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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-10196
INDEPENDENT BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-1717279
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
547 Chestnut Street
Abilene, Texas 79602
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (915) 677-5550
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.25 per share
Securities Registered Pursuant to Section 12(g) of the Act:
None
______________________________
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, based on the market value of such
stock on March 17, 1997, was $18,982,000. For purposes of this
computation, all executive officers, directors and 5% beneficial
owners of the Registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such executive
officers, directors and beneficial owners are, in fact, affiliates
of the Registrant. At March 17, 1997, 1,420,894 shares of the
Registrant's common stock, $0.25 par value per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
into the indicated part or parts of this report:
(1) Annual Report to Shareholders for the fiscal year ended
December 31, 1996, furnished to the Commission pursuant to
Rule 14a-3(b) - Part II and Part IV.
(2) Definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A in connection with the Annual
Meeting of Shareholders to be held April 29, 1997 - Part III.
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PART I
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND
ITEMS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS OF INDEPENDENT BANKSHARES, INC. AND ITS SUBSIDIARIES MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. CERTAIN FACTORS THAT COULD CONTRIBUTE TO SUCH
DIFFERENCES ARE DISCUSSED WITH THE FORWARD-LOOKING STATEMENTS
THROUGHOUT THIS REPORT AND ARE SUMMARIZED IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE."
ITEM 1. BUSINESS
General
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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.
In connection with its recent acquisition of Crown Park
Bancshares, Inc. ("Crown Park") and its subsidiary Western National
Bank ("Western National"), the Company merged, on December 30,
1996, its former subsidiary bank, First State Bank, National
Association, Odessa, Texas ("First State, N.A., Odessa"), with and
into the Bank in order to recognize certain cost savings and to
utilize the banks' capital more effectively than on a stand alone
basis.
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.
At December 31, 1996, the Company had, on a consolidated
basis, total assets of $205,968,000, total deposits of
$189,575,000, total loans, net of unearned income, of $92,017,000
and total stockholders' equity of $14,937,000. The Company's net
income has grown from $224,000 in 1991 to $1,422,000 in 1996.
Additionally, since 1991, the Company's total loans have grown at
a 12% average annual rate, resulting from a combination of internal
growth and the Company's acquisition of community banks.
The Company's complete mailing address and telephone number is
547 Chestnut Street, Abilene, Texas 79602, (915) 677-5550.
The Bank
- --------
The Company conducts substantially all of its business through
the Bank and its various branches in West Texas. Each of the
Bank's branches is an established franchise with a significant
presence in its respective service area. The main branch in Abilene
was the third largest of four commercial banks headquartered in
Abilene, Texas, in terms of total deposits at June 30, 1996, the
latest date for which information is available, and was the fifth
largest of ten banks in Abilene in terms of total branch deposits
at the same time. The branches in Stamford and Winters were the
largest bank branches in those cities in terms of total deposits at
June 30, 1996. The Odessa branch was the sixth largest of eight
banks in Odessa in terms of total branch deposits at June 30, 1996.
The branch in San Angelo was the eighth largest of ten banks in
terms of total branch deposits in that city at June 30, 1996. The
branch in Lubbock, acquired in January 1997, was the ninth largest
of twelve banks in terms of total branch deposits in that city at
June 30, 1996. The Bank operates through its branches as a
community bank that focuses on long-term relationships with
customers and provides individualized, quality service. Reflecting
its community banking heritage, the Bank has a stable deposit base
from customers located within its West Texas market area. Its
recent financial performance is characterized by consistent core
earnings, an increasingly diversified loan portfolio and strong
asset quality. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation (the "FDIC") to the maximum extent
provided by law.
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At December 31, 1996, the Bank had total assets of
$204,625,000, total deposits of $189,904,000, total loans, net of
unearned income of $92,017,000, and total stockholders' equity of
$13,487,000.
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
provide 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.
Acquisition of Subsidiary Banks
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Crown Park and Western National. On January 28, 1997, the
Company consummated the acquisition of Crown Park and its wholly
owned subsidiary bank, Western National, for an aggregate cash
purchase price of $7,510,000. The purchase price was initially
$7,425,000, but was adjusted to increase by the amount of interest
earned on the purchase price from December 1, 1996, through January
27, 1997, at a rate equal to the 26-week United States Treasury
Bill rate plus 2% (i.e., $85,000). The aggregate purchase price
included $143,000 that was paid to Crown Park's financial advisor.
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,
simultaneously with the closing, the Company consummated an
underwritten public offering of an aggregate of 316,250 shares of
its common stock 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 "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." 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.
The Company intends to increase the profitability of Western
National by expanding its loan portfolio and deposit base. The
Company believes enhanced marketing efforts, expanded loan and
deposit products and increased employee training and personal
attention to customers will promote this growth. The Company also
believes that savings can be realized in the area of noninterest
expenses through consolidation of operations. In addition to the
immediate increase in asset size and the potential for improved
future profitability, the Crown Park acquisition will allow the
Company to expand its market area into what the Company believes
are desirable banking locations. This expansion will increase the
geographic diversity of the Company's loan portfolio, which is
expected to decrease the Company's overall lending risks.
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San Angelo Branch. On May 27, 1996, First State, N.A.,
Abilene assumed the deposits and certain other liabilities and
purchased the loans and certain other assets of the San Angelo,
Texas branch of Coastal Banc ssb ("Coastal Banc - San Angelo") in
a cash transaction. On the date of the acquisition, Coastal Banc -
San Angelo had approximately $14,895,000 in total deposits and
$155,000 in total loans. The acquisition was accounted for under
the purchase method of accounting, and the assets and liabilities
of this branch were recorded at their estimated fair value. A
total of $743,000 of goodwill was recorded as a result of the
acquisition. Coastal Banc - San Angelo became a branch of the
Bank.
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. These amounts are not included
in the Consolidated Balance Sheet for the Company at December 31,
1995. The acquisition was accounted for under the purchase method
of accounting, and the assets and liabilities of Peoples National
were recorded at their estimated fair value. A total of $260,000
of goodwill was recorded as a result of this acquisition.
Other Subsidiaries
At the present time, the Company does not have any
subsidiaries other than Independent Financial and the Bank.
Business Strategy
The Company's strategic plan contemplates an increase in
profitability and shareholder value through the building of a
valuable West Texas banking franchise consisting of low cost core
deposits as a funding base to support local consumer and commercial
lending programs. The Company's acquisition activities have been
designed to augment this franchise by increasing market share and
expanding into contiguous markets demographically similar to its
current service areas. Following the recent acquisition of Crown
Park and its subsidiary Western National, the Company has locations
in four of the fastest growing consumer markets in West Texas.
Management believes that it can increase the profitability of the
Company through increased operating efficiencies, an increase in
the loan to deposit ratio and cross-selling a more expansive
product line to newly acquired customers.
The Company's operating strategy is to provide customers with
the business sophistication and breadth of products of a regional
financial services company, while retaining the special attention
to personal service and the local appeal of a community bank.
Decentralized decision making authority vested in the presidents
and senior officers of the Abilene, Lubbock and Odessa branches
allows for rapid response time and flexibility in dealing with
customer requests and credit needs. The participation of the
Company's directors, officers and employees in area civic and
service organizations demonstrates the Company's continuing
commitment to the communities it serves. Management believes that
these qualities distinguish the Company from its competitors and
will allow the Company to compete successfully in its market
against larger regional and out-of-state institutions.
Supervision and Regulation
References in this report to applicable statutes, regulations
and policies are brief summaries thereof, do not purport to be
complete, and are qualified in their entirety by reference to such
statutes, regulations and policies.
REGULATION AND SUPERVISION
THE COMPANY
General
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The Company is a bank holding company registered with, and
subject to regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). Federal law subjects
bank holding companies to particular restrictions on the types of
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activities in which they may engage and to a range of supervisory
requirements and activities, including regulatory enforcement
actions for violations of laws and policies.
Scope of Permissible Activities
-------------------------------
The BHCA prohibits a bank holding company, with certain
limited exceptions, from acquiring direct or indirect ownership or
control of any voting shares of any company that is not a bank or
from engaging in any activities other than those of banking. One
principal exception to these prohibitions allows the acquisition of
interests in companies whose activities are found by the Federal
Reserve Board, by order or regulation, to be so closely related to
banking as to be a proper incident thereto. Some of the activities
that have been determined by regulation to be closely related to
banking are making or servicing loans, performing certain data
processing services, acting as an investment or financial advisor
to certain investment trusts and investment companies and providing
certain securities brokerage services. In approving acquisitions by
the Company of entities engaged in banking-related activities, the
Federal Reserve Board would consider a number of factors, including
the expected benefits to the public, such as greater convenience
and increased competition or gains in efficiency, which would be
weighed against the risk of potential negative effects, such as
undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal
Reserve Board may also differentiate between activities commenced
DE NOVO and activities commenced through the acquisition of a going
concern. The Company has no current plans to form or acquire any
non-banking subsidiaries.
The Federal Reserve Board has approved applications by bank
holding companies to engage, through nonbank subsidiaries, in
certain securities-related activities (underwriting of municipal
revenue bonds, commercial paper, consumer-receivable-related
securities and certain mortgage-backed securities), provided that
the subsidiaries would not be "principally engaged" in such
activities for purposes of Section 20 of the Glass-Steagall Act. In
very limited situations, holding companies may be able to use such
subsidiaries to underwrite and deal in corporate debt and equity
securities. Bills from time to time have been introduced in both
the U.S. Senate and House of Representatives that would, if
enacted, remove many of the restraints imposed by the
Glass-Steagall Act, although no comprehensive bill has been enacted
to date.
On March 26, 1996 the U.S. Supreme Court ruled that Section 92
of the National Bank Act preempts state insurance laws which
prevent banks from exercising insurance powers granted under those
laws. Section 92 grants national banks located and doing business
in a place with a population not exceeding 5,000 inhabitants the
authority to act as insurance agent for any insurance company
authorized to do business in a state where the bank is located. In
response to this decision, on June 20, 1996, the Texas Department
of Insurance ("TDI") issued its "Interim Procedures for Banks
Selling Insurance" which contain licensing and consumer protection
guidance that apply to banks and savings associations located in
Texas. The TDI has stressed that these are only interim guidelines
intended to be in effect until the Texas Legislature or Congress
resolves some remaining issues which serve as impediments to the
ability of the banks to take full advantage of this activity. In
addition, the Comptroller has issued an advisory letter which
provides guidance to national banks regarding insurance and annuity
sales activities. The Comptroller has subsequently approved
applications by banks to engage in such general insurance agency
activities through operating subsidiaries.
Bank holding companies are not permitted to engage in unsafe
or unsound banking practices. For example, the Federal Reserve
Board's Regulation Y requires a holding company to give the Federal
Reserve Board prior notice of any redemption or repurchase of its
own equity securities, if the consideration to be paid, together
with the consideration paid for any repurchases or redemptions in
the preceding twelve-month period, is equal to 10% or more of the
company's consolidated net worth. The Federal Reserve Board may
oppose the transaction if it would constitute an unsafe or unsound
practice or would violate any law or regulation. Additionally, a
holding company may not impair the financial soundness of a
subsidiary bank by causing it to make funds available to nonbanking
subsidiaries or their customers when such a transaction would not
be prudent. The Federal Reserve Board may exercise several
administrative remedies including cease-and-desist powers over
parent holding companies and nonbanking subsidiaries when the
actions of such companies would constitute a serious threat to the
safety, soundness or stability of a subsidiary bank.
The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") expanded the Federal Reserve Board's
authority to prohibit activities of bank holding companies and
their nonbanking subsidiaries that
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represent unsafe and unsound banking practices or that constitute
violations of laws or regulations. FIRREA authorizes the
appropriate banking agency to issue cease and desist orders that
may, among other things, require affirmative action to correct any
harm resulting from a violation or practice, including restitution,
reimbursement, indemnification or guarantee against loss. A
financial institution may also be ordered to restrict its growth,
dispose of certain assets or take other appropriate action as
determined by the ordering agency.
FIRREA increased the amount of civil money penalties that the
Federal Reserve Board may assess for certain activities conducted
on a knowing and reckless basis, if those activities cause a
substantial loss to a depository institution. The penalties may
reach as much as $1,000,000 per day. FIRREA also expanded the scope
of individuals and entities or "institution-affiliated parties"
against which such penalties may be assessed. In addition, FIRREA
contains a "cross-guarantee" provision that makes commonly
controlled insured depository institutions liable to the FDIC for
any losses incurred, or reasonably anticipated to be incurred, in
connection with the failure of an affiliated insured depository
institution. The FDIC must present its claim within two years of
incurring such loss and may require either immediate or installment
payments.
Bank holding companies and their affiliates are prohibited
from tying the provision of certain services, such as extensions of
credit, to certain other services offered by a holding company or
its affiliates.
The Company is required to file quarterly and annual reports
with the Federal Reserve Bank of Dallas (the "Federal Reserve
Bank") and such additional information as the Federal Reserve Bank
may require pursuant to the BHCA. The Federal Reserve Bank may
examine a bank holding company or any of its subsidiaries and
charge the examined institution for the cost of such an
examination. The Company is also subject to reporting and
disclosure requirements under state and federal securities laws.
Capital Adequacy Requirements
-----------------------------
The Federal Reserve Board monitors the capital adequacy of
bank holding companies. The Federal Reserve Board has adopted a
system using a combination of risk-based guidelines and leverage
ratios to evaluate the capital adequacy of bank holding companies.
Under the risk-based capital guidelines, each category of assets is
assigned a different risk weight, based generally on the perceived
credit risk of the asset. These risk weights are multiplied by
corresponding asset balances to determine a "risk-weighted" asset
base. Certain off-balance sheet items, which previously were not
expressly considered in capital adequacy computations, are added to
the risk-weighted asset base by converting them to a balance sheet
equivalent and assigning to them the appropriate risk weight. In
addition, the guidelines define the capital components. Total
capital is defined as the sum of "Tier 1" and "Tier 2" capital
elements, with "Tier 2" being limited to 100% of "Tier 1." For bank
holding companies, "Tier 1" capital includes, with certain
restrictions, common stockholders' equity and qualifying perpetual
preferred stock and minority interests in consolidated
subsidiaries, reduced by goodwill and net deferred tax assets in
excess of regulatory capital limits. "Tier 2" capital includes,
with certain limitations, certain other preferred stock, as well as
qualifying debt instruments and all or part of the allowance for
possible loan losses.
The guidelines require a minimum ratio of qualifying total
capital to total risk-weighted assets of 8.0% (of which at least
4.0% is required to be in the form of "Tier 1" capital elements).
At December 31, 1996, the Company's ratios of "Tier 1" and total
capital to risk-weighted assets were 13.85% and 14.64%,
respectively. At such date, both ratios exceeded regulatory
minimums. The pro forma calculation of the Company's ratios of
"Tier 1" and total capital to risk-weighted assets would have been
10.99% and 12.15%, respectively, had the acquisition of Crown Park
occurred at December 31, 1996.
In addition to the risk-based capital guidelines, the Federal
Reserve Board and the FDIC have adopted the use of a leverage ratio
as an additional tool to evaluate the capital adequacy of bank
holding companies and banks. The leverage ratio is defined to be a
company's "Tier 1" capital divided by its adjusted quarterly
average total assets. The leverage ratio adopted by the federal
banking agencies requires a minimum 6.0% "Tier 1" capital to
adjusted quarterly average total assets ratio for a banking
organization to be considered well capitalized. The Company's and
the Bank's leverage ratios at December 31, 1996, were 6.86% and
6.19%, respectively, and each was considered to be well
capitalized. However, the pro forma calculation of the Company's
and the Bank's leverage ratios would have been 5.95% and 5.45%,
respectively, had the acquisition of Crown Park occurred at
December 31, 1996. As a result, the
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Company and the Bank would have been considered to be at least
adequately capitalized under the risk-based capital guidelines.
A bank holding company that fails to meet the applicable
capital standards will be at a disadvantage. For example, Federal
Reserve Board policy discourages the payment of dividends by a bank
holding company from borrowed funds as well as payments that would
adversely affect capital adequacy. Failure to meet the capital
guidelines may result in institution by the Federal Reserve Board
of appropriate supervisory or enforcement actions.
Imposition of Liability for Undercapitalized Subsidiaries
---------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") became effective at various times through
January 1994. FDICIA requires bank regulators to take "prompt
corrective action" to resolve problems associated with insured
depository institutions. In the event an institution becomes
"undercapitalized," it must submit a capital restoration plan. The
capital restoration plan will not be accepted by applicable
regulators unless each company "having control of" the
undercapitalized institution "guarantees" the subsidiary's
compliance with the capital restoration plan until it becomes
"adequately capitalized." The Company has control of the Bank for
purposes of this statute.
Under FDICIA, the aggregate liability of all companies
controlling a particular institution is generally limited to the
lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to bring the institution
into compliance with applicable capital standards. FDICIA grants
greater powers to regulatory authorities in situations where an
institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan. For
example, a bank holding company controlling such an institution may
be required to obtain prior Federal Reserve Board approval of
proposed dividends or could be required to consent to a merger or
to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies
--------------------------------------
Subject to certain exceptions, the BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve
Board before it may acquire all or substantially all of the assets
of any bank, or ownership or control of any voting shares of any
bank, if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank. In
approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial
resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be
served, and various competitive factors. The Attorney General of
the United States may, within 30 days after approval of an
acquisition by the Federal Reserve Board, bring an action
challenging such acquisition under the federal antitrust laws, in
which case the effectiveness of such approval is stayed pending a
final ruling by the courts.
Currently, the Federal Reserve Board will only allow the
acquisition by a bank holding company of an interest in any bank
located in another state if the statutory laws of the state in
which the target bank is located expressly authorize such
acquisition. The Texas Banking Act permits, in certain
circumstances, out-of-state bank holding companies to acquire
certain existing banks and bank holding companies in Texas.
However, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Interstate Act"), permits bank holding
companies to acquire banks located in any state without regard to
whether the transaction is prohibited under any state law, except
that states may establish the minimum age of their local banks
subject to interstate acquisition by out-of-state bank holding
companies. The minimum age of local banks subject to interstate
acquisition is limited to a maximum of five years.
FDICIA eased restrictions on cross-industry mergers. Members
of the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF") are generally allowed to merge, assume each
other's deposits, and transfer assets in exchange for an assumption
of deposit liabilities. A formula applies to treat insurance
assessments relating to acquired deposits as if they were still
insured through the acquired institution's insurance fund. The
transaction must be approved by the appropriate federal banking
regulator. In considering such approval, the regulators take into
account applicable capital requirements, certain interstate banking
restrictions and other factors.
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The Competitive Equality Banking Act of 1987 ("CEBA") amended
the Federal Deposit Insurance Act and certain other statutes to
provide federal regulatory agencies with expanded authority to deal
with troubled institutions. Among other things, CEBA expanded the
ability of out-of-state holding companies to acquire certain
financial institutions that are in danger of closing and permits
the FDIC, in certain circumstances, to establish a "bridge bank" to
assume the deposits or liabilities of one or more closed banks or
to perform certain other functions.
THE BANK
General
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The Bank is a national banking association organized under the
National Bank Act of 1864, as amended (the "National Bank Act"),
and is subject to regulatory supervision and examination by the
Office of the Comptroller of the Currency (the "Comptroller").
Pursuant to such regulation, the Bank is subject to special
restrictions, supervisory requirements and potential enforcement
actions.
Permissible Activities for National Banks
-----------------------------------------
The National Bank Act delineates the rights, privileges and
powers of national banks and defines the activities in which
national banks may engage. National banks are authorized to engage
in the following: make, arrange, purchase or sell loans or
extensions of credit secured by liens on interests in real estate;
purchase, hold and convey real estate under certain conditions;
offer certain trust services to the public; deal in investment
securities in certain circumstances; and, more broadly, engage in
the "business of banking" and activities that are "incidental" to
banking. Specifically, the following are a few of the activities
deemed incidental to the business of banking: the borrowing and
lending of money; receiving deposits, including deposits of public
funds; holding or selling stock or other property acquired in
connection with security on a loan; discounting and negotiating
evidences of debt; acting as guarantor, if the bank has a
"substantial interest in the performance of the transaction";
issuing letters of credit to or on behalf of its customers;
operating a safe deposit business; providing check guarantee plans;
issuing credit cards; operating a loan production office; selling
loans under repurchase agreements; selling money orders at offices
other than bank branches; providing consulting services to banks;
and verifying and collecting checks.
In general, statutory restrictions on the activities of banks
are aimed at protecting the safety and soundness of such depository
institutions. Many of the statutory restrictions limit the
participation of national banks in the securities and insurance
product markets. These restrictions do not now affect the Bank,
because the Bank is not presently involved in the types of
transactions covered by the restrictions.
Branching
---------
National banks may establish a branch anywhere in Texas
provided that the branch is approved in advance by the Comptroller,
which considers a number of factors, including financial history,
capital adequacy, earnings prospects, character of management,
needs of the community and consistency with corporate powers. The
Interstate Banking Act, which expands the authority of bank holding
companies and banks to engage in interstate bank acquisitions and
interstate banking, allows each state the option of "opting out" of
the interstate branching (but not banking) provisions. The Texas
Legislature opted out of the interstate branching provisions during
its 1995 Session. Interstate banking was effective on September 29,
1995, and interstate branching would have become effective in Texas
in June of 1997, if Texas had not elected to "opt out." The Texas
Legislature "opt-out" legislation prohibiting interstate branching
is effective until September of 1999.
Restrictions on Transactions with Affiliates
--------------------------------------------
Certain provisions of FDICIA applicable to the Bank enhance
safeguards against insider abuse by recodifying current law
restricting transactions among related parties. One set of
restrictions is found in Section 23A of the Federal Reserve Act,
which affects loans to and investments in "affiliates" of the Bank.
The term "affiliates" include the Company and any of its
subsidiaries. Section 23A imposes limits on the amount of such
transactions and also requires certain levels of collateral for
such loans. In addition, Section 23A limits the amount of advances
to third parties that are collateralized by the securities or
obligations of the Company or its subsidiaries.
-8-
<PAGE>
Another set of restrictions is found in Section 23B of the
Federal Reserve Act. Among other things, Section 23B requires that
certain transactions between the Bank and its affiliates must be on
terms substantially the same, or at least as favorable to the Bank,
as those prevailing at the time for comparable transactions with or
involving other nonaffiliated companies. In the absence of such
comparable transactions, any transaction between the Bank and its
affiliates must be on terms and under circumstances, including
credit underwriting standards and procedures, that in good faith
would be offered to or would apply to nonaffiliated companies. The
Bank is also subject to certain prohibitions against advertising
that suggests that the Bank is responsible for the obligations of
its affiliates.
The restrictions on loans to insiders contained in the Federal
Reserve Act and Regulation O of the Federal Reserve Board now apply
to all insured institutions and their subsidiaries and holding
companies. The aggregate amount of an institution's loans to
insiders is limited to the amount of its unimpaired capital and
surplus, unless the FDIC determines that a lesser amount is
appropriate. The Bank may pay, on behalf of any executive officer
or director, an amount exceeding funds on deposit in that
individual's personal account only if there is a written,
preauthorized, interest-bearing extension of credit specifying a
method of repayment and a written preauthorized transfer of funds
from another account of the executive officer or director at the
Bank. Insiders are subject to enforcement actions for knowingly
accepting loans in violation of applicable restrictions.
Interest Rate Limits and Lending Regulations
--------------------------------------------
The Bank is subject to various state and federal statutes
relating to the extension of credit and the making of loans. The
maximum legal rate of interest that the Bank may charge on a loan
depends on a variety of factors such as the type of borrower,
purpose of the loan, amount of the loan and date the loan is made.
Texas statutes establish maximum legal rates of interest for
various lending situations.
Loans made by banks located in Texas are subject to numerous
other federal and state laws and regulations, including
truth-in-lending statutes, the Texas Consumer Credit Code, the
Equal Credit Opportunity Act, the Real Estate Settlement Procedures
Act and the Home Mortgage Disclosure Act. These laws provide
remedies to the borrower and penalties to the lender for failure of
the lender to comply with such laws. The scope and requirements of
these laws and regulations have expanded in recent years, and
claims by borrowers under these laws and regulations may increase.
Restrictions on Subsidiary Bank Dividends
-----------------------------------------
Dividends payable by the Bank to Independent Financial are
restricted under the National Bank Act. The Bank's ability to pay
dividends is further restricted by the requirement that it maintain
adequate capital in accordance with capital adequacy guidelines
promulgated from time to time by the Comptroller. See "Dividend
Policy." Moreover, the prompt corrective provisions of FDICIA and
implementing regulations prohibit a bank from paying a dividend if,
following the payment, the bank would be in any of the three
capital categories for undercapitalized institutions. See "Capital
Adequacy Requirements" below.
Examinations
------------
The Comptroller periodically examines and evaluates national
banks. Based upon such evaluations, the Comptroller may revalue
certain assets of an institution and require that it establish
specific reserves to compensate for the difference between the
regulatory-determined value and the book value of such assets. The
Comptroller is authorized to assess the institution an annual fee
based upon deposits for, among other things, the costs of
conducting the examinations.
Capital Adequacy Requirements
-----------------------------
FDICIA, among other things, substantially revised existing
statutory capital standards, restricted certain powers of state
banks, gave regulators the authority to limit officer and director
compensation and required holding companies to guarantee the
capital compliance of their banks in certain instances. Among other
things, FDICIA requires the federal banking agencies to take
"prompt corrective action" with respect to banks that do not meet
minimum capital requirements. FDICIA established five capital
tiers: "well capitalized," "adequately capitalized,"
-9-
<PAGE>
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized," as defined by regulations adopted by
the Federal Reserve Board, the FDIC and the other federal
depository institution regulatory agencies. A depository
institution is well capitalized if it significantly exceeds the
minimum level required by regulation for each relevant capital
measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure,
significantly undercapitalized if it is significantly below such
measure and critically undercapitalized if it fails to meet any
critical capital level set forth in the regulations. The critical
capital level must be a level of tangible equity capital equal to
the greater of 2% of total tangible assets or 65% of the minimum
leverage ratio to be prescribed by regulation. An institution may
be deemed to be in a capitalization category that is lower than is
indicated by its actual capital position if it receives an
unsatisfactory examination rating. At December 31, 1996, the Bank
was well capitalized.
Banks with capital ratios below the required minimum are
subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a
temporary suspension of insurance without a hearing in the event
the institution has no tangible capital.
Corrective Measures for Capital Deficiencies
--------------------------------------------
FDICIA requires the federal banking regulators to take "prompt
corrective action" with respect to capital-deficient institutions
with the overall goal to reduce losses to the depository insurance
fund. In addition to requiring the submission of a capital
restoration plan (as discussed above), FDICIA contains broad
restrictions on certain activities of undercapitalized institutions
involving asset growth, acquisitions, branch establishment and
expansion into new lines of business. With certain exceptions, an
insured depository institution is prohibited from making capital
distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution's capital decreases, the FDIC's powers and
scrutiny become greater. A significantly under-capitalized
institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with
affiliates, removal of management, and other restrictions. Under
proposed regulations, an institution will be considered critically
undercapitalized if its tangible equity to assets ratio falls below
2%. The FDIC has only very limited discretion in dealing with a
critically undercapitalized institution and is virtually required
to appoint a receiver or conservator.
Real Estate Lending Evaluations and Appraisal Requirements
----------------------------------------------------------
The FDIC is required by the Federal Deposit Insurance Act to
assess all banks in order to adequately fund the BIF so as to
resolve any insured institution that is declared insolvent by its
primary regulator. FDICIA required the federal banking regulators
to adopt uniform standards for evaluations by the regulators of
loans collateralized by real estate or made to finance improvements
to real estate. In formulating the standards, the banking agencies
were required to take into consideration the risk posed to the
insurance funds by real estate loans, the need for safe and sound
operation of insured depository institutions and the availability
of credit. FDICIA also prohibits the regulators from adversely
evaluating a real estate loan or investment solely on the grounds
that the investment involves commercial, residential or industrial
property, unless the safety and soundness of an institution may be
affected.
The federal agencies adopted a number of regulatory standards
with regard to real estate lending. These standards require banking
institutions to establish and maintain written internal real estate
lending policies. These policies must not only be consistent with
safe and sound banking practices, but must also be appropriate to
the size of the institution and the nature and scope of its
operations. The policies must establish loan portfolio
diversification standards, prudent underwriting standards,
including clear and measurable loan-to-value limits (although such
limits should not exceed specific supervisory limits), loan
administration procedures and comprehensive documentation, approval
and reporting requirements to ensure compliance with these
policies. Additionally, the institution's policies must be reviewed
and approved by that institution's Board of Directors on at least
an annual basis and such policies must be continually monitored by
the institutions to ensure compatibility with current market
conditions. In addition, banks are required to secure appraisals
for real estate-collateralized loans with a transaction value of
$250,000 or more.
-10-
<PAGE>
Deposit Insurance Assessments
-----------------------------
The FDIC is required by the Federal Deposit Insurance Act to
assess all banks in order to adequately fund the BIF so as to
resolve any insured institution that is declared insolvent by its
primary regulator. FDICIA required the FDIC to establish a
risk-based deposit insurance premium schedule. The risk-based
assessment system is used to calculate a depository institution's
semi-annual deposit insurance assessment based upon the designated
reserve ratio for the deposit insurance fund and the probability
and extent to which the deposit insurance fund will incur a loss
with respect to this institution. In addition, the FDIC can impose
special assessments to cover the cost of borrowings from the U.S.
Treasury, the Federal Financing Bank and BIF member banks.
On September 15, 1992, the FDIC issued a rule revising its
assessment regulations from the existing flat-rate system for
deposit insurance assessments (or "premiums") to a new, risk-based
assessment system. This system became effective for the assessment
period beginning January 1, 1993. Under this system, each
depository institution will be placed in one of nine assessment
categories based on certain capital and supervisory measures.
Institutions assigned to higher-risk categories - that is,
institutions that pose a greater risk of loss to their respective
deposit insurance funds - pay assessments at higher rates than
would institutions that pose a lower risk. The Bank (including
First State, N.A., Odessa) was assessed a weighted average premium
of 0.006% of deposits for the year ended December 31, 1996.
On August 8, 1995, the FDIC amended its regulations to change
the range of deposit insurance assessments charged to members of
the BIF from the then-prevailing range of 0.23% to 0.31% of
deposits, to a range of 0.04% to 0.31% of deposits. On November 14,
1995, the FDIC further reduced the deposit insurance assessments
for BIF-member institutions, such that the range of BIF assessments
is currently between 0% and 0.27% of deposits. BIF-member
institutions which qualified for the 0% assessment category were,
until September 30, 1996, required to pay the $1,000 minimum
semi-annual assessment required by federal statute.
In connection with the new rate schedule, the FDIC established
a process for raising or lowering all rates for BIF-insured
institutions semi-annually if conditions warrant a change. Under
this new system, the FDIC will have the flexibility to adjust the
entire BIF assessment rate schedule twice a year without seeking
public comment first, but only within a range of five cents per
$100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the
current schedule can be made by the FDIC only after a full
rulemaking with opportunity for public comment.
On September 30, 1996, President Clinton signed into law an
act that contained a comprehensive approach to recapitalizing the
SAIF and to assure the payment of the Financing Corporation's
("FICO") bond obligations. Under this new act, banks insured under
the BIF are required to pay a portion of the interest due on bonds
that were issued by FICO in 1987 to help shore up the ailing
Federal Savings and Loan Insurance Corporation ("FSLIC"). The
amount of FICO debt service to be paid by all BIF-insured
institutions is currently estimated to be approximately
$320,343,000 per year, or 0.013% of deposits from 1997 until the
year 2000, when the obligation of BIF-insured institutions
increases to approximately $598,500,000 or 0.024% of deposits per
year through the year 2019.
Community Reinvestment Act
--------------------------
The Community Reinvestment Act of 1977 ("CRA") and the
regulations issued by the Comptroller to implement that law are
intended to encourage banks to help meet the credit needs of their
service area, including low and moderate income neighborhoods,
consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's
record in meeting the needs of its service area when considering
applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of
another bank. FIRREA requires federal banking agencies to make
public a rating of a bank's performance under the CRA. In the case
of a bank holding company, the CRA performance record of the banks
involved in the transaction are reviewed in connection with the
filing of an application to acquire ownership or control of shares
or assets of a bank or to merge with any other bank holding
company. An unsatisfactory record can substantially delay or block
the transaction. The bank regulatory agencies in 1995 adopted final
regulations implementing the CRA. These regulations affect
extensive changes to the existing procedures for determining
compliance with the CRA and the full effect of these new
regulations cannot be determined at this time.
-11-
<PAGE>
Changing Regulatory Structure
-----------------------------
Other legislative and regulatory proposals regarding changes
in banking, and regulations of banks, thrifts and other financial
institutions, are being considered by the executive branch of the
federal government, Congress and various state governments,
including Texas. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial
services industry. The Company cannot predict accurately whether
any of these proposals will be adopted or, if adopted, how these
proposals will affect the Company or the Bank.
Expanding Enforcement Authority
-------------------------------
One of the major additional burdens imposed on the banking
industry by FDICIA is the increased ability of banking regulators
to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board and FDIC are possessed of
extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository
institutions and other holding companies. For example, the FDIC may
terminate the deposit insurance of any institution that it
determines has engaged in an unsafe or unsound practice. The
regulatory agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions and publicly
disclose such actions. FDICIA, FIRREA and other laws have expanded
the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
Effect on Economic Environment
------------------------------
The policies of regulatory authorities, including the monetary
policy of the Federal Reserve Board, have a significant effect on
the operating results of bank holding companies and their
subsidiaries. Among the means available to the Federal Reserve
Board to affect the money supply are open market operations in U.S.
Government securities, control of borrowings at the "discount
window," changes in the discount rate on member bank borrowings,
changes in reserve requirements against member bank deposits and
against certain borrowings by banks and their affiliates and the
placing of limits on interest rates that member banks may pay on
time and savings deposits. These means are used in varying
combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may affect interest
rates charged on loans or paid for deposits. Federal Reserve Board
monetary policies have materially affected the operating results of
commercial banks in the past and are expected to continue to do so
in the future. The Company cannot predict the nature of future
monetary policies and the effect of such policies on the business
and earnings of the Company and the Bank.
COMPETITION
The activities in which the Company and the Bank engage are
highly competitive. Each activity engaged in and the geographic
market served involves competition with other banks and savings and
loan associations as well as with nonbanking financial institutions
and nonfinancial enterprises. In Texas, savings and loan
associations and banks are allowed to establish statewide branch
offices. The Bank actively competes with other banks in its effort
to obtain deposits and make loans, in the scope and type of
services offered, in interest rates paid on time deposits and
charged on loans and in other aspects of banking. In addition to
competing with other commercial banks within and without its
primary service areas, the Bank competes with other financial
institutions engaged in the business of making loans or accepting
deposits, such as savings and loan associations, credit unions,
insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, factors, certain
governmental agencies, credit card organizations and other
enterprises. Additional competition for deposits comes from
government and private issues of debt obligations and other
investment alternatives for depositors such as money market funds.
The Bank also competes with suppliers of equipment in providing
equipment financing.
EMPLOYEES
At February 28, 1997, the Company and the Bank had 128
full-time equivalent employees. Employees are provided with
employee benefits, such as an employee stock ownership/401(k) plan
and life, health and long-term disability insurance plans. The
Company considers the relationship of the Bank with its employees
to be excellent.
-12-
<PAGE>
ITEM 2. PROPERTIES
At February 28, 1997, the Company occupied approximately 600
square feet of space for its corporate offices at 547 Chestnut
Street, Abilene, Texas. The Central Branch of the Bank occupies
approximately 8,000 square feet at this same facility. The
following table sets forth, at February 28, 1997, certain
information with respect to the banking premises owned or leased by
the Company and the Bank. The Company considers such premises
adequate for its needs and the needs of the Bank.
<TABLE>
<CAPTION>
Approximate
Location Square Footage Ownership and Occupancy
- ---------------- -------------- ------------------------------
<S> <C> <C>
Abilene, Texas 8,600 Owned by the Bank and occupied
by the Central Branch of the
Bank and the Company
Abilene, Texas 3,500 Owned by the Bank and occupied
by the Wylie Branch
Lubbock, Texas 24,300(1) Owned by the Bank; occupied and
leased by the Lubbock Branch
Odessa, Texas 62,400(2) Owned by the Bank; occupied and
leased by the Odessa Branch
Odessa, Texas 2,400 Leased by the Bank and occupied
by the Winwood Branch
San Angelo, Texas 6,800(3) Owned by the Bank; occupied and
leased by the San Angelo Branch
Stamford, Texas 14,000 Owned by the Bank and occupied
by the Stamford Branch
Winters, Texas 9,500 Owned by the Bank and occupied
by the Winters Branch
_________________________
(1) The Lubbock Branch occupies approximately 14,600 square feet,
leases 6,700 square feet and is attempting to lease the
remaining 3,000 square feet.
(2) The Odessa Branch occupies approximately 20,400 square feet,
leases 25,100 square feet and is attempting to lease the
remaining 16,900 square feet.
(3) The San Angelo Branch occupied approximately 3,400 square
feet, leases 2,400 square feet and is attempting to lease the
remaining 1,000 square feet.
</TABLE>
The Bank owns or leases certain additional tracts of land for
parking, drive-in facilities and for future expansion or
construction of new premises. Aggregate annual rentals of the
Company and the Bank for all leased premises during the year ended
December 31, 1996, were $40,000. This amount represents rentals
paid for the lease of land by the Wylie Branch and of banking
premises by the Winwood Branch of the Bank.
ITEM 3. LEGAL PROCEEDINGS
In CONNIE POLLARD V. FIRST STATE BANK, N.A., ODESSA, TEXAS
(Cause No. A-100,846) brought in the 70th District Court of Ector
County, Texas, the plaintiff, the former Senior Vice President,
Manager of Trust Operations of First State, N.A., Odessa, alleges,
among other things, that she was discriminated against on the basis
of her sex, she was repeatedly passed over for promotion to the
Trust Department Manager, she was paid less than male employees and
that she was constructively discharged. The plaintiff alleges
damages for past and future wages, emotional distress and
constructive discharge, actual damages, exemplary damages,
attorneys' fees, reinstatement and promotion and pre-judgment and
post-judgment interest. The Company believes the plaintiff's claims
to be without merit and intends to vigorously defend this action.
Discovery is ongoing, and the case is currently scheduled for trial
in mid-1997.
-13-
<PAGE>
The Company is involved in various other litigation
proceedings incidental to the ordinary course of business. In the
opinion of management, however, the ultimate liability, if any,
resulting from such other litigation would not be material in
relation to the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year, no matter was
submitted by the Company to a vote of its shareholders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
Since September 12, 1995, the Company's Common Stock has
traded on the American Stock Exchange (the "AMEX") under the symbol
"IBK." Prior to September 12, 1995, the Common Stock was quoted on
Nasdaq's Small-Cap Market system under the symbol "IBKS."
The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock as reported by the
AMEX and by Nasdaq Small-Cap Market, as the case may be, and the
amount of dividends per share, adjusted for the 33-1/3% stock
dividend paid to stockholders in May 1995.
Cash
Dividends
High Low Per Share
------ ----- ----------
1995
--------------
First Quarter $ 6 $ 5-1/4 $ 0.0225
Second Quarter 7-1/2 5-1/4 0.03
Third Quarter 11-1/4 7-1/4 0.03
Fourth Quarter 10-7/8 10-1/4 0.03
1996
--------------
First Quarter $ 10-1/2 $ 9-3/4 $ 0.03
Second Quarter 11 9 0.05
Third Quarter 12 10-7/8 0.05
Fourth Quarter 17-1/2 12-1/8 0.05
1997
--------------
First Quarter
(through March 17, 1997) $ 17 $ 14-3/8 $ 0.05
The Nasdaq Small-Cap Market quotations represent prices
between dealers, without retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
SHAREHOLDERS
At March 17, 1997, there were 1,558 stockholders who were
individual participants in security position listings.
-14-
<PAGE>
DIVIDEND POLICY
The Company. In May 1994, the Company instituted the payment
of a $.03 per share quarterly cash dividend, which was raised to
$0.05 per share in May 1996. The Board of Directors presently
intends to continue the payment of a small cash dividend on the
Common Stock. The continued payment of dividends and the amount and
timing of any future dividend payments, however, will be determined
by the Board of Directors and will depend upon a number of factors,
including the extent of funds legally available therefor, dividend
requirements of the Company's Series C Cumulative Convertible
Preferred Stock ("Series C Preferred Stock"), and the earnings,
business prospects, acquisition opportunities, cash needs,
financial condition, regulatory and capital requirements of the
Company and the Bank and provisions of current and future loan or
financing agreements, including the Company's existing loan
agreement with the Amarillo Bank that restricts dividends if total
debt to the Amarillo Bank exceeds $1,200,000. At the date of the
filing of this report, the Company had outstanding borrowings of
$200,000 under the Amarillo Bank loan, which borrowings financed a
portion of the cost of acquiring Crown Park. Accordingly, no
dividend restriction is currently in effect.
The Company's ability to pay cash dividends is restricted by
the requirement that it and the Bank maintain certain levels of
capital in accordance with regulatory guidelines promulgated by, in
the case of the Company, the Federal Reserve Board and, in the case
of the Bank, the Comptroller. See "Item 1. Business - Regulation
and Supervision - the Company - Capital Adequacy Requirements."
Holders of the Series C Preferred Stock are entitled to
receive, if, as and when declared by the Company's Board of
Directors, out of funds legally available therefor, in preference
to the holders of Common Stock and any other stock ranking junior
to the Series C Preferred Stock in respect of dividends, quarterly
cumulative cash dividends at the annual rate of $4.20 per share.
The aggregate annual dividend payment on the 13,478 shares of the
Series C Preferred Stock outstanding at December 31, 1996, was
approximately $57,000. If earnings and cash flow from ordinary
operations of the Company are not sufficient to enable it to pay
the full amount of the dividend on the Series C Preferred Stock,
the Company may cumulate all or a portion of the annual dividend.
The Company can cause the mandatory conversion of the Series C
Preferred Stock into Common Stock beginning in December 1997. The
Series C Preferred Stock is the Company's only outstanding
preferred issue.
The Company may not, among other things, declare or pay any
cash dividend in respect of the Common Stock or any stock junior to
the Series C Preferred Stock with respect to dividends or
liquidation rights unless, on the date of payment, all accumulated
dividends in respect of the Series C Preferred Stock are paid or
set aside. Furthermore, the Company may not declare or pay any
dividends in respect of the Common Stock or purchase, redeem or
otherwise acquire shares of Common Stock if, on the record date for
such payment, or on the date of such purchase, redemption or
acquisition, such action would cause stockholders' equity
(including mandatorily redeemable preferred stock) of the Company,
as reported in the most recent quarterly or annual financial
statements filed by the Company with the Securities and Exchange
Commission, to be less than an amount equal to the sum of (i) 140%
of the number of then outstanding shares of Series C Preferred
Stock multiplied by its liquidation value and (ii) 140% of the
number of then outstanding shares of any stock ranking senior as to
dividends to the Series C Preferred Stock multiplied by the
liquidation value of such senior stock. Dividend payments on any
other stock junior to the Series C Preferred Stock with respect to
dividends or liquidation rights would be similarly limited.
The Federal Reserve Board has a policy prohibiting bank
holding companies from paying dividends on common stock except out
of current earnings. The Federal Reserve Board has asserted that
this policy, originally only applicable to common stock, also
limits dividends on preferred stocks. As expanded, the Federal
Reserve Board policy would limit dividends on the Series C
Preferred Stock to an amount equal to current earnings. To date,
the Company's earnings have been sufficient to cover dividends on
the Common Stock and the Series C Preferred Stock.
The Bank. The funds used by the Company to meet its
operational expenses and debt service obligations, to maintain the
necessary level of capital for itself and the Bank, and to pay cash
dividends on the Common Stock and the Series C Preferred Stock will
be derived primarily from dividends, management fees and tax
liabilities paid to the Company by Independent Financial and to
Independent Financial by the Bank. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity." The ability of the Bank to pay dividends
is
-15-
<PAGE>
restricted by the requirement that the Bank maintain an adequate
level of capital in accordance with regulatory guidelines and by
statute.
The Federal Deposit Insurance Corporation ("FDIC") requires
insured banks, such as the Bank, to maintain certain minimum
capital ratios. The FDIC is permitted to require higher ratios if
it believes that the financial condition and operations of a
particular bank mandates such a higher ratio. The Comptroller has
substantially similar requirements. See "Item 1. Business -
Regulation and Supervision - The Bank - Capital Adequacy
Requirements" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -
Capital Resources."
The National Bank Act of 1864, as amended (the "National Bank
Act"), provides that, prior to declaring a dividend, a bank must
transfer to its surplus account an amount equal to or greater than
10% of the net profits earned by the bank since its last dividend
was declared, unless such transfer would increase the surplus of
the bank to an amount greater than the bank's stated capital.
Moreover, the approval of the Comptroller is required for any
dividend to a bank holding company by a national bank if the total
of all dividends, including the proposed dividend, declared by the
bank in any calendar year exceeds the total of its net profits for
such year combined with its retained net profits for the preceding
two years, less any required transfers to surplus. In addition, the
prompt corrective provisions of FDICIA and implementing regulations
prohibit a bank from paying a dividend if, following the payment,
the bank would be in any of the three capital categories for
undercapitalized institutions. See "Item 1. Business - Regulation
and Supervision - The Bank - Capital Adequacy Requirements."
Dividends paid by the Bank (including First State, N.A.,
Odessa) to Independent Financial and by Independent Financial to
the Company each totaled $1,000,000 during 1996. At December 31,
1996, there were approximately $1,561,000 in dividends available
for payment to Independent Financial by the Bank without regulatory
approval.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein
by reference from page 28 of the Company's 1996 Annual Report to
Shareholders under the caption "Selected Consolidated Financial
Information."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein
by reference from pages 30 through 52, inclusive, of the Company's
1996 Annual Report to Shareholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein
by reference from pages 7 through 27, inclusive, of the Company's
1996 Annual Report to Shareholders under the captions "Report of
Coopers & Lybrand, L.L.P., Independent Auditors," "Consolidated
Balance Sheets," "Consolidated Income Statements," "Consolidated
Statements of Changes in Stockholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial
Statements" and "Quarterly Data (Unaudited)."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-16-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required for by this item is incorporated
herein by reference from pages 6 through 10, inclusive, of the
Company's definitive proxy statement to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission relating
to its Annual Meeting of Shareholders to be held April 29, 1997
(the "Definitive Proxy Statement"), under the respective captions
"Item 1. Election of Directors" and "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein
by reference from pages 10 and 11 of the Company's Definitive Proxy
Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein
by reference from pages 3 through 6, inclusive, of the Company's
Definitive Proxy Statement under the caption "Voting Securities and
Principal Shareholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein
by reference from pages 11 and 12 of the Company's Definitive Proxy
Statement under the caption "Executive Compensation - Transactions
with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents Filed as Part of Report.
1. Financial Statements
The following Consolidated Financial Statements of the
Company included in PART II of this report are incorporated by
reference from the Company's Annual Report to Shareholders for the
year ended December 31, 1996, furnished to the Securities and
Exchange Commission pursuant to Rule 14a-3(b):
<TABLE>
<CAPTION>
Page
Reference to
Item Annual Report
------------------------------------------------------------ -------------
<S> <C>
Report of Coopers & Lybrand, L.L.P., Independent Auditors 7
Consolidated Balance Sheets as of December 31, 1996 and 1995 8
Consolidated Income Statements for the three years in the
period ended December 31, 1996 9
Consolidated Statements of Changes in Stockholders' Equity
for the three years in the period ended December 31, 1996 10
Consolidated Statements of Cash Flows for the three years
in the period ended December 31, 1996 11
Notes to Consolidated Financial Statements 12-26
</TABLE>
-17-
<PAGE>
2. Financial Statement Schedules
All schedules for which provision is made in
the applicable accounting regulations of the Securities
and Exchange Commission have been omitted because such
schedules are not required under the related instructions
or are inapplicable or because the information required
is included in the Company's Consolidated Financial
Statements or notes thereto.
3. Exhibits
The exhibits listed below are filed as part of or
incorporated by reference in this report. Where such
filing is made by incorporation by reference to a
previously filed document, such document is identified in
parenthesis. See the Index of Exhibits included with the
exhibits filed as part of this report.
No. Description
--- -----------
3.1 Restated Articles of Incorporation of
Independent Bankshares, Inc. (Exhibit 3.1 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1994)
3.2 Restated Bylaws of Independent Bankshares,
Inc. (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1994)
4.1 Specimen Stock Certificate for Common Stock of
the Company (Exhibit 4.1 to the Company's
Registration Statement on Form S-1, SEC File
No. 333-16419)
10.1 Form of Nonqualified Option Agreement (Exhibit
10.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1992)
10.2 Loan Agreement dated January 23, 1997, by and
among Independent Bankshares, Inc. and
Boatmen's First National Bank of Amarillo and
related Variable Rate Promissory Note dated
January 23, 1997, Security Agreement dated
January 23, 1997 and Third Party Pledge
Agreement dated January 23, 1997, executed by
Independent Financial Corp. (filed herewith)
10.3 Master Equipment Lease Agreement, dated
December 24, 1992, between Independent
Bankshares, Inc. and NCR Credit Corporation,
Amendment to Master Equipment Lease Agreement
dated concurrently therewith, and related form
of Schedule and Commencement Certificate
(Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1993)
10.4 Asset Purchase and Account Assumption
Agreement dated March 4, 1996, between the
Company and Coastal Banc ssb (Exhibit 10.4 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1995)
10.5 Agreement and Plan of Reorganization dated
July 11, 1996, between the Company and Crown
Park Bancshares, Inc. and Agreement and Plan
of Merger dated July 11, 1996 between Western
National Bank and First State, N.A. Abilene
(Exhibit 1.1 to the Company's Current Report
on Form 8-K dated July 11, 1996)
13.1 Annual Report to Shareholders for the year
ended December 31, 1996 (filed herewith)
-18-
<PAGE>
21.1 Subsidiaries of Independent Bankshares, Inc.
(Exhibit 21.1 to the Company's Registration
Statement on Form S-1, SEC File No. 333-16419)
23.1 Consent of Coopers & Lybrand, L.L.P. (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K.
Current Report on Form 8-K dated February 10, 1997,
relating to the Company's acquisition of Crown Park
Bancshares, Inc. and its subsidiary, Western National
Bank
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDEPENDENT BANKSHARES, INC.
By: /s/ Bryan W. Stephenson
Bryan W. Stephenson,
President and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- --------------------------- --------------
<S> <C> <C>
/s/ Bryan W. Stephenson President, Chief Executive March 28, 1997
- ---------------------------- Officer and Director
Bryan W. Stephenson
/s/ Randal N. Crosswhite Senior Vice President, Chief March 28, 1997
- ---------------------------- Financial Officer, Corporate
Randal N. Crosswhite Secretary and Director
/s/ Lee Caldwell
- ----------------------------- Director March 28, 1997
Lee Caldwell
/s/ Mrs. Wm. R. (Amber) Cree Director March 28, 1997
- ----------------------------
Mrs. Wm. R. (Amber) Cree
- ---------------------------- Director March __, 1997
Louis S. Gee
/s/ Marshal M. Kellar Director March 28, 1997
- ----------------------------
Marshal M. Kellar
-20-
<PAGE>
/s/ Tommy McAlister Director March 28, 1997
- ----------------------------
Tommy McAlister
/s/ Scott L. Taliaferro Director March 28, 1997
- ----------------------------
Scott L. Taliaferro
/s/ James D. Webster, M.D. Director March 28, 1997
- ----------------------------
James D. Webster, M.D.
/s/ C. G. Whitten Director March 28, 1997
- ----------------------------
C.G. Whitten
/s/ John A. Wright Director March 28, 1997
- ----------------------------
John A. Wright
</TABLE>
-21-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Restated Articles of Incorporation of Independent
Bankshares, Inc. (Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994)
3.2 Restated Bylaws of Independent Bankshares, Inc.
(Exhibit 3.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
4.1 Specimen Stock Certificate for Common Stock of the
Company (Exhibit 4.1 to the Company's Registration
Statement on Form S-1, SEC File No. 333-16419)
10.1 Form of Nonqualified Option Agreement (Exhibit 10.2
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992)
10.2 Loan Agreement dated January 23, 1997, by and among
Independent Bankshares, Inc. and Boatmen's First
National Bank of Amarillo and related Variable Rate
Promissory Note dated January 23, 1997, Security
Agreement dated January 23, 1997 and Third Party
Pledge Agreement dated January 23, 1997, executed
by Independent Financial Corp. (filed herewith)
10.3 Master Equipment Lease Agreement, dated December
24, 1992, between Independent Bankshares, Inc. and
NCR Credit Corporation, Amendment to Master
Equipment Lease Agreement dated concurrently
therewith, and related form of Schedule and
Commencement Certificate (Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1993)
10.4 Asset Purchase and Account Assumption Agreement
dated March 4, 1996, between the Company and
Coastal Banc ssb (Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995)
10.5 Agreement and Plan of Reorganization dated July 11,
1996, between the Company and Crown Park
Bancshares, Inc. and Agreement and Plan of Merger
dated July 11, 1996 between Western National Bank
and First State, N.A. Abilene (Exhibit 1.1 to the
Company's Current Report on Form 8-K dated July 11,
1996)
13.1 Annual Report to Shareholders for the year ended
December 31, 1996 (filed herewith)
21.1 Subsidiaries of Independent Bankshares, Inc.
(Exhibit 21.1 to the Company's Registration
Statement on Form S-1, SEC File No. 333-16419)
23.1 Consent of Coopers & Lybrand, L.L.P. (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
-22-
EXHIBIT 10.2
LOAN AGREEMENT
BY AND BETWEEN
INDEPENDENT BANKSHARES, INC.
AND
BOATMEN'S FIRST NATIONAL BANK OF AMARILLO
JANUARY 23, 1997
<PAGE>
LOAN AGREEMENT
TABLE OF CONTENTS
ARTICLE 1. GENERAL TERMS ...................................... 1
1.1 Terms Defined Above ................................ 1
1.2 Certain Definitions ................................ 1
1.3 Accounting Principles .............................. 5
ARTICLE 2. AMOUNTS AND TERMS OF LOANS ......................... 5
2.1 The Loans and Commitments .......................... 5
2.2 Payment Procedure .................................. 5
2.3 Interest Rate ...................................... 6
2.4 Prepayment ......................................... 6
2.5 Business Days ...................................... 6
ARTICLE 3. COLLATERAL.......................................... 6
ARTICLE 4. REPRESENTATIONS AND WARRANTIES ..................... 7
4.1 Corporate Existence ................................ 7
4.2 Corporate Power and Authorization .................. 7
4.3 Binding Obligations ................................ 7
4.4 No Legal Bar or Resultant Lien ..................... 7
4.5 No Consent ......................................... 8
4.6 Financial Statements ............................... 8
4.7 Investments and Guaranties ......................... 8
4.8 Liabilities; Litigation ............................ 8
4.9 Taxes; Governmental Charges ........................ 8
4.10 Title to Properties ................................ 8
4.11 Defaults ........................................... 9
4.12 Use of Proceeds; Margin Stock ...................... 9
4.13 Compliance with the Law ............................ 9
4.14 No Misstatement .....................................9
4.15 Subsidiaries ........................................9
4.16 Location of Business and Offices ....................9
4.17 Fiscal Year .........................................10
4.18 Agreements ..........................................10
ARTICLE 5. AFFIRMATIVE COVENANTS ..............................10
5.1 Financial Statements and Reports ...................10
(a) Annual Reports ................................10
(b) Quarterly Reports .............................10
(c) Audit Reports .................................11
(d) Other Reports .................................11
5.2 Quarterly Certificates of Compliance ...............11
5.3 Taxes and Other Liens ..............................11
i
<PAGE>
5.4 Maintenance ........................................12
5.5 Further Assurances .................................12
5.6 Performance of Obligations .........................12
5.7 Reimbursement of Expenses ..........................12
5.8 Insurance ..........................................12
5.9 Right of Inspection ................................13
5.10 Notice of Certain Events ...........................13
ARTICLE 6. NEGATIVE COVENANTS .................................14
6.1 Debt ...............................................14
6.2 Liens ..............................................14
6.3 Investments, Loans and Advances ....................14
6.4 Dividends, Distributions and Redemptions ...........14
6.5 Nature of Business .................................15
6.6 Acquisitions and Mergers ...........................15
6.7 Sale of Assets .....................................15
6.8 Proceeds of Notes ..................................15
6.9 Purchase of Assets .................................15
6.10 Judicial Actions ...................................15
6.11 Minimum Capital ....................................15
6.12 Minimum Capital to Assets Ratio ....................15
6.13 Maximum Classified Assets ..........................15
6.14 Minimum Income .....................................16
6.15 Non Performing Loans ...............................16
6.16 Non Performing Assets ..............................16
ARTICLE 7. EVENTS OF DEFAULT ..................................16
7.1 Events .............................................16
(a) Payments ......................................16
(b) Representations and Warranties ................16
(c) Covenants .....................................16
(d) Other Security Instrument Obligations .........16
(e) Involuntary Bankruptcy or Other Proceedings ...16
(f) Voluntary Petitions, etc. .....................17
(g) Discontinuance of Business ....................17
(h) Undischarged Judgments ........................17
(i) Default on Other Agreements ...................17
(j) Material Adverse Effect .......................17
(k) Shares ........................................17
(l) Dividends .....................................18
7.2 Remedies ...........................................18
7.3 Right of Set-off ...................................18
7.4 Collateral .........................................18
7.5 Bank Not in Control ................................19
7.6 Diminution in Value of Collateral ..................19
7.7 Delegation of Duties and Rights ....................19
ii
<PAGE>
ARTICLE 8. CONDITIONS OF LENDING ..............................19
8.1 Loans ..............................................19
(a) Notes .........................................19
(b) Secretary's Certificates ......................19
(c) Security Instruments ..........................20
(d) No Default ....................................20
(e) Representations and Warranties ................20
(f) No Material Adverse Change ....................20
(g) Other .........................................20
ARTICLE 9. MISCELLANEOUS ......................................20
9.1. Notices ............................................20
9.2 Amendments and Waivers .............................21
9.3 Invalidity .........................................21
9.4 Survival of Agreements .............................21
9.5 Successors and Assigns .............................21
9.6 Renewal, Extension or Rearrangement ................22
9.7 Waivers ............................................22
9.8 Cumulative Rights ..................................22
9.9 Time ...............................................22
9.10 Singular and Plural ................................22
9.11 Construction .......................................22
9.12 Interest ...........................................22
9.13 References .........................................23
9.14 Taxes, Etc. ........................................23
9.15 Governmental Regulation ............................23
9.16 Titles of Articles, Sections and Subsections .......23
9.17 Counterparts .......................................24
9.18 Entirety ...........................................24
SIGNATURES .....................................................25
EXHIBITS
Note ....................................................Exhibit A
Certificate of Compliance ...............................Exhibit B
Opinion of Counsel ......................................Exhibit C
iii
<PAGE>
LOAN AGREEMENT
This Loan Agreement ("Agreement") made and effective as of
January 23, 1997, between INDEPENDENT BANKSHARES, INC. A Texas
corporation (the "Borrower"), whose address is 547 Chestnut,
Abilene, Texas 79604 and BOATMEN'S FIRST NATIONAL BANK OF AMARILLO,
a national banking association, (the "Bank"), whose address is P.
O. Box 1331, Amarillo, Potter County, Texas 79180, evidences that
the Borrower desires to borrow from the Bank and the Bank desires
to loan to the Borrower certain funds on the terms and conditions
hereinafter specified and that therefore, in consideration of the
premises and of the mutual covenants and obligations specified in
this Agreement, the parties to the Agreement agree as follows:
ARTICLE 1
GENERAL TERMS
1.1 Terms Defined Above. As used herein, the terms
"Borrower" and "Bank" shall have the meanings indicated above.
1.2 CERTAIN DEFINITIONS. As used in this Agreement, the
following terms shall have the following meanings, unless the
context otherwise requires:
"Agreement" shall mean this Loan agreement, as the same
from time to time may be amended or supplemented.
"Bank Liens" shall mean Liens in favor of the Bank
securing all or any of the Indebtedness, including, but not
limited to, rights in any Collateral created in favor of the
Bank, whether by mortgage, pledge, hypothecation, assignment,
transfer or other granting or creation of Liens.
"Base Rate" shall mean the rate of interest established
by Boatmen's First National Bank of Amarillo, Amarillo, Texas,
from time to time as its general reference rate, whether or
not actually charged in each instance.
"Business Day" shall mean a day of the year on which
banks are not required or authorized to close in Amarillo,
Texas.
"Cash Flow" shall mean for any period the Borrower's net
profit after provision for federal income tax less any items
of income which are of a non-recurring nature.
PAGE 2
"Classified Assets" shall mean the sum of all assets of
FSBA which are classified as substandard, doubtful or as a loss by
any examiner of the Comptroller of the Currency, Federal Deposit
Insurance, Corporation, Federal Reserve, any other regulatory
authority, or by Bank or a third party pursuant to Section 5.9
hereof.
"Collateral" shall mean all property which is subject to
Bank Liens pursuant to Article 3 hereof.
"Commitments" shall mean, collectively, the obligations
of the Bank to make loans to the Borrower pursuant to Section
2.1 hereof.
"Debt" shall mean, for any Person, without duplication:
(i) all indebtedness of such Person for borrowed money or for
the deferred purchase price of property of services for which
such Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which such Person
otherwise assures a creditor against loss; and (ii) all
obligations of such Person under leases which shall have been,
or should have been, in accordance with generally accepted
accounting principles in effect on the date of this Agreement,
recorded as capital leases for which such Person is liable,
contingently or otherwise, as obligor, guarantor or otherwise,
or in respect of which such Person otherwise assures a
creditor against loss.
"Default" shall mean the occurrence of any of the events
specified in section 7.1 hereof, whether or not any
requirement for notice or lapse of time or other condition
precedent has been satisfied.
"Event of Default" shall mean the occurrence of any of
the events specified in section 7.1 hereof, whether or not any
requirement for notice or lapse of time of any condition
precedent has been satisfied.
"Financial Statements" shall mean the financial
statements of the Borrower described or referred to in
Section 4.6 hereof.
"FSBA" shall mean First State Bank, N.A. Abilene, Texas
PAGE 3
"Governmental Requirement" shall mean any law, statute,
code, ordinance, order, rule, regulation, judgment, decree,
injunction, franchise, permit, certificate, license,
without limitation, any of the foregoing which relate to
environmental standards or controls, energy regulations and
occupational, safety and health standards or controls) of any
(domestic or foreign) federal, state, county, municipal or
other government, department, commission, board, court, agency
or other instrumentality of any of them, which exercises
jurisdiction over the Borrower or any of its property.
"Highest Lawful Rate" shall mean the maximum nonusurious
interest rate, if any, that at any time or from time to time
may be contracted for, taken, reserved, charged or received on
this Note or on other Indebtedness, as the case may be, under
laws applicable to the Bank which are presently in effect or,
to the extent allowed by law, under such applicable laws which
may hereafter be in effect and which allow a higher maximum
nonusurious interest rate than applicable laws now allow. To
the extent that Texas Revised Civil Statutes Art, 5069-1.4
of determining the Highest Lawful Rate, the Bank hereby elects
to determine the applicable rate ceiling under such Article by
the indicated (weekly) rate ceiling from time to time in
effect, subject to the Bank's right to subsequently change
such method in accordance with applicable law.
"Indebtedness" shall mean any and all amounts owing or to
be owing by the Borrower to the Bank in connection with the
Notes or this Agreement, and all other liabilities of the
Borrower to the Bank from time to time existing, whether in
connection with this or other transactions.
"Lien" shall mean any interest in property securing an
obligation owed to, or a claim by, a Person other than the
owner of the property, whether such interest is based on the
common law, statute or contract, and including but not limited
to the lien or security interest arising from mortgage,
encumbrance, pledge, security agreement, conditional sale or
trust receipt or a lease, consignment or bailment for security
purposes.
PAGE 4
"Material Adverse Effect" shall mean any material and
adverse effect on (i) the assets, liabilities, financial
condition, business, operations, affairs or circumstances of
the Borrower from those reflected in the Financial Statements
or from the facts represented or warranted in this Agreement
or any Security Instrument, or (ii) the ability of the
Borrower to carry out its or his business as at the date of
this Agreement or as proposed at the date of this Agreement to
be conducted or meet its or his obligations under the Notes,
this Agreement or Security Instruments on a timely
basis.
"Notes" shall mean, collectively, the Advancing Note/Term
Note together with any and all renewals, extensions for any
period, increases or rearrangements of said promissory notes.
"Permitted Liens" shall mean: (i) Liens for taxes,
assessments or other governmental charges or levies not yet
due or which are being contested in good faith by appropriate
action by or on behalf of the Borrower, (ii) Liens in
connection with workmen's compensation, unemployment insurance
or other social security, old age pension or public liability
obligations, and (iii) vendors', carriers', warehousemen's,
repairmen's, mechanic's, workmen's, materialmen's,
construction or improvement of any property in respect of
obligations which are not yet due.
"Person" shall mean any individual, corporation,
partnership, joint venture, association, joint stock company,
trust, unincorporated organization, government or any agency
or political subdivision thereof, or any other form of entity.
"Security Instruments" shall mean the instruments
described in section 8.1 (c) of this Agreement and any and
all other instruments now or hereafter executed in connection
with or as security for the payment of the Notes.
"Subsidiary" shall mean any corporation of which more
than fifty percent (50%) of the issued and outstanding
securities having ordinary voting power for the election of
directors is owned or controlled, directly or indirectly, by
the Borrower and/or one or more of its subsidiaries.
"Term Commitment" shall mean the commitments of the Bank
to make the Term Loan provided for in Section 2.1 of this
Agreement.
PAGE 5
"Term Loan" shall mean the loan made by the Bank pursuant
to the Term Commitment of the Bank as set forth in Section 2.1
of this Agreement.
"Term Note" shall mean the promissory note of the
Borrower described in Section 2.1 hereof and being in the form
of the note attached as Exhibit A hereto.
"Advancing Loan" shall mean the loan made by the Bank
pursuant to the Term Commitment of the Bank as set forth in
Section 2.1 of this Agreement.
"UCC" means the Uniform Commercial Code as enacted by the
State of Texas or other applicable jurisdiction, as amended.
1.3 ACCOUNTING PRINCIPLES. Where the character or amount of
any asset or liability or item of income or expense is required to
be determined or any other accounting computation is required to be
made for the purposes of this Agreement, this shall be done in
accordance with generally accepted accounting principles applied on
a basis consistent with those reflected by the Financial
Statements, except where such principles are inconsistent with the
requirements of this Agreement.
ARTICLE 2
AMOUNTS AND TERMS OF LOANS
2.1 THE LOANS AND COMMITMENTS. Subject to the terms and
conditions and relying on the representations and warranties
contained in this Agreement, the Bank agrees to make the following
loan to the Borrower:
ADVANCING LOAN.
The Bank agrees to make a loan to the Borrower in the amount
of $1,200,000.00 which shall be evidenced by the Borrower's
issuance, execution and delivery of the Note dated as of
the date of such loan. The Note shall be due and payable
as provided therein. Principal and all accrued interest shall
be finally due and payable on April 23, 1997. The Loan
is an advancing loan and shall not be construed as a revolving
line of credit as reborrowings are not permitted.
At maturity of the Advancing Note, Bank agrees to renew the
Advancing Note into a Term Note, in an amount not to exceed
the outstanding balance. The term note will be repaid in
equal annual installments over a seven year period. Interest
will be payable quarterly.
2.2 PAYMENT PROCEDURE. All payments and prepayments made by
the Borrower under the Notes or this Agreement shall be made to the
Bank at its office at the address indicated in the first paragraph
PAGE 6
of this Agreement and shall be made in immediately available funds
in Amarillo, Texas prior to 3:00 o'clock p.m., Amarillo time, on
the date that such payment is required or permitted to be made.
Any payment received by the Bank after 3:00 o'clock p.m., Amarillo
time, on any day shall be considered for all purposes (including
the calculation of interest, to the extent permitted by applicable
law) as having been made on the next following Business Day.
2.3 INTEREST RATE. Prior to maturity, the unpaid principal
amount of the Note shall bear interest at a rate per annum equal to
the lesser of (a) the Base Rate calculated as if a year consisted
of 360 days, with adjustments in such varying rate of interest to
be made as and when the Base Rate changes, or (b) the Highest
Lawful Rate. From and after maturity, the unpaid principal amount
of the Notes shall, respectively, bear interest at the Highest
Lawful Rate. No notice shall issue to Borrower when the Base Rate
or Highest Lawful Rate may change.
2.4 PREPAYMENT. The Borrower may at its option prepay any of
the Notes either in whole at any time, or in part from time to
time, without premium or penalty, but with accrued interest to the
date of prepayment on the amount being prepaid. All partial
prepayments of principal of the Notes shall be applied to the
principal installments in the inverse order of maturity; provided,
however, that at Borrower's option, it may prepay at anytime
principal in an amount not to exceed the principal amount of the
installment next coming due on the note and have such prepayment
applied to the reduction of the principal of that next due
installment.
2.5 BUSINESS DAY. If the date of any payment of principal or
interest on any of the Notes falls on a day which is not a Business
Day, then for all purposes of such Note and this Agreement the same
shall be deemed to have fallen on the next following Business Day
and such extension of time shall in such case be included in the
computation of payment of interest for the period for which such
payment is due and not included for the period for which the next
such payment is due.
ARTICLE 3
COLLATERAL
To secure full and complete payment and performance of the
Indebtedness, Borrower shall cause to be granted and conveyed to,
and create in favor of, the Bank, Bank Liens in, to and on all of
the following items and types of property:
(a) 250,000 shares of common stock of FSBA and all other
stock in said bank now owned or hereafter acquired by Borrower
or any entity owned or controlled by Borrower, together with
all cash and stock dividends and splits declared thereon;
PAGE 7
(b) 1,000 shares of common stock of Independent
Financial, Corp. and all other stock in said Bank now owned
or hereafter acquired by Borrower or any entity owned or
controlled by Borrower, together with all cash and stock
dividends and splits declared thereon;
(c) All replacements, accessions, substitutions and
proceeds of any of the above.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
As a material inducement to the Bank to enter into this
Agreement, the Borrower represents and warrants to the Bank (which
representations and warranties shall survive the delivery of the
Notes) that:
4.1 CORPORATE EXISTENCE. The Borrower is a corporation duly
organized and legally existing under the laws of the State of Texas
and is duly qualified as a foreign corporation in all jurisdictions
wherein the property owned or the business transacted makes such
qualification necessary or advisable.
4.2 CORPORATE POWER AND AUTHORIZATION. The Borrower is duly
authorized and empowered to create and issue the Notes; and to
execute, deliver and perform this Agreement and the Security
Instruments and all corporate action on the Borrower's part
requisite for the due creation and issuance of the Notes and for
the due execution, delivery and performance of the Security
Instruments has been duly and effectively taken.
4.3 BINDING OBLIGATION. This Agreement, the Notes and the
Security Instruments upon their creation, issuance, execution and
delivery will, constitute valid and binding obligations of the
Borrower enforceable in accordance with their terms subject to
applicable bankruptcy, insolvency or other similar law affecting
the enforceability of creditors' rights.
4.4 NO LEGAL BAR OR RESULTANT LIEN. This Agreement, the
Notes and the Security Instruments do not and will not violate any
provisions of the articles or certificate of incorporation or
bylaws of the Borrower, or any contract, agreement, instrument or
Governmental Requirement to which the Borrower is subject, or
result in the creation or imposition of any Lien upon any
properties of the Borrower other than in favor of the Bank.
PAGE 8
4.5 NO CONSENT. The Borrower's execution, delivery and
performance of this Agreement and the Notes and the Security
Instruments do not require the consent or approval of any other
Person which has not been previously obtained, including, without
limitation, any regulatory authority or governmental body of the
United States of America or any state thereof or any political
subdivision of the United States of America or any state thereof.
4.6 FINANCIAL STATEMENTS. The annual financial statements of
the Borrower for Borrower's fiscal year ended December 31, 1995
(including any related schedules or notes) which have been
delivered to the Bank, have been prepared in accordance with
generally accepted accounting principles, consistently applied, and
present fairly the financial condition and changes in financial
position of the Borrower as of the date or dates and for the period
or periods stated (subject only to normally year-end audit
adjustments with respect to such unaudited interim statement). No
material change, either in any case or in the aggregate, has since
occurred in the condition, financial or otherwise, of the Borrower.
4.7 INVESTMENTS AND GUARANTIES. At the date of this
Agreement, the Borrower has not made investments in, advances to or
guaranties of the obligations of any Person not otherwise disclosed
in the Financial Statements.
4.8 LIABILITIES; LITIGATION. Except for liabilities incurred
in the normal course of business, the Borrower has no (individually
or in the aggregate) liabilities, direct or contingent, except as
disclosed or referred to in the Financial Statements. At the date
of this Agreement, there is no litigation, legal, administrative or
arbitral proceeding, investigation or other action of any nature
pending or, to the knowledge of the Borrower, threatened against or
affecting the Borrower which involves the possibility of any
judgment or liability not fully covered by insurance. To the best
of the Borrower's knowledge, no unusual or unduly burdensome
restriction, restraint or hazard exists by contract, law or
governmental regulation or otherwise relative to the business or
properties of the Borrower.
4.9 TAXES: GOVERNMENTAL CHARGES. The Borrower has filed all
tax returns and reports required to be filed and has paid all
taxes, assessments, fees and other governmental charges levied upon
it or upon its properties or income which are due and payable,
including interest and penalties,or has provided adequate reserves
for the payment thereof.
4.10 TITLE TO PROPERTIES. The Borrower has good and
marketable title to all of its properties, free and clear of all
Liens except Permitted Liens, and has full authority to create Bank
Liens thereon.
PAGE 9
4.11 DEFAULTS. The Borrower is not in default and no event
or circumstance has occurred which, but for the passage of time or
the giving of notice, or both, would constitute a default by the
Borrower under any loan or credit agreement, indenture, mortgage,
deed of trust, security agreement or other agreement evidencing or
pertaining to any Debt of the Borrower, or under any agreement or
instrument to which the Borrower is a party or by which the
Borrower is bound. No Default hereunder has occurred or is
continuing.
4.12 USE OF PROCEEDS: MARGIN STOCK. The proceeds of the
loan made pursuant to Section 2.1 and evidenced by the Notes will
be used by the Borrower to purchase outstanding shares of Crown
Park Bancshares. None of such proceeds will be used for the purpose
of purchasing or carrying any "margin stock" as defined in
Regulation U of the Board of Governors of the Federal Reserve
System (12 C.F.R. Part 221), or for the purpose of reducing or
retiring any indebtedness which was originally incurred to purchase
or carry a margin stock or for any other purpose which might
constitute this transaction a "purpose credit" within the meaning
of such Regulation U. The Borrower is not engaged principally, or
as one of its important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock.
Neither the Borrower nor any person acting on behalf of the
Borrower has taken or will take any action which might cause the
Notes or any of the Security Instruments to violate Regulation U or
any other regulation of the Board of Governors of the Federal
Reserve System or to violate Section 7 of the Securities Exchange
Act of 1934 or any rule or regulation thereunder, in each case as
now in effect or as the same may hereinafter be in effect.
4.13 COMPLIANCE WITH THE LAW. The Borrower is not in
violation of any Governmental Requirement and has not failed to
obtain any license, permit, franchise or other governmental
authorization necessary to the ownership of any of its properties
or the conduct of its business.
4.14 NO MISSTATEMENT. No information, exhibit or report
furnished to the Bank by the Borrower in connection with the
negotiation of this Agreement contains any misstatement of fact or
omitted to state any fact necessary to make the statement continued
therein not misleading.
4.15 SUBSIDIARIES. Borrower has no Subsidiaries, other than
FSBA and Independent Financial, Corp., a Delaware Corporation.
4.16 LOCATION OF BUSINESS AND OFFICE. The Borrower's
principal place of business and chief executive offices are located
at the address indicated in the initial paragraph of this
Agreement.
PAGE 10
4.17 FISCAL YEAR. Borrower's fiscal year ends December 31 of
each calendar year.
4.18 AGREEMENTS. Borrower has furnished to Bank copies of
all buy-sell agreements, stock redemption agreements and all other
agreements and contracts involving the stock of FSBA.
ARTICLE 5
AFFIRMATIVE COVENANTS
As a material inducement to the Bank to enter into this
Agreement, the Borrower agrees that it will at all times comply
with the covenants contained in this Article 5, from the date
hereof and for so long as any part of the Indebtedness or the
Commitments are outstanding.
5.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will
promptly furnish to the Bank from time to time upon request such
information regarding the business and affairs and financial
condition of the Borrower as the Bank may reasonably request,
including but not limited to:
(a) ANNUAL REPORTS - promptly after becoming available
and in any event within ninety (90) days after the close of
each fiscal year of the Borrower:
(i) the annual report of Borrower; and
(ii) the Form 10-K of Borrower, if Borrower is
required to file such reports pursuant to applicable law; and
(iii) the annual call report of FSBA.
(b) QUARTERLY REPORTS - promptly after becoming
available and in any event within forty-five (45) days
after the end of each calendar quarter:
(i) the Form 10-Q of the Borrower as of the
end of such quarter, if Borrower is required to file
such reports pursuant to applicable law.
(ii) copies of the call report for FSBA for the
previous quarter;
(iii) a list of all Classified Assets of FSBA or
assets which are on a watch list showing any loan loss
reserves allocated to each such loan;
PAGE 11
(iv) a list of non-performing assets of FSBA
showing the amount carried on each bank's book's
respectively, and any loan loss reserves allocated by
bank in connection therewith.
(c) REPORTS - promptly upon receipt thereof,
each other report submitted to the Borrower by independent
accountants in connection with any annual, interim or special
audit made by them of the books of the Borrower or FSBA;
(d) OTHER REPORTS - promptly upon their becoming
available, each financial statement, report or notice sent by
the Borrower to its stockholders and all Federal Reserve
reports of FSBA or Borrower, including, but not limited to, any
FRY-6, FRY-6A, FRY-9LP, FRY-9C and any agreement, order or
decree issued by the Federal Reserve (or regional bank), the
FDIC, or the Comptroller of the Currency under which FSBA may
operate now or in the future.
5.2 QUARTERLY CERTIFICATES OF COMPLIANCE. On or before the
forty-fifth (45th) day following the end of each calendar quarter
(or the first Business Day thereafter), the Borrower will furnish
or cause to be furnished to the Bank a certificate in the form
attached as Exhibit B hereto signed by a principal financial
officer of the Borrower (i) stating that a review of the activities
of the Borrower has been made under his supervision with a view to
determining whether the Borrower has fulfilled all obligations
under this Agreement, the Notes and the Security Instruments and
that all representations made herein or therein continue to be true
and correct (or specifying the nature of any change), or if the
Borrower shall be in Default, specifying any Default and the nature
and status thereof; (ii) to the extent requested from time to time
by the Bank, specifically affirming compliance of the Borrower with
any of its representations or obligations under such instruments;
(iii) containing or accompanied by such financial or other details,
information and material as the Bank may reasonably request to
evidence such compliance.
5.3 TAXES AND OTHER LIENS. The Borrower will pay and
discharge promptly all taxes, assessments and governmental charges
or levies imposed upon the Borrower or upon the income or any
property of the Borrower as well as all claims of any kind
(including claims for labor, materials, supplies and rent) which,
if unpaid, might become a Lien upon any or all of the property of
the Borrower; provided, however, that the Borrower shall not be
required to pay any such tax, assessment, charge, levy or claim if
the amount, applicability or validity thereof shall currently be
contested in good faith by appropriate proceedings diligently
conducted by or on behalf of the Borrower, and if the Borrower
shall have set up reserves therefore adequate under generally
accepted accounting principles.
PAGE 12
5.4 MAINTENANCE. The Borrower will (i) maintain its corporate
existence and all of its rights and franchises, and (ii) observe
and comply with all Governmental Requirements.
5.5 FURTHER ASSURANCES. The Borrower will cure promptly any
defects in the creation and issuance of the Notes and the execution
and delivery of the Security Instruments, including this Agreement.
The Borrower at its expense will promptly execute and deliver to
the Bank upon request all such other and further documents,
agreements and instruments in compliance with or accomplishment of
the covenants and agreements of the Borrower in this Agreement, or
the Security Instruments or to correct any omissions in the
Security Instruments, or more fully to state the obligations set
out herein or in any of the Security Instruments.
5.6 PERFORMANCE OF OBLIGATIONS. The Borrower will pay the
Notes according to the reading, tenor and effect thereof; and the
Borrower will do and perform every act and discharge all of the
obligations provided to be performed and discharged by the Borrower
under the Security Instruments, including this Agreement, at the
time or times and in the manner specified.
5.7 REIMBURSEMENT OF EXPENSES. The Borrower will pay all
reasonable legal fees incurred by the Bank in connection with the
preparation of this Agreement and any and all other Security
Instruments contemplated hereby (including any amendments hereto
and thereto or consents or waivers hereunder or thereunder). The
Borrower will, upon request, promptly reimburse the Bank for all
amounts expended, advanced or incurred by the Bank to satisfy any
obligation of the Borrower under this Agreement or any other
Security Instrument, or to collect the Notes, or to enforce the
rights of the Bank under this Agreement or any other Security
Instrument, which amounts will include all court costs, attorneys'
fees (including, without limitation, for trial, appeal or other
proceedings), fees of auditors and accountants and investigation
expenses reasonably incurred by the Bank in connection with any
such matter, together with interest at the post-maturity rate
specified in section 2.3 above on each such amount from the date of
written demand or request by the Bank for reimbursement until the
date of reimbursement to the Bank.
5.8 INSURANCE. The Borrower will cause FSBA to maintain and
continue to maintain, with financially sound and reputable
insurers, insurance with respect to its properties and business
against such liabilities, casualties, risks and contingencies and
in such types and amounts as is customary in the case of Persons
engaged in the same or similar businesses and similarly situated.
The Borrower will furnish or cause to be furnished to the Bank
prior to funding and from time to time a summary of the insurance
coverage of FSBA in form and substance satisfactory to the Bank and
if requested will furnish the Bank copies of the applicable
policies. In the case of any fire, accident or other casualty
PAGE 13
causing loss or damage to the properties of the Borrower, the
proceeds of such policies shall be used at the option of the
Borrower (i) to repair or replace the damaged property, or (ii) to
prepay the Indebtedness.
5.9 RIGHT OF INSPECTION. The Borrower will permit any
officer, employee or agent of the Bank to visit and inspect any of
the properties of the Borrower and FSBA, examine the Borrower's and
FSBA's books of record and accounts, take copies and extracts
therefrom, and discuss the affairs, finances and accounts of the
Borrower with the Borrower's officer, accountants and auditors, all
at such reasonable times and as often as the Bank may reasonably
desire. Further, Borrower shall allow Bank to conduct an annual,
detailed review of FSBA's loan portfolio. If, after Bank's
examination of FSBA's loan portfolio, Bank's calculation of
Classified Assets exceeds FSBA's and BFNB's internal classification
by more than 20 percent, and such classification would cause an
Event of Default hereunder, then a third party acceptable to
Borrower and Bank shall be appointed to appraise and classify
FSBA's loan portfolio.
5.10 NOTICE OF CERTAIN EVENTS. The Borrower shall promptly
notify the Bank if the Borrower learns of the occurrence of (i) any
event which constitutes a Default, together with a detailed
statement by a responsible officer of the Borrower of the steps
being taken to cure the effect of such Default; or (ii) the receipt
of any notice from, or the taking of any other action by, the
holder of any promissory note, debenture or other evidence of
indebtedness of the Borrower or of any security (as defined in the
Securities Act of 1933, as amended) of the Borrower with respect to
a claimed default, together with a detailed statement by a
responsible officer of the Borrower or of any security (as defined
in the Securities Act of 1933 as amended) of the Borrower with
respect to a claimed default, together with a detailed statement by
a responsible officer of the Borrower by specifying the notice
given or other action taken by such holder and the nature of the
claimed default and what action the Borrower is taking or proposes
to take with respect thereto; (iii) any material legal, judicial or
regulatory proceedings affecting the Borrower; (iv) any dispute
between the Borrower and any governmental or regulatory body; (v)
any event or condition having a Material Adverse Effect; (vi) any
event which could cause Borrower's assets on a consolidated basis
to decline by 10% or more; (vii) any litigation shall be commenced
against Borrower which, together with court costs and attorneys's
fees could result in a liability in excess of $50,000.00.
PAGE 14
ARTICLE 6
NEGATIVE COVENANTS
As a material inducement to Bank to enter into this Agreement,
the Borrower agrees that it will at all times comply with the
covenants contained in this Article 6, from the date hereof and for
so long as any part of the Indebtedness is outstanding.
6.1 DEBT. Without the prior written consent of Bank, the
Borrower will not incur, create, assume or suffer to exist any
Debt, except:
(a) the Note;
(b) accounts payable (for the deferred purchase price of
property or services) from time to time incurred in the
ordinary course of business and which are not (i) in excess of
ninety (90) days past the invoice or billing date or (ii)
being disputed by the Borrower in good faith by appropriate
proceedings, diligently conducted; and
(c) leases associated with data processing, automated
teller machines and/or subsidiary branch locations.
6.2 LIENS. The Borrower will not create, incur, assume or
permit to exist any Lien upon any of its properties (now owned or
hereafter acquired), except for the Bank Liens and Permitted Liens.
6.3 INVESTMENTS, LOANS AND ADVANCES. The Borrower will not
make or permit to remain outstanding any loans or advances to or
for investments in any Person, except that the foregoing
restrictions shall not apply to:
(a) investments in direct obligations of the United
States of America or any agency thereof;
(b) investments in certificates of deposit of the Bank
of maturities less than one year, or issued by other
commercial banks in the United States; and
(c) investments in overnight federal funds transactions.
6.4 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. So long as
Borrower's debt to Bank exceeds $1,200,000, Borrower, without the
written consent of Bank, will not declare or pay any dividend
(other than dividends on preferred stock), purchase, redeem or
otherwise acquire for value any of its stock now or hereafter
outstanding, return any capital to its stockholders or make any
distribution of its assets to its stockholders as such. Once
Borrower's debt to Bank has been reduced to $1,200,000 or less,
Borrower may pay common stock dividends so long as such dividends
PAGE 15
would not cause Borrower's capital to be less than its allowable
minimum capital as defined in Sections 6.12 and 6.13 of this
Agreement.
6.5 NATURE OF BUSINESS. The Borrower will not permit any
material change to be made in the character of its business as
carried on at the date hereof.
6.6 ACQUISITIONS AND MERGERS. The Borrower will not merge or
consolidate, with any Person, (other than subsidiaries), or
acquire, other than in the normal course of business, directly or
indirectly, all or any substantial portion of the property, assets
or stock of, or interest in, any Person, except with the express
written consent of the Bank.
6.7 SALE OF ASSETS. The Borrower will not, directly or
indirectly, sell, lease or otherwise dispose of any of its assets
except as permitted under Section 6.3 of this Agreement.
6.8 PROCEEDS OF NOTES. The Borrower will not permit the
proceeds of the Note to be used for any purposes other than those
permitted by Section 4.12 hereof.
6.9 PURCHASE OF ASSETS. The Borrower shall not make any
expenditure in any fiscal year of the Borrower for capital or fixed
assets aggregating $200,000.00 or more, without the prior written
consent of Bank. The FSBA Branch expansion and the data processing
system are exempt from this paragraph.
6.10 JUDICIAL ACTIONS. Borrower shall not fail to have
discharged within a period of thirty (30) days after the
commencement thereof, any attachment, sequestration or similar
proceeding against any of its assets.
6.11 MINIMUM CAPITAL. Borrower shall not have capital of less
than $12,500,000 at any time. FSBA shall not have capital less
than $11,500,000 at any time. For purposes of this covenant,
"Capital" shall mean assets less liabilities calculated in
accordance with standard regulatory accounting practices.
6.12 MINIMUM CAPITAL TO ASSETS RATIO. Borrower, on a
consolidated basis, shall not allow the ratio of (i) its capital,
to (ii) its total assets to be less than 6.5%. FSBA shall not
allow the ratio of (i) its capital, to (ii) its total assets to be
less than 6.5%. These ratio requirements will be increased to 7.0%
subsequent to March 31, 1999. For purposes of this covenant,
"Capital" shall mean assets less liabilities calculated in
accordance with standard regulatory accounting practices..
6.13 MAXIMUM CLASSIFIED ASSETS. FSBA shall not have
Classified Assets in excess of 70% of its capital. For purposes of
this covenant, "Capital" shall mean total assets less total
liabilities.
PAGE 16
6.14 MINIMUM INCOME. FSBA shall not show net after-tax
income of less than $70,000 quarterly beginning June 30, 1997.
6.15 NON-PERFORMING LOANS RATIO. FSBA shall not show non-
performing loans to total loans greater than 1.50%. Non-performing
loans shall be defined as loans past due over 90 days and still
accruing plus non-accrual loans plus restructured loans.
6.16 NON-PERFORMING ASSETS RATIO. FSBA shall not show non-
performing assets to total loans plus other real estate owned
greater than 2.00%. Non-performing assets shall be defined as non-
performing loans plus other real estate owned.
ARTICLE 7
EVENTS OF DEFAULT
7.1 EVENTS. Any of the following events shall be considered
an "Event of Default" as that term is used herein:
(a) Payments - default is made in the payment when due
of any installment of principal or interest on the Note or
any fee provided for herein or other Indebtedness; or
(b) Representations and Warranties - any representation
or warranty by the Borrower herein or in any Security
Instrument, or in any certificate, request or other document
furnished pursuant to our under this Agreement proves to have
been incorrect in any material respect as of the date when
made or deemed made; or
(c) Covenants - default is made in the due observance or
performance by the Borrower of any of the covenants or
agreements contained in Articles 5 and 6 and, in the case of
default under Article 5 such default continues for thirty (30)
days after the first knowledge thereof by an officer of the
Borrower; or
(d) Other Security Instrument and Covenant Obligations -
default is made in the due observance or performance by the
Borrower of any of the other covenants or agreements contained
in any Security Instrument or other document (including but
not limited to that certain agreement regarding escrow account
of even date herewith between Borrower and Bank); or
(e) Involuntary Bankruptcy or Other Proceedings - an
involuntary case or other proceeding shall be commenced
against the Borrower which seeks liquidation, reorganization
or other relief with respect to it or its debt or other
liabilities under any bankruptcy, insolvency or other similar
PAGE 17
law now or hereafter in effect or seeking the appointment of
a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and
such involuntary case or other proceeding shall remain
undismissed or unstayed for a period of 60 days; or an order
for relief against the Borrower shall be entered in any such
case under the Federal Bankruptcy Code; or
(f) Voluntary Petitions, etc. - the Borrower shall
commence voluntary case of other proceeding seeking
liquidation, reorganization or other relief with respect to
itself or its debts or other liabilities under any bankruptcy,
insolvency or other similar law now or thereafter in effect or
seeking the appointment of a trustee, receiver, liquidator,
custodian or other similar official of it or any substantial
part of its property, or shall consent to any such relief or
to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit
of creditors, or shall fail generally to, or shall admit in
writing its inability to pay its debt generally as they become
due, or shall take any corporate action to authorize or effect
any of the foregoing; or
(g) Discontinuance of Business - the Borrower
discontinues its usual business; or
(h) Undischarged Judgments - Borrower shall fail within
30 days to pay, bond or otherwise discharge any judgment or
order for the payment of money that is not otherwise being
satisfied in accordance with its terms and is not stayed on
appeal or otherwise being appropriately contested in good
faith;
(i) Default on Other Agreements - the Borrower shall
suffer any acceleration, notice of default, filing of suit or
notice or breach by any creditor, lessee or party to any
agreement to which Borrower is a party when the amount in
controversy exceeds $100,000.00 and the failure of Borrower to
have such acceleration, notice of default, filing
of suit or notice of breach contested, rescinded, withdrawn,
cancelled or released, as the case may be, within 15 days
thereafter;
(j) Material Adverse Effect - any event occurs which has
a Material Adverse Effect or which, but for the passage of
time, would have a Material Adverse Effect;
(k) FSBA Shares and Independent Financial, Corp. Shares
- issues of any additional shares of any class of stock which
is not immediately pledged as collateral for the note;
PAGE 18
(l) Dividends - FSBA shall declare any dividend on its
outstanding stock, other than dividends which Borrower pays to
Bank on the Loan, which would cause the bank's capital to be
less than its allowable minimum capital as defined in
paragraphs 6.11 and 6.12; No Default described in
subparagraphs (b), (c), or (d) above shall be deemed an Event
or Default until 30 days shall have lapsed after notice to
Borrower by Bank of such Default.
7.2 REMEDIES. Upon the occurrence of any Event of Default
described in section 7.1(e) or (f) hereof, the Commitments and any
other lending obligations of the Bank hereunder shall immediately
terminate, and the entire principal amount of all Indebtedness then
outstanding together with interest then accrued thereon shall at
Bank's option become immediately due and payable, all without
written notice and without presentment, demand, notice of
nonpayment, protest, notice of protest or dishonor, notice of
intention to accelerate or of acceleration, bringing of suit, or
any other notice of default of any kind, all of which are hereby
expressly waived by the Borrower. Upon the occurrence and at any
time during the continuance of any other Event of Default specified
in section 7.1 hereof, the Bank may by written notice to the
Borrower, declare the entire principal amount of all Indebtedness
then outstanding together with interest then accrued thereon to be
immediately due and payable without presentment, demand, notice of
nonpayment, protest, notice of protest or dishonor, notice of
intention to accelerate or of acceleration, bringing of suit, or
other notice of default of any kind, all of which are hereby
expressly waived by the Borrower.
7.3 RIGHT OF SET-OFF. Upon the occurrence and during the
continuance of any Event of Default, or if the Borrower becomes
insolvent, however evidenced, the Bank is hereby authorized at any
time and from time to time, without notice to the Borrower (any
such notice being expressly waived by the Borrower), to set-off and
apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at
any time owing by the Bank to or for the credit or the account of
the Borrower against any and all of the Indebtedness of the
Borrower, irrespective of whether or not the Bank shall have made
any demand under this Agreement or the Notes and although such
obligations may be unmatured. The Bank agrees promptly to notify
the Borrower after any such set-off and application, provided that
the failure to give such notice shall not affect the validity of
such set-off and application. The rights of the Bank under this
section are in addition to other rights and remedies (including,
without limitation, other rights of set-off) which the Bank may
have.
7.4 COLLATERAL. Borrower shall not be entitled to a release
of any of the Collateral, notwithstanding that same may have been
sold or a reduction of principal may have been made on any of the
PAGE 19
Notes, and Bank shall thereafter be entitled to retain all proceeds
of any kind from the sale of assets of Borrower. Further, upon the
occurrence of any Event of Default, Bank may, in its discretion,
but shall not be required to, exercise such rights as are provided
it in any of the Security Instruments or at law or in equity.
Nothing contained in this Article shall be construed to limit or
amend in any way the Events of Default enumerated in any Security
Instrument or any other document executed in connection with the
transactions contemplated herein.
7.5 BANK NOT IN CONTROL. None of the covenants or other
provisions contained in this Agreement or the Security Instruments
shall, or shall be deemed to, give Bank the right to exercise
control over the affairs or management of Borrower or any
Guarantor, the rights of Bank being limited to the right to
exercise the remedies provided in this Article.
7.6 DIMINUTION IN VALUE OF COLLATERAL. Bank shall have no
liability or responsibility whatsoever for any diminution in or
loss of value of any Collateral, except for that caused by Bank's
willful misconduct or negligence.
7.7 DELEGATION OF DUTIES AND RIGHTS. Bank may perform any of
its duties or exercise any of its rights under this Agreement or
the Security Instruments by or through its officers, directors,
employees, attorney, agents or other representatives.
ARTICLE 8
CONDITIONS OF LENDING
The obligations of the Bank to make the loan pursuant to this
Agreement are subject to the conditions precedent stated in this
Article 8.
8.1 LOAN. The obligation of the Bank to make the initial
loan under this Agreement is subject to the following conditions
precedent wherein each document to be delivered to the Bank shall
be in form and substance satisfactory to it:
(a) Note - the Borrower shall have duly and validly
issued, executed and delivered the Note to the Bank.
(b) Secretary's Certificates -
(i) the Bank shall have received certificates of
the Secretary or Assistant Secretary of the Borrower
setting forth (A) resolutions of its board of directors
in form and substance satisfactory to the Bank with
respect to the authorization of the Notes, this
PAGE 20
Agreement and any Security Instruments provided
herein to which each is a party and the officers of the
Borrower are authorized to sign such instruments and (B)
specimen signatures of the officers of the Borrower
authorized to sign such instruments; and
(ii) the Bank shall have received a copy,
certified as true by the Secretary or Assistant Secretary
of the Borrower of the articles or certificate of
incorporation and the bylaws of the Borrower.
(c) Security Instruments - the Bank shall have received
the security agreements creating, granting, renewing and
extending the first and prior Bank liens pursuant to Section
3, each duly and validly executed and delivered by the
Borrower.
(d) No Default - the fact that immediately after such
loan, no Default shall have occurred and be continuing.
(e) Representations and Warranties - the fact that the
representations and warranties of the Borrower contained in
this Agreement or any Security Instrument (other than
those representations and warranties which are by their terms
limited to the date of the agreement in which they are
initially made) are true and correct in all respects on and as
of the date of such loan.
(f) No Material Adverse Change - there shall have
occurred, in the sole opinion of the Bank, no change in the
condition, financial or otherwise, of the Borrower or with
respect to the Borrower's properties from the facts
represented in any Security Instrument, including this
Agreement, which would have a Material Adverse Effect.
(g) Other - the Bank shall have received such other
documents as it may reasonably have requested at any time at
or prior to the closing of the loan.
ARTICLE 9
MISCELLANEOUS
9.1 NOTICES. Any notice required or permitted to be given
under or in connection with this Agreement, the other Security
Instruments (except as may otherwise be expressly required therein)
or the Notes shall be in writing and shall be mailed by first class
or express mail, postage prepaid, or sent by telex, telegram,
telecopy or other similar form of rapid transmission confirmed by
mailing (by first class or express mail, postage prepaid) written
confirmation at substantially the same time as such rapid
PAGE 21
transmission, or personally delivered to an officer of the
receiving party. All such communications shall be mailed, sent or
delivered:
(a) if to the Borrower, to its address as shown at the
beginning of this Agreement, or to such other address or to
such individual's or department's attention as it may have
furnished the Bank in writing; or
(b) if to the Bank, to its mailing address shown at the
beginning of this Agreement, or to such other address or to
such individual's or department's attention as it may have
furnished the Bank in writing; or
Any communication so addressed and mailed shall be deemed to be
given when so mailed; and any notice so sent by rapid transmission
shall be deemed to be given when receipt of such transmission is
acknowledged, and an any communication so delivered in person shall
be deemed to be given when receipted for by, or actually received
by, an authorized officer of the Borrower or the Bank, as the case
may be.
9.2 AMENDMENTS AND WAIVER. Any provision of this Agreement,
the other Security Instruments or the Notes may be amended or
waived if, but only if, such amendment or waiver is in writing and
is signed by the Borrower and the Bank.
9.3 INVALIDITY. In the event that any one or more of the
provisions contained in the Notes, this Agreement or in any other
Security Instrument shall, for any reason, be held invalid, illegal
or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provision of the Notes,
this Agreement or any other Security Instrument.
9.4 SURVIVAL OF AGREEMENTS. All representations and
warranties of the Borrower herein or in the other Security
Instruments, and all covenants and agreements herein not fully
performed before the effective date or dates of this Agreement and
of the other Security Instruments, shall survive such date or
dates.
9.5 SUCCESSORS AND ASSIGNS. All covenants and agreements by
or on behalf of the Borrower in the Notes, this agreement and any
other Security Instrument shall bind its successors and assigns and
shall inure to the benefit of the Bank and its successors and
assigns. The Borrower shall not, however, have the right to assign
its rights under this Agreement or any interest herein, without the
prior written consent of the Bank. In the event that the Bank
sells participations to other lenders in the Notes or other
Indebtedness of the Borrower incurred or to be incurred pursuant to
this Agreement, each of such other lenders shall have the same
rights in and to the Collateral as may be available to the Bank.
PAGE 22
9.6 RENEWAL, EXTENSION OR REARRANGEMENT. All provisions of
this Agreement and of any other Security Instruments relating to
the Notes or other Indebtedness shall apply with equal force and
effect to each and all promissory notes hereinafter executed which
in whole or in part represent a renewal, extension for any period,
increase or rearrangement of any part of the Indebtedness
originally represented by the Notes or of any part of such other
Indebtedness.
9.7 WAIVERS. No course of dealing on the part of the Bank,
its officers, employees, consultants or agents, acceptance of
partial payments, nor any failure or delay by the Bank with respect
to exercising any right, power or privilege of the Bank under the
Notes, this Agreement or any other Security Instrument shall
operate as a waiver thereof, except as otherwise provided in
Section 9.2.
9.8 CUMULATIVE RIGHTS. Rights and remedies of the Bank under
the Notes, this Agreement and each other Security Instrument shall
be cumulative, and the exercise or partial exercise of any such
right or remedy shall not preclude the exercise of any other right
or remedy.
9.9 TIME. Time is of the essence of this Agreement, the
Notes and the Security Instruments.
9.10 SINGULAR AND PLURAL. Words used herein the singular,
where the context so permits, shall be deemed to include the plural
and vice versa. The definitions of words in the singular herein
shall apply to such words when used in the plural where the context
so permits and vice versa.
9.11 CONSTRUCTION. This Agreement is, and the Notes will be,
a contract made under and shall be construed in accordance with and
governed by the laws of the United States of America and the State
of Texas, as such laws are now in effect and, with respect to usury
laws, if any, applicable to the Bank and to the extent allowed
thereby, as such laws may hereafter be in effect which allow a
higher maximum nonusurious interest rate than such laws now allow.
9.12 INTEREST. It is the intention of the parties hereto to
conform strictly to usury laws applicable to the Bank.
Accordingly, if the transactions contemplated hereby would be
usurious under applicable law (including the laws of the United
States of America and the State of Texas) then, in that event,
notwithstanding anything to the contrary in the Notes, this
Agreement or in any other Security Instrument or agreement entered
into in connection with or as security for the Note, it is agreed
as follows: (i) the aggregate of all consideration which
constitutes interest under law applicable to the Bank that is
contacted for, taken, reserved, charged or received under the
Notes, this Agreement or under any of the other aforesaid Security
PAGE 23
Instruments or agreements or otherwise in connection with the Notes
shall under no circumstances exceed the maximum amount allowed by
such applicable law, and any excess shall be credited by the Bank
on the principal amount of the Indebtedness (or, if the principal
amount of the Indebtedness shall have been paid in full, refunded
by the Bank to the Borrower); and (ii) in the event that the
maturity of the Notes is accelerated by reason of an election of
the Bank resulting from any Event of Default under this Agreement
or otherwise, or in the event of any required or permitted
prepayment, then such consideration that constitutes interest under
law applicable to the Bank may never include more than the maximum
amount allowed by such applicable law, and excess interest, if any,
provided for in this Agreement or otherwise shall be cancelled
automatically as of the date of such acceleration of prepayment
and, if theretofore paid, shall be credited by the Bank on the
principal amount of the Indebtedness (or, if the principal amount
of the Indebtedness shall have been paid in full, refunded by the
Bank to the Borrower).
9.13 REFERENCES. The words "herein," "hereof," "hereunder"
and other words of similar import when used in this Agreement refer
to this Agreement as a whole, and not to any particular article,
section or subsection.
9.14 TAXES, ETC. Any taxes (excluding income taxes) payable
or ruled payable by federal or state authority in respect of the
Note, this Agreement or the other Security Instruments shall be
paid by the Borrower, together with interest and penalties, if any.
9.15 GOVERNMENTAL REGULATION. Anything contained in this
Agreement to the contrary notwithstanding, if entering into a
partnership, merger or other business relationship, or any other
circumstance (not caused by the Bank) or act of the Borrower
occurring after the date of this Agreement would cause any amount
to be loaned under this Agreement by the Bank to be in violation of
any limitation or prohibition provided by an applicable statute or
other regulation, then the Bank shall not be obligated to extend
credit to the Borrower in an amount in violation of any such
limitation or prohibition.
9.16 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All
titles or headings to articles, sections, subsections or other
divisions of this Agreement or the exhibits hereto are only for the
convenience of the parties and shall not be construed to have any
effect or meaning with respect to the other content of such
articles, sections, subsections or other divisions, such other
content being controlling as to the agreement between the parties
hereto.
PAGE 24
9.17 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, and it shall not be necessary that the
signatures of all parties hereto be contained on any one
counterpart hereof; each counterpart shall be deemed an original,
but all of which together shall constitute one and the same
instrument.
9.18 ENTIRETY. THIS AGREEMENT, THE TERM NOTES AND THE
SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be duly executed as of the date first above written.
BORROWER: BANK:
Independent Bankshares, Inc. Boatmen's First National Bank
of Amarillo
By /s/ Bryan Stephenson By /s/ Louis E. Cardwell
---------------------------- ----------------------------
Bryan Stephenson Louis E. Cardwell
President Assistant Vice President
<PAGE>
EXHIBIT A
BORROWER'S NAME AND ADDRESS:
"I" includes each borrower above, joint and severally.
INDEPENDENT BANKSHARES, INC.
P O BOX 3296
ABILENE, TX 79604
LENDER'S NAME AND ADDRESS:
"You" means the lender, its successors and assigns.
BOATMEN'S FIRST NATIONAL BANK OF AMARILLO
8TH & TAYLOR - PO BOX 1331
AMARILLO, TX 79180
ACCOUNT #: 406386 LEC
Loan Number: 50405 GAO
Date: January 23, 1997
Maturity Date April 23, 1997
Loan Amount $1,200,000.00
Renewal of ______________
For value received, I promise to pay to you, or your order, at your
address listed above the PRINCIPAL sum of ONE MILLION TWO HUNDRED
THOUSAND AND NO/100 Dollars ($1,200,000)
[ ] SINGLE ADVANCE: I will receive all of the principal sum on
__________. No additional advances are contemplated under this
note.
[XX] MULTIPLE ADVANCE: The principal sum shown above is the
maximum amount of principal I can borrow under this note. On
JANUARY 23, 1997 I will receive the amount of $_______________ and
future principal advances are contemplated.
CONDITIONS: The conditions for future advances are
___________________.
[ ] OPEN END CREDIT: You and I agree that I may borrow up to
the maximum amount of principal more than one time. This feature
is subject to all other conditions and expires on
__________________.
[XX] CLOSED END CREDIT: You and I agree that I may borrow up to the
maximum only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal
balance from JANUARY 23, 1997 at the rate of 8.750% per year until
FIRST CHANGE DATE.
[XX] VARIABLE RATE: This rate may then change as stated below.
[XX] INDEX RATE: The future rate will be 0.500% OVER the
following index rate: BOATMEN'S FIRST NATIONAL BANK OF AMARILLO'S
BASE RATE AS ANNOUNCED PUBLICLY FROM TIME TO TIME BY BOATMEN'S
FIRST NATIONAL BANK OF AMARILLO
[XX] CEILING RATE: The interest rate ceiling for this note is
the STD QUARTERLY ceiling rate announced by the Credit Commissioner
from time to time.
[XX] FREQUENCY AND TIMING: The rate on this note may change
as often as DAILY.
A change in the interest rate will take effect ON THE
SAME DAY.
[ ] LIMITATIONS: During the term of this loan, the
applicable annual interest rate will not be more than _____% or
less than _____%. The rate may not change more than _____% each
_______________.
EFFECT OF VARIABLE RATE: A change in the interest rate will
have the following effect on the payments:
[ ] The amount of each scheduled payment will change.
[ ] The amount of the final payment will change.
[XX] THE AMOUNT DUE AT MATURITY WILL CHANGE.
----------------------------------------
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance
of this note owing after maturity, and until paid in full, as
stated below:
[ ] on the same fixed or variable rate basis in effect
before maturity (as indicated above).
[XX] at a rate equal to HIGHEST RATE PERMITTED BY LAW,
[ ] LATE CHARGE: If a payment is made more than _____ days after
it is due, I agree to pay a late charge of _______________________.
[ ] ADDITIONAL CHARGES: In addition to interest, I agree to pay
the following charges which __ are __ are not included in the
principal amount above:
______________________________________________.
PAYMENTS: I agree to pay this note as follows:
[XX] INTEREST: I agree to pay accrued interest ON DEMAND, BUT IF
NO DEMAND IS MADE AT MATURITY.
[XX] PRINCIPAL: I agree to pay the principal ON DEMAND, BUT IF NO
DEMAND IS MADE THEN ON APRIL 23, 1997.
[ ] INSTALLMENTS: I agree to pay this note in _____ payments.
The first payment will be in the amount of $____________ and will
be due _________. A payment of $___________ will be due
____________ thereafter. The final payment of the entire unpaid
balance of principal and interest will be due
______________________.
ADDITIONAL TERMS:
"I AGREE THAT IF THE "INDEX RATE" CEASES TO EXIST, YOU MAY
SUBSTITUTE A NEW "INDEX RATE" THAT IS REASONABLY SIMILAR TO THE
PRIOR "INDEX RATE."
[XX] SECURITY: This note is separately secured by (describe
separate document by type and date): STOCK MORE FULLY DESCRIBED IN
SECURITY AGREEMENTS DATED 01-23-97. (This section is for your
internal use. Failure to list a separate security document does
not mean the agreement will not secure this note).
THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN PARTIES.
PURPOSE: The purpose of this loan is BUSINESS; PURCHASE STOCK.
SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON
PAGE 2). I have received a copy of today's date.
INDEPENDENT BANKSHARES, INC.
BY: /S/ Bryan Stephenson
---------------------
Bryan Stephenson, President
Signature of Lender
/S/ LOUIS CARDWELL
- ------------------------
Louis Cardwell
Assistant Vice President
(Page 1 of 2)
<PAGE>
DEFINITIONS: As used on page 1, "XX" means the terms that apply to
this loan. "I," "me" or "my" means each Borrower who signs this
note and each other person or legal entity (including guarantors,
endorsers, and sureties) who agrees to pay this note (together
referred to as "us"). "You" or "your" means the Lender and its
successors and assigns.
APPLICABLE LAW: The law of the state of Texas will govern this
note. Any term of this note which is contrary to applicable law
will not be effective, unless the law permits you and me to agree
to such a variation. If any provision of this agreement cannot be
enforced according to its terms, this fact will not affect the
enforceability of the remainder of this agreement. No modification
of this agreement may be made without your express written consent.
Time is of the essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the
amount I owe you for charges which are neither interest nor
principal. The remainder of each payment will then reduce accrued
unpaid interest, and then unpaid principal. If you and I agree to
a different application of payments, we will describe our agreement
on this note. I may prepay a part of, or the entire balance of this
loan without penalty, unless we specify to the contrary on this
note. Any partial prepayment will not excuse or reduce any later
scheduled payment until this note is paid in full (unless, when I
make the prepayment, you and I agree in writing to the contrary).
INTEREST: Interest accrues on the principal remaining unpaid from
time to time, until paid in full. If I receive the principal in
more than one advance, each advance will start to earn interest
only when I receive the advance. The interest rate in effect on
this note at any given time will apply to the entire principal
advanced at that time. Notwithstanding anything to the contrary, I
do not agree to pay and you do not intend to charge any rate of
interest that is higher than the maximum rate of interest you could
charge under applicable law for the extension of credit that is
agreed to here (either before or after maturity). If any notice of
interest accrual is sent and is in error, we mutually agree to
correct it and if you actually collect more interest than allowed
by law and this agreement, you agree to refund it to me.
INDEX RATE: The index will serve only as a device for setting the
rate on this note. You do not guarantee by selecting this index, or
the margin, that the rate on this note will be the same rate you
charge on any other loans or class of loans to me or other
borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan
will be calculated using the interest rate and accrual method
stated on page 1 of this note. For the purpose of interest
calculation, the accrual method will determine the number of days
in a "year." If no accrual method is stated, then you may use any
reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post
Maturity Rate" (shown on page 1) applies, the term "maturity" means
the date of the last scheduled payment indicated on page 1 of this
note or the date you accelerate payment on the note, whichever is
earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I
expect that you will make only one advance of principal. However,
you may add other amounts to the principal if you make any payments
described in the "PAYMENTS BY LENDER" paragraph below.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and
I expect that you will make more than one advance of principal. If
this is closed end credit, repaying a part of the principal will
not entitle me to additional credit.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf,
charges I am obligated to pay (such as property insurance
premiums), then you may treat those payments made by you as
advances and add them to the unpaid principal under this note, or
you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable
under this note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your
possession for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total
amount of which you are entitled to demand payment under the terms
this note at the time you set off. This total includes any balance
the due date for which you properly accelerate under this note.
If my right to receive money from you is also owned by someone
who has not agreed to pay this note, your right of set-off will
apply to my interest in the obligation and to any other amounts I
could withdraw on my sole request or endorsement. Your right of
set-off does not apply to an account or other obligation where my
rights are only as a representative. It also does not apply to any
Individual Retirement Account or other tax-deferred retirement
account.
You will not be liable for the dishonor of any when the
dishonor occurs because you set off this debt against any of my
accounts. I agree to hold you harmless from any such claims arising
as a result of your exercise of your right of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real
estate or a residence that is personal property, the existence of
a default and your remedies for such a default will be determined
by applicable law, by the terms of any separate instrument creating
the security interest and, to the extent not prohibited by law and
not contrary to the terms of the separate security instrument, by
the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default on this loan and any agreement
securing this loan if any one or more of the following occurs:
(1) I fail to perform any obligation which I have undertaken in
this note or any agreement securing this note;
(2) you, in good faith, believe that the prospect of payment or
the prospect of my performance of any other of my obligations under
this note or any agreement securing this note is impaired.
If any of us are in default on this note or any security
agreement, you may exercise your remedies against any or all of us.
REMEDIES: If I am in default on this note you have, but are not
limited to the following remedies:
(1) You may demand immediate payment of my debt under this note
(principal, accrued unpaid interest and other accrued
charges).
(2) You may set off this debt against any right I have to the
payment of money from you, subject to the terms of the "Set-
Off" paragraph herein.
(3) You may demand security, additional security, or additional
parties to be obligated to pay this note as a condition for
not using any other remedy.
(4) You may refuse to make advances to me or allow purchases on
credit by me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give
up your right to later use any other remedy. By waiving your right
to declare an event to be a default, you do not waive your right to
later consider the event as a default if it continues or happens
again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of
collection, replevin or any other or similar type of cost if I am
in default. In addition, if you hire an attorney to collect this
note, I also agree to pay any fee you incur with such attorney plus
court costs (except where prohibited by law). To the extent
permitted by the United States Bankruptcy Code, I also agree to pay
the reasonable attorney's fees and costs you incur to collect this
debt as awarded by any court exercising jurisdiction under the
Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things. I
will not require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of f nonpayment (protest);
(3) give notice that amounts due have not been paid (notice
of dishonor);
(4) give notice of intent to accelerate; or
(5) give notice of acceleration.
I waive any defenses I have based on suretyship or impairment
of collateral.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note
even if someone else has also agreed to pay it (by, for example,
signing this form or separate guarantee or endorsement). You may
sue me alone or anyone else who is obligated on this note, or any
number of us together to collect this note. You may do so without
any notice that it has not paid (notice of dishonor). You may
without notice release any part this agreement without releasing
any other party. If you give up any of your rights, with or without
notice, it will not affect my duty to pay this note. Any extension
of new credit to any of us, or renewal of this note by all or less
than all of us will not release me from my duty to pay it. (Of
course, you are entitled to only one payment in full.) I agree that
you may at your option extend this note or the debt represented by
this note, or any portion of the note or debt, from time to time
without limit or notice and for any term without affecting my
liability for payment of the note. I will not assign my obligation
under this agreement without your prior written approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit
information about me from time to time (for example, by requesting
a credit report) and to report to others your credit experience
with me (such as a credit reporting agency). I agree to provide
you, upon request, any financial statement or information you may
deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and
complete.
NOTICE: Unless otherwise required by law, any notice to me shall be
given by delivering it or by mailing it by first class mail
addressed to me at my last known address. My current address is on
page 1. I agree to inform you in writing of any change in my
address. I will give any notice to you by mailing it first class to
your address stated on page 1 of this agreement, or to any other
address that you have designated.
<TABLE>
<CAPTION>
BORROWER'S INTEREST
DATE OF PRINCIPAL INITIALS PRINCIPAL PRINCIPAL INTEREST INTEREST PAID
TRANSACTION ADVANCE (NOT REQUIRED) PAYMENTS BALANCE RATE PAYMENTS THROUGH:
- ----------- --------- -------------- --------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
</TABLE>
(Page 2 of 2)
<PAGE>
SECURITY AGREEMENT
(Collateral Pledge Agreement)
DATE: JANUARY 23, 1997
DEBTOR: INDEPENDENT BANKSHARES, INC.
BUSINESS OR RESIDENCE ADDRESS: PO BOX 3296
CITY, STATE & ZIP CODE: ABILENE, TX 79604
SECURED PARTY: BOATMEN'S FIRST NATIONAL BANK
OF AMARILLO
ADDRESS: 8TH & TAYLOR - PO BOX 1331
CITY, STATE & ZIP CODE: AMARILLO, TX 79180
1. SECURITY INTEREST AND COLLATERAL. To secure (check one):
[XX] the payment and performance of each and every debt, liability
and obligation of every type and description which Debtor may now
or at any time hereafter owe to Secured Party (whether such debt,
liability or obligation now exists or is hereafter created or
incurred, and whether it is or may be direct or indirect, due or to
become due, absolute or contingent, primary or secondary,
liquidated or unliquidated, or joint, several or joint and several;
all such debts. Liabilities and obligations being herein
collectively referred to as the "Obligations").
[ ] the debt, liability or obligation of the Debtor to secured
party evidenced by the following:_______________________________
__________________________________, and any extensions, renewals or
replacements thereof (herein referred to as the "Obligations"),
Debtor hereby grants Secured Party a security interest (herein
called the "Security Interest") in (check one):
[ ] All property of any kind now or at any time hereafter owned
by Debtor, or in which Debtor may now or hereafter have an
interest, which may now be or may at any time hereafter come into
the possession or control of Secured Party or into the possession
or control of Secured Party's agents or correspondents, whether
such possession or control is given for collateral purposes or for
safekeeping, together with all rights in connection with such
property (herein called the "Collateral").
[ ] the property owned by Debtor and held by Secured Party that
is described as follows: INDEPENDENT FINANCIAL CORP. CAPITAL STOCK
- - 1,000 SHARES together with all rights in connection with such
property (herein called the "Collateral").
2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor represents,
warrants and covenants that:
(a) Debtor will duly endorse, in blank, each and every
instrument constituting Collateral by signing on said instrument or
by signing a separate document of assignment or transfer, if
required by Secured Party.
(b) Debtor is the owner of the Collateral free and clear of
all liens, encumbrances, security interests and restrictions,
except the Security Interest and any restrictive legend appearing
on any instrument constituting Collateral.
(c) Debtor will keep the Collateral free and clear of all
liens, encumbrances and security interests, except the Security
Interest.
(d) Debtor will pay, when due, all taxes and other
governmental charges levied or assessed upon or against any
Collateral.
(e) At any time, upon request by Secured Party, Debtor will
deliver to Secured Party all notices, financial statements, reports
or other communications received by Debtor as an owner or holder of
the Collateral.
(f) Debtor will upon receipt deliver to Secured Party in
pledge as additional Collateral all securities distributed on
account of the Collateral such as stock dividends and securities
resulting from stock splits, reorganizations and recapitalizations.
THIS AGREEMENT CONTAINS ADDITIONAL PROVISIONS SET FORTH ON PAGE 2
HEREOF, ALL OF WHICH ARE MADE A PART HEREOF.
Debtor's Name: INDEPENDENT BANKSHARES, INC.
By: /S/ BRYAN STEPHENSON
--------------------
Title: PRESIDENT
By: _________________________________
Title:________________________________
(Page 1 of 2)
<PAGE>
ADDITIONAL PROVISIONS
3. RIGHTS OF SECURED PARTY. Debtor agrees that Secured Party may
at any time, whether before or after the occurrence of an Event of
Default and without notice or demand of any kind, (i) notify the
obligor on or issuer of any Collateral to make payment to Secured
Party of any amounts due or distributable thereon, (ii) in Debtor's
name or Secured Party's name enforce collection of any Collateral
by suit or otherwise, or surrender, release or exchange all or any
part of it, or compromise, extend or renew for any period any
obligation evidenced by the Collateral, (iii) receive all proceeds
of the Collateral, and (iv) hold any increase or profits received
from the Collateral as additional security for the Obligations,
except that any money received from the Collateral shall, at
Secured Party's option be applied in reduction of the Obligations,
in such order of application as Secured
Party may determine, or be remitted to Debtor.
4. EVENTS OF DEFAULT. Each of the following occurrences shall
constitute an event of default under this Agreement (herein called
"Event of Default"); (i) Debtor shall fail to pay any or all of the
Obligations when due or (if payable on demand) on demand, or shall
fail to observe or perform any covenant or agreement herein binding
on it; (ii) any representation or warranty by Debtor set forth in
this Agreement or made to Secured Party in any financial statements
or reports submitted to Secured Party by or on behalf of Debtor
shall prove materially false or misleading; (iii) a garnishment
summons or a writ of attachment shall be issued against or served
upon the Secured Party for the attachment of any property of the
Debtor or any indebtedness owing to Debtor; (iv) Debtor or any
guarantor of any Obligation shall (A) be or become insolvent
(however defined); (B) voluntarily file, or have filed against it
involuntarily, a petition under this United States Bankruptcy Code;
or (C) if a corporation, partnership or organization, be dissolved
or liquidated or, if a partnership, suffer the death of a partner
or, if an individual, die; or (D) go out of business; (v) Secured
Party shall in good faith believe that the value then reliable by
collection or disposition of the Collateral, after deduction of
expenses of collection and disposition, is less than the aggregate
unpaid balance of all Obligations then outstanding; (vi) Secured
Party shall in good faith believe that the prospect of due and
punctual payment of any or all of the Obligations is impaired.
5. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event
of Default and at any time thereafter, Secured Party may exercise
any one or more of the following rights or remedies: (i) declare
all unmatured Obligations to be immediately due and payable, and
the same shall thereupon be immediately due and payable, without
presentment or other notice or demand; (ii) exercise all voting and
other rights as a holder of the Collateral; (iii) exercise and
enforce any or all rights and remedies available upon default to a
secured party under the Uniform Commercial Code, including the
right to offer and sell the Collateral privately to purchasers who
will agree to take the Collateral for investment and not with a
view to distribution and who will agree to the imposition of
restrictive legends on the certificates representing the
Collateral, and the right to arrange for a sale which would
otherwise qualify as exempt from registration under the Securities
Act of 1933; and if notice to Debtor of any intended disposition of
the Collateral or any other intended action is required by law in
a particular instance, such notice shall be deemed commercially
reasonable if given at least 10 calendar days prior to the date of
intended disposition or other action; (iv) exercise or enforce any
or all other rights or remedies available to Secured Party by law
or agreement against the Collateral, against Debtor or against any
other person or property. Upon the occurrence of the Event of
Default described in Section 4 (iv) (B), all Obligations shall be
immediately due and payable without demand or notice thereof.
6. MISCELLANEOUS. Any disposition of the Collateral in the manner
provided in Section 5 shall be deemed commercially reasonable. This
Agreement can be waived, modified, amended, terminated or
discharged, and the Security Interest can be released, only
explicitly in a writing signed by Secured Party. A waiver signed by
Secured Party shall be effective only in the specific instance and
for the specific purpose given. Mere delay or failure to act shall
not preclude the exercise or enforcement of any of Secured Party's
rights or remedies. All rights and remedies of Secured Party shall
be cumulative and may be exercised singularly or concurrently, at
Secured Party's option, and the exercise or enforcement of any one
such right or remedy shall neither be a condition to nor bar the
exercise or enforcement of any other. All notices to be given to
Debtor shall be deemed sufficiently given if delivered or mailed by
registered or certified mail, postage prepaid, to Debtor at its
address set forth above or at the most recent address shown on
Secured Party's records. Secured Party's duty of care with respect
to Collateral in its possession (as imposed by law) shall be deemed
fulfilled if Secured Party exercises reasonable care in physically
safekeeping such Collateral or, in the case of Collateral in the
custody or possession of a bailee or other third person, exercises
reasonable care in the selection of the bailee or other third
person, and Secured Party need not otherwise preserve, protect,
insure or care for any Collateral. Secured Party shall not be
obligated to preserve any rights Debtor may have against prior
parties, to exercise at all or in any particular manner any voting
rights which may be available with respect to any Collateral, to
realize on the Collateral at all or in any particular manner or
order, or to apply any cash proceeds of Collateral in any
particular order of application. Debtor will reimburse Secured
Party for all expenses (including reasonable attorney's fees and
legal expenses) incurred by Secured Party in the protection,
defense or enforcement of the Security Interest, including expenses
incurred in any litigation or bankruptcy or insolvency proceedings.
This Agreement shall be binding upon and inure to the benefit of
Debtor and Secured Party and their respective heirs,
representatives, successors and assigns and shall take effect when
signed by Debtor and delivered to Secured Party, and Debtor waives
notice of Secured Party's acceptance hereof. This Agreement shall
be governed by laws of the state in which it is executed and,
unless the context otherwise requires, all terms used herein which
are defined in Articles 1 and 9 of the Uniform Commercial Code, as
in effect in said state, shall have the meanings therein stated. If
any provision or application of this Agreement is held unlawful or
unenforceable in any respect, such illegality or unenforceability
shall not affect other provisions or applications which can be
given effect, and this Agreement shall be construed as if the
unlawful or unenforceable provision or application had never been
contained herein or prescribed hereby. All representations and
warranties contained in this Agreement shall survive the execution,
delivery and performance of this Agreement and the creation and
payment of the Obligations. If this Agreement is signed by more
than one person as Debtor, the term "Debtor" shall refer to each of
them separately and to both or all of them jointly, all such
persons shall be bound both severally and jointly with the
other(s); and the Obligations shall include all debts, liabilities
and obligations owed to Secured Party by a Debtor solely or by both
or several or all Debtors jointly or jointly and severally, and all
property described in Section 1 shall be included as part of the
Collateral, whether it is owned jointly by both or all Debtors or
is owned in whole or in part by one (or more) of them.
(Page 2 of 2)
<PAGE>
Third Party Pledge Agreement
DATE: JANUARY 23, 1997
PLEDGOR: INDEPENDENT FINANCIAL CORP.
BUSINESS OR RESIDENT ADDRESS: 15 E. NORTH STREET - PO BOX 899
CITY, STATE & ZIP CODE: DOVER, DE 19901
SECURED PARTY: BOATMEN'S FIRST NATIONAL BANK OF AMARILLO
ADDRESS: 8TH & TAYLOR - PO BOX 1331
CITY, STATE ZIP CODE: AMARILLO, TX 79180
1. SECURITY INTEREST AND COLLATERAL. To secure (check one):
[XX] the payment and performance of each and every debt, liability
and obligation of every type and description which INDEPENDENT
BANKSHARES, INC. ("Debtor") may now or at any time hereafter owe to
Secured Party (whether such debt, liability or obligation now
exists or is hereafter created or incurred, and whether it is or
may be direct or indirect, due or to become due, absolute or
contingent, primary or secondary, liquidated or unliquidated, or
joint, several or joint and several; all such debts, liabilities
and obligations being herein collectively referred to as the
"Obligations."),
[ ] the debt, liability or obligation of ("Debtor") to Secured
Party evidenced by or arising under the following:_______________
______________________, and any extensions, renewals or
replacements thereof (herein referred to as the "Obligations"),
Pledgor hereby grants Secured Party a security interest (herein
called the "Security Interest") in (check one):
[ ] all property of any kind now or at any time hereafter owned by
Pledgor, or in which Pledgor may now or hereafter have an interest,
which may now be or may at any time hereafter come into the
possession or control of Secured Party or into the possession or
control of Secured Party's agents or correspondents, whether such
possession or control is given for collateral purposes or for
safekeeping, together with all proceeds of and other rights in
connection with such property (herein called the "Collateral")
[XX] the property owned by Pledgor and held by Secured Party that
is described as follows: FIRST STATE BANK, N.A., CAPITAL STOCK -
250,000 SHARES, together with all rights in connection with that
property (herein called the "Collateral").
2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Pledgor represents,
warrants and covenants that:
(a) Pledgor will duly endorse, in blank, each and every
instrument constituting Collateral by signing on said instrument or
by signing a separate document of assignment or transfer, if
required by Secured Party.
(b) Pledgor is the owner of the Collateral free and clear of
all liens, encumbrances, security interests and restrictions,
except the Security Interest and any restrictive legend appearing
on any instrument constituting Collateral.
(c) Pledgor will keep the Collateral free and clear of all
liens, encumbrances and security interests, except the Security
Interest.
(d) Pledgor will pay, when due, all taxes and other
governmental charges levied or assessed upon or against any
Collateral.
(e) At any time, upon request by Secured Party, Pledgor will
deliver to Party all notices, financial statements, reports or
other communications received by Pledgor as an owner or holder of
the Collateral;
(f) Pledgor will upon receipt deliver to Secured Party in
Pledge as :additional collateral all securities distributed on
account of the Collateral such as stock dividends and securities
resulting from stock splits, reorganizations and recapitalizations.
3. RIGHTS OF SECURED PARTY. Pledgor agrees that Secured Party may
at any time, whether before or after the occurrence of an Event of
Default and without notice or demand of any kind, (i) notify the
obligor on or issuer of any Collateral to make payment to Secured
Party of any amounts due or distributable thereon, (ii) Pledgor's
name or Secured Party's name enforce collection of any Collateral
by suit or otherwise, or surrender, release or exchange all or any
part of it, or compromise, extend or renew for any period any
obligation evidenced by the Collateral, (iii) receive all proceeds
of the Collateral, and (iv) hold any increase or profits received
from the Collateral as additional security for the Obligations,
except that any money received from the Collateral shall, at
Secured Party's option, be applied in reduction of the Obligations,
in such order of application as Secured Party may determine, or be
remitted to Debtor.
THIS AGREEMENT CONTAINS ADDITIONAL PROVISIONS SET FORTH ON PAGE 2
HEREOF, ALL OF WHICH ARE MADE A PART HEREOF.
PLEDGOR'S NAME: INDEPENDENT FINANCIAL CORP.
BY: /S/ MICHAEL D. JARRETT
----------------------
TITLE: VICE PRESIDENT
BY:__________________________
TITLE:_______________________
(Page 1 of 2)
<PAGE>
ADDITIONAL PROVISIONS
4. EVENTS OF DEFAULT. Each of the following occurrences shall
constitute an event of default under this Agreement (herein called
"Event of Default"): (i) Debtor shall fail to pay any or all of the
Obligations when due or (if payable on demand) on demand; (ii)
Pledgor shall fail to observe or perform any covenant or agreement
herein binding on Pledgor; (iii) any representation or warranty by
Pledgor set forth in this Agreement or made to Secured Party in any
financial statement or report submitted to Secured Party by or on
behalf of debtor shall prove materially false or misleading; (iv)
Debtor shall voluntarily file or have involuntarily filed against
it a petition under the United States Bankruptcy Code.
5. REMEDIES UPON EVENT OF DEFAULT. upon the occurrence of an
Event of Default and at any time thereafter, Secured Party may
exercise any one or more of the following rights or remedies: (i)
declare all unmatured Obligations to be immediately due and payable
and the same shall thereupon be immediately due and payable,
without presentment or other notice or demand; (ii) exercise all
voting and other rights as a holder of the Collateral; (iii)
exercise and enforce any or all rights and remedies available upon
default to a secured party under the Uniform Commercial Code,
including the right to offer or sell the Collateral privately to
purchasers who will agree to take the Collateral for investment and
not with a view to distribution and who will agree to the
imposition of restrictive legends on the certificates representing
the Collateral, and the right to arrange for a sale which would
otherwise qualify as exempt from registration under the Securities
Act of 1933; and if notice to Pledgor of any intended disposition
of the Collateral or any other intended action is required by law
in a particular instance, such notice shall be deemed commercially
reasonable if given at least 10 calendar days prior to the date of
intended disposition or other action; (iv) exercise or enforce any
or all other rights or remedies available to Secured Party by law
or agreement against the Collateral, against Pledgor or against any
other person or property. Upon the occurrence of the Event of
Default described in Section 4 (iv); all Obligations shall be
immediately due and payable without demand or notice thereof.
6. WAIVERS BY PLEDGOR. Pledgor waives notice of Secured Party's
acceptance hereof and notice of the creation existence and payment
or nonpayment of the Obligations. None of the following acts or
things (which Secured Party is authorized to do or not to do with
or without notice to Pledgor) shall in any way affect or impair the
Security Interest or Pledgor's liabilities and obligations
hereunder; (a) any extension or renewal (whether or not for longer
than the original period) of any or all of the Obligations; (b) any
change in the terms of payment or other terms of any or all of the
Obligations or any Collateral therefor, or any substitution or
exchange of any evidence of any or all of the Obligations or
collateral therefor or any release of any collateral for any or all
of the Obligations; (c) any waiver or forbearance granted to Debtor
or any other person liable with respect to any or all of the
Obligations or any release of, compromise with, or failure to
assert rights against Debtor or any such other person; (d) the
procurement or failure to procure any other collateral for or
guarantors or sureties of any or all of the Obligations; (e) the
transfer to any person, at any time, of any interest in any of the
Obligations or any collateral therefor; (f) any arrangement,
composition, extension, moratoria or other relief granted to Debtor
pursuant to any statute now in force or hereafter enacted; (g) any
interruption in business relations between Secured Party and
Debtor; (h) the failure or neglect to protect or preserve any
Obligation or any collateral therefor, or to exercise any right
which may be available to Secured Party by law or agreement prior
to or after an Event of Default or a default under any other
agreement or any delay in doing any of the foregoing; (i) the
failure or neglect to ascertain or assure that the proceeds of any
loan to Debtor are used in any particular manner; and (k) the
application or failure to apply in any particular manner any
payments or credits upon the Obligations.
7. OTHER COLLATERAL. Whether or not Pledgor requests or demands
that Secured Party do so, Secured Party shall not be required
before exercising and enforcing its rights under this Agreement
first to resort for payment of the Obligations to Debtor or to any
guarantor or surety or other person obligated with respect to any
Obligation, or to their properties or estates or to any security
interest or other collateral securing payment of any or all
Obligations, or to any other interest, properties, liens, rights or
remedies whatsoever. Pledgor agrees to defer exercising, hereby
waives, any and all rights which Pledgor might otherwise have to
obtain reimbursement or payment from Debtor or other persons
obligated with respect to any or all of the Obligations or out of
the property of Debtor or of such other per person (whether such
rights to obtain reimbursement or payment are rights of recourse,
rights of subrogation, rights of contribution or otherwise until
all the Obligations shall have been fully paid to Secured Party.
8. MISCELLANEOUS. Any disposition of the Collateral in Section 5
shall be deemed commercially reasonable. This Agreement can be
waived, modified, amended, terminated, discharged, and the Security
Interest can be released, only explicitly in a writing signed by
Secured Party waiver signed by Secured Party shall be effective
only in the specific instance and for the specific purpose given.
Mere delay or failure to act shall not preclude the exercise or
enforcement of any Secured Party's rights or remedies. All rights
and remedies of Secured Party shall be cumulative and may be
exercised singularly or concurrently, at Secured Party's option,
and the exercise or enforcement of any one such right or remedy
shall neither be a condition to nor bar the exercise or enforcement
of any other. All notices to be given to Pledgor shall be deemed
sufficiently given if delivered or mailed by registered or
certified mail, postage prepaid, to Pledgor at its address set
forth above or at the most recent address shown on Secured Party's
records. Secured Party's duty of care with respect to Collateral in
its possession (as imposed by law shall be deemed fulfilled if
Secured Party exercises reasonable care in physically safekeeping
such Collateral or, in the case of Collateral in the custody or
possession of a bailee or other third person, exercises reasonable
care in the selection of the bailee or other third person, and
Secured Party need not otherwise preserve, protect, insure or care
for any Collateral. Secured Party shall not be obligated to
preserve any rights Pledgor may have against prior parties, to
exercise at all or in any particular manner any voting rights which
may be available with respect to any Collateral, to realize on the
Collateral at all or in a particular manner or order, or to apply
any cash proceeds of Collateral in any particular order of
application. Pledgor will reimburse Secured Party for all expenses
(including reasonable attorneys' fees and legal expenses) incurred
by Secured Party in the protection, defense or enforcement of the
Security Interest, including expenses incurred in any litigation or
bankruptcy or insolvency, proceedings, This Agreement shall be
binding upon and inure to the benefit of Pledgor and Secured Party
and their respective heirs, representatives, successors and assigns
and shall take effect when signed by Pledgor and delivered to
Secured Party. Except to the extent otherwise required by law,
this Agreement shall be governed by the laws of the state in which
it is executed and, unless the context otherwise requires, all
terms used herein which are defined in Articles 1 and 9 of the
Uniform Commercial Code, as in effect in said state, shall have the
meanings therein stated. If any provision or application of this
Agreement is held unlawful or unenforceable in any respect, such
illegality or unenforceability shall not affect other provisions or
applications which can be given effect, and this Agreement shall be
construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby.
All representations and warranties contained in this Agreement
shall survive the execution, delivery and performance of this
Agreement and the creation and payment of the Obligations. If this
Agreement is signed by more than one person as Pledgor, the term
"Pledgor" shall refer to each of them separately and to both or all
of them jointly; all such persons shall be bound both severally and
jointly with the other(s); and all property described in Section 1
shall be included as part of the Collateral, whether it is owned
jointly by both or all Pledgors or is owned in whole or in part by
one (or more) of them.
(Page 2 of 2)
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.
-9-
<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.
-10-
<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.
-11-
<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>
-46-
<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.
-47-
<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
-49-
<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.
-51-
<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.
-52-
<PAGE>
[LOGO - INDEPENDENT BANKSHARES, INC.]
[LOGO] Independent Bankshares, Inc.
P.O. Box 3296 / Abilene, Texas 79604 / 915-677-5550
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the two separate
registration statements of Independent Bankshares, Inc. on Form S-8
(File Nos. 33-83112 adn 333-07567) of our report dated February 3, 1997,
on our audits of the consolidated financial statements of Independent
Bankshares, Inc. as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994, which report is incorporated
by reference in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Fort Worth, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES, INC. AS OF AND FOR THE YEAR
ENDED DECEMBER 31, 1996 AND IS QUALIIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,458,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 18,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,771,000
<INVESTMENTS-CARRYING> 75,152,000<F1>
<INVESTMENTS-MARKET> 75,062,000<F1>
<LOANS> 92,017,000<F2>
<ALLOWANCE> 793,000
<TOTAL-ASSETS> 205,968,000
<DEPOSITS> 189,575,000
<SHORT-TERM> 120,000
<LIABILITIES-OTHER> 1,216,000
<LONG-TERM> 120,000
0
135,000
<COMMON> 276,000
<OTHER-SE> 14,526,000
<TOTAL-LIABILITIES-AND-EQUITY> 205,968,000
<INTEREST-LOAN> 8,005,000
<INTEREST-INVEST> 4,504,000
<INTEREST-OTHER> 1,047,000
<INTEREST-TOTAL> 13,556,000
<INTEREST-DEPOSIT> 6,382,000
<INTEREST-EXPENSE> 6,441,000
<INTEREST-INCOME-NET> 7,115,000
<LOAN-LOSSES> 201,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,290,000
<INCOME-PRETAX> 2,175,000
<INCOME-PRE-EXTRAORDINARY> 2,175,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,422,000
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 3.95
<LOANS-NON> 82,000
<LOANS-PAST> 41,000
<LOANS-TROUBLED> 73,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 759,000
<CHARGE-OFFS> 389,000
<RECOVERIES> 73,000
<ALLOWANCE-CLOSE> 793,000
<ALLOWANCE-DOMESTIC> 793,000<F3>
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 202,000
<FN>
<F1>Includes investments held for sale.
<F2>Net of unearned income on installment loans of $2,247,000.
<F3>Includes unallocated portion of the allowance.
</FN>
</TABLE>
