<PAGE>
Annual Report 1995
[photo of State of Texas flag]
[Independent Bankshares, Inc. Logo]
<PAGE>
[photo of State of Texas indicating
banking locations in West Texas]
BANKING LOCATIONS IN WEST TEXAS
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
For the Year 1995 1994 1993
- ------------ ---- ---- ----
<S> <C> <C> <C>
Net Income $ 1,132,000 $ 450,000 $ 1,229,000
Primary Earnings
Per Common Share 1.02 0.36 1.11
Fully Diluted Earnings
Per Common Share 0.84 0.33 0.91
At Year End 1995 1994 1993
- ----------- ---- ---- ----
Assets $180,344,000 $159,860,000 $160,712,000
Loans 81,927,000 81,306,000 69,647,000
Deposits 164,704,000 146,184,000 147,785,000
Notes Payable 849,000 930,000 1,194,000
Stockholders' Equity 13,818,000 11,073,000 10,845,000
Daily Averages 1995 1994 1993
- -------------- ---- ---- ----
Assets $169,532,000 $159,982,000 $152,472,000
Loans 82,302,000 74,727,000 59,767,000
Deposits 154,547,000 146,608,000 140,428,000
Notes Payable 1,069,000 1,061,000 1,260,000
Stockholders' Equity 12,594,000 11,302,000 9,831,000
</TABLE>
STOCK TRANSFER AGENT STOCK EXCHANGE LISTING
First State Bank, N.A. American Stock Exchange
547 Chestnut (AMEX)
P.O. Box 3296
Abilene, Texas 79604
AMEX TRADING SYMBOL AMEX LISTING
IBK Ind Bnk
[Annual Report '95 Logo]
1
<PAGE>
President's Letter
To Our Shareholders
Independent Bankshares, Inc. and its shareholders enjoyed a
profitable year in 1995. The Company reported $1,132,000 in net
income for the year ended December 31, 1995, compared to $450,000
in net income for 1994. These earnings translated into primary
earnings per common share of $1.02 in 1995, up from $0.36 per share
in 1994.
In addition to increased earnings, the Company experienced its
strongest rate of growth in several years. At year-end 1995, total
assets were $180,344,000, up $20,484,000, or 12.8 percent, over
1994. This growth, all internally generated, was the result of an
improving West Texas economy, a successful marketing campaign and
a renewed focus on what we do best - giving personal attention to
individuals and small businesses.
Our improved earnings, increased growth rate and the added
visibility of an American Stock Exchange listing boosted the
Company's common stock price over 75 percent during 1995. We are
pleased with these results and look forward to the challenges of
1996.
Our focus during 1996 will be directed toward expanding our
customer base throughout West Texas. As previously mentioned,
personal attention to our customers' financial needs has proven to
be a successful means by which to expand our customer base. We
believe that this proven formula of customer service combined with
selective acquisitions will generate profitable growth.
[photo of Scott Taliaferro,
Chairman of the Board, Bryan
Stephenson, President & Chief
Executive Officer, and Randal
Crosswhite, Senior Vice
President & Chief Financial
Officer]
During the first quarter of 1996, the Company and one of its
subsidiaries, First State Bank, N.A., Abilene, Texas, completed the
acquisition of the Peoples National Bank, Winters, Texas.
Additionally, during the first quarter of 1996, the Company
announced that it had entered into a definitive agreement to
acquire a branch of a savings bank in San Angelo, Texas. The
Winters transaction and the pending San Angelo purchase, which is
subject to regulatory approval, will add approximately 11 percent
to our asset base and will position our Company in three of the
largest consumer markets in West Texas.
We appreciate your support and look forward to representing
your interests in 1996.
Sincerely,
/s/ Bryan Stephenson
Bryan W. Stephenson
President & CEO
[Independent Bankshares, Inc. Logo]
2
<PAGE>
Board of Directors
BOARD OF DIRECTORS
LEE CALDWELL
Attorney
MRS. WILLIAM R. (AMBER) CREE
Entrepreneur
RANDAL N. CROSSWHITE
Senior Vice President
& Chief Financial Officer
Independent Bankshares, Inc.
LOUIS S. GEE
Chairman of the Board
& Chief Executive Officer
Tippett & Gee, Inc., Consulting Engineers
MARSHAL M. KELLAR
Principal
West Texas Wholesale Supply Co.
TOMMY MCALISTER
President
McAlister, Inc.
BRYAN W. STEPHENSON
President & Chief Executive Officer
Independent Bankshares, Inc.
SCOTT L. TALIAFERRO
Chairman of the Board
Independent Bankshares, Inc.
President
Texas Drilling Co.
JAMES D. WEBSTER, M.D.
Physician
C. G. WHITTEN
Senior Vice President, General Counsel
and Corporate Secretary
Pittencrieff Communications, Inc.
JOHN A. WRIGHT
Banking Consultant
ADVISORY DIRECTORS
ARLAS CAVETT
Farming and Investments
L. H. MOSLEY
President
Mosley Investments, Inc.
J. E. SMITH
Investments
[Annual Report '95 Logo]
3
<PAGE>
Annual Report 1995
ABILENE, TEXAS
[photo of First State Bank,
N.A., Abilene, Main Bank]
Located in west central Texas, one hundred eighty-three miles
west of Dallas, Abilene is the center of a 22-county area some
people call the Texas Midwest. Abilene is the hub of a diversified
economy which includes manufacturing, retail trade, farming and
ranching, medical care and petroleum.
Abilene is in Taylor County, one of 254 counties in the
nation's second-largest state. Taylor County, with a current
population of 119,700, was organized in 1878. The town of Abilene
was established in March 1881 upon the completion of the Texas &
Pacific Railway.
Abilene, which in 1990 was named as one of only 10 "All
America" cities in the country, is the 179th largest city in the
nation, with a population count of 106,700, according to statistics
released from the U.S. Census Bureau.
[photo of Board of Directors,
First State Bank, N.A.,
Abilene]
Abilene is a young, vibrant community with the median age of
its citizens of just over 30 years, due partly to a major military
installation, Dyess Air Force Base, and to the city's three
institutions of higher learning: Abilene Christian University,
Hardin-Simmons University and McMurry University, which have
collectively approximately 10,000 students.
Surveys indicate that there are twenty-two counties comprising
Abilene's primary retail trade territory. Population figures set
the twenty-two county population at approximately 314,000.
[photo of Selected officers and
employees, First State Bank,
N.A., Abilene]
The trade territory served by manufacturers and wholesalers
will vary from one company to another depending on such factors as
the type of product and the method of distribution employed. The
wholesale trade territory of Abilene comprises 39 counties with a
population of more than 749,000 people and an area of 36,833 square
miles.
Population statistics portray Abilene as being a young,
growing community with a bright future.
[Independent Bankshares, Inc. Logo]
4
<PAGE>
Annual Report 1995
ODESSA, TEXAS
[photo of First State Bank,
N.A., Main Bank]
Odessa is located in Ector County, approximately midway
between Ft. Worth and El Paso and one hundred seventy miles west of
Abilene. The city covers an area of thirty-five square miles
situated in the heart of the Permian Basin, a vast oval of land
(100,000 square miles). Three of the state's major land resources
meet here - the High Plains, Trans Pecos and Edwards Plateau.
Odessa's history as a settlement can be traced to the 1881
extension of the Texas and Pacific Railway across the south plains.
By the mid-1890's, Odessa was an established cattle shipping
center.
[photo of Board of Directors,
First State Bank, N.A., Odessa]
When oil was discovered in the area in 1926, the destiny of
the community took a different course. This discovery brought
people of varied interests and occupations to the area, and the
local economy began to change from a ranching area into an
industrial one.
Odessa is the 23rd largest city in Texas, with a population of
93,900. Ector County's population is 121,200. The population of
the Metropolitan Statistical Area (MSA) - which includes Ector and
Midland counties - is 234,300.
[photo of Officers,
First State Bank, N.A., Odessa]
The median age for Odessa is 31 years.
The fortunes of the Odessa-Ector County area have historically
followed those of the oil and gas industry.
Currently, the area's economic situation has many positive
aspects. Diversification efforts are under way, although ties to
the energy sector remain very strong. In terms of output, forty-
eight percent of all local production is directly related to oil
and gas activity, while eighteen percent of the employment base is
energy dependent.
Manufacturing and industrial services comprise a vital segment
of the community's economic situation. Odessa is beginning to take
the necessary steps to diversify its industrial base.
[Annual Report '95 Logo]
5
<PAGE>
Annual Report 1995
SAN ANGELO, TEXAS
San Angelo, a city of 88,000 established in 1867, is the hub
of a 13-county area of Texas with a widely diversified economy
supported by agriculture, petroleum, medical, communications,
education, federal, military, retail, retirement and tourism. The
city is located ninety miles southwest of Abilene. Total
population of Tom Green County is 102,000.
San Angelo is located in what is known as the Concho Valley of
west central Texas between the Texas Hill Country to the southeast
and the Rolling Plains in the northwest. The city became an early
ranching center for cattle and sheep, and today the San Angelo area
is the nation's largest primary wool and mohair market and a major
livestock auction center.
San Angelo is home to Goodfellow Air Force Base and several
divisions of large manufacturing companies, including Johnson &
Johnson and Levi Strauss.
Angelo State University is a local four-year and graduate
university with a student population of 6,300. Howard College's
local campus provides academic and occupational training and
certification for a student population of 1,000.
STAMFORD, TEXAS
[photo of First State Bank,
N.A., Abilene, Stamford Banch]
[photo of First State Bank,
N.A., Abilene, Stamford
Branch officer]
Stamford, developed in 1899 as a project of the Texas Central
Railroad, is located in Jones County, forty miles north of Abilene.
The population of Stamford is 3,800, with a total county population
of 16,500. The city is the retail, banking and commercial center
for a three-county area.
[photo of First State Bank,
N.A., Stamford Branch employee assisting customer]
[Independent Bankshares, Inc. Logo]
6
<PAGE>
Annual Report 1995
Stamford is situated in a predominantly agricultural area
known as the Rolling Plains. The primary industry is farming and
ranching, with the most prevalent crop being cotton. During the
past few years, however, several new sizeable businesses have begun
operations in Stamford. Business facilities include grain
elevators, cotton gins, a clothing factory, cottonseed oil mill,
feed mill, oil well machinery and wholesale outlets.
Stamford is best known, perhaps, for its Texas Cowboy Reunion
which was started in 1930 and is unchallenged as the world's
greatest amateur rodeo.
WINTERS, TEXAS
[photo of First State Bank,
N.A., Abilene, Winters Branch]
Winters, situated in Runnels County and first settled in about
1880, is located forty-three miles south of Abilene. The county
population is 11,300, with Winters making up 2,900 of that total.
[photo of First State Bank, N.A., Abilene,
Winters Branch employee assisting customer]
The area surrounding Winters is primarily agricultural in
nature, with some petroleum-related industry. Winters is now the
commercial and distribution center for this large agricultural and
ranching area.
Winters is also home to a large manufacturing company and a
regional milling and grain company.
[photo of First State Bank,
N.A., Abilene, Winters Branch officer]
Winters, known as "The Best Little Town in Texas," is
surrounded by lakes and has abundant fishing and hunting.
[Annual Report '95 Logo]
7
<PAGE>
Subsidiary Banks
FIRST STATE BANK, N.A., ABILENE
MAIN BANK WYLIE BRANCH
547 Chestnut St. 6301 Buffalo Gap Road
Abilene, TX 79602 Abilene, TX 79606
(915) 672-2902 (915) 691-0000
STAMFORD BRANCH WINTERS BRANCH
210 S. Swenson St. 500 S. Main St.
Stamford, TX 79553 Winters, TX 79567
(915) 773-5755 (915) 754-5511
<TABLE>
<CAPTION>
December 31
-----------
1995 1994
---- ----
<S> <C> <C>
Assets $119,255,000 $107,414,000
Loans 48,571,000 47,279,000
Deposits 110,120,000 99,007,000
Stockholder's Equity 8,370,000 7,756,000
</TABLE>
FIRST STATE BANK, N.A., ODESSA
MAIN BANK WINWOOD BRANCH
1330 E. 8th St. 3898 E. 42nd St.
Odessa, TX 79761 Odessa, TX 79762
(915) 332-0141 (915) 366-5903
<TABLE>
<CAPTION>
December 31
-----------
1995 1994
---- ----
<S> <C> <C>
Assets $59,475,000 $51,929,000
Loans 33,356,000 34,028,000
Deposits 54,817,000 47,626,000
Stockholder's Equity 4,443,000 4,002,000
</TABLE>
[photo of Bank Presidents: Mike Jarrett, First State Bank, N.A.,
Odessa and Jim Fitzhugh, First State Bank, N.A., Abilene and Branch
Management: Jim Jordan, First State Bank, N.A., Winters, Jimmy
Parker, First State Bank, N.A., Stamford, and Harold Andrews, First
State Bank, N.A., Abilene]
[Independent Bankshares, Inc. Logo]
8
<PAGE>
Report of Independent Accountants
Board of Directors and Shareholders
Independent Bankshares, Inc.
Abilene, Texas
We have audited the accompanying consolidated balance sheets of
Independent Bankshares, Inc. as of December 31, 1995 and 1994, and
the related consolidated income statements, statements of
stockholders' equity and cash flows for the years ended December
31, 1995 and 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits. The financial statements of Independent Bankshares, Inc.
for the year ended December 31, 1993, were audited by other
auditors, whose report, dated January 31, 1994 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Independent Bankshares, Inc. as of December 31, 1995
and 1994, and the consolidated results of its operations and its
cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Fort Worth, Texas
February 5, 1996
9
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
____ ____
<S> <C> <C>
Assets:
Cash and Cash Equivalents:
Cash and Due from Banks $ 8,559,000 $ 7,564,000
Federal Funds Sold 26,200,000 31,200,000
------------ ------------
Total Cash and Cash Equivalents 34,759,000 38,764,000
------------ ------------
Securities (Note 5):
Available-for-sale 16,746,000 17,078,000
Held-to-maturity - Market Value of
$39,384,000 for 1995 and
$15,913,000 for 1994 39,161,000 16,227,000
------------ ------------
Total Securities 55,907,000 33,305,000
------------ ------------
Loans (Note 6):
Total Loans 85,281,000 85,518,000
Less:
Unearned Income on Installment Loans 3,354,000 4,212,000
Allowance for Possible Loan Losses 759,000 817,000
------------ ------------
Net Loans 81,168,000 80,489,000
------------ ------------
Premises and Equipment (Note 7) 4,155,000 4,345,000
Real Estate and Other Repossessed Assets 337,000 631,000
Accrued Interest Receivable 1,494,000 945,000
Other Assets 2,524,000 1,381,000
------------ ------------
Total Assets $180,344,000 $159,860,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 8):
Noninterest-bearing Demand Deposits $ 33,267,000 $ 30,210,000
Interest-bearing Demand Deposits 52,430,000 56,520,000
Interest-bearing Time Deposits 79,007,000 59,454,000
------------ ------------
Total Deposits 164,704,000 146,184,000
Notes Payable (Note 9) 849,000 930,000
Accrued Interest Payable 882,000 408,000
Other Liabilities 91,000 1,265,000
------------ ------------
Total Liabilities 166,526,000 148,787,000
------------ ------------
Commitments and Contingent Liabilities (Notes 15 and 17)
Stockholders' Equity (Notes 11 and 18):
Preferred Stock - Par Value $10.00;
5,000,000 Shares Authorized:
Series C Preferred Stock - Stated
Value $42.00; 50,000 Shares
Designated; 16,436 and 16,668
Shares Issued at December 31,
1995 and 1994, Respectively 164,000 167,000
Common Stock - Par Value $0.25;
30,000,000 Shares Authorized;
1,050,292 and 778,081 Shares
Issued at December 31, 1995 and
1994, Respectively 263,000 195,000
Additional Paid-in Capital 9,875,000 8,241,000
Retained Earnings 3,448,000 2,570,000
Unrealized Gain (Loss) on
Available-for-sale Securities (Note 5) 68,000 (100,000)
------------ ------------
Total Stockholders' Equity 13,818,000 11,073,000
------------ ------------
Total Liabilities and
Stockholders' Equity $180,344,000 $159,860,000
============ ============
</TABLE>
See accompanying notes.
10
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Interest and Fees on Loans (Note 6) $ 7,726,000 $ 6,918,000 $5,333,000
Interest on Securities 2,389,000 2,516,000 3,588,000
Interest on Federal Funds Sold 1,847,000 697,000 300,000
----------- ----------- ----------
Total Interest Income 11,962,000 10,131,000 9,221,000
----------- ----------- ----------
Interest Expense:
Interest on Deposits 5,201,000 3,364,000 3,072,000
Interest on Notes Payable (Note 9) 108,000 88,000 104,000
----------- ----------- ----------
Total Interest Expense 5,309,000 3,452,000 3,176,000
----------- ----------- ----------
Net Interest Income 6,653,000 6,679,000 6,045,000
Provision for Loan Losses (Note 6) 206,000 147,000 154,000
----------- ----------- ----------
Net Interest Income After Provision for Loan Losses 6,447,000 6,532,000 5,891,000
----------- ----------- ----------
Noninterest Income:
Service Charges 1,167,000 1,226,000 1,081,000
Trust Fees 201,000 169,000 140,000
Gain on Sale of Subsidiary (Note 3) 0 0 286,000
Other Income 141,000 102,000 377,000
----------- ----------- ----------
Total Noninterest Income 1,509,000 1,497,000 1,884,000
----------- ----------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 2,849,000 2,838,000 2,575,000
Equipment Expense 723,000 641,000 453,000
Net Occupancy Expense 643,000 673,000 602,000
Legal Fees and Expense (Note 15) 344,000 1,207,000 288,000
Stationery, Printing and Supplies Expense 271,000 226,000 223,000
FDIC Insurance Expense 166,000 336,000 325,000
Accounting Fees 110,000 135,000 153,000
Data Processing Expense 98,000 237,000 516,000
Net Costs (Revenues) Applicable to Real Estate and
Other Repossessed Assets (7,000) (4,000) 56,000
Other Expenses 1,045,000 1,063,000 1,031,000
----------- ----------- ----------
Total Noninterest Expenses 6,242,000 7,352,000 6,222,000
----------- ----------- ----------
Income Before Federal Income Taxes and Cumulative
Effect of Accounting Change 1,714,000 677,000 1,553,000
Federal Income Taxes (Notes 2 and 10) 582,000 227,000 524,000
----------- ----------- ----------
Income Before Cumulative Effect of Accounting Change 1,132,000 450,000 1,029,000
Cumulative Effect of Change in Accounting for
Income Taxes 0 0 200,000
----------- ----------- ----------
Net Income $ 1,132,000 $ 450,000 $1,229,000
=========== =========== ==========
Preferred Stock Dividends (Note 11) $ 70,000 $ 70,000 $ 75,000
=========== =========== ==========
Net Income Available to Common Stockholders (Note 12) $ 1,062,000 $ 380,000 $1,154,000
=========== =========== ==========
</TABLE>
11
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS - CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Primary Earnings Per Common Share Available to Common
Stockholders (Note 12):
Income Before Cumulative Effect of Accounting Change $1.02 $0.36 $0.92
Cumulative Effect of Accounting Change 0.00 0.00 0.19
----- ----- -----
Net Income $1.02 $0.36 $1.11
===== ===== =====
Fully Diluted Earnings Per Common Share Available to
Common Stockholders (Note 12):
Income Before Cumulative Effect of Accounting Change $0.84 $0.33 $0.76
Cumulative Effect of Accounting Change 0.00 0.00 0.15
----- ----- -----
Net Income $0.84 $0.33 $0.91
===== ===== =====
</TABLE>
See accompanying notes.
12
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SERIES C ADDITIONAL AVAILABLE-
PREFERRED STOCK COMMON STOCK PAID-IN RETAINED FOR-SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES
------ ------ ------ ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances--January 1, 1993 16,668 $167,000 732,955 $183,000 $6,500,000 $1,388,000 $ 0
Net Income 1,229,000
Utilization of Net
Operating Loss
Carryforward (Note 2) 493,000
Cumulative Effect of
Accounting Change 700,000
Gain on Repurchase of Series A
Preferred Stock (Note 11) 47,000
Cash Dividends (75,000)
5% Stock Dividend (Note 11) 36,415 9,000 270,000 (282,000)
Exercise of Stock
Options (Note 11) 8,390 3,000 7,000
Unrealized Gain on
Available-for-sale Securities,
Net of Tax (Note 5) 206,000
------ -------- --------- -------- ---------- ---------- --------
Balances--December 31, 1993 16,668 167,000 777,760 195,000 8,017,000 2,260,000 206,000
Net Income 450,000
Utilization of Net
Operating Loss
Carryforward (Note 2) 222,000
Cash Dividends (140,000)
Exercise of Stock
Options (Note 11) 321 2,000
Adjustment to Unrealized
Gain (Loss) on Available-
for-sale Securities, Net
of Tax (Note 5) (306,000)
------ -------- --------- -------- ---------- ---------- --------
Balances--December 31, 1994 16,668 167,000 778,081 195,000 8,241,000 2,570,000 (100,000)
Net Income 1,132,000
Reduction of Deferred
Tax Asset Valuation
Allowance 1,600,000
Cash Dividends (187,000)
33-1/3% Stock Dividend
(Note 11) 259,371 65,000 (67,000)
Exercise of Stock
Options (Note 11) 9,037 2,000 32,000
Conversion of Series C
Preferred Stock (Note 11) (232) (3,000) 3,803 1,000 2,000
Adjustment to Unrealized
Gain (Loss) on Available-
for-sale Securities, Net
of Tax (Note 5) 168,000
------ -------- --------- -------- ---------- ---------- --------
Balances--December 31, 1995 16,436 $164,000 1,050,292 $263,000 $9,875,000 $3,448,000 $ 68,000
====== ======== ========= ======== ========== ========== ========
</TABLE>
See accompanying notes.
13
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,132,000 $ 450,000 $ 1,229,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Cumulative Effect of Change in Accounting for Income Taxes 0 0 (200,000)
Deferred Federal Income Tax Expense 547,000 222,000 493,000
Depreciation and Amortization 367,000 397,000 424,000
Provision for Loan Losses 206,000 147,000 154,000
Gain on Sale of Premises and Equipment (4,000) 0 0
Losses (Gains) on Sales of Real Estate and Other
Repossessed Assets (45,000) 52,000 (16,000)
Gain on Sale of Subsidiary 0 0 (286,000)
Writedown of Real Estate and Other Repossessed Assets 32,000 27,000 81,000
Decrease (Increase) in Accrued Interest Receivable (549,000) 376,000 422,000
Decrease (Increase) in Other Assets (176,000) (41,000) (133,000)
Increase (Decrease) in Accrued Interest Payable 474,000 115,000 (40,000)
Increase (Decrease) in Other Liabilities (840,000) 670,000 4,000
----------- ----------- -----------
Net Cash Provided by Operating Activities 1,144,000 2,415,000 2,132,000
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 21,828,000 34,436,000 0
Proceeds from Maturities of Held-to-maturity Securities 12,930,000 19,428,000 46,696,000
Proceeds from Sales of Available-for-sale Securities 0 8,000 0
Purchases of Available-for-sale Securities (21,242,000) (12,873,000) 0
Purchases of Held-to-maturity Securities (35,864,000) (9,909,000) (37,173,000)
Net Increase in Loans (1,603,000) (12,361,000) (9,489,000)
Proceeds from Sales of Premises and Equipment 4,000 0 0
Additions to Premises and Equipment (177,000) (214,000) (706,000)
Proceeds from Sales of Real Estate and Other Repossessed Assets 1,025,000 569,000 729,000
Cash Consideration Paid for Net Liabilities of
Olton State Transferred on January 1, 1993 0 0 (14,002,000)
Cash and Cash Equivalents Held by Winters State on
August 31, 1993 0 0 2,853,000
----------- ----------- -----------
Net Cash Provided by (Used in) Investing Activities (23,099,000) 19,084,000 (11,092,000)
----------- ----------- -----------
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits 18,520,000 (1,601,000) (1,973,000)
Proceeds from Notes Payable 275,000 0 450,000
Repayment of Notes Payable (690,000) (264,000) (1,546,000)
Net Proceeds from Issuance of Equity Securities 34,000 2,000 10,000
Payment of Cash Dividends (187,000) (140,000) (75,000)
Cash Paid for Fractional Shares in Stock Dividend (2,000) 0 (3,000)
Repurchase of Series A Preferred Stock 0 0 (173,000)
----------- ----------- -----------
Net Cash Provided by (Used In) Financing Activities 17,950,000 (2,003,000) (3,310,000)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (4,005,000) 19,496,000 (12,270,000)
Cash and Cash Equivalents at Beginning of Year 38,764,000 19,268,000 31,538,000
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $34,759,000 $38,764,000 $19,268,000
=========== =========== ===========
</TABLE>
See accompanying notes.
14
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statements
The accounting and reporting policies of Independent
Bankshares, Inc. (the "Company") conform with generally accepted
accounting principles followed by the banking industry.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of
the Company and its wholly-owned subsidiary, Independent Financial
Corp. ("Independent Financial") which, in turn, owns 100% of First
State Bank, National Association, Abilene, Texas ("First State,
N.A., Abilene") and First State Bank, National Association, Odessa,
Texas ("First State, N.A., Odessa") (collectively, the "Banks").
First State, N.A., Abilene has two branches in Abilene and one each
in Stamford, Texas, and Winters, Texas. First State, N.A., Odessa,
has two branches in Odessa. All significant intercompany accounts
and transactions have been eliminated upon consolidation.
Effective November 1, 1994, two of the Company's then existing
subsidiary banks, The Winters State Bank, Winters, Texas ("Winters
State"), and The First National Bank in Stamford, Stamford, Texas
("First National"), were merged with and into First State, N.A.,
Abilene. As a result of the merger, the offices of these two banks
became branches of First State, N.A., Abilene. All references to
Winters State and First National in the Company's Consolidated
Financial Statements are to these banks prior to the merger.
The Consolidated Income Statements include the detail income
and expense accounts of Winters State from August 31, 1993 (the
date of acquisition), through December 31, 1995. The transfer of
certain assets and liabilities of Olton State Bank, Olton, Texas
("Olton State"), a former subsidiary bank of the Company, was
completed on January 1, 1993. See "Note 3: Sale of Subsidiary
Bank."
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased and
sold for one-day periods.
Securities
Management determines the appropriate classification of
securities at the time of purchase. If the securities are
purchased with the positive intent and the ability to hold the
securities until maturity, they are classified as held-to-maturity
and carried at amortized historical cost. Securities to be held
for indefinite periods of time are classified as available-for-sale
and carried at fair value.
In May 1993, the Financial Accounting Standards Board (the
"FASB") issued Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). As
permitted under FAS 115, the Company elected to adopt the
provisions of the new standard as of December 31, 1993. The effect
at December 31, 1993, of adopting FAS 115 was an increase in
stockholders' equity of $206,000 (net of $105,000 in deferred
income taxes) to reflect the net unrealized holding gain on
available-for-sale securities. The effect for the year ended
December 31, 1994, was a decrease in stockholders' equity of
$306,000 (net of $154,000 in deferred income tax benefit) to
reflect the net unrealized holding loss on available-for-sale
securities at that date. The effect for the year ended December
31, 1995, was an increase in stockholders' equity of $168,000 (net
of $86,000 in deferred income taxes) to reflect the net unrealized
holding gain on available-for-sale securities at that date.
15
<PAGE>
Loans
Loans are stated at the principal amount outstanding.
Interest on the various types of commercial loans is accrued daily
based on the principal balances outstanding. Income on installment
loans is recognized using the interest method or other methods
under which income approximates the interest method.
The recognition of income on a loan is discontinued, and
previously accrued interest is reversed, when interest or principal
payments become ninety (90) days past due unless, in the opinion of
management, the outstanding interest remains collectible. Interest
is subsequently recognized only as received until the loan is
returned to accrual status.
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a
level that, in management's opinion, is adequate to absorb possible
losses in the loan portfolio. The allowance is based on a number
of factors, including risk ratings of individual credits, current
business and economic conditions, the size and diversity of the
portfolio, collateral values and past loan loss experience.
In June 1993, the FASB issued Statement No. 114, "Accounting
by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114
requires that impaired loans (including certain nonaccrual loans
and troubled debt restructurings) be measured at the present value
of expected cash flows discounted at the loan's effective interest
rate, or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. The Company adopted FAS 114 on January 1, 1995.
At December 31, 1995, the Company had a total of $100,000 in
impaired loans. There was a related allowance for possible loan
losses of $25,000 recorded for such loans. Impaired loans are
normally placed on nonaccrual status and, as a result, interest
income is recorded only as cash is received. The average balance
of impaired loans during the year ended December 31, 1995, was
approximately $125,000. There was no interest income recognized on
such loans during the year ended December 31, 1995.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation for financial reporting purposes is
computed primarily on the straight-line method over the estimated
useful lives of five (5) to forty (40) years.
Federal Income Taxes
In February 1992, the FASB issued Statement No. 109,
"Accounting for Income Taxes" ("FAS 109"), which required companies
to adopt the liability method for computing income taxes no later
than 1993. In applying the new method in 1993, the Company
established a gross deferred tax asset of $3,190,000, a portion of
which relates to federal tax net operating loss carryforwards and
deductible temporary differences arising prior to the Company's
quasi-reorganization as of December 31, 1989. FAS 109 requires
that consideration be given to establishing a valuation allowance
against such deferred tax assets. The Company established a
valuation allowance of $2,290,000, resulting in a net deferred tax
asset of $900,000. As a result of the quasi-reorganization,
approximately $700,000 of the cumulative effect of the change in
accounting method was credited directly to additional paid-in
capital and $200,000 was credited to income during 1993 as a
cumulative effect of an accounting change. As a result of the
acquisition of Winters State, the Company increased its gross
deferred tax asset and the related valuation allowance by
approximately $972,000 during 1993. This gross deferred tax asset
arose mainly due to net operating loss carryforwards and other
future deductible temporary differences. As a result of the
utilization of a portion of its net operating loss carryforwards,
the Company reduced its gross deferred tax asset and the related
valuation allowance by $222,000 and $493,000 during the years ended
December 31, 1994 and 1993, respectively. During 1995, the Company
reduced its gross deferred tax asset by $547,000 as of a result of
the utilization of a portion of its net operating loss
carryforwards. The Company also reduced the valuation allowance
during 1995 by $1,600,000 and transferred such amount to additional
paid-in-capital due to the Company's belief, based on the Company's
recent earnings history, that it is more likely than not that
sufficient pre-tax income will be generated in the foreseeable
future to realize its net deferred tax asset. Additionally, the
Company reduced its gross deferred tax asset and related valuation
allowance by $708,000 as a result of the write-off of a portion of
the
16
<PAGE>
deferred tax asset related to the Winters State net operating loss
carryforwards which will not be utilized. The Company may reduce
or increase its valuation allowance depending on changes in the
expectation of future earnings and other circumstances.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets consist principally
of real estate properties acquired by the Company through
foreclosure. Such assets are carried at the lower of cost
(generally the outstanding loan balance) or estimated fair value,
net of estimated costs of disposal, if any. If the estimated fair
value of the collateral securing the loan is less than the amount
outstanding on the loan at the time the assets are acquired, the
difference is charged against the allowance for possible loan
losses. Subsequent declines in estimated fair value, if any, are
charged to noninterest expense.
Fair Value of Financial Instruments
FASB Statement No. 107, "Disclosures About Fair Value of
Financial Instruments" ("FAS 107"), requires disclosure of fair
value information about financial instruments, whether or not
recognized in the Consolidated Balance Sheet, for which it is
practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. FAS 107
excludes all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain 1994 and 1993 amounts have been reclassified to
conform with the consolidated financial presentation adopted in
1995 and 1994, respectively.
NOTE 2: QUASI-REORGANIZATION
In connection with the restructuring of its indebtedness to a
financial institution in Dallas, Texas (the "Dallas Bank"), the
Company effected a quasi-reorganization as of December 31, 1989.
A quasi-reorganization is an elective accounting procedure under
Generally Accepted Accounting Principles ("GAAP") in which assets
and liabilities of the Company were restated to fair value and the
Company's accumulated deficit was reduced to zero. Under GAAP,
utilization of any of the Company's net operating loss
carryforwards subsequent to the quasi-reorganization date will not
be credited to future income. For periods prior to January 1,
1995, the tax effect of the utilization of the Company's net
operating loss carryforwards was credited directly to additional
paid-in capital. For periods subsequent to December 31, 1994, the
effect of such utilization has been and will be credited against
the Company's gross deferred tax asset. The tax effect of
utilization of these net operating losses in 1995, 1994 and 1993
totaled $547,000, $222,000 and $493,000, respectively.
NOTE 3: SALE OF SUBSIDIARY BANK
The Company entered into a letter of intent to transfer the
deposits, premises and equipment and certain loans of Olton State
during the second quarter of 1992. The various regulatory
approvals necessary to complete the transfer were received during
the third and fourth quarters of 1992. The transfer of the various
assets and liabilities of Olton State was completed on January 1,
1993, and the Company recognized a gain of $286,000, which is
included in noninterest income for the year ended December 31,
1993.
17
<PAGE>
In connection with and immediately prior to the transfer of
certain assets and liabilities of Olton State, that bank was merged
with and into First National, on January 1, 1993, in a transaction
accounted for in a manner similar to a pooling of interests. As a
result of the merger, the additional paid-in capital of First
National was increased by the amount of the net equity of Olton
State, or $1,854,000. Subsequent to the merger, First National
received regulatory approval to reduce its additional paid-in
capital by $1,500,000 through a capital distribution to the Company
and a total of $1,487,000 of the distribution was used by the
Company to make principal reductions on its note payable to a
financial institution in Amarillo, Texas (the "Amarillo Bank"),
during March and April of 1993.
NOTE 4: ACQUISITION OF SUBSIDIARY BANK
In the second quarter of 1990, the Banks foreclosed on the
stock of Winters State that collateralized a loan and, as a result,
the Banks became beneficial owners of an aggregate of 28.2% of the
outstanding stock of Winters State. During the third quarter of
1993, the Company acquired the aggregate 28.2% interest in Winters
State from the Banks and agreed with Winters State to purchase the
Company's pro rata share of a $450,000 new stock offering conducted
by Winters State or to purchase the entire offering if none of the
other Winters State stockholders elected to participate in the
offering. None of the other stockholders elected to participate in
the offering, and, upon regulatory approval, the Company purchased
the entire offering for cash consideration of $450,000. As a
result of its purchase in the offering, the Company acquired
control and increased its ownership of Winters State from 28.2% to
94.3%. The Company's equity in the net book value of Winters State
was $1,077,000 at August 31, 1993, the date of acquisition. The
acquisition was accounted for under the purchase method of
accounting and the assets and liabilities of Winters State were
recorded at their estimated fair value. At August 31, 1993,
Winters State had $16,316,000 in total assets, $7,453,000 in total
loans, net of unearned income, $15,079,000 in total deposits and
stockholders' equity of $1,142,000.
In December 1993, the Company purchased an additional interest
in Winters State from one of the remaining minority stockholders.
The purchase increased the Company's ownership of Winters State to
94.9%. On October 31, 1994, the Company purchased the remaining
minority interest in Winters State.
To fund the original stock purchase the Company obtained a
$450,000 loan from the Amarillo Bank, which was paid off during
1995.
The operations of Winters State from August 31, 1993, through
December 31, 1993, are included in the Consolidated Income
Statement for the year ended December 31, 1993. Net interest
income of Winters State for the last four months of 1993 was
$233,000. Income before federal income taxes of Winters State for
that same period was $14,000.
NOTE 5: SECURITIES
The amortized cost and estimated fair value of available-for-
sale securities at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $16,042,000 $101,000 $0 $16,143,000
Mortgage-backed securities 158,000 2,000 0 160,000
Other securities 443,000 0 0 443,000
----------- -------- -- -----------
Total available-for-sale securities $16,643,000 $103,000 $0 $16,746,000
=========== ======== == ===========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $15,905,000 $ 6,000 $(162,000) $15,749,000
Obligations of U.S. Government agencies
and corporations 879,000 7,000 0 886,000
Other securities 443,000 0 0 443,000
----------- ------- --------- -----------
Total available-for-sale securities $17,227,000 $13,000 $(162,000) $17,078,000
=========== ======= ========= ===========
</TABLE>
The amortized cost and estimated fair value of held-to-
maturity securities at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $16,152,000 $ 98,000 $(5,000) $16,245,000
Obligations of U.S. Government agencies
and corporations 23,009,000 130,000 0 23,139,000
----------- -------- ------- -----------
Total held-to-maturity securities $39,161,000 $228,000 $(5,000) $39,384,000
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1994
----
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities $15,692,000 $2,000 $(322,000) $15,372,000
Obligations of U.S. Government agencies
and corporations 268,000 2,000 0 270,000
Mortgage-backed securities 177,000 2,000 0 179,000
Obligations of states and political
subdivisions 90,000 2,000 0 92,000
----------- ------ --------- -----------
Total held-to-maturity securities $16,227,000 $8,000 $(322,000) $15,913,000
=========== ====== ========= ===========
</TABLE>
The amortized cost and estimated fair value of securities at
December 31, 1995, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Available-for-sale Securities Cost Value
- ----------------------------- --------- ----------
<S> <C> <C>
Due in one year or less $ 8,046,000 $ 8,073,000
Due after one year through five years 8,001,000 8,075,000
Due after ten years 438,000 438,000
----------- -----------
16,485,000 16,586,000
Mortgage-backed securities 158,000 160,000
----------- -----------
Total available-for-sale securities $16,643,000 $16,746,000
=========== ===========
Estimated
Amortized Fair
Held-to-maturity Securities Cost Value
- --------------------------- --------- ---------
Due in one year or less $ 8,240,000 $ 8,247,000
Due after one year through five years 30,921,000 31,137,000
----------- -----------
Total held-to-maturity securities $39,161,000 $39,384,000
=========== ===========
</TABLE>
19
<PAGE>
At December 31, 1995, securities with an amortized cost and
estimated fair value of $6,423,000 and $6,482,000, respectively,
were pledged as collateral for public and trust fund deposits and
for other purposes required or permitted by law. At December 31,
1994, the amortized cost and estimated fair value of pledged
securities were $5,332,000 and $5,219,000, respectively.
During 1995, a transfer was made from held-to-maturity
securities to available-for-sale securities in accordance with the
Financial Accounting Standards Board's "Special Report, A Guide to
Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." The amortized cost of
the securities transferred totaled $158,000 and the unrealized gain
of $2,000 was included as a separate component of stockholders'
equity.
NOTE 6: LOANS
The composition of loans at December 31, 1995 and 1994, was as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loans to Individuals $39,868,000 $43,113,000
Real estate loans 23,265,000 22,760,000
Commercial and industrial loans 19,510,000 16,702,000
Other loans 2,638,000 2,943,000
----------- -----------
Total loans 85,281,000 85,518,000
Less unearned income 3,354,000 4,212,000
----------- -----------
Total loans, net of unearned income $81,927,000 $81,306,000
=========== ===========
</TABLE>
An analysis of nonperforming assets at December 31, 1995, 1994
and 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $204,000 $ 48,000 $1,646,000
Accruing loans past due over ninety days 23,000 26,000 293,000
Restructured loans 65,000 80,000 195,000
Real estate and other repossessed assets 337,000 631,000 803,000
-------- -------- ----------
Total nonperforming assets $629,000 $785,000 $2,937,000
======== ======== ==========
</TABLE>
The amount of interest income that would have been recorded on
nonaccrual loans for the years ended December 31, 1995, 1994 and
1993, based on the loans' original terms was $14,000, $26,000 and
$117,000, respectively. No interest was collected on such loans
and recorded as income during 1995. A total of $38,000 and $70,000
in interest on nonaccrual loans was actually collected and recorded
as income during the years ended December 31, 1994 and 1993,
respectively.
Real estate and other repossessed assets at December 31, 1994,
included $125,000 of assets classified as in-substance
repossessions.
A summary of the transactions in the allowance for possible
loan losses for the years ended December 31, 1995, 1994 and 1993,
is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $817,000 $896,000 $617,000
Provision for loan losses 206,000 147,000 154,000
Loans charged off (376,000) (378,000) (241,000)
Recoveries of loans charged off 112,000 152,000 133,000
Acquisition of subsidiary 0 0 233,000
-------- -------- --------
Balance at end of year $759,000 $817,000 $896,000
======== ======== ========
</TABLE>
20
<PAGE>
NOTE 7: PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 707,000 $ 707,000
Buildings and improvements 4,100,000 4,092,000
Furniture and equipment 1,285,000 1,332,000
---------- ----------
6,092,000 6,131,000
Less accumulated depreciation 1,937,000 1,786,000
---------- ----------
Net premises and equipment $4,155,000 $4,345,000
========== ==========
</TABLE>
NOTE 8: DEPOSITS
At December 31, 1995 and 1994, interest-bearing time deposits
of $100,000 or more were $23,808,000 and $14,588,000, respectively.
NOTE 9: NOTES PAYABLE
The Company had two notes payable to the Amarillo Bank during
1995. The term note (the "Term Note") had an outstanding principal
balance of $498,000 at December 31, 1995. The Term Note has a
maturity of April 15, 1996, and equal principal payments based on
a seven-year amortization, plus accrued interest, are due quarterly
on January 15, April 15, July 15 and October 15. The Term Note
bears interest at the Amarillo Bank's floating base rate plus 1%
(9.5% at December 31, 1995). The Term Note is collateralized by
100% of the stock of First State, N.A., Abilene, and First State,
N.A., Odessa. The second note, the proceeds from which were used
for the acquisition of Winters State (the "Acquisition Note"), had
an original principal balance of $450,000 and matured on August 30,
1994. The Company paid the Amarillo Bank $150,000 to reduce the
outstanding balance of the Acquisition Note to $300,000 and the
maturity date was extended to August 30, 1997. The Acquisition
Note was paid off during the fourth quarter of 1995. The loan
agreement between the Company and the Amarillo Bank contains
certain covenants that, among other things, restrict the ability of
the Company to incur additional debt, to create liens on its
property, to merge or to consolidate with any other person or
entity, to make certain investments, to purchase or sell assets or
to pay cash dividends on the common stock without the approval of
the Amarillo Bank if the indebtedness due to the Amarillo Bank is
$1,000,000 or greater. The loan agreement also requires the
Company and the Banks to meet certain financial ratios, all of
which were met at December 31, 1995 and 1994.
In addition, at December 31, 1995, the Company had notes
payable to one current and two former directors of the Company
aggregating $334,000. The notes have a face amount of $350,000 but
were discounted upon issuance because they bear interest at a
below-market interest rate (6%). The notes are payable in three
equal annual installments, plus accrued interest, beginning
March 1, 1996. The notes represent a portion of the final
settlement of certain litigation. See "Note 15: Commitments and
Contingent Liabilities."
First State, N.A., Abilene has a $17,000 note payable to an
individual which matures in March 1999. Principal and interest at
7.5% are payable monthly. The note is collateralized by a two-
story commercial building in Abilene, Texas.
NOTE 10: FEDERAL INCOME TAXES
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the
liability method as required by FAS 109. As permitted under FAS
109, prior years' financial statements have not been restated.
Deferred income taxes reflect the net effects of temporary
differences between the carrying amount of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes.
21
<PAGE>
Significant components of the Company's deferred tax assets
and liabilities at December 31, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $1,655,000 $2,584,000
Allowance for possible loan losses 225,000 220,000
Tax credit carryforwards 142,000 0
Director indemnification 119,000 306,000
Real estate and other repossessed assets 82,000 252,000
Unrealized loss on available-for-sale securities 0 49,000
Depreciation and amortization 0 3,000
Other, net 8,000 89,000
---------- ----------
Total gross deferred tax assets 2,231,000 3,503,000
Less valuation allowance for deferred tax assets (227,000) (2,547,000)
---------- ----------
Net deferred tax assets 2,004,000 956,000
---------- ----------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities (37,000) 0
Depreciation and amortization (30,000) 0
---------- ----------
Total gross deferred tax liabilities (67,000) 0
---------- ----------
Net deferred tax asset $1,937,000 $ 956,000
========== ==========
</TABLE>
At December 31, 1995, the Company had available net operating
loss carryforwards and tax credit carryforwards to reduce future
federal income taxes. These carryforwards expire approximately as
follows:
<TABLE>
<CAPTION>
Net
Operating
Losses Tax Credits
--------- -----------
<S> <C> <C>
1996-2000 $ 0 $ 39,000
2001-2005 1,490,000 0
2006-2010 165,000 0
No expiration 0 103,000
---------- --------
Total carryforwards $1,655,000 $142,000
========== ========
</TABLE>
Included in the $1,655,000 of net operating loss carryforwards
is approximately $447,000 acquired as part of the Winters State
acquisition. For federal income tax purposes, due to certain
change of ownership requirements of the Internal Revenue Code,
utilization of the Winters State net operating loss carryforwards
is limited to approximately $40,000 per year. If the full amount
of that limitation is not used in any year, the amount not used
increases the allowable limit in the subsequent year. These net
operating loss carryforwards, if not used, expire between 2003 and
2008.
The comprehensive provisions for federal income taxes for the
years ended December 31, 1995, 1994 and 1993, consist of the
following:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current tax provision $ 35,000 $ 5,000 $ 31,000
Deferred tax provision 547,000 222,000 493,000
-------- -------- --------
Provision for tax expense charged to
results of operations 582,000 227,000 524,000
Tax on unrealized gain(loss) on
available-for-sale securities 86,000 (154,000) 105,000
-------- -------- --------
Comprehensive provision for
federal income taxes $668,000 $ 73,000 $629,000
======== ======== ========
</TABLE>
NOTE 11: STOCKHOLDERS' EQUITY
In December 1992, the Company's board of directors approved
the granting of nonqualified stock options for certain officers of
the Company under which an original aggregate of 14,000 shares of
Common Stock, adjusted for the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders
22
<PAGE>
in May 1995, could be issued. These options were exercisable at
any time during the period January 1, 1993, to December 31, 1995,
at a price of $3.75 per share, adjusted for the 5% stock dividend
paid to stockholders in May 1993 and the 33-1/3% stock dividend
paid to stockholders in May 1995. During the years ended December
31, 1993, 1994 and 1995, after adjustments for the two stock
dividends noted above, options for 771, 428 and 9,037 shares,
respectively, were exercised and options for 1,471, 1,261 and 1,032
shares, respectively, expired.
In December 1993, the Company's board of directors approved
the granting of nonqualified stock options to certain executive
officers of the Company under which an original aggregate of 14,667
shares of Common Stock, adjusted for the 33-1/3% stock dividend
paid to stockholders in May 1995, may be issued. Options are
exercisable at any time during the period January 1, 1994, to
December 31, 1997, at a price of $6.75 per share, adjusted for the
33-1/3% stock dividend paid to stockholders in May 1995. No
options were exercised or expired during the years ended December
31, 1994 and 1995.
At December 31, 1992, the Company had 2,200 shares of its
Series A Cumulative Convertible Mandatorily Redeemable Preferred
Stock (the "Series A Preferred Stock") outstanding. The Series A
Preferred Stock had a face value of $220,000, was cumulative, paid
quarterly dividends at the annual rate of $10.00 per share, was
senior to the Company's Common Stock and the Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock") with
respect to dividends and liquidation rights, was convertible into
Common Stock at a price of $6.00 per share and had certain voting
rights. On January 20, 1993, the Company repurchased the
outstanding 2,200 shares of Series A Preferred Stock ($220,000 face
value) for $173,000. The $47,000 was credited directly to
additional paid-in capital.
The Company's Series C Preferred Stock is cumulative, pays
quarterly dividends at the annual rate of $4.20 per share, is
senior to the Common Stock with respect to dividends and
liquidation rights, is convertible into Common Stock at a price of
$2.29 per share, adjusted for the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders in May 1995, and has certain voting rights if
dividends are in arrears for three quarters. A total of 232 shares
of the Series C Preferred Stock were converted into a total of
4,263 shares of Common Stock, adjusted for the 33-1/3% stock
dividend paid to stockholders in May 1995, during 1995. The Series
C Preferred Stock is redeemable in cash and/or Common Stock at the
Company's option beginning December 12, 1997, at $42.00 per share.
An additional 36,415 shares of Common Stock were issued as a
result of the 5% stock dividend paid to stockholders in May 1993.
The stock dividend was accounted for by a $9,000 transfer from
retained earnings to common stock, representing the above number of
shares at a par value of $0.25 per share. An additional 259,371
shares of Common Stock were issued as a result of the 33-1/3% stock
dividend paid to stockholders in May 1995. The stock dividend was
accounted for by a $65,000 transfer from retained earnings to
common stock, representing the above number of shares at a par
value of $0.25 per share.
The following is a summary at December 31, 1995, of the number
of shares of Common Stock reserved for issuance upon exercise or
conversion and the related exercise or conversion price per share,
adjusted for the 5% stock dividend paid to stockholders in May 1993
and the 33-1/3% stock dividend paid to stockholders in May 1995:
<TABLE>
<CAPTION>
Exercise or
Shares Conversion
Reserved for Price
Issuance Per Share
------------ -----------
<S> <C> <C>
Unexercised stock options granted to certain executive
officers of the Company 14,667 $ 6.75
Series C Preferred Stock 302,011 2.29
------- -----------
Total shares reserved for issuance and related
exercise or conversion price per share 316,678 $2.29-$6.75
======= ===========
</TABLE>
NOTE 12: EARNINGS PER SHARE
Primary earnings per common share is computed by dividing net
income available to common stockholders by the weighted average
number of shares and share equivalents outstanding during the
period. Because the Company's outstanding preferred stock is
cumulative, the dividends allocable to such preferred stock reduces
income available to common stockholders in the earnings per share
calculations. The Series A Preferred Stock and Series C Preferred
Stock issued in December 1990 were determined not to be common
stock equivalents and, therefore, are not used to calculate primary
earnings per common share. In computing fully diluted earnings per
common share for the years ended December 31, 1995, 1994 and 1993,
the conversion of the preferred stock was assumed, as the
23
<PAGE>
effect is dilutive. As noted above, the outstanding Series A
Preferred Stock was repurchased and retired by the Company in
January 1993. The following table presents information necessary
to calculate earnings per share for the years ended December 31,
1995, 1994 and 1993 (adjusted for the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders in May 1995):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Primary Earnings Per Common Share (In thousands)
- ---------------------------------
<S> <C> <C> <C>
Shares Outstanding:
Weighted average shares outstanding 1,039 1,037 1,036
Share equivalents 8 5 5
------ ------ ------
Adjusted shares outstanding 1,047 1,042 1,041
====== ====== ======
Net Income:
Net income $1,132 $ 450 $1,229
Less-preferred stock dividends 70 70 75
------ ------ ------
Net income available to common stockholders $1,062 $ 380 $1,154
====== ====== ======
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Fully Diluted Earnings Per Common Share (In thousands)
- ---------------------------------------
Shares Outstanding:
Weighted average shares outstanding 1,039 1,037 1,036
Share equivalents 8 5 5
Conversion of Series A Preferred Stock 0 0 2
Conversion of Series C Preferred Stock 305 306 306
------ ------ ------
Adjusted shares outstanding 1,352 1,348 1,349
====== ====== ======
Net Income $1,132 $ 450 $1,229
====== ====== ======
</TABLE>
NOTE 13: BENEFIT PLANS
The Company has an employee stock ownership/401(k) plan (the
"Plan") that covers most of its officers and employees. The Plan
stipulates, among other things, that vesting in employer
contributions begins after one year of service, each participant
will become fully vested in employer contributions after seven
years of service and the determination of the level of vesting
began with the original date of current employment of each
participant. Contributions made to the employee stock ownership
portion of the Plan by the Company were $72,000, $62,000 and
$66,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. These contributions were used to make distributions
to employees who left the Company's employment in the respective
years and to purchase Common Stock of the Company. No
contributions have been made by the Company to match contributions
made by plan participants to the 401(k) portion of the Plan. The
amount of all such contributions is at the discretion of the
Company's board of directors. Employee contributions are invested
in various equity, debt and money market investments, including
Common Stock of the Company. At December 31, 1995, 55,338 shares
of Common Stock and 2,918 shares of Series C Preferred Stock of the
Company were held by the Plan.
NOTE 14: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has loans,
deposits and other transactions with its senior officers and
directors and businesses with which such persons are associated.
It is the Company's policy that all such transactions are entered
into on substantially the same terms as those prevailing at the
time for comparable transactions with unrelated third parties. The
balances of loans to all such persons were $1,053,000, $1,587,000
and $1,290,000 at December 31, 1995, 1994 and 1993, respectively.
Additions and reductions on such loans were $1,254,000 and
$1,788,000, respectively, for the year ended December 31, 1995.
The Company and its subsidiaries paid $19,000, $55,000 and
$110,000 in fees to a director-related company for services
rendered on various legal matters during 1995, 1994 and 1993,
respectively.
24
<PAGE>
During the year ended December 31, 1995, the Company
reimbursed $800,000 ($450,000 in cash and $350,000 in notes
payable) to three former directors (one of whom is also a current
director of the Company) of a bank which was a repossessed asset of
a former subsidiary bank for payment of reasonable legal fees and
expenses in connection with their defense of an action brought by
the Federal Deposit Insurance Corporation (the "FDIC"). See "Note
15: Commitments and Contingent Liabilities."
During the year ended December 31, 1993, the Company
reimbursed $200,000 to twenty-two former directors of a former
subsidiary bank (six of whom are also current directors of the
Company) for payment of reasonable legal fees and expenses in
connection with their defense of an action brought by two
plaintiffs who purchased debentures previously sold by the former
subsidiary bank. The Company had accrued and expensed such
reimbursement during the year ended December 31, 1991.
NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES
In 1985, a former subsidiary bank of the Company foreclosed on
the stock of Texas Bank & Trust Company, Sweetwater, Texas ("TB&T-
Sweetwater"), which became a repossessed asset of the former
subsidiary. TB&T-Sweetwater subsequently failed, resulting in a
legal action being brought in federal court against the thirteen
TB&T-Sweetwater directors by the FDIC. In September 1993, nine
former outside directors of TB&T-Sweetwater (the "Outside
Directors") settled with the FDIC for an aggregate of $60,000. All
former directors of TB&T-Sweetwater requested that the Company
reimburse them for their expenses and settlement costs incurred by
them in their defense of the FDIC litigation. This request was
based on their interpretation of certain indemnification provisions
contained in the Company's Articles of Incorporation.
In January 1994, the Company filed a declaratory judgment
action in state district court to petition the court to rule on
certain matters that would have precluded indemnification. Certain
of the directors filed counterclaims against the Company asserting
their right to be indemnified. A hearing occurred in July 1994,
and the court issued an order in September 1994, denying the
Company's petition and upholding the directors' counterclaims.
In December 1994, a settlement was entered into between the
FDIC, one Outside Director and the three management directors of
TB&T-Sweetwater, who were also management directors of the Company
(the "Inside Directors"), with the Inside Directors paying the FDIC
a total of $450,000. As a result of the two settlements and
indemnification requests, the Outside Directors claimed
indemnification in the amount of approximately $467,000 and the
Inside Directors claimed indemnification in the amount of
approximately $900,000. In 1994, the Company accrued $900,000 for
the potential reimbursement of the $1,367,000 in claims.
On March 7, 1995, the Company agreed to settle the
indemnification requests of the Inside Directors for $450,000 in
cash and by delivery of three promissory notes in the aggregate
principal amount of $350,000. These notes are payable in three
equal annual installments beginning March 1, 1996, and bear
interest at 6% per annum. As a result of the below-market interest
rate, the notes were originally discounted to an aggregate of
$323,000. In April and May 1995, the Company consummated this
settlement with the Inside Directors by paying them an aggregate of
$450,000 and delivering such promissory notes to them. In May and
June 1995, the Company settled with the Outside Directors by paying
them a aggregate of $252,000 in cash.
The Company is involved in various other litigation
proceedings incidental to the ordinary course of business. In the
opinion of management, the ultimate liability, if any, resulting
from such other litigation would not be material in relation to the
Company's financial condition.
The Banks lease certain of their premises and equipment under
noncancellable operating leases. Rental expense under such
operating leases was approximately $290,000, $235,000 and $142,000
in 1995, 1994 and 1993, respectively.
The minimum payments due under these leases at December 31,
1995, are as follows:
<TABLE>
<S> <C>
1996 $298,000
1997 232,000
1998 87,000
1999 39,000
2000 39,000
2001-2003 61,000
--------
Total $756,000
========
</TABLE>
25
<PAGE>
NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial assets and
financial liabilities at December 31, 1995 and 1994, were as
follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial Assets
----------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 8,559,000 $ 8,559,000 $ 7,564,000 $ 7,564,000
Federal funds sold 26,200,000 26,200,000 31,200,000 31,200,000
Available-for-sale securities 16,746,000 16,746,000 17,078,000 17,078,000
Held-to-maturity securities 39,161,000 39,384,000 16,227,000 15,913,000
Loans, net of unearned income 81,927,000 83,857,000 81,306,000 80,761,000
Accrued interest receivable 1,494,000 1,494,000 945,000 945,000
Financial Liabilities
---------------------
Noninterest-bearing demand deposits $33,267,000 $33,267,000 $30,210,000 $30,210,000
Interest-bearing demand deposits 52,430,000 52,430,000 56,520,000 56,520,000
Interest-bearing time deposits 79,007,000 79,475,000 59,454,000 59,473,000
Notes payable 849,000 849,000 930,000 930,000
Accrued interest payable 882,000 882,000 408,000 408,000
</TABLE>
Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of
comparable instruments.
For variable-rate loans that reprice frequently with no
significant change in credit risk, fair values are based on
carrying values. The fair values of other loans are estimated
using discounted cash flow analyses, which utilize interest rates
currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair values of noninterest and interest-bearing demand
deposits are, by definition, equal to the amount payable on demand,
i.e., their carrying amount. The fair values of interest-bearing
time deposits are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates of similar maturities.
The carrying amounts for cash and due from banks, federal
funds sold, accrued interest receivable, notes payable and accrued
interest payable approximate the fair values of such assets and
liabilities.
Fair values for the Company's off-balance-sheet instruments,
which consist of lending commitments and standby letters of credit,
are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. Management
believes that the fair value of these off-balance-sheet instruments
is not materially different from the commitment amount.
NOTE 17: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-
balance-sheet risk entered into in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit, standby letters
of credit and financial guarantees. Those instruments involve, to
varying degrees, elements of credit risk in excess of the amount
recognized in the accompanying financial statements. The
contractual amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit, standby letters of credit and
financial guarantees is represented by the contractual amount of
those instruments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-
balance-sheet instruments. Unless noted otherwise, the Company
does not require collateral or other security to support financial
instruments with credit risk. The Company had outstanding loan
commitments of approximately $6,162,000 and $4,715,000 and
outstanding standby letters of credit and financial guarantees of
approximately $178,000 and $152,000 at December 31, 1995 and 1994,
respectively.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination
26
<PAGE>
clauses and may require payment of a fee. Because many of the
commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate, accounts
receivable, inventory, property, plant and equipment and income-
producing commercial properties.
Standby letters of credit and financial guarantees are
conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. These guarantees are
primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing standby letters
of credit is essentially the same as that involved in making loans
to customers.
The Company does not expect any material losses as a result of
loan commitments, standby letters of credit and financial
guarantees that were outstanding at December 31, 1995.
In the normal course of business, the Company maintains
deposits with other financial institutions in amounts which exceed
FDIC insurance coverage limits.
NOTE 18: REGULATORY MATTERS
At December 31, 1995, retained earnings of subsidiaries
included approximately $1,208,000 that was available for payment of
dividends to the Company without prior approval of regulatory
authorities.
NOTE 19: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of the Company, parent only,
are presented below:
INDEPENDENT BANKSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Assets:
Cash $ 191,000 $ 241,000
Investment in subsidiaries 12,908,000 12,065,000
Premises and equipment 4,000 6,000
Other assets 1,577,000 427,000
----------- -----------
Total assets $14,680,000 $12,739,000
=========== ===========
Liabilities:
Notes payable $ 832,000 $ 909,000
Accrued interest payable and other liabilities 30,000 757,000
----------- -----------
Total liabilities 862,000 1,666,000
Stockholders' equity 13,818,000 11,073,000
----------- -----------
Total liabilities and stockholders' equity $14,680,000 $12,739,000
=========== ===========
</TABLE>
27
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Income:
Dividends from subsidiaries (see Note 18) $ 905,000 $ 450,000 $ 510,000
Management fees from subsidiaries 177,000 158,000 164,000
Interest from subsidiaries 2,000 2,000 2,000
Other income 0 0 77,000
---------- ---------- ----------
Total income 1,084,000 610,000 753,000
---------- ---------- ----------
Expenses:
Interest 107,000 86,000 102,000
Other expenses 756,000 1,381,000 524,000
---------- ---------- ----------
Total expenses 863,000 1,467,000 626,000
---------- ---------- ----------
Income (loss) before federal income taxes, equity in
undistributed earnings of subsidiaries, and cumulative
effect of accounting change 221,000 (857,000) 127,000
Federal income tax benefit (236,000) (490,000) (76,000)
---------- ---------- ----------
Income (loss) before equity in undistributed earnings
of subsidiaries and cumulative effect of accounting change 457,000 (367,000) 51,000
Equity in undistributed earnings of subsidiaries 675,000 817,000 978,000
---------- ---------- ----------
Income before cumulative effect of accounting change 1,132,000 450,000 1,029,000
Cumulative effect of change in accounting for income
taxes 0 0 200,000
---------- ---------- ----------
Net income $1,132,000 $ 450,000 $1,229,000
========== ========== ==========
</TABLE>
28
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $1,132,000 $450,000 $1,229,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting
for income taxes 0 0 (200,000)
Deferred federal income tax expense 547,000 222,000 493,000
Depreciation and amortization 2,000 1,000 2,000
Equity in undistributed earnings of subsidiaries (675,000) (817,000) (978,000)
Gain on sale of subsidiary 0 0 (75,000)
Decrease (increase) in other assets (97,000) 4,000 25,000
Increase (decrease) in accrued interest payable
and other liabilities (390,000) 681,000 (134,000)
---------- -------- ----------
Net cash provided by operating activities 519,000 541,000 362,000
---------- -------- ----------
Cash flows from investing activities:
Proceeds from sale of premises and equipment 0 0 1,000
Proceeds from sale of subsidiary 0 0 75,000
Acquisition of subsidiary 0 0 (650,000)
Capital distribution from subsidiary 0 0 1,500,000
---------- -------- ----------
Net cash provided by investing activities 0 0 926,000
---------- -------- ----------
Cash flows from financing activities:
Proceeds from notes payable 275,000 0 450,000
Repayment of notes payable (687,000) (261,000) (1,542,000)
Net proceeds from issuance of equity securities 34,000 2,000 10,000
Cash paid for fractional shares in stock dividend (4,000) 0 (4,000)
Repurchase of Series A Preferred Stock 0 0 (173,000)
Payment of cash dividends (187,000) (140,000) (75,000)
---------- -------- ----------
Net cash used in financing activities (569,000) (399,000) (1,334,000)
---------- -------- ----------
Net increase (decrease) in cash and cash equivalents (50,000) 142,000 (46,000)
Cash and cash equivalents at beginning of year 241,000 99,000 145,000
---------- -------- ----------
Cash and cash equivalents at end of year $ 191,000 $241,000 $ 99,000
========== ======== ==========
</TABLE>
NOTE 20: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended
December 31, 1995, 1994 and 1993, is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest $4,835,000 $3,337,000 $3,215,000
Federal income taxes 15,000 17,000 38,000
Noncash investing activities:
Additions to real estate and other repossessed assets
during the year through foreclosures 1,039,000 424,000 457,000
Sales of real estate and other repossessed assets
financed with loans 196,000 335,000 202,000
Transfer of real estate and other repossessed assets
to loans 125,000 0 0
Increase (decrease) in unrealized gain/loss on
available-for-sale securities, net of tax 168,000 (306,000) 206,000
Other liabilities replaced with notes payable 334,000 0 0
</TABLE>
NOTE 21: SUBSEQUENT EVENT
First State, N.A., Abilene completed the acquisition of
Peoples National Bank in Winters, Texas ("Peoples National")
effective January 1, 1996. At December 31, 1995, Peoples National
had total assets of $5,505,000, total
29
<PAGE>
loans, net of unearned income, of $2,767,000, total deposits of
$4,958,000 and stockholders' equity of $525,000. These amounts are
not included in the Consolidated Balance Sheet for the Company at
December 31, 1995.
QUARTERLY DATA (UNAUDITED)
The following table presents the unaudited results of
operations for the past two years by quarter. See "Note 12:
Earnings Per Share" in the Company's Consolidated Financial
Statements.
<TABLE>
<CAPTION>
1995
----
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income $2,811 $2,971 $3,049 $3,131 $11,962
Interest expense 1,128 1,331 1,401 1,449 5,309
Net interest income 1,683 1,640 1,648 1,682 6,653
Provision for loan losses 42 30 69 65 206
Income before federal income taxes 502 277 479 456 1,714
Net income 332 182 317 301 1,132
Primary earnings per common share
available to common stockholders:
Income before federal income taxes $ 0.46 $ 0.25 $ 0.44 $ 0.42 $ 1.57
Net income 0.30 0.16 0.29 0.27 1.02
Fully diluted earnings per common share
available to common stockholders:
Income before federal income taxes $ 0.37 $ 0.20 $ 0.36 $ 0.34 $ 1.27
Net income 0.25 0.14 0.23 0.22 0.84
1994
----
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands, except per share amounts)
Interest income $2,471 $2,491 $2,506 $2,663 $10,131
Interest expense 791 821 875 965 3,452
Net interest income 1,680 1,670 1,631 1,698 6,679
Provision for loan losses 21 31 40 55 147
Income (loss) before federal income taxes 324 397 119 (163) 677
Net income (loss) 215 262 79 (106) 450
Primary earnings per common share
available to common stockholders:
Income (loss) before federal income taxes $ 0.29 $ 0.36 $ 0.10 $(0.17) $ 0.58
Net income (loss) 0.19 0.23 0.06 (0.12) 0.36
Fully diluted earnings per common share
available to common stockholders:
Income (loss) before federal income taxes $ 0.24 $ 0.29 $ 0.09 $(0.12) $ 0.50
Net income (loss) 0.16 0.19 0.06 (0.12) 0.33
</TABLE>
The above unaudited financial information reflects all
adjustments that are, in the opinion of management, necessary to
present a fair statement of the results of operations for the
interim periods presented.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents selected consolidated financial
information for the last five years. Such financial information
has been restated to reflect the 5% stock dividend paid to
stockholders in May 1993 and the 33-1/3% stock dividend paid to
stockholders in May 1995. See "Note 1: Summary of Significant
Accounting Policies-Principles of Consolidation," "Note 2: Quasi-
reorganization," "Note 3: Sale of Subsidiary Bank," "Note 4:
Acquisition of Subsidiary Bank," "Note 9: Notes Payable" and "Note
12: Earnings Per Share" in the Company's Consolidated Financial
Statements for other significant changes in financial statement
items.
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance sheet information:
Assets $180,344 $159,860 $160,712 $160,554 $149,052
Loans, net of unearned income 81,927 81,306 69,647 52,967 52,545
Deposits 164,704 146,184 147,785 134,679 137,535
Notes payable 849 930 1,194 2,290 2,610
Stockholders' equity 13,818 11,073 10,845 8,238 6,380
Income statement information:
Total interest income $ 11,962 $ 10,131 $ 9,221 $ 9,715 $ 11,438
Net interest income 6,653 6,679 6,045 5,639 5,188
Income before extraordinary item and
cumulative effect of accounting change 1,132 450 1,029 839 224
Extraordinary item 0 0 0 192 0
Cumulative effect of accounting change 0 0 200 0 0
Net income 1,132 450 1,229 1,031 224
Primary earnings per common share
available to common stockholders:
Income before extraordinary item and
cumulative effective of accounting change $ 1.02 $ 0.36 $ 0.92 $ 0.72 $ 0.13
Extraordinary item 0.00 0.00 0.00 0.19 0.00
Cumulative effect of accounting change 0.00 0.00 0.19 0.00 0.00
-------- -------- -------- -------- --------
Net income $ 1.02 $ 0.36 $ 1.11 $ 0.91 $ 0.13
======== ======== ======== ======== ========
Fully diluted earnings per common share
available to common stockholders:
Income before extraordinary item and
cumulative effect of accounting change $ 0.84 $ 0.33 $ 0.76 $ 0.60 $ 0.13
Extraordinary item 0.00 0.00 0.00 0.14 0.00
Cumulative effect of accounting change 0.00 0.00 0.15 0.00 0.00
-------- -------- -------- -------- --------
Net income $ 0.84 $ 0.33 $ 0.91 $ 0.74 $ 0.13
======== ======== ======== ======== ========
Cash dividends per common share $ 0.11 $ 0.07 $ 0.00 $ 0.00 $ 0.00
======== ======== ======== ======== ========
</TABLE>
31
<PAGE>
MARKET INFORMATION
Since September 12, 1995, the Company's Common Stock has
traded on the American Stock Exchange (the "AMEX") under the symbol
"IBK." Prior to September 12, 1995, the Common Stock traded on the
Nasdaq Small-Cap Market.
The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock as quoted on the
AMEX and Nasdaq Small-Cap Market and the amount of cash dividends
paid per share, adjusted for the 33-1/3% stock dividend paid to
stockholders in May 1995.
<TABLE>
<CAPTION>
Cash
Dividends
High Low Per Share
----- --- ---------
<S> <C> <C> <C>
1994
----
First Quarter $ 6-3/4 $6 $ 0
Second Quarter 7-1/8 6-1/8 0.0225
Third Quarter 7-1/8 6-3/8 0.0225
Fourth Quarter 6-3/4 5-3/4 0.0225
1995
----
First Quarter 6 5-1/4 0.0225
Second Quarter 7-1/2 5-1/4 0.03
Third Quarter 11-1/4 7-1/4 0.03
Fourth Quarter 10-7/8 10-1/4 0.03
1996
----
First Quarter (through March 15, 1996) 10-1/2 9-3/4 0.03
</TABLE>
The above quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not necessarily
represent actual transactions.
According to the records of the Company's transfer agent,
there were 1,268 stockholders of record at December 31, 1995.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company
Independent Bankshares, Inc. (the "Company") is a multi-bank
holding company that, at December 31, 1995, owned 100% of
Independent Financial Corp. ("Independent Financial") which, in
turn, owned 100% of First State Bank, National Association,
Abilene, Texas ("First State, N.A., Abilene") and First State Bank,
National Association, Odessa, Texas ("First State, N.A., Odessa")
(collectively, the "Banks"). First State, N.A., Abilene has two
branches in Abilene, one in Stamford, Texas, and one in Winters,
Texas, and First State, N.A., Odessa has two branches in Odessa.
First State, N.A., Abilene, acquired Peoples National Bank,
Winters, Texas ("Peoples National") effective January 1, 1996. The
existing location of Peoples National has subsequently been closed
and merged with and into First State, N.A., Abilene's existing
branch facility in Winters.
General
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
December 31, 1995 and 1994, and results of operations for each of
the three years in the period ended December 31, 1995, after
accounting for the sale and acquisition of the subsidiary banks
noted below and after giving effect to the quasi-reorganization of
the Company effective December 31, 1989. This discussion and
analysis should be read in conjunction with the Company's
Consolidated Financial Statements, notes thereto and other
financial information appearing elsewhere in this annual report.
Acquisition of Subsidiary Bank
During the third quarter of 1993, as a result of its purchase
of $450,000 of stock, the Company acquired control and increased
its ownership of Winters State Bank, Winters, Texas ("Winters
State") from 28.2% to 94.3%. The acquisition was accounted for
under the purchase method of accounting, and the assets and
liabilities of Winters State were recorded at their estimated fair
value. To fund the original stock purchase, the Company obtained
a $450,000 loan from a financial institution in Amarillo, Texas
(the "Amarillo Bank"), which was paid off during 1995. Subsequent
to the date of acquisition, the Company purchased the remaining
minority interests in Winters State.
The operations of Winters State from August 31, 1993 through
December 31, 1993, are included in the Company's Consolidated
Income Statement for the year ended December 31, 1993. Net
interest income of Winters State for the last four months of 1993
was $233,000. Income before federal income taxes of Winters State
for that same period was $14,000. At August 31, 1993, the date of
acquisition, Winters State had $16,316,000 in total assets,
$7,453,000 in total loans, net of unearned income, $15,079,000 in
total deposits and stockholders' equity of $1,142,000.
Results of Operations
General
Net income for the year ended December 31, 1995, amounted to
$1,132,000 ($1.02 primary earnings per common share) compared to
net income of $450,000 ($0.36 primary earnings per common share)
for the year ended December 31, 1994, and net income of $1,229,000
($1.11 primary earnings per common share) for the year ended
December 31, 1993. The results of operations for 1995 included
legal and settlement expenses of $205,000 ($135,000, net of tax),
or $0.13 primary earnings per common share, incurred as a result of
the final settlement of certain litigation. The results of
operations for 1994 were negatively impacted by the accrual of
$900,000 ($594,000, net of tax), or $0.57 primary earnings per
common share, for the reimbursement of certain legal fees,
33
<PAGE>
expenses and settlement costs in connection with the same
litigation. See "Note 15: Commitments and Contingent Liabilities"
to the Company's Consolidated Financial Statements. The results of
operations for 1993 included a $286,000 ($189,000, net of tax)
gain, or $0.18 primary earnings per common share, recognized on the
transfer of the deposits, premises and equipment and certain loans
of a former subsidiary of the Company, Olton State Bank, Olton,
Texas ("Olton State") on January 1, 1993.
The results for 1993 also included income of $200,000, or
$0.19 primary earnings per common share, from the cumulative effect
of a change in accounting for income taxes as a result of the
Company's adoption of Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" ("FAS 109"), effective
January 1, 1993. FAS 109 permits the recognition of deferred tax
assets to a greater extent than previously permitted and requires
companies to adopt the liability method for computing income taxes.
In adopting FAS 109, the Company established a gross deferred tax
asset of $3,190,000, a portion of which related to the Company's
federal tax net operating loss carryforwards and deductible
temporary differences arising prior to the Company's quasi-
reorganization as of December 31, 1989. FAS 109 requires that
consideration be given to establishing a valuation allowance
against such deferred tax assets. The Company established a
valuation allowance of $2,290,000, resulting in a net deferred tax
asset of $900,000. As a result of the quasi-reorganization,
approximately $700,000 of the cumulative effect of the change in
accounting method was credited directly to additional paid-in
capital and $200,000 was credited to income during 1993 as a
cumulative effect of an accounting change.
Two industry measures of the performance by a banking
institution are its return on average assets and return on average
stockholders' equity. Return on average assets ("ROA") measures
net income in relation to average total assets and indicates a
company's ability to employ its resources profitably. During 1995,
the Company's ROA was 0.67%, compared to 0.28% for 1994 and 0.81%
for 1993. Excluding the unusual and extraordinary items noted
above, the Company's ROA for 1995, 1994 and 1993 would have been
0.75%, 0.65% and 0.55%, respectively.
Return on average stockholders' equity ("ROE") is determined
by dividing net income by average stockholders' equity and
indicates how effectively a company can generate net income on the
capital invested by its stockholders. During 1995, the Company's
ROE was 8.99%, compared to 3.98% for 1994 and 12.50% for 1993.
Excluding the unusual and extraordinary items noted above, the
Company's ROE for 1995, 1994 and 1993 would have been 10.06%, 9.24%
and 8.54%, respectively.
Net Interest Income
Net interest income represents the amount by which interest
income on interest-earning assets, including loans and securities,
exceeds interest paid on interest-bearing liabilities, including
deposits and other borrowed funds. Net interest income is the
principal source of the Company's earnings. Interest rate
fluctuations, as well as changes in the amount and type of
interest-earning assets and interest-bearing liabilities, combine
to affect net interest income.
Net interest income amounted to $6,653,000 for 1995, a
decrease of $26,000 or 0.4% from 1994. Net interest income for
1994 was $6,679,000, an increase of $634,000, or 10.5%, from net
interest income of $6,045,000 for 1993. The small decrease in 1995
was due to an increase in average net earning assets (average
interest-earning assets minus average interest-bearing
liabilities), which was offset by a decrease in the Company's net
interest margin. The increase in 1994 was due primarily to a
significant increase in the amount of loans outstanding, which
generally earn a higher rate of interest than securities and
federal funds sold. The net interest margin on a fully taxable-
equivalent basis was 4.29% for 1995, compared to 4.62% for 1994 and
4.37% for 1993. The decrease in the net interest margin in 1995
was a result of a decrease of $7,423,000 in average noninterest-
bearing and interest-bearing demand deposits and an increase of
$15,362,000 in average interest-bearing time deposits, combined
with a rising interest rate environment on such time deposits
during most of 1995. The improvement in the net interest margin in
1994 was a result of the same reasons noted above for the increase
in net interest income.
The quoted national prime interest rate began the year at
8.50%, increased to 9.00% in February, but decreased to 8.75% in
July and to 8.50% in December 1995. At December 31, 1995,
approximately $21,360,000,
34
<PAGE>
or 26.1%, of the Company's total loans, net of unearned income,
were tied to fluctuations in the prime rate. This amount
represented 47.0% of loans, excluding loans to individuals, which
are always fixed rate in nature. Average rates paid for various
types of deposits increased in 1995. For example, the average rate
paid by the Company for certificates of deposit and other time
deposits of $100,000 or more increased to 5.61% during 1995 from
3.78% in 1994. The average rate paid for certificates of deposit
less than $100,000 also increased from 3.62% in 1994 to 5.41% in
1995. Rates on other types of deposits, such as savings accounts,
money market accounts and NOW accounts, increased slightly from an
average of 2.16% in 1994 to an average of 2.35% in 1995. Given the
fact that the Company's interest-bearing liabilities are subject to
repricing faster than its interest-earning assets in the very short
term, a rising interest rate environment normally produces a lower
net interest margin than a falling interest rate environment. As
noted under "Analysis of Financial Condition - Interest Rate
Sensitivity" below, because the Company's interest-bearing demand,
savings and money market deposits are somewhat less rate-sensitive
(as indicated above), the Company's net interest margin does not
necessarily decrease in a rising interest rate environment.
The following table presents the average balance sheets of the
Company for each of the last three fiscal years and indicates the
interest earned or paid on each major category of interest-earning
assets and interest-bearing liabilities on a fully taxable-
equivalent basis, and the average rates earned or paid on each
major category. This analysis details the contribution of
interest-earning assets and the overall impact of the cost of funds
on net interest income.
35
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------
1995 1994 1993
---- ---- ----
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------ ------- -------- ------
ASSETS(1) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income(2) $ 82,302 $ 7,726 9.39% $ 74,727 $ 6,918 9.26% $ 59,767 $5,333 8.92%
Securities(3) 41,846 2,391 5.71 53,986 2,521 4.67 68,409 3,595 5.26
Federal funds sold 31,076 1,847 5.94 15,939 697 4.37 10,171 300 2.95
-------- ------- ----- -------- ------- ---- -------- ------ ----
Total interest-earning assets 155,224 11,964 7.71 144,652 10,136 7.01 138,347 9,228 6.67
-------- ------- ----- -------- ------- ---- -------- ------ ----
Noninterest-earning assets:
Cash and due from banks 7,066 8,060 7,138
Premises and equipment, net 4,211 4,458 4,052
Accrued interest receivable
and other assets 3,817 3,617 3,660
Allowance for possible loan
losses (786) (805) (725)
-------- -------- --------
Total noninterest-earning
assets 14,308 15,330 14,125
-------- -------- --------
Total assets $169,532 $159,982 $152,472
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 53,391 $ 1,257 2.35% $ 59,689 $ 1,288 2.16% $ 57,880 $1,237 2.14%
Time deposits 72,137 3,944 5.47 56,775 2,076 3.66 54,132 1,835 3.39
-------- ------- ----- -------- ------- ---- -------- ------ ----
Total interest-bearing deposits 125,528 5,201 4.14 116,464 3,364 2.89 112,012 3,072 2.74
Notes payable 1,069 108 10.10 1,061 88 8.29 1,260 104 8.25
-------- ------- ----- -------- ------- ---- -------- ------ ----
Total interest-bearing
liabilities 126,597 5,309 4.19 117,525 3,452 2.94 113,272 3,176 2.80
-------- ------- ----- -------- ------- ---- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 29,019 30,144 28,416
Accrued interest payable and
other liabilities 1,322 1,011 942
-------- -------- --------
Total noninterest-bearing
liabilities 30,341 31,155 29,358
-------- -------- --------
Total liabilities 156,938 148,680 142,630
-------- -------- --------
Series A preferred stock 0 0 11
Stockholders' equity 12,594 11,302 9,831
-------- -------- --------
Total liabilities and
stockholders' equity $169,532 $159,982 $152,472
======== ======== ========
Net interest income $ 6,655 $ 6,684 $6,052
======= ======= ======
Interest rate spread(4) 3.52% 4.07% 3.87%
===== ==== ====
Net interest margin(5) 4.29% 4.62% 4.37%
===== ==== ====
______________________________
<FN>
(1) The Average Balance and Interest Income/Expense columns include all
of the balance sheet and income statement accounts of Winters State
beginning August 31, 1993 (the date of acquisition of such bank).
(2) Nonaccrual loans are included in the Average Balance columns and
income recognized on these loans, if any, is included in the
Interest Income/Expense columns. Interest income on loans includes
fees on loans, which are not material in amount.
(3) Nontaxable interest income on securities was adjusted to a taxable
yield assuming a tax rate of 34%.
(4) The interest rate spread is the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(5) The net interest margin is equal to net interest income, on a fully
taxable-equivalent basis, divided by average interest-earning
assets.
</FN>
</TABLE>
36
<PAGE>
The following table presents the changes in the components of
net interest income and identifies the part of each change due to
differences in the average volume of interest-earning assets and
interest-bearing liabilities and the part of each change due to the
average rate on those assets and liabilities. The changes in
interest due to both volume and rate in the table have been
allocated to volume or rate change in proportion to the absolute
amounts of the change in each.
<TABLE>
<CAPTION>
1995 vs 1994 1994 vs 1993 (1)
------------ ----------------
Increase (Decrease) Due To Increase (Decrease) Due To
Changes In: Changes In:
-------------------------- ---------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income $710 $ 98 $ 808 $1,376 $ 209 $1,585
Securities (2) (629) 499 (130) (702) (372) (1,074)
Federal funds sold 834 316 1,150 268 129 397
---- ------ ------ ------ ----- ------
Total interest income 915 913 1,828 942 (34) 908
---- ------ ------ ------ ----- ------
Interest-bearing liabilities:
Deposits:
Demand, savings and money
market deposits (140) 109 (31) 39 12 51
Time deposits 660 1,208 1,868 92 149 241
---- ------ ------ ------ ----- ------
Total deposits 520 1,317 1,837 131 161 292
Notes payable 1 19 20 (17) 1 (16)
---- ------ ------ ------ ----- ------
Total interest expense 521 1,336 1,857 114 162 276
---- ------ ------ ------ ----- ------
Increase (decrease) in net
interest income $394 $ (423) $ (29) $ 828 $(196) $ 632
==== ====== ====== ====== ===== ======
______________________________
<FN>
(1) Income statement items include all of the income statement accounts
of Winters State beginning August 31, 1993 (the date of acquisition of
such bank).
(2) Information with respect to interest income on tax-exempt securities
is provided on a fully taxable-equivalent basis assuming a tax rate of 34%.
</FN>
</TABLE>
Provision for Loan Losses
The amount of the provision for loan losses is based on
periodic (not less than quarterly) evaluations of the loan
portfolio, especially nonperforming and other potential problem
loans. During these evaluations, consideration is given to such
factors as: management's evaluation of specific loans; the level
and composition of nonperforming loans; historical loss experience;
results of examinations by regulatory agencies; an internal asset
review process conducted by the Company that is independent of the
management of the Banks; expectations of future economic conditions
and their impact on particular industries and individual borrowers;
the market value of collateral; the strength of available
guarantees; concentrations of credits; and other judgmental
factors. The provision for loan losses for the year ended December
31, 1995, was $206,000, compared to $147,000 for the year ended
December 31, 1994, which represents an increase of $59,000, or
40.1%. The increase in the provision for loan losses during 1995
was a result of increased repossessions and associated charge-offs
relating to the Company's indirect installment lending program.
The provision for loan losses for the year ended December 31, 1993,
was $154,000. The reduced provisions over the past several years
reflect the general stabilization of the economic conditions in the
Company's primary service area. In addition, the overall quality
of the Company's loan portfolio has improved during that same
period of time, necessitating generally lower provisions.
Noninterest Income
Noninterest income increased $12,000, or 0.8%, from $1,497,000
in 1994 to $1,509,000 in 1995. The amount for 1994 decreased
$387,000, or 20.5%, from $1,884,000 in 1993.
37
<PAGE>
Service charges on deposit accounts and charges for other
types of services are the major source of noninterest income to the
Company. Service charge income decreased $59,000, or 4.8%, from
$1,226,000 in 1994 to $1,167,000 in 1995, primarily due to a
reclassification of income received in relation to printed checks
from service charges to other income. This source of income
increased $145,000, or 13.4%, from $1,081,000 in 1993 to $1,226,000
in 1994. The 1994 increase was a result of an increase in the
average amount of demand deposits at the Banks and the fact that
the operations of Winters State were included in the Consolidated
Income Statement for all of 1994, but only for the last four months
of 1993.
Trust fees from the operation of the trust department of First
State, N.A., Odessa increased $32,000, or 18.9%, from $169,000
during 1994 to $201,000 during 1995 and increased $29,000, or
20.7%, from $140,000 in 1993, to $169,000 in 1994. The respective
increases are due to the growth in assets under management by the
trust department in 1995 and 1994 and to a one-time fee of $24,000
received in 1995 for services performed as executor of an estate.
As noted above, the Company recorded a gain of $286,000 on the
transfer of the various assets and liabilities of Olton State in
January 1993. There were no sales of securities during 1993 or
1995 and $8,000 of securities were sold during 1994. The
securities portfolio had an average maturity of approximately 1.46
years at December 31, 1995, compared to approximately 1.02 years at
December 31, 1994.
Other income is the sum of several small components of other
operating income including safe deposit box rental income and other
sources of miscellaneous income. Other income increased $39,000,
or 38.2% from $102,000 in 1994 to $141,000 in 1995, as a result of
the reclassification of income relating to printed checks noted
above. This increase was offset somewhat by a reduction in
insurance premium income from the sale of single interest insurance
on automobiles securing indirect installment loans. The reduction
in other income in 1994 was primarily due to the reclassification
of certain other charges from other income to service charges in
1994.
Noninterest Expenses
Noninterest expenses decreased $1,110,000, or 15.1%, from
$7,352,000 in 1994 to $6,242,000 in 1995. The amount for 1994 was
up $1,130,000, or 18.2%, from $6,222,000 in 1993. The decrease
from 1994 to 1995 and the increase from 1993 to 1994 was primarily
due to the accrual during 1994 of $900,000 for the reimbursement of
certain legal fees, expenses and settlement costs in connection
with certain litigation. See "Note 15: Commitments and Contingent
Liabilities" to the Company's Consolidated Financial Statements and
"Item 3. Legal Proceedings" in the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
Salaries and employee benefits increased $11,000, or 0.4%,
from $2,838,000 in 1994 to $2,849,000 in 1995. Despite overall
salary increases effective January 1, 1995, salaries and benefits
have been stable due to the ecomonies of scale achieved as a result
of the branching of The First National Bank in Stamford, Stamford,
Texas ("First National"), and Winters State with and into First
State, N.A., Abilene during the fourth quarter of 1994. The amount
for 1994 increased $263,000, or 10.2%, from $2,575,000 in 1993 to
$2,838,000 in 1994. Approximately $195,000, or 74.1%, of the
increase in 1994 was due to the fact that a full year of operations
for Winters State is included in the 1994 amount while only four
months of operations for that bank is included in the 1993 amount.
Equipment expense increased from $641,000 in 1994 to $723,000
in 1995, an increase of $82,000, or 12.8%, and increased $188,000,
or 41.5%, from $453,000 in 1993 to $641,000 in 1994. Equipment
leased to enable the Banks to do their own data processing
internally was the primary cause of the increase. First National
was converted to the new data processing system during the fourth
quarter of 1993 and First State, N.A., Abilene and First State,
N.A., Odessa were converted during the first quarter of 1994. The
Company's third-party data processing contracts expired during the
first five months of 1994. In addition, Winters State performed
its own data processing prior to conversion to the new system in
February 1995.
Net occupancy expense decreased $30,000, or 4.5%, from
$673,000 in 1994 to $643,000 in 1995, primarily due to lower
amounts of depreciation expense as a result of certain fixed assets
whose estimated useful lives have expired. Net occupancy expense
increased $71,000, or 11.8%, from $602,000 in 1993 to $673,000 in
38
<PAGE>
1994. Approximately two-thirds of the increase in 1994 was a
result of the operations of Winters State being included for a full
year in the Company's 1994 Consolidated Income Statement.
Legal fees and expense decreased $863,000, or 71.5%, from
$1,207,000 in 1994 to $344,000 in 1995, and increased $919,000, or
319.1%, from $288,000 in 1993 to the 1994 amount as a result of the
$900,000 accrual in 1994 noted above.
Stationery, printing and supplies expense increased $45,000,
or 19.9%, from $226,000 in 1994 to $271,000 in 1995 due primarily
to an increase in paper costs. Accounting fees decreased $25,000,
or 18.5%, from $135,000 in 1994 to $110,000 in 1995, as a result of
the change in independent public accountants, which was made in
1994. Data processing expense decreased $139,000, or 58.6%, from
$237,000 in 1994 to $98,000 in 1995, directly as a result of the
conversion to an in-house data processing system as noted above.
The Company expects to continue significant savings in the future
in the area of data processing expense.
Federal Deposit Insurance Corporation ("FDIC") insurance
expense decreased $170,000, or 50.6%, from $336,000 in 1994 to
$166,000 in 1995 as a result of a reduction by the FDIC of deposit
insurance rates for banks, which became effective June 1, 1995.
The deposit insurance rate that the Banks pay decreased from $0.23
per $100 of deposits to $0.04 per $100 of deposits.
Net costs applicable to real estate and other repossessed
assets consists of expenses associated with holding and maintaining
various repossessed assets, the net gain or loss on the sales of
such assets, the write-down of the carrying value of the assets and
any rental income on such assets that is credited as a reduction in
such expenses. These expenses decreased $3,000, from $4,000 in net
income in 1994 to $7,000 net income in 1995, as a result of gains
on sales of, and rental income received on, such assets. The
amount of the Company's real estate and other repossessed assets
has continued to decline over the past few years.
Other noninterest expense includes, among many other items,
postage, advertising, insurance, directors' fees, dues and
subscriptions, regulatory examinations, franchise taxes, travel and
entertainment and due from bank account charges. These expenses
decreased $18,000, or 1.7%, from $1,063,000 in 1994 to $1,045,000
in 1995. The decrease was primarily due to savings achieved as a
result of the merger of Winters State and First National into First
State, N.A., Abilene in November 1994.
All of the major categories of noninterest expense, with the
exception of accounting fees, data processing expense and net costs
applicable to real estate and other repossessed assets, increased
from 1993 to 1994, primarily due to the inclusion of a full year's
results of operations of Winters State in the Company's 1994
Consolidated Income Statement.
Federal Income Taxes
The Company effected a quasi-reorganization as of December 31,
1989. A quasi-reorganization is an elective accounting procedure
under Generally Accepted Accounting Principles ("GAAP") in which
assets and liabilities of the Company were restated to fair value
and the Company's accumulated deficit was reduced to zero. As a
result of this transaction, the Company's net operating loss
carryforwards existing at December 31, 1989, and utilized
subsequent to the quasi-reorganization date will not be credited to
future income. For periods prior to January 1, 1995, the tax
effect of the utilization of the Company's net operating loss
carryforwards was credited directly to additional paid-in capital.
For periods subsequent to December 31, 1994, the tax effect of such
utilization has been and will be credited against the Company's
gross deferred tax asset. The Company accrued $582,000, $227,000
and $524,000 in federal income taxes in 1995, 1994 and 1993,
respectively, and all of these amounts but $35,000 in 1995, $5,000
in 1994 and $31,000 in 1993 were transferred from federal income
taxes payable to reduce the Company's deferred tax asset in 1995
and to increase additional paid-in capital in 1994 and 1993.
Accordingly, the tax effect of utilization of these net operating
losses in 1995, 1994 and 1993 totaled $547,000, $222,000 and
$493,000, respectively. The $35,000, $5,000 and $31,000 not
transferred from federal income taxes payable represents
alternative minimum taxes accrued by the Company for 1995, 1994 and
1993, respectively.
39
<PAGE>
Cumulative Effect of Change in Accounting for Income Taxes
Effective January 1, 1993, the Company adopted FAS 109. FAS
109 permits the recognition of deferred tax assets to a greater
extent than previously permitted and requires companies to adopt
the liability method for computing income taxes. In adopting FAS
109, the Company established a gross deferred tax asset of
$3,190,000, a portion of which relates to the Company's federal tax
net operating loss carryforwards and deductible temporary
differences arising prior to the Company's quasi-reorganization as
of December 31, 1989. FAS 109 requires that consideration be given
to establishing a valuation allowance against such deferred tax
assets. The Company established a valuation allowance of
$2,290,000, resulting in a net deferred tax asset of $900,000. As
a result of the quasi-reorganization, approximately $700,000 of the
cumulative effect of the change in accounting method was credited
directly to additional paid-in capital and $200,000 was credited to
income during 1993 as a cumulative effect of an accounting change.
Impact of Inflation
The effects of inflation on the local economy and on the
Company's operating results have been relatively modest for the
past several years. Because substantially all of the Company's
assets and liabilities are monetary in nature, such as cash,
securities, loans and deposits, their values are less sensitive to
the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The
Company attempts to control the impact of interest rate
fluctuations by managing the relationship between its interest rate
sensitive assets and liabilities. See "Analysis of Financial
Condition - Interest Rate Sensitivity" below.
Analysis of Financial Condition
Assets
Total assets increased $20,484,000, or 12.8%, from
$159,860,000 at December 31, 1994, to $180,344,000 at December 31,
1995, primarily due to the growth in deposits at the Banks in 1995.
Total assets of the Company decreased $852,000, or 0.5%, from
$160,712,000 at December 31, 1993, to $159,860,000 at December 31,
1994. The slight decrease during 1994 was due to a decrease in
deposits at the Company's Stamford and Winters branch locations,
which was partially offset by deposit growth at the Abilene and
Odessa locations.
Cash and Cash Equivalents
At December 31, 1995, cash and cash equivalents were
$34,759,000, a decrease of $4,005,000, or 10.3%, from the December
31, 1994, balance of $38,764,000, which represented an increase of
$19,496,000, or 101.2%, over the December 31, 1993, balance of
$19,268,000. At December 31, 1995, the Company had $26,200,000 in
federal funds sold, down from $31,200,000 at December 31, 1994, due
to an increased amount of funds being invested in investment
securities. Cash and cash equivalents averaged $38,142,000,
$23,999,000 and $17,309,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
Securities
Securities increased $22,602,000, or 67.9%, from $33,305,000
at December 31, 1994, to $55,907,000 at December 31, 1995. The
increase in 1995 was due primarily to an increase in deposits,
which were used to purchase investment securities. The December
31, 1994, balance decreased $31,396,000, or 48.5%, from the
December 31, 1993, balance of $64,701,000. The decline in 1994 was
attributed to the fact that the Banks had collectively increased
the amount of loans outstanding and the Company had decided to
invest temporarily in federal funds sold.
The board of directors of each Bank reviews all securities
transactions monthly and the securities portfolio periodically.
The Company's current investment policy provides for the purchase
of U.S. Treasury securities and federal agency securities having
maturities of five years or less and for the purchase of state,
county and municipal agency's securities with maximum maturities of
10 years. The Company's policy is to maintain a securities
portfolio with a mixture of securities classified as held-to-
maturity and available-for-sale with staggered maturities to meet
its overall liquidity needs. Municipal securities must be rated A
or better. Certain school district issues,
40
<PAGE>
however, are acceptable with a Baa rating. Securities totaling
$16,746,000 are classified as available-for-sale and are carried at
fair value at December 31, 1995. Securities totaling $39,161,000
are classified as held-to-maturity and are carried at amortized
cost. During the fourth quarter of 1995, the Company transferred
$160,000 of mortgage-backed securities from held-to-maturity
securities to available-for-sale securities. The decision to sell
securities classified as available-for-sale is based upon
management's assessment of changes in economic or financial market
conditions.
Certain of the Company's securities are pledged to secure
public and trust fund deposits and for other purposes required or
permitted by law. At December 31, 1995, the book value of U.S.
Government and other securities so pledged amounted to $6,423,000,
or 11.5% of the total securities portfolio.
The following table summarizes the amounts and the
distribution of the Company's investment securities held at the
dates indicated:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $32,297 57.8% $31,441 94.4% $55,664 86.0%
Obligations of other U.S.
Government agencies and
corporations 23,021 41.2 1,154 3.5 8,179 12.6
Mortgage-backed securities 146 0.2 177 0.5 300 0.5
Obligations of states and
political subdivisions 0 -- 90 0.3 130 0.2
Other securities 443 0.8 443 1.3 428 0.7
------- ----- ------- ----- ------- -----
Total securities $55,907 100.0% $33,305 100.0% $64,701 100.0%
======= ===== ======= ===== ======= =====
Total market value $56,132 $32,991 $64,856
======= ======= =======
</TABLE>
The market value of held-to-maturity securities is usually
different from the reported carrying value of such securities due
to interest rate fluctuations that cause market valuations to
change.
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at December 31, 1995. The yield has been computed by
relating the forward income stream on the securities, plus or minus
the anticipated amortization of premium or accretion of discount,
to the book value of the securities. The book value of available-
for-sale securities is their fair value. The book value of held-
to-maturity securities is their cost, adjusted for previous
amortization or accretion. The restatement of the yields on tax-
exempt securities to a fully taxable-equivalent basis has been
computed assuming a tax rate of 34%.
41
<PAGE>
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at December 31, 1995 Amount Value Value Yield
- -------------------------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $16,250 $16,313 $16,320 5.59%
After one but within five years 16,000 15,984 16,068 5.95
------- ------- ------- ----
Total U.S. Treasury securities 32,250 32,297 32,388 5.77
------- ------- ------- ----
Obligations of other U.S. Government
agencies and corporations:
After one but within five years 23,000 23,007 23,139 6.60
------- ------- ------- ----
Total obligations of other U.S.
government agencies and corporations 23,000 23,007 23,139 6.60
------- ------- ------- ----
Mortgage-backed securities 158 160 160 9.40
------- ------- ------- ----
Other securities:
After one but within five years 5 5 5 5.50
After ten years 438 438 438 3.56
------- ------- ------- ----
Total other securities 443 443 443 3.59
------- ------- ------- ----
Total securities $55,851 $55,907 $56,130 6.10%
======= ======= ======= ====
</TABLE>
Loan Portfolio
Total loans, net of unearned income, increased $621,000, or
0.8%, from $81,306,000 at December 31, 1994, to $81,927,000 at
December 31, 1995. The December 31, 1994, amount is an increase of
$11,659,000, or 16.7%, from $69,647,000 at December 31, 1993. The
increase during 1995 was a result of an increase in commercial and
industrial loans, which was partially offset by decreases in loans
to individuals and other loans. The increase in 1994 was due to
primarily to an increase in loans to individuals, principally in
indirect installment loans.
The Banks primarily make installment loans to individuals and
commercial loans to small to medium-sized businesses and
professionals. The Banks offer a variety of commercial lending
products including revolving lines of credit, letters of credit,
working capital loans and loans to finance accounts receivable,
inventory and equipment. Typically, the Banks' commercial loans
have floating rates of interest, are for varying terms (generally
not exceeding five years), are personally guaranteed by the
borrower and are collateralized by accounts receivable, inventory
or other business assets.
Due to diminished loan demand in most areas, during the second
quarter of 1992, First State, N.A., Odessa instituted an
installment loan program whereby it began to purchase automobile
loans from automobile dealerships in the Abilene and
Odessa/Midland, Texas areas. Under this program, an automobile
dealership will agree to make a loan to a prospective customer to
finance the purchase of a new or used automobile. The different
financial institutions that have a pre-established relationship
with the particular dealership review the transaction, including
the credit history of the prospective borrower, and decide if they
would agree to purchase the loan from the dealership and, if so, at
what rate of interest. The dealership selects the financial
institution to which it decides to sell the loan. The financial
institution purchasing the loan has a direct loan to the borrower
collateralized by the automobile, and the dealership realizes a
profit based on the difference between the interest rate quoted to
the buyer by the dealership and the interest rate at which the loan
is purchased by the financial institution. During the second
quarter of 1993, First State, N.A., Abilene began a similar
indirect installment loan program. At December 31, 1995 and 1994,
the Company had approximately $30,206,000 and $29,402,000 net of
unearned income, respectively, of this type of loan outstanding.
42
<PAGE>
The following table presents the Company's loan balances at
the dates indicated separated by loan type:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993 1992(1) 1991
---- ---- ---- ------- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans to individuals $39,868 $43,113 $28,538 $17,718 $12,729
Real estate loans 23,265 22,760 22,658 16,535 16,690
Commercial and industrial loans 19,510 16,702 16,723 16,221 17,533
Other loans 2,638 2,943 4,322 3,767 5,878
------- ------- ------- ------- -------
Total loans 85,281 85,518 72,241 54,241 52,830
Less unearned income 3,354 4,212 2,594 1,274 285
------- ------- ------- ------- -------
Loans, net of unearned income $81,927 $81,306 $69,647 $52,967 $52,545
======= ======= ======= ======= =======
______________________________
<FN>
(1) Balances at December 31, 1992, do not include the loans of
Olton State sold as of January 1, 1993.
</FN>
</TABLE>
Loan concentrations are considered to exist when there are
amounts loaned to a multiple number of borrowers engaged in similar
activities that would cause them to be similarly impacted by
economic or other conditions. The Company had no concentrations of
loans at December 31, 1995, except for those described above. The
Banks had no loans outstanding to foreign countries or borrowers
headquartered in foreign countries at December 31, 1995.
Management of each Bank may renew loans at maturity when
requested by a customer whose financial strength appears to support
such renewal or when such renewal appears to be in the Company's
best interest. The Company requires payment of accrued interest in
such instances and may adjust the rate of interest, require a
principal reduction or modify other terms of the loan at the time
of renewal.
The following table presents the distribution of the maturity
of the Company's loans and the interest rate sensitivity of those
loans, excluding loans to individuals, at December 31, 1995. The
table also presents the portion of loans that have fixed interest
rates or interest rates that fluctuate over the life of the loans
in accordance with changes in the interest rate environment as
represented by the prime rate.
<TABLE>
<CAPTION>
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
-------- ------ ----- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans $ 2,324 $15,916 $5,025 $23,265
Commercial and industrial loans 6,683 10,415 2,412 19,510
Other loans 1,742 314 582 2,638
------- ------- ------ -------
Total loans $10,749 $26,645 $8,019 $45,413
======= ======= ====== =======
With fixed interest rates $ 2,004 $17,497 $4,552 $24,053
With variable interest rates 8,745 9,148 3,467 21,360
------- ------- ------ -------
Total loans $10,749 $26,645 $8,019 $45,413
======= ======= ====== =======
</TABLE>
Allowance for Possible Loan Losses
Implicit in the Company's lending activities is the fact that
loan losses will be experienced and that the risk of loss will vary
with the type of loan being made and the creditworthiness of the
borrower over the term of the loan. To reflect the currently
perceived risk of loss associated with the Company's loan
portfolio, additions are made to the Company's allowance for
possible loan losses (the "allowance"). The allowance is created
by direct charges against income (the "provision" for loan losses),
and the allowance is available to absorb possible loan losses. See
"Results of Operations - Provision for Loan Losses" above.
43
<PAGE>
The amount of the allowance equals the cumulative total of the
provisions made from time to time, reduced by loan charge-offs and
increased by recoveries of loans previously charged off. The
Company's allowance was $759,000, or 0.93% of loans, net of
unearned income, at December 31, 1995, compared to $817,000, or
1.00% of loans, net of unearned income, at December 31, 1994, and
$896,000, or 1.29% of loans, net of unearned income, at December
31, 1993. The reduction in the allowance is primarily due to the
improvement in the overall credit quality of the Company's loan
portfolio.
Credit and loan decisions are made by management and the board
of directors of each Bank in conformity with loan policies
established by the board of directors of the Company. The
Company's practice is to charge off any loan or portion of a loan
when the loan is determined by management to be uncollectible due
to the borrower's failure to meet repayment terms, the borrower's
deteriorating or deteriorated financial condition, the depreciation
of the underlying collateral, the loan's classification as a loss
by regulatory examiners or for other reasons. The Company charged
off $376,000 in loans during 1995. Charge-offs for 1995 were
concentrated in the following categories: loans to individuals -
$297,000, or 79.0%, and real estate - $72,000, or 19.1%. Charge-
offs on three loans totaled $57,000, or 15.2%, of total charge-
offs. The remainder of loan charge-offs were spread among numerous
loans, and no other charge-off to any one single borrower during
1995 exceeded $8,000. Recoveries during 1995 were $112,000 and
were concentrated in the following categories: commercial and
industrial - $52,000, or 46.4%, and loans to individuals - $43,000,
or 38.4%. Recoveries of $49,000 on six commercial and industrial
loans, $7,000 on one loan to an individual and $15,000 on one other
loan accounted for 63.4% of total recoveries during 1995.
The following table presents the provisions, loans charged off
and recoveries of loans previously charged off, the amount of the
allowance, average loans outstanding and certain pertinent ratios
for the last five years.
<TABLE>
<CAPTION>
1995 1994 1993(1) 1992(1) 1991(1)
---- ---- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Analysis of allowance for
possible loan losses:
Balance at January 1 $ 817 $ 896 $ 617 $ 669 $ 1,317
Provision for loan losses 206 147 154 185 139
Acquisition of subsidiary 0 0 233 0 0
------- ------- ------- ------- -------
1,023 1,043 1,004 854 1,456
------- ------- ------- ------- -------
Loans charged off:
Loans to individuals 297 150 88 40 94
Real estate loans 72 119 68 179 44
Commercial and industrial loans 7 32 69 114 800
Other loans 0 77 16 311 28
------- ------- ------- ------- -------
Total charge-offs 376 378 241 644 966
------- ------- ------- ------- -------
Recoveries of loans previously
charged off:
Loans to individuals 43 45 28 11 25
Real estate loans 2 0 4 56 46
Commercial and industrial loans 52 48 84 59 90
Other loans 15 59 17 281 18
------- ------- ------- ------- -------
Total recoveries 112 152 133 407 179
------- ------- ------- ------- -------
Net loans charged off 264 226 108 237 787
------- ------- ------- ------- -------
Balance at December 31 $ 759 $ 817 $ 896 $ 617 $ 669
======= ======= ======= ======= =======
Average loans outstanding,
net of unearned income $82,302 $74,727 $59,767 $50,507 $55,091
======= ======= ======= ======= =======
44
<PAGE>
Ratio of net loan charge-offs
to average loans, net of
unearned income 0.32% 0.30% 0.18% 0.47% 1.43%
Ratio of allowance for possible
loan losses to total loans,
net of unearned income, at
December 31 0.93 1.00 1.29 1.16 1.27
______________________________
<FN>
(1) Average loans, net of unearned income, for 1993, 1992 and 1991
include the average loans, net of unearned income, of Winters
State from August 31, 1993, through December 31, 1993, and of
Olton State from January 1, 1991, through June 30, 1992.
</FN>
</TABLE>
In the latter half of the 1980's, there was a downward trend
in the market value of collateral securing real estate loans and
commercial and industrial loans. Foreclosures on defaulted loans
resulted in the Company acquiring real estate and other repossessed
assets. Foreclosures have continued to occur, although recently at
a lower rate, and the amount of real estate and other repossessed
assets being carried on the Company's books, although decreasing,
is still significant. Accordingly, the Company incurs other
expenses, specifically net costs applicable to real estate and
other repossessed assets, in maintaining, insuring and selling such
assets. The Banks attempt to convert nonperforming loans into
interest-earning assets, although usually at a lower dollar amount
than the face value of such loans, either through liquidation of
the collateral securing the loan or through intensified collection
efforts.
As the economy has recovered and stabilized, there has been a
steady reduction in total loan losses and in the amount of the
provision necessary to maintain an adequate balance in the
allowance. This reflects not only the loan loss trend, but
management's assessment of the continued reduction of credit risks
associated with the loan portfolio.
The amount of the allowance is established by management based
upon estimated risks inherent in the existing loan portfolio.
Management reviews the loan portfolio on a continuing basis to
evaluate potential problems. This review encompasses management's
estimate of current economic conditions and the potential impact on
various industries, prior loan loss experience and financial
conditions of individual borrowers. Loans that have been
specifically identified as nonperforming or potential problem loans
are reviewed on at least a quarterly basis, and management
critically evaluates the prospect of ultimate losses arising from
such loans, based on the borrower's financial condition and the
value of available collateral. When a risk can be specifically
quantified for a loan, that amount is specifically allocated in the
allowance. In addition, the Company allocates the allowance based
upon the historical loan loss experience of the different types of
loans. Despite such allocation, both the allocated and unallocated
portions of the allowance are available for charge-offs of all
loans.
On January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan" ("FAS 114"). In accordance with FAS 114, any
change in the present value of such loans will be recognized as an
adjustment to the Company's allowance.
45
<PAGE>
The following table shows the allocations in the allowance and
the respective percentages of each loan category to total loans at
year-end for each of the past five years.
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993
---- ---- ----
Percent of Percent of Percent of
Amount of Loans by Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category to Allowance Category to
Allocated Loans, Net Allocated Loans, Net Allocated Loans, Net
to of Unearned to of Unearned to of Unearned
Category Income Category Income Category Income
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals $136 44.6% $207 47.8% $178 37.3%
Real estate loans 197 28.4 165 28.0 272 32.5
Commercial and industrial loans 96 23.8 122 20.5 212 24.0
Other loans 59 3.2 68 3.7 108 6.2
---- ----- ---- ----- ---- -----
Total allocated 488 100.0% 562 100.0% 770 100.0%
===== ===== =====
Unallocated 271 255 126
---- ---- ----
Total allowance for possible
loan losses $759 $817 $896
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
1992(1) 1991
------- ----
Percent of Percent of
Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category to
Allocated Loans, Net Allocated Loans, Net
to of Unearned to of Unearned
Category Income Category Income
--------- ------------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans to individuals $101 31.0% $ 18 23.7%
Real estate loans 142 31.2 123 31.8
Commercial and industrial loans 142 30.7 170 33.4
Other loans 53 7.1 27 11.1
---- ----- ---- -----
Total allocated 438 100.0% 338 100.0%
===== =====
Unallocated 179 331
---- ----
Total allowance for possible
loan losses $617 $669
==== ====
______________________________
<FN>
(1) The categories of loans at December 31, 1992, do not include the
loans of Olton State transferred on January 1, 1993.
</FN>
</TABLE>
Loan Review Process
The Company follows a loan review program to evaluate the credit
risk in its loan portfolio. Through the loan review process, the
Banks maintain an internally classified loan list that, along with
the list of nonperforming loans discussed below, helps management
assess the overall quality of the loan portfolio and the adequacy
of the allowance. Loans classified as "substandard" are those
loans with clear and defined weaknesses such as highly leveraged
positions, unfavorable financial ratios, uncertain repayment
sources or poor financial condition, which may jeopardize
recoverability of the loan. Loans classified as "doubtful" are
those loans that have characteristics similar to substandard loans,
but also have an increased risk that a loss may occur or at least
a portion of the loan may require a charge-off if liquidated at
present. Although loans classified as substandard do not duplicate
loans classified as doubtful, both substandard and doubtful loans
may include some loans that are past due at least 90 days, are on
nonaccrual status or have been restructured. Loans classified as
"loss" are those loans that are in the process of being charged
off. At December 31, 1995, substandard loans totaled $1,640,000,
of which $223,000 were loans designated as nonaccrual or 90 days
past due, and there were no doubtful or loss loans.
In addition to the internally classified loans, each Bank also
has a "watch list" of loans that further assists each Bank in
monitoring its loan portfolio. A loan is included on the watch
list if it demonstrates one or more
46
<PAGE>
deficiencies requiring attention in the near term or if the loan's
ratios have weakened to a point where more frequent monitoring is
warranted. These loans do not have all the characteristics of a
classified loan (substandard, doubtful or loss), but do have
weakened elements as compared with those of a satisfactory credit.
The Banks review these loans to assist in assessing the adequacy of
the allowance. Substantially all of the loans on the watch list as
of December 31, 1995, are current and paying in accordance with
loan terms. At December 31, 1995, watch list loans totaled
$779,000 (including $179,000 of loans guaranteed by U.S.
governmental agencies). At such date, none of the watch list loans
were designated as nonaccrual, past due or restructured loans. At
such date, $70,000 of loans not classified and not on the watch
list were designated as 90 days past due or restructured. See
"Nonperforming Assets" below.
Nonperforming Assets
Nonperforming loans consist of nonaccrual, past due and
restructured loans. A past due loan is an accruing loan that is
contractually past due 90 days or more as to principal or interest
payments. Loans on which management does not expect to collect
interest in the normal course of business are placed on nonaccrual
or are restructured. When a loan is placed on nonaccrual, any
interest previously accrued but not yet collected is reversed
against current income unless, in the opinion of management, the
outstanding interest remains collectible. Thereafter, interest is
included in income only to the extent of cash received. A loan is
restored to accrual status when all interest and principal payments
are current and the borrower has demonstrated to management the
ability to make payments of principal and interest as scheduled.
A "troubled debt restructuring" is a restructured loan upon
which interest accrues at a below market rate or upon which certain
principal has been forgiven so as to aid the borrower in the final
repayment of the loan, with any interest previously accrued, but
not yet collected, being reversed against current income. Interest
is accrued based upon the new loan terms.
Nonperforming loans are fully or substantially collateralized
by assets, with any excess of loan balances over collateral values
allocated in the allowance. Assets acquired through foreclosure
are carried at the lower of cost or estimated fair value, net of
estimated costs of disposal, if any. See "Real Estate and Other
Repossessed Assets" below.
The following table lists nonaccrual, past due and
restructured loans and real estate and other repossessed assets at
year-end for each of the past five years.
<TABLE>
<CAPTION>
December 31,
------------
1995 1994 1993 1992(1) 1991
---- ---- ---- ------- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $204 $ 48 $1,646 $ 773 $2,167
Accruing loans contractually
past due over 90 days 23 26 293 17 20
Restructured loans 65 80 195 295 517
Real estate and other repossessed
assets 337 631 803 849 1,140
---- ---- ------ ------ ------
Total nonperforming assets $629 $785 $2,937 $1,934 $3,844
==== ==== ====== ====== ======
_______________________________
<FN>
(1) Balances at December 31, 1992, do not include the assets of Olton
State that were sold on January 1, 1993.
</FN>
</TABLE>
The gross interest income that would have been recorded in
1995 on the Company's nonaccrual loans if such loans had been
current, in accordance with the original terms thereof and had been
outstanding throughout the period or, if shorter, since
origination, was approximately $14,000. No interest was collected
on such loans and recorded as income during 1995.
A potential problem loan is defined as a loan where
information about possible credit problems of the borrower is
known, causing management to have serious doubts as to the ability
of the borrower to comply with the present loan repayment terms and
which may result in the inclusion of such loan in one of the
nonperforming
47
<PAGE>
asset categories. The Company does not believe it has any
potential problem loans other than these reported in the above
table.
Real Estate and Other Repossessed Assets
Real estate and other repossessed assets consist of real
property and other assets unrelated to banking premises or
facilities. Income derived from real estate and other repossessed
assets, if any, is generally less than that which would have been
earned as interest at the original contract rates on the related
loans. At December 31, 1995, 1994 and 1993, real estate and other
repossessed assets had an aggregate book value of $337,000,
$631,000 and $803,000, respectively. Real estate and other
repossessed assets declined $294,000, or 46.6%, during 1995 to
$337,000 at December 31, 1995, primarily as a result of sales of
certain of these assets. Of the December 31, 1995, balance,
$184,000 represents twenty repossessed automobiles, $73,000
represents four commercial buildings and lots and $43,000
represents unimproved lots in a residential subdivision. The
December 31, 1994, balance of $631,000 represented a decrease of
$172,000, or 21.4%, from the December 31, 1993, balance of
$803,000.
Premises and Equipment
Premises and equipment decreased $190,000, or 4.4%, from
$4,345,000 at December 31, 1994, to $4,155,000 at December 31,
1995. The decrease was due to $177,000 in additions made during
1995, which were offset by depreciation expense of $367,000
recorded for 1995. Premises and equipment decreased $183,000, or
4.0%, during 1994, from $4,528,000 at December 31, 1993, to
$4,345,000 at December 31, 1994. The decrease was due to $256,000
in additions made during 1994, primarily in leasehold improvements
at First State, N.A., Odessa, which were offset by depreciation
expense of $397,000 recorded for 1994.
Accrued Interest Receivable
Accrued interest receivable consists of interest that has
accrued on securities and loans, but is not yet payable under the
terms of the related agreements. The balance of accrued interest
receivable increased $549,000, or 58.1%, from $945,000 at December
31, 1994, to $1,494,000 at December 31, 1995. The increase during
1995 was a result of additional funds being invested in securities
on which interest is collected semi-annually, as opposed to federal
funds sold on which interest is collected daily. Of the total
balance at December 31, 1995, $920,000, or 61.6%, was interest
accrued on securities and $574,000, or 38.4%, was interest accrued
on loans. The amounts of accrued interest receivable and
percentages attributable to securities and loans at December 31,
1994, were $385,000, or 40.7%, and $560,000, or 59.3%,
respectively. Total accrued interest receivable declined $376,000,
or 28.5%, from $1,321,000 at December 31, 1993, to $945,000 at
December 31, 1994. The decrease was a result of additional funds
being invested at December 31, 1994, in federal funds sold on which
interest is collected daily.
Other Assets
The most significant component of other assets at December 31,
1995 and 1994, is a net deferred tax asset of $1,937,000 and
$956,000, respectively. The balance of other assets increased
$1,143,000, or 82.8%, to $2,524,000 at December 31, 1995, from
$1,381,000 at December 31, 1994, as a result of a $1,600,000
decrease in the Company's valuation allowance on its deferred tax
asset, which was partially offset by a $547,000 decrease in the
gross deferred tax asset due to the utilization of a portion of the
Company's net operating loss carryforwards. Other assets increased
$41,000, or 3.1%, in 1994, from the December 31, 1993, balance of
$1,340,000. See "Results of Operations - Cumulative Effect of
Change in Accounting for Income Taxes" above.
Deposits
The Banks' lending and investing activities are funded almost
entirely by core deposits, approximately 52.0% of which are demand,
savings and money market deposits at December 31, 1995. Total
deposits increased $18,520,000, or 12.7%, from $146,184,000 at
December 31, 1994, to $164,704,000 at December 31, 1995. The
increase is due to an increase in interest-bearing time deposits at
the Banks, primarily as a result of an increase in rates paid on
such deposits. Total deposits at December 31, 1994, were
$1,601,000, or 1.1%, lower than the $147,785,000 balance at
December 31, 1993. The decrease was due to a decrease in deposits
at the Company's
48
<PAGE>
Stamford and Winters branch locations, which was partially offset
by deposit growth at the Abilene and Odessa locations. The Banks
do not accept brokered deposits.
The following table presents the average amounts of and the
average rate paid on deposits of the Company for each of the last
three years:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993(1)
---- ---- -------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 29,019 --% $ 30,144 --% $ 28,416 --%
Interest-bearing demand, savings
and money market deposits 53,391 2.35 59,689 2.16 57,880 2.14
Time deposits of less
than $100,000 52,452 5.41 43,158 3.62 41,776 3.39
Time deposits of $100,000
or more 19,685 5.61 13,617 3.78 12,356 3.38
-------- ---- -------- ---- -------- ----
Total deposits $154,547 3.36% $146,608 2.29% $140,428 2.19%
======== ==== ======== ==== ======== ====
______________________
<FN>
(1) The average amounts and average rates paid on deposits for the year ended
December 31, 1993, include the averages of Winters State from August 31 (the
date of acquisition) through December 31, 1993.
</FN>
</TABLE>
The maturity distribution of time deposits of $100,000 or more
at December 31, 1995, is presented below:
<TABLE>
<CAPTION>
December 31, 1995
-----------------
(In thousands)
<S> <C>
3 months or less $ 9,220
Over 3 through 6 months 5,983
Over 6 through 12 months 4,925
Over 12 months 3,680
-------
Total time deposits of $100,000 or more $23,808
=======
</TABLE>
The Banks experience relatively limited reliance on time
deposits of $100,000 or more. Time deposits of $100,000 or more
are a more volatile and costly source of funds than other deposits
and are most likely to affect the Company's future earnings because
of interest rate sensitivity. At December 31, 1995, deposits of
$100,000 or more represented 13.2% of the Company's total assets,
compared to 9.1% of the Company's total assets at December 31,
1994.
Notes Payable
The Company's notes payable decreased $81,000, or 8.7%, from
$930,000 at December 31, 1994, to $849,000 at December 31, 1995.
The decrease was a result of regular quarterly principal payments
made on the Term Note (as defined below) and the payoff of the
Acquisition Note (as defined below) during 1995, which were
partially offset by an increase in debt incurred as a result of the
final settlement of certain litigation. See "Note 15: Commitments
and Contingent Liabilities" to the Company's Consolidated Financial
Statements. The December 31, 1994, balance was $264,000, or 22.1%,
less than the December 31, 1993, balance of $1,194,000. The 1994
decrease represents principal payments made by the Company during
1994.
In March 1992, First State, N.A., Abilene purchased a two-
story commercial building across the street from its downtown
facility for a note payable in the amount of $30,000. The balance
of this note, on which principal and interest is payable monthly,
was $17,000 at December 31, 1995.
49
<PAGE>
Accrued Interest Payable
Accrued interest payable consists of interest that has accrued
on deposits and notes payable, but is not yet payable under the
terms of the related agreements. The balance of accrued interest
payable increased $474,000, or 116.2%, from $408,000 at December
31, 1994, to $882,000 at December 31, 1995. The increase was a
result of an increase in the amount of outstanding certificates of
deposit and the rising interest rate environment on certificates of
deposit during the last year. Accrued interest payable increased
$115,000, or 39.2%, from $293,000 at December 31, 1993, to $408,000
at December 31, 1994. The increase during 1994 was a result of a
rising interest rate environment, particularly during the last
quarter of 1994.
Other Liabilities
The most significant components of other liabilities are
amounts accrued for various types of expenses. The balance of
other liabilities decreased $1,174,000, or 92.8%, from $1,265,000
at December 31, 1994, to $91,000 at December 31, 1995. The 1994
balance represented an increase of $670,000, or 112.6%, from the
December 31, 1993, balance of $595,000. The reason for the high
balance at December 31, 1994, was that the Company had accrued
$900,000 for the potential reimbursement of legal fees, expenses
and settlement costs for certain litigation. See "Note 15:
Commitments and Contingent Liabilities" to the Company's
Consolidated Financial Statements.
Interest Rate Sensitivity
Interest rate risk arises when an interest-earning asset
matures or when such asset's rate of interest changes in a time
frame different from that of the supporting interest-bearing
liability. The Company seeks to minimize the difference between
the amount of interest-earning assets and the amount of interest-
bearing liabilities on which interest rates could change in the
same time frame in an attempt to reduce the risk of significant
adverse effects on the Company's net interest income caused by
interest rate changes. The Company does not attempt to match each
interest-earning asset with a specific interest-bearing liability.
Instead, as shown in the table below, it aggregates all of its
interest-earning assets and interest-bearing liabilities to
determine the difference between the two in specific time frames.
This difference is known as the rate-sensitivity gap. A positive
gap indicates that more interest-earning assets than interest-
bearing liabilities mature in a time frame, and a negative gap
indicates the opposite. Maintaining a balanced position will
reduce the risk associated with interest rate changes, but it will
not guarantee a stable interest rate spread since various rates
within a particular time frame may change by differing amounts and
in different directions. Management regularly monitors the
interest sensitivity position and considers this position in its
decisions with regards to interest rates and maturities for
interest-earning assets acquired and interest-bearing liabilities
accepted.
The Company's objective is to maintain a ratio of interest-
sensitive assets to interest-sensitive liabilities that is as
balanced as possible. The following tables show that ratio to be
72.0% at the 90-day interval, 69.0% at the 180-day interval and
62.5% at the 365-day interval at December 31, 1995. Currently, the
Company is in a liability-sensitive position at the three
intervals. During a rising interest rate environment, this
position normally produces a lower net interest margin than in a
falling interest rate environment; however, because the Company had
$52,430,000 of interest-bearing demand, savings and money market
deposits at December 31, 1995, that are somewhat less rate-
sensitive, the Company's net interest margin does not necessarily
decrease in a rising interest rate environment. The interest
sensitivity position is presented as of a point in time and can be
modified to some extent by management as changing conditions
dictate.
50
<PAGE>
The following table shows the interest rate sensitivity
position of the Company at December 31, 1995:
<TABLE>
<CAPTION>
Volumes
Cumulative Volumes Subject to Subject to
Repricing Within Repricing
90 Days 180 Days 365 Days After 1 Year Total
------- ------- -------- ----------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 26,200 $ 26,200 $ 26,200 $ 0 $ 26,200
Securities 6,244 10,548 16,313 39,594 55,907
Loans, net of unearned income 23,888 26,382 31,447 50,480 81,927
-------- -------- -------- ------- --------
Total interest-earning assets 56,332 63,130 73,960 90,074 164,034
-------- -------- -------- ------- --------
Interest-bearing liabilities:
Demand, savings and money market
deposits 52,430 52,430 52,430 0 52,430
Time deposits 25,242 38,453 65,275 13,732 79,007
Notes payable 614 615 616 233 849
-------- -------- -------- ------- --------
Total interest-bearing liabilities 78,286 91,498 118,321 13,965 132,286
-------- -------- -------- ------- --------
Rate-sensitivity gap(1) $(21,954) $(28,368) $(44,361) $76,109 $ 31,748
======== ======== ======== ======= ========
Rate-sensitivity ratio (2) 72.0% 69.0% 62.5%
==== ==== ====
______________________________
<FN>
(1) Rate-sensitive interest-earning assets less rate-sensitive
interest-bearing liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-
sensitive interest-bearing liabilities.
</FN>
</TABLE>
Selected Financial Ratios
The following table presents selected financial ratios for
each of the last three fiscal years:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993(1)
---- ---- -------
<S> <C> <C> <C>
Net income to:
Average assets 0.67% 0.28% 0.81%
Average interest-earning assets 0.73 0.31 0.89
Average stockholders' equity (2) 8.99 3.98 12.50
Dividend payout (3) to:
Net income 10.34 15.56 N/A
Average stockholders' equity 0.93 0.62 N/A
Average stockholders' equity to:
Average total assets (2) 7.43 7.06 6.45
Average loans (4) 15.30 15.12 16.48
Average total deposits 8.15 7.71 7.00
Average interest-earning assets to:
Average total assets 91.56 90.42 90.74
Average total deposits 100.44 98.67 98.52
Average total liabilities 98.91 97.29 97.00
Ratio to total average deposits of:
Average loans (4) 53.25 50.97 42.56
Average noninterest-bearing deposits 18.78 20.56 20.24
Average interest-bearing deposits 81.22 79.44 79.76
Total interest expense to total
interest income 44.38 34.07 34.44
_________________________
<FN>
(1) Averages and income items for 1993 include average balance sheet and
income statement items of Winters State for the period August 31 (the
date of acquisition) through December 31, 1993.
51
<PAGE>
(2) If the Series A Cumulative Convertible Mandatorily Redeemable
Preferred Stock (the "Series A Preferred Stock") had been included
in average stockholders' equity, net income to average stockholders'
equity for the year ended December 31, 1993, would have been 12.49% and
average stockholders' equity to average total assets for the year ended
December 31, 1993, would have been 6.46%.
(3) Dividends for Common Stock only.
(4) Before allowance for possible loan losses.
</FN>
</TABLE>
Liquidity
The Banks
Liquidity with respect to a financial institution is the ability
to meet its short-term needs for cash without suffering an
unfavorable impact on its on-going operations. The need for the
Banks to maintain funds on hand arises principally from maturities
of short-term money market borrowings, deposit withdrawals,
customers' borrowing needs and the maintenance of reserve
requirements. Liquidity with respect to a financial institution
can be met from either assets or liabilities. On the asset side,
the primary sources of liquidity are cash and due from banks,
federal funds sold, maturities of securities and scheduled
repayments and maturities of loans. The Banks maintain adequate
levels of cash and near-cash investments to meet their day-to-day
needs. Cash and due from banks averaged $7,066,000 in 1995 and
$8,060,000 in 1994. These amounts comprised 4.2% and 5.0% of
average total assets during 1995 and 1994, respectively. The
average level of securities and federal funds sold was $72,922,000
during 1995 and $69,925,000 during 1994. Loan demand has increased
over the past two years in the market areas served by First State,
N.A., Abilene and First State, N.A., Odessa. As a result, more
funds have been invested in the lending area. Due to the increase
in deposits in 1995, the level of funds invested in federal funds
sold and investment securities also increased.
No sales of securities were made during 1995 or 1993. During
1994, the Banks sold Federal Reserve Bank stock with a book value
of $8,000 and realized no gain or loss. At December 31, 1995,
$16,313,000, or 29.2%, of the Company's securities portfolio
matured within one year and $39,156,000, or 70.0%, matured after
one but within five years. The Banks' commercial lending
activities are concentrated in loans with maturities of less than
five years and with adjustable interest rates, while their
installment lending activities are concentrated in loans with
maturities of three to five years with fixed interest rates. At
December 31, 1995, approximately $31,447,000, or 38.4%, of the
Company's loan portfolio matured within one year and/or had
adjustable interest rates. See "Analysis of Financial Condition -
Interest Rate Sensitivity" above.
On the liability side, the principal sources of liquidity are
deposits, borrowed funds and the accessibility to money and capital
markets. Customer deposits are by far the largest source of funds.
In 1995, the Company's average deposits were $154,547,000, or
91.2%, of average total assets, compared to $146,608,000, or 91.6%
of average total assets, in 1994. The Company attracts its
deposits primarily from individuals and businesses located within
the market areas served by the Banks. See "Analysis of Financial
Condition - Deposits" above.
The level of nonperforming assets has squeezed interest margins
and has resulted in noninterest expenses from net operating costs
and write-downs associated with nonperforming assets, although the
impact of nonperforming assets was minimal during 1995 and 1994.
In order to improve liquidity, the Banks implemented various cost-
cutting and revenue-generating measures and extended efforts to
reduce nonperforming assets. The liquidity ratios for the Banks at
December 31, 1995, ranged from 46.1% to 63.8%.
The Company
The Company depends on the Banks for liquidity in the form of
cash flow, primarily to meet debt service and dividend requirements
and to cover other operating expenses. This cash flow from
subsidiaries comes from three sources: (1) dividends resulting from
earnings of the Banks, (2) current tax liabilities generated by the
Banks and (3) management and service fees for services performed
for the Banks.
The payment of dividends from the Banks is subject to applicable
law and the scrutiny of regulatory authorities. Dividends paid by
the Banks to Independent Financial in 1995 aggregated $700,000; in
turn, Independent Financial paid dividends to the Company totaling
$905,000 during 1995. Dividends paid by the Banks to Independent
52
<PAGE>
Financial and by Independent Financial to the Company totaled
$625,000 and $450,000, respectively, during 1994. At December 31,
1995, there were approximately $1,208,000 in dividends available
for payment to Independent Financial by the Banks without prior
regulatory approval.
The payment of current tax liabilities generated by the Banks and
management and service fees constituted approximately 40% and 7%,
respectively, of the Company's cash flow during 1995. Pursuant to
a tax-sharing agreement, the Banks pay to the Company an amount
equal to their individual tax liabilities on the accrual method of
federal income tax reporting. The accrual method generates more
timely payments of current tax liabilities by the Banks to the
Company, increasing the regularity of cash flow and shifting the
time value of such funds to the Company. In the event that the
Banks incur losses, the Company may be required to refund tax
liabilities previously collected. Current tax liabilities totaling
$930,000 were paid by the Banks to the Company during 1995,
compared to a total of $676,000 in 1994.
The Banks pay management fees to the Company for services
performed. These services include, but are not limited to,
financial and accounting consultation, attendance at the Banks'
board meetings, audit and loan review services and related
expenses. The Banks paid a total of $175,000 in management fees to
the Company in 1995, compared to $158,000 in 1994. The Company's
fees must be reasonable in relation to the management services
rendered, and each Bank is prohibited from paying management fees
to the Company if the Bank would be undercapitalized after any such
distribution or payment.
The Company had two notes payable to the Amarillo Bank during
1995. The term note (the "Term Note") had an outstanding principal
balance of $498,000 at December 31, 1995. The Term Note has a
maturity of April 15, 1996, and equal principal payments based on
a seven-year amortization, plus accrued interest, are due quarterly
on January 15, April 15, July 15 and October 15. The Term Note
bears interest at the Amarillo Bank's floating base rate plus 1%
(9.5% at December 31, 1995). The Term Note is collateralized by
100% of the stock of First State, N.A., Abilene, and First State,
N.A., Odessa. The second note, which was used for the acquisition
of Winters State (the "Acquisition Note"), had an original
principal balance of $450,000 and matured on August 30, 1994. The
Company paid the Amarillo Bank $150,000 to reduce the outstanding
balance of the Acquisition Note to $300,000 and the maturity date
was extended to August 30, 1997. The Acquisition Note was paid off
during the fourth quarter of 1995. The loan agreement between the
Company and the Amarillo Bank contains certain covenants that,
among other things, restrict the ability of the Company to incur
additional debt, to create liens on its property, to merge or to
consolidate with any other person or entity, to make certain
investments, to purchase or sell assets or to pay cash dividends on
the common stock without the approval of the Amarillo Bank if the
indebtedness due to the Amarillo Bank is $1,000,000 or greater.
The loan agreement also requires the Company and the Banks to meet
certain financial ratios, all of which were met at December 31,
1995 and 1994.
In addition, at December 31, 1995, the Company had notes payable
to one current and two former directors of the Company aggregating
$334,000. The notes have a face amount of $350,000, but were
discounted upon issuance because they bear interest at a below-
market interest rate (6%). The notes are payable in three equal
annual installments beginning March 1, 1996. The notes represent
a portion of the final settlement of certain litigation. See "Note
15: Commitments and Contingent Liabilities" to the Company's
Consolidated Financial Statements.
First State, N.A., Abilene has a $17,000 note payable to an
individual which matures in March 1999. Principal and interest at
7.5% are payable monthly. The note is collateralized by a two-
story commercial building in Abilene, Texas.
Capital Resources
At December 31, 1995, stockholders' equity totaled $13,818,000,
or 7.7% of total assets, compared to $11,073,000, or 6.9% of total
assets, at December 31, 1994.
Bank regulatory authorities in the United States have issued
risk-based capital standards by which all bank holding companies
and banks are evaluated in terms of capital adequacy. These
guidelines relate a banking company's capital to the risk profile
of its assets. The risk-based capital standards require all banks
to have Tier 1 capital of at least 4%, and total capital (Tier 1
and Tier 2) of at least 8%, of risk-weighted assets. Tier 1
capital
53
<PAGE>
includes common stockholders' equity, qualifying perpetual
preferred stock and minority interests in unconsolidated
subsidiaries, reduced by goodwill and net deferred tax assets in
excess of regulatory capital limits. Tier 2 capital may be
comprised of certain other preferred stock, qualifying debt
instruments and all or part of the allowance for possible loan
losses.
Banking regulators have also issued leverage ratio requirements.
The leverage ratio requirement is measured as the ratio of Tier 1
capital to adjusted quarterly average assets. The following table
provides a calculation of the Company's risk-based capital and
leverage ratios and a comparison of the Company's and the Banks'
risk-based capital ratios and leverage ratios to the minimum
regulatory requirements at December 31, 1995.
<TABLE>
<CAPTION>
The Company December 31, 1995
----------- -----------------
(Dollars in thousands)
<S> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized
gain on available-for-sale securities $ 13,060
Preferred stockholders' equity (1) 690
Net deferred tax asset in excess of regulatory
capital limits (2) (171)
--------
Total Tier 1 capital 13,579
--------
Tier 2 capital:
Allowance for possible loan losses (3) 759
--------
Total Tier 2 capital 759
--------
Total capital $ 14,338
========
Risk-weighted assets $ 89,172
========
Adjusted quarterly average assets $177,445
========
</TABLE>
<TABLE>
<CAPTION>
Minimum Actual
Regulatory Ratios for
The Company Requirement(4) December 31, 1995
- ----------- -------------- -----------------
<S> <C> <C>
Tier 1 capital to risk-weighted assets ratio 4.00% 15.23%
Total capital to risk-weighted assets ratio 8.00 16.08
Leverage ratio 3.00 7.65
The Banks
- ---------
Tier 1 capital to risk-weighted assets ratio 4.00% 12.42 - 16.04%
Total capital to risk-weighted assets ratio 8.00 13.27 - 16.91
Leverage ratio 3.00 7.10 - 7.57
_______________________________
<FN>
(1) Limited to 25% of total Tier 1 capital, with any remainder
qualifying as Tier 2 capital.
(2) The amount of the net deferred tax asset in excess of the lesser of
(i) 10% of Tier 1 capital or (ii) the amount of the tax benefit from
utilization of net operating loss carryforwards expected to be
realized within one year.
(3) Limited to 1.25% of risk-weighted assets.
(4) For top-rated banking organizations.
</FN>
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires each federal banking agency to revise its risk-
based capital standards to ensure that those standards take
adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities, as well as
reflect the actual performance and expected risk of loss on multi-
family mortgages. The law also requires each federal banking
agency to specify the levels at which an insured institution would
be considered "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Under the FDIC's regulations,
54
<PAGE>
the Company, First State, N.A., Abilene and First State, N.A.,
Odessa were all "well capitalized" at December 31, 1995.
The Company's ability to generate capital internally through
retention of earnings and access to capital markets is essential
for satisfying the capital guidelines for bank holding companies as
prescribed by the Board of Governors of the Federal Reserve System.
The payment of dividends on the Common Stock and the Series C
Cumulative Convertible Preferred Stock (the "Series C Preferred
Stock") is determined by the Company's board of directors in light
of circumstances and conditions then existing, including the
earnings of the Company and the Banks, funding requirements and
financial condition, applicable loan covenants and applicable laws
and regulations. The Company's ability to pay cash dividends is
restricted by the requirement that it maintain a certain level of
capital as discussed above in accordance with regulatory guidelines
and by the terms of its loan agreement with the Amarillo Bank.
Holders of the Series C Preferred Stock are entitled to receive,
if, as and when declared by the Company's board of directors, out
of funds legally available therefor, quarterly cumulative cash
dividends at the annual rate of 10%. The Federal Reserve Board has
promulgated a policy prohibiting bank holding companies from paying
dividends on common stock unless such bank holding company can pay
such dividends from current earnings. The Federal Reserve Board
has asserted that this policy is also applicable to payment of
dividends on preferred stock. Such an interpretation may limit the
ability of the Company to pay dividends on the Series C Preferred
Stock.
The Company began paying quarterly cash dividends of $0.03 per
share on its Common Stock during the second quarter of 1994. Cash
dividends of $0.03 per share have been paid quarterly since that
time. The Company also paid a 33-1/3% stock dividend on May 31,
1995.
Subsequent Event
First State, N.A., Abilene completed the acquisition of Peoples
National effective January 1, 1996. At December 31, 1995, Peoples
National had total assets of $5,505,000, total loans, net of
unearned income, of $2,767,000, total deposits of $4,958,000 and
stockholders' equity of $525,000. These amounts are not included
in the Consolidated Balance Sheet for the Company at December 31,
1995.
55
<PAGE>
[Independent Bankshares, Inc. Logo]
<PAGE>
[Independent Bankshares, Inc. Logo]
P.O. Box 3296
Abilene, Texas 79604
915-677-5550
