ANNUAL REPORT 1996
[Logo] Independent Bankshares, Inc.
<PAGE>
Banking Locations in West Texas
* Abilene (2 Locations)
* Lubbock
* Odessa (2 Locations)
* San Angelo
* Stamford
* Winters
[GRAPHIC OF TEXAS MAP SHOWING LOCATIONS OF BANKS]
[LOGO] INDEPENDENT BANKSHARES, INC.
<PAGE>
Financial Highlights
For The Year 1996 1995 1994
=================================================================
Net Income $1,422,000 $1,132,000 $450,000
Primary Earnings
Per Common Share 1.25 1.02 0.36
Fully Diluted Earnings
Per Common Share 1.05 0.84 0.33
At Year End 1996 1995 1994
=================================================================
Assets $205,968,000 $180,344,000 $159,860,000
Loans 92,017,000 81,927,000 81,306,000
Deposits 189,575,000 164,704,000 146,184,000
Notes Payable 240,000 849,000 930,000
Stockholders' Equity 14,937,000 13,818,000 11,073,000
Daily Averages 1996 1995 1994
=================================================================
Assets $196,155,000 $169,532,000 $159,982,000
Loans 85,880,000 82,302,000 74,727,000
Deposits 180,005,000 154,547,000 146,608,000
Notes Payable 568,000 1,069,000 1,061,000
Stockholders' Equity 14,375,000 12,594,000 11,302,000
Stock Transfer Agent:
First State Bank, N.A.
547 Chestnut Street
Abilene, Texas 79602
Stock Exchange Listing:
American Stock Exchange (AMEX)
AMEX Trading Symbol: IBK
AMEX Listing: Indep Bksh
<PAGE>
PRESIDENT'S LETTER
We are pleased to report that the Company's net income for the
year ended December 31, 1996, totaled $1,422,000, representing a
$290,000, or 25.6 percent, increase over the year ended December
31, 1995. Total deposits increased $24,871,000, or 15.1 percent,
during 1996.
The deposit increase was enhanced by the purchases of Peoples
National Bank, Winters, Texas, and a branch of a savings bank in
San Angelo, Texas. The Company's decision to pursue these
purchases was based on economies of scale resulting from
consolidation, in the case of Winters, and the desire to enter a
new market, in the case of San Angelo. Both acquisitions were
accomplished with existing capital and with a minimal increase in
expenses to the Company. In fact, total noninterest expenses in
1996 increased only $48,000, or 0.8 percent, over 1995.
The Company's strategy has been, and continues to be, the
creation of shareholder value through the continued expansion of
its West Texas banking franchise. With the January 1997 purchase
of Crown Park Bancshares, Inc. and its subsidiary, Western National
Bank, Lubbock, Texas, the Company is strategically positioned in
Abilene, Lubbock, Odessa and San Angelo, four of the more densely
populated markets in West Texas. We believe that by locating
branches in these cities, we can effectively market our brand of
customized services and increase profitability in the process.
[PHOTOGRAPH OF BRYAN STEPHENSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER]
Crown Park Bancshares, with total deposits of $53,618,000 on
the date of acquisition, increased the Company's total deposits by
28.3 percent over total deposits at December 31, 1996.
Additionally, and of greater importance to the Company, the Crown
Park Bancshares acquisition brings an additional $41,688,000 in
total loans to the Company. These additional loans increased the
Company's total loan portfolio by 45.3 percent over total loans at
December 31, 1996, and add a new dimension to the Company's
asset/liability structure. In prior years, excess funds were
invested in federal funds sold and short-term investment
securities. The addition of Crown Park Bancshares, with its higher
loan to deposit ratio and its proximity to a growing market, gives
the Company an opportunity to substitute higher yielding loans for
these lower-yielding investments. A higher loan to deposit ratio
should translate into increased net interest income and a
corresponding increase in net income.
Because of the deposits acquired during 1996, the Company
concentrated its efforts in finding new lending opportunities.
This effort was
-2-
<PAGE>
directed at small business owners that prefer to borrow money from
a local financial institution that can respond to their loan
requests in a timely manner. Implementing this approach, the
Company successfully increased its loan portfolio $10,090,000, or
12.3 percent, during 1996.
[PHOTOGRAPH OF SCOTT TALIAFERRO
CHAIRMAN OF THE BOARD]
The Company's success in expanding its franchise during 1996
and in the January 1997 acquisition of Crown Park Bancshares
created the need to increase the Company's stockholders' equity
through an underwritten common stock offering. The offering was
completed in conjunction with the Crown Park Bancshares purchase
and was well received. The Company, through its underwriters, sold
an aggregate of 316,250 shares of its common stock and raised
approximately $4.2 million of stockholders' equity. The offering
increased the number of common shares outstanding by 28.6 percent
and increased the number of shareholders by approximately 12
percent. We want to welcome our new shareholders to the family.
[PHOTOGRAPH OF RANDAL CROSSWHITE
SENIOR VICE PRESIDENT & CHIEF FINANCIAL OFFICER]
As a result of the Company's 1996 performance, our common
stock price at December 31, 1996, increased 47.7 percent from the
price at December 31, 1995. Our challenge is to build on this
success and continue our tradition of growth through customer
service in West Texas.
We look forward to these challenges and to the opportunity to
enhance your investment as shareholders. Thank you for your
continued support.
Sincerely,
/s/ Bryan Stephenson
-3-
<PAGE>
Graphic Analysis & Discussion
The Company's January 1997 underwritten common stock offering
provided an opportunity to present the Company's recent operating
history to a large number of potential investors. In preparation
for these presentations, it was necessary to reflect back over
several years and discuss the Company's recent financial
performance. The following graphic presentation gives a pictorial
history of the last five years.
[GRAPH - TOTAL ASSETS - IN MILLIONS]
1992 $161
1993 161
1994 160
1995 180
1996 206
[GRAPH - NONPERFORMING ASSETS/TOTAL ASSETS]
1992 1.20%
1993 1.83
1994 0.49
1995 0.35
1996 0.28
[GRAPH - LOAN DIVERSIFICATION AT DECEMBER 31, 1996]
Consumer 45.3%
Real estate 28.5
Commercial 23.3
Other 2.9
[GRAPH - NET INCOME (BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE) - IN THOUSANDS]
1992 $ 839
1993 1,029
1994 450
1995 1,132
1996 1,422
[GRAPH - NET INCOME PER PRIMARY SHARE(BEFORE EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE) - IN THOUSANDS]
1992 $0.72
1993 0.92
1994 0.36
1995 1.02
1996 1.25
[GRAPH - COMMON STOCK PRICE (PRICE QUOTE ON DECEMBER 31 OF EACH
YEAR ADJUSTED, AS APPLICABLE, FOR THE 5% STOCK DIVIDEND PAID IN MAY
1993 AND THE 33-1/3% STOCK DIVIDEND PAID IN MAY 1995)]
1992 $ 4.29
1993 6.94
1994 6.09
1995 10.75
1996 15.88
For the years 1992, 1993 and 1994, the Company concentrated
its efforts on resolving problems originating from the economic
difficulties of the late 1980's.
By 1995, the Company was beginning to expand its customer base
through advertising and an expanded officer calling program.
During 1996, internal growth was continuing while, at the same
time, the Company completed its purchase of Peoples National Bank,
Winters, Texas, and a branch of a savings bank in San Angelo,
Texas.
The reduction in the Company's ratio of nonperforming assets
to total assets beginning in 1994, and continuing through 1996,
evidenced the Company's conservative loan underwriting standards
and the benefits of loan diversification.
With assets increasing and nonperforming assets decreasing,
the Company's net income was able to increase in four of the last
five years. The one exception occurred in 1994, when the Company's
net income was negatively impacted by litigation expense.
The Company's common stock price has responded to improvements
in net income.
-4-
<PAGE>
Independent Bankshares, Inc.
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
Chairman of the Board
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
Scott Oils, Inc.
James D. Webster, M.D.
Physician
C.G. Whitten
Senior Vice President & General Counsel
Pittencrieff Communications, Inc.
John A. Wright
Banking Consultant
Advisory Directors
- ------------------
Arlas Cavett
Farming and Investments
L.H. Mosley
Mosley Investments, Inc.
J.E. Smith
Investments
First State Bank, N.A.
- ---------------------
Board of Directors
[Photograph of Jim Fitzhugh, Stanley Whisenhunt, Mike Trout, Mike
Jarrett, Virgil Trower, Tim Gorman, Bryan Stephenson, Scott
Taliaferro, Jr., Randal Crosswhite. Not pictured: Jack Bargainer,
M.D.]
-5-
<PAGE>
First State Bank, N.A., Officers
- --------------------------------
Abilene Branches
- ----------------
[Photograph of Kristy Kersh, Jane Bunyard, Kelly Dunlap, Angie
Rodriguez, Jim Fitzhugh, Tommy Thompson, Nancy Chancey, Gary
Yungblut, Ronnie Hobbs, Danielle Baker, Albert Jordan]
Lubbock Branch
- --------------
[Photograph of Kay Hudgens, Sheila Karr, Marilanda Cristan, Patsy
Hamilton, Steve Jones, Jim Vines, Fred Bradley, Mike Phelps, Stacy
Slater]
Odessa Branches
- ---------------
[Photograph of Suzanne Smith, Ronny Haynes, Josie Molinar, Joel
Velasquez, Jeannie Smith, Luther Suell, Carolyn Marshall, Fred
Broussard, Mike Jarrett, Larry Kirk, Tom Snoddy, Herman Wells,
Larry Melton]
San Angelo/Winters Branches
- ---------------------------
[Photograph of Juanita Bredemeyer, Jeanne Hillard, Ruth Grenwelge,
Jim Jordan, Tammy Kaczyk, Theresa Patterson, Jennifer Schulze,
Drake McKinney]
Stamford Branch
- ---------------
[Photograph of Lynda Folsom, Carolene Stovall, Jimmy Parker, Tammy
McLemore, Randy Riley]
-6-
<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, 1996 and 1995, and
the related consolidated income statements, statements of change in
stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. 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.
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, 1996
and 1995, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand, L.L.P.
Fort Worth, Texas
February 3, 1997
-7-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
---- ----
<S> <C> <C>
ASSETS:
Cash and Cash Equivalents:
Cash and Due from Banks $ 11,458,000 $ 8,559,000
Federal Funds Sold 18,500,000 26,200,000
------------- -------------
Total Cash and Cash Equivalents 29,958,000 34,759,000
------------- -------------
Securities (Note 4):
Available-for-sale 27,771,000 16,746,000
Held-to-maturity - Market Value of $47,291,000 for 1996
$39,384,000 for 1995 47,381,000 39,161,000
------------- -------------
Total Securities 75,152,000 55,907,000
------------- -------------
Loans (Note 5):
Total Loans 94,264,000 85,281,000
Less:
Unearned Income on Installment Loans 2,247,000 3,354,000
Allowance for Possible Loan Losses 793,000 759,000
------------- -------------
Net Loans 91,224,000 81,168,000
------------- -------------
Premises and Equipment (Note 6) 4,437,000 4,155,000
Accrued Interest Receivable 1,599,000 1,494,000
Goodwill (Note 3) 957,000 0
Real Estate and Other Repossessed Assets 389,000 337,000
Other Assets 2,252,000 2,524,000
------------- -------------
Total Assets $ 205,968,000 $ 180,344,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 7):
Noninterest-bearing Demand Deposits $ 32,240,000 $ 33,267,000
Interest-bearing Demand Deposits 58,676,000 52,430,000
Interest-bearing Time Deposits 98,659,000 79,007,000
------------- -------------
Total Deposits 189,575,000 164,704,000
Notes Payable (Note 8) 240,000 849,000
Accrued Interest Payable 951,000 882,000
Other Liabilities 265,000 91,000
------------- -------------
Total Liabilities 191,031,000 166,526,000
------------- -------------
Commitments and Contingent Liabilities (Notes 14 and 16)
STOCKHOLDERS' EQUITY (NOTES 10 AND 17):
Preferred Stock - Par Value $10.00; 5,000,000 Shares Authorized:
Series C Preferred Stock - Stated Value $42.00; 50,000 Shares
Designated; 13,478 and 16,436 Shares Issued and Outstanding at
December 31, 1996 and 1995, Respectively 135,000 164,000
Common Stock - Par Value $0.25; 30,000,000 Shares Authorized;
1,104,644 and 1,050,292 Shares Issued and Outstanding
at December 31, 1996 and 1995, Respectively 276,000 263,000
Additional Paid-in Capital 9,891,000 9,875,000
Retained Earnings 4,610,000 3,448,000
Unrealized Gain on Available-for-sale Securities (Note 4) 25,000 68,000
------------- -------------
Total Stockholders' Equity 14,937,000 13,818,000
------------- -------------
Total Liabilities and Stockholders' Equity $ 205,968,000 $ 180,344,000
============= =============
</TABLE>
See accompanying notes.
-8-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Interest and Fees on Loans (Note 5) $ 8,005,000 $ 7,726,000 $ 6,918,000
Interest on Securities 4,504,000 2,389,000 2,516,000
Interest on Federal Funds Sold 1,047,000 1,847,000 697,000
------------- ------------- -------------
Total Interest Income 13,556,000 11,962,000 10,131,000
------------- ------------- -------------
Interest Expense:
Interest on Deposits 6,382,000 5,201,000 3,364,000
Interest on Notes Payable (Note 8) 59,000 108,000 88,000
------------- ------------- -------------
Total Interest Expense 6,441,000 5,309,000 3,452,000
------------- ------------- -------------
Net Interest Income 7,115,000 6,653,000 6,679,000
Provision for Loan Losses (Note 5) 201,000 206,000 147,000
------------- ------------- -------------
Net Interest Income After Provision for Loan Losses 6,914,000 6,447,000 6,532,000
------------- ------------- -------------
Noninterest Income:
Service Charges 1,259,000 1,167,000 1,226,000
Trust Fees 189,000 201,000 169,000
Other Income 103,000 141,000 102,000
------------- ------------- -------------
Total Noninterest Income 1,551,000 1,509,000 1,497,000
------------- ------------- -------------
Noninterest Expenses:
Salaries and Employee Benefits 3,082,000 2,849,000 2,838,000
Net Occupancy Expense 716,000 643,000 673,000
Equipment Expense 663,000 723,000 641,000
Professional Fees (Note 14) 304,000 454,000 1,342,000
Stationery, Printing and Supplies Expense 288,000 271,000 226,000
Net Revenues Applicable to Real Estate and
Other Repossessed Assets (24,000) (7,000) (4,000)
Other Expenses 1,261,000 1,309,000 1,636,000
------------- ------------- -------------
Total Noninterest Expenses 6,290,000 6,242,000 7,352,000
------------- ------------- -------------
Income Before Federal Income Taxes 2,175,000 1,714,000 677,000
Federal Income Taxes (Notes 2 and 9) 753,000 582,000 227,000
------------- ------------- -------------
Net Income $ 1,422,000 $ 1,132,000 $ 450,000
============= ============= =============
Preferred Stock Dividends (Note 10) $ 63,000 $ 70,000 $ 70,000
============= ============= =============
Net Income Available to Common Stockholders (Note 11) $ 1,359,000 $ 1,062,000 $ 380,000
============= ============= =============
Primary Net Income Per Common Share Available to Common
Stockholders (Note 11) $ 1.25 $ 1.02 $ 0.36
============= ============= =============
Fully Diluted Net Income Per Common Share Available to
Common Stockholders (Note 11) $ 1.05 $ 0.84 $ 0.33
============= ============= ==============
</TABLE>
See accompanying notes.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1994 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 10) 321 2,000
Adjustment to Unrealized
Gain (Loss) on Available-
for-sale Securities, Net
of Tax of $154,000 (Note 4) (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 10) 259,371 65,000 (67,000)
Exercise of Stock
Options (Note 10) 9,037 2,000 32,000
Conversion of Series C
Preferred Stock (Note 10) (232) (3,000) 3,803 1,000 2,000
Adjustment to Unrealized
Gain (Loss) on Available-
for-sale Securities, Net
of Tax of $86,000 (Note 4) 168,000
------ -------- --------- -------- ----------- ----------- ----------
Balances--December 31, 1995 16,436 164,000 1,050,292 263,000 9,875,000 3,448,000 68,000
Net Income 1,422,000
Cash Dividends (260,000)
Conversion of Series C Preferred
Stock (Note 10) (2,958) (29,000) 54,352 13,000 16,000
Adjustment to Unrealized
Gain (Loss) on Available-
for-sale Securities, Net of
Tax of $22,000 (Note 4) (43,000)
------ -------- --------- -------- ----------- ----------- ----------
Balances--December 31, 1996 13,478 $135,000 1,104,644 $276,000 $ 9,891,000 $ 4,610,000 $ 25,000
====== ======== ========= ======== =========== =========== ==========
</TABLE>
See accompanying notes.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,422,000 $ 1,132,000 $ 450,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Deferred Federal Income Tax Expense 677,000 547,000 222,000
Depreciation and Amortization 404,000 367,000 397,000
Provision for Loan Losses 201,000 206,000 147,000
Losses on Sales of Investment Securities 10,000 0 0
Gains on Sales of Premises and Equipment 0 (4,000) 0
Losses (Gains) on Sales of Real Estate and Other
Repossessed Assets (50,000) (45,000) 52,000
Writedown of Real Estate and Other Repossessed Assets 21,000 32,000 27,000
Decrease (Increase) in Accrued Interest Receivable (17,000) (549,000) 376,000
Increase in Other Assets (382,000) (176,000) (41,000)
Increase (Decrease) in Accrued Interest Payable (14,000) 474,000 115,000
Increase (Decrease) in Other Liabilities 166,000 (840,000) 670,000
------------- ------------- -------------
Net Cash Provided by Operating Activities 2,438,000 1,144,000 2,415,000
------------- ------------- -------------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities 9,437,000 21,828,000 34,436,000
Proceeds from Maturities of Held-to-maturity Securities 26,461,000 12,930,000 19,428,000
Proceeds from Sale of Available-for-sale Securities 30,000 0 8,000
Proceeds from Sale of Held-to-maturity Securities 2,000,000 0 0
Purchases of Available-for-sale Securities (19,382,000) (21,242,000) (12,873,000)
Purchases of Held-to-maturity Securities (36,680,000) (35,864,000) (9,909,000)
Net Increase in Loans (8,160,000) (1,603,000) (12,361,000)
Proceeds from Sales of Premises and Equipment 94,000 4,000 0
Additions to Premises and Equipment (138,000) (177,000) (214,000)
Proceeds from Sales of Real Estate and Other
Repossessed Assets 754,000 1,025,000 569,000
Cash and Cash Equivalents Held by Peoples National
Bank, Winters, Texas, on January 1, 1996 (Date
of Acquisition), in Excess of Cash Paid for
Purchase of Peoples National Bank 584,000 0 0
Cash and Cash Equivalents Held by Coastal Banc ssb,
San Angelo, Texas, on May 27, 1996 (Date of Acquisition),
in Excess of Cash Paid for Coastal Banc ssb, San Angelo 13,619,000 0 0
------------- ------------- -------------
Net Cash Provided by (Used in) Investing Activities (11,381,000) (23,099,000) 19,084,000
------------- ------------- -------------
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits 5,018,000 18,520,000 (1,601,000)
Proceeds from Notes Payable 0 275,000 0
Repayment of Notes Payable (616,000) (690,000) (264,000)
Net Proceeds from Issuance of Equity Securities 0 34,000 2,000
Payment of Cash Dividends (260,000) (187,000) (140,000)
Cash Paid for Fractional Shares in Stock Dividend 0 (2,000) 0
------------- ------------- --------------
Net Cash Provided by (Used In) Financing Activities 4,142,000 17,950,000 (2,003,000)
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,801,000) (4,005,000) 19,496,000
Cash and Cash Equivalents at Beginning of Year 34,759,000 38,764,000 19,268,000
------------- ------------- -------------
Cash and Cash Equivalents at End of Year $ 29,958,000 $ 34,759,000 $ 38,764,000
============= ============= =============
</TABLE>
See accompanying notes.
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<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------
Independent Bankshares, Inc., a Texas corporation (the
"Company"), is a bank holding company headquartered in Abilene,
Texas. The Company indirectly owns through a Delaware subsidiary,
Independent Financial Corp. ("Independent Financial"), 100% of the
stock of First State Bank, National Association, Abilene, Texas
(the "Bank"). The Bank currently operates full-service banking
locations in the West Texas cities of Abilene (2 locations),
Lubbock (acquired in January 1997), Odessa (2 locations), San
Angelo, Stamford and Winters.
The Company's primary activities are to assist the Bank in the
management and coordination of its financial resources and to
provide capital, business development, long range planning and
public relations for the Bank. The Bank operates under the
day-to-day management of its own officers and board of directors
and formulates its own policies with respect to banking matters.
The principal services provided by the Bank are as follows:
Commercial Services. The Bank provides a full range of
banking services for its commercial customers. Commercial lending
activities include short-term and medium-term loans, revolving
credit arrangements, inventory and accounts receivable financing,
equipment financing and interim and permanent real estate lending.
Other services include cash management programs and federal tax
depository and night depository services.
Consumer Services. The Bank also provides a wide range of
consumer banking services, including checking, savings and money
market accounts, savings programs and installment and personal
loans. The Bank makes automobile and other installment loans
directly to customers, as well as indirectly through automobile
dealers. The Bank makes home improvement and real estate loans and
provides safe deposit services. As a result of sharing
arrangements with the Pulse automated teller machine system
network, the Bank provides 24-hour routine banking services through
automated teller machines ("ATMs"). The Pulse network provides ATM
accessibility throughout the United States.
Trust Services. The Bank provides trust and agency services
to individuals, partnerships and corporations from its offices in
Abilene, Lubbock and Odessa. The trust division also provides
investment management, administration and advisory services for
agency and trust accounts, and acts as trustee for pension and
profit sharing plans.
Basis of Financial Statements
- -----------------------------
The accounting and reporting policies of 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, Independent Financial and the Bank. 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 the Bank. As a
result of the merger, the offices of these two banks became
branches of the Bank. Effective December 30, 1996, another then
existing subsidiary bank, First State Bank, National Association,
Odessa, Texas ("First State, N.A., Odessa"), was merged with and
into the Bank. As a result of the merger, the offices of First
State, N.A., Odessa became branches of the Bank. All references to
First State, N.A., Odessa, Winters State and First National in the
Company's Consolidated Financial Statements are to these banks
prior to the respective mergers.
-12-
<PAGE>
Effective January 28, 1997, the Company acquired Crown Park
Bancshares, Inc. ("Crown Park") and its subsidiary bank, Western
National Bank, Lubbock, Texas ("Western National") in a transaction
accounted for as a purchase. As a result, the Company's
Consolidated Financial Statements do not include any information
for Crown Park or Western National at December 31, 1996. See "Note
20: Subsequent Event."
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.
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 and unfunded loan commitments. 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, 1996, the Company had no impaired loans. At
December 31, 1995, the Company had a total of $100,000 of impaired
loans. There was a related allowance for possible loan losses of
$25,000 at December 31, 1995, 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 years ended December 31, 1996
and 1995, was approximately $50,000 and $125,000, respectively.
There was no interest income recognized on such loans during the
years ended December 31, 1996 or 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.
Goodwill
- --------
Goodwill resulting from acquisitions accounted for using the
purchase method is being amortized on the straight-line method over
a period of fifteen (15) years. Management assesses the
recoverability of goodwill by
-13-
<PAGE>
comparing the goodwill to the undiscounted cash flows expected to
be generated by the acquired banks during the anticipated period of
benefit.
Federal Income Taxes
- --------------------
The Company uses the liability method of accounting for income
taxes as required by Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("FAS 109"). 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.
Real Estate and Other Repossessed Assets
- ----------------------------------------
Real estate and other repossessed assets consist principally
of real estate properties and automobiles 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.
Stock-based Compensation
- ------------------------
In October 1995, the FASB issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). This Statement defines a fair value
based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method
of accounting for all employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost
for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25").
Entities electing to continue to use the method of accounting
specified in Opinion 25 must make pro forma disclosures of net income
and, if presented, earnings per share, as if the fair value method
of accounting defined in FAS 123 had been applied. The Company
adopted FAS 123 on January 1, 1996. Due to the fact that no stock
options were granted during 1995 or 1996, no pro forma disclosures
are required.
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 1995 and 1994 amounts have been reclassified to
conform with the consolidated financial presentation adopted in
1996 and 1995, respectively.
-14-
<PAGE>
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 1996, 1995 and 1994
totaled $697,000, $547,000 and $222,000, respectively.
NOTE 3: BANK ACQUISITIONS
The Bank 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 loans, net of unearned income, of $2,767,000, total deposits
of $4,958,000 and stockholders' equity of $525,000. The Bank paid
$745,000 for the acquisition of Peoples National and, as a result
of such acquisition, recorded $260,000 of goodwill.
The Bank also completed the acquisition of the San Angelo
branch of Coastal Banc ssb ("Coastal Banc - San Angelo") effective
May 27, 1996. On that date, Coastal Banc - San Angelo had total
deposits of $14,895,000 and total loans, net of unearned income, of
$155,000. The Bank paid $760,000 as a premium on the deposits of
Coastal Banc - San Angelo and, as a result of such payment,
recorded $743,000 of goodwill.
A total of $46,000 in goodwill amortization expense was
recorded during 1996.
NOTE 4: SECURITIES
The amortized cost and estimated fair value of available-for-
sale securities at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 27,166,000 $ 76,000 $ (41,000) $ 27,201,000
Mortgage-backed securities 126,000 1,000 0 127,000
Other securities 443,000 0 0 443,000
------------ ------------ ------------ ------------
Total available-for-sale securities $ 27,735,000 $ 77,000 $ (41,000) $ 27,771,000
============ ============ ============ ============
1995
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
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>
-15-
<PAGE>
The amortized cost and estimated fair value of held-to-
maturity securities at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION> 1996
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 7,942,000 $ 25,000 $ 0 $ 7,967,000
Obligations of U.S. Government
agencies and corporations 29,928,000 129,000 (140,000) 29,917,000
Mortgage-backed securities 9,311,000 1,000 (111,000) 9,201,000
Obligations of states and
political subdivisions 200,000 6,000 0 206,000
------------- ------------- ------------- -------------
Total held-to-maturity securities $ 47,381,000 $ 161,000 $ (251,000) $ 47,291,000
============= ============= ============= =============
1995
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
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>
The amortized cost and estimated fair value of securities at
December 31, 1996, 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>
Amortized Estimated
Available-for-sale Securities Cost Fair Value
----------------------------- ------------ ------------
<S> <C> <C>
Due in one year or less $ 16,946,000 $ 17,005,000
Due after one year through five years 10,225,000 10,201,000
Due after ten years 438,000 438,000
------------ ------------
27,609,000 27,644,000
Mortgage-backed securities 126,000 127,000
------------ ------------
Total available-for-sale securities $ 27,735,000 $ 27,771,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
Amortized Estimated
Held-to-maturity Securities Cost Fair Value
--------------------------- ------------ ------------
<S> <C> <C>
Due in one year or less $ 4,942,000 $ 5,004,000
Due after one year through five years 29,880,000 29,877,000
Due after five years through ten years 3,248,000 3,209,000
------------ ------------
38,070,000 38,090,000
Mortgage-backed securities 9,311,000 9,201,000
------------ ------------
Total held-to-maturity securities $ 47,381,000 $ 47,291,000
============ ============
</TABLE>
At December 31, 1996, securities with an amortized cost and
estimated fair value of $10,847,000 and $10,820,000, respectively,
were pledged as collateral for public and trust fund deposits and
for other purposes required or permitted by law. At December 31,
1995, the amortized cost and estimated fair value of pledged
securities were $6,423,000 and $6,482,000, respectively.
During 1996, the Company sold available-for-sale securities
with a book value of $42,000 and recorded a $12,000 loss on such
sale. In addition, the Company sold held-to-maturity securities
with a book value of $1,998,000 approximately thirty (30) days
prior to their scheduled maturity and recorded a $2,000 gain on
such sale.
-16-
<PAGE>
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 5: LOANS
The composition of loans at December 31, 1996 and 1995, was as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Loans to individuals $ 43,927,000 $ 39,868,000
Real estate loans 26,233,000 23,265,000
Commercial and industrial loans 21,478,000 19,510,000
Other loans 2,626,000 2,638,000
------------ ------------
Total loans 94,264,000 85,281,000
Less unearned income 2,247,000 3,354,000
------------ ------------
Total loans, net of unearned income $ 92,017,000 $ 81,927,000
============ ============
</TABLE>
An analysis of nonperforming assets at December 31, 1996 and
1995, is as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Nonaccrual loans $ 82,000 $ 204,000
Accruing loans past due over ninety days 41,000 23,000
Restructured loans 73,000 65,000
Real estate and other repossessed assets 389,000 337,000
------------ ------------
Total nonperforming assets $ 585,000 $ 629,000
============ ============
</TABLE>
The amount of interest income that would have been recorded on
nonaccrual loans for the years ended December 31, 1996, 1995 and
1994, based on the loans' original terms was $17,000, $14,000 and
$26,000, respectively. No interest was collected on such loans and
recorded as income during 1996 or 1995. A total of $38,000 in
interest on nonaccrual loans was actually collected and recorded as
income during the year ended December 31, 1994.
A summary of the transactions in the allowance for possible
loan losses for the years ended December 31, 1996, 1995 and 1994,
is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 759,000 $ 817,000 $ 896,000
Provision for loan losses 201,000 206,000 147,000
Loans charged off (389,000) (376,000) (378,000)
Recoveries of loans charged off 73,000 112,000 152,000
Bank acquisitions 149,000 0 0
----------- ----------- -----------
Balance at end of year $ 793,000 $ 759,000 $ 817,000
=========== =========== ===========
</TABLE>
NOTE 6: PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at
December 31, 1996 and 1995:
1996 1995
----------- -----------
Land $ 928,000 $ 707,000
Buildings and improvements 4,312,000 4,100,000
Furniture and equipment 1,499,000 1,285,000
----------- -----------
6,739,000 6,092,000
Less accumulated depreciation 2,302,000 1,937,000
----------- -----------
Net premises and equipment $ 4,437,000 $ 4,155,000
=========== ===========
-17-
<PAGE>
NOTE 7: DEPOSITS
At December 31, 1996 and 1995, interest-bearing time deposits
of $100,000 or more were $29,627,000 and $23,808,000, respectively.
At December 31, 1996, the scheduled maturities of interest-
bearing time deposits was as follows:
Interest-bearing
Time Deposits
----------------
1997 $ 88,778,000
1998 6,439,000
1999 1,722,000
2000 989,000
2001 731,000
----------------
Total interest-bearing
time deposits $ 98,659,000
================
NOTE 8: NOTES PAYABLE
The Company had a note payable to a financial institution in
Amarillo, Texas (the "Amarillo Bank"). This note (the "Term Note")
had a maturity of April 15, 1996. On April 15, 1996, the Company
paid the Amarillo Bank $100,000 to reduce the outstanding principal
balance to $371,000 and the maturity was extended to April 15,
1999. Equal principal payments of $31,000, plus accrued interest,
were due quarterly on January 15, April 15, July 15 and October 15.
The Term Note bore interest at the Amarillo Bank's floating base
rate plus 1% and was collateralized by 100% of the stock of the
Bank, and First State, N.A., Odessa. On October 15, 1996, the
Company paid off the remaining principal balance of the Term Note.
In addition, at December 31, 1996, the Company had notes
payable to one current and two former directors of the Company
aggregating $228,000. The notes had an original face amount of
$350,000 but were discounted upon issuance because they bear
interest at a below-market interest rate (6%). The notes are
payable in three equal annual installments, plus accrued interest.
The first installment of $117,000 was made on March 1, 1996. The
notes represent a portion of the final settlement of certain
litigation. See "Note 14: Commitments and Contingent
Liabilities."
At December 31, 1996, the Bank had a $12,000 note payable to
an individual which matures in March 1999. Principal, plus
interest at 7.5%, is payable monthly. The note is collateralized
by a two-story commercial building in Abilene, Texas.
NOTE 9: FEDERAL INCOME TAXES
Significant components of the Company's deferred tax assets
and liabilities at December 31, 1996 and 1995, were as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,112,000 $ 1,655,000
Allowance for possible loan losses 278,000 225,000
Tax credit carryforwards 549,000 142,000
Director indemnification 79,000 119,000
Real estate and other repossessed assets 69,000 82,000
Other, net 3,000 8,000
------------ ------------
Total gross deferred tax assets 2,090,000 2,231,000
Less valuation allowance for deferred tax assets (389,000) (227,000)
------------ ------------
Net deferred tax assets 1,701,000 2,004,000
------------ ------------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities (14,000) (37,000)
Depreciation and amortization (23,000) (30,000)
------------ ------------
Total gross deferred tax liabilities (37,000) (67,000)
------------ ------------
Net deferred tax asset $ 1,664,000 $ 1,937,000
============ ============
</TABLE>
-18-
<PAGE>
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
during the year ended December 31, 1994. 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 deferred tax asset related to the
Winters State net operating loss carryforwards which will not be
utilized. As a result of the acquisition of Peoples National in
1996, the Company increased its gross deferred tax asset and the
related valuation allowance by $162,000. The Company may reduce or
increase its valuation allowance depending on changes in the
expectation of future earnings and other circumstances.
At December 31, 1996, the Company had available net operating
loss carryforwards and tax credit carryforwards to reduce future
federal income taxes. These carryforwards expire approximately as
follows:
Net
Operating
Losses Tax Credits
----------- -----------
1997-2001 $ 0 $ 33,000
2002-2006 238,000 0
2007-2011 3,031,000 516,000
----------- -----------
Total carryforwards $ 3,269,000 $ 549,000
=========== ===========
Included in the $3,269,000 of net operating loss carryforwards
is approximately $407,000 acquired as part of the Winters State
acquisition and $409,000 acquired as part of the Peoples National
acquisition. For federal income tax purposes, due to certain
change of ownership requirements of the Internal Revenue Code,
utilization of the Winters State and Peoples National net operating
loss carryforwards are limited to approximately $37,000 per year
and $42,000 per year, respectively. If the full amount of these
limitations 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 2010.
The comprehensive provisions for federal income taxes for the
years ended December 31, 1996, 1995 and 1994, consist of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current tax provision $ 76,000 $ 35,000 $ 5,000
Deferred tax provision 677,000 547,000 222,000
----------- ----------- -----------
Provision for tax expense charged to
results of operations 753,000 582,000 227,000
Tax (benefit) on adjustment to unrealized
gain/loss on available-for-sale securities (23,000) 86,000 (154,000)
----------- ----------- -----------
Comprehensive provision for
federal income taxes $ 730,000 $ 668,000 $ 73,000
=========== =========== ===========
</TABLE>
NOTE 10: 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 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, 1994 and 1995, after adjustments for the two
stock dividends noted above, options for 428 and 9,037 shares,
respectively, were exercised and options for 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%
-19-
<PAGE>
stock dividend paid to stockholders in May 1995. No options were
exercised or expired during the years ended December 31, 1994, 1995
and 1996.
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 and
2,958 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, and 54,352 shares
of Common Stock, during 1995 and 1996, respectively. 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 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, 1996, of the number
of shares of Common Stock reserved for issuance upon exercise of
options or conversion of preferred stock and the related exercise
or conversion price per share, adjusted for the 5% stock dividend
paid to stockholders in May 1993 and the 33-1/3% stock dividend
paid to stockholders in May 1995:
Exercise or
Shares Conversion
Reserved for Price
Issuance Per Share
------------ --------------
Unexercised stock options
granted to certain executive
officers of the Company 14,667 $ 6.75
Series C Preferred Stock 247,658 2.29
------------ --------------
Total shares reserved for
issuance and related exercise
or conversion price per
share 262,325 $ 2.29 - $6.75
============ ==============
NOTE 11: EARNINGS PER SHARE
Primary earnings per common share is computed by dividing net
income available to common stockholders by the weighted average
number of shares and share equivalents outstanding during the
period. Because the Company's outstanding preferred stock is
cumulative, the dividends allocable to such preferred stock reduces
income available to common stockholders in the earnings per share
calculations. The Series C Preferred Stock issued in December 1990
was determined not to be a common stock equivalent and, therefore,
is not used to calculate primary earnings per common share. In
computing fully diluted earnings per common share for the years
ended December 31, 1996, 1995 and 1994, the conversion of the
preferred stock was assumed, as the effect is dilutive. The
following table presents information necessary to calculate
earnings per share for the years ended December 31, 1996, 1995 and
1994 (adjusted for the 33-1/3% stock dividend paid to stockholders
in May 1995):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
Primary Earnings Per Common Share (In thousands)
- ---------------------------------
<S> <C> <C> <C>
Shares Outstanding:
Weighted average shares outstanding 1,084 1,039 1,037
Share equivalents 6 8 5
--------- --------- ---------
Adjusted shares outstanding 1,090 1,047 1,042
========= ========= =========
Net Income:
Net income $ 1,422 $ 1,132 $ 450
Preferred stock dividends (63) (70) (70)
--------- --------- ---------
Net income available to common stockholders $ 1,359 $ 1,062 $ 380
========= ========= =========
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Fully Diluted Earnings Per Common Share
Shares Outstanding:
Weighted average shares outstanding 1,084 1,039 1,037
Share equivalents 6 8 5
Conversion of Series C Preferred Stock 268 305 306
--------- --------- ---------
Adjusted shares outstanding 1,358 1,352 1,348
========= ========= =========
Net Income $ 1,422 $ 1,132 $ 450
========= ========= =========
</TABLE>
NOTE 12: 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 $77,000, $72,000 and
$62,000 for the years ended December 31, 1996, 1995 and 1994,
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, 1996, 112,672 shares
of Common Stock of the Company were held by the Plan.
NOTE 13: 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 $2,990,000, $1,053,000
and $1,587,000 at December 31, 1996, 1995 and 1994, respectively.
Additions and reductions on such loans were $2,293,000 and
$356,000, respectively, for the year ended December 31, 1996.
The Company and its subsidiaries paid $28,000, $19,000 and
$55,000 in fees to a director-related company for services rendered
on various legal matters during 1996, 1995 and 1994, respectively.
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
14: Commitments and Contingent Liabilities."
NOTE 14: 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.
-21-
<PAGE>
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 Bank leases certain of its premises and equipment under
noncancellable operating leases. Rental expense under such
operating leases was approximately $336,000, $290,000 and $235,000
in 1996, 1995 and 1994, respectively.
The minimum payments due under these leases at December 31,
1996, are as follows:
1997 $ 232,000
1998 87,000
1999 39,000
2000 39,000
2001 37,000
2002-2003 24,000
---------
Total $ 458,000
=========
NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial assets and
financial liabilities at December 31, 1996 and 1995, were as
follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial Assets
----------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 11,458,000 $ 11,458,000 $ 8,559,000 $ 8,559,000
Federal funds sold 18,500,000 18,500,000 26,200,000 26,200,000
Available-for-sale securities 27,771,000 27,771,000 16,746,000 16,746,000
Held-to-maturity securities 47,381,000 47,291,000 39,161,000 39,384,000
Loans, net of unearned income 92,017,000 93,814,000 81,927,000 83,857,000
Accrued interest receivable 1,599,000 1,599,000 1,494,000 1,494,000
Financial Liabilities
---------------------
Noninterest-bearing demand deposits $ 32,240,000 $ 32,240,000 $ 33,267,000 $ 33,267,000
Interest-bearing demand deposits 58,676,000 58,676,000 52,430,000 52,430,000
Interest-bearing time deposits 98,659,000 98,923,000 79,007,000 79,475,000
Notes payable 240,000 240,000 849,000 849,000
Accrued interest payable 951,000 951,000 882,000 882,000
</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.
-22-
<PAGE>
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 16: 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 $5,174,000, and $6,162,000 and
outstanding standby letters of credit and financial guarantees of
approximately $175,000 and $178,000 at December 31, 1996 and 1995,
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 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, 1996.
In the normal course of business, the Company maintains
deposits with other financial institutions in amounts which exceed
FDIC insurance coverage limits.
NOTE 17: REGULATORY MATTERS
The Company and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements could cause the
initiation of certain mandatory, and possibly additional
discretionary, actions by the regulatory authorities that, if
undertaken, could have a direct material effect on the Company's
and the Bank's respective financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific
capital guidelines that involve quantitative measures of the
Company's and the Bank's respective assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and the Bank's respective
-23-
<PAGE>
capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of Tier
1 capital and total capital (Tier 1 and Tier 2) to risk-weighted
assets and of Tier 1 capital to adjusted quarterly average assets.
At December 31, 1996, the Company and the Bank met all capital
adequacy requirements to which they were subject.
At December 31, 1996, the most recent notifications from the
FDIC categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Bank must maintain minimum Tier 1
capital to risk-weighted assets, total capital to risk-weighted
assets and Tier 1 capital to adjusted quarterly average assets
ratios as set forth in the tables. The pro forma calculation of the
Company's and the Bank's Tier 1 capital to adjusted quarterly average
assets would have been 5.95% and 5.45%, respectively, had the acquisition
of Crown Park occured at December 31, 1996. There are no other conditions
or events since the most recent notification that management believes
have changed either the Company's or the Bank's category.
The minimum capital amounts and ratios for well capitalized
bank holding companies and the Company's actual capital amounts and
ratios at December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Minimums for
Well Capitalized
Holding Companies Actual
----------------- -----------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 capital to risk-weighted assets $ 8,062 8.00% $ 13,955 13.85%
Total capital to risk-weighted assets 10,077 10.00 14,748 14.64
Tier 1 capital to adjusted quarterly average assets 12,214 6.00 13,955 6.86
</TABLE>
The minimum capital amounts and ratios for well capitalized
banks and the Bank's actual capital amounts and ratios at December
31, 1996, are as follows:
<TABLE>
<CAPTION>
Minimums for Well
Capitalized Banks Actual
----------------- -----------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 capital to risk-weighted assets $ 7,961 8.00% $ 12,506 12.57%
Total capital to risk-weighted assets 9,952 10.00 13,300 13.36
Tier 1 capital to adjusted quarterly average assets 12,127 6.00 12,506 6.19
</TABLE>
At December 31, 1996, retained earnings of the Bank included
approximately $1,561,000 that was available for payment of
dividends to the Company without prior approval of regulatory
authorities.
-24-
<PAGE>
NOTE 18: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of the Company, parent only,
are presented below:
INDEPENDENT BANKSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Assets:
Cash $ 148,000 $ 191,000
Investment in subsidiaries 13,576,000 12,908,000
Premises and equipment 3,000 4,000
Other assets 1,452,000 1,577,000
------------ ------------
Total assets $ 15,179,000 $ 14,680,000
============ ============
Liabilities:
Notes payable $ 228,000 $ 832,000
Accrued interest payable and other liabilities 14,000 30,000
------------ ------------
Total liabilities 242,000 862,000
Stockholders' equity 14,937,000 13,818,000
------------ ------------
Total liabilities and stockholders' equity $ 15,179,000 $ 14,680,000
============ ============
</TABLE>
INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries (see Note 18) $ 1,000,000 $ 905,000 $ 450,000
Management fees from subsidiaries 161,000 177,000 158,000
Interest from subsidiaries 3,000 2,000 2,000
------------ ------------ ------------
Total income 1,164,000 1,084,000 610,000
------------ ------------ ------------
Expenses:
Interest 58,000 107,000 86,000
Other expenses 557,000 756,000 1,381,000
------------ ------------ ------------
Total expenses 615,000 863,000 1,467,000
----------- ------------ ------------
Income (loss) before federal income taxes and equity in
undistributed earnings of subsidiaries 549,000 221,000 (857,000)
Federal income tax benefit (162,000) (236,000) (490,000)
------------ ------------ ------------
Income (loss) before equity in undistributed earnings
of subsidiaries 711,000 457,000 (367,000)
Equity in undistributed earnings of subsidiaries 711,000 675,000 817,000
------------ ------------ ------------
Net income $ 1,422,000 $ 1,132,000 $ 450,000
============ ============ ============
</TABLE>
-25-
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,422,000 $ 1,132,000 $ 450,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred federal income tax expense 677,000 547,000 222,000
Depreciation and amortization 1,000 2,000 1,000
Equity in undistributed earnings of subsidiaries (711,000) (675,000) (817,000)
Decrease (increase) in other assets (540,000) (97,000) 4,000
Increase (decrease) in accrued interest payable
and other liabilities (16,000) (390,000) 681,000
------------ ------------ ------------
Net cash provided by operating activities 833,000 519,000 541,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 0 275,000 0
Repayment of notes payable (616,000) (687,000) (261,000)
Net proceeds from issuance of equity securities 0 34,000 2,000
Cash paid for fractional shares in stock dividend 0 (4,000) 0
Payment of cash dividends (260,000) (187,000) (140,000)
------------ ------------ ------------
Net cash used in financing activities (876,000) (569,000) (399,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (43,000) (50,000) 142,000
Cash and cash equivalents at beginning of year 191,000 241,000 99,000
------------ ------------ ------------
Cash and cash equivalents at end of year $ 148,000 $ 191,000 $ 241,000
============ ============ ============
</TABLE>
NOTE 19: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended
December 31, 1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 6,372,000 $ 4,835,000 $ 3,337,000
Federal income taxes 438,000 15,000 17,000
Noncash investing activities:
Additions to real estate and other repossessed assets
during the year through foreclosures 1,015,000 1,039,000 424,000
Sales of real estate and other repossessed assets
financed with loans 240,000 196,000 335,000
Transfer of real estate and other repossessed assets
to loans 0 125,000 0
Increase (decrease) in unrealized gain/loss on
available-for-sale securities, net of tax (43,000) 168,000 (306,000)
Other liabilities replaced with notes payable 0 334,000 0
</TABLE>
NOTE 20: SUBSEQUENT EVENT
The Bank completed the acquisition of Crown Park and its
subsidiary, Western National, on January 28, 1997, for an aggregate
cash purchase price of $7,510,000. At the date of acquisition,
Crown Park had consolidated total assets of $60,420,000, total
loans, net of unearned income of $41,688,000, total deposits of
$53,618,000 and stockholders' equity of $4,238,000. Western
National was merged with and into, and became a branch of, the
Bank. To obtain funding for the acquisition, the Company sold an
aggregate of 316,250 shares of its common stock in an underwritten
offering at a price of $14.25 per share. This included 41,250 shares
covered by the underwriter's over-allotment option. The Company
borrowed $800,000 from the Amarillo Bank to finance the remaining
cost of acquiring Crown Park. The $800,000 of borrowings was later
reduced to $400,000 with the proceeds of the sale of the over-allotment
shares. This acquisition will be accounted for under the purchase
method of accounting. A total of $2,486,000 in goodwill was recorded
as a result of the acquisition.
-26-
<PAGE>
QUARTERLY DATA (UNAUDITED)
The following table presents the unaudited results of
operations for the past two years by quarter. See "Note 11:
Earnings Per Share" in the Company's Consolidated Financial
Statements.
<TABLE>
<CAPTION>
1996
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 3,223 $ 3,284 $ 3,502 $ 3,547 $ 13,556
Interest expense 1,485 1,544 1,693 1,719 6,441
Net interest income 1,738 1,740 1,809 1,828 7,115
Provision for loan losses 50 71 40 40 201
Income before federal income taxes 547 479 558 591 2,175
Net income 361 299 355 407 1,422
Primary earnings per common share
available to common stockholders:
Income before federal income taxes $ 0.50 $ 0.43 $ 0.49 $ 0.52 $ 1.94
Net income 0.33 0.27 0.32 0.33 1.25
Fully diluted earnings per common share
available to common stockholders:
Income before federal income taxes $ 0.40 $ 0.35 $ 0.41 $ 0.44 $ 1.60
Net income 0.27 0.23 0.27 0.28 1.05
1995
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
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
</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.
-27-
<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: Bank Acquisitions," "Note 8: Notes
Payable" and "Note 11: Earnings Per Share" in the Company's
Consolidated Financial Statements for other significant changes in
financial statement items.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Balance sheet information:
Assets $ 205,698 $ 180,344 $ 159,860 $ 160,712 $ 160,554
Loans, net of unearned income 92,017 81,927 81,306 69,647 52,967
Deposits 189,575 164,704 146,184 147,785 134,679
Notes payable 240 849 930 1,194 2,290
Stockholders' equity 14,937 13,818 11,073 10,845 8,238
Income statement information:
Total interest income $ 13,556 $ 11,962 $ 10,131 $ 9,221 $ 9,715
Net interest income 7,115 6,653 6,679 6,045 5,639
Income before extraordinary item and
cumulative effect of accounting change 1,422 1,132 450 1,029 839
Extraordinary item 0 0 0 0 192(1)
Cumulative effect of accounting change 0 0 0 200(2) 0
Net income 1,422 1,132 450 1,229 1,031
Primary earnings per common share
available to common stockholders:
Income before extraordinary item and
cumulative effective of accounting change $ 1.25 $ 1.02 $ 0.36 $ 0.92 $ 0.72
Extraordinary item 0.00 0.00 0.00 0.00 0.19(1)
Cumulative effect of accounting change 0.00 0.00 0.00 0.19(2) 0.00
--------- --------- --------- --------- ---------
Net income $ 1.25 $ 1.02 $ 0.36 $ 1.11 $ 0.91
========= ========= ========= ========= =========
Fully diluted earnings per common share
available to common stockholders:
Income before extraordinary item and
cumulative effect of accounting change $ 1.05 $ 0.84 $ 0.33 $ 0.76 $ 0.60
Extraordinary item 0.00 0.00 0.00 0.00 0.14(1)
Cumulative effect of accounting change 0.00 0.00 0.00 0.15(2) 0.00
--------- --------- --------- --------- ---------
Net income $ 1.05 $ 0.84 $ 0.33 $ 0.91 $ 0.74
========= ========= ========= ========= =========
Cash dividends per common share $ 0.18 $ 0.11 $ 0.07 $ 0.00 $ 0.00
========= ========= ========= ========= =========
______________________
(1) Gain on extinguishment of debt.
(2) Cumulative effect of a change in accounting for income taxes.
</TABLE>
-28-
<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>
Calendar Year Ended December 31, 1995
First Quarter $ 6 $ 5-1/4 $ 0.0225
Second Quarter 7-1/2 5-1/4 0.03
Third Quarter 11-1/4 7-1/4 0.03
Fourth Quarter 10-7/8 10-1/4 0.03
Calendar Year Ended December 31, 1996
First Quarter $ 10-1/2 $ 9-3/4 $ 0.03
Second Quarter 11 9 0.05
Third Quarter 12-1/8 10-7/8 0.05
Fourth Quarter 17-1/2 12-1/8 0.05
Calendar Year Ending December 31, 1997
First Quarter (through March 14) $ 17 $ 14-3/8 $ 0.05(1)
______________
(1) This cash dividend was paid February 28, 1997, to shareholders
of record on February 14, 1997.
</TABLE>
The Nasdaq Small-Cap Market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions.
At February 28, 1997, there were 1,558 stockholders who were
individual participants in security position listings.
-29-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE COMPANY
Independent Bankshares, Inc. (the "Company") is a bank holding
company headquartered in Abilene, Texas. The Company indirectly
owns through a Delaware subsidiary, Independent Financial Corp.
("Independent Financial"), 100% of First State Bank, National
Association, Abilene, Texas (the "Bank"). The Bank currently
operates full-service banking locations in the West Texas cities of
Abilene (2 locations), Lubbock (acquired in January 1997), Odessa
(2 locations), San Angelo, Stamford and Winters.
GENERAL
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition at
December 31, 1996 and 1995, and results of operations for each of
the three years in the period ended December 31, 1996, after
accounting for the 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.
BANK ACQUISITIONS
Crown Park and Western National. On January 28, 1997, the
Company consummated the acquisition of Crown Park Bancshares, Inc.
("Crown Park") and its wholly owned subsidiary bank, Western
National Bank ("Western National"), for an aggregate cash
consideration of $7,510,000. On the closing date, Crown Park was
merged with and into a wholly owned subsidiary of the Company and
Western National was merged with and into the Bank. To obtain
funding for the acquisition, the Company sold an aggregate of
316,250 shares of its common stock in an underwritten offering at
a price of $14.25 per share (the "Offering"). This included 41,250
shares covered by the underwriter's over-allotment option. The
Company borrowed $800,000 from a financial institution in Amarillo,
Texas (the "Amarillo Bank") to finance the remaining cost of
acquiring Crown Park. The $800,000 of borrowings was later reduced
to $400,000 with the proceeds of the sale of the over-allotment
shares. See "- Liquidity" and "- Capital Resources" below. This
acquisition will be accounted for under the purchase method of
accounting. A total of $2,486,000 of goodwill was recorded in 1997
as a result of this transaction.
Western National is a community bank that offers interest and
noninterest-bearing depository accounts, and makes consumer and
commercial loans. At the date of acquisition, on a consolidated
basis, Crown Park had total assets of $60,420,000, total loans, net
of unearned income, of $41,688,000, total deposits of $53,618,000
and stockholders' equity of $4,238,000.
San Angelo Branch. On May 27, 1996, the Bank assumed the
deposits and certain other liabilities and purchased the loans and
certain other assets of the San Angelo, Texas branch of Coastal
Banc ssb ("Coastal Banc - San Angelo") in a cash transaction, and
Coastal Banc - San Angelo became a branch of the Bank. On the date
of the acquisition, Coastal Banc - San Angelo had approximately
$14,895,000 in total deposits and $155,000 in total loans. The
acquisition was accounted for under the purchase method of
accounting, and the results of operations of Coastal Banc - San
Angelo are included in the Company's results of operations from the
date of purchase. The assets and liabilities of this branch were
recorded at their estimated fair value. A total of $743,000 of
goodwill was recorded as a result of the acquisition.
Peoples National. The Bank completed the acquisition of
Peoples National Bank, Winters, Texas ("Peoples National")
effective January 1, 1996, and Peoples National became part of the
Winters branch of the Bank. 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. The acquisition was accounted
for under the purchase method of accounting, and the results of
operations of Peoples National are included in the
-30-
<PAGE>
Company's results of operations from the date of purchase. The
assets and liabilities of Peoples National were recorded at their
estimated fair value. A total of $260,000 of goodwill was recorded
as a result of this acquisition.
RESULTS OF OPERATIONS
General
- -------
Net income for the year ended December 31, 1996, amounted to
$1,422,000 ($1.25 primary earnings per common share) compared to
net income of $1,132,000 ($1.02 primary earnings per common share)
for the year ended December 31, 1995, and net income of $450,000
($0.36 primary earnings per common share) for the year ended
December 31, 1994. 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, expenses
and settlement costs in connection with the same litigation. See
"Note 15: Commitments and Contingent Liabilities" to the Company's
Consolidated Financial Statements.
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 1996,
the Company's ROA was 0.72%, compared to 0.67% for 1995 and 0.28%
for 1994. Excluding the unusual and extraordinary items noted
above, the Company's ROA for 1995 and 1994 would have been 0.75%
and 0.65%, 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 1996, the Company's
ROE was 9.89%, compared to 8.99% for 1995 and 3.98% for 1994.
Excluding the unusual and extraordinary items noted above, the
Company's ROE for 1995 and 1994 would have been 10.06% and 9.24%,
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 $7,115,000 for 1996, an
increase of $462,000 or 6.9% from 1995. Net interest income for
1995 was $6,653,000, a decrease of $26,000, or 0.4%, from net
interest income of $6,679,000 for 1994. The increase in 1996 was
due to the Company's growth. 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 net
interest margin on a fully taxable-equivalent basis was 3.95% for
1996, compared to 4.29% for 1995 and 4.62% for 1994. The decrease
in 1996 was due primarily to the fact that in the acquisitions of
Peoples National and Coastal Banc - San Angelo, the Company
acquired $19,853,000 in deposits and only $2,922,000 in loans. As
a result, a significant amount of the increased funds has been
invested in investment securities and federal funds sold, which
yield a lower rate of interest than loans and, therefore, have a
negative impact on the Company's net interest margin. 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.
At December 31, 1996, approximately $24,938,000, or 27.0%, of
the Company's total loans, net of unearned income, were loans with
floating interest rates. This amount represented 49.5% of loans,
excluding loans to individuals, which are exclusively fixed rate in
nature. The overall average rate paid for total deposits increased
slightly in 1996. The average rate paid by the Company for
certificates of deposit and other time deposits of $100,000 or more
decreased
-31-
<PAGE>
to 5.39% during 1996 from 5.61% in 1995; however, the average rate
paid for certificates of deposit less than $100,000 increased
slightly from 5.41% in 1995 to 5.42% in 1996. Rates on other types
of deposits, such as savings accounts, money market accounts and
NOW accounts, increased slightly from an average of 2.35% in 1995
to an average of 2.41% in 1996. Given the fact that the Company's
interest-bearing liabilities are subject to repricing faster than
its interest-earning assets in the very short term, a falling
interest rate environment normally produces a higher net interest
margin than a rising 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 increase in a falling 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.
-32-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- --------- ------- --------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS (1)
Interest-earning assets:
Loans, net of unearned income (2) $ 85,880 $ 8,005 9.32% $ 82,302 $ 7,726 9.39%
Securities (3) 74,920 4,507 6.02 41,846 2,391 5.71
Federal funds sold 19,406 1,047 5.40 31,076 1,847 5.94
--------- --------- ----- --------- --------- -----
Total interest-earning assets 180,206 13,559 7.52 155,224 11,964 7.71
--------- --------- ----- --------- --------- -----
Noninterest-earning assets:
Cash and due from banks 7,151 7,066
Premises and equipment, net 4,427 4,211
Accrued interest receivable
and other assets 5,196 3,817
Allowance for possible loan losses (825) (786)
--------- ---------
Total noninterest-earning assets 15,949 14,308
--------- ---------
Total assets $ 196,155 $ 169,532
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 57,847 $ 1,397 2.41% $ 53,391 $ 1,257 2.35%
Time deposits 92,065 4,985 5.41 72,137 3,944 5.47
--------- --------- ----- --------- --------- -----
Total interest-bearing deposits 149,912 6,382 4.26 125,528 5,201 4.14
Notes payable 568 59 10.39 1,069 108 10.10
--------- --------- ----- --------- --------- -----
Total interest-bearing liabilities 150,480 6,441 4.28 126,597 5,309 4.19
--------- --------- ----- --------- --------- -----
Noninterest-bearing liabilities:
Demand deposits 30,093 29,019
Accrued interest payable and
other liabilities 1,207 1,322
--------- ---------
Total noninterest-bearing liabilities 31,300 30,341
--------- ---------
Total liabilities 181,780 156,938
--------- ---------
Stockholders' equity 14,375 12,594
--------- ---------
Total liabilities and
stockholders' equity $ 196,155 $ 169,532
========= =========
Net interest income $ 7,118 $ 6,655
========= =========
Interest rate spread (4) 3.24% 3.52%
===== =====
Net interest margin (5) 3.95% 4.29%
===== =====
Year Ended December 31,
---------------------------
1994
---------------------------
Interest
Average Income/ Yield/
Balance Expense Rate
--------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C>
ASSETS (1)
Interest-earning assets:
Loans, net of unearned income (2) $ 74,727 $ 6,918 9.26%
Securities (3) 53,986 2,521 4.67
Federal funds sold 15,939 697 4.37
--------- --------- -----
Total interest-earning assets 144,652 10,136 7.01
--------- --------- -----
Noninterest-earning assets:
Cash and due from banks 8,060
Premises and equipment, net 4,458
Accrued interest receivable
and other assets 3,617
Allowance for possible loan losses (805)
---------
Total noninterest-earning assets 15,330
---------
Total assets $ 159,982
=========
LIABILITIES AND STOCKHOLDERS' EQUITY (1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 59,689 $ 1,288 2.16%
Time deposits 56,775 2,076 3.66
--------- --------- -----
Total interest-bearing deposits 116,464 3,364 2.89
Notes payable 1,061 88 8.29
--------- --------- -----
Total interest-bearing liabilities 117,525 3,452 2.94
--------- --------- -----
Noninterest-bearing liabilities:
Demand deposits 30,144
Accrued interest payable and
other liabilities 1,011
---------
Total noninterest-bearing liabilities 31,155
---------
Total liabilities 148,680
---------
Stockholders' equity 11,302
---------
Total liabilities and
stockholders' equity $ 159,982
=========
Net interest income $ 6,684
=========
Interest rate spread (4) 4.07%
=====
Net interest margin (5) 4.62%
=====
______________________________
(1) The Average Balance and Interest Income/Expense columns
include the balance sheet and income statement accounts of Peoples
National and Coastal Banc - San Angelo, from January 1, 1996, and
May 27, 1996 (the respective dates of acquisition of such banks),
through December 31, 1996.
(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.
</TABLE>
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.
-33-
<PAGE>
<TABLE>
<CAPTION>
1996(1) vs 1995 1995 vs 1994
------------------------- --------------------------
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 $ 336 $ (57) $ 279 $ 710 $ 98 $ 808
Securities (2) 1,980 136 2,116 (629) 499 (130)
Federal funds sold (644) (156) (800) 834 316 1,150
------- ------- ------- ------- ------- -------
Total interest income 1,672 (77) 1,595 915 913 1,828
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Deposits:
Demand, savings and money
market deposits 107 33 140 (140) 109 (31)
Time deposits 1,084 (43) 1,041 660 1,208 1,868
------- ------- ------- ------ ------- -------
Total deposits 1,191 (10) 1,181 520 1,317 1,837
Notes payable (52) 3 (49) 1 19 20
------- ------- ------- ------ ------- -------
Total interest expense 1,139 (7) 1,132 521 1,336 1,857
------- -------- ------- ------ ------- -------
Increase (decrease) in net
interest income $ 533 $ (70) $ 463 $ 394 $ (423) $ (29)
======= ======= ======= ====== ======= =======
______________________________
(1) Income statement items include the income statement accounts
of Peoples National and Coastal Banc - San Angelo beginning
January 1, 1996, and May 27, 1996 (the respective dates of
acquisition of such banks), through December 31, 1996.
(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%.
</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 Bank; expectations of future economic conditions
and their impact on particular industries and individual borrowers;
the market value of collateral; the strength of available
guarantees; concentrations of credits; and other judgmental
factors. The provision for loan losses for the year ended December
31, 1996, was $201,000, compared to $206,000 for the previous year.
The provision in 1996 represented a decrease of $5,000, or 2.4%,
from the 1995 provision. The provision for loan losses for the
year ended December 31, 1995, represented an increase of $59,000,
or 40.1%, over the $147,000 provision for the year ended December
31, 1994. The increase in the provision for loan losses during 1995
was a result of an increase in loan volume as well as increased
repossessions and associated charge-offs relating to the Company's
indirect installment lending program. The relatively lower
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 $42,000, or 2.8%, from $1,509,000
in 1995 to $1,551,000 in 1996. The amount for 1995 increased
$12,000, or 0.8%, from $1,497,000 in 1994.
Service charges on deposit accounts and charges for other
types of services are the major source of noninterest income to the
Company. This source of income increased $92,000, or 7.9%, from
$1,167,000 for 1995 to $1,259,000 for 1996. The 1996 increase was
a result of the overall growth in deposits during the last year,
primarily as result of
-34-
<PAGE>
acquisitions, and an increase in charges for checks drawn on
insufficient funds. 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.
Trust fees from trust operations decreased $12,000, or 6.0%,
from $201,000 in 1995 to $189,000 in 1996 as a result of a one-time
$24,000 fee received for services performed as executor of an
estate during 1995, which was partially offset in the 1996 period
by increased fees collected due to an increased amount of assets
under management. Trust fees increased $32,000, or 18.9%, from
$169,000 during 1994 to $201,000 during 1995. The increase is due
to the same reasons noted above.
Securities with a carrying value of $2,028,000 and $8,000 were
sold during 1996 and 1994, respectively. Net losses of $10,000
were recorded on the securities sold during 1996. No gain or loss
was recorded as a result of the sales during 1994. There were no
sales of securities during 1995. The securities portfolio had an
average life of approximately 1.48 years at December 31, 1996,
compared to approximately 1.46 years at December 31, 1995.
Other income is the sum of several small components of other
operating income including check printing income, insurance
premiums earned on automobiles financed through the Company's
indirect installment loan program and other sources of
miscellaneous income. Other income decreased $38,000, or 27.0%,
from $141,000 in 1995 to $103,000 for 1996, due to $25,000 in sales
tax refunds that were received in 1995 and a net loss of $10,000 on
sales of securities in 1996. Other income increased $39,000, or
38.2%, from $102,000 in 1994 to $141,000 in 1995, as a result of
the reclassification of income relating to printed checks noted
above. This increase was offset somewhat by a reduction in
insurance premium income from the sale of single interest insurance
on automobiles collateralizing installment loans.
Noninterest Expenses
- --------------------
Noninterest expenses increased $48,000, or 0.8%, from
$6,242,000 in 1995 to $6,290,000 in 1996, primarily due to
increases in salaries and benefits and net occupancy expense, which
were partially offset by decreases in various other categories of
noninterest expense. Noninterest expenses decreased $1,110,000, or
15.1%, from $7,352,000 in 1994 to $6,242,000 in 1995. The decrease
from 1994 to 1995 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.
Salaries and benefits rose $233,000, or 8.2%, from $2,849,000
in 1995 to $3,082,000 in 1996. The increase was primarily a result
of the acquisitions of Peoples National effective January 1, 1996,
and Coastal Banc - San Angelo effective May 27, 1996, and overall
salary increases effective January 1, 1996. Salaries and employee
benefits increased $11,000, or 0.4%, from $2,838,000 in 1994 to
$2,849,000 in 1995. Despite overall salary increases effective
January 1, 1995, salaries and benefits were stable due to the
economies of scale achieved as a result of the branching of The
First National Bank in Stamford, Stamford, Texas ("First
National"), and Winters State Bank, Winters, Texas ("Winters
State"), with and into the Bank during the fourth quarter of 1994.
Net occupancy expense increased $73,000, or 11.4%, from
$643,000 in 1995 to $716,000 in 1996. The increase is due
primarily to a reduction in rental income received in 1996 as a
result of the loss of two tenants in a Bank-owned building and the
additional occupancy expense of the San Angelo branch acquired in
May 1996. Net occupancy expense decreased $30,000, or 4.5%, from
$673,000 in 1994 to $643,000 in 1995, primarily due to lower
amounts of depreciation expense as a result of certain fixed assets
whose estimated useful lives had expired during 1995.
Equipment expense decreased $60,000, or 8.3%, from $723,000 in
1995 to $663,000 for 1996. This decrease is the result of a
significant amount of furniture, fixtures and equipment that became
fully depreciated during the latter part of 1995 and the first
quarter of 1996, thereby decreasing depreciation expense associated
with such assets. Equipment expense increased from $641,000 in
1994 to $723,000 in 1995, an increase of $82,000, or 12.8%.
Equipment leased to enable the Bank to do its 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 the Bank was
-35-
<PAGE>
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.
Professional fees, which include legal and accounting fees,
decreased $150,000, or 33.0%, from $454,000 during 1995 to $304,000
for 1996. The decrease during 1996 was due to the payment of
$205,000 in 1995 for legal fees and settlement expenses on the
final settlement of certain litigation. Professional fees decreased
$888,000, or 66.2%, from $1,342,000 in 1994 to $454,000 in 1995, as
a result of the $900,000 accrual in 1994 noted above.
Stationery, printing and supplies expense increased $17,000,
or 6.3%, from $271,000 for 1995 to $288,000 for 1996, primarily due
to the acquisitions of Peoples National and Coastal Banc - San
Angelo effective January 1, 1996, and May 27, 1996, respectively.
Stationery, printing and supplies expense increased $45,000, or
19.9%, from $226,000 in 1994 to $271,000 in 1995 due primarily to
an increase in paper costs.
Net revenues 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. The Company recorded net revenues of $24,000 in
1996 compared to net revenues of $7,000 in 1995 as a result of
gains on sales of, and rental income received on, such assets.
These net revenues also increased $3,000, from $4,000 in net
revenues in 1994 to $7,000 net revenues in 1995, as a result of
gains on sales of, and rental income received on, such assets. The
amount of the Company's real estate and other repossessed assets
has continued to decline over the past few years, notwithstanding
the bank acquisitions made in 1996, which resulted in a small
increase in 1996.
Other noninterest expense includes, among many other items,
postage, advertising, insurance, directors' fees, dues and
subscriptions, regulatory examinations, franchise taxes, travel and
entertainment, due from bank account charges and Federal Deposit
Insurance Corporation ("FDIC") insurance. These expenses decreased
$48,000, or 3.7%, from $1,309,000 for 1995 to $1,261,000 for 1996.
FDIC insurance premiums decreased $154,000 during the past year as
a result of a reduction by the FDIC of deposit insurance rates for
banks. This decrease was partially offset by an increase in other
expenses as a result of the acquisitions of Peoples National and
Coastal Banc - San Angelo. Other noninterest expenses decreased
$327,000, or 20.0%, from $1,636,000 in 1994 to $1,309,000 in 1995.
The decrease was primarily due to a decrease in FDIC insurance
rates during 1995 and to savings achieved as a result of the merger
of Winters State and First National into the Bank in November 1994.
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 $753,000, $582,000
and $227,000 in federal income taxes in 1996, 1995 and 1994,
respectively. Of the $227,000 accrued in 1994, $222,000 was
transferred from federal income taxes payable to additional paid-in
capital.
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.
-36-
<PAGE>
The Company's objective is to maintain a ratio of interest-
sensitive assets to interest-sensitive liabilities that is as
balanced as possible. The following tables show that ratio to be
52.0% at the 90-day interval, 51.6% at the 180-day interval and
50.9% at the 365-day interval at December 31, 1996. Currently, the
Company is in a liability-sensitive position at the three
intervals. During a falling interest rate environment, this
position normally produces a higher net interest margin than in a
rising interest rate environment; however, because the Company had
$58,676,000 of interest-bearing demand, savings and money market
deposits at December 31, 1996, that are somewhat less rate-
sensitive, the Company's net interest margin does not necessarily
increase in a falling 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.
The following table shows the interest rate sensitivity
position of the Company at December 31, 1996:
<TABLE>
<CAPTION>
Volumes
Cumulative Volumes Subject to
Subject to Repricing Within Repricing
----------------------------- After
90 Days 180 Days 365 Days 1 Year Total
--------- --------- --------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold $ 18,500 $ 18,500 $ 18,500 $ 0 $ 18,500
Securities 3,106 9,371 22,091 53,061 75,152
Loans, net of unearned income 28,209 30,315 34,592 57,425 92,017
--------- --------- --------- --------- ---------
Total interest-earning assets 49,815 58,186 75,183 110,486 185,669
--------- --------- --------- --------- ---------
Interest-bearing liabilities:
Demand, savings and money market
deposits 58,676 58,676 58,676 0 58,676
Time deposits 36,945 54,059 88,806 9,853 98,659
Notes payable 118 119 121 119 240
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 95,739 112,854 147,603 9,972 157,575
--------- --------- --------- --------- ---------
Rate-sensitivity gap(1) $ (45,924)$ (54,668)$ (72,420) $ 100,514 $ 28,094
========= ========= ========= ========= =========
Rate-sensitivity ratio (2) 52.0% 51.6% 50.9%
====== ====== ======
_______________________________
(1) Rate-sensitive interest-earning assets less rate-sensitive
interest-bearing liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-
sensitive interest-bearing liabilities.
</TABLE>
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, and $25,624,000, or 14.2%, from year-end 1995 to $205,968,000
at December 31, 1996, primarily due to the growth in deposits at
the Bank in 1995 and 1996 and the bank acquisitions made in 1996.
Cash and Cash Equivalents
- -------------------------
At December 31, 1996, cash and cash equivalents were
$29,958,000, a decrease of $4,801,000, or 13.8%, from the December
31, 1995, balance of $34,759,000. At December 31, 1996, the
Company had $18,500,000 in federal funds sold, down from
$26,200,000 at December 31, 1995, due to an increased amount of
funds being invested in investment securities. Cash and cash
equivalents averaged $26,557,000, $38,142,000 and $23,999,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
-37-
<PAGE>
Securities
- ----------
Securities increased $19,245,000, or 34.4%, from $55,907,000
at December 31, 1995, to $75,152,000 at December 31, 1996. The
increase in 1996 was due primarily to the reduction in federal
funds sold noted above and the investment in securities of the net
proceeds received from the assumption of the deposits in the
Coastal Banc - San Angelo acquisition.
The board of directors of the Bank reviews all securities
transactions monthly and the securities portfolio periodically.
The Company's current investment policy provides for the purchase
of U.S. Treasury securities and federal agency securities having
maturities of five years or less and for the purchase of state,
county and municipal agencies' securities with maximum maturities
of 10 years. The Company's policy is to maintain a securities
portfolio with a mixture of securities classified as held-to-
maturity and available-for-sale with staggered maturities to meet
its overall liquidity needs. Municipal securities must be rated A
or better. Certain school district issues, however, are acceptable
with a Baa rating. Securities totaling $27,771,000 are classified
as available-for-sale and are carried at fair value at December 31,
1996. Securities totaling $47,381,000 are classified as held-to-
maturity and are carried at amortized cost. The securities
portfolio had an average life of approximately 1.48 years at
December 31, 1996, compared to approximately 1.46 years at
December 31, 1995. During the first quarter of 1996, the Company
sold investments in certain mutual funds obtained in the
acquisition of Peoples National with a book value of $30,000
because they did not meet the Company's investment criteria. A loss
of $12,000 was recorded on the sale of such investments. During the
second quarter of 1996, the Company sold investments classified as
held-to-maturity with a book value of $1,998,000 approximately
30 days prior to their scheduled maturity and recorded a $2,000
gain on such sale. During the fourth quarter of 1995, the Company
transferred $160,000 of mortgage-backed securities from held-to-
maturity securities to available-for-sale securities. The decision
to sell securities classified as available-for-sale is based upon
management's assessment of changes in economic or financial market
conditions.
Certain of the Company's securities are pledged to secure
public and trust fund deposits and for other purposes required or
permitted by law. At December 31, 1996, the book value of U.S.
Government and other securities so pledged amounted to $10,847,000,
or 14.4% 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,
-------------------------------------------------------
1996 1995 1994
------------- -------------- ---------------
Amount % Amount % Amount %
-------- --- --------- ---- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $ 35,143 46.8% $ 32,295 57.8% $ 31,441 94.4%
Obligations of other U.S.
Government agencies and
corporations 39,239 52.2 23,009 41.2 1,154 3.5
Mortgage-backed securities 127 0.2 160 0.2 177 0.5
Obligations of states and
political subdivisions 200 0.2 0 -- 90 0.3
Other securities 443 0.6 443 0.8 443 1.3
--------- ----- --------- ----- --------- -----
Total securities $ 75,152 100.0% $ 55,907 100.0% $ 33,305 100.0%
========= ===== ========= ===== ========= =====
Total fair value $ 75,062 $ 56,130 $ 32,991
========= ========= =========
</TABLE>
The fair 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, 1996. The yield has been computed by
relating the forward income stream on the securities, plus or minus
the anticipated amortization of premium or accretion of discount,
to the book value of the
-38-
<PAGE>
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%.
<TABLE>
<CAPTION>
Estimated Weighted
Principal Carrying Fair Average
Type and Maturity Grouping at December 31, 1996 Amount Value Value Yield
- ----------------------------------------------- --------- --------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $ 19,950 $ 19,943 $ 19,995 5.91%
After one but within five years 15,250 15,200 15,173 5.74
--------- --------- --------- ------
Total U.S. Treasury securities 35,200 35,143 35,168 5.83
--------- --------- --------- ------
Obligations of other U.S. Government
agencies and corporations:
Within one year 2,000 1,999 2,004 6.02
After one but within five years 25,000 24,881 24,910 6.42
After five but within ten years 3,000 3,048 3,003 5.74
--------- --------- --------- ------
Total obligations of other U.S. government
agencies and corporations 30,000 29,928 29,917 6.32
--------- --------- --------- ------
Mortgage-backed securities 9,209 9,438 9,328 6.29
--------- --------- --------- ------
Obligations of states and political subdivisions:
Within one year 0 0 0 --
After one but within five years 0 0 0 --
After five but within ten years 200 200 206 8.07
--------- --------- --------- ------
Total obligations of states and
political subdivisions 200 200 206 8.07
--------- --------- --------- ------
Other securities:
Within one year 5 5 5 5.49
After one but within five years 0 0 0 --
After five but within ten years 0 0 0 --
After ten years 438 438 438 3.59
--------- --------- --------- ------
Total other securities 443 443 443 3.61
--------- --------- --------- ------
Total securities $ 75,052 $ 75,152 $ 75,062 6.08%
========= ========= ========= ======
</TABLE>
Loan Portfolio
- --------------
Total loans, net of unearned income, increased $10,090,000, or
12.3%, from $81,927,000 at December 31, 1995, to $92,017,000 at
December 31, 1996. The increase during 1996 was partially due to
the purchase of Peoples National effective January 1, 1996, but
primarily due to increased loan activity due to improved economic
conditions in the Bank's market areas, primarily Abilene and
Odessa.
The Bank primarily makes installment loans to individuals and
commercial loans to small to medium-sized businesses and
professionals. The Bank offers a variety of commercial lending
products including revolving lines of credit, letters of credit,
working capital loans and loans to finance accounts receivable,
inventory and equipment. Typically, the Bank's commercial loans
have floating rates of interest, are for varying terms (generally
not exceeding five years), are personally guaranteed by the
borrower and are collateralized by accounts receivable, inventory
or other business assets.
Due to diminished loan demand in most areas, during the second
quarter of 1992, the Bank's Odessa branch instituted an installment
loan program whereby it began to purchase automobile loans from
automobile dealerships in
-39-
<PAGE>
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, the Bank's Abilene branch began a
similar indirect installment loan program. During the third
quarter of 1996, the Company instituted this program in the San
Angelo, Texas market. At December 31, 1996 and 1995, the Company
had approximately $33,188,000 and $30,206,000 net of unearned
income, respectively, of this type of loan outstanding.
The following table presents the Company's loan balances at
the dates indicated separated by loan type:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995 1994 1993 1992(1)
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans to individuals $ 43,927 $ 39,868 $ 43,113 $ 28,538 $ 17,718
Real estate loans 26,233 23,265 22,760 22,658 16,535
Commercial and industrial loans 21,478 19,510 16,702 16,723 16,221
Other loans 2,626 2,638 2,943 4,322 3,767
--------- --------- --------- --------- ---------
Total loans 94,264 85,281 85,518 72,241 54,241
Less unearned income 2,247 3,354 4,212 2,594 1,274
--------- --------- --------- --------- ---------
Loans, net of unearned income $ 92,017 $ 81,927 $ 81,306 $ 69,647 $ 52,967
========= ========= ========= ========= =========
______________________________
(1) Balances at December 31, 1992, do not include the loans of
Olton State sold as of January 1, 1993.
</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, 1996, except for those described above. The
Bank had no loans outstanding to foreign countries or borrowers
headquartered in foreign countries at December 31, 1996.
Management of the Bank may renew loans at maturity when
requested by a customer whose financial strength appears to support
such renewal or when such renewal appears to be in the Company's
best interest. The Company requires payment of accrued interest in
such instances and may adjust the rate of interest, require a
principal reduction or modify other terms of the loan at the time
of renewal.
The following table presents the distribution of the maturity
of the Company's loans and the interest rate sensitivity of those
loans, excluding loans to individuals, at December 31, 1996. The
table also presents the portion of loans that have fixed interest
rates or interest rates that fluctuate over the life of the loans
in accordance with changes in the interest rate environment as
represented by the prime rate.
-40-
<PAGE>
<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 $ 7,078 $ 14,000 $ 5,155 $ 26,233
Commercial and industrial loans 11,259 6,073 4,146 21,478
Other loans 1,342 776 508 2,626
--------- --------- --------- ---------
Total loans $ 19,679 $ 20,849 $ 9,809 $ 50,337
========= ========= ========= =========
With fixed interest rates $ 8,989 $ 12,217 $ 4,193 $ 25,399
With variable interest rates 10,690 8,632 5,616 24,938
--------- --------- --------- ---------
Total loans $ 19,679 $ 20,849 $ 9,809 $ 50,337
========= ========= ========= =========
</TABLE>
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,
-----------------------------------------------
1996 1995 1994 1993 1992(1)
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 82 $ 204 $ 48 $ 1,646 $ 773
Accruing loans contractually past due
over 90 days 41 23 26 293 17
Restructured loans 73 65 80 195 295
Real estate and other repossessed assets 389 337 631 803 849
------- ------- ------- ------- -------
Total nonperforming assets $ 585 $ 629 $ 785 $ 2,937 $ 1,934
======= ======= ======= ======= =======
_______________________________
(1) Balances at December 31, 1992, do not include the assets of
Olton State that were sold on January 1, 1993.
</TABLE>
The gross interest income that would have been recorded in
1996 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 $17,000. No interest was actually
recorded (received) on loans that were on nonaccrual during 1996.
-41-
<PAGE>
A potential problem loan is defined as a loan where
information about possible credit problems of the borrower is
known, causing management to have serious doubts as to the ability
of the borrower to comply with the present loan repayment terms and
which may result in the inclusion of such loan in one of the
nonperforming asset categories. The Company does not believe it
has any potential problem loans other than these reported in the
above table.
The Company follows a loan review program to evaluate the
credit risk in its loan portfolio. Through the loan review
process, the Banks maintain an internally classified loan list
that, along with the list of nonperforming loans discussed below,
helps management assess the overall quality of the loan portfolio
and the adequacy of the allowance. Loans classified as
"substandard" are those loans with clear and defined weaknesses
such as highly leveraged positions, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may
jeopardize recoverability of the loan. Loans classified as
"doubtful" are those loans that have characteristics similar to
substandard loans, but also have an increased risk that a loss may
occur or at least a portion of the loan may require a charge-off if
liquidated at present. Although loans classified as substandard do
not duplicate loans classified as doubtful, both substandard and
doubtful loans may include some loans that are past due at least 90
days, are on nonaccrual status or have been restructured. Loans
classified as "loss" are those loans that are in the process of
being charged off. At December 31, 1996, substandard loans totaled
$1,287,000, of which $130,000 were loans designated as nonaccrual,
90 days past due or restructured, and there were $13,000 in
doubtful loans, all of which were designated as 90 days past due.
There were no loss loans.
In addition to the internally classified loans, each Bank also
has a "watch list" of loans that further assists each Bank in
monitoring its loan portfolio. A loan is included on the watch
list if it demonstrates one or more deficiencies requiring
attention in the near term or if the loan's ratios have weakened to
a point where more frequent monitoring is warranted. These loans
do not have all the characteristics of a classified loan
(substandard, doubtful or loss), but do have weakened elements as
compared with those of a satisfactory credit. The Banks review
these loans to assist in assessing the adequacy of the allowance.
Substantially all of the loans on the watch list as of December 31,
1996, are current and paying in accordance with loan terms. At
December 31, 1996, watch list loans totaled $1,104,000 (including
$683,000 of loans guaranteed by U.S. governmental agencies). At
such date, none of the watch list loans were designated as
nonaccrual, 90 days past due or restructured loans. At such date,
$55,000 of loans not classified and not on the watch list were
designated as restructured loans.
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, 1996, 1995 and 1994, real estate and other
repossessed assets had an aggregate book value of $389,000,
$337,000 and $631,000, respectively. Real estate and other
repossessed assets increased $52,000, or 15.4%, during 1996
primarily as a result of the repossession of two properties by the
Bank's Odessa branch, which were partially offset by the sales of
several parcels of real estate during that time period. Of the
December 31, 1996, balance, $204,000 represented nineteen
repossessed automobiles, $103,000 represented four commercial
properties and $82,000 represented three residential properties.
The December 31, 1995, balance of $337,000 represented a decrease
of $294,000, or 46.6%, from the December 31, 1994, balance of
$631,000 as a result of sales of certain of these assets.
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.
-42-
<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 $793,000, or 0.86% of loans, net of
unearned income, at December 31, 1996, compared to $759,000, or
0.93% of loans, net of unearned income, at December 31, 1995, and
$817,000, or 1.00% of loans, net of unearned income, at December
31, 1994. The reduction in the ratio of the allowance to total
loans, net of unearned income, 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 the Bank in conformity with loan policies
established by the board of directors of the Company. The
Company's practice is to charge off any loan or portion of a loan
when 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 $389,000 in loans during 1996. Charge-offs for 1996 were
concentrated in the following categories: loans to individuals -
$231,000, or 59.4%, real estate - $100,000, or 25.7%, and
commercial and industrial - $58,000, or 14.9%. Charge-offs on five
loans totaled $166,000, or 42.7%, 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 1996 exceeded
$10,000. Recoveries during 1996 were $73,000 and were concentrated
in the following categories: loans to individuals - $28,000, or
38.4%, commercial and industrial - $25,000, or 34.2%, and real
estate - $20,000, or 27.4%. Recoveries of $19,000 on three
commercial and industrial loans, and $18,000 on one real estate
loan accounted for 50.7% of total recoveries during 1996.
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.
-43-
<PAGE>
<TABLE>
<CAPTION>
1996(1) 1995 1994 1993(2) 1992(2)
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Analysis of allowance for
possible loan losses:
Balance at January 1 $ 759 $ 817 $ 896 $ 617 $ 669
Provision for loan losses 201 206 147 154 185
Acquisition of subsidiary 149 0 0 233 0
-------- -------- -------- -------- --------
1,109 1,023 1,043 1,004 854
-------- -------- -------- -------- --------
Loans charged off:
Loans to individuals 231 297 150 88 40
Real estate loans 100 72 119 68 179
Commercial and industrial loans 58 7 32 69 114
Other loans 0 0 77 16 311
-------- -------- -------- -------- --------
Total charge-offs 389 376 378 241 644
-------- -------- -------- -------- --------
Recoveries of loans previously
charged off:
Loans to individuals 28 43 45 28 11
Real estate loans 20 2 0 4 56
Commercial and industrial loans 25 52 48 84 59
Other loans 0 15 59 17 281
-------- -------- -------- -------- --------
Total recoveries 73 112 152 133 407
-------- -------- -------- -------- --------
Net loans charged off 316 264 226 108 237
-------- -------- -------- -------- --------
Balance at December 31 $ 793 $ 759 $ 817 $ 896 $ 617
======== ======== ======== ======== ========
Average loans outstanding,
net of unearned income $ 85,880 $ 82,302 $ 74,727 $ 59,767 $ 50,507
======== ======== ======== ======== ========
Ratio of net loan charge-offs to average loans,
net of unearned income 0.37% 0.32% 0.30% 0.18% 0.47%
==== ==== ==== ==== ====
Ratio of allowance for possible loan losses
to total loans, net of unearned income, at
December 31 0.86% 0.93% 1.00% 1.29% 1.16%
==== ==== ==== ==== ====
______________________________
(1) Average loans, net of unearned income, for 1996 include the
average loans, net of unearned income, of Peoples National
from January 1, 1996, through December 31, 1996 and of Coastal
Banc - San Angelo from May 27, 1996, through December 31,
1996.
(2) Average loans, net of unearned income, for 1993 and 1992
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, 1992, through June 30, 1992.
</TABLE>
Foreclosures on defaulted loans resulted in the Company
acquiring real estate and other repossessed assets; however, the
amount of real estate and other repossessed assets being carried on
the Company's books, has been decreasing. Accordingly, the Company
incurs other expenses, specifically net costs applicable to real
estate and other repossessed assets, in maintaining, insuring and
selling such assets. The Bank attempts to convert nonperforming
loans into interest-earning assets, although usually at a lower
dollar amount than the face value of such loans, either through
liquidation of the collateral securing the loan or through
intensified collection efforts.
As the economies of the Bank's market areas over the past
several years 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
-44-
<PAGE>
specifically identified as problem or nonperforming loans are
reviewed on at least a quarterly basis, and management critically
evaluates the prospect of ultimate losses arising from such loans,
based on the borrower's financial condition and the value of
available collateral. When a risk can be specifically quantified
for a loan, that amount is specifically allocated in the allowance.
In addition, the Company allocates the allowance based upon the
historical loan loss experience of the different types of loans.
Despite such allocation, both the allocated and unallocated
portions of the allowance are available for charge-offs 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 is recognized as an
adjustment to the Company's allowance.
The following table shows the allocations in the allowance and
the respective percentages of each loan category to total loans at
year-end for each of the past five years.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- -----------------------
Percent of Percent of Percent of
Amount of Loans by Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category 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 $ 323 45.3% $ 136 44.6% $ 207 47.8%
Real estate loans 128 28.5 197 28.4 165 28.0
Commercial and industrial loans 97 23.3 96 23.8 122 20.5
Other loans 43 2.9 59 3.2 68 3.7
------- ------ ------- ------ ------- -------
Total allocated 591 100.0% 488 100.0% 562 100.0%
====== ====== =======
Unallocated 202 271 255
------- ------- -------
Total allowance for possible
loan losses $ 793 $ 759 $ 817
======= ======= =======
December 31,
----------------------------------------------
1993 1992(1)
--------------------- ---------------------
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)
Loans to individuals $ 178 37.3% $ 101 31.0%
Real estate loans 272 32.5 142 31.2
Commercial and industrial loans 212 24.0 142 30.7
Other loans 108 6.2 53 7.1
------- ------ ------- ------
Total allocated 770 100.0% 438 100.0%
====== ======
Unallocated 126 179
------- -------
Total allowance for possible
loan losses $ 896 $ 617
======= =======
______________________________
(1) The categories of loans at December 31, 1992, do not include
the loans of Olton State transferred on January 1, 1993.
</TABLE>
Premises and Equipment
- ----------------------
Premises and equipment increased $282,000, or 6.8%, from
$4,155,000 at December 31, 1995, to $4,437,000 at December 31,
1996. The increase was due to $116,000 in additions made during
1996 and $618,000 of premises and equipment acquired as of a result
of the acquisitions of Peoples National and Coastal Banc - San
Angelo, which were partially offset by depreciation expense of
$358,000 recorded for 1996.
-45-
<PAGE>
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 $105,000, or 7.0%, from $1,494,000 at December
31, 1995, to $1,599,000 at December 31, 1996. The increase during
1996 was a result of an increase in investment securities, on which
interest is collected semi-annually, and a decrease in federal
funds sold, on which interest is collected daily. Of the total
balance at December 31, 1996, $943,000, or 59.0%, was interest
accrued on securities and $656,000 or 41.0%, was interest accrued
on loans.
Goodwill
- --------
Goodwill increased to $957,000 at December 31, 1996, as a
result of the recording of $260,000 in goodwill from the Peoples
National acquisition and $743,000 in goodwill from the Coastal Banc
- - San Angelo acquisition. A total of $46,000 in goodwill
amortization expense was recorded during 1996.
Other Assets
- ------------
The most significant component of other assets at December 31,
1996 and 1995, is a net deferred tax asset of $1,664,000 and
$1,937,000, respectively. The balance of other assets decreased
$272,000, or 10.8%, to $2,252,000 at December 31, 1996, from
$2,524,000 at December 31, 1995, primarily as a result of a
$273,000 decrease in the net deferred tax asset primarily due to
the utilization of a portion of the Company's net operating loss
carryforwards.
Deposits
- --------
The Bank's lending and investing activities are funded almost
entirely by core deposits, approximately 48.0% of which are demand,
savings and money market deposits at December 31, 1996. Total
deposits increased $24,871,000, or 15.1%, from $164,704,000 at
December 31, 1995, to $189,575,000 at December 31, 1996. The
increase is due primarily to an increase in interest-bearing time
deposits at the Bank, primarily as a result of the acquisitions of
Peoples National and Coastal Banc - San Angelo. The Bank does not
have any 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,
1996(1) 1995 1994
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 $ 30,093 --% $ 29,019 --% $ 30,144 --%
Interest-bearing demand, savings
and money market deposits 57,847 2.41 53,391 2.35 59,689 2.16
Time deposits of less
than $100,000 64,112 5.42 52,452 5.41 43,158 3.62
Time deposits of $100,000
or more 27,953 5.39 19,685 5.61 13,617 3.78
-------- ------ -------- ----- -------- ------
Total deposits $180,005 3.55% $154,547 3.36% $146,608 2.29%
======== ====== ======== ====== ======== ======
______________________
(1) The average amounts and average rates paid on deposits for the
year ended December 31, 1996, include the averages of Peoples
National and Coastal Banc - San Angelo from January 1, 1996,
and May 27, 1996 (the respective dates of acquisition of such
banks), through December 31, 1996.
</TABLE>
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<PAGE>
The maturity distribution of time deposits of $100,000 or more
at December 31, 1996, is presented below:
December 31, 1996
-----------------
(In thousands)
3 months or less $ 12,736
Over 3 through 6 months 6,714
Over 6 through 12 months 8,377
Over 12 months 1,800
---------------
Total time deposits of $100,000 or more $ 29,627
===============
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, 1996, deposits of
$100,000 or more represented 14.4% of the Company's total assets,
compared to 13.2% of the Company's total assets at December 31,
1995.
Notes Payable
- -------------
The Company's notes payable decreased $609,000, or 71.7%, from
$849,000 at December 31, 1995, to $240,000 at December 31, 1996.
The decrease was a result of the payoff of the Term Note (as
defined below) during 1996 and the regular annual payment on debt
incurred as a result of the final settlement of certain litigation.
See "Note 14: Commitments and Contingent Liabilities" to the
Company's Consolidated Financial Statements.
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 $69,000, or 7.8%, from $882,000 at December 31,
1995, to $951,000 at December 31, 1996. The increase was a result
of an increase in the amount of outstanding certificates of
deposit.
Other Liabilities
- -----------------
The most significant components of other liabilities are
amounts accrued for various types of expenses. The balance of
other liabilities increased $174,000, or 191.2%, from $91,000 at
December 31, 1995, to $265,000 at December 31, 1996, primarily
because of an increase in the federal income tax liability of the
Company due to the fact that, for alternative minimum tax purposes,
all of the Company's net operating loss carryforwards had been
utilized at December 31, 1995. As a result, the Company began
paying federal income taxes at the effective rate of approximately
20% beginning January 1, 1996, as opposed to an effective rate of
approximately 2%, which the Company had been paying since 1989.
The Company still has net operating loss carryforwards available
for regular federal income tax purposes.
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<PAGE>
Selected Financial Ratios
- -------------------------
The following table presents selected financial ratios for
each of the last three fiscal years:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996(1) 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net income to:
Average assets 0.72% 0.67% 0.28%
Average interest-earning assets 0.79 0.73 0.31
Average stockholders' equity 9.89 8.99 3.98
Dividend payout (2) to:
Net income 13.85 10.34 15.56
Average stockholders' equity 1.37 0.93 0.62
Average stockholders' equity to:
Average total assets 7.33 7.43 7.06
Average loans (3) 16.74 15.30 15.12
Average total deposits 7.99 8.15 7.71
Average interest-earning assets to:
Average total assets 91.87 91.56 90.42
Average total deposits 100.11 100.44 98.67
Average total liabilities 99.13 98.91 97.29
Ratio to total average deposits of:
Average loans (3) 47.71 53.25 50.97
Average noninterest-bearing deposits 16.72 18.78 20.56
Average interest-bearing deposits 83.28 81.22 79.44
Total interest expense to total interest income 47.51 44.38 34.07
Efficiency ratio (4) 72.78 76.56 89.97
_________________________
(1) Average balance sheet and income statement items for 1996
include the averages for Peoples National and Coastal Banc -
San Angelo from January 1, 1996, and May 27, 1996 (the
respective dates of acquisition of such banks), through
December 31, 1996.
(2) Dividends for Common Stock only.
(3) Before allowance for possible loan losses.
(4) Calculated as noninterest expense less amortization of
intangibles and expenses related to other real estate owned
divided by the sum of net interest income before provision for
loan losses and total noninterest income excluding securities
gains and losses.
</TABLE>
LIQUIDITY
The Company depends on the Bank for liquidity in the form of
cash flow, primarily to meet debt service and dividend requirements
and to cover other operating expenses. This cash flow comes from
three sources: (1) dividends resulting from earnings of the Bank,
(2) current tax liabilities generated by the Bank and
(3) management and service fees for services performed for the
Bank.
The payment of dividends from the Bank is subject to
applicable law and the scrutiny of regulatory authorities.
Dividends paid by the Bank (including First State, N.A., Odessa) to
Independent Financial in 1996 aggregated $1,000,000; in turn,
Independent Financial paid dividends to the Company totaling
$1,000,000 during 1996. Dividends paid by the Bank (including
First State, N.A., Odessa) to Independent Financial and by
Independent Financial to the Company totaled $700,000 and $905,000,
respectively, during 1995. At December 31, 1996, there were
approximately $1,561,000 in dividends available for payment to
Independent Financial by the Bank without prior regulatory
approval.
The payment of current tax liabilities generated by the Bank
and management and service fees constituted approximately 43.1% and
7.9%, respectively, of the Company's cash flow during 1996.
Pursuant to a tax-sharing agreement, the Bank pays to the Company
an amount equal to its individual tax liability on the accrual
method of federal income tax reporting. The accrual method
generates more timely payments of current tax liabilities by the
Bank
-48-
<PAGE>
to the Company, increasing the regularity of cash flow and shifting
the time value of such funds to the Company. In the event that the
Bank incurs losses, the Company may be required to refund tax
liabilities previously collected. Current tax liabilities totaling
$885,000 were paid by the Bank (including First State, N.A.,
Odessa) to the Company during 1996, compared to a total of $930,000
in 1995. Of the amount paid in 1995, $81,000 represented the final
settlement of tax liabilities between the Company and the Bank for
the year ended December 31, 1993.
From January 1, 1989 through December 31, 1995, the Company
collected federal income taxes from the Bank based on an effective
tax rate of approximately 34% and paid taxes to the federal
government at the rate of approximately 2% as a result of the
utilization of the Company's net operating loss carryforwards for
both regular tax and alternative minimum tax purposes. At
December 31, 1995, the Company's net operating loss carryforwards
for alternative tax purposes had been fully utilized. As a result,
the Company began paying federal income taxes at the effective tax
rate of approximately 20% during the first quarter of 1996. The
Company still has net operating carryforwards available for regular
federal income tax purposes.
The Bank pays management fees to the Company for services
performed. These services include, but are not limited to,
financial and accounting consultation, attendance at the Bank's
board meetings, audit and loan review services and related
expenses. The Bank paid a total of $162,000 in management fees to
the Company in 1996, compared to $175,000 in 1995. The Company's
fees must be reasonable in relation to the management services
rendered, and the Bank is prohibited from paying management fees to
the Company if the Bank would be undercapitalized after any such
distribution or payment.
At December 31, 1995, the Company had a note payable to the
Amarillo Bank. This note (the "Term Note") had a maturity of
April 15, 1996. On April 15, 1996, the Company paid the Amarillo
Bank $100,000 to reduce the outstanding principal balance to
$371,000 and the maturity date was extended to April 15, 1999.
Equal principal payments of $31,000, plus accrued interest, were
due quarterly on January 15, April 15, July 15 and October 15. The
Term Note bore interest at the Amarillo Bank's floating base rate
plus 1% and was collateralized by 100% of the stock of the Bank
(including at that time First State, N.A., Odessa). The loan
agreement between the Company and the Amarillo Bank contained
certain covenants that, among other things, restricted the ability
of the Company to incur additional debt, to create liens on its
property, to merge or to consolidate with any other person or
entity, to make certain investments, to purchase or sell assets or
to pay cash dividends on the common stock without the approval of
the Amarillo Bank if the indebtedness due to the Amarillo Bank was
$1,000,000 or greater. The loan agreement also required the Company
and the Bank to meet certain financial ratios, all of which had
been satisfied. The remaining principal balance of the Term Note
was paid on October 15, 1996.
In addition, at December 31, 1996, the Company had notes
payable to one current and two former directors of the Company
aggregating $228,000. The notes had an original face amount of
$350,000, but were discounted upon issuance because they bear
interest at a below-market interest rate (6%). The notes are
payable in three equal annual installments plus interest. The
first annual principal installment of $117,000 was made on March 1,
1996. The notes represent a portion of the final settlement of
certain litigation. See "Note 14: Commitments and Contingent
Liabilities" to the Company's Consolidated Financial Statements.
At December 31, 1996, the Bank had a $12,000 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.
On January 28, 1997, the Company borrowed $800,000 from the
Amarillo Bank to finance a portion of the cost of acquiring Crown
Park. The terms of the loan provide that this loan accrues interest
at a floating per annum rate equal to the Amarillo Bank's base rate
plus one-half percent, principal and interest is payable on demand,
but if no demand is made, at maturity and the loan matures on
April 23, 1997. The loan is secured by a pledge of all of the stock
of Independent Financial and the Bank and has certain other loan
provisions, including limitations on additional debt, purchases and
sales of assets, and acquisitions and mergers, dividend
restrictions if total debt to the Amarillo Bank exceeds $1,200,000
and certain financial covenants (minimum capital of $12,500,000 for
the Company and $11,500,000 for the Bank; minimum capital to assets
ratios for the Company and the Bank of 6.5% for the first two years
and 7.0% thereafter; nonperforming loans to total loans and
nonperforming assets to total loans ratios for the
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<PAGE>
Bank of 1.5% and 2.0%, respectively; and minimum net income after
tax for the Bank of $70,000 quarterly). At the date of this report,
the Company was in compliance with all terms of the loan agreement.
The loan agreement provides that at maturity, the Amarillo Bank
will renew the note into a term note in an amount not to exceed the
outstanding balance. The term note would be payable over seven
years in annual principal installments with interest payable
quarterly. On February 14, 1997, the Company used $400,000 of the
net proceeds from the sale of shares of Common Stock to the
underwriter of the Company's recent Common Stock offering pursuant
to the underwriters' over-allotment option to reduce the principal
amount of the the Amarillo Bank loan from $800,000 to $400,000.
CAPITAL RESOURCES
At December 31, 1996, stockholders' equity totaled
$14,937,000, or 7.3% of total assets, compared to $13,818,000, or
7.7% of total assets, at December 31, 1995.
Bank regulatory authorities in the United States have issued
risk-based capital standards by which all bank holding companies
and banks are evaluated in terms of capital adequacy. These
guidelines relate a banking company's capital to the risk profile
of its assets. The risk-based capital standards require all banks
to have Tier 1 capital of at least 4%, and total capital (Tier 1
and Tier 2) of at least 8%, of risk-weighted assets. Tier 1
capital includes common stockholders' equity, qualifying perpetual
preferred stock and minority interests in unconsolidated
subsidiaries, reduced by goodwill and net deferred tax assets in
excess of regulatory capital limits. Tier 2 capital may be
comprised of certain other preferred stock, qualifying debt
instruments and all or part of the allowance for possible loan
losses.
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 Bank's risk-based capital ratios and leverage ratios to the
minimum regulatory requirements at December 31, 1996 and on a pro
forma basis at December 31, 1996, to reflect the Offering and the
acquisition of Crown Park:
<TABLE>
<CAPTION>
Pro Forma at
The Company December 31, 1996 December 31, 1996
----------- ----------------- -----------------
(Dollars in thousands)
<S> <C> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized
gain on available-for-sale securities $ 14,346 $ 18,496
Preferred stockholders' equity (1) 566 566
Goodwill (957) (3,443)
--------- ---------
Total Tier 1 capital 13,955 15,619
--------- ---------
Tier 2 capital:
Allowance for possible loan losses (2) 793 1,148
Subordinated debt 0 500
--------- ---------
Total Tier 2 capital 793 1,648
--------- ---------
Total capital $ 14,748 $ 17,267
========= =========
Risk-weighted assets $ 100,773 $ 142,070
========= =========
Adjusted quarterly average assets $ 203,559 $ 262,437
========= =========
</TABLE>
-50-
<PAGE>
<TABLE>
<CAPTION>
Minimum Actual
Regulatory Ratios for Pro Forma at
The Company Requirement(3) December 31, 1996 December 31, 1996
- ----------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Tier 1 capital to risk-weighted assets ratio 8.00% 13.85% 10.99%
Total capital to risk-weighted assets ratio 10.00 14.64 12.15
Leverage ratio 6.00 6.86 5.95
The Bank
- --------
Tier 1 capital to risk-weighted assets ratio 8.00% 12.57% 9.93%
Total capital to risk-weighted assets ratio 10.00 13.36 11.08
Leverage ratio 6.00 6.19 5.45
_______________________________
(1) Limited to 25% of total Tier 1 capital, with any remainder
qualifying as Tier 2 capital.
(2) Limited to 1.25% of risk-weighted assets.
(3) For well capitalized banking organizations.
</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, the
Company and the Bank were both "well capitalized" at December 31,
1996.
The Company's ability to generate capital internally through
retention of earnings and access to capital markets is essential
for satisfying the capital guidelines for bank holding companies as
prescribed by the Federal Reserve Board.
The payment of dividends on the Common Stock and the Series C
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 Bank, funding requirements and
financial condition, applicable loan covenants and applicable laws
and regulations. The Company's ability to pay cash dividends is
restricted by the requirement that it maintain a certain level of
capital as discussed above in accordance with regulatory guidelines
and by the terms of its loan agreement with the Amarillo Bank.
Holders of the Series C Preferred Stock are entitled to receive,
if, as and when declared by the Company's board of directors, out
of funds legally available therefor, quarterly cumulative cash
dividends at the annual rate of 10%. The Federal Reserve Board has
promulgated a policy prohibiting bank holding companies from paying
dividends on common stock unless such bank holding company can pay
such dividends from current earnings. The Federal Reserve Board
has asserted that this policy is also applicable to payment of
dividends on preferred stock. Such an interpretation may limit the
ability of the Company to pay dividends on the Series C Preferred
Stock.
The Company began paying quarterly cash dividends of $0.03 per
share on its Common Stock during the second quarter of 1994. The
Company also paid a 33-1/3% stock dividend on May 31, 1995. The
Company's Board of Directors increased the Company's quarterly
Common Stock cash dividend to $0.05 per share effective for the
cash dividend payable on May 31, 1996.
In connection with the Company's acquisition of Crown Park and
its subsidiary, Western National, sold an aggregate of 316,250
shares of the Common Stock in an underwritten offering at a price
of $14.25 per share. This amount included 41,250 shares covered by
the underwriters' over-allotment option. The Company received net
proceeds of approximately $4,150,000 from its offering, after
expenses of approximately $200,000.
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<PAGE>
ACCOUNTING MATTERS
In June 1996, the FASB issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings. This Statement requires that after a
transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after
December 31, 1996.
In February 1997, the FASB issued Statement of Accounting
Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128
simplifies the standards for computing earnings per share ("EPS")
previously found in APB Opinion No. 15, "Earnings per Share"
("Opinion 15"), and make them comparable to international EPS
standards. FAS 128 replaces the presentation of primary EPS with
a presentation of basic EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15. FAS 128 also requires dual presentation of
basic and diluted EPS on the face of the income statement for
entities with complex capital structures and a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. FAS 128
is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier
application is not permitted. FAS 128 requires restatement of all
prior-period EPS data presented.
Management does not believe that the adoption of these
pronouncements will have a material impact on the financial
statements of the Company.
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<PAGE>
[LOGO - INDEPENDENT BANKSHARES, INC.]
[LOGO] Independent Bankshares, Inc.
P.O. Box 3296 / Abilene, Texas 79604 / 915-677-5550
