT DECEMBER 31, 1993 190,372 951,860 965,196 982,326 (7,546) - 2,891,836
Initial unrealized gain
on securities available
for sale - - - - - 82,326 82,326
Sale of treasury stock - - - - 7,546 - 7,546
Net earnings - - - 558,179 - - 558,179
Change in unrealized gain
on securities
available for sale - - - - - (151,721) (151,721)
------- --------- --------- ----------- --------- ---------- -----------
BALANCE AT DECEMBER 31, 1994 190,372 951,860 965,196 1,540,505 - (69,395) 3,388,166
Net earnings - - - 532,946 - - 532,946
Change in unrealized loss
on securities available for sale - - - - - 94,031 94,031
------- --------- --------- ----------- --------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 190,372 $ 951,860 $ 965,196 $ 2,073,451 $ - $ 24,636 $ 4,015,143
------- --------- --------- ----------- --------- ---------- -----------
------- --------- --------- ----------- --------- ---------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-39
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 532,946 $ 558,179 $ 498,778
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 154,734 161,437 321,847
Provision for losses on loans 261,383 394,056 515,176
Amortization of investment securities, net of accretion 104,647 84,166 158,805
Deferred (benefit) provision for income taxes (29,271) 5,954 12,752
Increase (decrease) in accounts payable and accrued liabilities 3,208 (21,232) (76,750)
Increase in accrued interest receivable (55,322) (9,424) 39,040
Changes in operating assets and liabilities
(Increase) decrease in other assets (96,746) 109,545 (941,687)
Increase in other liabilities 69,528 82,341 (111,322)
------------ ----------- -----------
Net cash provided by operating activities 945,107 1,365,022 416,639
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of bank premises and equipment (11,719) (152,367) (29,704)
Purchases of securities held to maturity (1,399,987) (3,143,979) (3,675,719)
Proceeds from maturities of securities held to maturity 500,000 528,343 3,500,000
Purchases of securities available for sale (2,255,539) (2,003,611) -
Proceeds from maturities of securities available for sale 5,520,600 3,872,497 -
Net change in loans to customers (3,117,720) 375,671 12,182
Net change in federal funds sold (1,725,000) 2,050,000 (2,125,000)
Purchase of Federal Reserve Bank stock - - (3,450)
Purchase of Federal Home Loan Bank stock (176,400) - -
------------ ----------- -----------
Net cash provided (used) by investing activities (2,665,765) 1,526,554 (2,321,691)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 1,836,108 (2,535,221) 1,945,691
Sale of treasury stock - 7,546 16,500
Payment of notes payable (124,468) (142,123) (108,605)
------------ ----------- -----------
Net cash provided (used) by financing activities 1,711,640 (2,669,798) 1,853,586
------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (9,018) 221,778 (51,466)
Cash and due from banks at beginning of year 2,701,755 2,479,977 2,531,443
------------ ----------- -----------
CASH AND DUE FROM BANKS AT END OF YEAR $ 2,692,737 $ 2,701,755 $ 2,479,977
------------ ----------- -----------
------------ ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 1,925,669 $ 1,561,650 1,533,893
Income taxes paid 283,000 332,000 266,500
Increase (decrease) in unrealized
gain (loss) on securities available for sale 142,472 (105,219) -
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-40
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Crown Park Bancshares, Inc. (a Texas Corporation) is a single-bank
holding company, which owns all of the capital stock of Western
National Bank (the "Bank"). The Bank's primary source of revenue
is providing loans and banking services to consumers and commercial
customers in Lubbock, Texas and the surrounding area.
The accounting and reporting policies of the Crown Park Bancshares,
Inc., and subsidiary (the "Company") conform with generally
accepted accounting principles and to general practices of the
banking industry. Policies and practices which significantly
affect the determination of financial position, results of
operations and cash flows are summarized as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, which owns all of the
Company's premises. All significant intercompany transactions and
balances have been eliminated in consolidation.
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.
INVESTMENT SECURITIES
Securities classified as held to maturity are recorded at cost,
adjusted for amortization of premiums and accretion of discounts.
Securities classified as available for sale are recorded at fair
value, with unrealized gains and losses, net of applicable deferred
income taxes, reported as a separate component of stockholders'
equity. Securities classified as trading are recorded at fair
value, with unrealized gains and losses included in earnings. The
Company had no trading securities as of December 31, 1995 and 1994.
Gains and losses resulting from the sale of securities are
determined by the specific identification method.
LOANS AND ALLOWANCES FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by
unearned income and an allowance for loan losses. Unearned
interest on installment loans is recognized in income over the term
of the loans in decreasing amounts using a method that approximates
the interest method. Interest on other loans is calculated by
using the simple interest method on daily balances of the principal
amounts outstanding.
F-41
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against the
allowance when management believes the collectibility of the
principal is unlikely. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing
loans that may become uncollectible based upon management's review
and evaluation of the loan portfolio. The factors considered in
the evaluation of the loans include general economic conditions,
the financial condition of the borrower, the value and liquidity of
collateral, delinquency, prior loan loss experience, and the
results of periodic review of the portfolio. Accrual of interest
is discontinued on a loan when management believes, after
considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that
collection of interest is doubtful.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally on a
straight-line basis over the estimated useful lives of the related
assets.
OTHER REAL ESTATE OWNED
Real estate properties acquired through or in lieu of loan
foreclosure are initially recorded at fair value at the date of
foreclosure. Costs relating to development and improvement of
property are capitalized, whereas costs relating to holding
property or incurred in foreclosure proceedings are expensed.
Valuations are periodically performed by management and an
allowance for losses is established by means of a charge to
operations if the carrying value of a property exceeds its fair
value less estimated costs to sell.
FEDERAL INCOME TAXES
The Company and its subsidiary bank file a consolidated federal
income tax return. The subsidiary provides for taxes on a separate
basis and remits to the Company amounts determined to be currently
payable. Federal income tax expense differs from the amount
expected by applying federal statutory rates primarily due to tax
exempt income on securities. Deferred federal income tax assets
and liabilities are recognized to reflect the tax effect of the
differences in the tax and financial reporting basis of assets and
liabilities. General business credits are recognized as a
reduction of current income taxes in the year the credits are
utilized.
CASH EQUIVALENTS
The Company defines cash equivalents for the purposes of reporting
cash flows as cash and due from banks.
F-42
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
ACCOUNTING STANDARD NOT YET ADOPTED
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," was issued. This statement
requires that "long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable." This
statement applies to fiscal years beginning after December 15,
1995, and is not expected to have a material effect on the
accompanying financial statements.
- -------------------------------------------------------------------------------
NOTE 2: INVESTMENT SECURITIES
The Bank is required to maintain a reserve balance with the Federal
Reserve Bank. The reserve requirement as of December 31, 1995 and
1994 totaled approximately $240,000 and $301,000, respectively.
The amortized cost, estimated market values, and gross unrealized
gains and losses of the Company's investment securities as of
December 31, 1995 and 1994, are as follows:
<TABLE>
December 31, 1995
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Basis Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity
---------------------------
U.S. Treasury securities $8,408,477 $26,186 $25,006 $8,409,657
U.S. Government agencies 1,500,000 4,922 - 1,504,922
Mortgage-backed securities 59,487 40 - 59,527
---------- ------- ------- ----------
Total $9,967,964 $31,148 $25,006 $9,974,106
---------- ------- ------- ----------
---------- ------- ------- ----------
Securities available for sale
-----------------------------
U.S. Treasury securities $1,496,864 $ 3,526 $ - $1,500,390
U.S. Government agencies 1,488,052 20,151 - 1,508,203
Mortgage-backed securities 896,069 13,576 - 909,645
---------- ------- ------- ----------
Total debt securities 3,880,985 37,253 - 3,918,238
Equity securities 406,808 - - 406,808
---------- ------- ------- ----------
Total $4,287,793 $37,253 $ - $4,325,046
---------- ------- ------- ----------
---------- ------- ------- ----------
</TABLE>
F-43
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2: INVESTMENT SECURITIES - continued
<TABLE>
December 31, 1994
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Aggregate
Cost Basis Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity
---------------------------
U.S. Treasury securities $8,480,175 $ - $ 326,197 $8,153,978
U.S. Government agencies 501,013 - 7,731 493,282
Mortgage-backed securities 60,198 445 - 60,643
---------- ------- ---------- ----------
Total $9,041,386 $ 445 $ 333,928 $8,707,903
---------- ------- ---------- ----------
---------- ------- ---------- ----------
Securities available for sale
-----------------------------
U.S. Treasury securities $6,787,007 $ 290 $ 81,008 $6,706,289
Mortgage-backed securities 474,241 - 24,501 449,740
---------- ------- ---------- ----------
Total debt securities 7,261,248 290 105,509 7,156,029
Equity securities 219,237 - - 219,237
---------- ------- ---------- ----------
Total $7,480,485 $ 290 $ 105,509 $7,375,266
---------- ------- ---------- ----------
---------- ------- ---------- ----------
</TABLE>
The amortized cost and estimated market value of debt securities at
December 31, 1995, by contractual and expected maturity, are shown below:
<TABLE>
Amortized Aggregate
Cost Basis Fair Value
---------- ----------
<S> <C> <C>
Securities held to maturity
---------------------------
Due within one year $5,382,641 $5,379,032
Due after one year through five years 4,525,836 4,535,547
---------- ----------
9,908,477 9,914,579
Mortgage-backed securities 59,487 59,527
---------- ----------
Total $9,967,964 $9,974,106
---------- ----------
---------- ----------
Securities available for sale
Due within one year $1,497,442 $1,500,967
Due after one year through five years 1,488,052 1,508,204
---------- ----------
2,985,494 3,009,171
Mortgage-backed securities 895,491 909,067
---------- ----------
Total $3,880,985 $3,918,238
---------- ----------
---------- ----------
</TABLE>
F-44
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2: INVESTMENT SECURITIES - continued
Investment securities carried at approximately $1,366,000,
and $1,025,000 at December 31, 1995 and 1994, respectively, were
pledged as collateral for public or trust fund deposits and for
other purposes required or permitted by law. During 1995 and 1994,
there were no sales of investment securities.
- -------------------------------------------------------------------------------
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
The loan portfolio consisted of the following classes at December 31:
1995 1994
----------- -----------
Commercial $20,688,427 $19,966,043
Commercial real estate 3,538,709 2,558,814
Mortgage 5,733,030 4,760,209
Installment 3,516,909 3,414,866
----------- -----------
33,477,075 30,699,932
Unearned interest (444,726) (401,584)
Allowance for loan losses (517,673) (640,000)
----------- -----------
Total loans, net $32,514,676 $29,658,348
----------- -----------
----------- -----------
The Company adopted SFAS 114, "Accounting by Creditors for
Impairment of a Loan," and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan-Income Recognition and Disclosures," as of
January 1, 1995. SFAS No. 114 requires that certain impaired loans
be measured based on the present value of expected future cash
flows discounted at the loan's original effective interest rate.
As a practical expedient, impairment may be measured based on the
loan's observable market price or the fair value of the collateral
if the loan is collateral dependent. When the measure of the
impaired loan is less than the recorded investment in the loan, the
impairment is recorded through a valuation allowance. On
collateral dependent loans, the Company has adopted a policy which
requires measurement of an impaired loan based on the fair value of
the collateral. Other loan impairments will be measured based on
the present value of expected future cash flows or the loan's
observable market price.
The Company had previously measured the allowance for credit losses
using methods similar to those prescribed in SFAS No. 114. As a
result of adopting these statements, no additional allowance for
loan losses was required as of January 1, 1995. At December 31,
1995, all significant impaired loans have been determined to be
collateral dependent and have been measured utilizing the fair
value of the collateral.
F-45
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES - continued
As of December 31, 1995, the Company's recorded investment in impaired
loans and the related valuation allowance calculated under SFAS No. 114
are as follows:
Recorded Valuation
Investment Allowance
----------- -----------
Impaired loans-
Valuation allowance required $ 103,977 $ 87,977
No valuation allowance required - -
----------- -----------
Total impaired loans $ 103,977 $ 87,977
----------- -----------
----------- -----------
This valuation allowance is included in the allowance for loan
losses on the balance sheet.
The average recorded investment in impaired loans for the year
ended December 31, 1995, was $51,989. The Company had $574,700 in
nonperforming assets at December 31, 1995, of which $103,977
represented recorded investments in impaired loans.
Interest payments received on impaired loans are recorded as
interest income unless collections of the remaining recorded
investment is doubtful at which time payments received are recorded
as reductions of principal. The Company recognized interest income
on impaired loans of $3,119 during the year ended December 31,
1995, of which $1,200 represented cash interest payments received
and recorded as interest income. Interest on impaired loans has
been recognized on a full accrual basis in the period ended
December 31, 1995.
Loans on which the accrual of interest has been discontinued
totaled $296,000 and 115,000 on December 31, 1994 and 1993,
respectively. If interest on loans in nonaccrual status during the
year ended December 31, 1994 and 1993 had been accrued, such income
would have approximated $20,500 and $8,000, respectively. Interest
income on nonaccrual loans is recorded only when amounts received
reduce the principal amount of the nonaccrual loan to a realizable
level. No interest income on nonaccrual loans was received and
recorded in the year ended December 31, 1994.
The allowance for loan losses as of December 31, 1995, is presented
below. Management has evaluated the adequacy of the allowance for
loan losses by estimating the probable losses in various categories
of the loan portfolio which are identified below:
Allowance for loan losses provided for:
Loans specifically evaluated as impaired $ 103,977
Unidentified impaired loans 413,696
-----------
Total allowance for loan losses $ 517,673
-----------
-----------
The allowance for loan losses is maintained at a level considered
adequate to provide for estimated probable incurred losses
resulting from loans. The allowance is reviewed periodically, and
as losses are incurred and the amounts become estimable, they are
charged to operations in the periods that they become known.
F-46
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES - continued
The activity in the allowance for loan losses was as follows:
<TABLE>
December 31,
----------------------------------------
1995 1994 1993
----------- ----------- ---------
<S> <C> <C> <C>
Balance at beginning of year $ 640,000 $ 505,000 $ 602,000
Provision for loan losses 261,383 390,000 510,000
Writedowns (432,254) (356,406) (692,424)
Recoveries 48,544 101,406 85,424
----------- ----------- ---------
Balance at end of period $ 517,673 $ 640,000 $ 505,000
----------- ----------- ---------
----------- ----------- ---------
Loan maturities and rate sensitivity of the loan portfolio at
December 31, 1995, excluding loans on nonaccrual, are as follows:
(thousands)
-----------
Fixed rate loans with a remaining maturity of:
Three months or less $ 8,875
Over three months through twelve months 3,111
Over one year through five years 6,427
-----------
Total fixed rate loans $ 18,413
-----------
-----------
Variable rate loans with a repricing frequency of:
Quarterly or more frequently $ 14,966
-----------
-----------
</TABLE>
- -------------------------------------------------------------------------------
NOTE 4: BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
1995 1994
----------- -----------
<S> <C> <C>
Land $ 805,500 $ 805,500
Office building 1,804,028 1,804,028
Furniture and fixtures 179,376 179,216
Bank equipment and machines 541,434 530,594
Computer software 115,334 114,614
Automobiles 48,292 48,292
----------- -----------
3,493,964 3,482,244
Accumulated depreciation (1,135,851) (984,380)
----------- -----------
Total $ 2,358,113 $ 2,497,864
----------- -----------
----------- -----------
</TABLE>
F-47
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4: BANK PREMISES AND EQUIPMENT - continued
Depreciation expense totaled $154,734, $161,437 and $157,546 in 1995,
1994 and 1993, respectively, and is included as a component of
occupancy and equipment expense in the consolidated statements.
- -------------------------------------------------------------------------------
NOTE 5: DEPOSITS
Deposit account balances at December 31, 1995 and 1994, are summarized
as follows:
<TABLE>
1995 1994
----------- -----------
<S> <C> <C>
Noninterest bearing deposits $11,044,966 $11,717,355
Super Now accounts 4,709,608 4,630,348
Savings and money market accounts 15,928,952 18,870,517
Time, $100,000 and over 6,026,706 4,826,544
Other time 16,055,995 11,922,512
----------- -----------
Total $53,766,227 $51,967,276
----------- -----------
----------- -----------
Included in interest bearing deposits are certificates of deposit of
$100,000 or greater. The remaining maturities of these certificates
at December 31, 1995 and 1994, are as follows:
1995 1994
----------- -----------
Three months or less $ 1,354,706 $ 1,782,544
Over three months through twelve months 3,459,000 2,844,000
Over one year through five years 1,213,000 200,000
----------- -----------
Total $ 6,026,706 $ 4,826,544
----------- -----------
----------- -----------
</TABLE>
Interest expense on deposits of $100,000 or greater totaled $277,807,
$186,391 and $154,861 for the years ended December 31, 1995, 1994 and
1993, respectively.
- -------------------------------------------------------------------------------
NOTE 6: NOTE PAYABLE
Crown Park Bancshares, Inc. had notes payable to eight individuals
which total $1,000,000 and $1,100,000 as of December 31, 1995 and
1994, respectively. Interest accrues at the rate of one-half
percent over the New York prime rate. The interest rate at December
31, 1995 was 9%. Annual principal payments aggregating $100,000
will be paid on the notes beginning December, 1993 and continuing
through 1997, at which time a final payment of the unpaid principal
will be due. Security for the notes is 200,000 shares of Western
National Bank stock. Four of the individuals holding the above
notes are officers, directors, or employees of the Bank.
F-48
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6: NOTE PAYABLE - continued
Crown Park Bancshares, Inc. had a note payable dated May 1, 1994 to
Plains National Bank of Lubbock in the original principal amount of
$1,151,000, with interest accruing at the rate of 8.5%. Monthly
principal and interest payments of $9,350 began June 1, 1994. The
principal balances at December 31, 1995 and 1994, respectively,
were $1,110,763 and $1,135,231. The note calls for payment in full
of the outstanding principal and interest on May 1, 1997. This
note is secured by a condominium office building.
- -------------------------------------------------------------------------------
NOTE 7: FEDERAL INCOME TAXES
Deferred federal income taxes are provided for temporary
differences in the financial statement basis and tax basis of
certain assets and liabilities. Primarily, differences exist in
investment securities, property and equipment and accrued income
and expense. The realization of deferred tax assets is dependent
on the Company having future taxable income. Management has
determined that it is more likely than not that the Company will
have future taxable income; thus, the deferred tax assets have not
been reduced by a valuation allowance. The provision for income
taxes consists of the following:
1995 1994 1993
-------- -------- --------
Current provision $261,300 $246,062 $244,194
Deferred provision (benefit) (29,271) 5,954 12,752
-------- -------- --------
Total $232,029 $252,016 $256,946
-------- -------- --------
-------- -------- --------
- -------------------------------------------------------------------------------
NOTE 8: INCENTIVE STOCK OPTION PLAN
Crown Park Bancshares, Inc. established a stock option plan March,
1987 which allows for the granting of options to officers and key
employees of the Bank to purchase shares of the holding company at
the fair market value on the date of grant. A total of 25,000
shares have been reserved for issuance under this plan. No options
had been granted as of December 31, 1995.
- -------------------------------------------------------------------------------
NOTE 9: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has loans, deposits
and other transactions with its officers, directors and businesses
with which such persons are associated. It is the Bank's policy
that all such transactions are entered into on substantially the
same terms as those prevailing at the time for comparable
transactions with others. The Bank had loans to officers and
directors of $2,577,000 and $3,438,000 at December 31, 1995 and
1994, respectively.
F-49
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 10: REGULATORY MATTERS
The Bank, as a National Bank, is subject to the dividend
restrictions set forth by the Comptroller of the Currency (the
OCC). Under such restrictions, the Bank may not, without the prior
approval of the OCC, declare dividends in excess of the sum of the
current year's earnings (as defined) plus the retained earnings (as
defined) from the prior two years.
- -------------------------------------------------------------------------------
NOTE 11: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
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 clauses. Since many of the commitments are
expected to expire without being drawn upon, the total commitment
amount does not necessarily represent future cash requirements.
The Bank evaluates each customer's creditworthiness on a
case-by-case basis.
The amount of collateral obtained by the Bank upon extension of
credit is based on management's credit evaluation of the
counterparty. Collateral held varies but may include real estate,
accounts receivable, inventory, equipment and income producing
properties.
Most of the Bank's business activity is with customers located in
Lubbock and surrounding Counties. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent upon the local
economic sector.
In the normal course of business, the Bank carries certain assets
with other financial institutions which are subject to credit risk
by the amount such assets exceed federal deposit insurance limits.
The Bank periodically evaluates its financial institution
relationships to limit exposure to this credit risk.
- -------------------------------------------------------------------------------
NOTE 12: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments
to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments less the
liquidation of collateral securing such investments. The Bank uses
the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
F-50
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK -
continued
At December 31, 1995, financial instruments whose contract amount
represent credit risk are as follows:
Commitments to extend credit $2,852,000
Standby letters of credit 35,000
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities
to customers. The Bank holds various types of collateral on
standby letters of credit, including equipment and certificates of
deposit. The extent of the collateral held for those commitments
at December 31, 1995, varies from none to 100 percent of the
outstanding letter of credit.
- -------------------------------------------------------------------------------
NOTE 13: FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
In 1995, the Company adopted Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial
Instruments", which requires all entities to disclose the estimated
fair value of its financial instrument assets and liabilities. For
the Company, as for most financial institutions, approximately 91%
of its assets and 96% of its liabilities are considered financial
instruments as defined in Statement No. 107. Many of the Company's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an
exchange transaction. It is also the Company's general practice
and intent to hold its financial instruments to maturity and not to
engage in trading or sales activities. Therefore, significant
estimations and present value calculations were used by the Company
for the purpose of this disclosure.
Estimated fair values have been determined by the Company using the
best available data, as generally provided in the Company's
regulatory reports, and an estimation methodology suitable for each
category of financial instruments. For those loans and deposits
with floating interest rates, it is presumed that estimated fair
values generally approximate the recorded book balances.
Financial instruments actively traded in a secondary market have
been valued using quoted available market prices. The estimation
methodologies used, the estimated fair values and recorded book
balances at December 31, 1995, were as follows:
Recorded Estimated
Balance Fair Value
---------- ----------
Cash and due from banks $2,692,737 $2,692,737
Federal funds sold 7,275,000 7,275,000
Investment securities 14,293,010 14,299,152
F-51
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 13: FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS - continued
Financial instruments with stated maturities have been valued using
a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities.
Financial instrument assets with variable rates and financial
instrument liabilities with no stated maturities have an estimated
fair value equal to both the amount payable on demand and the
recorded book balance.
Recorded Estimated
Balance Fair Value
----------- -----------
Deposits with stated maturities $22,082,701 $22,154,635
Deposits with no stated maturities 31,683,526 31,683,526
Net loans 32,514,676 32,558,775
Changes in assumptions or estimation methodologies may have a
significant effect on these estimated fair values.
The Company's remaining assets and liabilities which are not
considered financial instruments have not been valued differently
than has been customary with historical cost accounting. No
disclosure of the relationship value of the Company's deposits is
required by Statement No. 107 nor has the Company estimated its
value. There is no significant difference between the notional
amount and the estimated fair value of off-balance sheet unfunded
loan commitments which total $2,852,000 and $3,684,000 at December
31, 1995 and 1994, respectively, and are generally priced at market
at the time of funding. Letters of credit discussed in Note 12 have
an estimated fair value based on fees currently charged for similar
agreements. At December 31, 1995 and 1994, fees related to the
unexpired term of the letters of credit are not significant.
Management is concerned that reasonable comparability between
financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be
made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation
methodologies also introduces a greater degree of subjectivity to
these estimated fair values.
- -------------------------------------------------------------------------------
NOTE 14: SUBSEQUENT EVENT
In July, 1996 the stockholders of the Company entered into a
definitive agreement to sell a super majority of the shares of the
Company to Independent Bankshares, Inc. The agreement is subject
to certain restrictive provisions and approval of appropriate
regulatory authorities. The sale is expected to occur in early
1997. It is anticipated that the Company will merge with a
wholly-owned subsidiary of Independent Bankshares, Inc. upon
consummation of the transaction.
F-52
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER
OR ANY OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF ANY OFFER TO PURCHASE, ANY SECURITY OTHER THAN THE
SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER OR SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................................................... 3
Investment Considerations................................................ 8
Disclosure Regarding Forward-Looking
Statements............................................................. 10
Use of Proceeds.......................................................... 11
Market for Common Stock.................................................. 11
Dividend Policy.......................................................... 11
The Acquisition.......................................................... 13
Pro Forma Combined Financial
Statements............................................................. 15
Capitalization........................................................... 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of the Company........................................... 22
Business and Properties of the Company................................... 48
Regulation and Supervision............................................... 53
Management............................................................... 61
Security Ownership of Management and
Certain Beneficial Owners.............................................. 64
Certain Relationships and Related
Transactions........................................................... 66
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 71
Underwriting............................................................. 71
Legal Matters............................................................ 72
Experts.................................................................. 72
Available Information.................................................... 72
Index to Financial Statements............................................ F-1
300,000 SHARES
[LOGO]
INDEPENDENT BANKSHARES, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
HOEFER & ARNETT
INCORPORATED
___________, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered.
Registration and filing fee $1,450.57
Printing and engraving *
Accounting fees and expenses *
Legal fees and expenses *
Blue sky fees and expenses *
AMEX listing fees *
Transfer agent's fee *
Miscellaneous *
---------
Total $ *
---------
---------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under Articles 2.02(A)(16) and 2.02-1 of the
Texas Business Corporation Act to indemnify its officers and directors to the
extent provided for in such statute.
The Company maintains directors' and officers' liability insurance that
covers the directors and officers of the Company with aggregate policy limits of
$3,000,000.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 as amended (the "Securities Act") may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
1. During the years ended December 31, 1993, 1994 and 1995, the Company
issued 771, 428 and 9,037 shares, respectively, of its Common Stock
to employees of the Company and the Banks at a price of $3.75 per
share upon the exercise of stock options previously granted. Such
transactions were deemed exempt from registration under the Securities
Act, by reason of Section 4(2) of the Securities Act. In connection
with each of these transactions, the shares were sold to a very
limited number of persons, such persons were provided access to all
relevant information regarding the Company and/or represented to the
Company that they were "sophisticated" investors, and each such
persons represented to the Company that the shares were purchased for
investment purposes only and with no view to distribution.
2. A total of 232 shares of the Series C Preferred Stock were converted
at a price of $2.29 per share, into a total of 4,263 shares of Common
Stock, during 1995. Such conversions were deemed exempt from
registration under the Securities Act, by reason of Section 3(a)(9)
of the Securities Act.
(All share and per-share data has been adjusted to reflect the 5% Common
Stock dividend paid to shareholders in May 1993 and the 33 1/3% Common Stock
dividend paid to shareholders in May 1995).
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
EXHIBITS. The exhibits listed below are filed as part of or incorporated
by reference in this Registration Statement. Where such filing is made by
incorporation by reference to a previously filed report, such report is
identified in parentheses. See the Index of Exhibits included with the exhibits
filed as part of this Registration Statement.
Number Description
- ------ -----------
1.1 Form of Underwriting Agreement (to be filed by amendment)
3.1 Restated Articles of Incorporation of the Company (Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994)
3.2 Restated Bylaws of the Company (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994)
4.1 Specimen Stock Certificate for Common Stock of the Company (to be
filed by amendment)
5.1 Opinion of Arter & Hadden (including the consent of such firm)
regarding the legality of securities being offered (to be filed by
amendment)
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 (Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995)
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 (Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
10.5 Agreement and Plan of Reorganization dated July 11, 1996, between the
Company and Crown Park Bancshares, Inc., Agreement and Plan of Merger
dated July 11, 1996 between Western National Bank and First State,
N.A., Abilene and Indemnity Agreement dated July 11, 1996, in favor of
the Company (Exhibit 1.1 to the Company's Current Report on Form 8-K
dated July 11, 1996)
21.1 Subsidiaries of the Company (to be filed by amendment)
23.1 Consent of Arter & Hadden (included as part of its opinion to be filed
as Exhibit 5.1)
23.2 Consent of Coopers & Lybrand, L.L.P., independent accountants (filed
herewith)
23.3 Consent of Ernst & Young, L.L.P.,independent auditors (filed herewith)
II-2
<PAGE>
23.4 Consent of Elaine McNair, Inc., independent accountants (filed
herewith)
25.1 Power of Attorney (included on the signature page hereto)
FINANCIAL STATEMENT SCHEDULES
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
unaudited nine-month consolidated financial statements or notes thereto or
audited year end consolidated financial statements or notes thereto.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
1. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the Registrant's Articles of Incorporation
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
2. The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of a registration statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of the registration statement as of the time it was declared
effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Abilene, State of Texas,
on November 19, 1996.
INDEPENDENT BANKSHARES, INC.
By: /s/ BRYAN W. STEPHENSON
-------------------------------------
Bryan W. Stephenson
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of Independent Bankshares, Inc., a Texas corporation, which is
filing a Registration Statement on Form S-1 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act
of 1933, as amended (the "Securities Act"), hereby constitute and appoint
Bryan W. Stephenson and Randal N. Crosswhite, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign such Registration Statement and any or all amendments,
including post-effective amendments, to the Registration Statement, including
a Prospectus or an amended Prospectus therein and in any registration
statement for the same offering that is to be effective upon filing pursuant
to Rule 462(b) under the Securities Act and all other documents in connection
therewith to be filed with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact as agents or any of them, or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
November 19, 1996 /s/ BRYAN W. STEPHENSON
-------------------------------------------------
Bryan W. Stephenson, President, Chief Executive
Officer and Director (Principal Executive Officer)
November 19, 1996 /s/ RANDAL N. CROSSWHITE
-------------------------------------------------
Randal N. Crosswhite, Senior Vice President, Chief
Executive Officer, Corporate Secretary and Director
(Chief Financial and Accounting Officer)
November __, 1996
-------------------------------------------------
Lee Caldwell, Director
November 19, 1996 /s/ MRS. WM. R. (AMBER) CREE
-------------------------------------------------
Mrs. Wm. R. (Amber) Cree, Director
November 19, 1996 /s/ LOUIS S. GEE
-------------------------------------------------
Louis S. Gee, Director
II-5
<PAGE>
November 19, 1996 /s/ MARSHAL KELLAR
-------------------------------------------------
Marshal M. Kellar, Director
November __, 1996
-------------------------------------------------
Tommy McAlister, Director
November 19, 1996 /s/ SCOTT L. TALIAFERRO
-------------------------------------------------
Scott L. Taliaferro, Director
November 19, 1996 /s/ JAMES D. WEBSTER
-------------------------------------------------
James D. Webster, M.D., Director
November 19, 1996 /s/ C.G. WHITTEN
-------------------------------------------------
C.G. Whitten, Director
November 19, 1996 /s/ JOHN A. WRIGHT
-------------------------------------------------
John A. Wright, Director
II-6
<PAGE>
INDEX TO EXHIBITS
Number Description
- ------ -----------
1.1 Form of Underwriting Agreement (to be filed by amendment)
3.1 Restated Articles of Incorporation of the Company (Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994)
3.2 Restated Bylaws of the Company (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994)
4.1 Specimen Stock Certificate for Common Stock of the Company (to be
filed by amendment)
5.1 Opinion of Arter & Hadden (including the consent of such firm)
regarding the legality of securities being offered (to be filed by
amendment)
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 (Exhibit 10.2 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995)
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 (Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995)
10.5 Agreement and Plan of Reorganization dated July 11, 1996, between the
Company and Crown Park Bancshares, Inc., Agreement and Plan of Merger
dated July 11, 1996 between Western National Bank and First State,
N.A., Abilene and Indemnity Agreement dated July 11, 1996, in favor of
the Company (Exhibit 1.1 to the Company's Current Report on Form 8-K
dated July 11, 1996)
21.1 Subsidiaries of the Company (to be filed by amendment)
23.1 Consent of Arter & Hadden (included as part of its opinion to be filed
as Exhibit 5.1)
23.2 Consent of Coopers & Lybrand, L.L.P., independent accountants (filed
herewith)
23.3 Consent of Ernst & Young, L.L.P.,independent auditors (filed herewith)
23.4 Consent of Elaine McNair, Inc., independent accountants (filed
herewith)
25.1 Power of Attorney (included on the signature page hereto)
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of Independent
Bankshares, Inc., on Form S-1 of our report dated February 5, 1996, on our
audits 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. We also consent to the reference to our firm under the caption
"Experts".
/s/ Coopers & Lybrand L.L.P.
- ----------------------------
COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
November 19, 1996
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 31, 1994, with respect to the 1993
consolidated financial statements of Independent Bankshares, Inc. included
in the Registration Statement (Form S-1) and related Prospectus of
Independent Bankshares, Inc. for the registration of 345,000 shares of its
common stock.
/s/ ERNST & YOUNG LLP
-------------------------
Fort Worth, Texas
November 15, 1996
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the registration statement of Independent
Bankshares, Inc. on Form S-1 of our report dated September 20, 1996, on our
audits of the consolidated financial statements of Crown Park Bancshares,
Inc. as of December 31, 1995 and 1994, and for the years ended December 31,
1995, 1994 and 1993. We also consent to the reference to our firm under the
caption "Experts".
/s/ Elaine McNair, Inc.
- -----------------------
Elaine McNair, Inc.
Lubbock, Texas
November 19, 1996
