<PAGE>
As filed with the Securities and Exchange Commission on August 4, 1998
Registration No. 333-__________
Registration No. 333-_______-01
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
INDEPENDENT BANKSHARES, INC. INDEPENDENT CAPITAL TRUST
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
Texas Delaware
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
75-1717279 75-2775055
(I.R.S. Employer (I.R.S. Employer
Identification Number) Identification Number)
547 Chestnut Street, Abilene, Texas 79602 (915) 677-5550
(Address, including zip code, and telephone number, including area code, of
registrants' principal executive offices)
Randal N. Crosswhite
Senior Vice President and Chief Financial Officer
Independent Bankshares, Inc.
547 Chestnut Street
Abilene, Texas 79602
Tel: (915) 677-5550
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Joseph A. Hoffman, Esq. Thomas C. Erb, Esq.
Arter & Hadden LLP Lewis, Rice & Fingersh, L.C.
1717 Main Street, Suite 4100 500 North Broadway, Suite 2000
Dallas, Texas 75201 St. Louis, Missouri 63102-2147
Tel: (214) 761-4779 Tel: (314) 444-7600
Approximate date of commencement of proposed sale to public:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Securities Act") check the following box: [_]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Title of Each Class of Securities to be Registered Proposed Maximum Amount of
Aggregate Offering Price Registration Fee
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<S> <C> <C>
Common Stock, $0.25 par value....................................................... $ 5,635,000(1) $1,662.35
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Preferred Securities of Independent Capital Trust................................... $11,500,000(2) $3,392.50
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Subordinated Debentures of Independent Bankshares, Inc.............................. (3)(4) --
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Guarantee of Independent Bankshares, Inc. with respect to Preferred Securities...... (4) --
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Total.............................................................................. $17,135,000 $5,054.85
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act based on the average of
the high and low sale price ($15.3125) on the American Stock Exchange, Inc.
on July 30, 1998.
(2) Such amount represents the liquidation amount of the Independent Capital
Trust Preferred Securities and the principal amount of the Subordinated
Debentures that may be due to the holders of Preferred Securities upon any
liquidation of Independent Capital Trust.
(3) The Subordinated Debentures will be purchased by Independent Capital Trust
with the proceeds of the sale of the Preferred Securities. Such securities
may later be distributed for no additional consideration to the holders of
the Preferred Securities of Independent Capital Trust upon its dissolution
and the distribution of its assets.
(4) This Registration Statement is deemed to cover the Subordinated Debentures
of Independent Bankshares, Inc., the rights of holders of Subordinated
Debentures of Independent Bankshares, Inc. under the Indenture, and the
rights of holders of the Preferred Securities under the Trust Agreement,
the Guarantee and the Expense Agreement entered into by Independent
Bankshares, Inc. Pursuant to Rule 457(n) of the Securities Act, no
separate filing fee is required in connection with the Guarantee.
The Registrants hereby amend this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrants shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. We may+
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This Prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 4, 1998
INDEPENDENT BANKSHARES, INC.
[LOGO]
320,000 Shares of Common Stock
INDEPENDENT CAPITAL TRUST
1,000,000 Shares
$10,000,000 of ___% Cumulative Trust Preferred Securities
(Liquidation Amount of $10.00 per Preferred Security)
Fully and Unconditionally Guaranteed, as described herein, by Independent
Bankshares, Inc.
Independent Bankshares, Inc., a Texas corporation (the "Company"), is hereby
offering 320,000 shares of its common stock, par value $0.25 per share (the
"Common Stock"), at a price of $ per share. In addition, Independent Capital
Trust, a statutory business trust formed under the laws of the State of Delaware
(the "Trust"), is hereby offering 1,000,000 shares or $10,000,000 aggregate
liquidation amount of its __% Cumulative Trust Preferred Securities, liquidation
amount $10.00 per preferred security (the "Preferred Securities"), fully and
unconditionally guaranteed, as described herein, by Independent Bankshares, Inc.
The Preferred Securities represent preferred beneficial interests in the assets
of the Trust. The Company will be the owner of all of the beneficial interests
represented by the common securities of the Trust (the "Common Securities" and,
together with the Preferred Securities, the "Trust Securities"). (The offering
of the Common Stock and the Preferred Securities may hereinafter be referred to
as the "Offering.") (Continued on next page.)
The Common Stock is traded on the American Stock Exchange, Inc. ("AMEX") under
the symbol "IBK." See "Price Range of Common Stock and Dividends." On July 30,
1998, the last sale price of the Common Stock as reported on AMEX was $15.3125.
The Company and Trust have applied to have the Preferred Securities listed on
AMEX under the symbol IBK.PR. (The Common Stock and the Preferred Securities
may sometimes be referred to herein as the "Securities"). The Offerings of the
Preferred Securities and Common Stock are contingent upon the successful
completion of each other and the consummation of the acquisition of Azle
Bancorp.
The Company will use all of the net proceeds of this Offering to fund a
portion of the cost of acquiring Azle Bancorp, a bank holding company that owns
Azle State Bank, Azle, Texas (the "Pending Acquisition"). See "Pending
Acquisition" and "Use of Proceeds."
See "Risk Factors" commencing on page 11 for a discussion of certain factors
that should be considered by prospective investors.
----------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR
ANY OTHER GOVERNMENTAL AGENCY.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
====================================================================================================================================
Underwriting Discounts
Price to Public and Commissions(1) Proceeds to Company(2) Proceeds to Trust(2)
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<S> <C> <C> <C> <C>
Per Share Common Stock $ $ $ N/A
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Total Common Stock(3) $ $ $ N/A
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Per Preferred Security..................... $10.00 $ N/A $10.00
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Total Preferred Securities (3)............. $10,000,000 $ A/A $10,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Offering (3)......................... $ $ $10,000,000
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</TABLE>
(1) The Company and the Trust have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act of
1933, as amended. See "Underwriting."
(2) The Company has agreed to pay expenses of the Offering estimated to be
$250,000. Additionally, in view of the fact that the proceeds of the sale
of the Preferred Securities will be invested in the Subordinated
Debentures, the Company, as issuer of the Subordinated Debentures, has
agreed to pay the Underwriter, as compensation, $ per Preferred
Security or $ in the aggregate ($ in the aggregate
if the over-allotment option is exercised in full). See "Underwriting."
(3) The Company and the Trust have granted the Underwriter a 30-day option to
purchase up to 48,000 additional shares of Common Stock and 150,000
additional Preferred Securities, respectively, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. To
the extent that the options are exercised, the Underwriter will offer the
additional shares of Common Stock and Preferred Securities at the Price to
Public shown above. If the options are exercised in full, the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Trust will be $ , $ , $ , and $
, respectively. See "Underwriting."
The Securities are offered by the Underwriter subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, subject to its right to
reject any order in whole or in part, and subject to certain other conditions.
It is expected that delivery of the Securities will be made on or about
September , 1998.
Stifel, Nicolaus & Company
Incorporated
The date of this Prospectus is , 1998.
<PAGE>
U.S. Trust Company of Texas, N.A. is the Property Trustee (as defined
herein) of the Trust. The Trust exists for the purpose of issuing the Preferred
Securities and investing the proceeds thereof in an equivalent amount of %
Subordinated Debentures (the "Subordinated Debentures") of the Company. The
Subordinated Debentures will mature on , 2028, which date may be
(i) shortened to a date not earlier than , 2003, or (ii) extended
to a date not later than , 2037, in each case if certain
conditions are met (including, in the case of shortening the Stated Maturity (as
defined herein), the Company having received prior approval of the Board of
Governors of the Federal Reserve System ("Federal Reserve") to do so if then
required under applicable capital guidelines or policies of the Federal
Reserve). The Preferred Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities. See
"Description of the Preferred Securities--Subordination of Common Securities."
Holders of Preferred Securities are entitled to receive preferential
cumulative cash distributions, at the annual rate of % of the liquidation
amount of $10 per Preferred Security (the "Liquidation Amount"), accruing from,
, 1998, the date of original issuance, and payable quarterly in
arrears on the last day of March, June, September and December of each year,
commencing December 31, 1998 (the "Distributions"). The Company has the right,
so long as no Debenture Event of Default (as defined herein) has occurred and is
continuing, to defer payment of interest on the Subordinated Debentures at any
time or from time to time for a period not to exceed 20 consecutive quarters
with respect to each deferral period (each, an "Extension Period"); provided
that no Extension Period may extend beyond the Stated Maturity of the
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, the Company may elect to begin a new
Extension Period subject to the requirements set forth herein. If interest
payments on the Subordinated Debentures are so deferred, Distributions on the
Preferred Securities will also be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to its capital stock or debt securities that
rank pari passu with or junior to the Subordinated Debentures. WHILE THE COMPANY
INTENDS TO TAKE THE POSITION THAT THE SUBORDINATED DEBENTURES WILL NOT BE DEEMED
TO BE ISSUED WITH ORIGINAL ISSUE DISCOUNT ("OID"), DURING AN EXTENSION PERIOD,
INTEREST ON THE SUBORDINATED DEBENTURES WILL CONTINUE TO ACCRUE (AND THE AMOUNT
OF DISTRIBUTIONS TO WHICH HOLDERS OF THE PREFERRED SECURITIES ARE ENTITLED WILL
ACCUMULATE) AT THE RATE OF % PER ANNUM, COMPOUNDED QUARTERLY, AND HOLDERS OF
THE PREFERRED SECURITIES WILL BE REQUIRED TO INCLUDE INTEREST INCOME AS OID IN
THEIR GROSS INCOME FOR UNITED STATES FEDERAL INCOME TAX PURPOSES IN ADVANCE OF
RECEIPT OF THE CASH DISTRIBUTIONS WITH RESPECT TO SUCH DEFERRED INTEREST
PAYMENTS. A HOLDER OF PREFERRED SECURITIES WHO DISPOSES OF ITS PREFERRED
SECURITIES BETWEEN RECORD DATES FOR PAYMENTS OF DISTRIBUTIONS (AND CONSEQUENTLY
DOES NOT RECEIVE A DISTRIBUTION FROM THE TRUST FOR THE PERIOD PRIOR TO SUCH
DISPOSITION) WILL NEVERTHELESS BE REQUIRED TO INCLUDE ACCRUED BUT UNPAID
INTEREST OR OID, IF ANY, ON THE SUBORDINATED DEBENTURES THROUGH THE DATE OF
DISPOSITION IN ORDINARY INCOME AND TO ADD THE AMOUNT OF ANY ACCRUED OID TO ITS
ADJUSTED TAX BASIS IN ITS PRO RATA SHARE OF THE UNDERLYING SUBORDINATED
DEBENTURES DEEMED DISPOSED OF. See "Description of the Subordinated Debentures--
Option to Extend Interest Payment Period," "Certain Federal Income Tax
Consequences--Potential Extension of Interest Payment Period and Original Issue
Discount" and "--Disposition of Preferred Securities."
The Company and the Trust believe that, taken together, the obligations of
the Company under the Guarantee, the Trust Agreement, the Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein)
provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of the Trust under the Preferred
Securities. See "Relationship Among the Preferred Securities, the Subordinated
Debentures and the Guarantee--Full and Unconditional Guarantee." The Guarantee
of the Company guarantees the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Trust, as described herein. See "Description of
the Guarantee--General." If the Company does not make interest payments on the
Subordinated Debentures held by the Trust, the Trust will have insufficient
funds to pay Distributions on the Preferred Securities. The Guarantee does not
cover payments of Distributions when the Trust does not have sufficient funds to
pay such Distributions. In such
<PAGE>
event, a holder of Preferred Securities may institute a legal proceeding
directly against the Company pursuant to the terms of the Indenture to enforce
payments of amounts equal to such Distributions to such holder. See "Description
of the Subordinated Debentures--Enforcement of Certain Rights by Holders of the
Preferred Securities." The obligations of the Company under the Guarantee and
the Preferred Securities are subordinate and junior in right of payment to all
Senior Debt, Subordinated Debt and Additional Senior Obligations (each as
defined herein) of the Company. The Subordinated Debentures are unsecured
obligations of the Company and are subordinated to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or
in part, upon repayment of the Subordinated Debentures at maturity or their
earlier redemption. Subject to approval of the Federal Reserve, if then required
under applicable capital guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to maturity at the option of the
Company (i) on or after ______________ , 2003, in whole at any time or in part
from time to time, or (ii) at any time, in whole (but not in part), within 180
days following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Subordinated Debentures so
redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. See "Description of the Preferred Securities--Redemption."
The Company has the right at any time to dissolve, wind up or terminate the
Trust subject to the Company having received prior approval of the Federal
Reserve to do so if then required under applicable capital guidelines or
policies of the Federal Reserve. In the event of the voluntary or involuntary
dissolution, winding up or termination of the Trust, after satisfaction of
liabilities to creditors of the Trust as required by applicable law, the holders
of Preferred Securities will be entitled to receive a Liquidation Amount of $10
per Preferred Security, plus accumulated and unpaid Distributions thereon to the
date of payment, which may be in the form of a Subordinated Debenture having an
aggregate principal amount equal to the Liquidation Amount of such Preferred
Securities (and carrying with it accumulated interest in an amount equal to the
accumulated and unpaid Distributions then due on such Preferred Securities),
subject to certain exceptions. See "Description of the Preferred Securities--
Redemption" and "--Liquidation Distribution Upon Termination."
The Company will provide Annual Reports containing financial statements
audited by the Company's independent auditors to the holders of Securities. The
Company will also furnish Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q free of charge to holders of Securities who so request in writing
addressed to the Secretary of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES. SUCH
TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING TRANSACTIONS, THE PURCHASE
OF SECURITIES TO COVER SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF SUCH ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING
TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
Map of the State of Texas describing banking locations of the Company before
and after the Pending Acquisition. Before the Pending Acquisition, First State
Bank, National Association, Abilene, Texas, had a main and branch offices in
Abilene and branch offices in Lubbock, Odessa, San Angelo, Stamford and Winters,
Texas. After the Pending Acquisition, First State Bank, N.A., Abilene will also
have two branch offices in Azle, Texas.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the consolidated financial statements and related notes
appearing elsewhere in this Prospectus. As used in this Prospectus, unless the
context otherwise requires, the term "Company" means Independent Bankshares,
Inc. and its subsidiaries. Unless otherwise indicated, the information
contained in this Prospectus (i) assumes no exercise of the Underwriter's over-
allotment options and (ii) reflects the 33 1/3% stock dividend paid to common
shareholders in May 1995 and the 25% stock dividend paid to shareholders in May
1997. Investors should carefully consider, among other things, the information
set forth under "Risk Factors."
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Prospective purchasers of the Securities offered hereby are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective purchasers of the
Securities should specifically consider the various factors identified in this
Prospectus, including the matters set forth under "Risk Factors," which could
cause actual results to differ materially from those indicated by such
forwarding-looking statements. See "Cautionary Statements Regarding Forward-
Looking Statements."
The Company
GENERAL
The Company is a bank holding company headquartered in Abilene, Texas, located
approximately 180 miles west of Dallas. The principal subsidiary of the Company
is First State Bank, National Association (the "Bank"), which currently operates
eleven full-service banking locations in and around four of the major markets in
West Texas. These markets include the Texas cities of Abilene (three locations),
Lubbock, Odessa (four locations) and San Angelo. These four markets serve as
regional medical and retail centers for West Texas. Abilene has a metropolitan
statistical area ("MSA") of approximately 125,000 and a diversified economy.
Abilene is home to five universities and colleges, two regional medical
complexes and Dyess Air Force Base. Lubbock is the ninth largest city in Texas
with a MSA of approximately 235,000. Lubbock is home to Texas Tech University
and a regional medical complex. The Lubbock area produces approximately 3% of
worldwide cotton production. Odessa has a MSA of approximately 246,000. Odessa
has a energy-related economy and has over 500 manufacturing businesses. San
Angelo has a population of 89,000 employed in a diversified economy centered
around healthcare, manufacturing, higher education and agriculture.
At June 30, 1998, the Company had, on a consolidated basis, total assets of
$263,501,000, total deposits of $240,964,000, total loans, net of unearned
income, of $140,809,000 and total stockholders' equity of $21,310,000. The
Company's net income has grown from $1,229,000 in 1993 to $2,110,000 in 1997.
Additionally, since 1993, the Company's total loans have grown at an average
annual rate of 19.2%, resulting from a combination of internal growth and the
Company's acquisition of community banks.
The Company recently announced that it had agreed to acquire the acquisition
of the Azle Bancorp and its subsidiary, Azle State, in Azle, Texas, north of
Fort Worth and northwest of Dallas. At June 30, 1998, Azle Bancorp has total
assets of $91,660,000, total loans, net of unearned income, of $45,102,000,
total deposits of $80,816,000, and stockholders' equity of $9,699,000. The
Company expects that this acquisition will provide for additional growth in West
and North Central Texas and provide an entry into the Dallas-Fort Worth
metropolitan area. The net proceeds of the Offering will be used to finance the
Pending Acquisition. See "Pending Acquisition" and "Use of Proceeds."
Over the past five years the Company has acquired three banks and completed
one branch purchase as it has followed a strategy of opportunistically acquiring
banks in its West Texas market. In October 1997, the Bank opened two full-
service branch locations in Albertson's supermarkets, one in Abilene and one in
Odessa. One additional branch in another Albertson's supermarket in Odessa
opened in May 1998. Management of the Company believes that establishing bank
branches in supermarkets is one of the most economical ways to increase the
Bank's market share in its market area. 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, while closely monitoring the Company's asset quality. See "Business
and Properties of the Company--Business Objectives and Strategy" and "--
Acquisition and Branch Activities."
The Bank provides a wide variety of commercial, consumer and trust services
and operates through its branches as a community bank and focus 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 Company's loan growth
has historically been impacted by its activity in the indirect auto lending
business, which portfolio currently accounts for approximately 28% of the
Company's loan portfolio. The Company's current strategy has been to focus its
lending on increasing its commercial and local residential loans and
diversifying away from indirect auto loans. Management's shift from indirect
auto loans has been due to increasing competition and decreasing interest rates
on these loans. Management believes that the Company's future growth strategy
lies in increasing commercial loans in the size range of $750,000 - $2,000,000,
which is between that size in which smaller local institutions are able to lend
and the sizes in which large regional banks are focusing.
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, home equity 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. The Bank also offers investment services and banking by phone or
personal computer.
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.
The combined branches in Abilene had the sixth largest total deposits of ten
commercial banks that had branch(es) in Taylor County, at June 30, 1997, the
latest date for which information is available. The branch in Lubbock had the
tenth largest total deposits of twenty-one banks that had branch(es) in Lubbock
County at June 30, 1997. The combined branches in Odessa had the sixth largest
total deposits of eight banks that had branch(es) in Ector County at June 30,
1997. The branch in San Angelo had the eighth largest total deposits of ten
banks that had branch(es) in Tom Green County at June 30, 1997. The branches in
Stamford and Winters were the largest bank branches in Jones and Runnels
Counties, respectively, in terms of total deposits at June 30, 1997.
The Company's address and telephone number is 547 Chestnut Street, Abilene,
Texas 79602, (915) 677-5550.
BUSINESS OBJECTIVES AND 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 core deposits as a funding base to support local
commercial and consumer lending programs. To accomplish this strategy, the
Company has focused its efforts in the following areas.
SOPHISTICATION AND BREADTH OF PRODUCTS; PERSONAL SERVICES. The Company's goal
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 local appeal of a community bank. As a result of
consolidation in the financial industry within the Company's marketplace, the
Company believes there are few financial institutions with larger lending limits
that are willing to provide the personal service to which the Company is
committed.
DECENTRALIZED DECISION MAKING. The Company's decentralized decision making
authority, vested in the president 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 and has contributed to a 17% increase in
the Company's commercial loan portfolio during the twelve-month period ended
June 30, 1998.
CREDIT QUALITY STANDARDS. Attention to credit quality standards has allowed
the Company to expand its commercial loan portfolio while maintaining superior
asset quality. Nonperforming assets were 0.18% of total assets at June 30,
1998.
EFFICIENT AND CONVENIENT DELIVERY SYSTEMS. The Company seeks to maintain and
expand efficient and convenient delivery systems for the Company's products and
services. Examples of the Company's efforts toward this goal include the
expansion of its branch network by locating banking centers in a leading
supermarket chain in Abilene and Odessa and the introduction of computer and
telephone home banking. Additionally, the Company maintains fifteen (15) ATM's
throughout its market.
ACQUISITION ACTIVITY. The Company's acquisition activity has been designed to
increase market share and expand into contiguous markets demographically similar
to the Company's current service areas. Following the acquisition of Azle
Bancorp and its subsidiary Azle State, the Company will have locations in or
near five of the major markets in West and North Central Texas. Management
believes that the acquisition of Azle Bancorp will increase the profitability of
the Company through increased operating efficiencies and an increase in the loan
to deposit ratio and by allowing the Company to cross-sell a more expansive
product line to newly acquired customers.
Pending Acquisition
PENDING ACQUISITION
The Company and Azle Bancorp have entered into the Reorganization Agreement
dated as of May 29, 1998 pursuant to which the Company will acquire Azle Bancorp
and its subsidiaries, including Azle State Bank ("Azle State"), by means of the
merger of Azle Bancorp with and into a subsidiary of the Company to be formed.
The shareholders of Azle Bancorp will receive merger consideration consisting of
cash in the amount of $18,431,420; provided, however, that if the Pending
Acquisition is not consummated on or prior to October 1, 1998, the merger
consideration will be increased by an amount equal to Azle Bancorp's net after
tax income for the period between October 1, 1998 and the end of the month prior
to the actual closing date (estimated to be approximately $120,000 if the
transaction were to close in early November 1998 rather than by October 1,
1998). In addition, the shareholders of Azle Bancorp will be entitled to receive
a quarterly dividend payment of approximately $164,000 if the transaction were
to close in early November 1998 rather than by October 1, 1998. In the event the
closing does not occur prior to or on October 1, 1998, the parties agree that
the closing shall not occur prior to November 1, 1998, and that the closing
shall not occur after the fifteenth day of any month after November, 1998. In
the event that Azle Bancorp is unable to obtain the approval by the holders of
at least seventy-five percent (75%) of the outstanding Azle Bancorp common stock
of the payments made to Mr. Carl E. Campbell, Jr. pursuant to certain deferred
compensation plan agreements with Azle State so that such payments would not be
considered an excess parachute payment under Section 280G of the Internal
Revenue Code, then the merger consideration will be decreased by an amount equal
to the tax effect of such failure to obtain shareholder approval. The
obligations of the parties to complete the Pending Acquisition are subject to
certain conditions. There can be no assurance that the applicable conditions
will be satisfied or that the Pending Acquisition will be completed. See
"Pending Acquisition."
Management of the Company believes that the Pending Acquisition presents an
excellent opportunity for increased earnings. The Company intends to increase
the profitability of Azle State 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 advance this growth. The Company also believes that certain
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 Pending
Acquisition will allow the Company to expand its market area into what it
believes are desirable banking locations, adjacent to the Dallas-Fort Worth,
Texas metroplex. This expansion will increase the geographic diversity of the
Company's loan portfolio which is expected to decrease the Company's overall
lending risks. See "Business and Properties of the Company--Business Strategy."
Azle Bancorp, a Texas corporation located in Azle, Texas, engages in no
significant activities other than owning and managing Azle State. Azle State is
a community bank that offers interest and noninterest-bearing depository
accounts, and makes consumer and commercial loans. At June 30, 1998, Azle
Bancorp had total assets of $91,660,000, total loans, net of unearned income, of
$45,102,000, total deposits of $80,816,000, and stockholders' equity of
$9,699,000. Azle State reported net income after taxes of $1,502,000 for 1997,
$1,532,000 for 1996, $1,316,000 for 1995 and $738,000 and $729,000 for the six-
month periods ended June 30, 1998 and 1997, respectively. See the consolidated
financial statements of Azle Bancorp and Azle State included elsewhere in this
Prospectus. At July 15, 1998, Azle Bancorp had 52 full-time equivalent
employees, 11 of which were officers.
The Trust
The Trust is a statutory business trust formed under Delaware law pursuant to
(i) a trust agreement, dated as of July 29, 1998, executed by the Company, as
depositor, and the trustees of the Trust (together with the Property Trustee,
the Debenture Trustee and the Guarantee Trustee, the "Trustees"), and (ii) a
certificate of trust filed with the Secretary of State of the State of Delaware
on July 29, 1998. The initial trust agreement will be amended and restated in
its
4
<PAGE>
entirety (as so amended and restated, the "Trust Agreement") substantially in
the form filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The Trust Agreement will be qualified as an indenture
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
Upon issuance of the Preferred Securities, the purchasers thereof will own all
of the Preferred Securities. The Company will acquire all of the Common
Securities, which will represent an aggregate liquidation amount equal to at
least 3% of the total capital of the Trust. The Common Securities will rank pari
passu, and payments will be made thereon pro rata, with the Preferred
Securities, except that upon the occurrence and during the continuance of an
Event of Default (as defined herein) under the Trust Agreement resulting from a
Debenture Event of Default, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Preferred Securities. See "Description of the Preferred Securities--
Subordination of Common Securities." The Trust exists for the exclusive purposes
of (i) issuing the Trust Securities representing undivided beneficial interests
in the assets of the Trust, (ii) investing the gross proceeds of the Trust
Securities in the Subordinated Debentures issued by the Company, and (iii)
engaging in only those other activities necessary, advisable, or incidental
thereto. The Subordinated Debentures and payments thereunder will be the only
assets of the Trust and payments under the Subordinated Debentures will be the
only revenue of the Trust. The Trust has a term of 55 years, but may terminate
earlier as provided in the Trust Agreement. The number of Trustees will,
pursuant to the Trust Agreement, initially be five. Three of the Trustees (the
"Administrative Trustees") will be persons who are employees or officers of, or
who are affiliated with, the Company. The fourth trustee will be a financial
institution that is unaffiliated with the Company, which trustee will serve as
institutional trustee under the Trust Agreement and as indenture trustee for the
purposes of compliance with the provisions of the Trust Indenture Act (the
"Property Trustee"). U.S. Trust Company of Texas, N.A., a national bank, ("U.S.
Trust"), will be the Property Trustee until removed or replaced by the holder of
the Common Securities. For purposes of compliance with the provisions of the
Trust Indenture Act, U.S. Trust will also act as trustee (the "Guarantee
Trustee") under the Guarantee and as Debenture Trustee (as defined herein) under
the Indenture. The fifth trustee will be an entity that maintains its principal
place of business in the State of Delaware (the "Delaware Trustee"). Wilmington
Trust Company, a Delaware chartered trust company, will act as Delaware Trustee.
The Property Trustee will hold title to the Subordinated Debentures for the
benefit of the holders of the Trust Securities and in such capacity will have
the power to exercise all rights, powers and privileges under the Indenture. The
Property Trustee will also maintain exclusive control of a segregated
noninterest-bearing bank account (the "Property Account") to hold all payments
made in respect of the Subordinated Debentures for the benefit of the holders of
the Trust Securities. The Property Trustee will make payments of Distributions
and payments on liquidation, redemption and otherwise to the holders of the
Trust Securities out of funds from the Property Account. The Guarantee Trustee
will hold the Guarantee for the benefit of the holders of the Preferred
Securities. The Company, as the holder of all the Common Securities, will have
the right to appoint, remove or replace any Trustee and to increase or decrease
the number of Trustees. The Company will pay all fees and expenses related to
the Trust and the offering of the Trust Securities. The rights of the holders of
the Preferred Securities, including economic rights, rights to information and
voting rights, are set forth in the Trust Agreement, the Delaware Business Trust
Act (the "Trust Act") and the Trust Indenture Act. See "Description of the
Preferred Securities." The principal executive office of the Trust is 547
Chestnut Street, Abilene, Texas 79602, and its telephone number is (915) 677-
5550.
The Offering
Securities Offered..... 320,000 shares of Common Stock and 1,000,000 shares or
$10,000,000 aggregate liquidation amount of Preferred
Securities
Use of Proceeds........ The Company will use all of the net proceeds from this
Offering to fund a portion of the cost of acquiring Azle
Bancorp.
Conditions to Closing.. The Offerings of Preferred Securities and Common Stock
are contingent upon the successful completion and
closing of each other and of the consummation of the
acquisition of Azle Bancorp.
Risk Factors........... See "Risk Factors" for a discussion of certain
considerations relevant to an investment in the
Securities offered hereby.
The Common Stock Offering
The Issuer............. Independent Bankshares, Inc., a Texas corporation.
5
<PAGE>
Price to Public.......... $__________ per share.
Common Stock Offered..... 320,000 shares. (1)
Common Stock Outstanding
After the Offering..... 2,307,296 shares. (1)(2)
AMEX Symbol.............. IBK
- -------------------
(1) Does not include up to 48,000 shares of Common Stock subject to the
Underwriter's over-allotment option.
(2) Based upon the number of shares of Common Stock issued and outstanding at
July 15, 1998. Does not include 116,360 shares of Common Stock issuable
upon the conversion of the Company's $10.00 Series C Cumulative Convertible
Preferred Stock ("Series C Preferred Stock").
The Preferred Securities Offering
The Issuer................ Independent Capital Trust, a Delaware statutory
business trust.
Price to Public........... $10.00 per Preferred Security.
AMEX Symbol............... Application has been made to list the Preferred
Securities on the AMEX under the symbol
IBK.PR.
Preferred Securities...... 1,000,000 Preferred Securities having a Liquidation
Amount of $10 per Preferred Security. The Preferred
Securities represent preferred undivided beneficial
interests in the assets of the Trust, which will
consist solely of the Subordinated Debentures and
payments thereunder. The Trust has granted the
Underwriter an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to
an additional 150,000 Preferred Securities at the
initial offering price, solely to cover over-
allotments, if any.
Distributions............. The Distributions payable on each Preferred Security
will be fixed at a rate per annum of % of the
Liquidation Amount of $10 per Preferred Security,
will be cumulative, will accrue from , 1998,
the date of original issuance of the Preferred
Securities, and will be payable quarterly in
arrears, on March 31, June 30, September 30 and
December 31 of each year, commencing December 31,
1998. See "Description of the Preferred Securities--
Distributions--Payment of Distributions."
Option to Extend Interest
Payment Period.......... The Company has the right, at any time, so long as
no Debenture Event of Default has occurred and is
continuing, to defer payments of interest on the
Subordinated Debentures for a period not exceeding
20 consecutive quarters; provided, that no Extension
Period may extend beyond the Stated Maturity of the
Subordinated Debentures. As a consequence of the
extension by the Company of the interest payment
period, quarterly Distributions on the Preferred
Securities will be deferred (though such
Distributions would continue to accrue with interest
thereon compounded quarterly, because interest will
continue to accrue and compound on the Subordinated
Debentures) during any such Extension Period. During
an Extension Period, the Company will be prohibited,
subject to certain exceptions described herein, from
declaring or paying any cash distributions with
respect to its capital stock or debt securities that
rank pari passu with or junior to the Subordinated
Debentures. Upon the termination of any Extension
Period and the payment of all amounts then due, the
Company may commence a new Extension Period, subject
to the foregoing requirements. See "Description of
the Preferred Securities--Distributions--Extension
Period" and "Description of the
6
<PAGE>
Subordinated Debentures Option to Extend Interest
Payment Period." Should an Extension Period occur,
holders of Preferred Securities will be required to
include deferred interest income in their gross
income for United States federal income tax purposes
in advance of receipt of the cash distributions with
respect to such deferred interest payments. See
"Certain Federal Income Tax Consequences--Potential
Extension of Interest Payment Period and Original
Issue Discount."
Optional Redemption....... The Preferred Securities are subject to mandatory
redemption, in whole or in part, upon repayment of
the Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve
approval, if then required under applicable capital
guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or
after , 2003, in whole at any time or in
part from time to time, or (ii) at any time, in
whole (but not in part), within 180 days following
the occurrence of a Tax Event, a Capital Treatment
Event or an Investment Company Event, in each case
at the redemption price equal to 100% of the
principal amount of the Subordinated Debenture,
together with any accrued but unpaid interest to the
date fixed for redemption. See "Description of the
Subordinated Debentures--Redemption."
Distribution of
Subordinated
Debentures.............. The Company has the right at any time to terminate
the Trust and cause the Subordinated Debentures to
be distributed to holders of Preferred Securities in
liquidation of the Trust, subject to the Company
having received prior approval of the Federal
Reserve to do so if then required under applicable
capital guidelines or policies of the Federal
Reserve. See "Description of the Preferred
Securities--Redemption" and "Description of the
Preferred Securities--Liquidation Distribution Upon
Termination."
Guarantee................. The Company has guaranteed the payment of
Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in
each case to the extent of funds held by the Trust,
as described herein. The Company and the Trust
believe that, taken together, the obligations of the
Company under the Guarantee, the Trust Agreement,
the Subordinated Debentures, the Indenture and the
Expense Agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of the
Trust under the Preferred Securities. The
obligations of the Company under the Guarantee and
the Preferred Securities are subordinate and junior
in right of payment to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the
Company. If the Company does not make principal or
interest payments on the Subordinated Debentures,
the Trust will not have sufficient funds to make
distributions on the Preferred Securities; in which
event, the Guarantee will not apply to such
Distributions until the Trust has sufficient funds
available therefor. See "Description of the
Guarantee."
Voting Rights............. The holders of the Preferred Securities will have no
voting rights except in limited circumstances. See
"Description of the Preferred Securities--Voting
Rights; Amendment of Trust Agreement."
Use of Proceeds by the
Trust................... The proceeds from the sale of the Preferred
Securities offered hereby will be used by the Trust
to purchase the Subordinated Debentures issued by
the Company.
Available Information
No separate financial statements of the Trust have been included herein. The
Company and the Trust do not consider that such financial statements would be
material to holders of the Trust Securities because the Trust is a newly formed
special purchase entity, has no operating history or independent operations and
is not engaged in and does not
7
<PAGE>
propose to engage in any activity other than holding as trust assets the
Subordinated Debentures and issuing the Trust Securities.
8
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF THE COMPANY
The following table presents selected historical consolidated financial
information and other data of the Company. Such financial information has been
restated to reflect the 33-1/3% stock dividend paid to shareholders in May 1995
and the 25% stock dividend paid to shareholders in May 1997. The following
selected historical consolidated financial data should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus and the information contained in
"Management's Discussions and Analysis of Financial Condition and Results of
Operations of the Company." The selected historical consolidated financial data
as of and for the five years in the period ended December 31, 1997, are derived
from the Company's consolidated financial statements which have been audited by
independent public accountants. The selected historical consolidated financial
data as of and for the six-month periods ended June 30, 1998, and June 30, 1997,
is unaudited. The following information includes the accounts of Winters State
Bank, Winters, Texas ("Winters State"), Peoples National Bank in Winters, Texas
("Peoples National"), Coastal Banc ssb, San Angelo, Texas ("Coastal Banc--San
Angelo") and Crown Park Bancshares, Inc., Lubbock, Texas ("Crown Park") from
August 31, 1993, January 1, 1996, May 27, 1996, and January 28, 1997, the
respective dates of acquisition of such companies. In the opinion of management
of the Company, the information presented reflects all adjustments considered
necessary for fair presentation of the results for such periods.
<TABLE>
<CAPTION>
Six-month Period
Ended June 30, Year Ended December 31,
-------------------- --------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $ 9,224 $ 8,974 $ 18,324 $ 13,556 $ 11,962 $ 10,131 $ 9,221
Net interest income 4,937 4,725 9,665 7,115 6,653 6,679 6,045
Income before cumulative
effect of accounting change 973 1,055 2,110 1,422 1,132 450 1,029
Cumulative effect of
accounting change 0 0 0 0 0 0 200(1)
Net income 973 1,055 2,110 1,422 1,132 450 1,229
COMMON SHARE DATA:
Earnings per share:
Basic $ 0.49 $ 0.59 $ 1.12 $ 1.00 $ .82 $ 0.29 $ 0.89
Diluted 0.47 0.52 1.03 0.84 0.67 0.27 0.73
Cash dividends 0.10 0.09 0.19 0.14 0.09 0.06 0.00
Dividend payout ratio 20.35% 15.96% 17.30% 13.85% 10.34% 15.56% N/A
Book value per share:
Common stock $ 10.70 $ 10.02 $ 10.36 $ 10.41 $ 10.00 $ 7.99 $ 7.82
Diluted 10.19 9.42 9.80 8.80 8.11 6.58 6.44
Period end shares outstanding 1,987 1,946 1,975 1,381 1,313 1,298 1,298
Weighted average shares
outstanding (in thousands):
Basic 1,964 1,742 1,842 1,355 1,299 1,302 1,300
Diluted 2,087 2,015 2,048 1,698 1,689 1,685 1,686
BALANCE SHEET DATA:
Assets $263,501 $265,766 $264,574 $205,968 $180,344 $159,860 160,712
Loans, net of unearned
income(2) 140,809 137,403 140,853 92,017 81,927 81,306 69,647
Deposits 240,964 244,068 242,801 189,575 164,704 146,184 147,785
Notes payable 4 824 57 240 849 930 1,194
Stockholders' equity 21,310 19,586 20,527 14,937 13,818 11,073 10,845
</TABLE>
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<PAGE>
SUMMARY PRO FORMA COMBINED INFORMATION OF THE COMPANY
The following table presents summary pro forma combined financial
information and other data for the Company for the six month periods ended June
30, 1998 and as of June 30, 1998, as if consummation of the Pending Acquisition
and this Offering had occurred, in the case of the statements of operations
data, as of January 1, 1997, and in the case of the balance sheet data, as of
June 30, 1998. The pro forma combined financial data do not purport to be
indicative of the Company's financial condition and results of operations at any
future date or for any future period. The financial data should be read in
conjunction with the Company's, Azle Bancorp's and Azle State's respective
financial statements, the notes thereto, the pro forma combined financial
statements of the Company, the notes thereto and the other financial
information, included elsewhere herein. In the opinion of management of the
Company, the data presented reflect all adjustments considered necessary for a
fair representation of the results for such periods.
<TABLE>
<CAPTION>
THE AZLE PRO FORMA
COMPANY BANCORP COMBINED
--------------- -------------- ---------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Income Statement Data:
Six-month Period ended June
30, 1998:
Total interest income $ 9,224 $ 3,528 $ 12,610
Net interest income 4,937 2,213 6,583
Net income 973 715 1,176
Year ended December 31,
1997:
Total interest income $ 18,324 $ 6,867 $ 24,908
Net interest income 9,665 4,252 12,784
Net income 2,110 1,454 2,542
Common Share Data:
Six-month Period ended June
30, 1998:
Earnings per share:
Basic $ 0.49 $ 1.09 $ 0.51
Diluted 0.47 N/A 0.49
Adjusted shares
outstanding (in
thousands):
Basic 1,964 659 2,284
Diluted 2,087 N/A 2,407
Year ended December 31,
1997:
Earnings per share:
Basic $ 1.12 $ 2.21 $ 1.16
Diluted 1.03 N/A 1.07
Adjusted shares
outstanding (in
thousands):
Basic 1,842 659 2,162
Diluted 2,048 N/A 2,368
Balance Sheet Data:
At June 30, 1998:
Assets $263,501 $91,660 $359,438
Loans, net of unearned
income 140,809 45,102 185,911
Deposits 240,964 80,816 321,780
Stockholders' equity 21,310 9,699 25,598
Capital Ratios:
At June 30, 1998:
Tier 1 capital to
risk-weighted assets 11.86% 18.38% 11.13%
Total capital to
risk-weighted assets 12.59 19.63 11.99
Leverage ratio 6.93 10.57 6.63
</TABLE>
10
<PAGE>
RISK FACTORS
Other than historical and factual statements, the matters and items discussed
in this Prospectus are forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. In addition to other
information contained in this Prospectus, the following factors could contribute
to such differences. Prospective investors should carefully consider the
following factors and cautionary statements in determining whether to purchase
Securities in this Offering. All factors should be considered in conjunction
with the other information and financial data appearing elsewhere in this
Prospectus. See "Disclosure Regarding Forward-Looking Statements."
Risk Factors Relating to the Company
Integration of the Pending Acquisition. As a result of the Pending
Acquisition, the Company's asset size will substantially increase. The future
prospects of the Company will depend, in significant part, on a number of
factors, including, without limitation, the Company's ability to integrate the
Pending Acquisition; its ability to compete effectively in the Azle, Texas
market area; its success in retaining earning assets and minimize non performing
assets, including loans, acquired in the Pending Acquisition; its ability to
generate new earning assets and minimize nonperforming assets; and its ability
to attract and retain qualified management and other appropriate personnel. No
assurance can be given with respect to the Company's ability to accomplish any
of the foregoing or that the Company will be able to achieve results in the
future similar to those achieved in the past or that the Company will be able to
manage effectively the growth resulting from the Pending Acquisition. In
addition, as a result of the Pending Acquisition, the Company's management must
successfully integrate the operations of Azle State with those of the Bank. The
operational areas requiring significant integration include the consolidation of
data processing operations among the Bank and Azle State, the combination of
employee benefit plans, the creation of joint account and lending products, the
development of unified marketing plans and other related issues. Accomplishment
of these goals will require additional expenditures by the Company that could
negatively impact the Company's net income. Completion of these tasks could
divert management's attention from other important issues. In addition, there
can be no assurance that management of the Company and Azle Bancorp/Azle State
will be compatible, and the process of combining the Bank and Azle State could
cause the interruption of, or the disruption in, the activities of either or
both the Bank's and Azle State's respective business, which could have an
adverse effect on their combined operations. The Company may also incur
additional unexpected costs in connection with integration of the Pending
Acquisition that could negatively impact the Company's net income. See "Pending
Acquisition."
Future Growth Through Acquisitions. The Company has grown significantly since
1996 through acquisitions. The future growth of the Company will be dependent
in part upon the ability of the Company to acquire businesses at favorable
prices, terms and conditions, and to properly manage and integrate their
operations. The Company's ability to expand successfully through acquisitions
depends upon many factors, including the successful identification and
acquisition of financial institutions and other related businesses and
management's ability to effectively integrate the acquired businesses.
Acquisitions entail risks that business judgment will prove inaccurate with
respect to anticipated market growth, projected revenue enhancements, and
expected operating expense savings. Acquisitions also entail the risks of the
diversion of management's attention and the conversion of the operations and the
assimilation of personnel of the acquired companies, each of which could
adversely affect the Company's operating results. In addition, the success of
any acquisition will depend in part upon the Company's ability to effectively
integrate the acquired company into the Company's operations and implement its
business style and philosophy.
The Company has financed its recent acquisitions primarily through borrowings
and the issuance of Common Stock and, with respect to the Pending Acquisition,
through borrowings and this Offering. If the Company pursues additional
acquisitions, however, it is likely to finance the acquisitions through a
combination of borrowings and public and/or private offerings of its securities.
There is no assurance that the Company will be able to obtain debt financing on
terms satisfactory to it or at all. Furthermore, if the Company sells
additional securities to raise funds in the future, the terms and conditions of
the issuances may have a dilutive effect or otherwise adversely impact existing
shareholders.
11
<PAGE>
There can be no assurance that future acquisition opportunities, if any, can
be consummated on favorable terms, that the Company will be successful in
acquiring or integrating any business, or that any such acquisitions, including
Azle Bancorp, will enhance the earnings of the Company.
Adverse Changes in the Economy. The Company's profitability is dependent on
the profitability of its operating subsidiary, the Bank. The Bank's
profitability is dependent on the economic vitality of its West Texas and, upon
consummation of the Pending Acquisition, North Central Texas service areas.
While the Company believes that the Bank's customers within the region are
widely diversified, there can be no assurance that the Company would be able to
withstand adverse changes in the in the West and North Central Texas economy
should they occur. In addition, there can be no assurance that adverse changes
in industry sectors of the Bank's or Azle State's market areas or that adverse
developments in the national economy would not adversely affect the Company's
financial condition or results of operations. Accordingly, the Company will
remain subject to risks associated with prolonged declines in either the local
or national economy.
Nonperforming Assets; No Assurance as to the Adequacy of Allowance for Loan
Losses. At of June 30, 1998, total nonperforming assets were $475,000, 0.2% of
total assets as of that date. At June 30, 1998, the Company had $757,000 of
substandard loans, of which $135,000 were loans designated as nonaccrual or 90
days past due, and $253,000 of foreclosed real estate classified as substandard.
The level of nonperforming assets may increase in the future and the levels of
nonaccrual loans and other real estate may fluctuate from period to period as
problem loans are worked out and in some instances additional properties are
taken into other real estate. Further, depending on real estate values, the
overall economy and other circumstances, the resolution of problem loans and
liquidation of other real estate may be more costly than presently anticipated,
and may require the Company to increase its allowance and incur additional other
real estate related expenses.
At June 30, 1998, the Company's allowance for possible loan losses amounted to
$1,121,000 or 505% of total nonperforming loans and 0.80% of net loans. The
Company's allowance for loan losses is maintained at a level considered adequate
by management to absorb inherent losses in its loan portfolio. The amount of
inherent loan losses which could be ultimately realized is susceptible to
changes in economic, operating, and other conditions, including changes in
interest rates, that could be beyond the Company's control. Such losses could
exceed current estimates. Although management believes that the Company's
allowance for loan losses is adequate, there can be no assurance that the
allowance will prove sufficient to cover actual loan losses should such losses
be realized or that the Company will not have to increase its allowance for loan
losses in the future.
The Company believes that its policies and procedures related to its
monitoring and resolution of problem assets are adequate. In this regard, the
Company monitors is problem assets, and based on information known to management
at such time, establishes allowances against foreseeable losses related to such
loans. While the Company believes it has established adequate reserves against
such loans or written down the value of the properties securing such loans to
reflect the current estimated fair values of such properties, no assurances can
be provided that the properties securing such loans will not further decrease in
value or can be sold for their estimated fair values in the event the Bank
forecloses or takes possession of such properties or that the Company will not
experience additional losses related to such loans.
Future Dividends. Although the Company has paid cash dividends on the Common
Stock since May 1994, there is no assurance that the Company will continue to
pay dividends in the future. The ability of the Company to pay cash dividends in
the future will depend to a large extent upon its receipt of dividends from the
Bank. The amount of dividends that the Bank may pay to Independent Financial
Corp., an intermediate holding company for the Bank ("Independent Financial"),
and that Independent Financial, in turn, may pay to the Company are subject to
the earnings and financial condition of the Bank, certain statutory and
regulatory restrictions and may be restricted by provisions of future financing
arrangements. Moreover, holders of the Series C Preferred Stock are entitled to
receive dividends before dividends may be paid on the Common Stock. See "Price
Range of Common Stock and Dividends" and "Regulation and Supervision."
Reliance on Key Personnel. The Company and the Bank are dependent upon their
executive officers and key employees. Specifically, the Company considers the
services of Bryan W. Stephenson, President and Chief Executive Officer, Randal
N. Crosswhite, Senior Vice President and Chief Financial Officer, and other
senior officers of the Bank
12
<PAGE>
to be important to the success of the Company. The unexpected loss of the
services of any of these individuals could have a detrimental effect on the
Company and the Bank.
Competition. There is significant competition among banks and bank holding
companies, many of which have far greater assets and resources than the Company.
The Company also encounters intense competition in its commercial banking
business from savings and loan associations, credit unions, factors, insurance
companies, commercial and captive finance companies, and certain other types of
financial institutions located in other major metropolitan areas in the United
States, many of which are larger in terms of capital, resources and personnel
than the Company, have greater lending limits than the Bank and provide services
that the Company and the Bank do not currently provide. Additionally, federal
legislation regarding interstate branching and banking may increase competition
in the future from large out-of-state banks. The number of competitors may
increase as a result of the easing of restrictions on interstate banking
effected under the Riegle-Neal Interstate Banking and Efficiency Act of 1994.
Non-bank competitors also are not subject to the extensive regulations
applicable to the Company and the Bank. See "Regulation and Supervision" and
"Business and Properties of the Company--Competition."
Regulation and Supervision. Banking organizations are subject to extensive
federal and state regulation and supervision. These regulations and laws are
primarily intended to protect depositors and the Federal Deposit Insurance
Corporation ("FDIC"), not shareholders or other creditors. Regulations and laws
affecting the financial institutions industry are undergoing continuous change,
and the ultimate effect of such changes cannot be predicted. Regulations and
laws affecting the Bank and Azle State may be modified at any time, and new
legislation affecting financial institutions may be proposed and enacted. There
is no assurance that such modifications or new laws will not materially and
adversely affect the business, condition or operations of the Bank and Azle
State or benefit competing entities which may not be subject too the same
regulations and supervision. See "Regulation and Supervision."
General Economic Conditions and Monetary Policy. The operating income and net
income of the Company depend to a substantial extent on "rate differentials,"
i.e., the differences between the income the Company receives from loans,
securities and other earning assets, and the interest expense it pays to obtain
deposits and other liabilities. These rates are highly sensitive to many
factors that are beyond the control of the Company, including general economic
conditions, rapid changes in interest rates, decline in real estate market
values and the monetary and fiscal policies of various governmental and
regulatory authorities. For example, in an expanding economy, loan demand
usually increases and the interest rates charged on loans increase. Increases
in the discount rate by the Federal Reserve usually lead to rising interest
rates, which affect the Company's interest income, interest expense and
investment portfolio. Also, governmental policies such as the creation of a tax
deduction for individual retirement accounts can increase savings and affect the
cost of funds. While management has taken measures intended to manage the risks
of operating in a changing interest rate environment, there can be no assurance
that such measures will be effective in avoiding undue interest rate risk. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company--Interest Rate Sensitivity."
Trading Market for the Common Stock. Although the Common Stock is listed for
trading on the AMEX, the volume of the Common Stock traded on such exchange has
been less active than other companies listed on AMEX and other exchanges and
the Nasdaq National Market. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of willing buyers and sellers of the Common Stock at any given
time, which presence is dependent, among other things, upon the individual
decisions of investors and general economic and market conditions over which the
Company has no control. While the Company believes that this Offering, by
increasing the number of shares of Common Stock outstanding, will improve the
liquidity of the market for the Common Stock, no assurance can be given that
this Offering will increase the volume of trading in the Common Stock. See
"Price Range of Common Stock and Dividends."
Uncertainties Arising from Year 2000. Like many financial institutions, the
Company, the Bank, Azle Bancorp and Azle State rely upon computers for the daily
conduct of their businesses and for information systems processing. Many
software applications and operational programs are not designed to recognize
calendar dates beginning in the Year 2000. The failure of such applications or
systems to properly recognize the dates beginning in the Year 2000 could result
in miscalculations or system failures. The Company's business depends, and upon
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consummation of the Pending Acquisition, will depend, in part upon the Bank's
and Azle State's ability to store, retrieve, process and manage significant data
bases and to expand and upgrade their information processing capabilities. The
Company and the Bank have been working to address this problem. At this time,
the Company does not anticipate incurring significant costs related to the Year
2000 problem. The Company does, however, anticipate an increase in the amount
of time management and staff will devote to closely monitoring the progress of
the compliance and also testing the applications. There can be no assurance
that the systems of other companies in which the Company's system or Azle
Bancorp's system rely also will be timely converted or that any such failure to
convert by another company would not have an adverse effect on the Company's
systems or Azle Bancorp's systems. Additionally, the failure of a Bank or Azle
State customer to prepare for Year 2000 compatibility could have a significant
adverse affect on such customers' operations and profitability, in turn
inhibiting its ability to repay loans in accordance with their terms.
Therefore, even if the Company does not incur significant direct costs in
connection with responding to the Year 2000 issue, there can be no assurance
that the failure or delay of the Company's customers or other third parties in
addressing the Year 2000 issue or the costs involved in such process will not
have a material adverse affect on the Company's business, financial condition,
or results of operations.
Risk Factors Relating to the Preferred Securities
Ranking of Subordinated Obligations Under the Guarantee and the Subordinated
Debentures. The obligations of the Company under the Guarantee issued for the
benefit of the holders of Preferred Securities and under the Subordinated
Debentures are unsecured and rank subordinate and junior in right of payment to
all Senior Debt, Subordinated Debt and Additional Senior Obligations of the
Company, whether now existing or hereafter incurred. At June 30, 1998, the
aggregate outstanding Senior Debt, Subordinated Debt and Additional Senior
Obligations of the Company was approximately $4,000. Because the Company is a
holding company, the right of the Company to participate in any distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of holders of the Preferred Securities to
benefit indirectly from such distribution) is subject to the prior claims of
creditors of that subsidiary, except to the extent that the Company may itself
be recognized as a creditor of that subsidiary. The Subordinated Debentures,
therefore, will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries and holders of Subordinated Debentures
and Preferred Securities should look only to the assets of the Company for
payments on the Subordinated Debentures. Neither the Indenture, the Guarantee
nor the Trust Agreement places any limitation on the amount of secured or
unsecured debt, including Senior Debt, Subordinated Debt and Additional Senior
Obligations, that may be incurred by the Company. See "Description of the
Guarantee--Status of the Guarantee" and "Description of the Subordinated
Debentures--Subordination."
The ability of the Trust to pay amounts due on the Preferred Securities is
dependent solely upon the Company making payments on the Subordinated Debentures
as and when required.
Option to Extend Interest Payment Period, Tax Consequences, Market Price
Consequences. The Company has the right under the Indenture, so long as no
Debenture Event of Default has occurred and is continuing, to defer the payment
of interest on the Subordinated Debentures at any time or from time to time for
a period not exceeding 20 consecutive quarters with respect to each Extension
Period; provided that no Extension Period may extend beyond the Stated Maturity
of the Subordinated Debentures. As a consequence of any such deferral, quarterly
Distributions on the Preferred Securities by the Trust will be deferred (and the
amount of Distributions to which holders of the Preferred Securities are
entitled will accumulate additional Distributions thereon at the rate of %
per annum, compounded quarterly from the relevant payment date for such
Distributions) during any such Extension Period. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock (other than (a) dividends or distributions in
common stock of the Company, any declaration of a noncash dividend in connection
with the implementation of a shareholder rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, and (b) purchases of common stock of the Company
related to the rights under any of the Company's benefit plans for its
directors, officers or employees), (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu with or junior in interest to the Subordinated
Debentures or make any guarantee payments with respect to any guarantee by
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the Company of the debt securities of any subsidiary of the Company if such
guarantee ranks pari passu with or junior in interest to the Subordinated
Debentures (other than payments under the Guarantee), or (iii) redeem, purchase
or acquire less than all of the Subordinated Debentures or any of the Preferred
Securities. Prior to the termination of any such Extension Period, the Company
may further defer the payment of interest; provided that no Extension Period may
exceed 20 consecutive quarters or extend beyond the Stated Maturity of the
Subordinated Debentures. Upon the termination of any Extension Period and the
payment of all interest then accrued and unpaid (together with interest thereon
at the annual rate of __% compounded quarterly, to the extent permitted by
applicable law), the Company may elect to begin a new Extension Period, subject
to the above requirements. Subject to the foregoing, there is no limitation on
the number of times that the Company may elect to begin an Extension Period. See
"Description of the Preferred Securities--Distributions--Extension Period" and
"Description of the Subordinated Debentures Option to Extend Interest Payment
Period."
Should an Extension Period occur, each holder of Preferred Securities will be
required to accrue and recognize income (in the form of OID) in respect of its
pro rata share of the interest accruing on the Subordinated Debentures held by
the Trust for United States federal income tax purposes. A holder of Preferred
Securities must, as a result, include such income in gross income for United
States federal income tax purposes in advance of the receipt of cash, and will
not receive the cash related to such income from the Trust if the holder
disposes of the Preferred Securities prior to the record date for the payment of
the related Distributions. See "Certain Federal Income Tax Consequences--
Potential Extension of Interest Payment Period and Original Issue Discount."
The Company has no current intention of exercising its right to defer payments
of interest by extending the interest payment period on the Subordinated
Debentures. Should the Company elect, however, to exercise such right in the
future, the market price of the Preferred Securities is likely to be adversely
affected. A holder that disposes of its Preferred Securities during an Extension
Period, therefore, might not receive the same return on its investment as a
holder that continues to hold its Preferred Securities. As a result of the
existence of the Company's right to defer interest payments, the market price of
the Preferred Securities may be more volatile than the market prices of other
securities on which OID accrues that are not subject to such optional deferrals.
Tax Event, Capital Treatment Event or Investment Company Event; Redemption.
The Company has the right to redeem the Subordinated Debentures in whole (but
not in part) within 180 days following the occurrence of a Tax Event, a Capital
Treatment Event or an Investment Company Event (whether occurring before or
after , 2003), and, therefore, cause a mandatory redemption of the
Preferred Securities. The exercise of such right is subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) the Trust is, or will be within 90 days of the date
of such opinion, subject to United States federal income tax with respect to
income received or accrued on the Subordinated Debentures, (ii) interest payable
by the Company on the Subordinated Debentures is not, or, within 90 days of such
opinion, will not be, deductible by the Company, in whole or in part, for United
States federal income tax purposes, or (iii) the Trust is, or will be within 90
days of the date of the opinion, subject to more than a de minimis amount of
other taxes, duties or other governmental charges. The Company must request and
receive an opinion with regard to such matters within a reasonable period of
time after it becomes aware of the possible occurrence of any of the events
described in clauses (i) through (iii) above.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such proposed change,
pronouncement or decision
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is announced on or after the date of issuance of the Preferred Securities under
the Trust Agreement, there is more than an insubstantial risk of impairment of
the Company's ability to treat the aggregate Liquidation Amount of the Preferred
Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the then
equivalent thereof) for purposes of the capital adequacy guidelines of the
Federal Reserve, as then in effect and applicable to the Company; provided,
however, that the inability of the Company to treat all or any portion of the
Liquidation Amount of the Preferred Securities as Tier 1 Capital shall not
constitute the basis for a Capital Treatment Event if such inability results
from the Company having cumulative preferred stock, minority interests in
consolidated subsidiaries, or any other class of security or interest which the
Federal Reserve now or may hereafter afford Tier 1 Capital treatment in excess
of the amount which may qualify for treatment as Tier 1 Capital under applicable
capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
becomes effective on or after the date of original issuance of the Preferred
Securities.
Shortening or Extension of Stated Maturity of Subordinated Debentures. The
Company has the right, at any time, to shorten the maturity of the Subordinated
Debentures to a date not earlier than , 2003. The exercise of
such right is subject to the Company having received prior approval of the
Federal Reserve if then required under applicable capital guidelines or policies
of the Federal Reserve. The Company also has the right to extend the maturity of
the Subordinated Debentures (whether or not the Trust is terminated and the
Subordinated Debentures are distributed to holders of the Preferred Securities)
to a date no later than , 2037, a date approximately 39 years
after the initial issuance of the Preferred Securities. Such right may only be
exercised, however, if at the time such election is made and at the time of such
extension (i) the Company is not in bankruptcy, otherwise insolvent or in
liquidation, (ii) the Company is not in default in the payment of any interest
or principal on the Subordinated Debentures, and (iii) the Trust is not in
arrears on payments of Distributions on the Preferred Securities and no deferred
Distributions are accumulated. See "Description of the Subordinated Debentures--
General."
Rights Under the Guarantee. The Guarantee guarantees to the holders of the
Preferred Securities, to the extent not paid by the Trust, (i) any accrued and
unpaid Distributions required to be paid on the Preferred Securities, to the
extent that the Trust has funds available therefor at such time, (ii) the
Redemption Price (as defined herein) with respect to any Preferred Securities
called for redemption, to the extent that the Trust has funds available therefor
at such time, and (iii) upon a voluntary or involuntary dissolution, winding-up
or liquidation of the Trust (other than in connection with the distribution of
Subordinated Debentures to the holders of Preferred Securities or a redemption
of all of the Preferred Securities), the lesser of (a) the amount of the
Liquidation Distribution (as defined herein), to the extent the Trust has funds
available therefor at such time, and (b) the amount of assets of the Trust
remaining available for distribution to holders of the Preferred Securities in
liquidation of the Trust. The holders of not less than a majority in Liquidation
Amount of the Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Guarantee or to direct the exercise of any trust power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Trust, the Guarantee Trustee or any other Person
(as defined in the Guarantee). If the Company were to default on its obligation
to pay amounts payable under the Subordinated Debentures, the Trust would lack
funds for the payment of Distributions or amounts payable on redemption of the
Preferred Securities or otherwise, and, in such event, holders of Preferred
Securities would not be able to rely upon the Guarantee for such amounts. In the
event, however, that a Debenture Event of Default has occurred and is continuing
and such event is attributable to the failure of the Company to pay interest on
or principal of the Subordinated Debentures on the payment date on which such
payment is due and payable, then a holder of Preferred Securities may institute
a legal proceeding directly against the Company for enforcement of payment to
such holder of the principal of or interest on such Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder (a "Direct Action"). The
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exercise by the Company of its right, as described herein, to defer the payment
of interest on the Subordinated Debentures does not constitute a Debenture Event
of Default. In connection with such Direct Action, the Company will have a right
of set-off under the Indenture to the extent of any payment made by the Company
to such holder of Preferred Securities in the Direct Action. Except as described
herein, holders of Preferred Securities will not be able to exercise directly
any other remedy available to the holders of the Subordinated Debentures or
assert directly any other rights in respect of the Subordinated Debentures. See
"Description of the Subordinated Debentures--Enforcement of Certain Rights by
the Holders of Preferred Securities," "Description of the Subordinated
Debentures--Debenture Events of Default" and "Description of the Guarantee." The
Trust Agreement provides that each holder of Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Indenture.
The Company and the Trust believe that, taken together, the obligations of the
Company under the Guarantee, the Trust Agreement, the Subordinated Debentures,
the Indenture and the Expense Agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of all of the
obligations of the Trust under the Preferred Securities. See "Relationship Among
the Preferred Securities, the Subordinated Debentures and the Guarantee--Full
and Unconditional Guarantee."
No Voting Rights Except in Limited Circumstances. Holders of Preferred
Securities will have no voting rights except in limited circumstances relating
only to the modification of the Preferred Securities and the exercise of the
rights of the Trust as holder of the Subordinated Debentures and the Guarantee.
Holders of Preferred Securities will not be entitled to vote to appoint, remove
or replace the Property Trustee or the Delaware Trustee, as such voting rights
are vested exclusively in the holder of the Common Securities (except upon the
occurrence of certain events described herein). The Property Trustee, the
Administrative Trustees and the Company may amend the Trust Agreement without
the consent of holders of Preferred Securities to ensure that the Trust will be
classified for United States federal income tax purposes as a grantor trust even
if such action adversely affects the interests of such holders. See "Description
of the Preferred Securities--Voting Rights; Amendment of Trust Agreement" and
"Description of the Preferred Securities--Removal of the Trust's Trustees."
Recent Tax Legislation. Certain legislative proposals were made in 1996 and
1997 which, if enacted, could have adversely affected the ability of the Company
to deduct interest paid on the Subordinated Debentures. However, these proposals
were not enacted. Nevertheless, there can be no assurance that other legislation
enacted after the date hereof will not otherwise adversely affect the ability of
the Company to deduct the interest payable on the Subordinated Debentures. In
addition, in a currently pending case in the Tax Court, Enron Corp v.
Commissioner, TC Dkt. No. 6149-98, the IRS is challenging the deductibility of
interest paid on securities which are similar, but not identical, to the
Subordinated Debentures. Depending upon the result obtained in that case, the
IRS may also challenge the deductibility of the interest paid on the
Subordinated Debentures, which could in turn trigger a Tax Event and a
redemption of the Preferred Securities.
Consequently, there can be no assurance that a Tax Event will not occur. A
Tax Event would permit the Company, upon approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve,
to cause a redemption of the Preferred Securities before, as well as after,
, 2003. See "Description of the Subordinated Debentures--Redemption" and
"Description of the Preferred Securities--Redemption--Tax Event Redemption,
Capital Treatment Event Redemption or Investment Company Event Redemption."
Redemption, Exchange of Preferred Securities for Subordinated Debentures. The
Company has the right at any time to dissolve, wind-up or terminate the Trust
and cause the Subordinated Debentures to be distributed to the holders of the
Preferred Securities in exchange therefor in liquidation of the Trust. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. The Company will have the right, in certain
circumstances, to redeem the Subordinated Debentures in whole or in part, in
lieu of a distribution of the Subordinated Debentures by the Trust, in which
event the Trust will redeem the Trust Securities on a pro rata basis to the same
extent as the Subordinated Debentures are redeemed by the Company. Any such
distribution or redemption prior to the Stated Maturity will be subject to prior
approval of the Federal Reserve if then required
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under applicable capital guidelines or policies of the Federal Reserve. See
"Description of the Preferred Securities--Redemption--Tax Event Redemption,
Capital Treatment Event Redemption or Investment Company Event Redemption."
Under current United States federal income tax law, a distribution of
Subordinated Debentures upon the dissolution of the Trust would not be a taxable
event to holders of the Preferred Securities. If, however, the Trust were to be
recharacterized as an association taxable as a corporation at the time of the
dissolution of the Trust, the distribution of the Subordinated Debentures may
constitute a taxable event to holders of Preferred Securities. Moreover, upon
occurrence of a Tax Event, a dissolution of the Trust in which holders of the
Preferred Securities receive cash may be a taxable event to such holders. See
"Certain Federal Income Tax Consequences--Receipt of Subordinated Debentures or
Cash Upon Liquidation of the Trust."
There can be no assurance as to the market prices for the Preferred Securities
or the Subordinated Debentures that may be distributed in exchange for Preferred
Securities upon a dissolution or liquidation of the Trust, The Preferred
Securities or the Subordinated Debentures, may trade at a discount to the price
that the investor paid to purchase the Preferred Securities offered hereby.
Because holders of Preferred Securities may receive Subordinated Debentures,
prospective purchasers of Preferred Securities are also making an investment
decision with regard to the Subordinated Debentures and should carefully review
all the information regarding the Subordinated Debentures contained herein.
If the Subordinated Debentures are distributed to the holders of Preferred
Securities upon the liquidation of the Trust, the Company will use its best
efforts to list the Subordinated Debentures on the AMEX or such stock exchanges
or other organizations, if any, on which the Preferred Securities are then
listed or quoted.
Trading Price, Absence of Prior Public Market and Ratings for the Preferred
Securities. The Preferred Securities may trade at prices that do not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Subordinated Debentures. A holder of Preferred Securities that disposes of its
Preferred Securities between record dates for payments of Distributions (and
consequently does not receive a Distribution from the Trust for the period prior
to such disposition) will nevertheless be required to include accrued but unpaid
interest on the Subordinated Debentures through the date of disposition in
income as ordinary income and to add such amount to its adjusted tax basis in
its pro rata share of the underlying Subordinated Debentures deemed disposed of.
Such holder will recognize a capital loss to the extent the selling price (which
may not fully reflect the value of accrued but unpaid interest) is less than its
adjusted tax basis (which will include all accrued but unpaid interest). Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for United States federal income tax purposes. See "Certain
Federal Income Tax Consequences--Disposition of Preferred Securities."
There is no current public market for the Preferred Securities. Although the
Preferred Securities have been approved for trading on the AMEX, there can be no
assurance that an active public market will develop for the Preferred Securities
or that, if such market develops, the market price will equal or exceed the
public offering price set forth on the cover page of this Prospectus. The public
offering price for the Preferred Securities has been determined through
negotiations between the Company, the Trust and the Underwriter. Prices for the
Preferred Securities will be determined in the marketplace and may be influenced
by many factors, including prevailing interest rates, the liquidity of the
market for the Preferred Securities, investor perceptions of the Company and
general industry and economic conditions. The Preferred Securities have not been
rated by any rating agency.
Preferred Securities Are Not Insured. The Preferred Securities are not insured
by the Bank Insurance Fund (the "BIF") or the Savings Association Insurance Fund
of the Federal Deposit Insurance Corporation or by any other governmental
agency.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated herein by reference includes
"forward-looking statements" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are based on the current beliefs of the
Company's management as well as
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assumptions made by and information currently available to the Company's
management. All statements other than statements of historical facts included in
this Prospectus, including without limitation, statements under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Company" and "Business and Properties
of the Company" regarding the Company's financial position, business strategy
and plans and objectives of management of the Company for future operations, are
forward-looking statements. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they related to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("cautionary statements")
include, but are not limited to: (i) the specific matters referred to herein,
including, without limitation, those noted under the caption Risk Factors," (ii)
the results of the Company's efforts to implement its business strategy, (iii)
expected cost savings that may be associated with future and completed or
announced acquisitions, including Azle Bancorp, may not be fully realized and/or
revenues following such acquisitions may be lower than expected and/or expenses
following such acquisitions may be higher than expected, (iv) changes in the
interest rate environment could reduce margins, (vii) legislation or regulatory
requirements or changes could adversely affect the businesses in which the
Company is engaged, (viii) possible adverse changes in business conditions and
inflation, (ix) changes in general economic conditions, either nationally or
regionally, which are less favorable than expected and that result in, among
other things, a deterioration in credit quality, (x) competitive pressures among
financial institutions may increase significantly, (xi) changes in the
securities markets, (xii) actions of the Company's competitors and the Company's
ability to respond to such actions, (xiii) the cost of the Company's capital,
which may depend in part on the Company's portfolio quality, ratings, prospects
and outlook, (xiv) changes in governmental regulation, tax rates and similar
matters, (xv) "year 2000" computer and data processing issues., and (xvi) other
risks detailed in the Company's other filings with the Securities and Exchange
Commission (the "Commission"). Based upon changing conditions, should any one or
more of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the foregoing factors. Investors are cautioned not to place undue
reliance on such statements, which speak only as of the date hereof. The Company
does not intend to update these forward-looking statements. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
applicable cautionary statements.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock (at an assumed public offering price of $ ) and the
Preferred Securities offered in the Offering are estimated to be approximately
$ million (or $ million if the Underwriter's over-
allotment option with respect to the Common Stock and Preferred Securities are
each exercised in full) in each case after deducting the Underwriting discount
and estimated expenses. All of the proceeds from the sale of the Preferred
Securities will be invested by the Trust in the Subordinated Debentures. The
Company will use the net proceeds from the sale of the Common Stock offered
hereby and the net proceeds from the issuance of the Subordinated Debentures,
expected to be approximately $ , to fund a portion of the cost of
acquiring Azle Bancorp, expected to be approximately $19,025,000. The remaining
portion of the purchase price and related expenses for the Pending Acquisition,
approximately $5,137,000, will be funded by indebtedness to be incurred by the
Company. The Company expects to obtain financing subject to customary terms and
conditions with an interest rate not to exceed 8.5% and a maturity of not less
than one year, based upon an amortization of principal over a period of not less
than six years. The Company has received two commitments from banks to provide
financing for the Pending Acquisition which generally satisfy these parameters,
but has not yet accepted any of the commitments. The Company is currently
analyzing the various commitments and negotiating with the prospective lenders.
See "Pending Acquisition."
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<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is listed for trading on the AMEX under the symbol "IBK." 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 the amount of dividends
per share.
<TABLE>
<CAPTION>
Price Range Cash
--------------------- Dividends
High Low Per Share
--------- --------- ---------
<S> <C> <C> <C>
Year Ended December 31, 1996
----------------------------
First Quarter.................... $ 8 $ 7 13/16 $ 0.02
Second Quarter................... 8 13/16 7 3/16 0.04
Third Quarter.................... 9 11/16 8 11/16 0.04
Fourth Quarter................... 14 9 11/16 0.04
Year Ended December 31, 1997
----------------------------
First Quarter.................... $ 13 $ 11 1/2 $ 0.04
Second Quarter................... 13 1/4 11 13/16 0.05
Third Quarter.................... 18 1/4 13 1/8 0.05
Fourth Quarter................... 19 16 1/8 0.05
Year Ending December 31, 1998
-----------------------------
First Quarter.................... $ 19 $ 15 $ 0.05
Second Quarter................... 19 14 0.05
Third Quarter (through July 30).. 15 9/16 15 3/16 --
</TABLE>
The last reported sales price for the Common Stock on the AMEX on July 30,
1998 was $15.3125. On July 15, 1998, there were 1,671 shareholders who were
individual participants in security position listings.
The holders of the Common Stock will be entitled to receive any cash dividends
as may be declared by the Company's Board of Directors. The declaration and
payment of future dividends to holders of the Common Stock will be at the
discretion of the Company's 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 Preferred Stock, the Company's earnings
and financial condition, capital requirements of its subsidiaries, regulatory
requirements and considerations and such other factors as the Company's Board of
Directors may deem relevant.
As a holding company, the Company is ultimately dependent upon its
subsidiaries to provide funding for its operating expenses, debt service and
dividends. Various banking laws applicable to the Company's subsidiaries limit
the payment of dividends, management fees and other distributions by such
subsidiaries to the Company and may therefore limit the ability of the Company
to make dividend payments.
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 5,066 shares of the Series C Preferred
Stock outstanding at June 30, 1998, was approximately $21,000. 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
currently has the right to cause, beginning December 12, 1997 or on any
anniversary thereafter, the mandatory conversion of the Series C Preferred Stock
into cash and/or Common Stock. The Series C Preferred Stock is the Company's
only outstanding preferred stock. See "Description of Capital Stock -- Potential
Limits or Qualifications from Preferred Stock."
20
<PAGE>
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 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 ($298,000 at June 30, 1998) 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 (none at June 30, 1998). Dividend payments on any other stock
junior to the Series C Preferred Stock with respect to dividends or liquidation
rights would be similarly limited. See "Regulation and Supervision."
MARKET FOR THE PREFERRED SECURITIES
Application has been made to have the Preferred Securities listed for trading
on the AMEX under the symbol "IBK.PR." There can be no assurance,
however, that an active and liquid trading market will develop or, if developed,
that such a market will continue. The offering price and distribution rate have
been determined by negotiations among representatives of the Company and the
Underwriter, and the offering price of the Preferred Securities may not be
indicative of the market price following the offering. See "Underwriting."
ACCOUNTING TREATMENT
The Trust will be treated, for financial reporting purposes, as a subsidiary
of the Company and, accordingly, the accounts of the Trust will be included in
the consolidated financial statements of the Company. The Preferred Securities
will be presented as a separate category in the consolidated balance sheet of
the Company under the caption "Guaranteed preferred beneficial interests in the
Company's Subordinated Debentures," and appropriate disclosures about the
Preferred Securities, the Guarantee and the Subordinated Debentures will be
included in the notes to consolidated financial statements. The Company will
record Distributions payable on the Preferred Securities as an expense in its
consolidated statements of operations for financial reporting purposes.
All future reports of the Company filed under the Exchange Act while the
Preferred Securities are outstanding will (a) present the Trust Securities
issued by the Trust on the balance sheet as a separate category entitled
"Guaranteed preferred beneficial interests in the Company's Subordinated
Debentures," (b) include in a footnote to the financial statements disclosure
that the sole assets of the Trust are the Subordinated Debentures (including the
outstanding principal amount, interest rate and maturity date of such
Subordinated Debentures), and (c) include in a footnote to the financial
statements disclosure that the Company owns all of the Common Securities of the
Trust, the sole assets of the Trust are the Subordinated Debentures, and the
back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of the Trust under the Preferred
Securities.
PENDING ACQUISITION
The Company and Azle Bancorp have entered into the Reorganization Agreement
dated as of May 29, 1998 (the "Reorganization Agreement") pursuant to which the
Company will acquire Azle Bancorp and its subsidiaries, including Azle State, by
means of the merger of Azle Bancorp with and into a subsidiary of the Company to
be formed. The shareholders of Azle Bancorp will receive merger consideration
consisting of cash in the amount of $18,431,420; provided, however, that if the
Pending Acquisition is not consummated on or prior to October 1, 1998, the
merger consideration will be increased by an amount equal to Azle Bancorp's net
after tax income for the period between October 1, 1998 and the end of the month
prior to the actual closing date (estimated to be approximately $120,000 if the
transaction were to close in early November 1998 rather than by October 1,
21
<PAGE>
1998). In addition, the shareholders of Azle Bancorp will be entitled to
receive a quarterly dividend payment of approximately $164,000 if the
transaction were to close in early November rather than by October 1, 1998. In
the event the closing does not occur prior to or on October 1, 1998, the parties
agree that the closing shall not occur prior to November 1, 1998 and that the
closing shall not occur after the fifteenth day of any month after November,
1998. In the event that Azle Bancorp is unable to obtain the approval by the
holders of at least seventy-five percent (75%) of the outstanding Azle Bancorp
common stock of the payments made to Mr. Carl E. Campbell, Jr. pursuant to
certain deferred compensation plan agreements with Azle State so that such
payments would not be considered an excess parachute payment under Section 280G
of the Internal Revenue Code, then the merger consideration will be decreased by
an amount equal to the tax effect of such failure to obtain shareholder
approval.
Management of the Company believes that the Pending Acquisition presents an
excellent opportunity for increased earnings in future periods. The Company
intends to increase the profitability of Azle State 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 advance this growth. The Company also believes that
certain 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 Pending Acquisition
will allow the Company to expand its market area into what it believes are
desirable banking locations, adjacent to the Dallas-Fort Worth, Texas metroplex.
This expansion will increase the geographic diversity of the Company's loan
portfolio which is expected to decrease the Company's overall lending risks. See
"Business and Properties of the Company--Business Strategy."
Azle Bancorp, a Texas corporation located in Azle, Texas, engages in no
significant activities other than owning and managing Azle State. At June 30,
1998, Azle Bancorp had total assets of $91,660,000, total loans, net of unearned
income, of $45,102,000, total deposits of $80,816,000, and stockholders' equity
of $9,699,000.
Azle State is a community bank that offers interest and noninterest-bearing
depository accounts, and makes consumer and commercial loans. At June 30, 1998,
Azle State's loan portfolio consisted primarily of $23,105,000 of real estate
loans (51.2% of the total loan portfolio), $11,454,000 of commercial loans
(25.4% of the total loan portfolio) and $9,955,000 of loans to individuals
(22.1% of the total loan portfolio). At June 30, 1998, Azle State's total
nonperforming loans were $307,000 (0.7% of the total loan portfolio). The
allowance for possible loan losses was $660,000, or 215.0% of total
nonperforming loans, and 1.5% of the total loan portfolio. Real estate and other
repossessed assets of Azle State was $305,000 at June 30, 1998. Azle State
reported net income after taxes of $1,502,000 for 1997, $1,532,000 for 1996,
$1,316,000 for 1995 and $738,000 and $729,000 for the six-month periods ended
June 30, 1998 and 1997, respectively. See the consolidated financial statements
of Azle Bancorp and Azle State included elsewhere in this Prospectus. At July
15, 1998, Azle Bancorp had 52 full-time equivalent employees, 11 of which were
officers.
The obligations of the parties to complete the Pending Acquisition are subject
to certain conditions, including the conditions that (i) all approvals of any
regulatory authority having jurisdiction have been received and all applicable
statutory waiting periods have expired and (ii) at the closing date, no action
or legislation is pending or threatened that would adversely affect certain
aspects of the Pending Acquisition. In addition, the Company is not obligated
to complete the Pending Acquisition unless certain conditions have been
satisfied or waived by the Company, including that (i) at least two-thirds of
Azle Bancorp shareholders shall have approved the transactions contemplated
under the Reorganization Agreement; (ii) Azle Bancorp shall have acquired one
hundred percent (100%) of the capital stock of Azle State immediately prior to
the merger pursuant to a share exchange with the minority shareholders (holding
an aggregate of 3.12%) of Azle State, in which the Company will join, in which
such minority shareholders will receive an aggregate consideration of $593,580;
(iii) neither Azle Bancorp nor Azle State shall have suffered any material
adverse change in their financial condition, assets, properties, liabilities,
reserves, business, or results of operations or prospects; (iv) the Chairman of
the Board, the President and the directors of Azle State shall have entered into
noncompetition and nonsolicitation agreements with the Company having a term of
two (2) years that provide such officer or director will not directly or
indirectly, individually or as an employee, partner, officer, director or
shareholder or in any capacity whatsoever, (a) solicit the banking business of
any current customer of Azle State, (b) acquire a greater than 2% financial
interest in any financial institution, or financial institution holding company,
charter, operate or enter into any franchise or other operating agreement with
any financial institution or financial institution holding company, (c) serve as
an officer, director, employee, agent or consultant to any financial institution
or financial institution holding company an office of which is located within a
ten mile radius of Azle, Texas, (d) establish or operate a branch or other
22
<PAGE>
office of a financial institution an office of which is located within a ten
mile radius of Azle, Texas, (d) engage in financial service, banking or banking
related business within a ten mile radius of Azle, Texas or (e) recruit, hire,
assist others in recruiting or hiring, discuss employment with or refer others
concerning employment, any person who is, or within the preceding twelve months
was an employee of Azle State; (v) all accounting and tax treatment, entries
and adjustment for the Pending Acquisition are satisfactory to the Company.
Azle Bancorp is not obligated to complete the transaction if certain conditions
are not met, including the condition that the Company has approved the merger of
Azle Bancorp and the Company's subsidiary.
The closing date of the Pending Acquisition will be selected by mutual
agreement of the parties to the Reorganization Agreement following the
satisfaction of all conditions to closing. As of the date of this Prospectus,
the Federal Reserve Bank of Dallas and the Texas Department of Banking have
approved the merger contemplated by the Reorganization Agreement. A meeting of
the shareholders of Azle Bancorp to vote on the merger is expected to be held in
August of 1998. Based on the executed voting agreements of the Azle Bancorp
shareholders, the Company has the ability to vote approximately 58% of the
outstanding Azle Bancorp common stock at the Azle Bancorp special shareholders
meeting called to consider and vote upon the merger. There can be no assurance
that the foregoing conditions will be satisfied or that the Pending Acquisition
will be completed.
23
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS
The following pro forma combined financial statements set forth the Company's
pro forma combined balance sheet at June 30, 1998, and pro forma income
statements for the six-month period ended June 30, 1998, and for the year ended
December 31, 1997, as if the consummation of the Pending Acquisition and this
Offering had occurred, in the case of the pro forma income statements as of
January 1, 1997, and in the case of the pro forma balance sheet data, as of June
30, 1998. The pro forma financial data do not purport to be indicative of the
Company's financial condition and results of operations at any future date or
for any future period. The financial data should be read in conjunction with
the Company's, Azle Bancorp's and Azle State's respective financial statements,
the notes thereto and the other financial information, included elsewhere
herein. In the opinion of management of the Company, the data presented reflect
all adjustments considered necessary for a fair presentation of the results for
such periods.
PRO FORMA COMBINED BALANCE SHEET
June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------- Pro Forma
The Company Azle Bancorp Debits Credits Combined
----------- -------------- ------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 13,111 $ 5,553 $ 4,288(A) $ 5,137(C) $ 13,527
9,600(B) 19,025(D)
5,137(C)
Federal Funds Sold 29,200 1,000 30,200
-------- ------- ------- -------- --------
Total Cash and Cash
Equivalents 42,311 6,553 19,025 24,162 43,727
-------- ------- ------- -------- --------
Securities 66,480 36,784 573(D) 103,837
-------- ------- ------- -------- --------
Total Loans 141,691 46,377 188,068
Less: Unearned Income
on Installment Loans 882 1,275 2,157
Allowance for Possible
Loan Losses 1,121 660 1,781
-------- ------- ------- -------- --------
Net Loans 139,688 44,442 0 0 184,130
-------- ------- ------- -------- --------
Premises and Equipment 7,624 2,334 375(D) 10,333
Intangible Assets 3,046 8,066(B) 11,112
Accrued Interest Receivable 2,140 869 3,009
Other Real Estate and Other
Repossessed Assets 253 305 558
Other Assets 1,959 373 400(B) 2,732
-------- ------- ------- -------- --------
Total Assets $263,501 $91,660 $28,439 $ 24,162 $359,438
======== ======= ======= ======== ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------------- Pro Forma
The Company Azle Bancorp Debits Credits Combined
------------ --------------- ------------- ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits:
Noninterest-bearing
Demand Deposits $ 44,296 $16,091 $ $ $ 60,387
Interest-bearing
Demand Deposits 75,098 31,675 106,773
Interest-bearing
Time Deposits 121,570 33,050 154,620
-------- ------- ------- ------- --------
Total Deposits 240,964 80,816 0 0 321,780
Accrued Interest Payable 868 221 1,089
Notes Payable 4 5,137(C) 5,137(C) 4
Other Liabilities 355 612 967
Minority Interest 312 312(D) 0
-------- ------- ------- ------- --------
Total Liabilities 242,191 81,961 5,449 5,137 323,840
-------- ------- ------- ------- --------
Company - obligated
Manditorily Redeemable
Preferred Securities of
Subsidiary Holding Solely
Subordinated Debentures
of the Company 10,000(B) 10,000
-------- ------- ------- ------- --------
Series C Preferred Stock 51 51
Common Stock 497 659 659(D) 80(A) 577
Additional Paid-in Capital 13,923 827 827(D) 4,208(A) 18,131
Retained Earnings 6,982 8,193 8,193(D) 6,982
Unrealized Gain on
Securities 39 20 20(D) 39
Unearned ESOP Stock (182) (182)
-------- ------- ------- ------- --------
Total Stockholders'
Equity 21,310 9,699 9,699 4,288 25,598
-------- ------- ------- ------- --------
Total Liabilities and
Stockholders' Equity $263,501 $91,660 $15,148 $19,425 $359,438
======== ======= ======= ======= ========
</TABLE>
- -------------------
(A) The sale of 320,000 shares of Common Stock at an assumed public offering
price of $15.25 per share, minus a 7% underwriting commission ($342,000)
and estimated offering expenses ($250,000).
(B) The sale of 1,000,000 shares of Preferred Securities at $10.00 per share,
minus a 4% underwriting commission ($400,000).
(C) The borrowing of $5,137,000 and repayment of such borrowing after the
acquisition is consummated through a dividend from Azle State.
(D) The purchase of 100% of Azle Bancorp for an assumed price of $19,025,000 in
cash, the elimination of the capital accounts of Azle Bancorp and the
minority interest in Azle State, the adjustment of Azle Bancorp's assets
and liabilities to fair value and the recording of $8,066,000 in intangible
assets. No market adjustment on loans or deposits was made on this date
because the Company believes that any such adjustment would be immaterial.
25
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
Six-month Period ended June 30, 1998 (unaudited)
Pro Forma Adjustments Pro
The Azle --------------------- Forma
Company Bancorp Debits Credits Combined
-------- -------- ---------- --------- --------
(In thousands)
Interest Income:
Interest and Fees on Loans $6,333 $2,323 $ $ $ 8,656
Interest on Securities 1,973 1,164 3,137
Interest on Federal Funds
Sold 918 41 142(A) 817
------ ------ ---- ---- -------
Total Interest Income 9,224 3,528 142 0 12,610
------ ------ ---- ---- -------
Interest Expense:
Interest on Deposits 4,286 1,315 5,601
Interest on
Company-Obligated
Manditorily Redeemable
Preferred Securities of
subsidiary Holding Solely
Subordinated Debentures of
the Company 432(B) 432
Interest on Notes Payable 1 1
------ ------ ---- ---- -------
Total Interest Expense 4,287 1,315 432 0 6,020
------ ------ ---- ---- -------
Net Interest Income 4,937 2,213 560 0 6,576
Provision for Loan Losses 300 36 336
------ ------ ---- ---- -------
Net Interest Income After
Provision for Loan Losses 4,637 2,177 560 0 6,240
------ ------ ---- ---- -------
Noninterest Income:
Service Charges 974 321 1,295
Other Income 363 77 440
------ ------ ---- ---- -------
Total Noninterest Income 1,337 398 0 0 1,735
------ ------ ---- ---- -------
Noninterest Expense:
Salaries and Employee
Benefits 2,145 876 3,021
Net Occupancy Expense 468 97 6(C) 571
Equipment Expense 402 121 523
Other Expenses 1,422 471 202(D) 75(E) 2,020
------ ------ ---- ---- -------
Total Noninterest
Expenses 4,437 1,565 208 75 6,135
------ ------ ---- ---- -------
Income Before Federal
Income Taxes 1,537 1,010 782 75 1,840
Federal Income Taxes 564 272 25(F) 197(F) 664
------ ------ ---- ---- -------
Income Before Minority
Interest 973 738 807 272 1,176
Minority Interest 23 23(G) 0
------ ------ ---- ---- -------
Net Income $ 973 $ 715 $807 $295 $ 1,176
====== ====== ==== ==== =======
26
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------- Pro Forma
The Company Azle Bancorp Debits Credits Combined
----------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Earnings Per Share:
Basic Earnings per Share $ 0.49 $ 0.51
Diluted Earnings per Share 0.47 0.49
</TABLE>
- -------------------
(A) Interest income on federal funds sold at the rate of 5.53% lost as a result
of the repayment of $5,137,000 in debt immediately after the acquisition.
(B) Interest expense on 1,000,000 shares of Preferred Securities ($10,000,000
liquidation value) at the assumed rate of 8.50% ($425,000 for six months)
and amortization of $400,000 cost of debentures over a life of 30 years
($7,000 for six months).
(C) Depreciation expense on the write-up of bank premises by $375,000 over an
estimated remaining useful life of thirty (30) years.
(D) Amortization of $8,066,000 of intangible assets over an average life of 20
years ($202,000 for six months).
(E) Anticipated annual cost savings of $150,000 per year, including cost
savings from professional fees, directors' fees, stationery, painting and
supplies and other miscellaneous expenses.
(F) Tax effect of the above entries, excluding the amortization of intangibles,
which is not deductible.
(G) Deletion of minority interest due to acquisition of 100% of Azle State.
27
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
Year ended December 31, 1997 (unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro
The Azle --------------------- Forma
Company Bancorp Debits Credits Combined
-------- -------- ---------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $12,236 $4,491 $ $ $16,727
Interest on Securities 5,176 2,280 7,456
Interest on Federal Funds
Sold 912 96 283(A) 725
------- ------ ------- -------- -------
Total Interest Income 18,324 6,867 283 0 24,908
------- ------ ------- -------- -------
Interest Expense:
Interest on Deposits 8,600 2,615 11,215
Interest on
Company-Obligated
Manditorily Redeemable
Preferred Securities of
Subsidiary Holding Solely
Subordinated Debentures
of the Company 863(B) 863
Interest on Notes Payable 59 59
------- ------ ------- -------- -------
Total Interest Expense 8,659 2,615 863 0 12,137
------- ------ ------- -------- -------
Net Interest Income 9,665 4,252 1,120 0 12,771
Provision for Loan Losses 250 60 310
------- ------ ------- -------- -------
Net Interest Income After
Provision for Loan Losses 9,415 4,192 1,120 0 12,461
------- ------ ------- -------- -------
Noninterest Income:
Service Charges 1,605 644 2,249
Other Income 304 114 418
------- ------ ------- -------- -------
Total Noninterest Income 1,909 758 0 0 2,667
------- ------ ------- -------- -------
Noninterest Expense:
Salaries and Employee
Benefits 3,970 1,616 5,586
Net Occupancy Expense 857 201 13(C) 1,071
Equipment Expense 834 236 1,070
Other Expenses 2,576 840 403(D) 150(E) 3,669
------- ------ ------- -------- -------
Total Noninterest Expenses 8,237 2,893 416 150 11,396
------- ------ ------- -------- -------
Income Before Federal
Income Taxes 3,087 2,057 1,562 150 3,732
Federal Income Taxes 977 556 51(F) 394(F) 1,190
------- ------ ------- -------- -------
Income Before Minority
Interest 2,110 1,501 1,613 544 2,542
Minority Interest 47 47(G) 0
------- ------ ------- -------- -------
Net Income $ 2,110 $1,454 $ 1,613 $ 591 $ 2,542
======= ====== ======= ======== =======
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Adjustments
--------------------- Pro Forma
The Company Azle Bancorp Debits Credits Combined
------------- -------------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Earnings Per Share:
Basic Earnings per Share $ 1.12 $ 1.16
Diluted Earnings per Share 1.03 1.07
</TABLE>
- -------------------
(A) Interest income on federal funds sold at the rate of 5.55% lost as a result
of the repayment of $5,137,000 in debt immediately after the acquisition.
(B) Interest expense on 1,000,000 shares of Preferred Securities ($10,000,000
liquidation value) at the assumed rate of 8.50% ($850,000 per year) and
amortization of $400,000 cost of debentures over a life of 30 years
($13,000 per year).
(C) Depreciation expense on the write-up of bank premises by $375,000 over an
estimated remaining useful life of thirty (30) years.
(D) Amortization of $8,066,000 of intangible assets over an average life of 20
years ($403,000 per year).
(E) Anticipated annual cost savings of $150,000 per year including cost savings
from professional fees, directors' fees, stationery, printing and supplies
expenses and other miscellaneous expenses.
(F) Tax effect of the above entries, excluding the amortization of intangibles,
which is not deductible.
(G) Deletion of minority interest due to acquisition of 100% of Azle State.
29
<PAGE>
PRO FORMA CAPITAL RATIOS
June 30, 1998
<TABLE>
<CAPTION>
Pro Forma
Azle Consolidated
The Company Bancorp Adjustments Balance
------------ -------- --------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
TIER 1 CAPITAL:
Preferred Stockholders' Equity $ 213 $ $ $ 213
Common Stockholders' Equity 21,058 9,679 (5,391)(A) 25,346
Company-Obligated Manditorily
Redeemable Preferred Securities of
Subsidiary Holding Solely Subordinated
Debentures of the Company 8,519 (B) 8,519
Intangible Assets (3,046) (8,066)(C) (11,112)
-------- ------- ------- --------
Total Tier 1 Capital 18,225 9,679 (4,938) 22,966
-------- ------- ------- --------
TIER 2 CAPITAL:
Allowance for Possible Loan Losses 1,121 658 2(D) 1,781
-------- ------- ------- --------
Total Tier 2 Capital 1,121 658 2 1,781
-------- ------- ------- --------
Total Capital $ 19,346 $10,337 $(4,936) $ 24,747
======== ======= ======= ========
Adjusted Quarterly Average Assets $262,857 $91,542 $(8,066)(C) $346,333
======== ======= ======= ========
Total Risk-weighted Assets $153,697 $52,669 $ 0 $206,366
======== ======= ======= ========
Tier 1 Capital to Adjusted Quarterly
Average Assets 6.93% 10.57% 6.63%
======== ======= ========
Tier 1 Capital to Total Risk-weighted
Assets 11.86% 18.38% 11.13%
======== ======= ========
Total Capital to Total Risk-weighted
Assets 12.59% 19.63% 11.99%
======== ======= ========
</TABLE>
- -------------------
(A) The elimination of the equity accounts of Azle Bancorp in conjunction with
the merger and the sale of $4,880,000 in additional Common Stock, at an
assumed public offering price of $15.25 per share, less underwriting
commissions and expenses.
(B) The sale of 1,000,000 shares of Preferred Securities ($10,000,000
liquidation value) which count as regulatory Tier 1 capital up to 25% of
total Tier 1 capital, including the Preferred Securities. As a result of
this limitation, $8,519,000 of the Preferred Securities would have counted
as Tier 1 capital as of June 30, 1998.
(C) The elimination of the amount of intangible assets recorded in conjunction
with the merger and the elimination of the intangible assets recorded from
adjusted quarterly average assets.
(D) The adjustment of the allowance for possible loan losses for the amount of
the allowance of Azle Bancorp which could not be utilized as Tier 2 capital
on a stand-alone bank basis but can be utilized after the merger.
30
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company as of June 30, 1998 and as adjusted to give effect to the
consummation of the Offering and the application of the net proceeds therefrom
to consummate the Pending Acquisition as if each such transaction had occurred
on June 30, 1998, assuming a public offering price of $15.25 per share of the
Common Stock in this Offering. See "Use of Proceeds," "Pending Acquisition,"
"Pro Forma Consolidated Financial Statements" and notes thereto and the
Company's, Azle Bancorp's and Azle State's respective financial statements and
notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
June 30, 1998
--------------------------
As Adjusted
for the
Offering and
Pending
Actual Acquisition
------------ ------------
<S> <C> <C>
Long-Term Debt:
Notes payable................................................... $ 4,000 $ 4,000
----------- -----------
Company-Obligated Mandatorily redeemable Preferred Securities
of subsidiary financing trust holding solely Subordinated
Debentures of the Company(1).................................. 0 10,000,000
Total.........................................................
Stockholders' equity:
Preferred Stock, $10.00 par value; 5,000,000 shares authorized
Series C Preferred Stock -- $42.00 stated value; 50,000
shares designated; 5,066 shares issued at June 30, 1998........ 51,000 51,000
Common Stock, $0.25 par value; 30,000,000 shares authorized;
1,987,296 shares issued and outstanding at June 30, 1998;
2,307,296 shares as adjusted(2)................................ 497,000 577,000
Additional paid-in capital...................................... 13,923,000 18,131,000
Retained earnings............................................... 6,982,000 6,982,000
Unrealized gain on available-for-sale securities................ 39,000 39,000
Unearned ESOP stock............................................. (182,000) (182,000)
----------- -----------
Total stockholders' equity.................................... 21,310,000 25,598,000
----------- -----------
Total capitalization.......................................... $21,314,000 $35,602,000
=========== ===========
Capital Ratios:
Stockholders' equity to total assets............................ 8.09% 7.13%
Leverage ratio(3)(4)............................................ 6.93% 6.63%
Risk-based capital ratio(4)(5)
Tier 1 capital to risk-weighted assets......................... 11.86% 11.13%
Total risk-based capital to risk-weighted assets............... 12.59% 11.99%
</TABLE>
- ---------------
(1) The Preferred Securities will be issued by the Trust in an amount which
will be $10,000,000. The sole assets of the Trust will consist of
$10,000,000 of the Subordinated Debentures issued by the Company to the
Trust. The Subordinated Debentures will accrue interest at ____% per annum
and mature on ______________, 2028.
(2) Does not include an aggregate of 116,360 shares of Common Stock issuable
upon conversion of outstanding shares of Series C Preferred Stock.
(3) The leverage ratio is Tier 1 capital divided by average quarterly assets,
after deducting intangible assets and net deferred tax assets in excess of
regulatory maximum limits.
(4) The capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the Preferred Securities, in a manner
consistent with Federal Reserve guidelines.
(5) Federal Reserve guidelines for calculation of Tier 1 capital to risk-
weighted assets limits the amount of cumulative preferred stock which can
be included in Tier 1 capital to 25% of total Tier 1 capital. A portion of
the Preferred Securities offered hereby ($8,519,000) will be included as
Tier 1 capital for the Company.
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated
financial information and other data of the Company. Such financial information
has been restated to reflect the 33-1/3% stock dividend paid to shareholders in
May 1995 and the 25% stock dividend paid to shareholders in May 1997. The
following selected historical consolidated financial data should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto appearing elsewhere in this Prospectus and the information
contained in "Management's Discussions and Analysis of Financial Condition and
Results of Operations of the Company." The selected historical consolidated
financial data as of and for the five years in the period ended December 31,
1997, are derived from the Company's consolidated financial statements which
have been audited by independent public accountants. The selected historical
consolidated financial data as of and for the six-month periods ended June 30,
1998, and June 30, 1997, is unaudited. The following information includes the
accounts of Winters, Peoples, Coastal Banc--San Angelo and Crown Park from
August 31, 1993, January 1, 1996, May 27, 1996, and January 28, 1997, the
respective dates of acquisition of such companies. In the opinion of management
of the Company, the information presented reflects all adjustments considered
necessary for fair presentation of the results for such periods.
<TABLE>
<CAPTION>
Six-month Period
Ended June 30, Year Ended December 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $ 9,224 $ 8,974 $ 18,324 $ 13,556 $ 11,962 $ 10,131 $ 9,221
Net interest income 4,937 4,725 9,665 7,115 6,653 6,679 6,045
Income before cumulative
effect of accounting change 973 1,055 2,110 1,422 1,132 450 1,029
Cumulative effect of
accounting change 0 0 0 0 0 0 200(1)
Net income 973 1,055 2,110 1,422 1,132 450 1,229
COMMON SHARE DATA:
Earnings per share:
Basic $ 0.49 $ 0.59 $ 1.12 $ 1.00 $ .82 $ 0.29 $ 0.89
Diluted 0.47 0.52 1.03 0.84 0.67 0.27 0.73
Cash dividends 0.10 0.09 0.19 0.14 0.09 0.06 0.00
Dividend payout ratio 20.35% 15.96% 17.30% 13.85% 10.34% 15.56% N/A
Book value per share:
Common stock $ 10.70 $ 10.02 $ 10.36 $ 10.41 $ 10.00 $ 7.99 $ 7.82
Diluted 10.19 9.42 9.80 8.80 8.11 6.58 6.44
Period end shares outstanding 1,987 1,946 1,975 1,381 1,313 1,298 1,298
Weighted average shares
outstanding (in thousands):
Basic 1,964 1,742 1,842 1,355 1,299 1,302 1,300
Diluted 2,087 2,015 2,048 1,698 1,689 1,685 1,686
BALANCE SHEET DATA:
Assets $263,501 $265,766 $264,574 $205,968 $180,344 $159,860 $ 160,712
Loans, net of unearned
income(2) 140,809 137,403 140,853 92,017 81,927 81,306 69,647
Deposits 240,964 244,068 242,801 189,575 164,704 146,184 147,785
Notes payable 4 824 57 240 849 930 1,194
Stockholders' equity 21,310 19,586 20,527 14,937 13,818 11,073 10,845
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
At June 30, or for the
Six-month Period At December 31, or for the
Ended June 30, Year Ended December 31,
---------------------- ----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- -------- ------- --------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
PERFORMANCE DATA
(RETURNS ANNUALIZED
FOR INTERIM PERIODS):
Return on average total
assets 0.73% 0.83% 0.82% 0.72% 0.67% 0.28% 0.81%
Return on average
stockholders' equity 9.26 11.42 10.95 9.89 8.99 3.98 12.50
Net interest margin(3) 4.16 4.08 4.13 3.95 4.29 4.62 4.37
Ratios to total average
deposits of average loans,
net of unearned income(2) 57.44 54.11 55.98 47.71 53.25 50.97 42.56
Efficiency ratio(4) 68.17 69.45 69.09 72.78 76.56 89.97 77.77
ASSET QUALITY RATIOS:
Nonperforming assets to
total assets(5) 0.18% 0.40% 0.39% 0.28% 0.35% 0.49% 1.83%
Nonperforming loans to
total loans, net of unearned
income(2)(5) 0.16 0.22 0.21 0.21 0.36 0.19 3.06
Net loan charge-offs (recoveries)
to average loans, net of
unearned income
(annualized for interim
periods)(2) 0.50 (0.13) 0.20 0.37 0.32 0.30 0.18
Allowance for loan losses to
total loans, net of
unearned income(2)(5) 0.80 0.97 0.83 0.86 0.93 1.00 1.29
Allowance for loan losses
to nonperforming loans(5) 504.95 429.77 397.63 404.59 259.93 530.52 41.99
CAPITAL RATIOS:
Average equity to average
total assets 7.92% 7.24% 7.45% 7.33% 7.43% 7.06% 6.45%
Total capital to risk-weighted
assets(5) 12.59 12.04 12.02 14.64 16.08 13.97 16.54
Leverage ratio(5) 6.93 6.22 6.71 6.86 7.65 7.03 7.23
</TABLE>
- -----------------
(1) Cumulative effect of the change in accounting for income taxes.
(2) Before allowance for possible loan losses.
(3) Fully taxable-equivalent basis.
(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.
(5) At period end.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company contains certain forward-looking statements. Actual
results could differ from those projected in such forward-looking statements as
a result of, among other things, the factors set forth under "Risk Factors."
See "Disclosure Regarding Forward Looking Statements".
General
The following discussion and analysis presents the more significant factors
affecting the Company's financial condition at June 30, 1998, and at December
31, 1997 and 1996, and results of operations for the six-month periods ended
June 30, 1998 and 1997, and for each of the three years in the period ended
December 31, 1997, after accounting for the acquisition of the subsidiary banks
noted below. This discussion and analysis should be read in conjunction with
the Company's consolidated financial statements, notes thereto and other
financial information appearing elsewhere in this Prospectus.
Acquisition Activities
In addition to the Pending Acquisition discussed under "Pending Acquisition,"
the Company has been party to a number of acquisition transactions since January
1, 1996.
On January 28, 1997, the Company consummated the acquisition of Crown Park and
its wholly owned subsidiary bank, Western National Bank, Lubbock, Texas
("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 395,312 shares of
its common stock in an underwritten offering at a public offering price of
$11.40 per share, which included 51,562 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 paid down during
1997 and completely paid off on December 31, 1997. See "- Liquidity" and "-
Capital Resources" below. 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 $53,604,000 and stockholders' equity of
$4,238,000.
On May 27, 1996, the Bank assumed the deposits and certain other liabilities
and purchased the loans and certain other assets of 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 total
deposits of $14,895,000 and total loans of $155,000.
The Bank completed the acquisition of Peoples National effective January 1,
1996. At December 31, 1995, Peoples National had total assets of $5,505,000,
total loans, net of unearned income, of $2,767,000, total deposits of $4,958,000
and stockholders' equity of $525,000.
These acquisitions were accounted for under the purchase method of accounting,
and the results of operations of Crown Park, Coastal Banc--San Angelo and
Peoples National are included in the Company's results of operations from their
respective dates of purchase. The assets and liabilities of Crown Park, Coastal
Banc--San Angelo and Peoples National were recorded at their estimated fair
value. A total of $2,486,000, $743,000 and $260,000 of goodwill, respectively,
was recorded as a result of these acquisitions.
34
<PAGE>
Results of Operations
General
Net income for the six-month period ended June 30, 1998, was $973,000 ($0.47
diluted earnings per common share) compared to net income of $1,055,000 ($0.52
diluted earnings per common share) for the six-month period ended June 30, 1997.
Net income for the year ended December 31, 1997, amounted to $2,110,000 ($1.03
diluted earnings per common share) compared to net income of $1,422,000 ($0.84
diluted earnings per common share) for the year ended December 31, 1996, and
compared to net income of $1,132,000 ($0.67 diluted earnings per common share)
for the year ended December 31, 1995. The net income and earnings per share
amounts for the six-month period ended June 30, 1998, were negatively impacted
by $125,000 ($83,000, net of tax), or $0.04 diluted earnings per common share,
as a result of the settlement of certain potential litigation described under
"Business and Properties of the Company--Legal Proceedings." The results of
operations for 1995 included legal and settlement expenses of $205,000
($135,000, net of tax), or $0.08 diluted earnings per common share, incurred as
a result of the final settlement of certain litigation.
Two industry measures of the performance by a banking institution are its
return on average assets ("ROA") and return on average stockholders' equity
("ROE"). ROA measures net income in relation to average total assets and
indicates a company's ability to employ its resources profitably. During the
six-month period ended June 30, 1998, the Company's ROA was 0.73%, compared to
0.82% for 1997, 0.72% for 1996 and 0.67% for 1995. Excluding the unusual items
noted above, the Company's ROA for the six-month period ended June 30, 1998, and
for 1995 would have been 0.80% and 0.75%, respectively.
ROE is determined by dividing net income by average stockholders' equity and
indicates how effectively a company can generate net income on the capital
invested by its stockholders. During the six-month period ended June 30, 1998,
the Company's ROE was 9.26%, compared to 10.95% for 1997, 9.89% for 1996 and
8.99% for 1995. Excluding the unusual item noted above, the Company's ROE for
the first six months of 1998 and for 1995 would have been 10.05% and 10.06%,
respectively.
Net Interest Income
Net interest income represents the amount by which interest income on
interest-earning assets, including loans and securities, exceeds interest paid
on interest-bearing liabilities, including deposits and other borrowed funds.
Net interest income is the principal source of the Company's earnings. Interest
rate fluctuations, as well as changes in the amount and type of interest-earning
assets and interest-bearing liabilities, combine to affect net interest income.
Net interest income for the first six months of 1998 was $4,937,000, an
increase of $212,000, or 4.5%, from net interest income of $4,725,000 for the
first six months of 1997. The year-to-date increase in 1998 was due to the
acquisition of Crown Park effective January 28, 1997. The net interest margin
on a fully taxable-equivalent basis was 4.16% for the first six months of 1998,
compared to 4.08% for the first six months of 1997. The primary reasons for the
increase in the net interest margin during 1998 are the Company's higher loan-
to-deposit ratio in 1998 and a slightly lower cost of funds in 1998 when
compared to 1997.
Net interest income amounted to $9,665,000 for 1997, an increase of
$2,550,000, or 35.8%, from 1996. Net interest income for 1996 was $7,115,000,
an increase of $462,000, or 6.9%, from 1995. The increase in 1997 was primarily
due to the acquisition of Crown Park in January 1997, which had a higher loan-
to-deposit ratio than the Bank. The increase in 1996 was also due to the
Company's overall growth. The net interest margin on a fully taxable-equivalent
basis was 4.13% for 1997, compared to 3.95% for 1996 and 4.29% for 1995. The
primary reason for the increase in 1997 was the acquisition of Crown Park noted
above. 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 was invested in investment securities
and federal funds sold, which yielded a lower rate of interest than loans and,
therefore, had a negative impact on the Company's net interest margin.
35
<PAGE>
At June 30, 1998, approximately $36,496,000, or 25.9%, of the Company's total
loans, net of unearned income, were loans with floating interest rates. This
amount represented 42.8% of loans, excluding loans to individuals, which are
exclusively fixed rate in nature. Average rates paid for various types of
deposits, particularly certificates of deposit, remained relatively stable for
the first six months of 1998, compared to the first six months of 1997. The
average rate paid by the Company for certificates of deposit of $100,000 or more
decreased slightly from 5.47% for the first six months of 1997 to 5.39% for the
first six months of 1998; however, the average rate paid for certificates of
deposit less than $100,000 increased slightly from 5.29% during the first six
months of 1997 to 5.31% during the first six months of 1998. Overall average
rates paid for various types of deposits increased slightly in 1997. The
average rate paid by the Company for certificates of deposit and other time
deposits of $100,000 or more increased to 5.54% during 1997 from 5.39% in 1996.
The average rate paid for certificates of deposit less than $100,000 decreased
from 5.42% in 1996 to 5.36% in 1997. Rates on other types of deposits, such as
savings accounts, money market accounts and NOW accounts, increased from an
average of 2.41% in 1996 to an average of 2.69% in 1997. Rates on other types of
deposits, such as interest-bearing demand, savings and money market deposits,
decreased slightly from an average of 2.66% during the first six months of 1997
to an average of 2.63% during the first six months of 1998. 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, an overall falling interest
rate environment normally produces a higher net interest margin than an overall
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 significantly in an overall falling interest rate
environment.
The following tables present the average balance sheets of the Company for the
six month periods ended June 30, 1998 and 1997, and for each of the last three
fiscal years and indicate the interest earned or paid on each major category of
interest-earning assets and interest-bearing liabilities on a fully taxable-
equivalent basis, and the average rates earned or paid on each major category.
This analysis details the contribution of interest-earning assets and the
overall impact of the cost of funds on net interest income.
36
<PAGE>
<TABLE>
<CAPTION>
Six-month Period Ended June 30,
----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------- -------- ---------- ------------ -------- -------
ASSETS (1) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (2) $139,564 $6,333 9.08% $126,841 $5,833 9.20%
Securities (3) 64,655 1,979 6.12 88,629 2,702 6.10
Federal funds sold 33,436 918 5.49 16,318 442 5.42
-------- ------ --------- ----------- -------- ------
Total interest-earning assets 237,655 9,230 7.77 231,788 8,977 7.75
-------- ------ --------- ----------- -------- ------
Noninterest-earning assets:
Cash and due from banks 13,664 9,803
Premises and equipment 7,482 6,623
Goodwill 3,102 2,983
Accrued interest receivable
and other assets 4,654 5,062
Allowance for possible loan losses (1,089) (1,168)
-------- -----------
Total noninterest-earning assets 27,813 23,303
-------- -----------
Total assets $265,468 $255,091
======== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY(1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 77,458 $1,018 2.63% $ 74,526 $ 992 2.66%
Time deposits 122,515 3,268 5.34 120,557 3,222 5.34
-------- ------ --------- ----------- -------- ------
Total interest-bearing deposits 199,973 4,286 4.29 195,083 4,214 4.32
Notes payable 5 1 7.85 859 35 8.15
-------- ------ --------- ----------- -------- ------
Total interest-bearing liabilities 199,978 4,287 4.29 195,942 4,249 4.34
-------- ------ --------- ----------- -------- ------
Noninterest-bearing liabilities:
Demand deposits 42,996 39,319
Accrued interest payable and
other liabilities 1,471 1,352
-------- -----------
Total noninterest-bearing liabilities 44,467 40,671
-------- -----------
Total liabilities 244,445 236,613
Stockholders' equity 21,023 18,478
-------- -----------
Total liabilities and
stockholders' equity $265,468 $255,091
======== ===========
Net interest income $4,943 $4,728
====== ========
Interest rate spread (4) 3.48% 3.41%
========= ======
Net interest margin (5) 4.16% 4.08%
========= ======
</TABLE>
- -----------------------------
(1) The Average Balance and Interest Income/Expense columns for 1997 include
the balance sheet and income statement accounts of Crown Park from January
28, 1997, the acquisition date of such company.
(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.
37
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------- ---------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- -------- -------- --------- ------- -------- --------- ------- -------
ASSETS (1) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (2) $132,891 $12,236 9.21% $ 85,880 $ 8,005 9.32% $ 82,302 $ 7,726 9.39%
Securities (3) 84,566 5,181 6.13 74,920 4,507 6.02 41,846 2,391 5.71
Federal funds sold 16,469 912 5.54 19,406 1,047 5.40 31,076 1,847 5.94
-------- ------- -------- -------- ------- ------- -------- ------- ------
Total interest-earning assets 233,926 18,329 7.84 180,206 13,559 7.52 155,224 11,964 7.71
-------- ------- -------- -------- ------- ------- -------- ------- ------
Noninterest-earning assets:
Cash and due from banks 11,051 7,151 7,066
Premises and equipment, net 6,951 4,427 4,211
Goodwill 3,116 689 0
Accrued interest receivable
and other assets 5,030 4,507 3,817
Allowance for possible loan losses (1,200) (825) (786)
-------- -------- --------
Total noninterest-earning
assets 24,948 15,949 14,308
-------- -------- --------
Total assets $258,874 $196,155 $169,532
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (1)
Interest-bearing liabilities:
Demand, savings and money
market deposits $ 75,833 $ 2,037 2.69% $ 57,847 $ 1,397 2.41% $ 53,391 $ 1,257 2.35%
Time deposits 121,218 6,563 5.41 92,065 4,985 5.41 72,137 3,944 5.47
-------- ------- -------- -------- ------- ------- -------- ------- ------
Total interest-bearing deposits 197,051 8,600 4.36 149,912 6,382 4.26 125,528 5,201 4.14
Notes payable 714 59 8.26 568 59 10.39 1,069 108 10.10
-------- ------- -------- -------- ------- ------- -------- ------- ------
Total interest-bearing
liabilities 197,765 8,659 4.38 150,480 6,441 4.28 126,597 5,309 4.19
-------- ------- -------- -------- ------- ------- -------- ------- ------
Noninterest-bearing liabilities:
Demand deposits 40,328 30,093 29,019
Accrued interest payable and
other liabilities 1,506 1,207 1,322
-------- -------- --------
Total noninterest-bearing
liabilities 41,834 31,300 30,341
-------- -------- --------
Total liabilities 239,599 181,780 156,938
-------- -------- --------
Stockholders' equity 19,275 14,375 12,594
-------- -------- --------
Total liabilities and
stockholders' equity $258,874 $196,155 $169,532
======== ======== ========
Net interest income $ 9,670 $ 7,118 $ 6,655
======== ======== ========
Interest rate spread (4) 3.46% 3.24% 3.52%
======= ======= ======
Net interest margin (5) 4.13% 3.95% 4.29%
======= ======= ======
</TABLE>
- -----------------------------
(1) The Average Balance and Interest Income/Expense columns include the balance
sheet and income statement accounts of Peoples National, Coastal Banc--San
Angelo and Crown Park from January 1, 1996, May 27, 1996 and January 28,
1997 (the respective dates of acquisition of such banks), through December
31, 1997.
(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.
38
<PAGE>
The following table presents the changes in the components of net interest
income and identifies the part of each change due to differences in the average
volume of interest-earning assets and interest-bearing liabilities and the part
of each change due to the average rate on those assets and liabilities. The
changes in interest due to both volume and rate in the table have been allocated
to volume or rate change in proportion to the absolute amounts of the change in
each.
<TABLE>
<CAPTION>
Six-month Period Ended
June 30, 1998 vs 1997(1) 1997(1) vs 1996 1996(1) vs 1995
----------------------------- ------------------------------ -----------------------------
Increase (Decrease) Due to Increase (Decrease) Due To Increase (Decrease) Due To
Changes In: Changes In: Changes In:
----------------------------- ------------------------------ -----------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
------- -------- ------ ------- -------- ------- ------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans, net of unearned income (2) $ 578 $(78) $ 500 $4,377 $(146) $4,231 $ 336 $ (57) $ 279
Securities (3) (731) 8 (723) 581 93 674 1,980 136 2,116
Federal funds sold 470 6 476 (158) 23 (135) (644) (156) (800)
----- ---- ----- ------ ----- ------ ------ ----- ------
Total interest income 317 (64) 253 4,800 (30) 4,770 1,672 (77) 1,595
----- ---- ----- ------ ----- ------ ------ ----- ------
Interest-bearing liabilities:
Deposits:
Demand, savings and money
market deposits 38 (12) 26 430 210 640 107 33 140
Time deposits 46 0 46 1,578 0 1,578 1,084 (43) 1,041
----- ---- ----- ------ ----- ------ ------ ----- ------
Total interest-bearing deposits 84 (12) 72 2,008 210 2,218 1,191 (10) 1,181
Notes payable (33) (1) (34) 15 (15) 0 (52) 3 (49)
----- ---- ----- ------ ----- ------ ------ ----- ------
Total interest expense 51 (13) 38 2,023 195 2,218 1,139 (7) 1,132
----- ---- ----- ------ ----- ------ ------ ----- ------
Increase (decrease) in net
interest income $ 266 $(51) $ 215 $2,777 $(225) $2,552 $ 533 $ (70) $ 463
===== ==== ===== ====== ===== ====== ====== ===== ======
</TABLE>
- -----------------------------
(1) Income statement items include the income statement accounts of Peoples
National, Coastal Banc--San Angelo and Crown Park beginning January 1,
1996, May 27, 1996, and January 28, 1997 (the respective dates of
acquisition of such companies).
(2) Nonaccrual loans have been included in average assets for the purposes of
the computations, thereby reducing yields.
(3) Information with respect to interest income on tax-exempt securities is
provided on a fully taxable-equivalent basis assuming a tax rate of 34%.
Provisions 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 six-month period ended June 30, 1998, was
$300,000 compared to $60,000 for the six-month period ended June 30, 1997. This
represents an increase of $240,000, or 400.0%. The increased provision in the
six month period of 1998 was primarily a result of increased charge-offs during
the first half of 1998, particularly in the area of indirect installment loans.
In addition, the Company had net loan recoveries during the first half of 1997,
requiring a lower provision for that time period. The provision for loan losses
for the year ended December 31, 1997, was $250,000, compared to $201,000 for the
previous year. The provision in 1997 represented an increase of $49,000, or
24.4%, from the 1996 provision. The higher provision in 1997 is due to
increased charge-offs during 1997, primarily in the indirect installment loan
portfolio. This situation was mitigated somewhat by the fact that the Company's
classified loans have continued to decline, notwithstanding the acquisitions
made during 1996 and 1997. The provision in 1996 represented a decrease of
$5,000, or 2.4%, from the 1995 provision. The overall quality of the Company's
loan portfolio has improved during the last several years.
39
<PAGE>
Noninterest Income
Noninterest income increased $451,000, or 50.9%, from $886,000 for the six-
month period ended June 30, 1997, to $1,337,000 for the six-month period ended
June 30, 1998. Noninterest income increased $358,000, or 23.1%, from $1,551,000
in 1996 to $1,909,000 in 1997. The amount for 1996 increased $42,000, or 2.8%,
from $1,509,000 in 1995.
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 $235,000, or 31.8%, from $739,000 for the first six months of
1997 to $974,000 for the first six months of 1998. The increase was due to the
acquisition of Crown Park during January 1997, service charges on the accounts
of seven Albertson's grocery stores which began in October 1997 and an increase
in rates on selected charges during the first quarter of 1998. This source of
income increased $346,000, or 27.5%, from $1,259,000 for 1996 to $1,605,000 for
1997. Approximately 75% of the increase was attributable to the acquisition of
Crown Park in January 1997. Service charge income increased $92,000, or 7.9%,
from $1,167,000 for 1995 to $1,259,000 for 1996, primarily due to acquisitions
and an increase in charges for checks drawn on insufficient funds.
Trust fees from the operation of the trust department of the Bank increased
$10,000, or 10.6%, from $94,000 for the first six months of 1997, to $104,000
for the first six months of 1998 primarily as a result of an overall increase in
the value of assets under management of the trust department. Trust fees from
trust operations increased $6,000, or 3.2%, from $189,000 in 1996 to $195,000 in
1997. Trust fees decreased $12,000, or 6.0%, from $201,000 during 1995 to
$189,000 during 1996. The decrease in 1996 is due to a one-time $24,000 fee
received for services performed as executor of an estate during 1995, which was
partially offset by a one-time $5,000 fee received in 1996. The 1996 one-time
fee caused the increase in 1997 to be less than it normally would have been
because of an increase in the market value of assets under management.
Securities with a carrying value of $193,000 were sold during 1997. There
was no gain or loss recorded on such sale. Securities with a carrying value of
$2,028,000 were sold during 1996. Net losses of $10,000 were recorded on the
securities sold during 1996. There were no sales of securities during the first
six months of 1998 or during 1995. The securities portfolio had an average life
of approximately 1.45 years at June 30, 1998, approximately 1.32 years at
December 31, 1997, and approximately 1.48 years at December 31, 1996.
Other income is the sum of several components of other noninterest income
including insurance premiums earned on automobiles financed through the
Company's internal installment loan program, bankcard royalty income, check
printing income and other sources of miscellaneous income. Other income
increased $206,000, or 388.7%, from $53,000 for the first six months of 1997 to
$259,000 for the corresponding period in 1998, primarily due to a significant
increase in insurance premiums received during the first six months of 1998 on
automobiles financed through the Company's installment lending program and an
increase in check printing income. The Company also had a significant increase
in income from investment services which it began offering during the second
quarter of 1997. Other income increased $6,000, or 5.8%, from $103,000 in 1996
to $109,000 in 1997 due to the acquisition of Crown Park in January 1997. 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.
Noninterest Expenses
Noninterest expenses increased $479,000, or 12.1%, from $3,958,000 during the
first six months of 1997 to $4,437,000 during the first six months of 1998.
Noninterest expenses for the six-month period ended June 30, 1998, were higher
than the same period for 1997 primarily as a result of the acquisition of Crown
Park at the end of January 1997. Noninterest expenses increased $1,947,000, or
31.0%, from $6,290,000 in 1996 to $8,237,000 in 1997, primarily due to the
acquisition of Crown Park. This acquisition accounted for approximately 80% of
the increase. 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.
40
<PAGE>
Salaries and employee benefits rose $219,000, or 11.4%, from $1,926,000 for
the six-month period ended June 30, 1997, to $2,145,000 for the corresponding
period of 1998. The increase was primarily a result of the opening of two
grocery store branches in October 1997 and one grocery store branch in May 1998,
as well as overall salary increases. Salaries and benefits rose $888,000, or
28.8%, from $3,082,000 in 1996 to $3,970,000 in 1997. Approximately 79% of the
increase was a result of the acquisition of Crown Park in January 1997.
Salaries and employee benefits increased $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.
Net occupancy expense increased $57,000, or 13.9%, from $411,000 for the
first six months of 1997 to $468,000 for the first six months of 1998. The
increase is due primarily to the opening of the three additional branches noted
above. Net occupancy expense increased $141,000, or 19.7%, from $716,000 in 1996
to $857,000 in 1997. The increase is due entirely to the acquisition of Crown
Park. 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.
Equipment expense decreased $13,000, or 3.1%, from $415,000 for the first six
months of 1997 to $402,000 for the first six months of 1998. The decrease was
due to the expiration of operating leases on certain date processing equipment
during the first six months of 1998. The equipment was purchased at the end of
the leases for fair market value and the depreciation currently being recorded
is less than the lease expense previously recorded. Equipment expense increased
$171,000, or 25.8%, from $663,000 in 1996, to $834,000 in 1997. Approximately
three-fourths of this increase is the result of the Crown Park acquisition.
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.
Stationery, printing and supplies expense increased $22,000, or 12.0%, from
$184,000 for the first six months of 1997 to $206,000 for the first six months
of 1998, primarily due to the opening of the three grocery store branches noted
above and acquisition of Crown Park effective January 28, 1997. Stationery,
printing and supplies expense increased $131,000, or 45.5%, from $288,000 for
1996 to $419,000 for 1997, due primarily to the Crown Park acquisition and the
opening of two supermarket bank branches in Abilene and Odessa. 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.
Professional fees, which include legal and accounting fees, decreased
$41,000, or 22.5%, from $182,000 during the first six months of 1997 to $141,000
for the corresponding period of 1998. The decrease was a result of increased
legal fees incurred immediately after the acquisition related to Crown Park
loans and legal fees incurred that were related to settlement of litigation
during the first quarter of 1997, which resulted in recovery of approximately
$108,000 of a previously charged off loan. Professional fees increased $29,000,
or 9.5%, from $304,000 during 1996 to $333,000 during 1997. The entire increase
was due to additional legal fees incurred by the Lubbock branch of the Bank,
relating to collections of loans which had been made by management of Crown
Park; otherwise professional fees would have decreased $40,000, or 13.2%.
Professional 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.
The Company recorded $125,000 in expense during the second quarter of 1998 as
a result of the settlement of potential litigation involving a bank that had
been repossessed by a former subsidiary bank of the Company. See "Note 8:
Settlement of Potential Litigation" to the Company's Consolidated Financial
Statements for the six month periods ended June 30, 1998 and 1997.
Goodwill amortization was $57,000 for both the second quarter of 1998 and
1997, and increased $12,000, or 11.9%, from $101,000 for the first six months of
1997 to $113,000 for the first six months of 1998. Amortization expense of
goodwill related to the acquisition of Crown Park on January 28, 1997, was the
cause of the year-to-date increase.
41
<PAGE>
Net costs (revenues) applicable to real estate and other repossessed assets
consists of expenses associated with holding and maintaining repossessed assets,
the net gain or loss on the sales of such assets, the write-down of the carrying
value of the assets and any rental income on such assets that is credited as a
reduction in such expenses. The Company recorded net costs of $47,000 for the
first six months of 1998, compared to net revenues of $40,000 for the first six
months of 1997. The net revenues resulted primarily from gains on the sales
during the first quarter of 1997 of two petroleum producing properties held by
the Winters branch of the Bank. The Company recorded net costs of $23,000 in
1997 compared to net revenues of $24,000 in 1996 as a result of $52,000 of such
expenses incurred by the Lubbock branch of the Bank during 1997. Net gains on
sales of such assets totaled $58,000 for 1997, compared to $50,000 for 1996.
Net revenues of the Company were $24,000 in 1996 compared to net revenues of
$7,000 in 1995 as a result of additional gains on sales of, and rental income
received on, such assets.
Other noninterest expense includes, among many other items, postage, due from
bank account charges, data processing, armored car and courier fees, travel and
entertainment, advertising, regulatory examination fees, directors' fees, dues
and subscriptions, franchise taxes, and FDIC insurance premiums. These expenses
increased $11,000, or 1.4%, from $779,000 for the first six months of 1997 to
$790,000 for the first six months of 1998. These expenses increased $540,000, or
42.8%, from $1,261,000 during 1996 to $1,801,000 during 1997. Approximately 71%
of the increase was due to the acquisition of Crown Park in January 1997. 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 1996 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.
Federal Income Taxes
Due to the fact that the Company effected a quasi-reorganization as of
December 31, 1989, utilization of any of the Company's net operating loss
carryforwards subsequent to that 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 $564,000 and $538,000 in federal income
taxes in the first six months of 1998 and 1997, respectively. The effective tax
rate for the first six months of 1998 and 1997 were 36.7% and 33.8%,
respectively. The lower effective rate for 1997 was a result of a $41,000
reduction in federal income tax expense due to an adjustment in the amount of
the utilization of the Company's net operating loss carryforwards. The Company
accrued $977,000, $753,000 and $582,000 in federal income taxes in 1997, 1996
and 1995, respectively. The 1997 amount was lowered by $112,000 as a result of
a reduction made in the Company's deferred tax asset valuation allowance
relating to Peoples National and Winters State based on the Company's trend of
positive operating results.
Impact of Inflation
The effects of inflation on the local economy and on the Company's operating
results have been relatively modest for the past several years. Because
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company attempts
to control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. See "--Analysis of
Financial Condition--Interest Rate Sensitivity" below.
Interest Rate Sensitivity
Interest rate risk arises when an interest-earning asset matures or when such
asset's rate of interest changes in a time frame different from that of the
supporting interest-bearing liability. The Company seeks to minimize the
difference between the amount of interest-earning assets and the amount of
interest-bearing liabilities on which interest rates could change in the same
time frame in an attempt to reduce the risk of significant adverse effects on
the Company's net interest income caused by interest rate changes. The Company
does not attempt to match each interest-earning asset with a specific interest-
bearing liability. Instead, as shown in the table below, it aggregates all of
its
42
<PAGE>
interest-earning assets and interest-bearing liabilities to determine the
difference between the two in specific time frames. This difference is known as
the rate-sensitivity gap. A positive gap indicates that more interest-earning
assets than interest-bearing liabilities mature in a time frame, and a negative
gap indicates the opposite. Maintaining a balanced position will reduce the risk
associated with interest rate changes, but it will not guarantee a stable
interest rate spread since various rates within a particular time frame may
change by differing amounts and in different directions. Management regularly
monitors the interest sensitivity position and considers this position in its
decisions with regards to interest rates and maturities for interest-earning
assets acquired and interest-bearing liabilities accepted.
The Company's objective is to maintain a ratio of interest-sensitive assets
to interest-sensitive liabilities that is as balanced as possible. The
following tables show that ratio to be 67.6% at the 90-day interval, 58.9% at
the 180-day interval and 52.8% at the 365-day interval at June 30, 1998.
Currently, the Company is in a liability-sensitive position at the three
intervals. The Company had $75,098,000 of interest-bearing demand, savings and
money market deposits at June 30, 1998, that are somewhat less rate-sensitive.
Excluding these deposits, the Company's interest-sensitive ratio would have been
91.6% at the 365-day interval at June 30, 1998. 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 June 30, 1998:
<TABLE>
<CAPTION>
Volumes
Subject
Cumulative Volumes to
Subject to Repricing Within Repricing
------------------------------- After
90 Days 180 Days 365 Days 1 Year Total
--------- --------- --------- --------- --------
Interest-earning assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Federal funds sold $ 29,200 $ 29,200 $ 29,200 $ 0 $ 29,200
Securities 2,751 4,754 8,747 57,733 66,480
Loans, net of unearned
income 42,055 46,605 55,648 85,161 140,809
-------- -------- -------- -------- --------
Total interest-earning
assets 74,006 80,559 93,595 142,894 236,489
-------- -------- -------- -------- --------
Interest-bearing
liabilities:
Demand, savings and money
market deposits 75,098 75,098 75,098 0 75,098
Time deposits 34,378 61,620 102,175 19,395 121,570
Notes payable 1 2 4 0 4
-------- -------- -------- -------- --------
Total interest-bearing
liabilities 109,477 136,720 177,277 19,395 196,672
-------- -------- -------- -------- --------
Rate-sensitivity gap(1) $(35,471) $(56,161) $(83,682) $123,499 $ 39,817
======== ======== ======== ======== ========
Rate-sensitivity ratio(2) 67.6% 58.9% 52.8%
======== ======== ========
</TABLE>
- -----------------------------
(1) Rate-sensitive interest-earning assets less rate-sensitive interest-bearing
liabilities.
(2) Rate-sensitive interest-earning assets divided by rate-sensitive interest-
bearing liabilities.
43
<PAGE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1997. Except for the effects of prepayments and scheduled principal
amortization on mortgage related assets, the table presents principal cash flows
and related weighted average interest rates by the contractual terms to
maturity. Nonaccrual loans are included in the loan totals. All investments are
classified as other than trading.
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------
Fair
1998 1999 2000 2001 2002 Thereafter Total Value
-------- ------- ------- ------- ------- ---------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Maturities $ 44,640 $28,399 $20,292 $12,359 $ 3,725 $ 2,835 $112,250 $115,141
Average interest rate 8.88% 8.90% 8.99% 9.07% 9.03% 8.92% 8.93%
Adjustable Rate Loans:
Maturities 12,850 $ 6,370 4,701 2,915 910 857 28,603 28,603
Average interest rate 9.52% 9.95% 9.97% 9.97% 9.99% 9.87% 9.76%
Investments and Other
Interest-earning Assets:
Maturities 41,623 10,478 12,010 14,443 15,382 758 94,694 94,777
Average interest rate 5.63% 6.30% 6.23% 6.53% 6.70% 4.35% 6.08%
Total Interest-earning
Assets:
Maturities $ 99,113 $45,247 $37,003 $29,717 $20,017 $ 4,450 $235,547 $238,521
Average interest rate 7.60% 8.45% 8.22% 7.92% 7.28% 8.32% 7.89%
Savings Deposits:
Maturities $ 0 $ 0 $ 0 $ 0 $ 0 $13,201 $ 13,201 $ 13,201
Average interest rate --% --% --% --% --% 3.21% 3.21%
NOW Deposits:
Maturities 0 0 0 0 0 33,204 33,204 33,204
Average interest rate --% --% --% --% --% 2.05% 2.05%
Money Market Deposits:
Maturities 0 0 0 0 0 31,090 31,090 31,090
Average interest rate --% --% --% --% --% 3.25% 3.25%
Certificates of Deposit:
Maturities 108,810 8,482 1,785 1,139 1,222 0 121,438 121,724
Average interest rate 5.38% 5.69% 6.31% 5.79% 6.07% --% 5.43%
Notes Payable:
Maturities 57 0 0 0 0 0 57 57
Average interest rate 9.74% --% --% --% --% --% 9.74%
Total Interest-bearing
Liabilities:
Maturities $108,867 $ 8,482 $ 1,785 $ 1,139 $ 1,222 $77,495 $198,990 $199,276
Average interest rate 5.38% 5.69% 6.31% 5.79% 6.07% 2.73% 4.38%
</TABLE>
The Company assumed that 100% of savings, NOW and money market deposits at
December 31, 1997, are core deposits and are, therefore, expected to roll off
after five years. No roll-off is applied to certificates of deposit. Fixed
maturity deposits reprice at maturity.
In evaluating the Company's exposure to interest rate risk, certain
limitations inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates.
44
<PAGE>
Also, the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
other assets have features that restrict changes in interest rates, and
prepayment and early withdrawal levels may deviate significantly from those
assumed in calculating the table. Finally, the ability of many borrowers to
service their debt may decrease in the event of an interest rate increase. The
Company considers all of these factors in monitoring its exposure to interest
rate risk.
Analysis of Financial Condition
Assets
Total assets decreased $1,073,000, or 0.4%, from $264,574,000 at December 31,
1997 to $263,501,000 at June 30, 1998, primarily due to a slight decrease in the
level of deposits noted below. Total assets increased $58,606,000, or 28.5%,
from $205,968,000 at December 31, 1996, to $264,574,000 at December 31, 1997,
due to the acquisition of Crown Park, which had total assets of $60,420,000 at
January 28, 1997, the date of acquisition. Total assets increased $20,484,000,
or 12.8%, from $180,344,000 at year-end 1995 to $205,968,000 at December 31,
1996, primarily due to the overall growth in deposits at the Bank and the bank
acquisitions made in 1996.
Loan Portfolio
Total loans, net of unearned income, decreased $44,000 from $140,853,000 at
December 31, 1997, to $140,809,000 at June 30, 1998. The decrease during the
first six months of 1998 was a result of a significant amount of payoffs
received on the Company's indirect installment loans. This decrease was offset
by a $7,878,000 increase in commercial and industrial loans and a $3,146,000
increase in other loans during the first six months of 1998. Total loans, net
of unearned income, increased $48,836,000, or 53.1%, from $92,017,000 at
December 31, 1996, to $140,853,000 at December 31, 1997. The increase during
1997 was due to the acquisition of Crown Park which had $41,688,000 in loans,
net of unearned income, at the date of acquisition and overall internal loan
growth at the Bank, primarily at the Lubbock and San Angelo branches.
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.
The Bank has an installment loan program whereby it purchases automobile loans
from automobile dealerships in its west Texas market area. 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. At June 30,
1998, December 31, 1997, and December 31, 1996, the Company had approximately
$39,655,000, $50,052,000 and $33,188,000 net of unearned income, respectively,
of this type of loan outstanding. The decrease in the first six months of 1998
was a result of a significant amount of payoffs received on the Company's
indirect installment loans. The increase from 1996 to 1997 was due to the
acquisition of Crown Park, which had instituted its own indirect installment
lending program prior to being acquired by the Company. The Bank's current goal
is to reduce the percentage of installment loans to total loans and to increase
the percentage of commercial loans to total loans.
45
<PAGE>
The following table presents the Company's loan balances at the dates
indicated separated by loan type:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals $ 56,431 $ 67,453 $46,975 $42,142 $43,113 $28,538
Real estate loans 43,944 44,569 26,233 23,265 22,760 22,658
Commercial and industrial loans 32,062 24,184 18,430 17,236 16,702 16,723
Other loans 9,254 6,109 2,626 2,638 2,943 4,322
-------- -------- ------- ------- ------- -------
Total loans 141,691 142,315 94,264 85,281 85,518 72,241
Less unearned income 882 1,462 2,247 3,354 4,212 2,594
-------- -------- ------- ------- ------- -------
Loans, net of unearned income $140,809 $140,853 $92,017 $81,927 $81,306 $69,647
======== ======== ======= ======= ======= =======
</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 June 30, 1998, except for those set
forth in the above table. The Bank had no loans outstanding to foreign
countries or borrowers headquartered in foreign countries at June 30, 1998.
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 June 30, 1998. The table also presents the portion of
loans that have fixed interest rates or interest rates that fluctuate over the
life of the loans in accordance with changes in the interest rate environment as
represented by the prime rate.
<TABLE>
<CAPTION>
One to Over Total
One Year Five Five Carrying
and Less Years Years Value
-------- ------- ------- --------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans $ 6,152 $29,942 $ 7,850 $43,944
Commercial and industrial loans 15,795 10,679 5,588 32,062
Other loans 8,412 621 221 9,254
------- ------- ------- -------
Total loans $30,359 $41,242 $13,659 $85,260
======= ======= ======= =======
With fixed interest rates $11,151 $30,824 $ 6,789 $48,764
With variable interest rates 19,208 10,418 6,870 36,496
------- ------- ------- -------
Total loans $30,359 $41,242 $13,659 $85,260
======= ======= ======= =======
</TABLE>
Loan Review Process
The Company follows a loan review program to evaluate the credit risk in
its loan portfolio. Through the loan review process, the Bank maintains 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 June
46
<PAGE>
30, 1998, substandard loans totaled $757,000, of which $135,000 were loans
designated as nonaccrual or 90 days past due, and there were no doubtful or loss
loans. At December 31, 1997, substandard loans totaled $941,000, of which
$122,000 were loans designated as nonaccrual, 90 days past due or restructured,
and there was one $16,000 doubtful loan, which was currently performing. There
were no loss loans.
In addition to the internally classified loans, the Bank also has a "watch
list" of loans that further assists the 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.
Management of the Bank reviews these loans to assist in assessing the adequacy
of the allowance. Substantially all of the loans on the watch list at June 30,
1998, and December 31, 1997, were current and paying in accordance with loan
terms. At June 30, 1998, watch list loans totaled $1,204,000 (including
$383,000 of loans guaranteed by U.S. governmental agencies). Of the total loans
on the watch list, at June 30, 1998, there were $572,000 of the loans involved
borrowers who had filed Chapter 13 bankruptcy and the Bank was awaiting
finalization of the individual borrowers' bankruptcy plans. At December 31,
1997, watch list loans totaled $1,271,000 (including $489,000 of loans
guaranteed by U.S. governmental agencies). At such date, $75,000 of loans on
the watch list were designated as 90 days past due. All of these loans involved
borrowers who had filed Chapter 13 bankruptcy and the Bank was awaiting
finalization of the individual borrowers' bankruptcy plans. In addition, at
June 30, 1998 and December 31, 1997, $116,000 and $88,000, respectively, of
loans not classified and not on the watch list were designated as restructured
loans.
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 "--
Analysis of Financial Condition--Other Real Estate and Other Repossessed Assets"
below.
47
<PAGE>
The following table lists nonaccrual, past due and restructured loans and
other real estate and other repossessed assets at June 30, 1998, and at year-end
for each of the past five years.
December 31,
June 30, --------------------------------------
1998 1997 1996 1995 1994 1993
-------- ------ ------ ------ ------ ------
(In thousands)
Nonaccrual loans $ 57 $ 70 $ 82 $ 204 $ 48 $1,646
Accruing loans contractually
past due over 90 days 78 121 41 23 26 293
Restructured loans 87 104 73 65 80 195
Other real estate and other
repossessed assets 253 739 389 337 631 803
-------- ------ ------ ------ ------ ------
Total nonperforming
assets $ 475 $1,034 $ 585 $ 629 $ 785 $2,937
======== ====== ====== ====== ====== ======
The gross interest income that would have been recorded in the first six
months of 1998 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
$4,000. No interest was actually recorded (received) on loans that were on
nonaccrual during the first six months of 1998. The gross interest income that
would have been recorded in 1997 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 $16,000. A total of $2,000 in interest on nonaccrual loans was
actually recorded (received) during 1997.
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.
Other Real Estate and Other Repossessed Assets
Other real estate and other repossessed assets consist of real property and
other assets unrelated to banking premises or facilities. Income derived from
other 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 June 30, 1998, other real estate and other repossessed
assets had an aggregate book value of $253,000. Other real estate and other
repossessed assets decreased $486,000, or 65.8%, during the first six months of
1998, primarily due to the sale of a parcel of real estate for $357,000 and a
reduction in the number of repossessed automobiles held by the Company. Of the
June 30, 1998 balance, $143,000 represented sixteen repossessed automobiles and
$110,000 represented three commercial and two residential properties. The
largest individual parcel of real estate is carried at $72,000. At December 31,
1997, 1996 and 1995, other real estate and other repossessed assets had an
aggregate book value of $739,000, $389,000 and $337,000, respectively. Other
real estate and other repossessed assets increased $350,000, or 90.0%, during
1997 due to the acquisition of Crown Park. At the date of acquisition, Crown
Park had a total of $456,000 in other real estate and other repossessed assets.
The December 31, 1997, balance of $739,000 included three commercial properties
($391,000), 38 repossessed automobiles ($302,000) and five residential
properties ($46,000). 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.
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
48
<PAGE>
income (the "provision" for loan losses), and the allowance is available to
absorb possible loan losses. See "--Results of Operations--Provision for Loan
Losses" above.
The amount of the allowance equals the cumulative total of the provisions made
from time to time, reduced by loan charge-offs and increased by recoveries of
loans previously charged off. The Company's allowance was $1,121,000, or 0.80%,
of loans, net of unearned income, at June 30, 1998. The Company's allowance was
$1,173,000, or 0.83% of loans, net of unearned income, at December 31, 1997,
compared to $793,000, or 0.86% of loans, net of unearned income, at December 31,
1996, and $759,000, or 0.93% of loans, net of unearned income, at December 31,
1995. The increase in the balance of the allowance from December 31, 1996, to
December 31, 1997, was a result of the acquisition of Crown Park, which had an
allowance of $395,000 at the date of acquisition. 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 $398,000 loans during the first six months of
1998. These charge-offs were concentrated in the following categories: loans
to individuals--$355,000, or 89.2%, and real estate loans--$40,000, or 10.1%.
The Company charged off $581,000 in loans during 1997. Charge-offs for 1997
were concentrated in the following categories: loans to individuals--$457,000,
or 78.7%, and commercial and industrial--$107,000, or 18.4%. Charge-offs on two
commercial and industrial loans totaled $80,000, or 13.8%, of total charge-offs.
All but $44,000 of the remaining $501,000 in charge-offs were installment loans,
of which $424,000 represented indirect loans secured by automobiles. Recoveries
during the first six months of 1998 were $46,000. Recoveries during 1997 were
$316,000 and were concentrated in the following categories: commercial and
industrial--$220,000, or 69.6%, loans to individuals--$60,000, or 19.0%, and
real estate--$35,000, or 11.1%. Recoveries of $218,000 on four commercial and
industrial loans, and $32,000 on one real estate loan accounted for 79.1% of
total recoveries during 1997.
49
<PAGE>
The following table presents the provisions, loans charged off and
recoveries of loans previously charged off, the amount of the allowance, average
loans outstanding and certain pertinent ratios for the six-month period ended
June 30, 1998 and for the last five years.
<TABLE>
<CAPTION>
June 30,
1998 1997(1) 1996(2) 1995 1994 1993(3)
--------- ----------- ------------- ----------- -------- ----------
Analysis of allowance for possible (Dollars in thousands)
loan losses:
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,173 $ 793 $ 759 $ 817 $ 896 $ 617
Provision for loan losses 300 250 201 206 147 154
Acquisition of subsidiary 0 395 149 0 0 233
-------- -------- ------- ------- ------- -------
1,473 1,438 1,109 1,023 1,043 1,004
-------- -------- ------- ------- ------- -------
Loans charged off:
Loans to individuals 355 457 231 297 150 88
Real estate loans 40 6 100 72 119 68
Commercial and industrial loans 3 107 58 7 32 69
Other loans 0 11 0 0 77 16
-------- -------- ------- ------- ------- -------
Total charge-offs 398 581 389 376 378 241
-------- -------- ------- ------- ------- -------
Recoveries of loans previously
charged off:
Loans to individuals 21 60 28 43 45 28
Real estate loans 15 35 20 2 0 4
Commercial and industrial loans 10 220 25 52 48 84
Other loans 0 1 0 15 59 17
-------- -------- ------- ------- ------- -------
Total recoveries 46 316 73 112 152 133
-------- -------- ------- ------- ------- -------
Net loans charged off 352 265 316 264 226 108
-------- -------- ------- ------- ------- -------
Balance at end of period $ 1,121 $ 1,173 $ 793 $ 759 $ 817 $ 896
======== ======== ======= ======= ======= =======
Average loans outstanding,
net of unearned income $139,564 $132,891 $85,880 $82,302 $74,727 $59,767
======== ======== ======= ======= ======= =======
Ratio of net loan charge-offs to
average loans, net of unearned income 0.50% 0.20% 0.37% 0.32% 0.30% 0.18%
==== ==== ==== ==== ==== ====
Ratio of allowance for possible
loan losses to total loans, net of
unearned income, at end of period 0.80% 0.83% 0.86% 0.93% 1.00% 1.29%
==== ==== ==== ==== ==== ====
</TABLE>
- ------------------------------------
(1) Average loans, net of unearned income, for 1997 include the average loans,
net of unearned income, of Crown Park from January 28 through December 31,
1997.
(2) Average loans, net of unearned income, for 1996 include the average loans,
net of unearned income, of Peoples National from January 1 through December
31, 1996, and of Coastal Banc--San Angelo from May 27 through December 31,
1996.
(3) Average loans, net of unearned income, for 1993 include the average loans,
net of unearned income, of Winters State from August 31 through December
31, 1993.
Foreclosures on defaulted loans result in the Company acquiring other
real estate and other repossessed assets. Accordingly, the Company incurs other
expenses, specifically net costs applicable to other 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.
50
<PAGE>
As the economies of the Bank's market areas over the past several
years have recovered and stabilized, there has been a steady reduction in the
amount of the provision, as a percentage of average loans outstanding, necessary
to maintain an adequate balance in the allowance. This reflects management's
assessment of the continued reduction of credit risks associated with the loan
portfolio.
The amount of the allowance is established by management based upon
estimated risks inherent in the existing loan portfolio. Management reviews the
loan portfolio on a continuing basis to evaluate potential problems. This
review encompasses management's estimate of current economic conditions and the
potential impact on various industries, prior loan loss experience and financial
conditions of individual borrowers. Loans that have been specifically
identified as 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.
The following table shows the allocations in the allowance and the
respective percentages of each loan category to total loans at June 30, 1998,
and at year-end for each of the past five years.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
June 30, 1998 1997 1996
----------------------- ----------------------- -----------------------
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 $ 549 39.4% $ 570 46.8% $323 48.6%
Real estate loans 67 31.2 52 31.6 128 28.5
Commercial and industrial loans 149 22.8 193 17.2 97 20.0
Other loans 29 6.6 28 4.4 43 2.9
------ ----- ------ ----- ---- -----
Total allocated 794 100.0% 843 100.0% 591 100.0%
===== ===== =====
Unallocated 327 330 202
------ ------ ----
Total allowance for possible
loan losses $1,121 $1,173 $793
====== ====== ====
<CAPTION>
December 31,
------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Amount of Loans by Amount of Loans by Amount of Loans by
Allowance Category to Allowance Category to Allowance Category to
Allocated Loans, Net Allocated Loans, Net Allocated Loans, Net
to of Unearned to of Unearned to of Unearned
Category Income Category Income Category Income
--------- ----------- --------- ----------- --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals $ 136 47.4% $ 207 47.8% $178 37.3%
Real estate loans 197 28.4 165 28.0 272 32.5
Commercial and industrial loans 96 21.0 122 20.5 212 24.0
Other loans 59 3.2 68 3.7 108 6.2
------ ----- ------ ----- ---- -----
Total allocated 488 100.0% 562 100.0% 770 100.0%
===== ===== =====
Unallocated 271 255 126
------ ------ ----
Total allowance for possible
loan losses $ 759 $ 817 $896
====== ====== ====
</TABLE>
51
<PAGE>
Cash and Cash Equivalents
The amount of cash and cash equivalents increased $2,893,000, or 7.3%, from
$39,418,000 at December 31, 1997, to $42,311,000 at June 30, 1998, due to
maturities of securities, which were greater than purchases of securities,
during the first six months of 1998 and an increased amount of funds that were
invested temporarily in federal funds sold at June 30, 1998. At December 31,
1997, the Company had $39,418,000 in cash and cash equivalents, up from
$29,958,000 at December 31, 1996, due to a decreased amount of funds being
invested in investment securities as a result of the current interest rate
environment. During 1996, cash and cash equivalents decreased $4,801,000, or
13.8%, from the December 31, 1995, balance of $34,759,000. Cash and cash
equivalents averaged $47,100,000 and $26,121,000 for the six-month periods ended
June 30, 1998 and 1997, respectively, and $27,520,000, $26,557,000 and
$38,142,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Securities
Securities decreased $3,314,000, or 4.7%, from $69,794,000 at December 31,
1997, to $66,480,000 at June 30, 1998. The decrease in the first six months
1998 is due to funds from maturities of securities being invested temporarily in
federal funds sold. Securities decreased $5,358,000, or 7.1%, from $75,152,000
at December 31, 1996, to $69,794,000 at December 31, 1997. The decrease in 1997
was due primarily to lower interest rates that were being paid on securities
during the fourth quarter of 1997. As a result, more of the Company's available
funds were being invested temporarily in federal funds sold.
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 ten
years. The weighted average maturity of the Company's securities portfolio at
June 30, 1998 was 1.45 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
$26,332,000 were classified as available-for-sale and are carried at fair value
at June 30, 1998. At such date, securities totaling $40,148,000 were classified
as held-to-maturity and are carried at amortized cost. During the second quarter
of 1997, the Company sold $193,000 of investments classified as available-for-
sale. No gain or loss was recognized on the sale of such investments.
Securities totaling $22,501,000 were classified as available-for-sale and were
carried at fair value at December 31, 1997. Securities totaling $47,293,000
were classified as held-to-maturity and were carried at amortized cost. The
securities portfolio had an average life of approximately 1.32 years at December
31, 1997, compared to approximately 1.48 years at December 31, 1996. 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 June 30,
1998, the book value of U.S. Government and other securities so pledged amounted
to $10,473,000, or 15.8% of the total securities portfolio.
52
<PAGE>
The following table summarizes the amounts and the distribution of the
Company's investment securities held at the dates indicated:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
June 30, 1998 1997 1996 1995
--------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount %
------- ------ ------- ------ ------- ------ ------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities $15,372 23.1% $21,292 30.5% $35,143 46.8% $32,295 57.8%
Obligations of other U.S.
Government agencies and
corporations 39,535 59.5 36,122 51.8 29,928 39.8 23,009 41.2
Mortgage-backed securities 10,145 15.2 11,622 16.7 9,438 12.6 160 0.2
Obligations of states and
political subdivisions 844 1.3 175 0.2 200 0.2 0 --
Other securities 584 0.9 583 0.8 443 0.6 443 0.8
------- ----- ------- ----- ------- ----- ------- -----
Total securities $66,480 100.0% $69,794 100.0% $75,152 100.0% $55,907 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Total fair value $66,570 $69,877 $75,062 $56,130
======= ======= ======= =======
</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.
53
<PAGE>
The following table provides the maturity distribution and weighted
average interest rates of the Company's total securities portfolio at June 30,
1998. The yield has been computed by relating the forward income stream on the
securities, plus or minus the anticipated amortization of premium or accretion
of discount, to the book value of the securities. The book value of available-
for-sale securities is their fair value. The book value of held-to-maturity
securities is their cost, adjusted for previous amortization or accretion. The
restatement of the yields on tax-exempt securities to a fully taxable-equivalent
basis has been computed assuming a tax rate of 34%.
<TABLE>
<CAPTION>
Estimated Weighted
Type and Maturity Grouping Principal Carrying Fair Average
at June 30, 1998 Amount Value Value Yield
- ------------------------------------ --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year $ 6,250 $ 6,269 $ 6,269 5.67%
After one but within five years 9,000 9,103 9,104 5.79
------- ------- ------- ----
Total U.S. Treasury securities 15,250 15,372 15,373 5.74
------- ------- ------- ----
Obligations of other U.S.
Government agencies and
corporations:
Within one year 2,500 2,485 2,497 6.48
After one but within five years 37,000 37,050 37,084 6.16
------- ------- ------- ----
Total obligations of U.S.
Government agencies
and corporations 39,500 39,535 39,581 6.18
------- ------- ------- ----
Mortgage-backed securities 10,038 10,145 10,174 6.16
------- ------- ------- ----
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 445 447 457 7.30
After ten years 400 397 401 6.98
------- ------- ------- ----
Total obligations of states and
political subdivisions 845 844 858 7.15
------- ------- ------- ----
Other securities:
Within one year 0 0 0 --
After one but within five years 0 0 0 --
After five but within ten years 0 0 0 --
After ten years 584 584 584 3.96
------- ------- ------- ----
Total other securities 584 584 584 3.96
------- ------- ------- ----
Total securities $66,217 $66,480 $66,570 6.04%
======= ======= ======= ====
</TABLE>
Goodwill
Goodwill decreased $113,000, or 3.6%, from $3,159,000 at December 31, 1997 to
$3,046,000 at June 30, 1998. This decrease was due entirely to goodwill
amortization expense recorded during the first half of 1998. The goodwill
recorded from all of the recent acquisitions made by the Company is being
amortized over a period of 15 years.
Other Assets
The most significant component of other assets at June 30, 1998, and December
31, 1997 and 1996, is a net deferred tax asset of $1,022,000, $1,282,000 and
$1,664,000, respectively. The balance of other assets decreased $99,000, or
4.8%, to $1,959,000 at June 30, 1998, from $2,058,000 at December 31, 1997,
primarily as a result of the utilization of a portion of the Company's tax
credit carryforwards. The balance of other assets decreased $194,000, or
54
<PAGE>
8.6%, to $2,058,000 at December 31, 1997, from $2,252,000 at December 31, 1996,
primarily as a result of a decrease in the Company's net deferred tax asset due
principally 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, 49.5% of which are demand, savings and money market deposits at June
30, 1998. Total deposits decreased $1,837,000, or 0.8%, from $242,801,000 at
December 31, 1997, to $240,964,000 at June 30, 1998. Total deposits increased
$53,226,000, or 28.1%, from $189,575,000 at December 31, 1996, to $242,801,000
at December 31, 1997. The increase is due to the purchase of Crown Park, which
had $53,604,000 in total deposits at the date of acquisition. Decreases in
deposits at the Lubbock branch subsequent to the date of acquisition were offset
by an aggregate increase in deposits at the Bank's remaining branches. 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 the six-month period ended June 30, 1998, and for
each of the last three years:
<TABLE>
<CAPTION>
Six-month Year Ended December 31,
Period Ended ----------------------------------------------------------
June 30, 1998 1997(1) 1996(2) 1995
------------------ ------------------ ------------------ ------------------
Average Average Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 42,996 --% $ 40,328 -- % $ 30,093 -- % $ 29,019 -- %
Interest-bearing demand,
savings and money
market deposits 77,458 2.63 75,833 2.69 57,847 2.41 53,391 2.35
Time deposits of less
than $100,000 83,027 5.31 84,267 5.36 64,112 5.42 52,452 5.41
Time deposits of $100,000
or more 39,488 5.39 36,951 5.54 27,953 5.39 19,685 5.61
-------- ---- -------- ---- -------- ---- -------- ----
Total deposits $242,969 3.53% $237,379 3.62% $180,005 3.55% $154,547 3.36%
======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
- ----------------------
(1) The average amounts and average rates paid on deposits for the year ended
December 31, 1997, include the averages of Crown Park from January 28
through December 31, 1997.
(2) 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 and May 27 (the respective dates of
acquisition of such banks) through December 31, 1996.
The maturity distribution of time deposits of $100,000 or more at June
30, 1998, and at December 31, 1997, is presented below:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(In thousands)
<S> <C> <C>
3 months or less $11,394 $13,669
Over 3 through 6 months 10,458 8,945
Over 6 through 12 months 14,111 12,852
Over 12 months 2,634 2,905
------- -------
Total time deposits of $100,000 or
more $38,597 $38,371
======= =======
</TABLE>
55
<PAGE>
The Bank experiences 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 June 30,
1998, deposits of $100,000 or more represented approximately 14.6% of the
Company's total assets. At December 31, 1997, deposits of $100,000 or more
represented 14.5% of the Company's total assets, compared to 14.4% of the
Company's total assets at December 31, 1996.
Selected Financial Ratios
The following table presents selected financial ratios for the six-month
periods ended June 30, 1998 and 1997 (annualized), and for each of the last
three fiscal years:
<TABLE>
<CAPTION>
Six-month Period
Ended June 30, Year Ended December 31,
---------------- --------------------------------
1998 1997 1997(1) 1996(2) 1995
------- ------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net income to:
Average assets 0.73% 0.83% 0.82% 0.72% 0.67%
Average interest-earning
assets 0.82 0.91 0.90 0.79 0.73
Average stockholders'
equity 9.26 11.42 10.95 9.89 8.99
Dividend payout (3) to:
Net income 20.35 15.96 17.30 13.85 10.34
Average stockholders'
equity 1.88 1.82 1.89 1.37 0.93
Average stockholders'
equity to:
Average total assets 7.92 7.24 7.45 7.33 7.43
Average loans (4) 15.06 14.57 14.50 16.74 15.30
Average total deposits 8.65 7.88 8.12 7.99 8.15
Average interest-earning
assets to:
Average total assets 89.52 90.86 90.36 91.87 91.56
Average total deposits 97.81 98.88 98.55 100.11 100.44
Average total liabilities 97.22 97.96 97.63 99.13 98.91
Ratio to total average
deposits of:
Average loans (4) 57.44 54.11 55.98 47.71 53.25
Average noninterest-
bearing deposits 17.70 16.77 16.99 16.72 18.78
Average interest-bearing
deposits 82.30 83.23 83.01 83.28 81.22
Total interest expense to
total interest income 46.48 47.35 47.25 47.51 44.38
Efficiency ratio (5) 68.17 69.45 69.09 72.78 76.56
- -------------------------
</TABLE>
(1) Average balance sheet and income statement items for 1997 include the
averages for Crown Park from January 28 through December 31, 1997.
(2) Average balance sheet and income statement items for 1996 include the
averages for Peoples National and Coastal Banc--San Angelo from January 1
and May 27 (the respective dates of acquisition of such banks) through
December 31, 1996.
(3) Dividends for Common Stock only.
(4) Before allowance for possible loan losses.
(5) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate and other repossessed assets divided
by the sum of net interest income before provision for loan losses and
total noninterest income excluding securities gains and losses.
Liquidity
The Bank
Liquidity with respect to a financial institution is the ability to meet its
short-term needs for cash without suffering an unfavorable impact on its on-
going operations. The need for the Bank to maintain funds on hand arises
56
<PAGE>
principally from maturities of short-term borrowings, deposit withdrawals,
customers' borrowing needs and the maintenance of reserve requirements.
Liquidity with respect to a financial institution can be met from either assets
or liabilities. On the asset side, the primary sources of liquidity are cash
and due from banks, federal funds sold, maturities of securities and scheduled
repayments and maturities of loans. The Bank maintains adequate levels of cash
and near-cash investments to meet its day-to-day needs. Cash and due from banks
averaged $13,309,000, $11,051,000 and $7,151,000 during the six months ended
June 30, 1998, and during the years ended December 31, 1997 and 1996,
respectively. These amounts comprised 5.1%, 4.3% and 3.6% of average total
assets during the six months ended June 30, 1998, and during the years ended
December 31, 1997 and 1996, respectively. The average level of securities and
federal funds sold was $98,091,000, $101,035,000 and $94,326,000 during the six
months ended June 30, 1998, and during the years ended December 31, 1997 and
1996, respectively. The increases from 1996 to 1997 were primarily due to the
acquisition of Crown Park on January 28, 1997.
The Bank sold securities classified as available-for-sale with a book value of
$193,000 during the year ended December 31, 1997. The Bank sold securities with
a book value of $2,028,000 during the year ended December 31, 1996. At June 30,
1998, $8,754,000, or 13.2%, of the Company's securities portfolio, excluding
mortgage-backed securities, matured within one year and $46,153,000, or 69.4%,
excluding mortgage-backed securities, matured after one but within five years.
At December 31, 1997, $16,723,000, or 28.7%, of the Company's securities
portfolio, excluding mortgage-backed securities, matured within one year and
$40,691,000, or 69.9%, excluding mortgage-backed securities, matured after one
but within five years. The Bank's commercial lending activities are
concentrated in loans with maturities of less than five years and with both
fixed and adjustable interest rates, while its installment lending activities
are concentrated in loans with maturities of three to five years and with fixed
interest rates. The Bank's experience, however, has been that these installment
loans are paid off in an average of approximately 30 months. At June 30, 1998,
approximately $55,648,000, or 39.5%, of the Company's loans, net of unearned
income, matured within one year and/or had adjustable interest rates. At
December 31, 1997, approximately $46,383,000, or 32.9%, of the Company's loans,
net of unearned income, matured within one year and/or had adjustable interest
rates. At such date, approximately $40,145,000, or 53.6%, of the Company's
loans (excluding loans to individuals) matured within one year and/or had
adjustable interest rates. See "--Analysis of Financial Condition--Loan
Portfolio" above.
On the liability side, the principal sources of liquidity are deposits,
borrowed funds and the accessibility to money and capital markets. Customer
deposits are by far the largest source of funds. During the six months ended
June 30, 1998, and the years ended December 31, 1997 and 1996, the Company's
average deposits were $242,969,000, or 91.5% of average total assets,
$237,379,000, or 91.7% of average total assets, and $180,005,000, or 91.8% of
average total assets, respectively. The Company attracts its deposits primarily
from individuals and businesses located within the market areas served by the
Bank. See "--Analysis of Financial Condition--Deposits" above.
The level of nonperforming assets has pressured interest margins and has
resulted in noninterest expenses from net operating costs and write-downs
associated with nonperforming assets, although the ratio of such nonperforming
assets to total assets has generally been decreasing over the past several
years. In order to improve liquidity, the Bank has implemented various cost-
cutting and revenue-generating measures and extended efforts to reduce
nonperforming assets.
The Company
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 to Independent
Financial during the first six months of 1998 totaled $250,000. Dividends paid
by Independent Financial to the Company during the first six months of 1998 were
$250,000. At June 30, 1998, there were approximately $3,025,000 in dividends
available for payment to Independent Financial by the Bank without
57
<PAGE>
regulatory approval. Dividends paid by the Bank to Independent Financial in 1997
aggregated $900,000; in turn, Independent Financial paid dividends to the
Company totaling $900,000 during 1997. Dividends paid by the Bank to Independent
Financial and by Independent Financial to the Company totaled $1,000,000 and
$1,000,000, respectively, during 1996.
The payment of current tax liabilities generated by the Bank and management
and service fees constituted approximately 66% and 7%, respectively, of the
Company's cash flow during the first six months of 1998 and 54.6% and 6.5%,
respectively, of the Company's cash flow from the Bank during 1997. 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 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 $657,000 were paid by the Bank to
the Company during the first six months of 1998. Current tax liabilities
totaling $1,266,000 were paid by the Bank to the Company during 1997, compared
to a total of $885,000 in 1996.
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 net operating carryforwards available for regular federal income tax
purposes were fully utilized by December 31, 1997. The Company still has net
tax credit carryforwards available for alternative minimum tax purposes which
should not be fully utilized before December 31, 1998.
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 $73,000 in management fees to the
Company in the first six months of 1998. The Bank paid a total of $150,000 in
management fees to the Company in 1997, compared to $162,000 in 1996. 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.
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
provided that this loan accrued interest at a floating per annum rate equal to
the Amarillo Bank's base rate plus one-half percent, principal and interest was
payable on demand, but if no demand is made, at maturity and the loan matured on
April 23, 1997. The loan was secured by a pledge of all of the stock of
Independent Financial and the Bank and had certain other loan provisions,
including limitations on additional debt, purchases and sales of assets,
acquisitions and mergers, dividend restrictions if total debt to the Amarillo
Bank exceeded $1,200,000 and certain other financial covenants. 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 Common Stock offering pursuant
to the underwriters' over-allotment option to reduce the principal amount of the
Amarillo Bank loan from $800,000 to $400,000. The balance was further reduced to
$200,000 by the end of the first quarter of 1997. The loan maturity was
extended to July 23, 1997, and on that day, the $200,000 balance was renewed
into a note that had a one-year maturity with payments of $50,000 principal plus
interest to be made quarterly beginning October 23, 1997. The first required
principal payment was made and the Company paid off the remaining principal
balance on the note on December 31, 1997.
Capital Resources
At June 30, 1998, stockholders' equity totaled $21,310,000, or 8.1%, of total
assets. At December 31, 1997, stockholders' equity totaled $20,527,000, or 7.8%
of total assets, compared to $14,937,000, or 7.3% of total assets, at December
31, 1996.
58
<PAGE>
Bank regulatory authorities in the United States have 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
capital) of at least 8%, of risk-weighted assets and, to be designated as well-
capitalized, the banking company must have Tier 1 and total capital ratios of 6%
and 10%, respectively. For the Company, Tier 1 capital includes common
stockholders' equity and qualifying perpetual preferred stock reduced by
goodwill. Tier 2 capital for the Company is comprised of all of the allowance
for possible loan losses.
Banking regulators also have leverage ratio requirements. The leverage ratio
requirement is measured as the ratio of Tier 1 capital to adjusted quarterly
average assets. The leverage ratio standards require all banking companies to
have a minimum leverage ratio of 4% and, to be designated as well-capitalized,
the banking company must have a leverage ratio of 5%. 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 and well-capitalized minimum
requirements at June 30, 1998, and December 31, 1997:
<TABLE>
<CAPTION>
Pro Forma At
June 30, 1998
Giving Effect
to the Offering
At At and Pending
The Company June 30, 1998 December 31, 1997 Acquisition
- ----------- ------------- ----------------- ---------------
(In thousands)
<S> <C> <C> <C>
Tier 1 capital:
Common stockholders'
equity, excluding
unrealized gain on
available-for-sale
securities $ 21,058 $ 20,261 $ 25,346
Preferred stockholders'
equity (1) 213 235 213
Preferred Securities (1) 0 0 8,519
Goodwill (3,046) (3,159) (11,112)
-------- -------- --------
Total Tier 1 capital 18,225 17,337 22,966
-------- -------- --------
Tier 2 capital:
Allowance for possible
loan losses (2) 1,121 1,173 1,781
-------- -------- --------
Total Tier 2 capital 1,121 1,173 1,781
-------- -------- --------
Total capital $ 19,346 $ 18,510 $ 24,747
======== ======== ========
Risk-weighted assets $153,697 $154,036 $206,366
======== ======== ========
Adjusted quarterly average
assets $262,857 $258,496 $346,333
======== ======== ========
</TABLE>
59
<PAGE>
The minimum regulatory capital amounts and ratios and minimum capital amounts
and ratios for well capitalized holding companies and the Company's actual and
pro forma capital amounts and ratios at June 30, 1998, and the Company's actual
ratios at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Pro Forma At
June 30, 1998
Regulatory Minimums for At June 30, 1998 At December 31, 1997 to Give Effect to the
Minimums for Well Capitalized ----------------- --------------------- Offering and the
Holding Companies Holding Companies Actual Actual Pending Acquisition
------------------ ------------------ ----------------- --------------------- ----------------------
The Company Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
- ----------- -------- -------- --------- ------- -------- ------- ---------- --------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital to
risk-weighted
assets $ 6,148 4.00% $12,296 6.00% $18,225 11.86% $17,337 11.26% $22,966 11.13%
Total capital to
risk-weighted
assets 12,296 8.00 15,370 10.00 19,346 12.59 18,510 12.02 24,747 11.99
Tier 1 capital to
adjusted
quarterly
average assets 7,886 4.00 15,772 5.00 18,225 6.93 17,337 6.71 22,966 6.67
</TABLE>
The minimum regulatory capital amounts and ratios and minimum capital amounts
and ratios for well capitalized banks and the Bank's actual and pro forma
capital amounts and ratios at June 30, 1998, and the Bank's actual ratios at
December 31, 1997, were as follows:
<TABLE>
<CAPTION>
Pro Forma At
June 30, 1998
At June 30, 1998 At December 31, 1997 to Give Effect to the
Regulatory Minimums Minimums for Well ----------------- --------------------- Offering and the
for Banks Capitalized Banks Actual Actual Pending Acquisition
-------------------- ------------------ ----------------- --------------------- --------------------
The Bank Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
- -------- --------- --------- --------- ------- -------- ------- ---------- --------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tier 1 capital to
risk-weighted
assets $ 6,184 4.00% $12,368 6.00% $16,900 10.93% $15,855 10.24% $16,900 10.93%
Total capital to
risk-weighted
assets 12,368 8.00 15,601 10.00 18,021 11.66 17,028 11.00 18,021 11.66
Tier 1 capital to
adjusted
quarterly
average assets 7,855 4.00 15,710 5.00 16,900 6.45 15,855 6.18 16,900 6.45
</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 nontraditional 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 June 30, 1998 and at December 31,
1997.
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.
60
<PAGE>
The payment of dividends on the Common Stock and the Series C Preferred
Stock is determined by the Company's board of directors in light of
circumstances and conditions then existing, including the earnings of the
Company and the 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. 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 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 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.
At June 30, 1998, and at December 31, 1997, retained earnings of the Bank
included approximately $3,025,000 and $2,780,000, respectively, that was
available for payment of dividends to the Company without prior approval of
regulatory authorities.
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 4-for-3
stock split, effected in the form of 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 during the second quarter of 1996. In addition,
the Company paid a 5-for-4 stock split, effected in the form of a 25% stock
dividend, on May 30, 1997.
At its meeting on July 15, 1998, the Board of Directors of the Company
approved the payment of the regular quarterly cash dividend of $0.05 per share
on August 31, 1998, to shareholders of record of the Common Stock on August 17,
1998.
In connection with the Company's acquisition of Crown Park and its
subsidiary, Western National, the Company sold an aggregate of 395,312 shares of
the Common Stock in an underwritten offering at a price of $11.40 per share.
This amount included 51,562 shares covered by the underwriters' over-allotment
option. The Company received net proceeds of approximately $3,978,000 from its
offering.
Upon consummation of the sale of the Securities offered pursuant to this
Prospectus, the Company will use all of the net proceeds to fund a portion of
the cost of acquiring Azle Bancorp. See "Capitalization."
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a four
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company believes it has identified all significant applications that
will require modification to ensure Year 2000 Compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
Compliance. The modification process of all significant applications by outside
hardware and software suppliers is substantially complete. The Company plans on
completing the testing process of all significant applications by December 31,
1998.
The Company leased virtually all of its computer hardware under leases that
expired during the first six months of 1998. The Company replaced this
hardware, as well as the software used for its main operating system and major
banking applications, during this same time period. The Company believes that
all such hardware and software is now Year 2000 compliant.
In addition, the Company has had formal communications with other vendors
with which it does significant business to determine their Year 2000 readiness
and the extent to which the Company appears vulnerable to any third party Year
2000 issues. There can be no assurance, however, that the systems of other
companies will be timely
61
<PAGE>
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.
As a result of the timing of the replacement and upgrade of the Company's
hardware and software, the total cost to the Company of Year 2000 Compliance
activities has not been and is not anticipated to be material to the Company's
financial position or results of operations in any given year. Year 2000
compliance costs and the date on which the Company plans to complete the Year
2000 modifications and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. There can be no assurance, however, that
these estimates will be achieved and actual results could differ from those
plans.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130"). FAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
adopted FAS 130 beginning January 1, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
133"). FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. The Company
adopted FAS 133 beginning July 1, 1998.
Management does not believe that the adoption of these pronouncements will
have a material impact on the financial statements of the Company.
BUSINESS AND PROPERTIES OF THE COMPANY
GENERAL
The Company is a bank holding company headquartered in Abilene, Texas,
located approximately 180 miles west of Dallas. The principal subsidiary of the
Company is the Bank, which currently operates eleven full-service banking
locations in and around four of the major markets in West Texas. These markets
include the Texas cities of Abilene (three locations), Lubbock, Odessa (four
locations) and San Angelo. These four markets serve as regional medical and
retail centers for West Texas. Abilene has a metropolitan statistical area
("MSA") of approximately 125,000 and a diversified economy. Abilene is home to
five universities and colleges, two regional medical complexes and Dyess Air
Force Base. Lubbock is the ninth largest city in Texas with a MSA of
approximately 235,000. Lubbock is home to Texas Tech University and a regional
medical complex. The Lubbock area produces approximately 3% of worldwide cotton
production. Odessa has a MSA of approximately 246,000. Odessa has a energy-
related economy and has over 500 manufacturing businesses. San Angelo has a
population of 89,000 employed in a diversified economy centered around
healthcare, manufacturing, higher education and agriculture.
At June 30, 1998, the Company had, on a consolidated basis, total assets of
$263,501,000, total deposits of $240,964,000, total loans, net of unearned
income, of $140,809,000 and total stockholders' equity of $21,310,000. The
Company's net income has grown from $1,229,000 in 1993 to $2,110,000 in 1997.
Additionally, since 1993, the Company's total loans have grown at an average
annual rate of 19.2%, resulting from a combination of internal growth and the
Company's acquisition of community banks.
The Company recently announced that it had agreed to acquire the
acquisition of the Azle Bancorp and its subsidiary, Azle State, in Azle, Texas,
north of Fort Worth and northwest of Dallas. At June 30, 1998, Azle Bancorp
has total assets of $91,660,000, total loans, net of unearned income, of
$45,102,000, total deposits of $80,816,000, and stockholders' equity of
$9,699,000. The Company expects that this acquisition will provide for
additional growth in West and North Central Texas and provide an entry into the
Dallas-Fort Worth metropolitan area. The net proceeds of the Offering will be
used to finance the Pending Acquisition. See "Pending Acquisition" and "Use of
Proceeds."
Over the past five years the Company has acquired three banks and completed
one branch purchase as it has followed a strategy of opportunistically acquiring
banks in its West Texas market. In October 1997, the Bank opened two full-
service branch locations in Albertson's supermarkets, one in Abilene and one in
Odessa. One additional branch in another Albertson's supermarket in Odessa
opened in May 1998. Management of the Company believes that establishing bank
branches in supermarkets is one of the most economical ways to increase the
Bank's market share in its market area. 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, while closely monitoring the Company's asset quality. See "Business
and Properties of the Company--Business Objectives and Strategy" and "--
Acquisition and Branch Activities."
The Bank provides a wide variety of commercial, consumer and trust services
and operates through its branches as a community bank and focus 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 Company's loan growth
has historically been impacted by its activity in the indirect auto lending
business, which portfolio currently accounts for approximately 28% of the
Company's loan portfolio. The Company's current strategy has been to focus its
lending on increasing its commercial and local residential loans and
diversifying away from indirect auto loans. Management's shift from indirect
auto loans has been due to increasing competition and decreasing interest rates
on these loans. Management believes that the Company's future growth strategy
lies in increasing commercial loans in
62
<PAGE>
the size range of $750,000 - $2,000,000, which is between that size in which
smaller local institutions are able to lend and the sizes in which large
regional banks are focusing.
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, home equity 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. The Bank also offers investment services and banking by phone or
personal computer.
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.
The combined branches in Abilene had the sixth largest total deposits of
ten commercial banks that had branch(es) in Taylor County, at June 30, 1997, the
latest date for which information is available. The branch in Lubbock had the
tenth largest total deposits of twenty-one banks that had branch(es) in Lubbock
County at June 30, 1997. The combined branches in Odessa had the sixth largest
total deposits of eight banks that had branch(es) in Ector County at June 30,
1997. The branch in San Angelo had the eighth largest total deposits of ten
banks that had branch(es) in Tom Green County at June 30, 1997. The branches in
Stamford and Winters were the largest bank branches in Jones and Runnels
Counties, respectively, in terms of total deposits at June 30, 1997.
ACQUISITION AND BRANCH ACTIVITIES
PENDING ACQUISITION. On May 29, 1998, the Company entered into a
definitive agreement to acquire Azle Bancorp and its subsidiary, Azle State. See
"Pending Acquisition."
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. 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 395,312 shares of
its common stock at a price of $11.40 per share (which included 51,562 shares
covered by the underwriter's over-allotment option). The Company borrowed
$800,000 from an 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 and the remaining principal amount of
this borrowing was paid in full by December 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." This acquisition was accounted for using the
purchase method of accounting. A total of $2,486,000 of goodwill was recorded as
a result of this transaction. At the date of acquisition, Crown Park had, on a
consolidated basis, total assets of $60,420,000, total deposits of $53,604,000,
total loans, net of unearned income, of $41,688,000, and stockholders' equity of
$4,238,000.
The Company has and expects to continue to realize savings in the area of
noninterest expenses through consolidation of the operations of Western National
into the Bank. In addition to the immediate increase in asset
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size and the potential for improved future profitability, the Crown Park
acquisition has allowed the Company to expand its market area into what the
Company believes is a desirable banking location. This expansion has increased
the geographic diversity of the Company's loan portfolio, and, thus, should
decrease the Company's overall lending risks.
ALBERTSON'S SUPERMARKET BRANCHES. During the second quarter of 1997, the
Bank filed an application with the Office of the Comptroller of the Currency
("Comptroller") to establish four additional branch banking facilities. These
facilitates, two in Abilene and two in Odessa, are to be located in Albertson's
supermarkets. The Bank received approval to open the branches during the third
quarter and in October 1997 opened two full-service branch locations in
Albertson's supermarkets, one in Abilene and one in Odessa. One additional
branch in another Albertson's supermarket in Odessa opened in May 1998. No
definitive plans have been established for opening the fourth branch in Abilene
at this time. Management of the Company believes that establishing bank branches
in supermarkets is one of the most economical ways to increase the Bank's market
share in its West Texas market area.
Business Objectives and 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 core deposits as a funding base to support local
commercial and consumer lending programs. To accomplish this strategy, the
Company has focused its efforts in the following areas.
SOPHISTICATION AND BREADTH OF PRODUCTS; PERSONAL SERVICES. The Company's
goal 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 local appeal of a community bank. As a result
of consolidation in the financial industry within the Company's marketplace, the
Company believes there are few financial institutions with larger lending limits
that are willing to provide the personal service to which the Company is
committed.
DECENTRALIZED DECISION MAKING. The Company's decentralized decision making
authority, vested in the president 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 and has contributed to a 17% increase in
the Company's commercial loan portfolio during the twelve-month period ended
June 30, 1998.
CREDIT QUALITY STANDARDS. Attention to credit quality standards has allowed
the Company to expand its commercial loan portfolio while maintaining superior
asset quality. Nonperforming assets were 0.18% of total assets at June 30,
1998.
EFFICIENT AND CONVENIENT DELIVERY SYSTEMS. The Company seeks to maintain
and expand efficient and convenient delivery systems for the Company's products
and services. Examples of the Company's efforts toward this goal include the
expansion of its branch network by locating banking centers in a leading
supermarket chain in Abilene and Odessa and the introduction of computer and
telephone home banking. Additionally, the Company maintains fifteen (15) ATM's
throughout its market.
ACQUISITION ACTIVITY. The Company's acquisition activity has been designed
to increase market share and expand into contiguous markets demographically
similar to the Company's current service areas. Following the acquisition of
Azle Bancorp and its subsidiary Azle State, the Company will have locations in
or near five of the major markets in West and North Central Texas. Management
believes that the acquisition of Azle Bancorp will increase the profitability of
the Company through increased operating efficiencies and an increase in the loan
to deposit ratio and by allowing the Company to cross-sell a more expansive
product line to newly acquired customers.
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
outside 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 issuers 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 June 30, 1998, the Company and the Bank had 133 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.
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Properties
At June 30, 1998, the Company occupied approximately 600 square feet of
space for its corporate offices at 547 Chestnut Street, Abilene, Texas. The Main
Bank occupies approximately 8,000 square feet at this same facility. The
following table sets forth, at June 30, 1998, 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; occupied by
the Main Bank and the Company
Abilene, Texas 3,500 Owned by the Bank; occupied by
the Wylie Branch
Abilene, Texas 400 Leased by the Bank; occupied by
the Buffalo Gap Road Branch
Lubbock, Texas 23,200(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; occupied by
the Winwood Branch
Odessa, Texas 400 Leased by the Bank; occupied by
the 42nd Street Branch
Odessa, Texas 400 Leased by the Bank; occupied by
the County Road West 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; occupied by
the Stamford Branch
Winters, Texas 9,500 Owned by the Bank; occupied by
the Winters Branch
</TABLE>
- ---------------
(1) The Lubbock Branch occupies approximately 13,300 square feet, leases 8,400
square feet and is attempting to lease the remaining 1,500 square feet.
(2) The Odessa Branch occupies approximately 18,500 square feet, leases 29,200
square feet and is attempting to lease the remaining 14,700 square feet.
(3) The San Angelo Branch occupies approximately 3,400 square feet and leases
approximately 3,400 square feet.
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, 1997, were $51,000. This amount represents
rentals paid for the lease of land by the Wylie Branch and of banking premises
by the Winwood, Buffalo Gap Road and 42nd Street Branches of the Bank.
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Legal Proceedings
In November 1995, the Pension Benefit Guaranty Corporation (the "PBGC")
sent a letter to the Company regarding the Retirement Plan for Employees (the
"Plan") of the Texas Bank and Trust Co., Sweetwater, Texas ("Texas Bank"). In
the letter, the PBGC alleged that the Company was responsible for the Plan and
asked that the Company assume sponsorship of the Plan. The Company declined the
PBGC's request to assume responsibility for, and sponsorship of, the Plan. If
the Company had assumed responsibility for the Plan, the Company would have owed
as of June 30, 1995, according to PBGC calculations, approximately $656,000 to
the PBGC. In response, the PBGC, in June 1996, terminated the Plan and became
the Plan's trustee, effective as of June 30, 1992.
Texas Bank became a repossessed asset of The First State Bank, Abilene,
Texas ("FSB--Abilene"), a former subsidiary of the Company, through a bank
foreclosure that occurred in 1985. FSB--Abilene was placed into receivership by
the FDIC on February 17, 1989. Texas Bank was placed into receivership by the
FDIC on July 27, 1989.
The Company did not intend to assume any responsibility for the Plan and
had decided to vigorously contest any attempt by the PBGC to have the Company
assume responsibility with respect to any aspect of the Plan. The statute of
limitations for any action to be taken by the PBGC against the Company regarding
this matter was set to expire on June 30, 1998. The PBGC indicated to the
Company that as of June 30, 1998, the Company's potential responsibility to the
Plan, according to PBGC calculations, was in excess of $1,000,000. The Company
and the PBGC entered into settlement negotiations, and on June 30, 1998, the
Company and the PBGC executed a tolling agreement to extend the expiration of
the statute of limitations regarding this matter to July 20, 1998. A settlement
agreement was negotiated and consummated on July 20, 1998, and the Company paid
a total of $125,000 ($83,000, net of tax) to the PBGC to settle the matter and
avoid costs of litigation. The settlement amount was expensed in the Company's
Consolidated Financial Statements at June 30, 1998.
The Company is involved in various 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.
REGULATION AND SUPERVISION
General
The Company and the Bank are extensively regulated under federal and state
law. These laws and regulations are intended to protect depositors, not
shareholders. To the extent that the following information describes statutory
or regulatory provisions, it is qualified in its entirety by reference to the
particular statutory or regulatory provisions. Any change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company. The operations of the Company may be affected by legislative changes
and by the policies of various regulatory authorities. The Company is unable to
predict the nature or the extent of the effects on its business and earnings
that fiscal or monetary policies, economic controls or new federal or state
legislation may have in the future.
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956 (as amended, the "BHCA") and, as such, is subject to
regulation, supervision and examination by the Board of Governors of the Federal
Reserve. The Company is required to file annual reports with the Federal Reserve
and to provide the Federal Reserve such additional information as it may
require.
The Bank, as a national banking association, is subject to the supervision
and regulation of the Office the Comptroller of the Currency (the "OCC").
Because the FDIC provides deposit insurance to the Bank, the Bank is also
subject to supervision and regulation by the FDIC (even though the FDIC is not
its primary federal regulator).
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Recent and Pending Legislation
The enactment of the legislation described below has significantly affected
the banking industry generally and will have an ongoing effect on the Company
and the Bank in the future.
Financial Institutions Reform, Recovery and Enforcement Act Of 1989
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
("FIRREA") reorganized and reformed the regulatory structure applicable to
financial institutions generally. FIRREA, among other things, enhanced the
supervisory and enforcement powers of the federal bank regulatory agencies,
required insured financial institutions to guarantee repayment of losses
incurred by the FDIC in connection with the failure of an affiliated financial
institution, required financial institutions to provide their primary federal
regulator with notice (under certain circumstances) of changes in senior
management and broadened authority for bank holding companies to acquire savings
institutions.
Under FIRREA, federal bank regulators were granted expanded enforcement
authority over "institution-affiliated parties" (i.e., officers, directors,
controlling shareholders, as well as attorneys, appraisers or accountants who
knowingly or recklessly participate in wrongful action likely to have an adverse
effect on an insured institution). Federal banking regulators have greater
flexibility to bring enforcement actions against insured institutions and
institution-affiliated parties, including cease and desist orders, prohibition
orders, civil money penalties, termination of insurance and the imposition of
operating restrictions and capital plan requirements. These enforcement actions,
in general, may be initiated for violations of laws and regulations and unsafe
or unsound practices. Since the enactment of FIRREA, the federal bank regulators
have significantly increased the use of written agreements to correct compliance
deficiencies with respect to applicable laws and regulations and to ensure safe
and sound practices. Violations of such written agreements are grounds for
initiation of cease-and-desist proceedings. FIRREA granted the FDIC back-up
enforcement authority to recommend enforcement action to an appropriate federal
banking agency and to bring such enforcement action against a financial
institution or an institution-affiliated party if such federal banking agency
fails to follow the FDIC's recommendation. FIRREA also requires, except under
certain circumstances, public disclosure of final enforcement actions by the
federal banking agencies.
FIRREA also established a cross-guarantee provision pursuant to which the
FDIC may recover from a depository institution losses that the FDIC incurs in
providing assistance to, or paying off the insured depositors of, any of such
depository institution's affiliated insured banks or thrifts. The cross-
guarantee thus enables the FDIC to assess a holding company's healthy BIF
members and SAIF members for the losses of any of such holding company's failed
BIF and SAIF members. Cross-guarantee liabilities are generally superior in
priority to obligations of the depository institution to its shareholders due
solely to their status as shareholders and obligations to other affiliates.
Cross-guarantee liabilities are generally subordinated, except with respect to
affiliates, to deposit liabilities, secured obligations or any other general or
senior liabilities, and any obligations subordinated to depositors or other
general creditors.
The Federal Deposit Insurance Corporation Improvement Act Of 1991
FDICIA was adopted to recapitalize the BIF and impose certain supervisory
and regulatory reforms on insured depository institutions. FDICIA, in general,
includes provisions, among others, to (i) increase the FDIC's line of credit
with the U.S. Treasury in order to provide the FDIC with additional funds to
cover the losses of federally insured banks, (ii) reform the deposit insurance
system, including the implementation of risk-based deposit insurance premiums,
(iii) establish a format for closer monitoring of financial institutions to
enable prompt corrective action by banking regulators when a financial
institution begins to experience financial difficulty, (iv) establish five
capital levels for financial institutions ("well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized") that impose more scrutiny and restrictions on
less capitalized institutions, (v) require the banking regulators to set
operational and managerial standards for all insured depository institutions and
their holding companies, including limits on excessive compensation to executive
officers, directors, employees and principal shareholders, and establish
standards for
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loans secured by real estate, (vi) adopt certain accounting reforms and require
annual on-site examinations of federally insured institutions, including the
ability to require independent audits of banks and thrifts, (vii) revise risk-
based capital standards to ensure that they (a) take adequate account of
interest-rate changes, concentration of credit risk and the risks of
nontraditional activities, and (b) reflect the actual performance and expected
risk of loss of multi-family mortgages, and (viii) restrict state-chartered
banks from engaging in activities not permitted for national banks unless they
are adequately capitalized and have FDIC approval. FDICIA also authorized the
FDIC to make special assessments on insured depository institutions, in amounts
determined by the FDIC to be necessary to give it sufficient assessment income
to repay amounts borrowed from the U.S. Treasury and other sources or for any
other purpose the FDIC deems necessary. FDICIA also grants authority to the FDIC
to establish semiannual assessment rates on BIF and SAIF member banks so as to
maintain these funds at the designated reserve ratios.
FDICIA, as noted above, authorizes and (under certain circumstances)
requires the federal banking agencies to take certain actions against
institutions that fail to meet certain capital-based requirements. The federal
banking agencies are required, under FDICIA, to establish five levels of insured
depository institutions based on leverage limit and risk-based capital
requirements established for institutions subject to their jurisdiction plus, in
their discretion, individual additional capital requirements for such
institutions. Under the final rules that have been adopted by each of the
federal banking agencies, an institution is designated (i) "well-capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or
greater, and the institution is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized" if
the institution has a total risk-based capital ratio of 8% or greater, a Tier 1
risk-based capital ratio of 4% or greater, and a leverage ratio of 4% or
greater, (iii) "undercapitalized" if the institution has a total risk-based
capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is
less than 4%, or a leverage ratio that is less than 4%, (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, a Tier 1 risk-based capital ratio that is less than 3%, or a
leverage ratio that is less than 3%, and (v) "critically undercapitalized" if
the institution has a ratio of tangible equity to total assets that is equal to
or less than 2%.
"Undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" institutions are required to submit capital restoration plans
to the appropriate federal banking agency and are subject to certain operational
restrictions. Companies controlling an undercapitalized institution are also
required to guarantee the subsidiary institution's compliance with the capital
restoration plan subject to an aggregate limitation of the lesser of 5% of the
institution's assets at the time it received notice that it was undercapitalized
or the amount of the capital deficiency when the institution first failed to
meet the plan.
Significantly or critically undercapitalized institutions and
undercapitalized institutions that do not submit or comply with acceptable
capital restoration plans are subject to restrictions on the compensation of
senior executive officers and to additional regulatory sanctions that may
include a forced offering of shares or merger, restrictions on affiliate
transactions, restrictions on rates paid on deposits, asset growth and new
activities, the dismissal of directors or senior executive officers and
mandatory divestitures by the institution or its parent company. The banking
agency must require the offering of shares or merger and restrict affiliate
transactions and the rates paid on deposits unless it is determined that they
would not further capital improvement. FDICIA generally requires the appointment
of a conservator or receiver within 90 days after an institution becomes
critically undercapitalized. The federal banking agencies have adopted uniform
procedures for the issuance of directives by the appropriate federal banking
agency. Under these procedures, an institution will generally be provided
advance notice when the appropriate federal banking agency proposes to impose
one or more of the sanctions set forth above. These procedures provide an
opportunity for the institution to respond to the proposed agency action or,
where circumstances warrant immediate agency action, an opportunity for
administrative review of the agency's action.
As described under "Management's Discussion and Analysis--Capital
Resources," both the Company and the Bank were "well capitalized" at June 30,
1998 and December 31, 1997.
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Pursuant to FDICIA, the Federal Reserve and the other federal banking
agencies adopted real estate lending guidelines pursuant to which each insured
depository institution is required to adopt and maintain written real estate
lending policies in conformity with the prescribed guidelines. Under these
guidelines, each institution is expected to set loan-to-value ratios not
exceeding the supervisory limits set forth in the guidelines. A loan-to-value
ratio is generally defined as the total loan amount divided by the appraised
value of the property at the time the loan is originated. The guidelines require
that the institution's real estate policy include proper loan documentation and
prudent underwriting standards. These guidelines became effective on March 19,
1993. These rules have had no material adverse impact on the Company and the
Bank.
FDICIA also contained the Truth in Savings Act, which requires clear and
uniform disclosure of the rates of interest payable on deposit accounts by
depository institutions, and the fees assessable against deposit accounts, so
that consumers can make a meaningful comparison between the competing claims of
financial institutions with regard to deposit accounts and products.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Act") in September 1994. Since September
1995, bank holding companies have the right to expand, by acquiring existing
banks, into all states, even those which had theretofore restricted entry. The
legislation also provided that, subject to future action by individual states, a
holding company has the right, commencing in 1997, to convert the banks which
its owns in different states to branches of a single bank. A state was permitted
to "opt out" of provisions of the Interstate Act which permitted conversion of
separate banks to branches, but was not permitted to "opt out" of the law
allowing bank holding companies from other states to enter the state. Texas has
adopted legislation to "opt out" of the interstate branching provisions (which
Texas law currently expires on September 2, 1999). NationsBank of Texas, N.A.
circumvented this legislation by converting, through merger, its Texas branches
into branches of its principal North Carolina-based bank. This merger was
vigorously opposed by the Texas Banking Commissioner but the Commissioner has
now acquiesced to the transaction. The federal legislation also establishes
limits on acquisitions by large banking organizations, providing that no
acquisition may be undertaken if it would result in the organization having
deposits exceeding either 10% of all bank deposits in the United States or 30%
of the bank deposits in the state in which the acquisition would occur.
Economic Growth and Regulatory Paperwork Reduction Act of 1996
The Economic Growth and Regulatory Paperwork Reduction Act of 1996
("EGRPRA") was signed into law on September 30, 1996. EGRPRA streamlined the
non-banking activities application process for well-capitalized and well-managed
bank holding companies. Under EGRPRA, qualified bank holding companies may
commence a regulatorily approved non-banking activity without prior notice to
the Federal Reserve; written notice is required within 10 days after commencing
the activity. Under EGRPRA, the prior notice period is reduced to 12 days in the
event of any non-banking acquisition or share purchase, assuming the size of the
acquisition does not exceed 10% of risk-weighted assets of the acquiring bank
holding company and the consideration does not exceed 15% of Tier 1 capital. The
foregoing prior notice requirement also applies to commencing non-banking
activity de novo which has been previously approved by order of the Federal
Reserve, but not yet implemented by regulations.
Pending Legislation
Because of concerns relating to competitiveness and the safety and
soundness of the banking industry, Congress is considering a number of wide-
ranging proposals for altering the structure, regulation and competitive
relationships of the nation's financial institutions. Among such bills are new
proposals to merge the BIF and the SAIF insurance funds, to eliminate the
federal thrift charter, to alter the statutory separation of commercial and
investment banking and to further expand the powers of banks, bank holding
companies and competitors of banks. It cannot be predicted whether or in what
form any of these proposals will be adopted or the extent to which the business
of the Company may be affected thereby.
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Bank And Bank Holding Company Regulation
Under the BHCA, the activities of a bank holding company are limited to
businesses so closely related to banking, managing or controlling banks as to be
a proper incident thereto. The Company is also subject to capital requirements
applied on a consolidated basis in a form substantially similar to those
required of the Bank. The BHCA also requires a bank holding company to obtain
approval from the Federal Reserve before (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares), (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company, or (iii) merging or consolidating with another bank holding company.
The Federal Reserve will not approve any acquisition, merger or consolidation
that would have a substantially anticompetitive result, unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in meeting the convenience and needs of the community to
be served. The Federal Reserve also considers capital adequacy and other
financial and managerial factors in reviewing acquisitions or mergers.
The BHCA also prohibits a bank holding company, with certain limited
exceptions, (i) from acquiring or retaining direct or indirect ownership or
control of more than 5% of the voting shares of any company which is not a bank
or bank holding company, or (ii) from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, or
providing services for its subsidiaries. The principal exceptions to these
prohibitions involve certain non-bank activities which, by statute or by Federal
Reserve regulation or order, have been identified as activities closely related
to the business of banking or of managing or controlling banks. The Federal
Reserve, in making such determination, considers whether the performance of such
activities by a bank holding company can be expected to produce benefits to the
public such as greater convenience, increased competition or gains in efficiency
in resources, which can be expected to outweigh the risks of possible adverse
effects such as decreased or unfair competition, conflicts of interest or
unsound banking practices. FIRREA (described in more detail herein) made a
significant addition to the list of permitted non-bank activities for bank
holding companies by providing that bank holding companies may acquire thrift
institutions upon approval by the Federal Reserve.
Insurance of Accounts
The FDIC provides insurance, through the BIF, to deposit accounts at the
Bank to a maximum of $100,000 for each insured depositor.
Through December 31, 1992, all FDIC-insured institutions, whether members
of the BIF or the Savings Association Insurance Fund ("SAIF"), paid the same
premium (23 cents per $100 of assessable deposits) under a flat-rate system
mandated by law. FDICIA required the FDIC to raise the reserves of the BIF and
the SAIF, implement a risk-related premium system and adopt a long-term schedule
for recapitalizing the BIF. Effective January 1, 1993, the FDIC amended its
regulations regarding insurance premiums to provide that a bank or thrift would
pay an insurance assessment within a range of 23 cents to 31 cents for each $100
of assessable deposits, depending on its risk classification.
Effective January 1, 1996, the FDIC implemented an amendment to the BIF
risk-based assessment schedule which effectively eliminated deposit insurance
assessments for most commercial banks and other depository institutions with
deposits insured by the BIF only, while maintaining the assessment rate for
SAIF-insured institutions in even the lowest risk-based premium category at 23
cents for each $100 of assessable deposits. Following enactment of EGRPRA, the
overall assessment rate for 1997 for institutions in the lowest risk-based
premium category was revised to equal 1.29 cents and 6.44 cents for each $100 of
assessable deposits of BIF and SAIF, respectively, in comparison to the prior
assessment rate for such institutions, applicable only to SAIF deposits, of 23
cents for each $100 of assessable deposits. At this time, the deposit insurance
assessment rate for institutions in the lowest risk-based premium category is
zero, and all of the assessments paid by institutions in this category are used
to service debt issued by the Financing Corporation, a federal agency
established to finance the recapitalization of the former Federal Savings and
Loan Insurance Corporation.
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The Preferred Securities offered by this Prospectus are not savings or
deposit accounts, are not obligations of any banking or nonbanking affiliate of
the Company (except to the extent that the Preferred Securities are guaranteed
by the Company as described herein), and are not insured by the FDIC, the BIF or
any other governmental agency and involve investment risks, including possible
loss of principal.
Regulations Governing Capital Adequacy
The federal bank regulatory agencies use capital adequacy guidelines in
their examination and regulation of bank holding companies and banks. If the
capital falls below the minimum levels established by these guidelines, the bank
holding company or bank may be denied approval to acquire or establish
additional banks or nonbank businesses or to open facilities.
The Federal Reserve and the OCC adopted risk-based capital guidelines for
banks and bank holding companies. The risk-based capital guidelines are designed
to make regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, to account for off-balance sheet
exposure and to minimize disincentives for holding liquid assets. Assets and
off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
Federal Reserve has noted that bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital ratios
and should maintain ratios well in excess of the minimums. Under these
guidelines, all bank holding companies and federally regulated banks must
maintain a minimum risk-based total capital ratio equal to 8%, of which at least
one-half must be Tier 1 capital.
The Federal Reserve also has implemented a leverage ratio, which is Tier 1
capital to total assets, to be used as a supplement to the risk-based
guidelines. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank holding company may leverage
its equity capital base. The Federal Reserve requires a minimum leverage ratio
of 3%. For all but the most highly-rated bank holding companies and for bank
holding companies seeking to expand, however, the Federal Reserve expects that
additional capital sufficient to increase the ratio by at least 100 to 200 basis
points will be maintained.
On October 21, 1996, the Federal Reserve issued a press release announcing
that it had approved the use of certain cumulative preferred stock instruments,
such as the Preferred Securities, in Tier 1 capital for bank holding companies.
Because, subject to certain regulatory limitations, the Preferred Securities may
qualify as Tier 1 capital and, under current United States federal tax law, the
issuer will receive a tax deduction for interest in respect of the Subordinated
Debentures, the issuance of the Preferred Securities is a cost effective method
of raising capital on an after-tax basis.
See "Management's Discussion and Analysis--Capital Resources" for a
discussion of the capital adequacy of the Company and the Bank.
Management of the Company believes that the risk-weighting of assets and
the risk-based capital guidelines do not have a material adverse impact on the
Company's operations or on the operations of the Bank. The requirement of
deducting certain intangibles in computing capital ratios contained in the
guidelines, however, could adversely affect the ability of the Company to make
acquisitions in the future in transactions that would be accounted for using the
purchase method of accounting. Although these requirements would not reduce the
ability of the Company to make acquisitions using the pooling of interests
method of accounting, the Company has not historically made, and has no present
plans to make, acquisitions on this basis.
Community Reinvestment Act
The Community Reinvestment Act of 1977 requires that, in connection with
examinations of financial institutions within their jurisdiction, the federal
banking regulators must evaluate the record of the financial institutions in
meeting the credit needs of their local communities, including low and moderate
income
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neighborhoods, consistent with the safe and sound operation of those banks.
These factors are also considered in evaluating mergers, acquisitions and
applications to open a branch or facility.
Regulations Governing Extensions of Credit
The Bank is subject to certain restrictions imposed by the Federal Reserve
Act on extensions of credit to the Company or the Bank, or investments in their
securities and on the use of their securities as collateral for loans to any
borrowers. These regulations and restrictions limit the ability of the Company
to borrow funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest and operating expenses.
Further, under the BHCA and certain regulations of the Federal Reserve, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tying arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, the Bank may not generally
require a customer to obtain other services from the Bank or the Company, and
may not require the customer to promise not to obtain other services from a
competitor as a condition to an extension of credit to the customer.
The Bank is also subject to certain restrictions imposed by the Federal
Reserve Act on extensions of credit to executive officers, directors, principal
shareholders or any related interest of such persons. Extensions of credit (i)
must be made on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that are not less
stringent than, those prevailing at the time for comparable transactions with
persons not covered above and who are not employees, and (ii) must not involve
more than the normal risk of repayment or present other unfavorable features.
The Bank is also subject to certain lending limits and restrictions on
overdrafts to such persons.
Reserve Requirements
The Federal Reserve requires all depository institutions to maintain
reserves against their transaction accounts and non-personal time deposits.
Reserves of 3% must be maintained against net transaction accounts of $47.8
million or less (subject to adjustment by the Federal Reserve) and an initial
reserve of $1,434,000 plus 10% (subject to adjustment by the Federal Reserve to
a level between 8% and 14%) must be maintained against that portion of net
transaction accounts in excess of such amount. The balances maintained to meet
the reserve requirements imposed by the Federal Reserve may be used to satisfy
liquidity requirements.
Institutions are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve regulations require institutions to
exhaust other reasonable alternative sources of funds, including Federal Home
Loan Bank advances, before borrowing from the Federal Reserve Bank.
Dividends
The Company's primary sources of funds are the dividends and management
fees paid by the Bank. The ability of the Bank to pay dividends and management
fees is limited by various state and federal laws, by the regulations
promulgated by their respective primary regulators and by the principles of
prudent bank management.
Monetary Policy And Economic Control
The commercial banking business in which the Company engages is affected
not only by general economic conditions, but also by the monetary policies of
the Federal Reserve. Changes in the discount rate on member bank borrowing,
availability of borrowing at the "discount window," open market operations, the
imposition of changes in reserve requirements against member banks deposits and
assets of foreign branches, and the imposition of and changes in reserve
requirements against certain borrowings by banks and their affiliates are some
of the instruments of monetary policy available to the Federal Reserve. These
monetary policies are used in varying combinations to influence overall growth
and distributions of bank loans, investments and deposits, and such use may
affect interest rates charged on loans or paid on deposits. The monetary
policies of the Federal Reserve have had a significant effect on the operating
results of commercial banks and are expected to do so in the future. The
monetary policies of the Federal Reserve are influenced by various factors,
including inflation, unemployment, short-term and long-term changes in the
international trade balance and in the fiscal policies of the U.S. Government.
Future monetary
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policies and the effect of such policies on the future business and earnings of
the Company and the Bank cannot be predicted.
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the directors
and executive officers of the Company and the Bank as of the date hereof:
<TABLE>
<CAPTION>
Year First
Became a Director
Name and Age of the Company Principal Occupation During Last Five Years
- -------------------------- ----------------- ------------------------------------------------------
<S> <C> <C>
Scott L. Taliaferro (76) 1980 Chairman of the Board of the Company and President
of Scott Oils, Inc. (oil and gas drilling)
Bryan W. Stephenson (48) 1989 President and Chief Executive Officer of the
Company; Chairman of the Board of the Bank
Randal N. Crosswhite (44) 1995 Senior Vice President, Chief Financial Officer and
Corporate Secretary of the Company
Thomas C. Darden (42) N/A Lubbock Branch President of the Bank (1997 to
present); previously, Executive Vice President of
Plains National Bank, Lubbock, Texas
James G. Fitzhugh (49) N/A Abilene Branch President of the Bank (1997 to
present); previously, President of the Bank
Michael D. Jarrett (48) N/A Odessa Branch President of the Bank (1997 to
present); previously, President of First State Bank,
N.A., Odessa, a former subsidiary bank
John L. Beckham (39) 1998 Attorney at Law, Beckham, Rector & Eargle, LLP
Lee Caldwell (63) 1985 Attorney at Law
Mrs. Wm. R. (Amber) Cree (67) 1982 Entrepreneuse
Louis S. Gee (75) 1981 Chairman of the Board and Chief Executive Officer of
Tippett & Gee, Inc. (mechanical engineering)
Nancy E. Jones (48) 1998 Executive Director of the Community Foundation of
Abilene
Marshal M. Kellar (65) 1981 A principal of West Texas Wholesale Supply
Company (hardware)
Tommy McAlister (49) 1985 President of McAlister, Inc. (investments)
James D. Webster, M.D. (58) 1988 Physician
C.G. Whitten (73) 1980 Attorney at Law, Whitten & Young, P.C. (1997 to
present); previously, Senior Vice President, General
Counsel and Corporate Secretary of Pittencrieff
Communications, Inc. (telecommunications)
</TABLE>
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<PAGE>
John A. Wright (79) 1980 Bank Consultant
In addition, Messrs. Stephenson, Crosswhite, Darden, Fitzhugh and Jarrett
serve as directors of the Bank.
Board of Directors; Election of Officers
The Company has a classified Board of Directors currently comprised of
thirteen members (exclusive of advisory directors), with directors serving
staggered three-year terms. One class is elected at each annual meeting of the
Company's shareholders. The terms of Madame Cree and Messrs. McAlister, Webster
and Wright expire in 1999. The terms of Messrs. Caldwell, Crosswhite, Gee and
Kellar expire in 2000 and the terms of Madame Jones and Messrs. Beckham,
Stephenson, Taliaferro and Whitten expire in 2001.
All directors hold office until their successors are duly elected and
qualified. Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum except that any vacancy on the Board of Directors resulting from the
removal of a director by the shareholders must be filled only by the
shareholders entitled to vote at an annual or special meeting called for that
purpose. A director elected to fill a vacancy is elected for the unexpired term
of his predecessor in office. Any directorship to be filled by reason of an
increase in the number of directors must be filled by election at an annual
meeting or at a special meeting of the shareholders entitled to vote called for
that purpose.
The Bylaws of the Company provide for advisory directors. The following
individuals currently serve as advisory directors of the Company: Arlas Cavett,
L.H. Mosley and J.E. Smith.
Executive officers of the Company are elected by the Board of Directors at
its annual meeting and hold office until the next annual meeting of the Board of
Directors or until their respective successors are duly elected and have
qualified. The officers of the Bank are elected by the board of directors of the
Bank at its annual meeting and hold office until the next annual meeting of such
board of directors or until their respective successors are duly elected and
have qualified.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table and notes thereto set forth certain information as July
15, 1998, and as adjusted to reflect the Pending Acquisition and the sale of the
Common Stock offered by this Prospectus with respect to the shares of Common
Stock beneficially owned by (i) each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each director,
advisory director and named executive officer and (iii) all current directors
and executive officers of the Company as a group. There are no Preferred
Securities currently outstanding.
<TABLE>
<CAPTION>
Shares Beneficially Owned Shares Beneficially Owned
Before the Offering(1) After the Offering(1)
----------------------------- ----------------------------
Name and Address of Beneficial Owner Number Percent(2) Number Percent(3)
- ------------------------------------ -------------- ------------- ----------- ---------------
5% Stockholders
- ---------------
<S> <C> <C> <C> <C>
Independent Bankshares, Inc........................ 155,099 7.80% 155,099 6.72%
Employee Stock Ownership/401(k) Plan
P.O. Box 3296
Abilene, Texas 79604
Bryan W. Stephenson................................ 107,794(4) 5.40 107,794(4) 4.65
547 Chestnut
Abilene, Texas 79602
Scott L. Taliaferro, Jr............................ 100,313(5) 5.05 100,313(5) 4.35
P.O. Box 240
Abilene, Texas 79604
Farmers & Merchants Company........................ 99,942(6) 5.03 99,942(6) 4.33
</TABLE>
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<PAGE>
c/o First National Bank Trust Department
P.O. Box 701
Abilene, Texas 79604
<TABLE>
<CAPTION>
Directors and Executive Officers
- --------------------------------
<S> <C> <C> <C> <C>
John L. Beckham.................................... 1,500 0.08 1,500 0.07
Lee Caldwell....................................... 14,206 0.71 14,206 0.62
Arlas Cavett*...................................... 25,575(7) 1.29 25,575(7) 1.11
Mrs. Wm. R. (Amber) Cree........................... 4,527 0.23 4,527 0.20
Randal N. Crosswhite............................... 24,503(8) 1.23 24,503(8) 1.06
Thomas C. Darden................................... 0 -- 0 --
James G. Fitzhugh.................................. 14,013(9) 0.71 14,013(9) 0.61
Louis S. Gee....................................... 45,032(10) 2.25 45,032(10) 1.94
Michael D. Jarrett................................. 7,154(11) 0.36 7,154(11) 0.31
Nancy E. Jones..................................... 0 -- 0 --
Marshal M. Kellar.................................. 1,931(12) 0.10 1,931(12) 0.08
Tommy McAlister.................................... 5,360(13) 0.27 5,360(13) 0.23
L.H. Mosley*....................................... 55,309 2.77 55,039 2.39
J.E. Smith*........................................ 3,875(14) 0.19 3,875(14) 0.17
Bryan W. Stephenson................................ 107,794(4) 5.40 107,794(4) 4.65
Scott L. Taliaferro................................ 79,961(15) 4.02 79,961(15) 3.47
James D. Webster, M.D.............................. 885 0.04 885 0.04
C.G. Whitten....................................... 6,550 0.33 6,550 0.28
John A. Wright..................................... 89,250 4.49 89,250 3.87
All executive officers and directors as a group
(19 individuals, including the executive officers
and directors listed above)........................ 487,155(16) 24.25% 487,155(16) 20.92%
</TABLE>
- ------------------
* Advisory Director.
(1) Beneficial ownership as reported in the above table has been determined in
accordance with Rule 13d-3 under the Exchange Act. Unless as otherwise
indicated, all shares are owned directly, and each person has sole voting
and investment power with respect to the shares reported.
(2) The percentage of Common Stock indicated is based on 1,987,296 shares of
Common Stock issued and outstanding at July 15, 1998.
(3) The percentage of Common Stock indicated is based on 2,307,296 shares of
Common Stock issued and outstanding upon consummation of the offering made
hereby.
(4) Includes 15,088 shares owned by Mr. Stephenson's wife and minor children
and 9,624 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock owned by Mr. Stephenson's wife. Also
includes Mr. Stephenson's beneficial ownership of 12,219 shares held by the
Plan.
(5) Includes 99,942 shares held by Farmers and Merchants Company, Abilene,
Texas, as trustee for Mr. Taliaferro.
(6) Constitutes shares held in trust for the benefit of Scott L. Taliaferro,
Jr.
(7) Includes 17,956 shares owned by Cavett & Frost, a general partnership in
which Mr. Cavett is a 50% partner, and 971 shares owned by Cavett, Inc. Mr.
Cavett is President and a 50% shareholder of Cavett, Inc.
(8) Includes Mr. Crosswhite's beneficial ownership of 11,135 shares held by the
Plan.
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<PAGE>
(9) Includes Mr. Fitzhugh's beneficial ownership of 9,212 shares held by the
Plan.
(10) Includes 14,467 shares owned by Tippett & Gee, Inc. Mr. Gee is the
Chairman of the Board and majority shareholder of Tippett & Gee, Inc. Also
includes 11,484 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock.
(11) Includes Mr. Jarrett's beneficial ownership of 4,654 shares held by the
Plan.
(12) Includes 1,931 shares owned by M & G Kellar Investment Limited
Partnership, a partnership in which Mr. Kellar is a general partner.
(13) Includes 3,235 shares owned by McAlister Oil Co., Inc. Mr. McAlister is
President and sole shareholder of McAlister Oil Co., Inc. Also includes 689
shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock owned by McAlister Oil Co., Inc.
(14) Includes 1,750 shares owned by Mr. Smith's wife.
(15) Includes 1,240 shares owned by Mr. Taliaferro's wife.
(16) Includes 21,797 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock. Also includes such executive
officers' beneficial ownership of 37,220 shares held by the Plan.
DESCRIPTION OF CAPITAL STOCK
Common Stock
The Company is authorized to issue 30,000,000 shares of Common Stock of
which 1,987,296 shares were issued and outstanding at July 15, 1998.
Holders of Common Stock are entitled to receive dividends when, as and
if declared by the Board of Directors from funds legally available therefor.
Each share of Common Stock entitles the holder thereof to one vote upon matters
voted upon by the shareholders. Cumulative voting for the election of directors
is not permitted, which means that the holders of a majority of shares voting
for the election of directors can elect all members of each class of the Board
of Directors. Except as otherwise required by applicable Texas law and under the
Fair Price provision described below, a two-thirds vote is sufficient for any
action that requires the vote or concurrence of shareholders, except that a
plurality vote is sufficient to elect directors.
The holders of Common Stock do not have any preemptive, subscription,
redemption or conversion rights or privileges. Upon liquidation or dissolution
of the Company, the holders of Common Stock are entitled to share ratably in the
net assets of the Company remaining after payment of liabilities and liquidation
preferences of any outstanding shares of preferred stock. All shares of Common
Stock now outstanding are, and shares to be issued in the Offering will be,
fully paid and nonassessable. Each share of Common Stock has the same rights,
privileges and preferences as every other share.
Potential Limits or Qualifications from Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock,
par value $10.00 per share (the "Preferred Stock"), which the Board of Directors
may designate and issue from time to time in one or more series. With respect to
each series of the Preferred Stock, the Board of Directors is authorized to fix
and determine by the resolution or resolutions providing for the issuance of the
series the number of shares to constitute the series and the designation of the
series and any one or more of the following rights and preferences: (i) the rate
of dividend; (ii) the price at and terms and conditions on which shares may be
redeemed; (iii) the amount payable for shares in the event of involuntary or
voluntary liquidation; (iv) sinking funds provisions (if any) for the redemption
or repurchase of the shares; (v) the terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion; and (vi) voting rights (including the number of votes per share, the
matters on which the shares
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<PAGE>
can vote and the contingencies that make voting rights effective). The shares of
each series of the Preferred Stock may vary from the shares of any other series
of Preferred Stock in any or all of the foregoing respects.
Pursuant to action of the Board of Directors, 50,000 shares of Preferred
Stock have been designated as $10.00 Series C Cumulative Convertible Preferred
Stock ("the "Series C Preferred Stock"), and 5,066 shares of Series C Preferred
Stock were issued and outstanding at July 15, 1998. Holders of Series C
Preferred Stock are entitled to receive, if, as and when declared by the Board
of Directors, out of funds legally available therefore, in preference to the
holders of Common Stock and of any other stock ranking junior to the Series C
Preferred Stock in respect of dividends, annual cumulative cash dividends at the
per share rate of $4.20 payable quarterly, in arrears. The Company may not (i)
declare or pay any dividend in respect of the Common Stock or any stock junior
to the Series C Preferred Stock with respect to dividend and liquidation rights
unless, on the date of payment, all accumulated dividends in respect of the
Series C Preferred Stock are paid, or (ii) purchase, redeem or otherwise
acquire, or set aside monies or create a sinking fund for the purchase,
redemption or acquisition of, Common Stock or any such junior preferred stock
generally if the Company has failed to declare and pay (or set aside monies for
the payment of) dividends in respect of the Series C Preferred Stock.
Furthermore, the Company may not declare or pay any dividend in respect of the
Common Stock or purchase or otherwise acquire shares of Common Stock if, on the
record date for such payment, or the date of such purchase or acquisition, such
action would cause stockholders' equity of the Company, as reported in the most
recent quarterly or annual financial statements filed by the Company with the
Securities and Exchange Commission, to be less than an amount equal to the sum
of (i) 140% of the product of the number of then outstanding shares of Series C
Preferred Stock multiplied by $42.00, and (ii) 140% of the product of the number
of then outstanding shares of stock senior to the Series C Preferred Stock with
respect to dividends multiplied by the liquidation amount thereof.
Whenever dividends on the Series C Preferred Stock, or any other class
or series of stock of the Company ranking pari passu with the Series C Preferred
Stock as to dividends, have not been paid in an aggregate amount equal to at
least three quarterly dividends (regardless of whether consecutive), the holders
of Series C Preferred Stock shall be entitled to vote on all corporate matters
on the basis of 105 votes for each share of Series C Preferred Stock held of
record. Such voting rights will terminate when all such dividends accrued and in
default have been paid in full or set aside for payment. Without the affirmative
vote or consent of the holders of at least two-thirds of the total number of
shares of Series C Preferred Stock of the Company at the time outstanding,
voting as a class, the Company may not (i) amend, alter or repeal any of the
rights, preferences or powers of the holders of the Series C Preferred Stock so
as to affect adversely any such rights, preferences or powers, or (ii)
authorize, issue or increase the authorized amount of any class or series of
stock ranking senior to, or pari passu with, the Series C Preferred Stock as to
dividends or upon liquidation, dissolution or winding up of the Company. The
Texas Business Corporation Act provides that the holders of the outstanding
shares of a class will be entitled to vote as a class upon a proposed amendment,
and the holders of the outstanding shares of a series will be entitled to vote
as a class upon a proposed amendment, whether or not entitled to vote thereon by
the provisions of the articles of incorporation, if the amendment would: (i)
increase or decrease the aggregate number of authorized shares of such class or
series; (ii) increase or decrease the par value of the shares of such class,
including changing shares having a par value into shares without par value;
(iii) effect an exchange, reclassification or cancellation of all or part of the
shares of such class or series; (iv) effect an exchange, or create a right of
exchange, of all or any part of the shares of another class into the shares of
such class or series; (v) change the designations, preferences, limitations or
relative rights of the shares of such class or series; (vi) change the shares of
such class or series into the same or different number of shares, either with or
without par value, of the same class or series or another class or series; (vii)
create a new class or series of shares having rights and preferences equal,
prior or superior to the shares of such class or series, or increase the rights
and preferences of any class or series having rights and preferences equal,
prior or superior to the shares of such class or series, or increase the rights
and preferences of any class or series having rights or preferences later or
inferior to the series of such class or series in a manner as to become equal,
prior, or superior to the shares of such class or series; (viii) divide the
shares of such class into series and fix and determine the designation of such
series and the variations in the relative rights and preferences between the
shares of such series; (ix) limit or deny the existing preemptive rights of the
shares of such class or series; or (x) cancel or otherwise effect the dividends
on the shares of such class or series which had accrued but had not been
declared.
Each share of Series C Preferred Stock is convertible, at the option of
the holder thereof, at any time prior to the redemption thereof, into a number
of shares of Common Stock equal to the quotient of $42.00 divided by the
conversion price (initially $0.40 per share and subject to adjustment in certain
events). As of July 15, 1998, each share
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<PAGE>
of Series C Preferred Stock was convertible into 22.969 shares of Common Stock,
with cash paid in lieu of fractional shares. Beginning December 12, 1997, or on
any anniversary thereafter, the Company may redeem all or any part of the
outstanding Series C Preferred Stock by paying a redemption price per share of
$42.00 in cash plus, in each case, accumulated and unpaid dividends to the
redemption date. In certain cases, the Company may elect to pay all or a portion
of the redemption price in shares of its Common Stock.
In the event of any liquidation of the Company, after payment or
provision for payment of the debts and other liabilities of the Company, the
holders of Series C Preferred Stock will be entitled to receive, out of the
remaining net assets of the Company available for distribution to shareholders,
the amount of $42.00 per share, plus an amount equal to the amount of all
dividends accrued and unpaid on each such share (regardless of whether declared)
to the date fixed for distribution, before any distribution is made to holders
of the Common Stock or any other stock that ranks junior to the Series C
Preferred Stock.
Certain Provisions of the Restated Articles of Incorporation and the Bylaws
Certain provisions in the Restated Articles of Incorporation (the
"Articles") and Restated Bylaws ("Bylaws") of the Company could make more
difficult the acquisition of the Company by means of a tender offer, a proxy
contest or otherwise. These provisions are intended to discourage certain types
of coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to first negotiate with the
Board of Directors of the Company. The Company believes that the benefits of
increased protection of the Company's potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure the
Company outweigh the disadvantages of discouraging such proposals because, among
other things, negotiations of such proposals could result in an improvement of
their terms.
Restated Articles of Incorporation
Classified Board of Directors. The Articles provide that the Board of
Directors is divided into three classes of directors, with the term of each
class expiring in a different year. The Bylaws provide that the number of
directors will be fixed from time to time exclusively by the Board of Directors
but will consist of not more than 30 nor less than seven directors. A majority
of the Board of Directors then in office has the sole authority to fill any
vacancies on the Board of Directors, except that any vacancy in the Board of
Directors resulting from the removal of a director by the shareholders may be
filled only by the shareholders entitled to vote at an annual meeting or a
special meeting called for that purpose.
Preferred Stock. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of the Company or may
materially affect the rights evidenced by, or amounts payable with respect to,
the shares of Common Stock. The voting and conversion rights of any class or
series of preferred stock issued by the Company could adversely affect, among
other things, the voting rights of existing shareholders.
Fair Price Provision. The Articles contain a Fair Price provision that,
among other things, requires the approval by the holders of 80% of the voting
power of the then outstanding shares of capital stock of the Company entitled to
vote generally in the election of directors (the "Voting Stock") as a condition
for mergers and certain other business combinations, (including, for these
purposes, with respect to the Company or its subsidiaries, the sale or
disposition of assets, the issuance or transfer of stock or other securities,
any plan or liquidation or dissolution, any reclassification of securities, or
recapitalization, merger or consolidation that increases the proportionate
shares of outstanding stock) (collectively, "Business Combinations") involving
the Company and any person or group holding 5% or more of such voting power (an
"Interested Shareholder") unless the transaction is either approved by a
majority of the members of the Board of Directors who are unaffiliated with the
Interested Shareholder and who were directors before the Interested Shareholder
became an Interested Shareholder or certain minimum price and procedural
requirements are met. The 80% vote requirement is in addition to, and not in
lieu of, the vote of any other class of voting securities that may be entitled
to vote on Business Combinations, such as outstanding issues of preferred stock.
The Company believes that the Fair Price provision helps assure that all
of the holders of the Company's Voting Stock will be treated similarly if a
Business Combination is effected. Further, the Fair Price provision does not
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<PAGE>
limit the ability of a third party who owns, or can obtain the affirmative votes
of, at least 80% of the voting power of the Voting Stock to effect a Business
Combination involving the Company in which the equity interest of the minority
stockholders is eliminated. The Fair Price provision, however, makes it more
difficult to accomplish certain transactions that are opposed by the incumbent
Board of Directors and that may be beneficial to shareholders.
Amendment to Bylaws. In addition to being altered, amended or repealed
by the Board of Directors, the Articles provide that the Bylaws may be altered,
amended or repealed at any meeting of the shareholders, at which a quorum is
present, by the affirmative vote of the holders of two-thirds of the Common
Stock of the Company present, in person or by proxy, at such meeting, provided
that notice of the proposed alteration, amendment or repeal is contained in the
notice of the meeting sent to shareholders. This provision makes it more
difficult for a shareholder controlling a majority of the shares of the Common
Stock to avoid the requirements of the Bylaws by simply repealing them.
Bylaws
Conduct of Meetings. The Bylaws provide that the Chairman of any meeting
of shareholders may prescribe rules that will govern the orderly conduct of such
meeting. The Chairman's determination and interpretations of the rules will be
in his reasonable discretion and will be final, unless the Articles or Bylaws,
resolution of the Board of Directors, or applicable law establishes rules
governing a particular matter, in which case such provision will be dispositive,
or in the event that a majority of the shareholders present in person at the
meeting request that there be a shareholder vote on the Chairman's ruling, then
the Chairman's ruling may be overruled by the affirmative vote of the holders of
two-thirds of the issued and outstanding capital stock of the Company entitled
to vote on such matters at the meeting and present at the meeting in person or
by proxy. The two-thirds vote requirement gives the Chairman the authority to
prescribe rules that may be opposed by a majority of the holders of capital
stock present at the meeting.
Nominations of Directors. The Bylaws also provide that nominations for
the election of directors may be made by the Board of Directors or by any
shareholder entitled to vote for the election of directors, pursuant to
procedures that require advance notice in writing of shareholder nominations for
directors. Shareholders intending to nominate director candidates for election
must deliver written notice to the Secretary of the Company at least 30 days,
but not more than 50 days, prior to the shareholders' meeting called for the
election of directors. The notice must set forth certain information concerning
the nominee, including his or her name, address, description of qualifications,
the number of shares of stock he or she beneficially owns and a covenant to
provide such other information as the Company may reasonably request. The
Chairman of the meeting may refuse to acknowledge the nomination of any person
not made in compliance with such procedure.
This requirement affords the Board of Directors the opportunity to
consider the qualifications of the proposed nominee(s) and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders about
such qualifications. Although this Bylaw provision does not give the Board of
Directors the power to approve or disapprove shareholder nominations for
election of directors, it may have the effect of precluding a contest for the
election of directors if the procedures established by it are not followed and
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors, without regard to whether this might be
harmful or beneficial to the Company and its shareholders.
Removal of Directors. The Bylaws further provide that any director may
be removed from the Board of Directors at any time, but only for "cause," at any
special or annual meeting of the shareholders. "Cause," for these purposes, is
defined to mean conviction of a felony, an adjudication of negligence or
misconduct, inability or incapacity to perform the material duties required of a
director or failure to attend at least six consecutive or 50% of the regular or
special meetings of the Board of Directors during any one calendar year. This
provision may have the effect of making it more difficult and time consuming to
remove management.
Amendment of Bylaws. The Bylaws also provide that, in addition to being
repealed or changed by the Board of Directors, the Bylaws may be repealed or
changed by the affirmative vote of the holders of two-thirds of the stock of the
Company entitled to vote and present at any meeting of shareholders. The
requirement of an increased shareholder vote essentially parallels the
requirement in the Articles.
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Limitations on Liability
As authorized by Article 1301-7.06 of the Texas Miscellaneous
Corporation Laws Act, the Articles provide that to the fullest extent, now or
hereafter permitted by Texas law, the Company's directors will have no personal
liability to the Company or its shareholders for monetary damages for breach or
alleged breach of the directors' duty of care. This provision in the Articles
does not, however, eliminate directors' liability resulting from suits by third
parties, and does not affect the Company or its shareholders' ability to obtain
equitable remedies such as an injunction or a rescission of an agreement or
transaction deemed improper. Furthermore, each director will continue to be
subject to liability for (1) a breach of a director's duty of loyalty to the
Company or its shareholders, (2) an act or omission not in good faith or that
involves intentional misconduct or a knowing violation of the law, (3) a
transaction from which a director received an improper benefit, whether or not
the benefit resulted from an action taken within the scope of the director's
office, (4) an act or omission for which the liability of a director is
expressly provided for by statute, or (5) an act related to an unlawful share
repurchase or payment of a dividend.
Transfer Agent
The Bank is the Transfer Agent and Registrar for the Common Stock.
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the
Trust Agreement. The Trust Agreement will be qualified as an indenture under the
Trust Indenture Act. The Property Trustee, U.S. Trust Company of Texas, N.A.,
will act as indenture trustee for the Preferred Securities under the Trust
Agreement for purposes of complying with the provisions of the Trust Indenture
Act. The terms of the Preferred Securities will include those stated in the
Trust Agreement and those made part of the Trust Agreement by the Trust
Indenture Act. The following summary of the material terms and provisions of the
Preferred Securities and the Trust Agreement does not purport to be complete and
is subject to, and is qualified in its entirety by reference to, the Trust
Agreement, the Trust Act, and the Trust Indenture Act. Wherever particular
defined terms of the Trust Agreement are referred to, but not defined herein,
such defined terms are incorporated herein by reference. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
General
Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of
the Trust, will issue the Trust Securities. All of the Common Securities will be
owned by the Company. The Preferred Securities will represent preferred
undivided beneficial interests in the assets of the Trust and the holders
thereof will be entitled to a preference in certain circumstances with respect
to Distributions and amounts payable on redemption or liquidation over the
Common Securities, as well as other benefits as described in the Trust
Agreement. The Trust Agreement does not permit the issuance by the Trust of any
securities other than the Trust Securities or the incurrence of any indebtedness
by the Trust.
The Preferred Securities will rank pari passu, and payments will be made
thereon pro rata, with the Common Securities, except as described under "--
Subordination of Common Securities." Legal title to the Subordinated Debentures
will be held by the Property Trustee in trust for the benefit of the holders of
the Trust Securities. The Guarantee executed by the Company for the benefit of
the holders of the Preferred Securities will be a guarantee on a subordinated
basis with respect to the Preferred Securities, but will not guarantee payment
of Distributions or amounts payable on redemption or liquidation of such
Preferred Securities when the Trust does not have funds on hand available to
make such payments. U.S. Trust Company of Texas, N.A., as Guarantee Trustee,
will hold the Guarantee for the benefit of the holders of the Preferred
Securities. See "Description of the Guarantee."
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Distributions
Payment of Distributions
Distributions on each Preferred Security will be payable at the annual
rate of % of the stated Liquidation Amount of $10, payable quarterly in arrears
on March 31, June 30, September 30 and December 31 of each year, to the holders
of the Preferred Securities on the relevant record dates (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). The record date will be the 15th day of the month in which the relevant
Distribution Date occurs. Distributions will accumulate from , 1998, the date of
original issuance. The first Distribution Date for the Preferred Securities will
be December 31, 1998. The amount of Distributions payable for any period will be
computed on the basis of a 360-day year of twelve 30-day months. In the event
that any date on which Distributions are payable on the Preferred Securities is
not a Business Day, then payment of the Distributions payable on such date will
be made on the next succeeding day that is a Business Day (and without any
additional Distributions, interest or other payment in respect of any such
delay) with the same force and effect as if made on the date such payment was
originally due and payable. "Business Day" means any day other than a Saturday
or a Sunday, a day on which banking institutions in the City of New York are
authorized or required by law or executive order to remain closed or a day on
which the corporate trust office of the Property Trustee or the Debenture
Trustee is closed for business.
Extension Period
The Company has the right under the Indenture, so long as no Debenture
Event of Default has occurred and is continuing, to defer the payment of
interest on the Subordinated Debentures at any time, or from time to time (each,
an "Extension Period"), which, if exercised, would defer quarterly Distributions
on the Preferred Securities during any such Extension Period. Distributions to
which holders of the Preferred Securities are entitled will accumulate
additional Distributions thereon at the rate per annum of % thereof, compounded
quarterly from the relevant Distribution Date. "Distributions," as used herein,
includes any such additional Distributions. The right to defer the payment of
interest on the Subordinated Debentures is limited, however, to a period, in
each instance, not exceeding 20 consecutive quarters and no Extension Period may
extend beyond the Stated Maturity of the Subordinated Debentures. During any
such Extension Period, the Company may not (i) declare or pay any dividends or
distributions on, or redeem, purchase, acquire or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) dividends or
distributions in common stock of the Company, any declaration of a non-cash
dividend in connection with the implementation of a shareholder rights plan, or
the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (b) purchases of common
stock of the Company related to the rights under any of the Company's benefit
plans for its directors, officers or employees), (ii) make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu with or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (iii)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities. Prior to the termination of any such Extension
Period, the Company may further defer the payment of interest; provided that
such Extension Period may not exceed 20 consecutive quarters or extend beyond
the Stated Maturity of the Subordinated Debentures. Upon the termination of any
such Extension Period and the payment of all amounts then due, the Company may
elect to begin a new Extension Period, subject to the above requirements.
Subject to the foregoing, there is no limitation on the number of times that the
Company may elect to begin an Extension Period.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.
Source of Distributions
The funds of the Trust available for distribution to holders of its
Preferred Securities will be limited to payments under the Subordinated
Debentures in which the Trust will invest the proceeds from the issuance and
sale
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of its Trust Securities. See "Description of the Subordinated Debentures."
Distributions will be paid through the Property Trustee who will hold amounts
received in respect of the Subordinated Debentures in the Property Account for
the benefit of the holders of the Trust Securities. If the Company does not make
interest payments on the Subordinated Debentures, the Property Trustee will not
have funds available to pay Distributions on the Preferred Securities. The
payment of Distributions (if and to the extent the Trust has funds legally
available for the payment of such Distributions and cash sufficient to make such
payments) is guaranteed by the Company. See "Description of the Guarantee."
Distributions on the Preferred Securities will be payable to the holders thereof
as they appear on the register of holders of the Preferred Securities on the
relevant record dates, which will be the 15th day of the month in which the
relevant Distribution Date occurs.
Redemption
General
The Subordinated Debentures will mature on , 2028. The Company
will have the right to redeem the Subordinated Debentures (i) on or after ,
2003, in whole at any time or in part from time to time, or (ii) at any time, in
whole (but not in part), within 180 days following the occurrence of a Tax
Event, a Capital Treatment Event or an Investment Company Event, in each case
subject to receipt of prior approval by the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve. The
Company will not have the right to purchase the Subordinated Debentures, in
whole or in part, from the Trust until after , 2003. See "Description of the
Subordinated Debentures-General."
Mandatory Redemption
Upon the repayment or redemption, in whole or in part, of any
Subordinated Debentures, whether at Stated Maturity or upon earlier redemption
as provided in the Indenture, the proceeds from such repayment or redemption
will be applied by the Property Trustee to redeem a Like Amount (as defined
herein) of the Trust Securities, upon not less than 30 nor more than 60 days
notice, at a redemption price (the "Redemption Price") equal to the aggregate
Liquidation Amount of such Trust Securities plus accumulated but unpaid
Distributions thereon to the date of redemption (the "Redemption Date"). See
"Description of the Subordinated Debentures--Redemption." If less than all of
the Subordinated Debentures are to be repaid or redeemed on a Redemption Date,
then the proceeds from such repayment or redemption will be allocated to the
redemption of the Trust Securities pro rata.
Distribution of Subordinated Debentures
Subject to the Company having received prior approval of the Federal
Reserve if so required under applicable capital guidelines or policies of the
Federal Reserve, the Company will have the right at any time to dissolve, wind-
up or terminate the Trust and, after satisfaction of the liabilities of
creditors of the Trust as provided by applicable law, cause the Subordinated
Debentures to be distributed to the holders of Trust Securities in liquidation
of the Trust. See "--Liquidation Distribution Upon Termination."
Tax Event Redemption, Capital Treatment Event Redemption or Investment Company
Event Redemption
If a Tax Event, a Capital Treatment Event or an Investment Company Event
in respect of the Trust Securities occurs and is continuing, the Company has the
right to redeem the Subordinated Debentures in whole (but not in part) and
thereby cause a mandatory redemption of such Trust Securities in whole (but not
in part) at the Redemption Price within 180 days following the occurrence of
such Tax Event, Capital Treatment Event or Investment Company Event. In the
event a Tax Event, a Capital Treatment Event or an Investment Company Event in
respect of the Trust Securities has occurred and the Company does not elect to
redeem the Subordinated Debentures and thereby cause a mandatory redemption of
such Trust Securities or to liquidate the Trust and cause the Subordinated
Debentures to be distributed to holders of such Trust Securities in liquidation
of the Trust as described below under "--Liquidation Distribution Upon
Termination," such Preferred Securities will remain outstanding and Additional
Payments (as defined herein) may be payable on the Subordinated Debentures.
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"Additional Payments" means the additional amounts as may be necessary
in order that the amount of Distributions then due and payable by the Trust on
the outstanding Trust Securities will not be reduced as a result of any
additional taxes, duties and other governmental charges to which the Trust has
become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust
Securities, Trust Securities having a Liquidation Amount equal to that portion
of the principal amount of Subordinated Debentures to be contemporaneously
redeemed in accordance with the Indenture, which will be used to pay the
Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of the Trust, Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Subordinated Debentures are
distributed. Each Subordinated Debenture distributed pursuant to clause (ii)
above will carry with it accumulated interest in an amount equal to the
accumulated and unpaid interest then due on such Subordinated Debentures.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
After the liquidation date fixed for any distribution of Subordinated
Debentures for Preferred Securities (i) such Preferred Securities will no longer
be deemed to be outstanding, and (ii) any certificates representing Preferred
Securities will be deemed to represent the Subordinated Debentures having a
principal amount equal to the Liquidation Amount of such Preferred Securities,
and bearing accrued and unpaid interest in an amount equal to the accrued and
unpaid Distributions on the Preferred Securities until such certificates are
presented to the Administrative Trustees or their agent for transfer or
reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities if a dissolution and liquidation of the Trust were to
occur. The Preferred Securities that an investor may purchase, or the
Subordinated Debentures that an investor may receive on dissolution and
liquidation of the Trust, may, therefore, trade at a discount to the price that
the investor paid to purchase the Preferred Securities offered hereby.
Redemption Procedures
Preferred Securities redeemed on each Redemption Date will be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
Redemption Date only to the extent that the Trust has funds on hand available
for the payment of such Redemption Price. See "--Subordination of Common
Securities."
If the Trust gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, eastern standard time, on the Redemption Date,
to the extent funds are available, the Property Trustee will irrevocably deposit
with the paying agent for the Preferred Securities funds sufficient to pay the
aggregate Redemption Price and will give the paying agent for the Preferred
Securities irrevocable instructions and authority to pay the Redemption Price to
the holders thereof upon surrender of their certificates evidencing such
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
will be payable to the holders of such Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption will
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price, but without interest on such
Redemption Price, and such Preferred Securities will cease to be outstanding. In
the event that any date fixed for redemption of Preferred Securities is not a
Business Day, then payment of the Redemption Price payable on such date will be
made on the next succeeding day which is a Business Day (and without any
additional Distribution, interest or other payment in respect of any such delay)
with the same force and effect as if made on such date. In the event that
payment of the Redemption Price in respect of Preferred Securities called for
redemption is improperly withheld or refused and not paid either by the Trust,
or by the Company
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pursuant to the Guarantee, Distributions on such Preferred Securities will
continue to accrue at the then applicable rate, from the Redemption Date
originally established by the Trust for such Preferred Securities to the date
such Redemption Price is actually paid, in which case the actual payment date
will be considered the date fixed for redemption for purposes of calculating the
Redemption Price. See "Description of the Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), and further provided that the Company does not and is
not continuing to exercise its right to defer interest payments on the
Subordinated Debentures, the Company or its subsidiaries may at any time and
from time to time purchase outstanding Preferred Securities by tender, in the
open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Subordinated Debentures to holders of Preferred Securities will
be made to the applicable recordholders thereof as they appear on the register
for the Preferred Securities on the relevant record date, which date will be the
date 15 days prior to the Redemption Date or liquidation date, as applicable.
If less than all of the Trust Securities are to be redeemed on a
Redemption Date, then the aggregate Liquidation Amount of such Trust Securities
to be redeemed will be allocated pro rata to the Trust Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed will be selected by the Property Trustee from the
outstanding Preferred Securities not previously called for redemption, by such
method as the Property Trustee deems fair and appropriate and which may provide
for the selection for redemption of portions (equal to $10 or an integral
multiple of $10 in excess thereof) of the Liquidation Amount of Preferred
Securities of a denomination larger than $10. The Property Trustee will promptly
notify the registrar for the Preferred Securities in writing of the Preferred
Securities selected for redemption and, in the case of any Preferred Securities
selected for partial redemption, the Liquidation Amount thereof to be redeemed.
For all purposes of the Trust Agreement, unless the context otherwise requires,
all provisions relating to the redemption of Preferred Securities will relate to
the portion of the aggregate Liquidation Amount of Preferred Securities which
has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the redemption price on the Subordinated Debentures, on and after the Redemption
Date interest will cease to accrue on such Subordinated Debentures or portions
thereof (and Distributions will cease to accrue on the related Preferred
Securities or portions thereof) called for redemption.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, will be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default has occurred and is continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, will be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for redemption,
will have been made or provided for, and all funds available to the Property
Trustee will first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Preferred Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effects of all such Events of Default with respect to
the Preferred Securities have been cured, waived or otherwise eliminated. Until
any such Events of Default under the Trust Agreement with respect to the
Preferred Securities have been so cured, waived or otherwise eliminated, the
Property Trustee will act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Company, as holder of the
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Common Securities, and only the holders of the Preferred Securities will have
the right to direct the Property Trustee to act on their behalf.
Liquidation Distribution Upon Termination
The Company will have the right at any time to dissolve, wind-up or
terminate the Trust and cause the Subordinated Debentures to be distributed to
the holders of the Preferred Securities. Such right is subject, however, to the
Company having received prior approval of the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve.
Pursuant to the Trust Agreement, the Trust will automatically terminate
upon expiration of its term and will terminate earlier on the first to occur of
(i) certain events of bankruptcy, dissolution or liquidation of the Company,
(ii) the distribution of a Like Amount of the Subordinated Debentures to the
holders of its Trust Securities, if the Company, as depositor, has given written
direction to the Property Trustee to terminate the Trust (which direction is
optional and wholly within the discretion of the Company, as depositor), (iii)
redemption of all of the Preferred Securities as described under "--Redemption--
Mandatory Redemption," or (iv) the entry of an order for the dissolution of the
Trust by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv)
of the preceding paragraph, the Trust will be liquidated by the Trustees as
expeditiously as the Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, to the holders of such Trust Securities a Like Amount of the Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of the Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to, in the case of holders of Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by the Trust on the
Preferred Securities will be paid on a pro rata basis. The Company, as the
holder of the Common Securities, will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that, if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities. See "--
Subordination of Common Securities."
Under current United States federal income tax law and interpretations
and assuming, as expected, that the Trust is treated as a grantor trust, a
distribution of the Subordinated Debentures should not be a taxable event to
holders of the Preferred Securities. Should there be a change in law, a change
in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Receipt of Subordinated Debentures
or Cash Upon Liquidation of the Trust." If the Company elects neither to redeem
the Subordinated Debentures prior to maturity nor to liquidate the Trust and
distribute the Subordinated Debentures to holders of the Preferred Securities,
the Preferred Securities will remain outstanding until the repayment of the
Subordinated Debentures.
If the Company elects to liquidate the Trust and thereby causes the
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of the Trust, the Company will continue to have the right to
shorten or extend the maturity of such Subordinated Debentures, subject to
certain conditions. See "Description of the Subordinated Debentures-General."
Liquidation Value
The amount of the Liquidation Distribution payable on the Preferred
Securities in the event of any liquidation of the Trust is $10 per Preferred
Security plus accrued and unpaid Distributions thereon to the date of payment,
which may be in the form of a distribution of such amount in Subordinated
Debentures, subject to certain exceptions. See "--Liquidation Distribution Upon
Termination."
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Events of Default; Notice
Any one of the following events constitutes an event of default under
the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities (whatever the reason for such Event of Default and whether voluntary
or involuntary or effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description
of the Subordinated Debentures--Debenture Events of Default"); or
(ii) default by the Trust in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a
period of 30 days; or
(iii) default by the Trust in the payment of any Redemption Price of any
Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Trustees in the Trust Agreement
(other than a covenant or warranty a default in the performance of
which or the breach of which is dealt with in clauses (ii) or
(iii) above), and continuation of such default or breach for a
period of 60 days after there has been given, by registered or
certified mail, to the Trustee(s) by the holders of at least 25%
in aggregate Liquidation Amount of the outstanding Preferred
Securities, a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to
appoint a successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default has been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
termination of the Trust. See "--Liquidation Distribution Upon Termination." The
existence of an Event of Default does not entitle the holders of Preferred
Securities to accelerate the maturity thereof.
Removal of the Trust's Trustees
Unless a Debenture Event of Default has occurred and is continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event, however, will the holders of the Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in the Company as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
Co-Trustees and Separate Property Trustee
Unless an Event of Default has occurred and is continuing, at any time
or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust Property (as
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defined in the Trust Agreement) may at the time be located, the Company, as the
holder of the Common Securities, will have power to appoint one or more Persons
(as defined in the Trust Agreement) either to act as a co-trustee, jointly with
the Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such Trust Property, in either case with such powers as
may be provided in the instrument of appointment, and to vest in such Person or
Persons in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement. In case a Debenture
Event of Default has occurred and is continuing, the Property Trustee alone will
have power to make such appointment.
Merger or Consolidation of Trustees
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee is a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Trust Agreement,
provided such Person is otherwise qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Trust
The Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described below. The Trust
may, at the request of the Company, with the consent of the Administrative
Trustees and without the consent of the holders of the Preferred Securities, the
Property Trustee or the Delaware Trustee, merge with or into, consolidate,
amalgamate, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the laws
of any State; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of the Trust with respect to the Preferred
Securities, or (b) substitutes for the Preferred Securities other securities
having substantially the same terms as the Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Preferred
Securities rank in priority with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee in its capacity as the holder of the Subordinated Debentures,
(iii) the Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
other organization on which the Preferred Securities are then listed (including,
if applicable, the AMEX), if any, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect, (v) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Company has received an opinion from independent counsel to the effect that (a)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not adversely affect the rights, preferences and privileges of the
holders of the Preferred Securities (including any Successor Securities) in any
material respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity will be required to register as an "investment company" under the
Investment Company Act, and (vi) the Company owns all of the common securities
of such successor entity and guarantees the obligations of such successor entity
under the Successor Securities at least to the extent provided by the Guarantee,
the Indenture, the Subordinated Debentures, the Trust Agreement and the Expense
Agreement. Notwithstanding the foregoing, the Trust will not, except with the
consent of holders of 100% in Liquidation Amount of the Preferred Securities,
consolidate, amalgamate, merge with or into, or be replaced by or convey,
transfer or lease its properties and assets substantially as an entirety to any
other Person or permit any other Person to consolidate, amalgamate, merge with
or into, or replace it if such consolidation, amalgamation, merger, replacement,
conveyance, transfer or lease would cause the Trust or the successor entity to
be classified as other than a grantor trust for United States federal income tax
purposes.
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Voting Rights; Amendment of Trust Agreement
Except as provided below and under "Description of the Guarantee--Voting
Rights; Amendments and Assignment" and as otherwise required by the Trust Act,
the Trust Agreement and the Guarantee, the holders of the Preferred Securities
will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) with respect to acceptance of
appointment by a successor trustee, (ii) to cure any ambiguity, correct or
supplement any provisions in such Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement (provided such amendment is not
inconsistent with the other provisions of the Trust Agreement), (iii) to modify,
eliminate or add to any provisions of the Trust Agreement to such extent as is
necessary to ensure that the Trust will be classified for United States federal
income tax purposes as a grantor trust at all times that any Trust Securities
are outstanding or to ensure that the Trust will not be required to register as
an "investment company" under the Investment Company Act, or (iv) to reduce or
increase the Liquidation Amount per Trust Security and simultaneously to
increase or decrease the number of Trust Securities issued and outstanding
solely for the purpose of maintaining the eligibility of the Preferred
Securities for listing or quotation on any national securities exchange or other
organization on which the Preferred Securities are then listed or quoted
(including, if applicable, the AMEX); provided, however, that in the case of
clause (ii), such action may not adversely affect in any material respect the
interests of any holder of Trust Securities and that, in the case of clause
(iv), the aggregate Liquidation Amount of the Trust Securities outstanding, upon
completion of any such reduction or increase, must be the same as the aggregate
Liquidation Amount of the Trust Securities outstanding immediately prior to any
such reduction or increase, and any amendments of such Trust Agreement will
become effective when notice thereof is given to the holders of Trust Securities
(or, in the case of an amendment pursuant to clause (iv), as of the date
specified in the notice). The Trust Agreement may be amended by the Trustees and
the Company with (i) the consent of holders representing not less than a
majority in the aggregate Liquidation Amount of the outstanding Trust
Securities, and (ii) receipt by the Trustees of an opinion of counsel to the
effect that such amendment or the exercise of any power granted to the Trustees
in accordance with such amendment will not affect the Trust's status as a
grantor trust for United States federal income tax purposes or the Trust's
exemption from status as an "investment company" under the Investment Company
Act. Notwithstanding anything in this paragraph to the contrary, without the
consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (a) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date, or (b)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
The Trustees will not, so long as any Subordinated Debentures are held
by the Property Trustee, (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or executing any
trust or power conferred on the Property Trustee with respect to the
Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Subordinated Debentures will be due and payable, or (iv)
consent to any amendment, modification or termination of the Indenture or the
Subordinated Debentures, where such consent is required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Preferred Securities; provided, however,
that where a consent under the Indenture requires the consent of each holder of
Subordinated Debentures affected thereby, no such consent will be given by the
Property Trustee without the prior consent of each holder of the Preferred
Securities. The Trustees may not revoke any action previously authorized or
approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property Trustee
will notify each holder of Preferred Securities of any notice of default with
respect to the Subordinated Debentures. In addition to obtaining the foregoing
approvals of the holders of the Preferred Securities, prior to taking any of the
foregoing actions, the Trustees must obtain an opinion of counsel experienced in
such matters to the effect that the Trust will not be classified as an
association taxable as a corporation for United States federal income tax
purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at
a meeting of holders of Preferred Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
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meeting at which holders of Preferred Securities are entitled to vote, or of any
matter upon which action by written consent of such holders is to be taken, to
be given to each holder of record of Preferred Securities in the manner set
forth in the Trust Agreement.
No vote or consent of the holders of Preferred Securities will be
required for the Trust to redeem and cancel its Preferred Securities in
accordance with the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are
entitled to vote or consent under any of the circumstances described above, any
of the Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee will, for purposes of such vote or
consent, be treated as if they were not outstanding.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made by check
mailed to the address of the holder entitled thereto as such address will appear
on the register of holders of the Preferred Securities. The paying agent for the
Preferred Securities will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrative
Trustees and the Company. The paying agent for the Preferred Securities may
resign as paying agent upon 30 days' written notice to the Property Trustee and
the Company. In the event that the Property Trustee no longer is the paying
agent for the Preferred Securities, the Administrative Trustees will appoint a
successor (which must be a bank or trust company acceptable to the
Administrative Trustees and the Company) to act as paying agent.
Registrar and Transfer Agent
U.S. Trust will act as the registrar and the transfer agent for the
Preferred Securities. Registration of transfers of Preferred Securities will be
effected without charge by or on behalf of the Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. The Trust will not be required to register or cause to be
registered the transfer of Preferred Securities after such Preferred Securities
have been called for redemption.
Information Concerning the Property Trustee.
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, upon the occurrence and
during the continuance of an Event of Default, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Agreement at
the request of any holder of Preferred Securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby. If no Event of Default has occurred and is continuing and the
Property Trustee is required to decide between alternative causes of action,
construe ambiguous provisions in the Trust Agreement or is unsure of the
application of any provision of the Trust Agreement, and the matter is not one
on which holders of Preferred Securities are entitled under the Trust Agreement
to vote, then the Property Trustee will take such action as is directed by the
Company and if not so directed, will take such action as it deems advisable and
in the best interests of the holders of the Trust Securities and will have no
liability except for its own bad faith, negligence or willful misconduct.
Miscellaneous
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate the Trust in such a way that the Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. The Company and the Administrative Trustees are
authorized, in this
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connection, to take any action, not inconsistent with applicable law, the
certificate of trust of the Trust or the Trust Agreement, that the Company and
the Administrative Trustees determine in their discretion to be necessary or
desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Concurrently with the issuance of the Preferred Securities, the Trust will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in the Subordinated Debentures issued by the Company.
The Subordinated Debentures will be issued as unsecured debt under the
Indenture, to be dated as of , 1998 (the "Indenture"), between
the Company and U.S. Trust Company of Texas, N.A., as trustee (the "Debenture
Trustee"). The Indenture will be qualified as an indenture under the Trust
Indenture Act. The following summary of the material terms and provisions of the
Subordinated Debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture and
to the Trust Indenture Act. Wherever particular defined terms of the Indenture
are referred to, but not defined herein, such defined terms are incorporated
herein by reference. The form of the Indenture has been filed as an exhibit to
the Registration Statement of which this Prospectus forms a part.
General
The Subordinated Debentures will be limited in aggregate principal amount to
approximately $10,000,000 (or $11,500,000 if the option described under the
heading "Underwriting" is exercised by the Underwriters), such amount being the
sum of the aggregate stated Liquidation Amount of the Trust Securities. The
Subordinated Debentures will bear interest at the annual rate of % of the
principal amount thereof, payable quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year (each, an "Interest Payment Date")
beginning December 31, 1998, to the Person (as defined in the Indenture) in
whose name each Subordinated Debenture is registered, subject to certain
exceptions, at the close of business on the fifteenth day of the last month of
the calendar quarter. It is anticipated that, until the liquidation of the
Trust, the Subordinated Debentures will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Preferred Securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of %
thereof, compounded quarterly. The term "interest," as used herein, includes
quarterly interest payments, interest on quarterly interest payments not paid on
the applicable Interest Payment Date and Additional Payments, as applicable.
The Subordinated Debentures will mature on , 2028 (such date,
as it may be shortened or extended as hereinafter described, the "Stated
Maturity"). Such date may be shortened at any time by the Company to any date
not earlier than , 2003, subject to the Company having received
prior approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Such date may also be extended at
any time at the election of the Company but in no event to a date later than
, 2037, provided that at the time such election is made and at the time of
extension (i) the Company is not in bankruptcy, otherwise insolvent or in
liquidation, (ii) the Company is not in default in the payment of any interest
or principal on the Subordinated Debentures, and (iii) the Trust is not in
arrears on payments of Distributions on the Preferred Securities and no deferred
Distributions are accumulated. In the event that the Company elects to shorten
or extend the Stated Maturity of the Subordinated Debentures, it will give
notice thereof to the Debenture Trustee, the Trust and to the holders of the
Subordinated Debentures no more than 180 days and no less than 90 days prior to
the
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effectiveness thereof. The Company will not have the right to purchase the
Subordinated Debentures, in whole or in part, from the Trust until after ,
2003, except if a Tax Event, a Capital Treatment Event or an Investment Company
Event has occurred and is continuing.
The Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any Subsidiary Bank, upon any such Subsidiary Bank's liquidation or
reorganization or otherwise (and thus the ability of holders of the Subordinated
Debentures to benefit indirectly from such distribution), is subject to the
prior claim of creditors of such Subsidiary Bank, except to the extent that the
Company may itself be recognized as a creditor of such Subsidiary Bank. The
Subordinated Debentures will, therefore, be effectively subordinated to all
existing and future liabilities of the Subsidiary Banks, and holders of
Subordinated Debentures should look only to the assets of the Company for
payments on the Subordinated Debentures. The Indenture does not limit the
incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Debt, Subordinated Debt and Additional Senior Obligations,
whether under the Indenture or any existing indenture or other indenture that
the Company may enter into in the future or otherwise. See "--Subordination."
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
Option to Extend Interest Payment Period
The Company has the right under the Indenture at any time during the term of
the Subordinated Debentures, so long as no Debenture Event of Default has
occurred and is continuing, to defer the payment of interest at any time, or
from time to time (each, an "Extension Period"). The right to defer the payment
of interest on the Subordinated Debentures is limited, however, to a period, in
each instance, not exceeding 20 consecutive quarters and no Extension Period may
extend beyond the Stated Maturity of the Subordinated Debentures. At the end of
each Extension Period, the Company must pay all interest then accrued and unpaid
(together with interest thereon at the annual rate of %, compounded
quarterly, to the extent permitted by applicable law). During an Extension
Period, interest will continue to accrue and holders of Subordinated Debentures
(or the holders of Preferred Securities if such securities are then outstanding)
will be required to accrue and recognize income for United States federal income
tax purposes. See "Certain Federal Income Tax Consequences--Potential Extension
of Interest Payment Period and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock (other
than (a) dividends or distributions in Common Stock of the Company, any
declaration of a non-cash dividend in connection with the implementation of a
shareholder rights plan, or the issuance of stock under any such plan in the
future, or the redemption or repurchase of any such rights pursuant thereto, and
(b) purchases of Common Stock of the Company related to the rights under any of
the Company's benefit plans for its directors, of officers or employees), (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu
with or junior in interest to the Subordinated Debentures or make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks pari passu or junior in
interest to the Subordinated Debentures (other than payments under the
Guarantee), or (iii) redeem, purchase or acquire less than all of the
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided that no Extension Period may exceed 20 consecutive
quarters or extend beyond the Stated Maturity of the Subordinated Debentures.
Upon the termination of any such Extension Period and the payment of all amounts
then due on any Interest Payment Date, the Company may elect to begin a new
Extension Period subject to the above requirements. No interest will be due and
payable during an Extension Period, except at the end thereof. The Company has
no present intention of exercising its rights to defer payments of interest on
the Subordinated Debentures. The Company must give the Property Trustee, the
Administrative Trustees and the Debenture Trustee notice of its election of such
Extension Period at least two Business Days prior to the earlier of
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(i) the next succeeding date on which Distributions on the Trust Securities
would have been payable except for the election to begin such Extension Period,
or (ii) the date the Trust is required to give notice of the record date, or the
date such Distributions are payable, to the AMEX (or other applicable self-
regulatory organization) or to holders of the Preferred Securities, but in any
event at least one Business Day before such record date. Subject to the
foregoing, there is no limitation on the number of times that the Company may
elect to begin an Extension Period.
Additional Sums
If the Trust or the Property Trustee is required to pay any additional taxes,
duties or other governmental charges as a result of the occurrence of a Tax
Event, the Company will pay to the recordholders of the Subordinated Debentures
as additional amounts (referred to herein as "Additional Payments") on the
Subordinated Debentures such additional amounts as may be required so that the
net amounts received and retained by the Trust after paying any such additional
taxes, duties or other governmental charges will not be less than the amounts
the Trust would have received had such additional taxes, duties or other
governmental charges not been imposed.
Redemption
The Company will have the right to redeem the Subordinated Debentures prior to
maturity (i) on or after , 2003, in whole at any time or in part
from time to time, or (ii) at any time in whole (but not in part), within 180
days following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event, in each case at a redemption price equal to the
accrued and unpaid interest on the Subordinated Debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount thereof. Any such
redemption prior to the Stated Maturity will be subject to prior approval of the
Federal Reserve if then required under applicable capital guidelines or policies
of the Federal Reserve.
"Tax Event" means the receipt by the Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) interest payable by the Company on the Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States federal income
tax purposes, (ii) the Trust is, or will be within 90 days after the date of
such opinion of counsel, subject to United States federal income tax with
respect to income received or accrued on the Subordinated Debentures, or (iii)
the Trust is, or will be within 90 days after the date of such opinion of
counsel, subject to more than a de minimis amount of other taxes, duties,
assessments or other governmental charges. The Company must request and receive
an opinion with regard to such matters within a reasonable period of time after
it becomes aware of the possible occurrence of any of the events described in
clauses (i) through (iii) above.
"Capital Treatment Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such proposed change,
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk of impairment of the Company's ability to treat the aggregate
Liquidation Amount of the Preferred Securities (or any substantial portion
thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then in effect and
applicable to the Company, provided, however, that the inability of the Company
to treat all or any portion of the Liquidation Amount of the Preferred
Securities as Tier 1 Capital shall not constitute the basis for a Capital
Treatment Event if such inability results from the Company having cumulative
preferred stock, minority interests in consolidated subsidiaries, or any other
class of security or interest which the Federal Reserve now or may hereafter
afford Tier I Capital Treatment in
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excess of the amount which may qualify for treatment as Tier 1 Capital under
applicable capital adequacy guidelines of the Federal Reserve.
"Investment Company Event" means the receipt by the Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, the Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the date of original
issuance of the Preferred Securities.
Notice of any redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of Subordinated Debentures to be
redeemed at its registered address. Unless the Company defaults in payment of
the redemption price for the Subordinated Debentures, on and after the
redemption date interest ceases to accrue on such Subordinated Debentures or
portions thereof called for redemption.
The Subordinated Debentures will not be subject to any sinking fund.
Distribution Upon Liquidation
As described under "Description of the Preferred Securities--Liquidation
Distribution Upon Termination," under certain circumstances involving the
termination of the Trust, the Subordinated Debentures may be distributed to the
holders of the Preferred Securities in liquidation of the Trust after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law. Any such distribution will be subject to receipt of prior approval by the
Federal Reserve if then required under applicable policies or guidelines of the
Federal Reserve. If the Subordinated Debentures are distributed to the holders
of Preferred Securities upon the liquidation of the Trust, the Company will use
its best efforts to list the Subordinated Debentures on the AMEX or such stock
exchanges or other organizations, if any, on which the Preferred Securities are
then listed or quoted. There can be no assurance as to the market price of any
Subordinated Debentures that may be distributed to the holders of Preferred
Securities.
Restrictions on Certain Payments
If at any time (i) there has occurred a Debenture Event of Default, (ii) the
Company is in default with respect to its obligations under the Guarantee, or
(iii) the Company has given notice of its election of an Extension Period as
provided in the Indenture with respect to the Subordinated Debentures and has
not rescinded such notice, or such Extension Period, or any extension thereof,
is continuing, the Company will not (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock (other than (a) dividends or
distributions in common stock of the Company, any declaration of a non-cash
dividend in connection with the implementation of a shareholder rights plan, or
the issuance of stock under any such plan in the future, or the redemption or
repurchase of any such rights pursuant thereto, and (b) purchases of common
stock of the Company related to the rights under any of the Company's benefit
plans for its directors, officers or employees), (2) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities of the Company that rank pari passu with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks pari passu or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (3)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities.
Subordination
The Indenture provides that the Subordinated Debentures are subordinated and
junior in right of payment to all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company. Upon any payment or distribution of assets to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors, marshaling of assets or any bankruptcy,
insolvency, debt restructuring or similar proceedings in connection with any
insolvency or bankruptcy proceedings of the Company, the holders of Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company will first be
entitled to receive payment in
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full of principal of (and premium, if any) and interest, if any, on such Senior
Debt, Subordinated Debt and Additional Senior Obligations of the Company before
the holders of Subordinated Debentures will be entitled to receive or retain any
payment in respect of the principal of or interest on the Subordinated
Debentures.
In the event of the acceleration of the maturing of any Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Subordinated Debentures.
No payments on account of principal or interest in respect of the Subordinated
Debentures may be made if there has occurred and is continuing a default in any
payment with respect to Senior Debt, Subordinated Debt or Additional Senior
Obligations of the Company or an event of default with respect to any Senior
Debt, Subordinated Debt or Additional Senior Obligations of the Company
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding is pending with respect to any such default.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every capital lease obligation of such Person, and (vi) and every
obligation of the type referred to in clauses (i) through (v) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior Debt" means, with respect to the Company, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Subordinated Debentures
or to other Debt which is pari passu with, or subordinated to, the Subordinated
Debentures; provided, however, that Senior Debt will not be deemed to include
(i) any Debt of the Company which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, (iii) any Debt to any employee of the Company, (iv) any
Debt which by its terms is subordinated to trade accounts payable or accrued
liabilities arising in the ordinary course of business to the extent that
payments made to the holders of such Debt by the holders of the Subordinated
Debentures as a result of the subordination provisions of the Indenture would be
greater than they otherwise would have been as a result of any obligation of
such holders to pay amounts over to the obligees on such trade accounts payable
or accrued liabilities arising in the ordinary course of business as a result of
subordination provisions to which such Debt is subject, and (v) Debt which
constitutes Subordinated Debt.
"Subordinated Debt" means, with respect to the Company, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the Indenture
or thereafter incurred, which is by its terms expressly provided to be junior
and subordinate to other Debt of the Company (other than the Subordinated
Debentures).
"Additional Senior Obligations" means, with respect to the Company, all
indebtedness, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; provided, however, that Additional Senior Obligations do not
include claims in respect of Senior Debt or Subordinated Debt or obligations
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which, by their terms, are expressly stated to be not superior in right of
payment to the Subordinated Debentures or to rank pari passu in right of payment
with the Subordinated Debentures. "Claim," as used herein, has the meaning
assigned thereto in Section 101(5) of the United States Bankruptcy Code of 1978,
as amended.
The Indenture places no limitation on the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by the
Company. The Company expects from time to time to incur additional indebtedness
constituting Senior Debt, Subordinated Debt and Additional Senior Obligations.
As of June 30, 1998, the Company had aggregate Senior Debt, Subordinated Debt
and Additional Senior Obligations of approximately $4,000. Because the Company
is a holding company, the Subordinated Debentures are effectively subordinated
to all existing and future liabilities of the Company subsidiaries, including
obligations to depositors of the Subsidiary Banks.
Payment and Paying Agents
Payment of principal of and any interest on the Subordinated Debentures will
be made at the office of the Debenture Trustee in Dallas, Texas, except that, at
the option of the Company, payment of any interest may be made (i) by check
mailed to the address of the Person entitled thereto as such address appears in
the register of holders of the Subordinated Debentures, or (ii) by transfer to
an account maintained by the Person entitled thereto as specified in the
register of holders of the Subordinated Debentures, provided that proper
transfer instructions have been received by the regular record date. Payment of
any interest on Subordinated Debentures will be made to the Person in whose name
such Subordinated Debenture is registered at the close of business on the
regular record date for such interest, except in the case of defaulted interest.
The Company may at any time designate additional paying agents for the
Subordinated Debentures or rescind the designation of any paying agent for the
Subordinated Debentures; however, the Company will at all times be required to
maintain a paying agent in each place of payment for the Subordinated
Debentures.
Any moneys deposited with the Debenture Trustee or any paying agent for the
Subordinated Debentures, or then held by the Company in trust, for the payment
of the principal of or interest on the Subordinated Debentures and remaining
unclaimed for two years after such principal or interest has become due and
payable will be repaid to the Company on May 31 of each year or (if then held in
trust by the Company) will be discharged from such trust and the holder of such
Subordinated Debenture will thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
Registrar and Transfer Agent
U.S. Trust will act as the registrar and the transfer agent for the
Subordinated Debentures. Subordinated Debentures may be presented for
registration of transfer (with the form of transfer endorsed thereon or a
satisfactory written instrument of transfer, duly executed), at the office of
the registrar in Abilene, Texas. The Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts. The Company may at any time
designate additional transfer agents with respect to the Subordinated
Debentures. In the event of any redemption, neither the Company nor the
Debenture Trustee will be required to (i) issue, register the transfer of or
exchange Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Subordinated
Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption, or (ii) transfer or exchange any Subordinated
Debentures so selected for redemption, except, in the case of any Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.
Modification of Indenture
The Company and the Debenture Trustee may, from time to time without the
consent of the holders of the Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
outstanding
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Subordinated Debentures, to modify the Indenture; provided, that no such
modification may, without the consent of the holder of each outstanding
Subordinated Debenture affected by such proposed modification, (i) extend the
fixed maturity of the Subordinated Debentures, or reduce the principal amount
thereof, or reduce the rate or extend the time of payment of interest thereon,
or (ii) reduce the percentage of principal amount of Subordinated Debentures,
the holders of which are required to consent to any such modification of the
Indenture; provided that so long as any of the Preferred Securities remain
outstanding, no such modification may be made that requires the consent of the
holders of the Subordinated Debentures, and no termination of the Indenture may
occur, and no waiver of any Debenture Event of Default may be effective, without
the prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the Preferred Securities and that if the consent of the
holder of each Subordinated Debenture is required, such modification will not be
effective until each holder of Trust Securities has consented thereto.
Debenture Events of Default
The Indenture provides that any one or more of the following described events
with respect to the Subordinated Debentures that has occurred and is continuing
constitutes an event of default (each, a "Debenture Event of Default") with
respect to the Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Subordinated Debentures
when due (subject to the deferral of any due date in the case of an
Extension Period); or
(ii) failure to pay any principal on the Subordinated Debentures when due
whether at maturity, upon redemption by declaration or otherwise; or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice
to the Company from the Debenture Trustee or the holders of at least
25% in aggregate outstanding principal amount of the Subordinated
Debentures; or
(iv) certain events of bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee. The
Debenture Trustee, or the holders of not less than 25% in aggregate outstanding
principal amount of the Subordinated Debentures, may declare the principal due
and payable immediately upon a Debenture Event of Default. The holders of a
majority in aggregate outstanding principal amount of the Subordinated
Debentures may annul such declaration and waive the default if the default
(other than the non-payment of the principal of the Subordinated Debentures
which has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the Subordinated Debentures fail to annul such declaration
and waive such default, the holders of a majority in aggregate Liquidation
Amount of the Preferred Securities will have such right.
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
If a Debenture Event of Default has occurred and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on such
Subordinated Debentures, and any other amounts payable under the Indenture, to
be forthwith due and payable and to enforce its other rights as a creditor with
respect to such Subordinated Debentures.
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Enforcement of Certain Rights by Holders of the Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such event
is attributable to the failure of the Company to pay interest on or principal of
the Subordinated Debentures on the payment date on which such payment is due and
payable, then a holder of Preferred Securities may institute a legal proceeding
directly against the Company for enforcement of payment to such holder of the
principal of or interest on such Subordinated Debentures having a principal
amount equal to the aggregate Liquidation Amount of the Preferred Securities of
such holder (a "Direct Action"). In connection with such Direct Action, the
Company will have a right of set-off under the Indenture to the extent of any
payment made by the Company to such holder of Preferred Securities in the Direct
Action. The Company may not amend the Indenture to remove the foregoing right to
bring a Direct Action without the prior written consent of the holders of all of
the Preferred Securities. If the right to bring a Direct Action is removed, the
Trust may become subject to the reporting obligations under the Exchange Act.
The Company has the right under the Indenture to set-off any payment made to
such holder of Preferred Securities by the Company in connection with a Direct
Action.
The holders of the Preferred Securities will not be able to exercise directly
any remedies, other than those set forth in the preceding paragraph, available
to the holders of the Subordinated Debentures unless there has been an Event of
Default under the Trust Agreement. See "Description of the Preferred Securities-
- -Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Company may not consolidate with or merge into any other Person or convey
or transfer its properties and assets substantially as an entirety to any
Person, and any Person may not consolidate with or merge into the Company or
sell, convey, transfer or otherwise dispose of its properties and assets
substantially as an entirety to the Company, unless (i) in the event the Company
consolidates with or merges into another Person or conveys or transfers its
properties and assets substantially as an entirety to any Person, the successor
Person is organized under the laws of the United States or any State or the
District of Columbia, and such successor Person expressly assumes by
supplemental indenture the Company's obligations on the Subordinated Debentures,
(ii) immediately after giving effect thereto, no Debenture Event of Default, and
no event which, after notice or lapse of time or both, would become a Debenture
Event of Default, has occurred and is continuing, and (iii) certain other
conditions as prescribed in the Indenture are met.
Satisfaction and Discharge
The Indenture will cease to be of further effect (except as to the Company's
obligations to pay certain sums due pursuant to the Indenture and to provide
certain officers' certificates and opinions of counsel described therein) and
the Company will be deemed to have satisfied and discharged the Indenture when,
among other things, all Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation (i) have become due and payable, or (ii) will
become due and payable at their Stated Maturity within one year or are to be
called for redemption within one year, and the Company deposits or causes to be
deposited with the Debenture Trustee funds, in trust, for the purpose and in an
amount sufficient to pay and discharge the entire indebtedness on the
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation, for the principal and interest to the date of the deposit or to
the Stated Maturity or redemption date, as the case may be.
Governing Law
The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Texas.
Information Concerning the Debenture Trustee
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Subordinated Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which
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might be incurred thereby. The Debenture Trustee is not required to expend or
risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Debenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured to it.
Miscellaneous
The Company has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of the Trust (provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities), (ii) not to voluntarily
terminate, wind up or liquidate the Trust, except upon prior approval of the
Federal Reserve if then so required under applicable capital guidelines or
policies of the Federal Reserve, and (a) in connection with a distribution of
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of the Trust, or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the Trust Agreement, and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause the Trust to remain classified as a grantor trust and
not as an association taxable as a corporation for United States federal income
tax purposes.
DESCRIPTION OF THE GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred Securities.
The Guarantee will be qualified as an indenture under the Trust Indenture Act.
The Guarantee Trustee will act as indenture trustee under the Guarantee for
purposes of complying with the provisions of the Trust Indenture Act. The
Guarantee Trustee, U.S. Trust Company of Texas, N.A., will hold the Guarantee
for the benefit of the holders of the Preferred Securities. The following
summary of the material terms and provisions of the Guarantee does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Guarantee and the Trust Indenture Act. Wherever
particular defined terms of the Guarantee are referred to, but not defined
herein, such defined terms are incorporated herein by reference. The form of the
Guarantee has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
General
The Company will, pursuant to the Guarantee, irrevocably agree to pay in full
on a subordinated basis, to the extent set forth therein, the Guarantee Payments
(as defined below) to the holders of the Preferred Securities, as and when due,
regardless of any defense, right of set-off or counterclaim that the Trust may
have or assert other than the defense of payment [proviso?]. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of the Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accrued and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that the Trust has funds available therefor
at such time, (ii) the Redemption Price with respect to any Preferred Securities
called for redemption to the extent that the Trust has funds available therefor
at such time, and (iii) upon a voluntary or involuntary dissolution, winding up
or liquidation of the Trust (other than in connection with the distribution of
Subordinated Debentures to the holders of Preferred Securities or a redemption
of all of the Preferred Securities), the lesser of (a) the amount of the
Liquidation Distribution, to the extent the Trust has funds available therefor
at such time, and (b) the amount of assets of the Trust remaining available for
distribution to holders of Preferred Securities in liquidation of the Trust. The
obligation of the Company to make a Guarantee Payment may be satisfied by direct
payment of the required amounts by the Company to the holders of the Preferred
Securities or by causing the Trust to pay such amounts to such holders.
The Guarantee will not apply to any payment of Distributions except to the
extent the Trust has funds available therefor. If the Company does not make
interest payments on the Subordinated Debentures held by the Trust, the Trust
will not pay Distributions on the Preferred Securities and will not have funds
legally available therefor.
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Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company and will
rank subordinate and junior in right of payment to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company in the same manner as the
Subordinated Debentures. The Guarantee does not place a limitation on the amount
of additional Senior Debt, Subordinated Debt or Additional Senior Obligations
that may be incurred by the Company. The Company expects from time to time to
incur additional indebtedness constituting Senior Debt, Subordinated Debt and
Additional Senior Obligations.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against any other Person). The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by the Trust or upon distribution of the Subordinated Debentures to the
holders of the Preferred Securities. Because the Company is a holding company,
the right of the Company to participate in any distribution of assets of any
Subsidiary Bank upon such Subsidiary Bank's liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that Subsidiary Bank,
except to the extent the Company may itself be recognized as a creditor of that
Subsidiary Bank. The Company's obligations under the Guarantee, therefore, will
be effectively subordinated to all existing and future liabilities of the
Company subsidiaries, and claimants should look only to the assets of the
Company for payments thereunder.
The Company and the Trust believe that, taken together, the obligations of the
Company under the Guarantee, the Trust Agreement, the Subordinated Debentures,
the Indenture and the Expense Agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of all of the
obligations of the Trust under the Preferred Securities. See "Relationship Among
the Preferred Securities, the Subordinated Debentures and the Guarantee--Full
and Unconditional Guarantee."
Amendments and Assignment
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. See "Description of the Preferred Securities--
Voting Rights; Amendment of Trust Agreement." All guarantees and agreements
contained in the Guarantee will bind the successors, assigns, receivers,
trustees and representatives of the Company and will inure to the benefit of the
holders of the Preferred Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Trust, the Guarantee Trustee or any
other Person.
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
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Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of any Preferred Securities, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of the Trust, or (c)
distribution of the Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under such Preferred Securities or the
Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the laws of
the State of Texas.
Expense Agreement
The Company will, pursuant to the Agreement as to Expenses and Liabilities
entered into by it under the Trust Agreement (the "Expense Agreement"),
irrevocably and unconditionally guarantee to each person or entity to whom the
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of the Trust, other than obligations of the Trust to pay to the
holders of the Preferred Securities or other similar interests in the Trust of
the amounts due such holders pursuant to the terms of the Preferred Securities
or such other similar interests, as the case may be. Third party creditors of
the Trust may proceed directly against the Company under the Expense Agreement,
regardless of whether such creditors had notice of the Expense Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES,
THE SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent the Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." The Company and the Trust
believe that, taken together, the obligations of the Company under the
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of Distributions
and other amounts due on the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full irrevocable and unconditional guarantee
of the obligations of the Trust under the Preferred Securities. If and to the
extent that the Company does not make payments on the Subordinated Debentures,
the Trust will not pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the Trust
does not have sufficient funds to pay such Distributions. In such event, the
remedy of a holder of Preferred Securities is to institute a legal proceeding
directly against the Company for enforcement of payment of such Distributions to
such holder. The obligations of the Company under the Guarantee are subordinate
and junior in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company.
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Sufficiency of Payments
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover Distributions
and other payments due on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Subordinated Debentures will be equal to the
sum of the aggregate stated Liquidation Amount of the Trust Securities, (ii) the
interest rate and interest and other payment dates on the Subordinated
Debentures will match the Distribution rate and Distribution and other payment
dates for the Preferred Securities, (iii) the Company will pay for all and any
costs, expenses and liabilities of the Trust (except the obligations of the
Trust to holders of the Preferred Securities), and (iv) the Trust Agreement
further provides that the Trust will not engage in any activity that is not
consistent with the limited purposes of the Trust.
Enforcement Rights of Holders of Preferred Securities
A holder of any Preferred Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, the Trust or any
other Person. A default or event of default under any Senior Debt, Subordinated
Debt or Additional Senior Obligations of the Company would not constitute a
default or Event of Default. In the event, however, of payment defaults under,
or acceleration of, Senior Debt, Subordinated Debt or Additional Senior
Obligations of the Company, the subordination provisions of the Indenture
provide that no payments may be made in respect of the Subordinated Debentures
until such Senior Debt, Subordinated Debt or Additional Senior Obligations has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on the Subordinated Debentures would
constitute an Event of Default.
Limited Purpose of the Trust
The Preferred Securities evidence a preferred undivided beneficial interest in
the assets of the Trust. The Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of the Trust, (ii) investing the gross proceeds of the Trust Securities
in the Subordinated Debentures issued by the Company, and (iii) engaging in only
those other activities necessary, advisable, or incidental thereto. A principal
difference between the rights of a holder of a Preferred Security and the rights
of a holder of a Subordinated Debenture is that a holder of a Subordinated
Debenture is entitled to receive from the Company the principal amount of and
interest accrued on Subordinated Debentures held, while a holder of Preferred
Securities is entitled to receive Distributions from the Trust (or from the
Company under the Guarantee) if and to the extent the Trust has funds available
for the payment of such Distributions.
Rights Upon Termination
Upon any voluntary or involuntary termination, winding-up or liquidation of
the Trust involving the liquidation of the Subordinated Debentures, the holders
of the Preferred Securities will be entitled to receive, out of assets held by
the Trust, the Liquidation Distribution in cash. See "Description of the
Preferred Securities--Liquidation Distribution Upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Subordinated Debentures, would be a subordinated
creditor of the Company, subordinated in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company (as set forth
in the Indenture), but entitled to receive payment in full of principal and
interest before any shareholders of the Company receive payments or
distributions. Because the Company is the guarantor under the Guarantee and has
agreed to pay for all costs, expenses and liabilities of the Trust (other than
the obligations of the Trust to the holders of its Preferred Securities), the
positions of a holder of the Preferred Securities and a holder of the
Subordinated Debentures relative to other creditors and to shareholders of the
Company in the event of liquidation or bankruptcy of the Company are expected to
be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the material United States federal income tax
considerations that may be relevant to the purchasers of the Preferred
Securities and, insofar as it relates to matters of law and legal
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conclusions, reflects the opinion of Arter & Hadden LLP, special counsel to the
Company.insofar as it relates to matters of law and legal conclusions. This
summary is based upon current provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), Treasury regulations issued thereunder and current
administrative rulings and court decisions, all of which are subject to change
at any time, with possible retroactive effect. Subsequent changes may cause the
tax consequences to vary substantially from the consequences described below.
Furthermore, the authorities on which the following summary is based are subject
to various interpretations, and it is therefore possible that the United States
federal income tax treatment of the purchase, ownership, and disposition of the
Preferred Securities may differ from the treatment described below.
No attempt has been made in the following discussion to comment on all
United States federal income tax matters affecting purchasers of the Preferred
Securities. Moreover, this summary generally focuses on holders of the Preferred
Securities who are individual citizens or residents of the United States and who
acquire the Preferred Securities on their original issue at their offering price
and hold the Preferred Securities as capital assets. This summary has only
limited application to dealers in securities, corporations, estates, trusts or
nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment, such as, for
example, banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt
investors, or persons that will hold the Preferred Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. This summary also does not address the tax consequences to
persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of the
Preferred Securities. Further, it does not include any description of any
alternative minimum tax consequences or the tax laws of any state or local
government or of any foreign government that may be applicable to the Preferred
Securities. Accordingly, each prospective investor should consult, and should
rely exclusively on, such investor's own tax advisors in analyzing the federal,
state, local and foreign tax consequences of the purchase, ownership or
disposition of the Preferred Securities.
Classification of the Subordinated Debentures
The Company intends to take the position that the Subordinated Debentures
will be classified for United States federal income tax purposes as indebtedness
of the Company under current law, and, by acceptance of a Preferred Security,
each holder covenants to treat the Subordinated Debentures as indebtedness and
the Preferred Securities as evidence of an indirect beneficial ownership
interest in the Subordinated Debentures. No assurance can be given, however,
that such position of the Company will not be challenged by the Internal Revenue
Service or, if challenged, that such a challenge will not be successful. See
"Certain Federal Income Tax Consequences - Effect of Changes in Tax Laws and
Pending Litigation." The remainder of this discussion assumes that the
Subordinated Debentures will be classified for United States federal income tax
purposes as indebtedness of the Company.
Classification of the Trust
Under current law and assuming full compliance with the terms of the Trust
Agreement and Indenture (and certain other documents described herein), the
Trust will be classified for United States federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
for United States federal income tax purposes, each holder of the Preferred
Securities generally will be treated as owning an undivided beneficial interest
in the Subordinated Debentures, and upon the occurrence of an Extension Period
each holder will be required to include in its gross income any OID accrued with
respect to its allocable share of the Subordinated Debentures whether or not
cash is actually distributed to such holder.
Potential Extension of Interest Payment Period and Original Issue Discount
Under recently issued Treasury regulations (the "Regulations"), a debt
instrument will be deemed to be issued with OID if there is more than a "remote"
contingency that periodic stated interest payments due on the instrument will
not be timely paid. Because the exercise by the Company of its option to defer
the payment of stated interest on the Subordinated Debentures would prevent the
Company from declaring dividends on any class of
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equity, the Company believes that the likelihood of its exercising the option is
"remote" within the meaning of the Regulations. As a result, the Company intends
to take the position that the Subordinated Debentures will not be deemed to be
issued with OID. Accordingly, based on this position, stated interest payments
on the Subordinated Debentures will be includible in the ordinary income of a
holder at the time that such payments are paid or accrued in accordance with the
holder's regular method of accounting. Because the Regulations have not yet been
addressed in any published rulings or other published interpretations issued by
the Internal Revenue Service, it is possible that the Internal Revenue Service
could take a position contrary to the position taken by the Company.
If the Company were to exercise its option to defer the payment of stated
interest on the Subordinated Debentures, the Subordinated Debentures would be
treated, solely for purposes of the OID rules, as being "reissued" at such time
with OID. The amount of interest income includible in the taxable income of a
holder of the Subordinated Debentures would be determined on the basis of a
constant yield method over the remaining term of the instrument regardless of
the holder's method of tax accounting and the actual receipt of future payments
of stated interest on the Subordinated Debentures would no longer be separately
reported as taxable income. Consequently, a holder of the Preferred Securities
would be required to include OID in ordinary income, on a current basis, over
the period that the instrument is held even though the Company would not be
making any actual cash payments during the Extension Period. The amount of OID
that would accrue, in the aggregate, during the Extension Period would be
approximately equal to the amount of the cash payment due at the end of such
period. Moreover, under the Regulations, if the option to defer the payment of
interest income with respect to the Subordinated Debentures was determined not
to be "remote," the Subordinated Debentures would be treated as having been
originally issued with OID. In such event, all of a holder's taxable interest
income would be accounted for as OID and any OID included in income would
increase the holder's adjusted tax basis in the Subordinated Debentures and the
holder's actual receipt of interest payments would reduce such basis.
Because income on the Preferred Securities will constitute interest income
for United States federal income tax purposes, corporate holders of the
Preferred Securities will not be entitled to claim a dividends received
deduction in respect of such income.
Market Discount and Acquisition Premium
Holders of the Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Subordinated Debentures with "market discount"
or "acquisition premium" as such phrases are defined for United States federal
income tax purposes. Such holders are advised to consult their tax advisors as
to the income tax consequences of the acquisition, ownership and disposition of
the Preferred Securities.
Receipt of Subordinated Debentures or Cash Upon Liquidation of the Trust
Under certain circumstances, as described under "Description of the
Preferred Securities--Redemption" and "--Liquidation Distribution Upon
Termination," the Subordinated Debentures may be distributed to holders of the
Preferred Securities upon a liquidation of the Trust. Under current United
States federal income tax law, such a distribution would be treated as a
nontaxable event to each such holder and would result in such holder having an
adjusted tax basis in the Subordinated Debentures received in the liquidation
equal to such holder's adjusted tax basis in the Preferred Securities
immediately before the distribution. A holder's holding period in the
Subordinated Debentures so received in liquidation of the Trust would include
the period for which such holder held the Preferred Securities.
If, however, a Tax Event were to occur which resulted in the Trust being
treated as an association taxable as a corporation, the distribution would
likely constitute a taxable event to holders of the Preferred Securities. Under
certain circumstances described herein, the Subordinated Debentures may be
redeemed for cash and the proceeds of such redemption distributed to holders in
redemption of their Preferred Securities. Under current law, such a redemption
would, for United States federal income tax purposes, constitute a taxable
disposition of the redeemed Preferred Securities, and a holder would recognize
gain or loss as if the holder sold such Preferred Securities for
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cash. See "Description of the Preferred Securities--Redemption" and "--
Liquidation Distribution Upon Termination."
Disposition of Preferred Securities
Upon the sale of the Preferred Securities, a holder will recognize a gain
or loss in an amount equal to the difference between its adjusted tax basis in
the Preferred Securities and the amount realized in the sale (except to the
extent of any amount received in respect of accrued but unpaid interest not
previously included in income). A holder's adjusted tax basis in the Preferred
Securities generally will be its initial purchase price increased by OID (if
any) previously includible in the holder's gross income to the date of
disposition and decreased by payments (if any) received on the Preferred
Securities in respect of OID to the date of disposition. Such gain or loss
generally will be a capital gain or loss. In the case of non-corporate
taxpayers, the tax rates applicable to capital gains from the disposition of
Preferred Securities generally will vary depending upon whether, at the time of
disposition, the Preferred Securities have been held for more than twelve
months.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID if the Subordinated
Debentures are treated as having been issued, or reissued, with OID) with
respect to the underlying Subordinated Debentures. A holder who disposes of its
Preferred Securities between record dates for payments of distributions thereon
will be required to include in ordinary income (i) any portion of the amount
realized that is attributable to such accrued but unpaid interest to the extent
not previously included in income, or (ii) any amount of OID, in either case,
that has accrued on its pro rata share of the underlying Subordinated Debentures
during the taxable year of sale through the date of disposition. Any such income
inclusion will increase the holder's adjusted tax basis in its Preferred
Securities disposed of. To the extent that the amount realized in the sale is
less than the holder's adjusted tax basis, a holder will recognize a capital
loss. Subject to certain limited exceptions applicable to non-corporate
taxpayers, capital losses cannot be applied to offset ordinary income for United
States federal income tax purposes.
Effect of Changes in Tax Laws and Pending Litigation
In recent years there have been several proposals which, if enacted, could
have adversely affected the ability of the Company to deduct interest paid on
the Subordinated Debentures. However, these proposals were not enacted.
Nevertheless, there can be no assurance that other legislation enacted after the
date hereof will not otherwise adversely affect the ability of the Company to
deduct the interest payable on the Subordinated Debentures.
In addition, in a currently pending case in the Tax Court, Enron Corp. v.
Commissioner, TC Dkt. No. 6149-98, the IRS is challenging the deductibility of
interest paid on securities which are similar, but not identical to, the
Subordinated Debentures. The IRS may also challenge the deductibility of the
interest paid on the Subordinated Debentures, which could in turn trigger a Tax
Event and a redemption of the Preferred Securities.
Consequently, there can be no assurance that a Tax Event will not occur. A
Tax Event would permit the Company, upon approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve,
to cause a redemption of the Preferred Securities before, as well as after,
, 2003. See "Description of the Subordinated Debentures--Redemption" and
"Description of the Preferred Securities--Redemption--Tax Event Redemption,
Capital Treatment Event Redemption or Investment Company Event Redemption."
Backup Withholding and Information Reporting
Interest paid on the Subordinated Debentures, or the amount of OID accrued
on the Subordinated Debentures, if applicable, held of record by individual
citizens or residents of the United States, or certain trusts, estates, and
partnerships, will be reported to the Internal Revenue Service on Forms 1099,
which forms should be mailed to such holders of the Preferred Securities by
January 31 following each calendar year. Payments made on, and proceeds from the
sale of, the Preferred Securities may be subject to a "backup" withholding tax
(currently at
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31%) unless the holder complies with certain identification and other
requirements. Any amounts withheld under the backup withholding rules will be
allowed as a credit against the holder's United States federal income tax
liability, provided the required information is provided to the Internal Revenue
Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF THE PREFERRED SECURITIES. HOLDERS OF THE
PREFERRED SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
ERISA CONSIDERATIONS
Each of the Company (the obligor with respect to the Subordinated
Debentures held by the Trust), and its affiliates and the Property Trustee may
be considered a "party in interest" (within the meaning of ERISA) or a
"disqualified person" (within the meaning of Section 4975 of the Code) with
respect to may employee benefit plans ("Plans") that are subject to ERISA and
certain employee benefit-related provisions of the Code. The purchase and/or
holding of Preferred Securities by a fiduciary of a Plan that is subject to the
fiduciary responsibility provisions of ERISA or the prohibited transaction
provisions of Section 4975 of the Code (including individual retirement
arrangements and other plans described in Section 4975(e)(1) of the Code) and
with respect to which Plan the Company, the Property Trustee or any affiliate is
a service provider (or otherwise is a party in interest or a disqualified
person) may constitute or result in a prohibited transaction under ERISA or
Section 4975 of the Code, unless such Preferred Securities are acquired pursuant
to and in accordance with an applicable exemption, such as Prohibited
Transaction Class Exemption ("PTCE") 84-14 (an exemption for certain
transactions determined by an independent qualified professional asset manager),
PTCE 91-38 (an exemption for certain transactions involving bank collective
investment funds), PTCE 90-1 (an exemption for certain transactions involving
insurance company pooled separate accounts). PTCE 95-60 (an exemption for
transactions involving certain insurance company general accounts) or PTCE 96-23
(an exemption for certain transactions determined by an in-house asset manager).
In addition, a Plan fiduciary considering the purchase of Preferred Securities
should be aware that the assets of the Trust may be considered "plan assets" for
ERISA purposes pursuant to the Department of Labor regulation defining what
constitutes the assets of a Plan. In such event, any person exercising
discretion or providing services with respect to the Subordinated Debentures may
become parties in interest or disqualified persons with respect to the investing
Plans. In order to avoid certain prohibited transactions under ERISA and the
Code that could thereby result, the fiduciary, with respect to each investing
Plan, by purchasing the Preferred Securities, will be deemed to have directed
the Trust to invest in the Subordinated Debentures and to have consented to the
appointment of the Property Trustee. In this regard, it should be noted that,
in an Event of Default, the Company may not remove the Property Trustee without
the approval of a majority of the holder of the Preferred Securities.
A Plan fiduciary should consider whether the purchase of Preferred
Securities could result in the delegation of fiduciary authority to the Property
Trustee, and, if so, whether such a delegation of fiduciary authority is
permissible under the Plan's governing instrument or pursuant to any investment
management agreement with the Plan. In making such determinations, a Plan
fiduciary should note that the Property Trustee is a U.S. bank qualified to be
an investment manager (within the meaning of Section 3(38) of ERISA) to which
such a delegation of authority generally would be permissible under ERISA.
Further, prior to an Event of Default with respect to the Subordinated
Debentures, the Property Trustee will have only limited custodial and
ministerial authority with respect to Trust assets.
THE SALE OF PREFERRED SECURITIES TO PLANS IS IN NO RESPECT A REPRESENTATION
BY THE TRUST, THE COMPANY, THE PROPERTY TRUSTEE, THE UNDERWRITERS OR ANY OTHER
PERSON ASSOCIATED WITH THE SALE OF THE PREFERRED SECURITIES THAT SUCH SECURITIES
SATISFY ALL RELEVANT LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS
GENERALLY OR ANY PARTICULAR PLAN, OR THAT SUCH SECURITIES ARE OTHERWISE
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APPROPRIATE FOR PLANS GENERALLY OR ANY PARTICULAR PLAN. ANY PURCHASER PROPOSING
TO ACQUIRE PREFERRED SECURITIES WITH ASSETS OF ANY PLAN SHOULD CONSULT WITH ITS
COUNSEL.
UNDERWRITING
Sale of Common Stock
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter relating to the sale of the Common Stock (the
"Common Stock Underwriting Agreement"), the form of which is filed as an exhibit
to the Registration Statement of which this Prospectus is a part, the
Underwriter has agreed to purchase from the Company, and the Company has agreed
to sell to the Underwriter, 320,000 shares of Common Stock.
The Common Stock Underwriting Agreement provides that the obligations of
the Underwriter thereunder are subject to the satisfaction of certain conditions
precedent. The Underwriter has agreed to purchase and pay for all 320,000 shares
of Common Stock (other than those shares subject to the over-allotment option
described below) if any are purchased. The Company has been advised that the
Underwriter proposes to offer the shares of Common Stock directly to the public
at the public offering price set forth on the cover page of this Prospectus, and
to certain securities dealers at such price less a concession not in excess of
$ per share. The Underwriter may allow, and such dealers may reallow, a
discount not in excess of $ per share to certain other dealers. After
commencement of this Offering, the offering price concession and discounts may
be changed by the Underwriter.
The Company has granted the Underwriter an option to purchase up to an
additional 48,000 shares of Common Stock at the same price per share which the
Company will receive for the shares offered herein. Such option, which expires
30 days after the date of this Prospectus, may be exercised only for the purpose
of covering over-allotments.
In the Common Stock Underwriting Agreement, the Company has agreed that it
will not, for 120 days from the date of this Prospectus, directly or indirectly
offer, sell, contract to sell or otherwise dispose of any shares of the
Company's equity securities, any securities convertible or exchangeable for such
equity securities or any other rights to acquire such equity securities without
the Underwriter's prior written consent, other than shares of Common Stock
issued and sold to the Underwriter pursuant to the Common Stock Underwriting
Agreement, shares of Common Stock issued upon exercises of employee stock
options outstanding as of the date of the Common Stock Underwriting Agreement
and Common Stock issued upon conversion of the Company's outstanding Series C
Preferred Stock. The Company's executive officers, directors, and beneficial
owners of more than five percent of the Common Stock (other than the Independent
Bankshares, Inc. Employee Stock Ownership Plan) have agreed, for 120 days from
the date of this Prospectus, not to directly or indirectly offer, sell, contract
to sell or otherwise dispose of any shares of the Company's equity securities,
any securities convertible or exchangeable for the Company's equity securities
or any other rights to acquire such equity securities without the prior written
consent of the Underwriter.
Sale of Preferred Securities
Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter relating to the sale of the Preferred Securities
(the "Preferred Securities Underwriting Agreement"), the form of which is filed
as an exhibit to the Registration Statement of which this Prospectus is a part,
the Underwriter has agreed to purchase from the Trust, and the Trust has agreed
to sell to the Underwriter, 1,000,000 Preferred Securities.
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The Preferred Securities Underwriting Agreement provides that the
obligations of the Underwriter thereunder are subject to the satisfaction of
certain conditions precedent. The Underwriter has agreed to purchase and pay for
all 1,000,000 Preferred Securities (other than those Preferred Securities
subject to the over-allotment option described below) if any are purchased. The
Company has been advised that the Underwriter proposes to offer the Preferred
Securities directly to the public at the public offering price set forth on the
cover page of this Prospectus, and to certain securities dealers at such price
less a concession not in excess of $ per Preferred Security. The
Underwriter may allow, and such dealers may reallow, a discount not in excess
of $ per Preferred Security to certain other dealers. After commencement
of this Offering, the offering price concession and discounts may be changed by
the Underwriter.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Subordinated Debentures of the Company,
the Preferred Securities Underwriting Agreement provides that the Company will
pay as compensation to the Underwriter arranging the investment therein of such
proceeds, an amount in immediately available funds of $ 0.40 per Preferred
Security (or $ 400,000 in the aggregate).
The Trust has granted the Underwriter an option to purchase up to an
additional 150,000 Preferred Securities at the same price per Preferred Security
which the Trust will receive for the Preferred Securities offered herein. Such
option, which expires 30 days after the date of this Prospectus, may be
exercised only for the purpose of covering over-allotments.
The Company and the Trust have agreed that they will not, for 120 days from
the date of this Prospectus, without the Underwriter's prior written consent,
directly or indirectly offer, sell, contract to sell or otherwise dispose of the
Preferred Securities other than pursuant to the Preferred Securities
Underwriting Agreement, any other beneficial interests in the assets of the
Trust or any securities of the Trust or the Company that are substantially
similar to the Preferred Securities or the Subordinated Debentures, including
any guarantee of such beneficial interests or substantially similar securities,
or securities convertible into or exchangeable for or that represent the right
to receive any such beneficial interest or substantially similar securities.
General
Although the Common Stock is listed on the AMEX and application has been
made to have the Preferred Securities offered hereby listed on the AMEX, no
assurances can be made as to the liquidity of such Common Stock and the
Preferred Securities. See "Risk Factors - Risk Factors Relating to the Company-
Trading Market for the Common Stock, Risk Factors Relating to the Preferred
Securities, Trading Price, Absence of Prior Public Market, and Ratings for the
Preferred Securities. The offering price of the Common Stock and the offering
price and distribution rate of the Preferred Securities have been determined by
negotiations among representatives of the Company and the Underwriter, and such
offering prices may not be indicative of the market price of the Common Stock or
the Preferred Securities following the Offering.
The Company and the Underwriter have agreed to indemnify, or to contribute
to payments made by, each other against certain civil liabilities, including
certain civil liabilities under the Securities Act.
In connection with the Offering, the Underwriter and its affiliates may
engage in transactions effected in accordance with Rule 104 of the Commission's
Regulation M that are intended to stabilize, maintain or otherwise affect the
market price of the Common Stock or the Preferred Securities. Such transactions
may include over-allotment transactions in which the Underwriter creates a short
position for its own account by selling more Common Stock or Preferred
Securities than it is committed to purchase. In such case, to cover all or part
of the short position, the Underwriter may exercise either or both of the over-
allotment options described above to purchase additional Common Stock or
Preferred Securities or may purchase Common Stock or Preferred Securities in the
open market following completion of the initial offering thereof. The
Underwriter also may engage in stabilizing transactions in which it bids for,
and purchases, Common Stock or Preferred Securities at a level above that which
might otherwise prevail in the open market for the purpose of preventing or
retarding a decline in the market price of the Common Stock or the Preferred
Securities. The Underwriter also may reclaim any selling concessions allowed to
a dealer if the Underwriter repurchases Common Stock or Preferred Securities
distributed by that dealer. Any of the foregoing transactions may
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result in the maintenance of a price for the Common Stock or the Preferred
Securities at a level above that which might otherwise prevail in the open
market. Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock or the Preferred
Securities. The Underwriter is not required to engage in any of the foregoing
transactions and, if commenced, such transactions may be discontinued at any
time without notice.
LEGAL MATTERS
The legality of the Common Stock will be passed upon for the Company by
Arter & Hadden LLP, Dallas, Texas, counsel to the Company. Arter & Hadden LLP
will rely as to certain matters of Delaware law on the opinion of Prickett,
Jones, Elliott, Kristol & Schnee. Certain legal matters will be passed upon for
the Underwriter by Lewis, Rice & Fingersh, L.C., St. Louis, Missouri.
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of the
Trust will be passed upon by Prickett, Jones, Elliott, Kristol & Schnee, special
counsel to the Company and to the Trust. The validity under Delaware Law of the
Subordinated Debentures and the Guarantee will be passed upon for the Company
and the Trust by Arter & Hadden LLP. Certain matters relating to United States
federal income tax consideration will be passed upon for the Company by Arter &
Hadden LLP.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996, and the
consolidated income statements, statements of changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997, included in this Prospectus, have been included herein in reliance on the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The 1997 audited financial statements of Azle Bancorp included in this
Prospectus have been audited by Stovall, Grandey & Whatley, L.L.P., independent
accountants, for the period set forth in their report thereupon appearing
elsewhere herein and are included in reliance upon such report given upon
authority of such firm as experts in accounting and auditing.
The financial statements of Azle State Bank at December 31, 1996 and 1995,
and for each of the two years in the period ended December 31, 1996, appearing
in this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-2 (as amended and together with all exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the shares of
Common Stock offered by this Prospectus. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement. Statements contained in this Prospectus
concerning the provisions of any contract, agreement or other document are not
necessarily complete. With respect to each contract, agreement or other document
filed as an exhibit to the Registration Statement, reference is made to the
exhibit for the complete contents of the exhibit, and each statement concerning
its provisions is qualified in its entirety by such reference.
The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following regional offices of the Commission: Chicago
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Regional Office, Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material may also be obtained
by mail at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition,
such materials filed electronically by the Company with the Commission are
available at the Commissions' World Wide Web site at http://www.sec.gov. The
Common Stock is quoted on the AMEX, and reports and other information concerning
the Company may be inspected and copied at the offices of AMEX at 86 Trinity
Place, New York, New York 10006.
No separate financial statements of the Trust have been included herein.
The Company does not consider that such financial statements would be material
to holders of Preferred Securities because (i) all of the voting securities of
the Trust will be owned by the Company, a reporting company under the Exchange
Act; (ii) the Trust has no independent operations but exists solely for the sole
purpose of issuing securities representing undivided beneficial interests in the
assets of the Trust and investing the proceeds thereof in Subordinated
Debentures issued by the Company, and (iii) the obligations of the Company
described herein to provide certain indemnities in respect of and be responsible
for certain costs, expenses, debts and liabilities of the Trust under the
Indenture and pursuant to the Trust Agreement, the Guarantee issued by Company
with respect to the Preferred Securities, the Subordinated Debentures purchased
by the Trust and the related Indenture, taken together, constitute, in the
belief of the Company and the Trust, a full and unconditional guarantee of
payments due on the Preferred Securities. See "Description of the Subordinated
Debentures" and "Description of the Guarantee."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, previously filed by the Company with the
Commission pursuant to Section 15(d) of the Exchange Act, are incorporated
herein by reference:
(a) The Company's Annual Report on Form 10-K for the year ended December
31,1997; and
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998, and June 30, 1998.
(c) The Company's Current Report on Form 8-K dated May 29, 1998.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by
reference (other than exhibits to such documents which are not
specifically incorporated herein by reference in such documents).
Written requests for such copies should be directed to Randal N.
Crosswhite, Vice President and Chief Financial Officer, Independent
Bankshares, Inc., 547 Chestnut Street, Abilene, Texas 79602. Telephone
requests may be directed to (915) 677-5550.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEPENDENT BANKSHARES, INC.
<S> <C>
Consolidated Balance Sheets at June 30, 1998 and December 31, 1997
(unaudited)............................................................... F-3
Consolidated Statements of Income and Comprehensive Income for the Six-month
Periods ended June 30, 1998 and 1997 (unaudited).......................... F-4
Consolidated Statements of Cash Flows for the Six-month Periods ended June 30,
1998 and 1997 (unaudited)................................................. F-5
Notes to Consolidated Financial Statements (unaudited)....................... F-6
Report of Independent Accountants............................................ F-9
Consolidated Balance Sheets at December 31, 1997 and 1996.................... F-10
Consolidated Income Statements for the Years ended December 31, 1997, 1996
and 1995.................................................................. F-11
Consolidated Statements of Changes in Stockholders' Equity for the Years
ended December 31, 1997, 1996 and 1995.................................... F-12
Consolidated Statements of Cash Flows for the Years ended December 31, 1997,
1996 and 1995............................................................. F-13
Notes to Consolidated Financial Statements................................... F-14
AZLE BANCORP AND SUBSIDIARIES
Accountant's Compilation Report.............................................. F-33
Consolidated Balance Sheets at June 30, 1998 and 1997 (unaudited)............ F-34
Consolidated Statements of Earnings for the Periods of Six Months ended June
30, 1998 and 1997 (unaudited)............................................. F-35
Consolidated Statements of Changes in Shareholders' Equity for the Periods of
Six Months ended June 30, 1998 and 1997 and December 31, 1997
(unaudited)............................................................... F-36
Consolidated Statements of Cash Flow for the Periods of Six Months ended June
30, 1998 and 1997 (unaudited)............................................. F-37
Notes to Consolidated Financial Statements (unaudited)....................... F-38
Independent Auditor's Report................................................. F-44
Consolidated Balance Sheet at December 31, 1997 (audited) and 1996
(unaudited)............................................................... F-45
Consolidated Statement of Income for the Years ended December 31, 1997
(audited) and 1996 (unaudited)............................................ F-47
Consolidated Statement of Changes in Shareholders' Equity for the Years ended
December 31, 1997 (audited) and 1996 (unaudited).......................... F-48
Consolidated Statement of Cash Flow for the Years ended December 31, 1997
(audited) and 1996 (unaudited)............................................ F-49
Notes to Consolidated Financial Statements................................... F-51
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
AZLE STATE BANK
<S> <C>
Report of Independent Auditors............................................... F-60
Balance Sheets at December 31, 1996 and 1995................................. F-61
Statements of Income for the Years Ended December 31, 1996 and 1995.......... F-62
Statements of Changes in Stockholders' Equity for the Years Ended December 31,
1996 and 1995............................................................. F-63
Statements of Cash Flows for the Years Ended December 31, 1996 and 1995...... F-64
Notes to Financial Statements................................................ F-65
</TABLE>
F-2
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
June 30, December 31,
ASSETS 1998 1997
- ------ ------------ ------------
Cash and Cash Equivalents:
Cash and Due from Banks $ 13,111,000 $ 14,518,000
Federal Funds Sold 29,200,000 24,900,000
------------ ------------
Total Cash and Cash Equivalents 42,311,000 39,418,000
------------ ------------
Securities:
Available-for-sale 26,332,000 22,501,000
Held-to-maturity 40,148,000 47,293,000
------------ ------------
Total Securities 66,480,000 69,794,000
------------ ------------
Loans:
Total Loans 141,691,000 142,315,000
Less:
Unearned Income on Installment Loans 882,000 1,462,000
Allowance for Possible Loan Losses 1,121,000 1,173,000
------------ ------------
Net Loans 139,688,000 139,680,000
------------ ------------
Premises and Equipment 7,624,000 7,518,000
Goodwill 3,046,000 3,159,000
Accrued Interest Receivable 2,140,000 2,208,000
Other Real Estate and Other Repossessed Assets 253,000 739,000
Other Assets 1,959,000 2,058,000
------------ ------------
Total Assets $263,501,000 $264,574,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits $ 44,296,000 $ 43,868,000
Interest-bearing Demand Deposits 75,098,000 77,495,000
Interest-bearing Time Deposits 121,570,000 121,438,000
------------ ------------
Total Deposits 240,964,000 242,801,000
Accrued Interest Payable 868,000 947,000
Notes Payable 4,000 57,000
Other Liabilities 355,000 242,000
------------ ------------
Total Liabilities 242,191,000 244,047,000
------------ ------------
Stockholders' Equity:
Series C Preferred Stock 51,000 56,000
Common Stock 497,000 494,000
Additional Paid-in Capital 13,923,000 13,921,000
Retained Earnings 6,982,000 6,218,000
Unrealized Gain on Available-for-sale Securities 39,000 31,000
Unearned ESOP Shares (182,000) (193,000)
------------ ------------
Total Stockholders' Equity 21,310,000 20,527,000
------------ ------------
Total Liabilities and Stockholders' Equity $263,501,000 $264,574,000
============ ============
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
QUARTERS AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
Six-month Period
Quarter Ended June 30, Ended June 30,
----------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Interest Income:
Interest and Fees on
Loans $3,189,000 $3,102,000 $6,333,000 $5,833,000
Interest on Securities 955,000 1,389,000 1,973,000 2,699,000
Interest on Federal
Funds Sold 505,000 187,000 918,000 442,000
---------- ---------- ---------- ----------
Total Interest Income 4,649,000 4,678,000 9,224,000 8,974,000
---------- ---------- ---------- ----------
Interest Expense:
Interest on Deposits 2,134,000 2,178,000 4,286,000 4,214,000
Interest on Notes Payable 0 15,000 1,000 35,000
---------- ---------- ---------- ----------
Total Interest Expense 2,134,000 2,193,000 4,287,000 4,249,000
---------- ---------- ---------- ----------
Net Interest Income 2,515,000 2,485,000 4,937,000 4,725,000
Provision for Loan Losses 125,000 60,000 300,000 60,000
---------- ---------- ---------- ----------
Net Interest Income
After Provision for
Loan Losses 2,390,000 2,425,000 4,637,000 4,665,000
---------- ---------- ---------- ----------
Noninterest Income:
Service Charges 514,000 393,000 974,000 739,000
Trust Fees 57,000 48,000 104,000 94,000
Other Income 107,000 23,000 259,000 53,000
---------- ---------- ---------- ----------
Total Noninterest
Income 678,000 464,000 1,337,000 886,000
---------- ---------- ---------- ----------
Noninterest Expenses:
Salaries and Employee
Benefits 1,066,000 1,007,000 2,145,000 1,926,000
Net Occupancy Expense 239,000 216,000 468,000 411,000
Equipment Expense 188,000 213,000 402,000 415,000
Stationery, Printing and
Supplies Expense 108,000 98,000 206,000 184,000
Professional Fees 78,000 92,000 141,000 182,000
Litigation Settlement
Expense 125,000 0 125,000 0
Goodwill Amortization 57,000 57,000 113,000 101,000
Net Cost (Revenues)
Applicable to Real
Estate and Other
Repossessed Assets 21,000 (45,000) 47,000 (40,000)
Other Expenses 372,000 430,000 790,000 779,000
---------- ---------- ---------- ----------
Total Noninterest
Expenses 2,254,000 2,068,000 4,437,000 3,958,000
---------- ---------- ---------- ----------
Income Before
Federal Income Taxes 814,000 821,000 1,537,000 1,593,000
Federal Income Taxes 295,000 259,000 564,000 538,000
---------- ---------- ---------- ----------
Net Income 519,000 562,000 973,000 1,055,000
Other Comprehensive
Income, Net of Tax:
Unrealized Holding Gains
(Losses) on
Available-for-sale
Securities Arising
During the Period (9,000) 63,000 8,000 (1,000)
---------- ---------- ---------- ----------
Comprehensive
Income $ 510,000 $ 625,000 $ 981,000 $1,054,000
========== ========== ========== ==========
Preferred Stock Dividends $ 6,000 $ 14,000 $ 12,000 $ 28,000
========== ========== ========== ==========
Net Income Available to
Common Stockholders $ 513,000 $ 548,000 $ 961,000 $1,027,000
========== ========== ========== ==========
Basic Earnings per Common
Share
Available to Common
Stockholders $ 0.26 $ 0.30 $ 0.49 $ 0.59
========== ========== ========== ==========
Diluted Earnings Per
Common Share
Available to Common
Stockholders $ 0.25 $ 0.27 $ 0.47 $ 0.52
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
1998 1997
------------- ------------
Cash Flows from Operating Activities:
Net Income $ 973,000 $ 1,055,000
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Deferred Federal Income Tax Expense 232,000 239,000
Depreciation and Amortization 393,000 336,000
Provision for Loan Losses 300,000 60,000
Gains on Sales of Other Real Estate and Other
Repossessed Assets (3,000) (64,000)
Writedown of Other Real Estate and Other
Repossessed Assets 0 2,000
Decrease (Increase) in Accrued Interest Receivable 68,000 (100,000)
Decrease (Increase) in Other Assets (133,000) 528,000
Decrease in Accrued Interest Payable (79,000) (224,000)
Increase (Decrease) in Other Liabilities 113,000 (193,000)
------------ -----------
Net Cash Provided by Operating Activities 1,864,000 1,639,000
------------ -----------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale
Securities 5,189,000 1,228,000
Proceeds from Maturities of Held-to-maturity
Securities 19,866,000 9,919,000
Proceeds from Sale of Available-for-sale
Securities 0 193,000
Purchases of Available-for-sale Securities (9,019,000) (6,037,000)
Purchases of Held-to-maturity Securities (12,768,000) (8,021,000)
Net Increase in Loans (763,000) (4,561,000)
Additions to Premises and Equipment (386,000) (174,000)
Proceeds from Sales of Other Real Estate and
Other Repossessed Assets 1,010,000 643,000
Cash Paid for Purchase of Crown Park Bancshares,
Inc., Lubbock, Texas, in Excess of Cash and
Cash Equivalents Held by Crown Park Bancshares
on January 28, 1997
(Date of Acquisition) 0 (1,236,000)
------------ -----------
Net Cash Provided by (Used in) Investing
Activities 3,129,000 (8,046,000)
------------ -----------
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits (1,837,000) 889,000
Proceeds from Notes Payable 0 1,300,000
Repayment of Notes Payable (53,000) (2,805,000)
Net Proceeds from Issuance of Equity Securities 0 4,004,000
Payment of Cash Dividends (210,000) (196,000)
Payment for Fractional Shares in Stock Dividend 0 (5,000)
------------ -----------
Net Cash Provided by (Used in) Financing
Activities (2,100,000) 3,187,000
------------ -----------
Net Increase (Decrease) in Cash and Cash
Equivalents 2,893,000 (3,220,000)
Cash and Cash Equivalents at Beginning of Period 39,418,000 29,958,000
------------ -----------
Cash and Cash Equivalents at End of Period $ 42,311,000 $26,738,000
============ ===========
Noncash Investing Activities:
Additions to Other Real Estate and Other
Repossessed Assets Through Foreclosures $ 611,000 $ 571,000
Sales of Other Real Estate and Other Repossessed
Assets Financed with Loans 83,000 81,000
Increase (Decrease) in Unrealized Gain/Loss on
Available-for-sale Securities, Net of Tax 8,000 (1,000)
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
For information with regard to significant accounting policies,
reference is made to Notes to Consolidated Financial Statements included in the
Annual Report on Form 10-K for the year ended December 31, 1997, which was filed
with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934, as amended.
The accompanying financial statements reflect all adjustments
necessary to present a fair statement of the results for the interim periods
presented, and all adjustments are of a normal recurring nature.
(2) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general purpose financial statements. FAS 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company adopted FAS 130 on January 1, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
FAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. The Company
adopted FAS 133 beginning July 1, 1998.
(3) Acquisition of Subsidiary Bank
The Company completed the acquisition of Crown Park Bancshares, Inc.
("Crown Park") and its wholly owned subsidiary bank, Western National Bank,
Lubbock, Texas ("Western National"), effective January 28, 1997, for an
aggregate cash consideration of $7,510,000. On the acquisition date, Crown Park
was merged with and into a wholly owned subsidiary of the Company and Western
National was merged with and into the Company's subsidiary bank, First State
Bank, National Association, Abilene, Texas (the "Bank"). To obtain funding for
the acquisition, the Company sold an aggregate of 395,312 shares of its common
stock (the "Common Stock") in an underwritten offering at a price of $11.40 per
share (the "Offering"). This included 51,562 shares covered by the
underwriter's over-allotment option. The above number of shares and price per
share have been adjusted for the 5-for-4 stock split, effected in the form of a
25% stock dividend, paid to the Company's shareholders in May 1997. The Company
borrowed $800,000 from a financial institution in Amarillo, Texas (the "Amarillo
Bank") to finance a portion of the cost of acquiring Crown Park. The $800,000 of
borrowings was reduced to $400,000 with the proceeds of the sale of the over-
allotment shares. The borrowing was paid off on December 31, 1997. At the date
of acquisition, Crown Park had total assets of $60,420,000, total loans, net of
unearned income, of $41,688,000, total deposits of $53,604,000 and stockholders'
equity of $4,238,000. This acquisition was accounted for using the purchase
method of accounting. A total of $2,486,000 of goodwill was recorded as a
result of this acquisition.
(4) Pending Acquisition
The Company has entered into a definitive agreement to acquire Azle
Bancorp ("Azle Bancorp") and its subsidiary bank, Azle State Bank, Azle, Texas
("Azle State"), for $19,025,000 in cash. The Company anticipates that it will
raise the funds necessary to consummate the acquisition through a combination of
an underwritten Common Stock offering, an underwritten offering of a new trust
preferred stock issue and borrowings. Details of such potential stock issuances
and borrowings are yet to be determined.
F-6
<PAGE>
At June 30, 1998, Azle State had total assets of $91,658,000, total
loans, net of unearned income, of $45,103,000, total deposits of $80,826,000 and
stockholders' equity of $9,998,000.
The acquisition has been approved by the various regulatory
authorities but is still subject to the approval of the shareholders of Azle
Bancorp and other conditions. If such approval is received and the other
conditions are satisfied, the transaction will probably be consummated during
the third or fourth quarter of 1998.
(5) Unearned ESOP Stock
The Company's Employee Stock Ownership/401(k) Plan (the "Plan")
purchased 18,750 shares, adjusted for the 5-for-4 stock split, effected in the
form of a 25% stock dividend, paid to shareholders in May 1997, of Common Stock
in the Offering in January 1997 for $214,000. The funds used for the purchase
were borrowed from the Company. The note evidencing such borrowing is due in
eighty-four equal monthly installments of $4,000, including interest, and
matures on February 27, 2004. The note bears interest at the Company's floating
base rate plus 1% (9.50% at June 30, 1998). The note is collateralized by the
stock purchased in the Offering.
As a result of the lending arrangement between the Company and the
Plan, the shares are considered "unearned." The shares are "earned" on a pro
rata basis as principal payments are made on the note. The shares are included
in the Company's earnings per share calculations only as they are earned. At
June 30, 1998, a total of 15,923 shares with an original cost of $182,000 are
considered to be unearned.
(6) Earnings Per Share
Basic earnings per common share is computed by dividing net income
available to common shareholders by the weighted average number of shares and
share equivalents outstanding during the period. Because the Company's
outstanding Series C Cumulative Convertible Preferred Stock (the "Series C
Preferred Stock") is cumulative, the dividends allocable to such preferred stock
reduces income available to common shareholders in the basic earnings per share
calculations. In computing diluted earnings per common share for the quarters
and six-month periods ended June 30, 1998 and 1997, the conversion of the Series
C Preferred Stock was assumed, as the effects are dilutive. The weighted
average common shares outstanding used in computing basic earnings per common
share for the quarters ended June 30, 1998 and 1997, was 1,968,000 and 1,854,000
shares, respectively. The weighted average common shares outstanding used in
computing basic earnings per share for the six-month periods ended June 30, 1998
and 1997, was 1,964,000 and 1,742,000 shares, respectively. The weighted
average common shares outstanding used in computing diluted earnings per common
share for the quarters ended June 30, 1998 and 1997, was 2,088,000 and 2,079,000
shares, respectively. The weighted average common shares outstanding used in
computing diluted earnings per common share for the six-month periods ended June
30, 1998 and 1997, was 2,087,000 and 2,015,000 shares, respectively.
(7) Accumulated Other Comprehensive Income
An analysis of accumulated other comprehensive income for the quarters
and six-month periods ended June 30, 1998 and 1997, is as follows:
Unrealized Gains (Losses),
Net of Taxes,
on Available-for-sale Securities
------------------------------------
Quarter Ended Six-month Period
June 30, Ended June 30,
---------------- ----------------
1998 1997 1998 1997
-------- ------ ------ -------
(In thousands)
Balance, beginning of period $ 48 $ (39) $ 31 $ 25
Current period change (9) 63 8 (1)
----- ----- ----- -----
Balance, end of period $ 39 $ 24 $ 39 $ 24
===== ===== ===== =====
F-7
<PAGE>
(8) Settlement of Potential Litigation
In November 1995, the Pension Benefit Guaranty Corporation (the "PBGC")
sent a letter to the Company regarding the Retirement Plan for Employees of the
Texas Bank and Trust Co., Sweetwater, Texas (the "Plan"). In the letter, the
PBGC alleged that the Company was responsible for the Plan and asked that the
Company assume sponsorship of the Plan. The Company declined the PBGC's request
to assume responsibility for, and sponsorship of, the Plan. If the Company had
assumed responsibility for the Plan, the Company would have owed as of June 30,
1995, according to PBGC calculations, approximately $656,000 to the PBGC. In
response, the PBGC, in June 1996, terminated the Plan and became the Plan's
trustee, effective as of June 30, 1992.
Texas Bank and Trust Co., Sweetwater, Texas ("Texas Bank"), became a
repossessed asset of The First State Bank, Abilene, Texas ("FSB - Abilene"), a
former subsidiary of the Company, through a bank foreclosure that occurred in
1985. FSB - Abilene was placed into receivership by the Federal Deposit
Insurance Corporation (the "FDIC") on February 17, 1989. Texas Bank was placed
into receivership by the FDIC on July 27, 1989.
The Company did not intend to assume any responsibility for the Plan and
had decided to vigorously contest any attempt by the PBGC to have the Company
assume responsibility with respect to any aspect of the Plan. The statute of
limitations for any action to be taken by the PBGC against the Company regarding
this matter was set to expire on June 30, 1998. The PBGC indicated to the
Company that as of June 30, 1998, the Company's potential responsibility to the
Plan, according to PBGC calculations, was in excess of $1,000,000. The Company
and the PBGC entered into settlement negotiations, and on June 30, 1998, the
Company and the PBGC executed a tolling agreement to extend the expiration of
the statute of limitations regarding this matter to July 20, 1998. A settlement
agreement was negotiated and consummated on July 20, 1998, and the Company paid
a total of $125,000 ($83,000, net of tax) to the PBGC to avoid costs of
litigation regarding this matter. This amount was accrued into expense in the
Company's Consolidated Financial Statements at June 30, 1998.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Independent Bankshares, Inc.
Abilene, Texas
We have audited the accompanying consolidated balance sheets of Independent
Bankshares, Inc. as of December 31, 1997 and 1996, and the related consolidated
income statements, statements of changes in stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
February 2, 1998
F-9
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------ ------------
Assets:
<S> <C> <C>
Cash and Cash Equivalents:
Cash and Due from Banks $ 14,518,000 $ 11,458,000
Federal Funds Sold 24,900,000 18,500,000
------------ ------------
Total Cash and Cash Equivalents 39,418,000 29,958,000
------------ ------------
Securities (Note 3):
Available-for-sale 22,501,000 27,771,000
Held-to-maturity 47,293,000 47,381,000
------------ ------------
Total Securities 69,794,000 75,152,000
------------ ------------
Loans (Note 4):
Total Loans 142,315,000 94,264,000
Less:
Unearned Income on Installment Loans 1,462,000 2,247,000
Allowance for Possible Loan Losses 1,173,000 793,000
------------ ------------
Net Loans 139,680,000 91,224,000
------------ ------------
Premises and Equipment (Note 5) 7,518,000 4,437,000
Goodwill (Note 2) 3,159,000 957,000
Accrued Interest Receivable 2,208,000 1,599,000
Other Real Estate and Other Repossessed Assets 739,000 389,000
Other Assets 2,058,000 2,252,000
------------ ------------
Total Assets $264,574,000 $205,968,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 6):
Noninterest-bearing Demand Deposits $ 43,868,000 $ 32,240,000
Interest-bearing Demand Deposits 77,495,000 58,676,000
Interest-bearing Time Deposits 121,438,000 98,659,000
------------ ------------
Total Deposits 242,801,000 189,575,000
Accrued Interest Payable 947,000 951,000
Notes Payable (Note 7) 57,000 240,000
Other Liabilities 242,000 265,000
------------ ------------
Total Liabilities 244,047,000 191,031,000
------------ ------------
Commitments and Contingent Liabilities (Notes 13
and 15)
Stockholders' Equity (Notes 9 and 16):
Preferred Stock--Par Value $10.00; 5,000,000
Shares Authorized:
Series C Preferred Stock--Stated Value $42.00;
50,000 Shares Designated; 5,590 and 13,478
Shares Issued and Outstanding at December 31,
1997 and 1996, Respectively 56,000 135,000
Common Stock--Par Value $0.25; 30,000,000 Shares
Authorized; 1,975,263 and 1,104,644 Shares Issued
and Outstanding at December 31, 1997 and 1996,
Respectively 494,000 276,000
Additional Paid-in Capital 13,921,000 9,891,000
Retained Earnings 6,218,000 4,610,000
Unrealized Gain on Available-for-sale Securities
(Note 3) 31,000 25,000
Unearned Employee Stock Ownership Plan Stock (Note
9) (193,000) 0
------------ ------------
Total Stockholders' Equity 20,527,000 14,937,000
------------ ------------
Total Liabilities and Stockholders'
Equity $264,574,000 $205,968,000
============ ============
</TABLE>
See accompanying notes.
F-10
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
1997 1996 1995
----------- ------------ -----------
Interest Income:
Interest and Fees on Loans (Note 4) $12,236,000 $ 8,005,000 $ 7,726,000
Interest on Securities 5,176,000 4,504,000 2,389,000
Interest on Federal Funds Sold 912,000 1,047,000 1,847,000
----------- ----------- -----------
Total Interest Income 18,324,000 13,556,000 11,962,000
----------- ----------- -----------
Interest Expense:
Interest on Deposits 8,600,000 6,382,000 5,201,000
Interest on Notes Payable (Note 7) 59,000 59,000 108,000
----------- ----------- -----------
Total Interest Expense 8,659,000 6,441,000 5,309,000
----------- ----------- -----------
Net Interest Income 9,665,000 7,115,000 6,653,000
Provision for Loan Losses (Note 4) 250,000 201,000 206,000
----------- ----------- -----------
Net Interest Income After Provision for
Loan Losses 9,415,000 6,914,000 6,447,000
----------- ----------- -----------
Noninterest Income:
Service Charges 1,605,000 1,259,000 1,167,000
Trust Fees 195,000 189,000 201,000
Other Income 109,000 103,000 141,000
----------- ----------- -----------
Total Noninterest Income 1,909,000 1,551,000 1,509,000
----------- ----------- -----------
Noninterest Expenses:
Salaries and Employee Benefits 3,970,000 3,082,000 2,849,000
Net Occupancy Expense 857,000 716,000 643,000
Equipment Expense 834,000 663,000 723,000
Stationery, Printing and Supplies
Expense 419,000 288,000 271,000
Professional Fees 333,000 304,000 454,000
Net Costs (Revenues) Applicable to
Other Real Estate
and Other Repossessed Assets 23,000 (24,000) (7,000)
Other Expenses 1,801,000 1,261,000 1,309,000
----------- ----------- -----------
Total Noninterest Expenses 8,237,000 6,290,000 6,242,000
----------- ----------- -----------
Income Before Federal Income Taxes 3,087,000 2,175,000 1,714,000
Federal Income Taxes (Note 8) 977,000 753,000 582,000
----------- ----------- -----------
Net Income $ 2,110,000 $ 1,422,000 $ 1,132,000
=========== =========== ===========
Preferred Stock Dividends (Note 9) $ 41,000 $ 63,000 $ 70,000
=========== =========== ===========
Net Income Available to Common
Stockholders (Note 10) $ 2,069,000 $ 1,359,000 $ 1,062,000
=========== =========== ===========
Basic Earnings Per Common Share
Available to Common Stockholders
(Note 10) $ 1.12 $ 1.00 $ 0.82
=========== =========== ===========
Diluted Earnings Per Common Share
Available to Common Stockholders
(Note 10) $ 1.03 $ 0.84 $ 0.67
=========== =========== ===========
See accompanying notes.
F-11
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS) UNEARNED EMPLOYEE
SERIES C ON STOCK OWNERSHIP
PREFERRED STOCK COMMON STOCK ADDITIONAL AVAILABLE- PLAN STOCK
------------------ ------------------- PAID-IN RETAINED FOR-SALE --------------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES SHARES AMOUNT
------- --------- --------- -------- ------------ ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances--January 1, 1995 16,668 $167,000 778,081 $195,000 $ 8,241,000 $2,570,000 $(100,000) 0 $ 0
Net Income 1,132,000
Adjustment to Unrealized
Gain on Available-for-sale
Securities, Net of Tax
of $86,000 (Note 3) 168,000
Reduction of Deferred Tax
Asset Valuation
Allowance 1,600,000
Cash Dividends (187,000)
4-for-3 Stock Split (Note
9) 259,371 65,000 (2,000) (67,000)
Exercise of Stock Options
(Note 9) 9,037 2,000 34,000
Conversion of Series C
Preferred Stock (Note 9) (232) (3,000) 3,803 1,000 2,000
------ -------- --------- -------- ----------- ---------- --------- ------- ---------
Balances--December 31, 1995 16,436 164,000 1,050,292 263,000 9,875,000 3,448,000 68,000 0 0
Net Income 1,422,000
Adjustment to Unrealized
Loss on Available-for-sale
Securities, Net of Tax of
$23,000 (Note 3) (43,000)
Cash Dividends (260,000)
Conversion of Series C
Preferred Stock (Note 9) (2,958) (29,000) 54,352 13,000 16,000
------ -------- --------- -------- ----------- ---------- --------- ------- ---------
Balances--December 31, 1996 13,478 135,000 1,104,644 276,000 9,891,000 4,610,000 25,000 0 0
Net Income 2,110,000
Adjustment to Unrealized
Gain on Available-for-sale
Securities, Net of Tax of
$3,000 (Note 3) 6,000
Cash Dividends (405,000)
Sale of Stock in Public
Offering (Note 9) 316,250 79,000 3,899,000
Purchase of Stock in
Public Offering by ESOP,
Financed by a Loan from
the Company--Unearned
Stock (Note 9) (15,000) (214,000)
Principal Payments on
Loan to ESOP for Stock
Purchase--Earned Stock
(Note 9) 1,789 21,000
5-for-4 Stock Split (Note
9) 388,911 97,000 (5,000) (97,000) (3,750)
Exercise of Stock Options
(Note 9) 17,499 5,000 94,000
Conversion of Series C
Preferred Stock (Note 9) (7,888) (79,000) 147,959 37,000 42,000
------ -------- --------- -------- ----------- ---------- --------- ------- ---------
Balances--December 31, 1997 5,590 $ 56,000 1,975,263 $494,000 $13,921,000 $6,218,000 $ 31,000 (16,961) $(193,000)
====== ======== ========= ======== =========== ========== ========== ======= =========
</TABLE>
See accompanying notes.
F-12
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 2,110,000 $ 1,422,000 $ 1,132,000
Adjustments to Reconcile Net Income
to Net Cash
Provided by Operating Activities:
Deferred Federal Income Tax
Expense 772,000 677,000 547,000
Depreciation and Amortization 733,000 404,000 367,000
Provision for Loan Losses 250,000 201,000 206,000
Losses on Sales of Investment
Securities 0 10,000 0
Gains on Sales of Premises and
Equipment 0 0 (4,000)
Gains on Sales of Other Real
Estate and Other Repossessed
Assets (58,000) (50,000) (45,000)
Writedown of Other Real Estate
and Other Repossessed Assets 2,000 21,000 32,000
Increase in Accrued Interest
Receivable (192,000) (17,000) (549,000)
Decrease (Increase) in Other
Assets 452,000 (382,000) (176,000)
Increase (Decrease) in Accrued
Interest Payable (182,000) (14,000) 474,000
Increase (Decrease) in Other
Liabilities (1,106,000) 166,000 (840,000)
------------ ------------ ------------
Net Cash Provided by
Operating Activities 2,781,000 2,438,000 1,144,000
------------ ------------ ------------
Cash Flows from Investing Activities:
Proceeds from Maturities of
Available-for-sale Securities 17,809,000 9,437,000 21,828,000
Proceeds from Maturities of
Held-to-maturity Securities 20,195,000 26,461,000 12,930,000
Proceeds from Sale of
Available-for-sale Securities 193,000 30,000 0
Proceeds from Sale of
Held-to-maturity Securities 0 2,000,000 0
Purchases of Available-for-sale
Securities (8,060,000) (19,382,000) (21,242,000)
Purchases of Held-to-maturity
Securities (15,080,000) (36,680,000) (35,864,000)
Net Increase in Loans (8,692,000) (8,160,000) (1,603,000)
Proceeds from Sales of Premises
and Equipment 0 94,000 4,000
Additions to Premises and
Equipment (819,000) (138,000) (177,000)
Proceeds from Sales of Other
Real Estate and Other
Repossessed Assets 1,352,000 754,000 1,025,000
Net Cash and Cash Equivalents
Acquired (Paid) in Acquisitions (1,236,000) 14,203,000 0
------------ ------------ ------------
Net Cash Provided by (Used
in) Investing Activities 5,662,000 (11,381,000) (23,099,000)
------------ ------------ ------------
Cash Flows from Financing Activities:
Net Increase (Decrease) in
Deposits (378,000) 5,018,000 18,520,000
Proceeds from Notes Payable 1,300,000 0 275,000
Repayment of Notes Payable (3,572,000) (616,000) (690,000)
Net Proceeds from Issuance of
Equity Securities 4,077,000 0 34,000
Payment of Cash Dividends (405,000) (260,000) (187,000)
Cash Paid for Fractional Shares
in Stock Dividend (5,000) 0 (2,000)
------------ ------------ ------------
Net Cash Provided by
Financing Activities 1,017,000 4,142,000 17,950,000
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 9,460,000 (4,801,000) (4,005,000)
Cash and Cash Equivalents at
Beginning of Year 29,958,000 34,759,000 38,764,000
------------ ------------ ------------
Cash and Cash Equivalents at End of
Year $ 39,418,000 $ 29,958,000 $ 34,759,000
============ ============ ============
</TABLE>
See accompanying notes.
F-13
<PAGE>
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
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 (3 locations), Lubbock, Odessa (3
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, home equity 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. The Bank also offers investment services and banking by phone or
personal computer.
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 December 30, 1996, an existing subsidiary bank of the
Company, 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.
F-14
<PAGE>
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 this
method or other methods under which income approximates this 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.
At December 31, 1997 and 1996, the Company had no impaired 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, 1997 and 1996, was $0 and
$50,000, respectively. There was no interest income recognized on such loans
during the years ended December 31, 1997, 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. When assets are retired or otherwise disposed of, the
cost and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the period.
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 comparing the
goodwill to the undiscounted cash flows expected to be generated by the acquired
banks during the anticipated period of benefit. As of December 31, 1997,
management believes that no impairment has occurred.
Federal Income Taxes
The Company uses the liability method of accounting for income taxes
as required by 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.
F-15
<PAGE>
Other Real Estate and Other Repossessed Assets
Other 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.
Earnings Per Share
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("FAS 128"), which establishes standards
for computing and presenting earnings per share for entities with publicly held
common stock or potential common stock. FAS 128 simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share," and makes them comparable to international
earnings per share accounting standards. It replaces the presentation of
primary earnings per share with a presentation of basic earnings per share,
which excludes dilution. It also requires dual presentation of basic and
diluted earnings per share on the face of the income statement for all entities
with complex capital structures. The Company adopted FAS 128 on December 31,
1997.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. FAS 130 requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company will adopt FAS 130
beginning January 1, 1998.
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.
NOTE 2: 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 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.
The Company completed the acquisition of Crown Park Bancshares, Inc.
("Crown Park") and its wholly owned subsidiary bank, Western National Bank,
Lubbock, Texas ("Western National"), effective January 28, 1997, for an
aggregate cash consideration of $7,510,000. On the acquisition 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 395,312 shares of its common stock
in an
F-16
<PAGE>
underwritten offering at a price of $11.40 per share (the "Offering"). This
included 51,562 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 a portion of the cost of acquiring Crown Park. The
$800,000 of borrowings was reduced to $400,000 with the proceeds of the sale of
the over-allotment shares. The borrowing was paid off on December 31, 1997. At
the date of acquisition, Crown Park had total assets of $60,420,000, total
loans, net of unearned income, of $41,688,000, total deposits of $53,604,000 and
stockholders' equity of $4,238,000. This acquisition was accounted for using the
purchase method of accounting. A total of $2,486,000 of goodwill was recorded as
a result of this acquisition.
A total of $218,000 and $46,000 in goodwill amortization expense was
recorded during the years ended December 31, 1997 and 1996, respectively. No
goodwill amortization expense was recorded during the year ended December 31,
1995.
The following pro forma financial information combines the historical
results of the Company as if the Crown Park acquisition had occurred as of the
beginning of each period presented. The pro forma amounts do not purport to be
indicative of the results that would have actually been obtained if the
acquisition had occurred at the beginning of each period presented or that may
be obtained in the future:
Year Ended December 31,
-------------------------
1997 1996
------------ -----------
(In thousands,
except per share amounts)
Net interest income $9,833 $9,504
Net income 1,933 1,799
Basic earnings per share 1.03 0.99
Diluted earnings per share 0.94 0.86
Some amounts, specifically the pro forma amounts for net income and basic
and diluted earnings per share for the year ended December 31, 1997, and basic
earnings per share for the year ended December 31, 1996, are less than the
amounts reported herein as a result of certain adjustments recorded by Crown
Park prior to the acquisition.
F-17
<PAGE>
NOTE 3: SECURITIES
The amortized cost and estimated fair value of available-for-sale
securities at December 31, 1997 and 1996, were as follows:
1997
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury securities $16,280,000 $40,000 $13,000 $16,307,000
Obligations of U.S.
Government agencies
and corporations 4,520,000 20,000 2,000 4,538,000
Mortgage-backed securities 1,066,000 7,000 0 1,073,000
Other securities 583,000 0 0 583,000
----------- ------- ------- -----------
Total available-for-sale
securities $22,449,000 $67,000 $15,000 $22,501,000
=========== ======= ======= ===========
1996
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
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
=========== ======= ======= ===========
The amortized cost and estimated fair value of held-to-maturity securities
at December 31, 1997 and 1996, were as follows:
1997
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
U.S. Treasury securities $ 4,985,000 $ 7,000 $ 0 $ 4,992,000
Obligations of U.S.
Government agencies
and corporations 31,584,000 119,000 113,000 31,590,000
Mortgage-backed securities 10,549,000 82,000 21,000 10,610,000
Obligations of states and
political subdivisions 175,000 9,000 0 184,000
----------- -------- -------- -----------
Total held-to-maturity
securities $47,293,000 $217,000 $134,000 $47,376,000
=========== ======== ======== ===========
F-18
<PAGE>
1996
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
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
=========== ======== ======== ===========
The amortized cost and estimated fair value of securities at December 31,
1997, 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.
Amortized Estimated
Available-for-sale Securities Cost Fair Value
----------------------------- ----------- -----------
Due in one year or less $11,744,000 $11,737,000
Due after one year through five years 9,056,000 9,108,000
Due after ten years 583,000 583,000
----------- -----------
21,383,000 21,428,000
Mortgage-backed securities 1,066,000 1,073,000
----------- -----------
Total available-for-sale securities $22,449,000 $22,501,000
=========== ===========
Amortized Estimated
Held-to-maturity Securities Cost Fair Value
--------------------------- ----------- -----------
Due in one year or less $ 4,985,000 $ 4,992,000
Due after one year through five years 31,584,000 31,590,000
Due after five years through ten years 175,000 184,000
----------- -----------
36,744,000 36,766,000
Mortgage-backed securities 10,549,000 10,610,000
----------- -----------
Total held-to-maturity securities $47,293,000 $47,376,000
=========== ===========
At December 31, 1997, securities with an amortized cost and estimated fair
value of $9,666,000 and $9,650,000, respectively, were pledged as collateral for
public and trust fund deposits and for other purposes required or permitted by
law. At December 31, 1996, the amortized cost and estimated fair value of
pledged securities were $10,847,000 and $10,820,000, respectively.
During 1997, the Company sold available-for-sale securities with a book
value of $193,000 and recorded no gain or loss on such sale. 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.
F-19
<PAGE>
NOTE 4: LOANS
The composition of loans at December 31, 1997 and 1996, was as follows:
1997 1996
------------ -----------
Loans to individuals $ 67,453,000 $46,975,000
Real estate loans 44,569,000 26,233,000
Commercial and industrial loans 24,184,000 18,430,000
Other loans 6,109,000 2,626,000
------------ -----------
Total loans 142,315,000 94,264,000
Less unearned income 1,462,000 2,247,000
------------ -----------
Total loans, net of unearned income $140,853,000 $92,017,000
============ ===========
Nonperforming assets at December 31, 1997 and 1996, were as follows:
1997 1996
------------ -----------
Nonaccrual loans $ 70,000 $ 82,000
Accruing loans past due over ninety days 121,000 41,000
Restructured loans 104,000 73,000
Other real estate and other repossessed assets 739,000 389,000
------------ -----------
Total nonperforming assets $ 1,034,000 $ 585,000
============ ===========
The amount of interest income that would have been recorded on nonaccrual
loans for the years ended December 31, 1997, 1996 and 1995, based on the loans'
original terms was $16,000, $17,000 and $14,000, respectively. A total of
$2,000 in interest on nonaccrual loans was actually collected and recorded as
income during the year ended December 31, 1997. No interest was collected on
such loans and recorded as income during 1996 or 1995.
A summary of the transactions in the allowance for possible loan losses for
the years ended December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995
----------- ---------- -----------
Balance at beginning of year $ 793,000 $ 759,000 $ 817,000
Provision for loan losses 250,000 201,000 206,000
Loans charged off (581,000) (389,000) (376,000)
Recoveries of loans charged
off 316,000 73,000 112,000
Bank acquisitions 395,000 149,000 0
----------- ---------- ----------
Balance at end of year $ 1,173,000 $ 793,000 $ 759,000
=========== ========== ==========
NOTE 5: PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1997
and 1996:
1997 1996
----------- ----------
Land $ 1,486,000 $ 928,000
Buildings and improvements 6,821,000 4,312,000
Furniture and equipment 2,028,000 1,499,000
----------- ----------
10,335,000 6,739,000
Less accumulated depreciation 2,817,000 2,302,000
----------- ----------
Net premises and equipment $ 7,518,000 $4,437,000
=========== ==========
F-20
<PAGE>
NOTE 6: DEPOSITS
At December 31, 1997 and 1996, interest-bearing time deposits of $100,000
or more were $38,371,000, and $29,627,000, respectively.
At December 31, 1997, the scheduled maturities of interest-bearing time
deposits was as follows:
Interest-bearing
Time Deposits
----------------
1998 $108,810,000
1999 8,482,000
2000 1,785,000
2001 1,139,000
2002 1,222,000
------------
Total interest-bearing
time deposits $121,438,000
============
NOTE 7: NOTES PAYABLE
The Company had a note payable to a financial institution in Amarillo,
Texas (the "Amarillo Bank"). The note, proceeds of which were used to help fund
the purchase of Crown Park, originated on January 23, 1997, at $800,000. The
balance was reduced to $200,000 by July 23, 1997. This $200,000 was renewed
with a note that had a one-year maturity with payments of $50,000 principal plus
interest to be made quarterly beginning October 23, 1997. The note bore interest
at the Amarillo Bank's floating base rate plus 1% and was collateralized by 100%
of the stock of the Bank. On December 31, 1997, the Company paid off the
remaining principal balance of the note.
In addition, at December 31, 1997, the Company had a note payable to
one current director of the Company with a balance of $50,000. The note had an
original face amount of $152,000, but was discounted upon issuance because it
bore interest at a below-market interest rate (6%). The note was payable in
three equal annual installments, plus accrued interest beginning March 1, 1996.
The note was paid off on January 2, 1998. The balance of two additional notes
to two former directors of the Company, with similar terms, aggregating $67,000
were paid off on December 19, 1997. The two additional notes had an aggregate
original face amount of $198,000. The three notes represented a portion of the
final settlement of certain litigation.
At December 31, 1997, the Bank had a $7,000 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 8: FEDERAL INCOME TAXES
Due to the fact that the Company effected a quasi-reorganization as of
December 31, 1989, utilization of any of the Company's net operating loss
carryforwards subsequent to that 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 Company's deferred tax provision for 1997, 1996 and
1995 totaled $772,000, $677,000 and $547,000, respectively.
F-21
<PAGE>
Significant components of the Company's deferred tax assets and
liabilities at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 238,000 $1,112,000
Allowance for possible loan losses 265,000 278,000
Tax credit carryforwards 998,000 549,000
Director indemnification 17,000 79,000
Real estate and other repossessed assets 115,000 69,000
Other, net 0 3,000
---------- ----------
Total gross deferred tax assets 1,633,000 2,090,000
Less valuation allowance for deferred
tax assets (167,000) (389,000)
---------- ----------
Net deferred tax assets 1,466,000 1,701,000
---------- ----------
Deferred tax liabilities:
Unrealized gain on available-for-sale
securities (17,000) (14,000)
Depreciation and amortization (93,000) (23,000)
Other, net (74,000) 0
---------- ----------
Total gross deferred tax liabilities (184,000) (37,000)
---------- ----------
Net deferred tax asset $1,282,000 $1,664,000
========== ==========
</TABLE>
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. 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
decreased the valuation allowance relating to Peoples National and Winters State
by $112,000 during the third quarter of 1997 based on the Company's trend of
positive operating results. The Company may reduce or increase its valuation
allowance depending on changes in the expectation of future earnings and other
circumstances. Management believes that it is more likely than not that the
Company will generate sufficient future taxable income to realize the deferred
tax asset less the related valuation allowance.
At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $372,000 acquired as part of the Winters State
acquisition and approximately $367,000 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.
At December 31, 1997, the Company had available general business credit and
alternative minimum tax credit carryforwards of approximately $30,000 and
$968,000, respectively. If not utilized, the general business credit
carryforwards will expire as follows: 1998--$13,000, 1999--$6,000 and 2000--
$11,000. The alternative minimum tax credit will carryforward until utilized to
reduce future federal income taxes.
F-22
<PAGE>
The comprehensive provisions for federal income taxes for the years ended
December 31, 1997, 1996 and 1995, consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Current tax provision $205,000 $ 76,000 $ 35,000
Deferred tax provision 772,000 677,000 547,000
-------- -------- --------
Provision for tax expense charged
to results of operations 977,000 753,000 582,000
Tax (benefit) on adjustment to
unrealized gain/loss on
available-for-sale securities 3,000 (23,000) 86,000
-------- -------- --------
Comprehensive provision for
federal income taxes $980,000 $730,000 $668,000
======== ======== ========
</TABLE>
NOTE 9: STOCKHOLDERS' EQUITY
In December 1993, the Company's board of directors approved the granting of
nonqualified stock options for certain executive officers of the Company under
which an original aggregate of 18,333 shares of Common Stock, adjusted for the
4-for-3 stock split, effected in the form of a 33 1/3% stock dividend, paid to
stockholders in May 1995, and the 5-for-4 stock split, effected in the form of a
25% stock dividend, paid to stockholders in May 1997, may be issued. Options
were exercisable at any time during the period January 1, 1994, to December 31,
1997, at a price of $5.40 per share, adjusted for the stock dividends noted
above.
The Company's Series C Cumulative Convertible Preferred Stock ("Series C
Preferred Stock") 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 $1.83 per share, adjusted
for the three stock dividends noted above, and has certain voting rights if
dividends are in arrears for three quarters. 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
4-for-3 stock split, effected in the form of a 33 1/3% stock dividend, paid to
stockholders in May 1995. An additional 388,911 shares of Common Stock were
issued as a result of the 5-for-4 stock split, effected in the form of a 25%
stock dividend, paid to stockholders in May 1997. The 1995 and 1997 stock
dividends were accounted for by a transfer from retained earnings to common
stock of $65,000 and $97,000, respectively, representing the above respective
number of shares at a par value of $0.25 per share. Cash paid in lieu of
fractional shares was transferred from additional paid-in capital.
All references throughout these consolidated financial statements to the
number of shares of Common Stock, per share amounts, stock option data and
market prices of the Common Stock have been restated for the above-referenced
stock splits, effected in the form of stock dividends.
F-23
<PAGE>
The following are summaries of the number of options or shares of Series C
Preferred Stock, the number of shares of Common Stock reserved for issuance upon
exercise of options or conversion of Series C Preferred Stock and the related
exercise or conversion price per share, adjusted for the three stock dividends
noted above, for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Exercise or
Shares Conversion
Reserved for Price
Issuance Per Share
------------- ------------
<S> <C> <C>
1993 Stock Options
------------------
Balance January 1, 1995 11,000 $ 9.00
4-for-3 Stock Split 3,666 (2.25)
-------- ------
Balance December 31, 1995 and 1996 14,666 6.75
5-for-4 Stock Split 2,833 (1.35)
Options Exercised (17,499) (5.40)
-------- ------
Balance December 31, 1997 0 $ 0
======== ======
Series C Preferred Stock
------------------------
Balance January 1, 1995 229,685 $ 3.05
4-for-3 Stock Split 76,128 (0.76)
Shares Converted (3,803) 0
-------- ------
Balance December 31, 1995 302,010 2.29
Shares Converted (54,352) 0
-------- ------
Balance December 31, 1996 247,658 2.29
5-for-4 Stock Split 28,697 (0.46)
Shares Converted (147,959) 0
-------- ------
Balance December 31, 1997 128,396 $ 1.83
======== ======
</TABLE>
The Company's Employee Stock Ownership/401(k) Plan (the "Plan") purchased
18,750 shares, adjusted for the 5-for-4 stock split, effected in the form of a
25% stock dividend, paid to stockholders on May 30, 1997, of the Company's
Common Stock in the Company's public stock offering in January 1997 for
$214,000. The funds used for the purchase were borrowed from the Company. The
note evidencing such borrowing is due in eighty-four equal monthly installments
of $4,000, including interest, and matures on February 27, 2004. The note bears
interest at the Company's floating base rate plus 1% (9.50% at December 31,
1997). The note is collateralized by the stock purchased in the stock offering.
As a result of the lending arrangement between the Company and the Plan,
the shares are considered "unearned." The shares are "earned" on a pro rata
basis as principal payments are made on the note. The shares are included in
the Company's earnings per share calculations only as they are earned. At
December 31, 1997, a total 16,961 shares with an original cost of $193,000 are
considered to be unearned.
NOTE 10: EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Because the Company's outstanding Series C
Preferred Stock is cumulative, the dividends allocable to such preferred stock
reduces income available to common stockholders in the basic earnings per share
calculations. In computing diluted earnings per common share for the years ended
December 31, 1997, 1996 and 1995, the conversion of the Series C Preferred Stock
and the exercise of outstanding stock options were assumed, as the effects are
dilutive. The following table presents information necessary to calculate
earnings per share for the years ended December 31, 1997, 1996 and 1995
(adjusted for the 4-for-3 stock split, effected in the form of a 33 1/3% stock
dividend, paid to stockholders in May 1995, and for the 5-for-4 stock split,
effected in the form of a 25% stock dividend, paid to stockholders in May 1997):
F-24
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Basic Earnings Per Common Share (In thousands)
- -------------------------------
<S> <C> <C> <C>
Net income $ 2,110 $ 1,422 $ 1,132
Preferred stock dividends (41) (63) (70)
-------- -------- --------
Net income available to common stockholders $ 2,069 $ 1,359 $ 1,062
======== ======== ========
Weighted average shares outstanding 1,842 1,355 1,299
======== ======== ========
<CAPTION>
Year Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Diluted Earnings Per Common Share (In thousands)
- ---------------------------------
<S> <C> <C> <C>
Net income $ 2,110 $ 1,422 $ 1,132
======== ======== ========
Weighted average shares outstanding 1,842 1,355 1,299
Exercise of stock options 9 8 11
Conversion of Series C Preferred Stock 197 335 379
-------- -------- --------
Adjusted weighted average shares outstanding 2,048 1,698 1,689
======== ======== ========
</TABLE>
NOTE 11: BENEFIT PLANS
The Company's Plan 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
with the Company or the Bank. Contributions made to the employee stock ownership
portion of the Plan by the Company were $100,000, $77,000 and $72,000 for the
years ended December 31, 1997, 1996 and 1995, 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 in 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, 1997,
154,199 shares of Common Stock of the Company were held by the Plan.
NOTE 12: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company and the Bank have loans,
deposits and other transactions with their respective 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 $2,511,000, $3,025,000 and
$1,053,000 at December 31, 1997, 1996 and 1995, respectively. Additions and
reductions on such loans were $2,903,000 and $3,417,000, respectively, for the
year ended December 31, 1997.
The Company and its subsidiaries paid $42,000, $28,000 and $19,000 in fees
to a director-related company for services rendered on various legal matters
during 1997, 1996 and 1995, 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").
F-25
<PAGE>
NOTE 13: COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various 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
$289,000, $336,000 and $290,000 in 1997, 1996 and 1995, respectively.
The minimum payments due under these leases at December 31, 1997, are as
follows:
1998 $160,000
1999 115,000
2000 118,000
2001 89,000
2002 64,000
2003 2,000
--------
Total $548,000
========
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial assets and financial
liabilities at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Financial Assets
----------------
Cash and due from banks $ 14,518,000 $ 14,518,000 $ 11,458,000 $ 11,458,000
Federal funds sold 24,900,000 24,900,000 18,500,000 18,500,000
Available-for-sale securities 22,501,000 22,501,000 27,771,000 27,771,000
Held-to-maturity securities 47,293,000 47,376,000 47,381,000 47,291,000
Loans, net of unearned income 140,853,000 143,744,000 92,017,000 93,814,000
Accrued interest receivable 2,208,000 2,208,000 1,599,000 1,599,000
Financial Liabilities
---------------------
Noninterest-bearing demand deposits $ 43,868,000 $ 43,868,000 $ 32,240,000 $ 32,240,000
Interest-bearing demand deposits 77,495,000 77,495,000 58,676,000 58,676,000
Interest-bearing time deposits 121,438,000 121,724,000 98,659,000 98,923,000
Accrued interest payable 947,000 947,000 951,000 951,000
Notes payable 57,000 57,000 240,000 240,000
</TABLE>
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
For variable-rate loans that reprice frequently with no significant change
in credit risk, fair values are based on carrying values. The fair values of
other loans are estimated using discounted cash flow analyses, which utilize
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.
The fair values of noninterest and interest-bearing demand deposits are, by
definition, equal to the amount payable on demand, i.e., their carrying amount.
The fair values of interest-bearing time deposits are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates of similar maturities.
F-26
<PAGE>
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 15: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
entered into in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit and financial guarantees. Those instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
in the accompanying financial statements. The contractual amounts of those
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
standby letters of credit and financial guarantees is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments. Unless noted otherwise, the Company does not require
collateral or other security to support financial instruments with credit risk.
The Company had outstanding loan commitments of approximately $6,930,000 and
outstanding standby letters of credit and financial guarantees of approximately
$187,000 at December 31, 1997.
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, 1997.
In the normal course of business, the Company maintains deposits with other
financial institutions in amounts which exceed FDIC insurance coverage limits.
NOTE 16: 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
F-27
<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, 1997, the Company and the Bank met all capital adequacy
requirements to which they were subject.
At December 31, 1997, 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. 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,
1997, were 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 $ 12,323 8.00% $ 17,337 11.26%
Total capital to risk-weighted assets 15,404 10.00 18,510 12.02
Tier 1 capital to adjusted quarterly
average assets 15,510 6.00 17,337 6.71
</TABLE>
The minimum capital amounts and ratios for well capitalized banks and the
Bank's actual capital amounts and ratios at December 31, 1997, were 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 $ 12,385 8.00% $ 15,855 10.24%
Total capital to risk-weighted assets 15,482 10.00 17,028 11.00
Tier 1 capital to adjusted quarterly
average assets 15,431 6.00 15,855 6.18
</TABLE>
At December 31, 1997, retained earnings of the Bank included approximately
$2,780,000 that was available for payment of dividends to the Company without
prior approval of regulatory authorities.
F-28
<PAGE>
NOTE 17: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of the Company, parent only, are presented
below:
INDEPENDENT BANKSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
----------- -----------
Assets:
Cash $ 326,000 $ 148,000
Investment in subsidiaries 19,125,000 13,576,000
Premises and equipment 2,000 3,000
Other assets 1,214,000 1,452,000
----------- -----------
Total assets $20,667,000 $15,179,000
=========== ===========
Liabilities:
Notes payable $ 50,000 $ 228,000
Accrued interest payable and other liabilities 90,000 14,000
----------- -----------
Total liabilities 140,000 242,000
Stockholders' equity 20,527,000 14,937,000
----------- -----------
Total liabilities and stockholders' equity $20,667,000 $15,179,000
=========== ===========
INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
----------- ----------- -----------
Income:
Dividends from subsidiaries (see Note
16) $ 900,000 $1,000,000 $ 905,000
Management fees from subsidiaries 150,000 161,000 177,000
Interest on loan to the Plan 18,000 0 0
Interest from subsidiaries 1,000 3,000 2,000
---------- ---------- ----------
Total income 1,069,000 1,164,000 1,084,000
---------- ---------- ----------
Expenses:
Interest 33,000 58,000 107,000
Other expenses 570,000 557,000 756,000
---------- ---------- ----------
Total expenses 603,000 615,000 863,000
---------- ---------- ----------
Income before federal income taxes and
equity in undistributed earnings of
subsidiaries 466,000 549,000 221,000
Federal income tax benefit (276,000) (162,000) (236,000)
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiaries 742,000 711,000 457,000
Equity in undistributed earnings of
subsidiaries 1,368,000 711,000 675,000
---------- ---------- ----------
Net income $2,110,000 $1,422,000 $1,132,000
========== ========== ==========
F-29
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 2,110,000 $1,422,000 $1,132,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred federal income tax expense 772,000 677,000 547,000
Depreciation and amortization 1,000 1,000 2,000
Equity in undistributed earnings of
subsidiaries (1,368,000) (711,000) (675,000)
Increase in other assets (197,000) (540,000) (97,000)
Decrease in accrued interest payable
and other liabilities (231,000) (16,000) (390,000)
----------- ---------- ----------
Net cash provided by operating
activities 1,087,000 833,000 519,000
----------- ---------- ----------
Cash flows from investing activities:
Loans made to employee stock
ownership plan (239,000) 0 11,000
Proceeds from repayments of loans
made to employee stock ownership
plan 46,000 0 (11,000)
Capital contribution made to
subsidiary (4,200,000) 0 0
----------- ---------- ----------
Net cash used in investing
activities (4,393,000) 0 0
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from notes payable 800,000 0 275,000
Repayment of notes payable (983,000) (616,000) (687,000)
Net proceeds from issuance of
equity securities 4,077,000 0 34,000
Cash paid for fractional shares in
stock dividend (5,000) 0 (4,000)
Payment of cash dividends (405,000) (260,000) (187,000)
----------- ---------- ----------
Net cash used in financing
activities 3,484,000 (876,000) (569,000)
----------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 178,000 (43,000) (50,000)
Cash and cash equivalents at beginning
of year 148,000 191,000 241,000
----------- ---------- ----------
Cash and cash equivalents at end of
year $ 326,000 $ 148,000 $ 191,000
=========== ========== ==========
F-30
<PAGE>
NOTE 18: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 1997,
1996 and 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest $ 8,663,000 $ 6,372,000 $4,835,000
Federal income taxes 670,000 438,000 15,000
Noncash investing activities:
Additions to other real estate and
other repossessed assets during the
year through foreclosures $ 1,283,000 $ 1,015,000 $1,039,000
Sales of other real estate and other
repossessed assets financed with
loans 93,000 240,000 196,000
Transfer of other real estate and
other repossessed assets to loans 0 0 125,000
Increase (decrease) in unrealized
gain/loss on available-for-sale
securities, net of tax 6,000 (43,000) 168,000
Other liabilities replaced with notes
payable 0 0 334,000
Details of acquisitions:
Cash paid in acquisitions $ 7,510,000 $ 1,505,000 $ 0
Cash and cash equivalents held by
companies acquired at dates of
acquisition (6,274,000) (15,708,000) 0
----------- ------------ ----------
Net cash paid (acquired) in
acquisitions $ 1,236,000 $(14,203,000) $ 0
=========== ============ ==========
</TABLE>
F-31
<PAGE>
QUARTERLY DATA (UNAUDITED)
The following table presents the unaudited results of operations for the
past two years by quarter. See "Note 10: Earnings Per Share" in the Company's
Consolidated Financial Statements.
1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(In thousands, except per share amounts)
Interest income $4,296 $4,678 $4,678 $4,672 $18,324
Interest expense 2,056 2,193 2,204 2,206 8,659
Net interest income 2,240 2,485 2,474 2,466 9,665
Provision for loan losses 0 60 150 40 250
Income before federal income taxes 772 821 698 796 3,087
Net income 493 562 550 505 2,110
Basic earnings per common share
available to common stockholders $ 0.29 $ 0.30 $ 0.27 $ 0.26 $ 1.12
Diluted earnings per common share
available to common stockholders 0.26 0.27 0.26 0.24 1.03
1996
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(In thousands, except per share amounts)
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
Basic earnings per common share
available to common stockholders $ 0.26 $ 0.22 $ 0.26 $ 0.26 $ 1.00
Diluted earnings per common share
available to common stockholders 0.21 0.19 0.22 0.22 0.84
The above unaudited financial information reflects all adjustments that
are, in the opinion of management, necessary to present a fair statement of the
results of operations for the interim periods presented.
F-32
<PAGE>
ACCOUNTANT'S COMPILATION REPORT
To the Board of Directors and Shareholders
of Azle Bancorp
Azle, Texas
We have compiled the accompanying consolidated balance sheets of Azle Bancorp
and Subsidiaries as of June 30, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
periods of six months then ended, and the consolidated statements of changes in
shareholders' equity for the period of six months ended December 31, 1997 in
accordance with Statements on Standards for Accounting and Review Services
issued by the American Institute of Certified Public Accountants..
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying financial statements and, accordingly, do not express
an opinion or any other form of assurance on them.
/s/ STOVALL, GRANDEY & WHATLEY
July 17, 1998
F-33
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash and Due from Banks $ 5,553,411 $ 5,087,142
Federal Funds Sold 1,000,000 1,500,000
Investment Securities--Note 2
Available-for-sale 4,242,375 4,376,585
Held-to-maturity 32,541,328 31,967,389
----------- -----------
Total Investment Securities 36,783,703 36,343,974
Loans, Net of unearned discount and allowance for
loan losses--Note 3 44,442,140 42,095,813
Bank Premises and Equipment, Net of accumulated
depreciation--Note 4 2,334,155 1,621,217
Other Real Estate 304,582 216,104
Accrued Interest Receivable And Other Assets 1,242,140 1,052,589
----------- -----------
Total Assets $91,660,131 $87,916,839
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand $16,091,397 $15,468,929
Interest bearing transaction accounts 22,210,803 20,411,441
Savings 9,463,712 9,286,609
Time 33,049,868 32,825,860
----------- -----------
Total Deposits 80,815,780 77,992,839
Other Liabilities
Accrued interest and other payables 386,638 406,350
Income taxes--Note 5:
Current 14,279 20,229
Net deferred tax liability 432,831 434,082
Minority interest in consolidated subsidiary 311,938 282,464
----------- -----------
Total Other Liabilities 1,145,686 1,143,125
----------- -----------
Total Liabilities 81,961,466 79,135,964
Commitments and Contingencies--Notes 8 And 10
Shareholders' Equity--Note 11:
Capital stock, par value--$1 a share:
Authorized--1,000,000 shares; Issued and
outstanding--662,595 shares 662,595 662,595
Capital surplus 827,115 827,115
Retained earnings 8,192,947 7,272,818
Unrealized gain on available-for-sale securities,
net of deferred tax:
1998--$10,209; 1997--$11,415 19,819 22,158
----------- -----------
9,702,476 8,784,686
Less capital stock held in treasury, 3,811 shares (3,811) (3,811)
----------- -----------
Total Shareholders' Equity 9,698,665 8,780,875
----------- -----------
Total Liabilities and Shareholders' Equity $91,660,131 $87,916,839
=========== ===========
</TABLE>
See Accountant's Compilation Report and Notes to Consolidated Financial
Statements.
F-34
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---------- ----------
Interest Income:
Interest and fees on loans $2,323,461 $2,165,123
Interest on investment securities:
Taxable 924,378 906,111
Nontaxable 239,539 239,140
---------- ----------
1,163,917 1,145,251
Interest on federal funds sold 40,918 28,255
---------- ----------
Total Interest Income 3,528,296 3,338,629
Interest Expense--on deposits 1,315,089 1,275,289
---------- ----------
Net Interest Income 2,213,207 2,063,340
Provision for Loan Losses--Note 3 36,211 29,755
---------- ----------
Net Interest Income after Provision for Loan Losses 2,176,996 2,033,585
Noninterest Income
Service charges on deposit accounts 321,026 305,560
Other 77,128 70,366
---------- ----------
Total Noninterest Income 398,154 375,926
---------- ----------
2,575,150 2,409,511
Noninterest Expense 1,565,394 1,422,213
---------- ----------
Income before Federal Income Taxes and Minority
Interest 1,009,756 987,298
Federal Income Taxes--Note 5 271,550 258,591
---------- ----------
Income Before Minority Interest 738,206 728,707
Minority Interest 23,082 23,223
---------- ----------
Net Income $ 715,124 $ 705,484
========== ==========
The accompanying Notes are an integral part of these financial statements.
F-35
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE PERIODS OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
Capital Capital Retained on AFS Treasury
Stock Surplus Earnings Securities Stock Total
-------- -------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $662,595 $827,115 $6,732,030 $ 14,302 $ (3,811) $8,232,231
Net income for the period
of six months ended
June 30, 1997 705,484 705,484
Cash dividends--$.25 a share (164,696) (164,696)
Unrealized gain on available-
for-sale securities,
net of tax 7,856 7,856
-------- -------- ---------- ---------- -------- ----------
Balance at June 30, 1997 662,595 827,115 7,272,818 22,158 (3,811) 8,780,875
Net income for the period
of six months ended
December 31, 1997 748,502 748,502
Cash dividends--$.325 a share (214,105) (214,105)
Unrealized gain on available-
for-sale securities,
net of tax 1,880 1,880
-------- -------- ---------- ---------- -------- ----------
Balance at December 31, 1997 662,595 827,115 7,807,215 24,038 (3,811) 9,317,152
Net income for the period
of six months ended
June 30, 1998 715,124 715,124
Cash dividends--$.50 a share (329,392) (329,392)
Unrealized loss on available-
for-sale securities, net of
tax benefit (4,219) (4,219)
-------- -------- ---------- ---------- -------- ----------
Balance at June 30, 1998 $662,595 $827,115 $8,192,947 $ 19,819 $ (3,811) $9,698,665
======== ======== ========== ========== ======== ==========
</TABLE>
See Accountant's Compilation Report and Notes to Consolidated Financial
Statements.
F-36
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIODS OF SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(UNAUDITED)
1998 1997
------------ ------------
Cash Flows From Operating Activities:
Net income $ 715,124 $ 705,484
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 88,422 84,038
Provision for loan losses 36,211 29,755
Net premium amortization or (discount accretion)
on investment securities (10,005) (959)
(Increase) decrease in accrued income and
other assets (55,857) 164,145
Increase (decrease) in accrued expenses and
other liabilities (137,988) (168,260)
Minority interest in subsidiary income 23,082 23,223
----------- -----------
Total adjustments (56,135) 131,972
----------- -----------
Net Cash Provided by Operating Activities 658,989 837,456
Cash Flows from Investing Activities:
Net decrease in federal funds sold 2,500,000 1,000,000
Excess of purchases of investment
securities over proceeds from maturities:
Available-for-sale (360,156) 438,360
Held-to-maturity (483,384) 23,331
Net increase in loans (1,140,648) (1,629,270)
Purchase of premises and equipment (761,455) (16,794)
Purchase of capital stock of subsidiary -- (5,421)
----------- -----------
Net Cash Used by Investing Activities (245,643) (189,794)
Cash Flows from Financing Activities:
Net increase (decrease) in demand deposits,
interest-bearing transaction accounts and savings 2,551,486 (1,041,366)
Net increase (decrease) in certificates of deposit (568,955) 955,719
Dividends paid (329,392) (164,696)
----------- -----------
Net Cash Provided (Used) by Financing Activities 1,653,139 (250,343)
----------- -----------
Net Increase in Cash and Due From Banks 2,066,485 397,319
Cash and Due from Banks At Beginning of Period 3,486,926 4,689,823
----------- -----------
Cash and Due from Banks at End of Period $ 5,553,411 $ 5,087,142
=========== ===========
Supplemental Schedule of Noncash Investing and
Financing Activities:
(1) Interest paid $ 1,374,626 $ 1,402,140
(2) Income taxes paid 350,000 300,000
(3) Other real estate acquired through loan
foreclosures 88,478 120,680
See Accountant's Compilation Report and Notes to Consolidated Financial
Statements.
F-37
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Azle Bancorp and Subsidiaries are
in accordance with generally accepted accounting principles. A summary of the
more significant policies follows:
Principles of Consolidation
The consolidated financial statements of Azle Bancorp (Bancorp) includes
its accounts and those of its wholly-owned subsidiary Azle Holdings, Inc.
(Holdings) and Holdings 97% owned subsidiary Azle State Bank (Bank). All
significant inter-company accounts and transactions have been eliminated on
consolidation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
primary area of estimation in the accompanying financial statements relates to
the determination of the allowance for loan losses.
Investment Securities
Effective January 1, 1994, Bancorp adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). Under the provisions of SFAS 115, investment
securities that are held for short-term resale are classified as trading
securities and carried at fair value. Debt securities that management has the
ability and intent to hold to maturity are classified as held-to-maturity and
carried at cost, adjusted for amortization of premiums and accretion of
discounts using methods approximating the interest method. Other marketable
securities are classified as available-for-sale and are carried at fair value.
Realized and unrealized gains and losses on trading securities are included in
net income. Unrealized gains and losses on securities available-for-sale, net
of the tax effect, are recognized as direct increases or decreases in
shareholders' equity.
Gains or losses on disposition are recognized using the specific
identification method.
Loans and Allowance For Loan Losses
Loans are stated at the principal amount outstanding less unearned
discount, fees and the allowance for loan losses. Unearned discount on
installment loans is recognized in income over the terms of the loans by a
method approximating the interest method. Interest income on all other loans is
recognized based upon the principal amounts outstanding. The accrual of
interest on a loan is discontinued when, in the opinion of management, there is
doubt about the ability of the borrower to pay interest or principal. Interest
previously earned, but uncollected on such loans, is recognized as income when
collected, until such time as the loan is returned to an accrual status.
Loans and Allowance For Loan Losses
The allowance for loan losses is comprised of amounts charged against
income in the form of the provision for loan losses, less charged-off loans, net
of recoveries. The amount of the provision for possible loan losses charged
against income in each period is determined by management based on a number of
factors, including the
F-38
<PAGE>
Bank's loss experience in relation to outstanding loans and the existing level
of the allowance, prevailing and prospective economic conditions, and
management's continuing review of nonperforming loans and its evaluation of the
quality of the loan portfolio. Loans are placed in nonaccrual status when
management believes that the borrower's financial condition, after giving
consideration to economic and business conditions and collection efforts, is
such that collection of interest is doubtful. Loans are charged against the
allowance for loan losses when management believes that collection of the
principal is unlikely.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation expense is computed on the straight-line and
accelerated methods, based upon the estimated useful lives of the assets.
Maintenance and repairs are charged to operating expenses. Renewals and
betterments are added to the asset accounts and depreciated over the periods
benefited. Depreciable assets sold or retired are removed from the asset and
related accumulated depreciation accounts and any gain or loss is reflected in
the income and expense accounts.
Other Real Estate
Assets (primarily real estate) acquired in satisfaction of uncollectible
loans are initially recorded at the lower of the loan balance or estimated fair
value at the time of foreclosure. Any excess of the loan balance over the
estimated fair value is charged to the allowance for loan losses. The carrying
value is periodically evaluated by management and is reduced to estimated fair
value, by charges to expense.
Federal Income Taxes
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the tax and financial reporting
of the allowance for loan losses, nonaccrual loans, securities and accumulated
depreciation. The deferred tax assets and liabilities represent the future tax
return consequences of those differences which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
The Parent Company files a consolidated federal income tax return.
Pursuant to a tax sharing agreement with the Bank, Holdings and the Parent
Company, the Parent Company and Holdings have allocated the tax benefits of
their losses to the Bank. Consequently, payments or refunds of taxes are
usually made by or allocated to the Bank. Deferred income taxes are recorded
for temporary differences between income for financial reporting and income tax
purposes.
Cash and Cash Equivalents
For the purpose of presentation in the Statements of Cash Flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "Cash and Due from Banks".
F-39
<PAGE>
NOTE 2: INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at June 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
Available-For-Sale
- ------------------
<S> <C> <C> <C> <C>
U.S. government agencies and corporations $ 1,996,066 $ 2,371 $ (2,188) $ 1,996,249
U.S. government agency mortgage backed securities 2,215,313 32,581 (1,768) 2,246,126
----------- -------- -------- -----------
Totals $ 4,211,379 $ 34,952 $ (3,956) $ 4,242,375
=========== ======== ======== ===========
Held-to-Maturity
- ----------------
U.S. treasury securities $ 399,668 $ 2,457 $ - $ 402,125
U.S. government agencies and corporations 24,283,212 84,438 (36,247) 24,331,403
Obligations of states and political subdivisions 7,858,448 522,149 (181) 8,380,416
----------- -------- -------- -----------
Totals $32,541,328 $609,044 $(36,428) $33,113,944
=========== ======== ======== ===========
</TABLE>
The balance sheet as of June 30, 1998, reflects the fair value of available-
----------
for-sale securities, $4,242,375, and the amortized cost of held-to-maturity
--------------
securities, $ 32,541,328, for a total of $36,783,703. A net unrealized gain of
$30,996 is in the available-for-sale investment securities balance. The
unrealized gain, net of tax, is included in shareholder's equity.
<TABLE>
<CAPTION>
1997
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available-For-Sale
- ------------------
U.S. government agencies and corporations $ 987,158 $ 2,842 $ - $ 990,000
U.S. government agency mortgage backed securities 3,354,752 36,870 (5,037) 3,386,585
----------- -------- -------- -----------
Totals $ 4,341,910 $ 39,712 $ (5,037) $ 4,376,585
=========== ======== ======== ===========
Held-to-Maturity
- ----------------
U.S. treasury securities $ 2,496,638 $ 4,940 $ (2,109) $ 2,499,469
U.S. government agencies and corporations 21,647,143 95,059 (66,175) 21,676,027
Obligations of states and political subdivisions 7,823,608 501,250 (539) 8,324,319
----------- -------- -------- -----------
Totals $31,967,389 $601,249 $(68,823) $32,499,815
=========== ======== ======== ===========
</TABLE>
The balance sheet as of June 30, 1997, reflects the fair value of available-
----------
for-sale securities, $4,376,585, and the amortized cost of held-to-maturity
--------------
securities, $31,967,389, for a total of $36,343,974. A net unrealized gain of
$34,675 is in the available-for-sale investment securities balance. The
unrealized gain, net of tax, is included in shareholder's equity.
Securities with amortized cost of $5,655,798 and $4,767,266 and fair values of
$5,760,996 and $4,828,744 at June 30, 1998 and 1997, respectively, were pledged
to secure public deposits and for other purposes as required or permitted by
law.
F-40
<PAGE>
There were no sales of investment securities in 1998 or 1997.
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
An analysis of loan categories at June 30, 1998 and 1997, is as follows:
1998 1997
----------- -----------
Commercial, farm and industrial loans $16,292,314 $16,014,402
Real estate loans 20,615,588 19,494,523
Installment loans 9,439,251 8,344,645
Overdrafts 29,934 24,641
----------- -----------
46,377,087 43,878,211
Less: Unearned discount and fees (1,274,565) (1,127,185)
Allowance for loan losses (660,382) (655,213)
----------- -----------
Loans, Net $44,442,140 $42,095,813
=========== ===========
Transactions in the allowance for loan losses are summarized as follows:
1998 1997
----------- -----------
Balance, beginning of period $ 640,596 $ 668,053
Provisions, charged to income 36,211 29,755
----------- -----------
676,807 697,808
Loans charged off (39,258) (59,911)
Recoveries of loans previously charged off 22,833 17,316
----------- -----------
Net (16,425) (42,595)
----------- -----------
Balance at end of period $ 660,382 $ 655,213
=========== ===========
At June 30, 1998, the Bank had nonaccrual loans of approximately $165,000
for which impairment had not been recognized. If interest on these loans had
been recognized at the original interest rates, interest income would have
increased approximately $5,850 for 1998.
Azle State Bank grants commercial, real estate and consumer loans to
customers within its local lending area. Although the Bank has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the local real estate market.
NOTE 4: BANK PREMISES AND EQUIPMENT
The investment in bank premises and equipment stated at cost at June 30,
1998and 1997, is as follows:
1998 1997
---------- ----------
Land $ 264,092 $ 264,092
Buildings and improvements 2,449,462 1,780,116
Furniture, fixtures and equipment 1,787,643 1,566,348
---------- ----------
4,501,197 3,610,556
Less accumulated depreciation 2,167,042 1,989,339
---------- ----------
Bank Premises and Equipment--Net $2,334,155 $1,621,217
========== ==========
F-41
<PAGE>
Depreciation on bank premises and equipment charged to expense totaled $88,422
and $84,038 for the years ended June 30, 1998 and 1997, respectively.
NOTE 5: INCOME TAXES
The components of the income tax provision were as follows:
1998 1997
--------- ---------
Federal Income Tax Provision:
Current $296,785 $287,300
Deferred (benefit) (38,194) (15,750)
-------- --------
Total Federal Income Tax Provision $258,591 $271,550
======== ========
The principal factors causing a variation from the statutory tax rate are as
follows:
1998 1997
-------- --------
Statutory tax on income $335,681 $343,317
Reduction in taxes resulting from:
Tax exempt interest (80,100) (80,236)
Disallowance of interest expense
related to tax exempt securities 8,016 7,751
Other (5,006) 718
-------- --------
Total Income Tax Provision $258,591 $271,550
======== ========
At June 30, 1998 and 1997, the net deferred tax asset is comprised of the
following temporary differences and carryforward items:
1998 1997
-------- --------
Write down of other real estate not deductible for tax
purposes $ 31,146 $ 31,146
Deferred compensation 75,024 $ 56,567
-------- --------
Total Deferred Tax Asset 106,170 87,713
-------- --------
Excess of depreciation taken for tax reporting purposes
over the amount for financial purposes 112,994 146,949
Loan loss provisions and allowances for tax purposes
in excess of amounts allowed for financial purposes 289,915 291,742
Accretion on securities recognized for financial
purposes but not realized for tax purposes 42,517 37,605
Unrealized gain on available-for-sale securities 10,539 11,790
Other, net 83,036 33,709
-------- --------
Total Deferred Tax Liability 539,001 521,795
-------- --------
Net Deferred Tax Liability $432,831 $434,082
======== ========
NOTE 6: RELATED PARTY TRANSACTIONS
During the periods of six months ended June 30, 1998 and 1997, the Bank had
transactions made in the ordinary course of business with certain of its
officers, directors and principal shareholders. All loans included in such
transactions were made on substantially the same terms, including interest rate
and collateral, as those
F-42
<PAGE>
prevailing at the time for comparable transactions with other persons. The
balances of these loans were approximately $1,187,000 and $1,271,000 at June 30.
1998 and 1997, respectively.
NOTE 7: COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the financial statements. Unfunded loan commitments
were $4,323,184 and $4,535,199, and outstanding letters of credit were $109,681
and $201,727 at June 30, 1998 and 1997, respectively. No losses are anticipated
as a result of these transactions.
NOTE 8: PROFIT-SHARING PLAN
The Bank has a thrift plan available to all employees who have completed
one year of service or are at least 21 years of age. Contributions to the plan
are made at the discretion of management. Bank contributions to the plan were
$17,852 and $14,878 for the periods of six months ended June 30, 1998 and 1997,
respectively.
NOTE 9: COMPENSATED ABSENCES
Employees of the Bank are entitled to paid vacation, paid sick days and
other personal days off, depending on job classification, length of service, and
other factors. It is impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been recorded in the
accompanying financial statements. The Bank's policy is to recognize the costs
of compensated absences when actually paid to employees.
NOTE 10: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory (and possibly additional discretionary) actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. The regulations require the Bank to meet specific
capital adequacy guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is 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 Bank to maintain minimum ratios (set forth in the table below) of
Tier I capital (as defined in the regulations) to total average assets and
minimum ratios of Tier I and total capital to risk-weighted assets as set forth
in the table below. The Bank's actual capital ratios are also presented in the
table.
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Capital Adequacy Capital Adequacy
-------------------------- --------------------------
Required Actual Required Actual
Ratio Ratio Ratio Ratio
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tier I Capital (to Average Assets) 4.0% 10.9% 4.0% 10.3%
Tier I Capital (to Risk Weighted Assets) 4.0% 18.9% 4.0% 18.5%
Total Capital (to Risk Weighted Assets) 8.0% 20.2% 8.0% 19.7%
</TABLE>
Management believes, as of June 30, 1998, and 1997, that the Bank meets all
capital requirements to which it is subject.
F-43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders
of Azle Bancorp
Azle, Texas
We have audited the accompanying consolidated balance sheet of Azle Bancorp
and Subsidiaries as of December 31, 1997, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated balance sheet of Azle
Bancorp and Subsidiaries as of December 31, 1996 was audited by other auditor's
whose report dated April 11, 1997, expressed an unqualified opinion on that
statement.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Azle Bancorp and Subsidiaries
as of December 31, 1997, the results of their operations and their cash flows
for the year then ended, in conformity with generally accepted accounting
principles.
We have compiled the accompanying consolidated statements of income, changes
in shareholders' equity and cash flows of Azle Bancorp and Subsidiaries for the
year ended December 31, 1996, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the financial statements referred to in the preceding paragraph and,
accordingly, do not express an opinion or any other form of assurance on them.
/s/ STOVALL, GRANDEY & WHATLEY
March 6, 1998
F-44
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
----------- -----------
CASH AND DUE FROM BANKS $ 3,486,926 $ 4,689,823
FEDERAL FUNDS SOLD 3,500,000 2,500,000
INVESTMENT SECURITIES--Note 2
Available-for-sale 3,875,813 4,801,581
Held-to-maturity 32,058,024 31,990,831
----------- -----------
TOTAL INVESTMENT SECURITIES 35,933,837 36,792,412
LOANS, Net of unearned discount and
allowance for loan losses--Note 3 43,524,479 39,934,823
BANK PREMISES AND EQUIPMENT, Net of
accumulated depreciation--Note 4 1,661,122 1,688,461
OTHER REAL ESTATE 216,104 95,424
ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS 1,101,623 1,904,799
----------- -----------
TOTAL ASSETS $89,424,091 $87,605,742
=========== ===========
F-45
<PAGE>
LIABILITIES AND SHAREHOLDERS' EQUITY
1997 1996
------------ ------------
DEPOSITS
Demand $14,907,467 $15,744,413
Interest bearing transaction accounts 21,289,951 21,288,189
Savings 9,017,008 9,175,743
Time 33,618,823 31,870,141
----------- -----------
TOTAL DEPOSITS 78,833,249 78,078,486
OTHER LIABILITIES
Accrued interest and other payables 446,175 533,201
Income taxes--Note 5:
Current 92,730 61,638
Net deferred tax liability 435,074 429,902
Minority interest in consolidated subsidiary 299,711 270,284
----------- -----------
TOTAL OTHER LIABILITIES 1,273,690 1,295,025
----------- -----------
TOTAL LIABILITIES 80,106,939 79,373,511
COMMITMENTS AND CONTINGENCIES--Notes 8 and 10
SHAREHOLDERS' EQUITY--Note 11
Capital stock, par value--$1 a share:
Authorized--1,000,000 shares
Issued and outstanding--662,595 shares 662,595 662,595
Capital surplus 827,115 827,115
Retained earnings 7,807,215 6,732,030
Unrealized gain on available-for-sale securities,
net of deferred tax: 1997--$12,782; 1996--$7,609 24,038 14,302
----------- -----------
9,320,963 8,236,042
Less capital stock held in treasury, 3,811 shares (3,811) (3,811)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 9,317,152 8,232,231
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $89,424,091 $87,605,742
=========== ===========
F-46
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
DECEMBER 31, 1997 AND 1996
(AUDITED) (UNAUDITED)
1997 1996
----------- -----------
INTEREST INCOME
Interest and fees on loans $4,490,814 $4,012,430
Interest on investment securities:
Taxable 1,802,131 1,889,289
Nontaxable 477,740 465,201
---------- ----------
2,279,871 2,354,490
Interest on federal funds sold 96,149 73,205
---------- ----------
TOTAL INTEREST INCOME 6,866,834 6,440,125
INTEREST EXPENSE--on deposits 2,614,750 2,457,767
---------- ----------
NET INTEREST INCOME 4,252,084 3,982,358
PROVISION FOR LOAN LOSSES--Note 3 60,002 30,000
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,192,082 3,952,358
NONINTEREST INCOME
Service charges on deposit accounts 643,873 584,038
Other 113,977 138,483
---------- ----------
TOTAL NONINTEREST INCOME 757,850 722,521
---------- ----------
4,949,932 4,674,879
NONINTEREST EXPENSE 2,892,569 2,611,827
---------- ----------
INCOME BEFORE FEDERAL INCOME
TAXES AND MINORITY INTEREST 2,057,363 2,063,052
FEDERAL INCOME TAXES--Note 5 556,091 532,686
---------- ----------
INCOME BEFORE
MINORITY INTEREST 1,501,272 1,530,366
MINORITY INTEREST 47,286 48,718
---------- ----------
NET INCOME $1,453,986 $1,481,648
========== ==========
F-47
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 (AUDITED) AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Gain/(Loss)
Capital Capital Retained on AFS Treasury
Stock Surplus Earnings Securities Stock Total
-------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT
JANUARY 1, 1996 $662,595 $837,515 $5,579,900 $(6,367) $(2,811) $7,070,832
-------- -------- ---------- ------- ------- ----------
Purchase of treasury stock (10,400) (1,000) (11,400)
Net income for the year
ended December 31, 1996 1,481,648 1,481,648
Cash dividends -
$.50 a share (329,518) (329,518)
Unrealized gain on available-
for-sale securities, net of
tax 20,669 20,669
-------- -------- ---------- ------- ------- ----------
BALANCE AT
DECEMBER 31, 1996 662,595 827,115 6,732,030 14,302 (3,811) 8,232,231
Net income for the year
ended December 31, 1997 1,453,986 1,453,986
Cash dividends -
$.575 a share (378,801) (378,801)
Unrealized gain on available-
for-sale securities, net of
tax 9,736 9,736
-------- -------- ---------- ------- ------- ----------
BALANCE AT
DECEMBER 31, 1997 $662,595 $827,115 $7,807,215 $24,038 $(3,811) $9,317,152
======== ======== ========== ======= ======= ==========
</TABLE>
F-48
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(AUDITED) (UNAUDITED)
1997 1996
------------ -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 1,453,986 $ 1,481,648
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 176,425 167,088
Provision for loan losses 60,002 30,000
Deferred income tax benefit (46,396) (3,826)
Net premium amortization or (discount accretion)
on investment securities (8,035) (14,749)
Net gain on sale of other real estate - (12,506)
(Increase) decrease in accrued income and
other assets 777,336 (957,285)
Increase (decrease) in accrued expenses and
other liabilities (55,931) 43,306
Minority interest in subsidiary income 47,286 48,718
----------- ------------
Total adjustments 950,687 (699,254)
----------- ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,404,673 782,394
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in federal funds sold (1,000,000) (500,000)
Purchase of investment securities
Available-for-sale - (423,841)
Held-to-maturity (9,890,844) (12,092,271)
Proceeds from maturities of investment securities
Available-for-sale 937,667 3,988,168
Held-to-maturity 9,835,000 8,630,000
Net increase in loans (3,996,274) (4,508,617)
Proceeds from sales of other real estate - 94,083
Purchase of premises and equipment 149,086 (308,454)
Proceeds from sale of equipment - 4,539
Purchase of capital stock of subsidiary (5,421) -
----------- ------------
NET CASH USED BY
INVESTING ACTIVITIES (3,970,786) (5,116,393)
F-49
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
1997 1996
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
interest-bearing transaction
accounts and savings $ (993,919) $3,778,450
Net increase in certificates of deposit 1,748,682 819,200
Dividends paid (391,547) (340,775)
Purchase of treasury stock - (11,400)
----------- ----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 363,216 4,245,475
----------- ----------
NET DECREASE IN CASH AND
DUE FROM BANKS (1,202,897) (88,524)
CASH AND DUE FROM BANKS AT BEGINNING
OF YEAR 4,689,823 4,778,347
----------- ----------
CASH AND DUE FROM BANKS AT END OF YEAR $ 3,486,926 $4,689,823
=========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
(1) Interest paid $ 2,594,000 $2,454,000
(2) Income taxes paid 525,000 540,000
(3) Other real estate acquired through loan
foreclosures 121,000 59,000
(4) Bank financed sales of other real estate - 34,000
F-50
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - Summary of Significant Accounting Policies
- ------
The accounting and reporting policies of Azle Bancorp and Subsidiaries are
in accordance with generally accepted accounting principles. A summary of the
more significant policies follows:
Principles of Consolidation
---------------------------
The consolidated financial statements of Azle Bancorp (Bancorp)
includes its accounts and those of its wholly-owned subsidiary Azle
Holdings, Inc. (Holdings) and Holdings 97% owned subsidiary Azle State Bank
(Bank). All significant inter-company accounts and transactions have been
eliminated on consolidation.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. The primary area of estimation in the accompanying financial
statements relates to the determination of the allowance for loan losses.
Investment Securities
---------------------
Effective January 1, 1994, Bancorp adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115). Under the provisions of SFAS 115,
investment securities that are held for short-term resale are classified as
trading securities and carried at fair value. Debt securities that
management has the ability and intent to hold to maturity are classified as
held-to-maturity and carried at cost, adjusted for amortization of premiums
and accretion of discounts using methods approximating the interest method.
Other marketable securities are classified as available-for-sale and are
carried at fair value. Realized and unrealized gains and losses on trading
securities are included in net income. Unrealized gains and losses on
securities available-for-sale, net of the tax effect, are recognized as
direct increases or decreases in shareholders' equity.
Gains or losses on disposition are recognized using the specific
identification method.
Loans and Allowance For Loan Losses
-----------------------------------
Loans are stated at the principal amount outstanding less unearned
discount, fees and the allowance for loan losses. Unearned discount on
installment loans is recognized in income over the terms of the loans by a
method approximating the interest method. Interest income on all other
loans is recognized based upon the principal amounts outstanding. The
accrual of interest on a loan is discontinued when, in the opinion of
management, there is doubt about the ability of the borrower to pay
interest or principal. Interest previously earned, but uncollected on such
loans, is recognized as income when collected, until such time as the loan
is returned to an accrual status.
F-51
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - Summary of Significant Accounting Policies (continued)
- ------
Loans and Allowance For Loan Losses
-----------------------------------
The allowance for loan losses is comprised of amounts charged against
income in the form of the provision for loan losses, less charged-off
loans, net of recoveries. The amount of the provision for possible loan
losses charged against income in each period is determined by management
based on a number of factors, including the Bank's loss experience in
relation to outstanding loans and the existing level of the allowance,
prevailing and prospective economic conditions, and management's continuing
review of nonperforming loans and its evaluation of the quality of the loan
portfolio. Loans are placed in nonaccrual status when management believes
that the borrower's financial condition, after giving consideration to
economic and business conditions and collection efforts, is such that
collection of interest is doubtful. Loans are charged against the
allowance for loan losses when management believes that collection of the
principal is unlikely.
Bank Premises and Equipment
---------------------------
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation expense is computed on the straight-line and
accelerated methods, based upon the estimated useful lives of the assets.
Maintenance and repairs are charged to operating expenses. Renewals
and betterments are added to the asset accounts and depreciated over the
periods benefited. Depreciable assets sold or retired are removed from the
asset and related accumulated depreciation accounts and any gain or loss is
reflected in the income and expense accounts.
Other Real Estate
-----------------
Assets (primarily real estate) acquired in satisfaction of
uncollectible loans are initially recorded at the lower of the loan balance
or estimated fair value at the time of foreclosure. Any excess of the loan
balance over the estimated fair value is charged to the allowance for loan
losses. The carrying value is periodically evaluated by management and is
reduced to estimated fair value, by charges to expense.
Federal Income Taxes
--------------------
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due
plus deferred taxes related primarily to differences between the tax and
financial reporting of the allowance for loan losses, nonaccrual loans,
securities and accumulated depreciation. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences which will either be taxable or deductible when the assets and
liabilities are recovered or settled.
The Parent Company files a consolidated federal income tax return.
Pursuant to a tax sharing agreement with the Bank, Holdings and the Parent
Company, the Parent Company and Holdings have allocated the tax benefits of
their losses to the Bank. Consequently, payments or refunds of taxes are
usually made by or allocated to the Bank. Deferred income taxes are
recorded for temporary differences between income for financial reporting
and income tax purposes.
F-52
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 1 - Summary of Significant Accounting Policies (continued)
- ------
Cash and Cash Equivalents
-------------------------
For the purpose of presentation in the Statements of Cash Flows, cash
and cash equivalents are defined as those amounts included in the balance
sheet caption "Cash and Due from Banks".
Reclassifications
-----------------
Certain accounts have been reclassified in the financial statements of
December 31, 1996 to conform to the 1997 presentation.
F-53
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - Investment Securities
- ------
The amortized cost and fair values of investment securities at December 31,
1996 and 1995 are as follows:
1997
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-For-Sale Cost Gains Losses Value
----------- ---------- ----------- -----------
U.S. government agencies
and corporations $ 2,501,373 $ 5,204 $ - $ 2,506,577
U.S. government agency
mortgage backed
securities 1,336,845 32,391 - 1,369,236
----------- -------- -------- -----------
Totals $ 3,838,218 $ 37,595 $ - $ 3,875,813
=========== ======== ======== ===========
Held-to-Maturity
U.S. treasury securities $ 1,498,542 $ 3,303 $ (127) $ 1,501,718
U.S. government agencies
and corporations 22,750,954 104,767 (35,212) 22,820,509
Obligations of states and
political subdivisions 7,808,528 563,197 - 8,371,725
----------- -------- -------- -----------
Totals $32,058,024 $671,267 $(35,339) $32,693,952
=========== ======== ======== ===========
The balance sheet as of December 31, 1997, reflects the fair value of
----------
available-for-sale securities, $3,875,813, and the amortized cost of held-to-
--------------
maturity securities, $32,058,024, for a total of $35,933,837. A net unrealized
gain of $37,595 is in the available-for-sale investment securities balance. The
unrealized gain, net of tax, is included in shareholder's equity.
1996
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-For-Sale Cost Gains Losses Value
----------- ---------- ----------- -----------
U.S. government agencies
and corporations $ 3,173,000 $ 6,000 $(10,000) $ 3,169,000
U.S. government agency
mortgage backed
securities 1,606,000 27,000 - 1,633,000
----------- -------- -------- -----------
Totals $ 4,779,000 $ 33,000 $(10,000) $ 4,802,000
=========== ======== ======== ===========
Held-to-Maturity
U.S. treasury securities $ 2,096,000 $ 5,000 $ (2,000) $ 2,099,000
U.S. government agencies
and corporations 22,051,000 136,000 (70,000) 22,117,000
Obligations of states and
political subdivisions 7,844,000 493,000 (3,000) 8,334,000
----------- -------- -------- -----------
Totals $31,991,000 $634,000 $(75,000) $32,550,000
=========== ======== ======== ===========
The balance sheet as of December 31, 1996, reflects the fair value of
----------
available-for-sale securities, $4,801,581, and the amortized cost of held-to-
--------------
maturity securities, $31,990,831, for a total of $36,792,412. A net unrealized
gain of $22,381 is in the available-for-sale investment securities balance. The
unrealized gain, net of tax, is included in shareholder's equity.
F-54
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 2 - Investment Securities (continued)
- ------
The amortized cost and estimated market value of debt securities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties.
Securities Securities
Available-For-Sale Held-To-Maturity
------------------------ -------------------------
Amounts maturing in: Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ----------- ------------ -----------
One year or less $ 991,612 $ 994,687 $ 3,699,326 $ 3,697,093
After one year through
five years 299,934 297,194 15,439,660 15,520,217
After five years through
ten years 402,917 402,844 11,584,040 12,049,434
Due after ten years 806,910 811,852 1,334,998 1,427,208
---------- ---------- ----------- -----------
2,501,373 2,506,577 32,058,024 32,693,952
U. S. government agencies
mortgage backed securities 1,336,845 1,369,236 - -
---------- ---------- ----------- -----------
Totals $3,838,218 $3,875,813 $32,058,024 $32,693,952
========== ========== =========== ===========
Securities with amortized cost of $6,753,000 and $4,784,000 and fair
values of $6,869,000 and $4,854,000 at December 31, 1997 and 1996, respectively,
were pledged to secure public deposits and for other purposes as required or
permitted by law.
There were no sales of investment securities in 1997 or 1996.
NOTE 3 - Loans and Allowance For Loan Losses
- ------
An analysis of loan categories at December 31, 1997 and 1996, is as
follows:
1997 1996
------------ ------------
Commercial, farm and industrial loans $16,389,822 $14,271,581
Real estate loans 19,884,821 19,523,630
Installment loans 9,008,942 7,815,201
Overdrafts 80,590 24,482
----------- -----------
45,364,175 41,634,894
Less: Unearned discount and fees (1,199,100) (1,032,018)
Allowance for loan losses (640,596) (668,053)
----------- -----------
Loans, Net $43,524,479 $39,934,823
=========== ===========
F-55
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 3 - Loans and Allowance For Loan Losses (continued)
- ------
Transactions in the allowance for loan losses are summarized as follows:
1997 1996
---------- ---------
Balance, beginning of year $ 668,053 $674,312
Provisions, charged to income 60,002 30,000
--------- --------
728,055 704,312
Loans charged off (146,313) (68,856)
Recoveries of loans previously charged off 58,854 32,597
--------- --------
Net (87,459) (36,259)
--------- --------
Balance at end of year $ 640,596 $668,053
========= ========
At December 31, 1997 the Bank had loans in the amount of $70,500 that were
specifically classified as impaired. The allowance for loan losses related to
impaired loans amounted to approximately $7,000 at December 31, 1997. In
addition, at December 31, 1997, the Bank had other nonaccrual loans of
approximately $39,500 for which impairment had not been recognized. If interest
on these loans had been recognized at the original interest rates, interest
income would have increased approximately $8,000 for 1997.
Azle State Bank grants commercial, real estate and consumer loans to
customers within its local lending area. Although the Bank has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the local real estate market.
NOTE 4 - Bank Premises and Equipment
- ------
The investment in bank premises and equipment stated at cost at December
31, 1997 and 1996, is as follows:
1997 1996
---------- ----------
Land $ 264,092 $ 264,092
Buildings and improvements 1,827,833 1,780,116
Furniture, fixtures and equipment 1,647,123 1,545,753
---------- ----------
3,739,048 3,589,961
Less accumulated depreciation 2,077,926 1,901,500
---------- ----------
Bank Premises and Equipment--Net $1,661,122 $1,688,461
========== ==========
Depreciation on bank premises and equipment charged to expense totaled
$176,425 and $167,088 for the years ended December 31, 1997 and 1996,
respectively.
F-56
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 5 - Income Taxes
- ------
The components of the income tax provision were as follows:
1997 1996
---------- ----------
Federal Income Tax Provision:
Current $ 602,487 $ 536,512
Deferred (benefit) (46,396) (3,826)
--------- ---------
Total Federal Income Tax
Provision $ 556,091 $ 532,686
========= =========
The principal factors causing a variation from the statutory tax rate are
as follows:
1997 1996
---------- ----------
Statutory tax on income $ 699,602 $ 701,999
Reduction in taxes resulting from:
Tax exempt interest (160,018) (158,168)
Disallowance of interest expense
related to tax exempt securities 16,031 14,777
Other 476 (25,922)
--------- ---------
Total Income Tax Provision $ 556,091 $ 532,686
========= =========
At December 31, 1997 and 1996, the net deferred tax asset is comprised of
the following temporary differences and carryforward items:
1997 1996
---------- ----------
Write down of other real estate not deductible for
tax purposes $ 31,146 $ 31,146
Deferred compensation 67,331 45,805
--------- ---------
TOTAL DEFERRED TAX ASSET 98,477 76,951
--------- ---------
Excess of depreciation taken for tax reporting
purposes over the amount for financial purposes 132,369 161,528
Loan loss provisions and allowances for tax
purposes in excess of amounts allowed for
financial purposes 296,643 287,376
Accretion on securities recognized for financial
purposes but not realized for tax purposes 38,618 36,592
Unrealized gain on available-for-sale securities 12,782 7,609
Other, net 53,139 13,748
--------- ---------
TOTAL DEFERRED TAX LIABILITY (533,551) (506,853)
--------- ---------
NET DEFERRED TAX LIABILITY $(435,074) $(429,902)
========= =========
F-57
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 6 - Related Party Transactions
- ------
During 1997 and 1996, the Bank had transactions made in the ordinary course
of business with certain of its officers, directors and principal shareholders.
All loans included in such transactions were made on substantially the same
terms, including interest rate and collateral, as those prevailing at the time
for comparable transactions with other persons. The balances of these loans
were approximately $1,229,000 and $1,333,000 at December 31, 1997 and 1996,
respectively.
NOTE 7 - Commitments and Contingent Liabilities
- ------
In the normal course of business, there are outstanding various commitments
and contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the financial statements. Unfunded loan commitments
were $4,633,000 and $3,973,000, and outstanding letters of credit were $132,000
and $233,000 at December 31, 1997 and 1996, respectively. No losses are
anticipated as a result of these transactions.
NOTE 8 - Profit-Sharing Plan
- ------
The Bank has a thrift plan available to all employees who have completed
one year of service or are at least 21 years of age. Contributions to the plan
are made at the discretion of management. Bank contributions to the plan were
$30,000 in 1997 and 1996, respectively.
NOTE 9 - Compensated Absences
- ------
Employees of the Bank are entitled to paid vacation, paid sick days and
other personal days off, depending on job classification, length of service, and
other factors. It is impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been recorded in the
accompanying financial statements. The Bank's policy is to recognize the costs
of compensated absences when actually paid to employees.
F-58
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
NOTE 10 - Regulatory Matters
- -------
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory (and possibly additional discretionary) actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. The regulations require the Bank to meet specific
capital adequacy guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is 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 Bank to maintain minimum ratios (set forth in the table below) of
Tier I capital (as defined in the regulations) to total average assets and
minimum ratios of Tier I and total capital to risk-weighted assets as set forth
in the table below. The Bank's actual capital ratios are also presented in the
table.
<TABLE>
<CAPTION>
1997 1996
---- ----
Capital Adequacy Capital Adequacy
------------------ ------------------
Required Actual Required Actual
Ratio Ratio Ratio Ratio
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Tier I Capital (to Average Assets) 4.0% 10.6% 4.0% 9.9%
Tier I Capital (to Risk Weighted Assets) 4.0% 18.0% 4.0% 17.7%
Total Capital (to Risk Weighted Assets) 8.0% 19.2% 8.0% 19.0%
</TABLE>
Management believes, as of December 31, 1997 and 1996, that the Bank meets
all capital requirements to which it is subject.
F-59
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Azle State Bank
We have audited the accompanying balance sheets of Azle State Bank (the Bank) as
of December 31, 1996 and 1995, and the related statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Bank'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 financial position of Azle State Bank at December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
April 11, 1997
F-60
<PAGE>
Azle State Bank
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,689,823 $ 4,778,347
Federal funds sold 2,500,000 2,000,000
----------------------------
Total cash and cash equivalents 7,189,823 6,778,347
Securities:
Available-for-sale 4,801,581 8,339,316
Held-to-maturity 31,990,831 28,508,055
Net loans 39,934,823 35,499,548
Premises and equipment, net 1,688,461 1,551,634
Accrued interest receivable 801,741 779,852
Other real estate and repossessed assets 103,513 141,748
Other assets 1,092,969 157,573
----------------------------
Total assets $87,603,742 $81,756,073
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing $15,745,410 $13,945,767
Interest-bearing 62,334,073 59,535,891
----------------------------
Total deposits 78,079,483 73,481,658
Other liabilities 1,024,738 974,257
----------------------------
Total liabilities 79,104,221 74,455,915
Commitments and contingencies
Stockholders' equity:
Capital stock, $5 par value:
Authorized, issued and outstanding shares-150,000 750,000 750,000
Capital surplus 3,465,000 3,465,000
Accumulated earnings 4,269,750 3,091,734
Unrealized gain (loss) on securities available-for-sale,
net of deferred income taxes 14,771 (6,576)
----------------------------
Total stockholders' equity 8,499,521 7,300,158
----------------------------
Total liabilities and stockholders' equity $87,603,742 $81,756,073
============================
</TABLE>
See accompanying notes.
F-61
<PAGE>
Azle State Bank
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
Interest income:
Loans, including fees $4,012,430 $3,889,510
Investment securities:
Taxable 1,889,289 1,745,513
Nontaxable 465,201 432,257
Federal funds sold 73,205 96,037
---------------------------
Total interest income 6,440,125 6,163,317
Interest expense on deposits 2,457,767 2,449,423
---------------------------
Net interest income 3,982,358 3,713,894
Provision for loan losses 30,000 53,848
---------------------------
Net interest income after provision for loan losses 3,952,358 3,660,046
Other income:
Service charges on deposit accounts 584,038 521,030
Other 138,483 107,731
---------------------------
Total other income 722,521 628,761
Other expenses:
Salaries and employee benefits 1,479,540 1,429,756
Net occupancy 432,760 407,384
Professional and regulatory fees 110,475 240,545
Net operating costs and (gains) losses on other real estate 2,474 (36,332)
Other 584,928 590,943
---------------------------
Total other expenses 2,610,177 2,632,296
---------------------------
Income before federal income taxes 2,064,702 1,656,511
Provision for federal income taxes:
Current 536,512 271,750
Deferred (3,826) 69,000
---------------------------
Net income $1,532,016 $1,315,761
===========================
</TABLE>
See accompanying notes.
F-62
<PAGE>
Azle State Bank
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities Total
Capital Capital Accumulated Available-for- Stockholders'
Stock Surplus Earnings Sale Equity
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $750,000 $3,465,000 $2,282,973 $(295,484) $6,202,489
Net income -- -- 1,315,761 -- 1,315,761
Cash dividends ($3.38 per share) -- -- (507,000) -- (507,000)
Change in unrealized gain (loss) on
securities available-for-sale, net
of deferred income taxes of
$149,000 -- -- -- 288,908 288,908
---------------------------------------------------------------------
Balance, December 31, 1995 750,000 3,465,000 3,091,734 (6,576) 7,300,158
Net income -- -- 1,532,016 -- 1,532,016
Cash dividends ($2.36 per share) -- -- (354,000) -- (354,000)
Change in unrealized gain (loss) on
securities available-for-sale, net
of deferred income taxes of $11,000 -- -- -- 21,347 21,347
---------------------------------------------------------------------
Balance, December 31, 1996 $750,000 $3,465,000 $4,269,750 $ 14,771 $8,499,521
=====================================================================
</TABLE>
See accompanying notes.
F-63
<PAGE>
Azle State Bank
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1996 1995
----------------------------
<S> <C> <C>
Operating activities
Net income $ 1,532,016 $ 1,315,761
Adjustments to reconcile net income to net cash provided by
operating activities:
Provisions for loan and other real estate losses 30,000 53,848
Loss on sale of investments 31,250
Net gain on sale of other real estate (12,506) (60,434)
Deferred federal income tax provision (benefit) (3,826) 69,000
Depreciation 167,088 152,643
Net accretion of security discount (14,749) (16,538)
Increase in accrued interest receivable (21,889) (8,349)
Increase in other assets (935,396) (45,542)
Increase in other liabilities 43,306 12,396
----------------------------
Net cash provided by operating activities 784,044 1,504,035
Investing activities
Proceeds from maturities of securities held-to-maturity 8,630,000 3,500,000
Proceeds from sales or maturities of securities available-for-sale 3,988,168 6,502,814
Purchases of securities:
Held-to-maturity (12,092,271) (9,286,898)
Available-for-sale (423,841) (1,968,751)
Net (increase) decrease in loans (4,508,617) 487,181
Purchase of premises and equipment (308,454) (221,962)
Proceeds from sale of other real estate 94,083 62,542
Proceeds from sale of premises and equipment 4,539 --
----------------------------
Net cash used in investing activities (4,616,393) (925,074)
Financing activities
Net increase in deposits 4,597,825 370,274
Cash dividends paid (354,000) (507,000)
----------------------------
Net cash provided by (used in) financing activities 4,243,825 (136,726)
----------------------------
Increase in cash and cash equivalents 411,476 442,235
Cash and cash equivalents at beginning of year 6,778,347 6,336,112
----------------------------
Cash and cash equivalents at end of year $ 7,189,823 $ 6,778,347
============================
</TABLE>
See accompanying notes.
F-64
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Summary of Significant Accounting Policies
Organization
The Bank is a 97% owned subsidiary of Azle Holdings, Inc. (Holdings), which is
wholly-owned by Azle Bancorp (the Parent Company), a one-bank holding company.
The Bank provides all customary banking services with the exception of trust
department activities. The Bank's principal market for these services is Azle,
Texas and surrounding communities.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. The primary area of estimation
in the accompanying financial statements relates to the determination of the
allowance for loan losses.
Securities
The Bank determines the appropriate classification of debt securities at the
time of purchase. Debt securities are classified as held-to-maturity (HTM) when
the Bank has the positive intent and ability to hold the securities to maturity.
HTM securities are stated at amortized cost.
Debt securities not classified as HTM or trading, and marketable equity
securities not classified as trading, are classified as available-for-sale
(AFS). AFS securities are stated at estimated fair value with unrealized gains
and losses, net of deferred income taxes, reported as a separate component of
stockholders' equity.
The classification of securities in this manner was due to the adoption on
January 1, 1994 of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The effect
as of January 1, 1994, of adopting Statement No. 115, was an increase in
stockholders' equity of $176,730 (net of $91,000 in deferred income taxes) to
reflect the net unrealized gain on securities classified as AFS previously
carried at amortized cost. Prior to adopting Statement No. 115, all investment
securities were stated at amortized cost.
The amortized cost of debt securities classified as HTM or AFS is adjusted for
amortization of premium and accretion of discount. The cost of securities sold
is based on the specific identification method. Realized gains and losses and
declines in value judged to be other than temporary are included in securities
gains (losses).
Loans and Allowances for Possible Loan Losses
Loans are stated at the principal amount outstanding. Loan origination and
commitment fees and costs incurred relating to the origination of loans are
recognized in income when received or incurred and are not significant. Interest
on loans is accrued based on the principal amount outstanding or other methods
that approximate the interest method (generally for installment loans).
F-65
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (continued)
Loans are placed on a nonaccruing status when management believes that interest
on such loans may not be collected in the normal course of business. Interest
income on nonaccruing loans is usually reported on a cash basis as it is
collected.
The allowance for loan losses and related provision charged to operating expense
is an amount which, in the opinion of management, is necessary to absorb
possible losses on existing loans that may become uncollectible. It is based on
a number of factors, including loss experience, review of problem loans,
estimated collateral values, quality of the loan portfolio and business and
economic conditions. To the extent that adjustments to the allowance become
necessary, they are reported in earnings in the periods in which they become
known. Loans which management believes are uncollectible are charged against
this allowance with subsequent recoveries, if any, credited to the allowance.
The allowance is based on estimates and ultimate losses may vary from the
current estimates if future events vary substantially from the assumptions used
in making the assessments.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated over the estimated useful life of the asset, using
the straight-line method. Land is stated at cost.
Other Real Estate and Repossessed Assets
Assets (primarily real estate) acquired in satisfaction of uncollectible loans
are initially recorded at the lower of the loan balance or estimated fair value
at the time of foreclosure. Any excess of the loan balance over the estimated
fair value is charged to the reserve for loan losses. The carrying value is
periodically evaluated by management and is reduced to estimated fair value, by
charges to expense.
Income Taxes
The Bank, Holdings and the Parent Company have a tax sharing agreement whereby
the Bank is included in the consolidated federal income tax return filed by the
Parent Company. Pursuant to the agreement, the Parent Company has allocated the
tax benefits of its losses and the losses of Holdings to the Bank. Consequently,
payments or refunds of taxes are usually made by or allocated to the Bank,
respectively.
Deferred income tax assets and liabilities are recorded for temporary
differences between the financial reporting and income tax bases of assets and
liabilities. See Note 6 for further data about income taxes.
Profit Sharing Plan
The Bank has a thrift plan available to all employees who have completed one
year of service or are at least 21 years of age. Contributions to the plan are
made at the discretion of management. Employer contributions were $30,000 in
1996 and 1995.
F-66
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (continued)
Statements of Cash Flows
For purposes of the statements of cash flows, management considers due from
banks and Federal funds sold to be cash equivalents. These highly liquid
instruments have an original maturity of three months or less.
Interest paid in cash during 1996 and 1995 totaled $2,454,000 and $2,410,000,
respectively. Taxes paid in cash during 1996 and 1995 were approximately
$540,000 and $420,000, respectively. Loans transferred to other real estate
amounted to approximately $59,000 in 1996 and $80,000 in 1995. Additionally,
other real estate sold during 1996 and 1995 and financed by loans from the Bank
totaled approximately $34,000 and $206,000, respectively.
2. Securities
The following is a summary of AFS securities and HTM securities at December 31,
1996 (dollars in thousands):
<TABLE>
<CAPTION>
Available-for-Sale Securities
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
<S> <C> <C> <C> <C>
United States Government agencies $3,173 $ 6 $(10) $3,169
Mortgage-backed instruments 1,606 27 1,633
-----------------------------------------------
$4,779 $33 $(10) $4,802
===============================================
<CAPTION>
Held-to-Maturity Securities
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury securities $ 2,096 $ 5 $ (2) $ 2,099
United States Government agencies 22,051 136 (70) 22,117
Obligations of states and political
subdivisions 7,844 493 (3) 8,334
-----------------------------------------------
$31,991 $634 $(75) $32,550
===============================================
</TABLE>
The following is a summary of AFS securities and HTM securities at December 31,
1995 (dollars in thousands):
<TABLE>
<CAPTION>
Available-for-Sale Securities
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
<S> <C> <C> <C> <C>
United States Government agencies $ 6,423 $ 3 $ - $ 6,426
Obligations of states and political
subdivisions 20 - - 20
Mortgage-backed instruments 1,906 - (13) 1,893
-----------------------------------------------
$ 8,349 $ 3 $ (13) $ 8,339
===============================================
</TABLE>
F-67
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (continued)
2. Securities (continued)
<TABLE>
<CAPTION>
Held-to-Maturity Securities
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
<S> <C> <C> <C> <C>
United States Treasury securities $ 2,092 $ 18 $ - $ 2,110
United States Government agencies 19,185 228 (34) 19,379
Obligations of states and political
subdivisions 7,231 497 (15) 7,713
-----------------------------------------------
$28,508 $743 $(49) $29,202
===============================================
</TABLE>
The amortized cost and estimated fair values of debt securities at December 31,
1996, by contractual maturity, are shown below (dollars in thousands). Actual
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>
Available-for-Sale Held-to-Maturity
Securities Securities
----------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------------- ---------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 227 $ 226 $ 6,933 $ 6,964
Due after one year through five years 1,453 1,453 13,368 13,408
Due after five years through ten years - - 8,959 9,248
Due after ten years 1,493 1,490 2,731 2,930
---------------------- ---------------------
3,173 3,169 31,991 32,550
Mortgage-backed instruments 1,606 1,633 - -
---------------------- ---------------------
$4,779 $4,802 $31,991 $32,550
====================== =====================
</TABLE>
Securities with book values approximating $4,784,000 and $3,812,000 were pledged
as collateral to secure public deposits at December 31, 1996 and 1995,
respectively.
3. Regulatory Matters and Capital Adequacy
The Federal Reserve requires that the Bank maintain minimum average reserve
balances with the Federal Reserve System. At December 31, 1996 and 1995, the
required balances were approximately $639,000 and $642,000, respectively.
Dividends that may be paid by the Bank are routinely restricted by various
regulatory authorities. At December 31, 1996, $2,789,000 of the accumulated
earnings of the Bank were free of such restrictions and available for dividends
to Holdings, subject to prudent management and capital adequacy guidelines of
regulatory authorities.
F-68
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (continued)
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications 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 Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk-
weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 31, 1996 and 1995, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage ratios as
set forth in the table. There are no conditions or events since the notification
that management believes have changed the institution's category.
<TABLE>
<CAPTION>
To Be Well Capitalized
Actual For Capital Under Prompt Corrective
------------------- Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------------------- ----------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk
weighted assets) Greater than Greater than 8.0% Greater than Greater than 10.0%
$9,084,000 19.0% but equal to $3,828,160 but equal to but equal to $4,785,200 but equal to
Tier 1 capital (to risk
weighted assets) Greater than Greater than 4.0% Greater than Greater than 6.0%
8,485,000 17.7% but equal to 1,914,080 but equal to but equal to 2,871,120 but equal to
Tier 1 capital (to
average assets) Greater than Greater than 4.0% Greater than Greater than 5.0%
8,485,000 9.9% but equal to 3,437,360 but equal to but equal to 4,296,700 but equal to
</TABLE>
4. Loans and Allowance for Loan Losses
Loans are comprised of the following at December 31, 1996 and 1995 (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------
<S> <C> <C>
Commercial $14,271 $13,027
Real estate 19,524 17,159
Consumer 7,754 6,769
Other 73 59
Unearned interest (1,019) (840)
-------------------
40,603 36,174
Allowance for loan losses (668) (674)
-------------------
$39,935 $35,500
===================
</TABLE>
F-69
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (continued)
Loans made to certain executives, officers, directors, and their associates of
the Parent Company, Holdings or the Bank were approximately $1,333,000 and
$1,474,000 at December 31, 1996 and 1995, respectively. These loans were made on
substantially the same basis as those for nonrelated parties.
The Bank grants commercial, real estate, and consumer loans to customers
throughout its local lending area. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their loan
contracts is dependent upon the local real estate market.
At December 31, 1996 and 1995, nonaccrual, restructured and impaired loans
amounted to approximately $296,000 and $280,000, respectively.
Transactions in the allowance for loan losses for the years ended December 31,
1996 and 1995, were as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------
<S> <C> <C>
Balance at beginning of year $ 674 $ 675
Charge-offs (69) (79)
Recoveries 33 24
Provision for loan losses 30 54
---------------
Balance at end of year $ 668 $ 674
===============
</TABLE>
5. Premises and Equipment
The composition of premises and equipment at December 31, 1996 and 1995, follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------
<S> <C> <C>
Land $ 264 $ 114
Building 1,780 1,706
Furniture, fixtures and equipment 1,545 1,483
Vehicles 4 4
-------------------
3,593 3,307
Accumulated depreciation (1,905) (1,755)
-------------------
$ 1,688 $ 1,552
===================
</TABLE>
6. Federal Income Taxes
The liability method is used to account for income taxes. Under this method,
deferred income tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities
F-70
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (continued)
and are measured using the enacted tax rates and laws. Significant components of
the Bank's net deferred income tax liability as of December 31 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------
<S> <C> <C>
Deferred income tax assets:
Other real estate writedowns not currently deductible for income tax
purposes $ 31 $ 34
Unrealized (gain) loss on available-for-sale securities (8) 3
Deferred compensation 46 29
---------------
Total deferred income tax assets 69 66
Deferred income tax liabilities:
Difference between financial reporting and income tax allowance for
loan losses and other items applicable to loans 287 284
Difference between financial reporting and income tax bases of
premises and equipment 161 178
Other, net 50 26
---------------
Total deferred income tax liabilities 498 488
---------------
Net deferred income tax liability $ 429 $ 422
===============
</TABLE>
The net deferred income tax liabilities of approximately $429,000 and $422,000
have been included in other liabilities in the accompanying balance sheets at
December 31, 1996 and 1995, respectively.
The differences between actual income tax expense and expected tax expense for
1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------
<S> <C> <C>
Income tax provision at statutory rate $ 702 $ 563
Nontaxable interest income, net (143) (132)
Tax benefits allocated from parent (1) (4)
Adjustment of deferred income taxes and other items (26) (86)
---------------
$ 532 $ 341
===============
</TABLE>
Approximately $23,000 of federal income taxes currently payable are included in
other liabilities at December 31, 1996 ($66,000 at December 31, 1995).
7. Commitments and Contingencies
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the accompanying financial
statements.
F-71
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (continued)
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
December 31
1996 1995
------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk
(dollars in thousands):
Commitments to extend credit $3,973 $3,568
Standby letters of credit 233 251
</TABLE>
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. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing these standby letters of credit is essentially the same as
that involved in extending loan facilities to customers.
The Bank is a defendant in various litigation involving lender liability and
other matters. Discovery in certain of these cases will have to be completed to
determine if the suits are valid and the extent, if any, of the Bank's liability
thereunder. The Bank is not aware of any activity in these cases. Counsel is
unable to opine as to the Bank's liability (if any) in these matters and the
ultimate outcome of the litigation cannot presently be determined. Due to the
uncertainties surrounding this litigation, no provision for loss has been
recorded in the financial statements.
F-72
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation in connection with this offering other
than those contained in this Prospectus, and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Company, the Trust the Underwriter or any other person. This Prospectus does not
constitute an offer to sell, or the solicitation of any offer to purchase, any
security other than the shares of Common Stock or Preferred Securities offered
by this Prospectus, nor does it constitute an offer or solicitation in any
jurisdiction in which such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that information contained herein is
correct as of any time subsequent to the date hereof.
-----------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary................................ 4
Risk Factors...................................... 11
Cautionary Statements Regarding Forward-Looking
Statements....................................... 18
Use of Proceeds................................... 19
Price Range of Common Stock and Dividends......... 20
Market for Preferred Securities................... 21
Accounting Treatment.............................. 21
Pending Acquisition............................... 21
Pro Forma Combined Financial Statements........... 24
Capitalization.................................... 31
Selected Consolidated Financial Data.............. 32
Management's Discussion and Analysis of
Financial Condition and Results of Operations
of the Company................................... 34
Business and Properties of the Company............ 62
Regulation and Supervision........................ 66
Management........................................ 73
Security Ownership of Management and
Certain Beneficial Owners........................ 74
Description of Capital Stock...................... 76
Description of the Preferred Securities........... 80
Description of Subordinated Debentures............ 90
Description of Guarantee.......................... 98
Relationship Among the Preferred Securities,
the Subordinated Debentures and the Guarantee.... 100
Certain Federal Income Tax Consequences........... 101
ERISA Considerations.............................. 105
Underwriting...................................... 106
Legal Matters..................................... 108
Experts........................................... 108
Available Information............................. 108
Incorporation of Certain Information by Reference. 109
Index to Financial Statements..................... F-1
[LOGO]
INDEPENDENT
BANKSHARES, INC.
320,000 SHARES OF COMMON STOCK
INDEPENDENT
CAPITAL TRUST
__% Cumulative Trust Preferred Securities
(Liquidation Amount $10 per Preferred Security)
guaranteed, as described herein, by
Independent Bankshares, Inc.
-----------------------
$10,000,000 __% Subordinated Debentures of
Independent Bankshares, Inc.
-----------------------
PROSPECTUS
__________, 1998
-----------------------
Stifel, Nicolaus & Company,
Incorporated
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered.
SEC Registration fee $4,838
NASD filing fee 2,000
American Stock Exchange, Inc. listing fees *
Blue Sky qualification fees and expenses *
Accounting fees and expenses *
Legal fees and expenses *
Trustee's fees and expenses *
Printing and engraving *
Transfer agent's and registrar's fees *
Miscellaneous *
------
Total $ *
======
* To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Article 2.02-1 of the Texas Business Corporations Act (the "TBCA")
authorizes a court to award or a corporation's Board of Directors to grant
indemnification to directors and officers in terms sufficiently broad to permit
such indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article IX of the Company's Bylaws provides
for mandatory indemnification of its directors and officers and permissible
indemnification of employees and other agents to the maximum extent permitted by
the TBCA.
Article VII of the Company's Articles of Incorporation, as amended,
provides for permissible indemnification of its directors, officers, and persons
who may have served as a director or officer of another corporation under
certain circumstances, at the discretion of the Company's Board of Directors.
This provision in the Articles of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of nonmonetary relief will remain available
under Texas law. In addition, each director will continue to be subject to
liability for breach of faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Texas law.
The Company maintains directors' and officers' liability insurance that
covers the directors and officers of the Company with aggregate policy limits of
$3,000,000.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 as amended (the "Securities Act") may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is therefore unenforceable.
II-1
<PAGE>
Item 15. Recent Sales of Unregistered Securities
1. During the years ended December 31, 1995 and 1997, the Company issued
11,296 and 17,499 shares, respectively, of its Common Stock to
officers of the Company and the Bank at prices between $3.00 and $5.40
per share upon the exercise of stock options previously granted. Such
transactions were deemed exempt from registration under the Securities
Act, by reason of Section 4(2) of the Securities Act. In connection
with each of these transactions, the shares were sold to a very
limited number of persons, such persons were provided access to all
relevant information regarding the Company and/or represented to the
Company that they were "sophisticated" investors, and each such
persons represented to the Company that the shares were purchased for
investment purposes only and with no view to distribution.
2. A total of 232, 2,958, 7,888 and 524 shares of the Series C Preferred
Stock were converted at a price of $1.83 per share, into a total of
5,328, 67,940, 184,948 and 12,035 shares of Common Stock, during 1995,
1996 and 1997 and the first six months of 1998, respectively. Such
conversions were deemed exempt from registration under the Securities
Act, by reason of Section 3(a)(9) of the Securities Act.
(All share and per-share data has been adjusted to reflect the 33% Common
Stock dividend paid to shareholders in May 1995 and the 25% Common Stock
dividend paid to shareholders in May 1997).
Item 16. Exhibits and Financial Statement Schedules
Exhibits. The exhibits listed below are filed as part of or incorporated
by reference in this Registration Statement. Where such filing is made by
incorporation by reference to a previously filed report, such report is
identified in parentheses. See the Index of Exhibits included with the exhibits
filed as part of this Registration Statement.
Number Description
- ------ -----------
1.1 Form of Underwriting Agreement for Common Stock (to be filed by
amendment)
1.2 Form of Underwriting Agreement for Preferred Securities (to be filed by
amendment)
3.1 Restated Articles of Incorporation of the Company (Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1994)
3.2 Restated Bylaws of the Company (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1994)
4.1 Specimen Stock Certificate for Common Stock of the Company (Exhibit 4.1
to the Company's Registration Statement on Form S-1, SEC File No. 333-
16419)
4.2 Form of Indenture of the Company relating to the Subordinated Debentures
(filed herewith)
4.3 Form of Subordinated Debenture of the Company (filed herewith)
4.4 Certificate of Trust of Independent Capital Trust (filed herewith)
4.5 Declaration of Trust of Independent Capital Trust (filed herewith)
4.6 Form of Amended and Restated Trust Agreement (filed herewith)
4.7 Form of Preferred Security Certificate (included as an exhibit to
Exhibit 4.6)
II-2
<PAGE>
4.8 Form of Preferred Securities Guarantee Agreement (filed herewith)
4.9 Form of Agreement as to Expenses and Liabilities (included as an exhibit
to Exhibit 4.6)
5.1 Opinion of Arter & Hadden LLP (including the consent of such firm)
regarding the legality of the common stock being offered hereby (to be
filed by amendment)
5.2 Opinion of Prickett, Jones, Elliot, Kristol & Schnee, special Delaware
counsel, as to the validity of the Preferred Securities being offered
hereby (to be filed by amendment)
8.1 Opinion of Arter & Hadden LLP as to certain federal income tax matters
(to be filed by amendment)
10.1 Form of Nonqualified Option Agreement (Exhibit 10.2 the Company's Annual
Report on Form 10-K for the year ended December 31, 1992)
10.2 Master Equipment Lease Agreement, dated July 30, 1998, between
Independent Bankshares, Inc. and First State Bank, N.A., (as Co-Lessees)
and AT&T Credit Corporation, Amendments to Master Equipment Lease
Agreement dated concurrently therewith, and related forms of Schedule,
Commencement Certificate and Bill of Sale (to be filed by amendment)
10.3 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)
10.4 Agreement and Plan of Reorganization dated May 29, 1998, between the
Company and Azle Bancorp (Exhibit 1.1 to the Company's Current Report on
Form 8-K dated June 19, 1998)
12.1 Statements Regarding Computation of Ratio of Earnings to Fixed Charges
(to be filed by amendment)
21.1 Subsidiaries of the Company (Exhibit 21.1 to the Company's Registration
Statement on Form S-1, SEC File No. 333-16419)
23.1 Consent of Arter & Hadden LLP (included as part of its opinion to be
filed as Exhibit 5.1)
23.2 Consent of Prickett, Jones, Elliott, Kristol & Schnee (included as part
of its opinion to be filed as Exhibit 5.2)
23.3 Consent of PricewaterhouseCoopers LLP, independent accountants (filed
herewith)
23.4 Consent of Stovall, Grandey & Whatley, L.L.P., independent accountants
(filed herewith)
23.5 Consent of Ernst & Young LLP (filed herewith)
25.1 Power of Attorney (included on the signature page hereto)
25.2 Form T-1 Statement of Eligibility of U.S. Trust Company of Texas, N.A.
to act as trustee under the Indenture (filed herewith)
25.3 Form T-1 Statement of Eligibility of U.S. Trust Company of Texas, N.A.
to act as trustee under the Amended and Restated Trust Agreement (filed
herewith)
II-3
<PAGE>
25.4 Form T-1 Statement of Eligibility of U.S. Trust Company of Texas, N.A.
to act as trustee under the Preferred Securities Guarantee Agreement
(filed herewith)
Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted because
such schedules are not required under the related instructions or are
inapplicable or because the information required is included in the Company's
unaudited nine-month consolidated financial statements or notes thereto or
audited year end consolidated financial statements or notes thereto.
Item 17. Undertakings
A. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the Registrant's
Articles of Incorporation or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
B. The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of a registration statement in reliance upon Rule
430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
C. The Trust hereby undertakes to provide to the Representative at the
closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
undersigned registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Abilene, Texas on August 4, 1998.
INDEPENDENT BANKSHARES, INC.
By: /s/ Bryan W. Stephenson
---------------------------------------
Bryan W. Stephenson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the
undersigned registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form S-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in Abilene, Texas on August 4, 1998.
INDEPENDENT CAPITAL TRUST
By: /s/ Bryan W. Stephenson
---------------------------------------
Bryan W. Stephenson, Trustee
By: /s/ Randal N. Crosswhite
---------------------------------------
Randal N. Crosswhite, Trustee
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Abilene,
State of Texas, on July 31, 1998.
INDEPENDENT BANKSHARES, INC.
By: /s/ Bryan W. Stephenson
---------------------------------------
Bryan W. Stephenson
President and Chief Executive Officer
Power of Attorney
KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and
directors of Independent Bankshares, Inc., a Texas corporation, which is filing
a Registration Statement on Form S-2 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act of
1933, as amended (the "Securities Act"), hereby constitute and appoint Bryan W.
Stephenson and Randal N. Crosswhite, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign such Registration Statement and any or all amendments,
including post-effective amendments, to the Registration Statement, including a
Prospectus or an amended Prospectus therein and in any registration statement
for the same offering that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act and all other documents in connection therewith
to be filed with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact as agents or any of them, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
July 31, 1998 /s/ Bryan W. Stephenson
--------------------------------------------
Bryan W. Stephenson, President, Chief
Executive Officer and Director (Principal
Executive Officer)
July 31, 1998 /s/ Randal N. Crosswhite
--------------------------------------------
Randal N. Crosswhite, Senior Vice President,
Chief Financial Officer, Corporate Secretary
and Director (Chief Financial and Accounting
Officer)
July 31, 1998 /s/ John L. Beckham
--------------------------------------------
John L. Beckham, Director
July 31, 1998 /s/ Lee Caldwell
--------------------------------------------
Lee Caldwell, Director
II-6
<PAGE>
July 31, 1998 /s/ Mrs. Wm. R. (Amber) Cree
--------------------------------------------
Mrs. Wm. R. (Amber) Cree, Director
July 31, 1998
--------------------------------------------
Louis S. Gee, Director
July 31, 1998
--------------------------------------------
Nancy E. Jones, Director
July 31, 1998 /s/ Marshal M. Kellar
--------------------------------------------
Marshal M. Kellar, Director
July 31, 1998 /s/ Tommy McAlister
--------------------------------------------
Tommy McAlister, Director
July 31, 1998 /s/ Scott L. Taliaferro
--------------------------------------------
Scott L. Taliaferro, Director
July 31, 1998 /s/ James D. Webster
--------------------------------------------
James D. Webster, M.D., Director
July 31, 1998 /s/ C.G. Whitten
--------------------------------------------
C.G. Whitten, Director
July 31, 1998 /s/ John A. Wright
--------------------------------------------
John A. Wright, Director
II-7
<PAGE>
EXHIBIT 4.2
================================================================================
INDEPENDENT BANKSHARES, INC.
AS ISSUER
AND
U.S. TRUST COMPANY OF TEXAS, N.A.
AS TRUSTEE
INDENTURE
_____% SUBORDINATED DEBENTURES DUE ____
Dated as of ______________, 1998
===============================================================================
<PAGE>
CROSS REFERENCE TABLE
SECTION OF TRUST
INDENTURE ACT OF SECTION OF
1939, AS AMENDED INDENTURE
- ---------------- ----------
310(a).......................................... 9.10
310(b)..................................... 9.9, 9.11
310(c)............................... Not Applicable
311(a)......................................... 9.14
311(b)......................................... 9.14
311(c)............................... Not Applicable
312(a).................................. 6.1, 6.2(a)
312(b)...................................... 6.2(c)
312(c)...................................... 6.2(c)
313(a)...................................... 6.4(a)
313(b)...................................... 6.4(b)
313(c)............................... 6.4(a), 6.4(b)
313(d)...................................... 6.4(c)
314(a)...................................... 6.3(a)
314(b)............................... Not Applicable
314(c)......................................... 15.7
314(d)............................... Not Applicable
314(e)......................................... 15.7
314(f)............................... Not Applicable
315(a).................................. 9.1(a), 9.3
315(b).......................................... 9.2
315(c)....................................... 9.1(a)
315(d)....................................... 9.1(b)
315(e)......................................... 7.7
316(a)..................................... 1.1, 7.6
316(b)....................................... 7.4(b)
316(c)...................................... 10.1(b)
317(a)......................................... 7.2
317(b)......................................... 5.3
318(a)........................................ 15.9
Note: This Cross-Reference Table does not constitute part
of this Indenture and shall not affect the interpretation
of any of its terms or provisions.
i
<PAGE>
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS
Section 1.1 Definitions of Terms
ARTICLE II. ISSUE, DESCRIPTION, TERMS, CONDITIONS,
REGISTRATION AND EXCHANGE OF DEBENTURES
Section 2.1 Designation and Principal Amount
Section 2.2 Maturity
Section 2.3 Form and Payment
Section 2.4 [Intentionally Omitted]
Section 2.5 Interest
Section 2.6 Execution and Authentications
Section 2.7 Registration of Transfer and Exchange
Section 2.8 Temporary Debentures
Section 2.9 Mutilated, Destroyed, Lost or Stolen Debentures
Section 2.10 Cancellation
Section 2.11 Benefit of Indenture
Section 2.12 Authentication Agent
ARTICLE III. REDEMPTION OF DEBENTURES
Section 3.1 Redemption
Section 3.2 Special Event Redemption
Section 3.3 Optional Redemption by Company
Section 3.4 Notice of Redemption
Section 3.5 Payment Upon Redemption
Section 3.6 No Sinking Fund
ARTICLE IV. EXTENSION OF INTEREST PAYMENT PERIOD
Section 4.1 Extension of Interest Payment Period
Section 4.2 Notice of Extension
Section 4.3 Limitation on Transactions
ARTICLE V. PARTICULAR COVENANTS OF COMPANY
Section 5.1 Payment of Principal and Interest
Section 5.2 Maintenance of Agency
Section 5.3 Paying Agents
Section 5.4 Appointment to Fill Vacancy in Office of Trustee
Section 5.5 Compliance with Consolidation Provisions
Section 5.6 Limitation on Transactions
Section 5.7 Covenants as to the Trust
Section 5.8 Covenants as to Purchases
i.
<PAGE>
ARTICLE VI. DEBENTUREHOLDERS' LISTS AND REPORTS BY
COMPANY AND TRUSTEE
Section 6.1 Company to Furnish Trustee Names and Addresses
of Debentureholders
Section 6.2 Preservation of Information Communications with
Debentureholders
Section 6.3 Reports by Company
Section 6.4 Reports by Trustee
ARTICLE VII. REMEDIES OF TRUSTEE AND DEBENTUREHOLDERS
ON EVENT OF DEFAULT
Section 7.1 Events of Default
Section 7.2 Collection of Indebtedness and Suits for Enforcement by
Trustee
Section 7.3 Application of Moneys Collected
Section 7.4 Limitation on Suits
Section 7.5 Rights and Remedies Cumulative; Delay or Omission not Waiver
Section 7.6 Control by Debentureholders
Section 7.7 Undertaking to Pay Costs
ARTICLE VIII. FORM OF DEBENTURE AND ORIGINAL ISSUE
Section 8.1 Form of Debenture
Section 8.2 Original Issue of Debentures
ARTICLE IX. CONCERNING TRUSTEE
Section 9.1 Certain Duties and Responsibilities of Trustee
Section 9.2 Notice of Defaults
Section 9.3 Certain Rights of Trustee
Section 9.4 Trustee Not Responsible for Recitals, etc.
Section 9.5 May Hold Debentures
Section 9.6 Moneys held in Trust
Section 9.7 Compensation and Reimbursement
Section 9.8 Reliance on Officers' Certificate
Section 9.9 Disqualification: Conflicting Interests
Section 9.10 Corporate Trustee Required; Eligibility
Section 9.11 Resignation and Removal; Appointment of Successor
Section 9.12 Acceptance of Appointment by Successor
Section 9.13 Merger, Conversion, Consolidation or Succession to Business
Section 9.14 Preferential Collection of Claims Against the Company
ARTICLE X. CONCERNING DEBENTUREHOLDERS
Section 10.1 Evidence of Action by Holders
Section 10.2 Proof of Execution by Debentureholders
Section 10.3 Who May be Deemed Owners
ii.
<PAGE>
Section 10.4 Certain Debentures Owned by Company Disregarded
Section 10.5 Actions Binding on Future Debentureholders
ARTICLE XI. SUPPLEMENTAL INDENTURES
Section 11.1 Supplemental indentures Without the Consent of
Debentureholders
Section 11.2 Supplemental Indentures with Consent of Debentureholders
Section 11.3 Effect of Supplemental Indentures
Section 11.4 Debentures Affected by Supplemental Indentures
Section 11.5 Execution of Supplemental Indentures
ARTICLE XII. SUCCESSOR CORPORATION
Section 12.1 Company May Consolidate, etc.
Section 12.2 Successor Corporation Substituted
Section 12.3 Evidence of Consolidation, etc. to Trustee
ARTICLE XIII. SATISFACTION AND DISCHARGE
Section 13.1 Satisfaction and Discharge of Indenture
Section 13.2 Discharge of Obligations
Section 13.3 Deposited Moneys to be Held in Trust
Section 13.4 Payment of Monies Held by Paying Agents
Section 13.5 Repayment to Company
ARTICLE XIV. IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS
Section 14.1 No Recourse
ARTICLE XV. MISCELLANEOUS PROVISIONS
Section 15.1 Effect on Successors and Assigns
Section 15.2 Actions by Successor
Section 15.3 Surrender of Company Powers
Section 15.4 Notices
Section 15.5 Governing Law
Section 15.6 Treatment of Debentures as Debt
Section 15.7 Compliance Certificates and Opinions
Section 15.8 Payments on Business Days
Section 15.9 Conflict with Trust Indenture Act
Section 15.10 Counterparts
Section 15.11 Separability
Section 15.12 Assignment
Section 15.13 Acknowledgment of Rights; Right of Setoff
ARTICLE XVI. SUBROGATION OF DEBENTURES
Section 16.1 Agreement to Subordinate
Section 16.2 Default on Senior Debt, Subordinated Debt or
iii.
<PAGE>
Additional Senior Obligations
Section 16.3 Liquidation; Dissolution; Bankruptcy
Section 16.4 Subrogation
Section 16.5 Trustee to Effectuate Subordination
Section 16.6 Notice by Company
Section 16.7 Rights of Trustee; Holders of Senior Indebtedness
Section 16.8 Subordination may not be Impaired
iv.
<PAGE>
INDENTURE
INDENTURE, dated as of ______________, 1998, between INDEPENDENT BANKSHARES,
INC., a Texas corporation (the "Company"), and U.S. TRUST COMPANY OF TEXAS,
N.A., a national bank with trust powers, as trustee (the "Trustee");
RECITALS
WHEREAS, for its lawful corporate purposes, the Company has duly authorized
the execution and delivery of this Indenture to provide for the issuance of
securities to be known as its % Subordinated Debentures due 2028 (hereinafter
referred to as the "Debentures"), the form and substance of such Debentures and
the terms, provisions and conditions thereof to be set forth as provided in this
Indenture;
WHEREAS, Independent Capital Trust, a Delaware statutory business trust (the
"Trust"), has offered to the public $10,000,000 aggregate liquidation amount of
its Preferred Securities (as defined herein) (or, $11,500,00 aggregate
liquidation amount of its Preferred Securities if the over-allotment option is
exercised in full) and proposes to invest the proceeds from such offering,
together with the proceeds of the issuance and sale by the Trust to the Company
of $309,280 aggregate liquidation amount of its Common Securities (as defined
herein) (or, $355,670 aggregate liquidation amount of its Common Securities if
the over-allotment option is exercised in full), in $10,309,280 aggregate
principal amount of the Debentures (or, $11,855,670 aggregate principal amount
of the Debentures if the over-allotment option is exercised in full); and
WHEREAS, the Company has requested that the Trustee execute and deliver this
Indenture; and
WHEREAS, all requirements necessary to make this Indenture a valid instrument
in accordance with its terms, and to make the Debentures, when executed by the
Company and authenticated and delivered by the Trustee, the valid obligations of
the Company, have been performed, and the execution and delivery of this
Indenture have been duly authorized in all respects; and
WHEREAS, to provide the terms and conditions upon which the Debentures are to
be authenticated, issued and delivered, the Company has duly authorized the
execution of this Indenture; and
WHEREAS, all things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done.
NOW, THEREFORE, in consideration of the premises and the purchase of the
Debentures by the holders thereof, it is mutually covenanted and agreed as
follows for the equal and ratable benefit of the holders of the Debentures:
<PAGE>
ARTICLE I.
DEFINITIONS
SECTION 1.1. DEFINITIONS OF TERMS.
The terms defined in this Section 1.1 (except as in this Indenture otherwise
expressly provided or unless the context otherwise requires) for all purposes of
this Indenture and of any indenture supplemental hereto shall have the
respective meanings specified in this Section 1.1 and shall include the plural
as well as the singular. All other terms used in this Indenture that are
defined in the Trust Indenture Act, or that are by reference in the Trust
Indenture Act defined in the Securities Act (except as herein otherwise
expressly provided or unless the context otherwise requires), shall have the
meanings assigned to such terms in the Trust Indenture Act and in the Securities
Act as in force at the date of the execution of this instrument. All accounting
terms used herein and not expressly defined shall have the meanings assigned to
such terms in accordance with Generally Accepted Accounting Principles.
"Accelerated Maturity Date" means if the Company elects to accelerate the
Maturity Date in accordance with Section 2.2(c), the date selected by the
Company which is prior to the Scheduled Maturity Date, but is after
_____________, 2003.
"Additional Payments" shall have the meaning set forth in Section 2.5.
"Additional Senior Obligations" means all indebtedness of the Company whether
incurred on or prior to the date of this Indenture or thereafter incurred, for
claims in respect of derivative products such as interest and foreign exchange
rate contracts, commodity contracts and similar arrangements; provided, however,
that Additional Senior Obligations does not include claims in respect of Senior
Debt or Subordinated Debt or obligations which, by their terms, are expressly
stated to be not superior in right of payment to the Debentures or to rank pari
passu in right of payment with the Debentures. For purposes of this definition,
"claim" shall have the meaning assigned thereto in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended.
"Administrative Trustees" shall have the meaning set forth in the Trust
Agreement.
"Affiliate" means, with respect to a specified Person, (a) any Person directly
or indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities or other ownership interests of the specified
Person; (b) any Person 10% or more of whose outstanding voting securities or
other ownership interests are directly or indirectly owned, controlled or held
with power to vote by the specified Person; (c) any Person directly or
indirectly controlling, controlled by, or under common control with the
specified Person; (d) a partnership in which the specified Person is a general
partner; (e) any officer or director of the specified Person; and (f) if the
specified Person is an individual, any entity of which the specified Person is
an officer, director or general partner.
2
<PAGE>
"Authenticating Agent" means an authenticating agent with respect to the
Debentures appointed by the Trustee pursuant to Section 2.12.
"Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state
law for the relief of debtors.
"Board of Directors" means the Board of Directors of the Company or any duly
authorized committee of such Board.
"Board Resolution" means a copy of a resolution certified by the Secretary or
an Assistant Secretary of the Company to have been duly adopted by the Board of
Directors and to be in full force and effect on the date of such certification.
"Business Day" means, with respect to the Debentures, any day other than a
Saturday or a Sunday or a day on which federal or state banking institutions in
the Borough of Manhattan, The City of New York or the City of Dallas, Texas, are
authorized or required by law, executive order or regulation to close, or a day
on which the Corporate Trust Office of the Trustee or the Property Trustee is
closed for business.
"Capital Treatment Event" means the receipt by the Trust of an Opinion of
Counsel, rendered by a law firm having a recognized banking law practice, to the
effect that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such proposed change, pronouncement or decision is announced on or after the
date of issuance of the Preferred Securities under the Trust Agreement, there is
more than an insubstantial risk of impairment of the Company's ability to treat
the aggregate liquidation amount of the Preferred Securities (or any substantial
portion thereof) as "Tier 1 Capital" (or the then equivalent thereof) for
purposes of the capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to the Company.
"Certificate" means a certificate signed by the principal executive officer,
the principal financial officer, the principal accounting officer, the treasurer
or any vice president of the Company. The Certificate need not comply with the
provisions of Section 15.7.
"Change in 1940 Act Law" shall have the meaning set forth in the definition
of "Investment Company Event."
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or, if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
3
<PAGE>
"Common Securities" means undivided beneficial interests in the assets of the
Trust which rank pari passu with the Preferred Securities; provided, however,
that upon the occurrence of an Event of Default, the rights of holders of Common
Securities to payment in respect of (i) distributions, and (ii) payments upon
liquidation, redemption and otherwise, are subordinated to the rights of holders
of Preferred Securities.
"Company" means Independent Bankshares, Inc., a corporation duly organized and
existing under the laws of the State of Texas, and, subject to the provisions of
Article XII, shall also include its successors and assigns.
"Compounded Interest" shall have the meaning set forth in Section 4.1.
"Corporate Trust Office" means the office of the Trustee at which, at any
particular time, its corporate trust business shall be principally administered,
which office at the date hereof is located at U.S. Trust Company of Texas, N.A.,
2001 Ross Avenue, Suite 2700, Dallas, TX 75201.
"Coupon Rate" shall have the meaning set forth in Section 2.5.
"Custodian" means any receiver, trustee, assignee, liquidator, or similar
official under any Bankruptcy Law.
"Debentures" shall have the meaning set forth in the Recitals hereto.
"Debentureholder," "holder of Debentures," "registered holder," or other
similar term, means the Person or Persons in whose name or names a particular
Debenture shall be registered on the books of the Company or the Trustee kept
for that purpose in accordance with the terms of this Indenture.
"Debenture Register" shall have the meaning set forth in Section 2.7(b).
"Debenture Registrar" shall have the meaning set forth in Section 2.7(b).
"Debt" means with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such Person for money borrowed; (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such Person; and (vi) and every
obligation of the type referred to in clauses (i) through (v) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
4
<PAGE>
"Default" means any event, act or condition that with notice or lapse of time,
or both, would constitute an Event of Default.
"Deferred Payments" shall have the meaning set forth in Section 4.1.
"Dissolution Event" means that as a result of the occurrence and continuation
of a Special Event, the Trust is to be dissolved in accordance with the Trust
Agreement and the Debentures held by the Property Trustee are to be distributed
to the holders of the Trust Securities issued by the Trust pro rata in
accordance with the Trust Agreement.
"Distribution" shall have the meaning set forth in the Trust Agreement.
"Event of Default" means, with respect to the Debentures, any event specified
in Section 7.1, which has continued for the period of time, if any, and after
the giving of the notice, if any, therein designated.
"Exchange Act," means the Securities Exchange Act of 1934, as amended, as in
effect at the date of execution of this instrument.
"Extended Interest Payment Period" shall have the meaning set forth in Section
4.1.
"Extended Maturity Date" means if the Company elects to extend the Maturity
Date in accordance with Section 2.2(b), the date selected by the Company which
is after the Scheduled Maturity Date but before ___________, 2037.
"Federal Reserve" means the Board of Governors of the Federal Reserve System.
"Generally Accepted Accounting Principles" means such accounting principles as
are generally accepted at the time of any computation required hereunder.
"Governmental Obligations" means securities that are (i) direct obligations of
the United States of America for the payment of which its full faith and credit
is pledged; or (ii) obligations of a Person controlled or supervised by and
acting as an agency or instrumentality of the United States of America, the
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America that, in either case, are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of
the Securities Act) as custodian with respect to any such Governmental
Obligation or a specific payment of principal of or interest on any such
Governmental Obligation held by such custodian for the account of the holder of
such depositary receipt; provided, however, that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depositary receipt from any amount received by the
custodian in respect of the Governmental Obligation or the specific payment of
principal of or interest on the Governmental Obligation evidenced by such
depositary receipt.
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"Herein," "hereof," and "hereunder," and other words of similar import, refer
to this Indenture as a whole and not to any particular Article, Section or other
subdivision.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into in accordance with the terms hereof.
"Interest Payment Date," shall have the meaning set forth in Section 2.5.
"Investment Company Act" means the Investment Company Act of 1940, as amended,
as in effect at the date of execution of this instrument.
"Investment Company Event" means the receipt by the Trust of an Opinion of
Counsel, rendered by a law firm having a recognized tax and securities law
practice, to the effect that, as a result of the occurrence of a change in law
or regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law"), the Trust is or shall be considered an "investment
company" that is required to be registered under the Investment Company Act,
which Change in 1940 Act Law becomes effective on or after the date of original
issuance of the Preferred Securities under the Trust Agreement.
"Maturity Date" means the date on which the Debentures mature and on which the
principal shall be due and payable together with all accrued and unpaid interest
thereon including Compounded Interest and Additional Payments, if any.
"Ministerial Action" shall have the meaning set forth in Section 3.2.
"Officers' Certificate" means a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Controller or an
Assistant Controller or the Secretary or an Assistant Secretary of the Company
that is delivered to the Trustee in accordance with the terms hereof. Each such
certificate shall include the statements provided for in Section 15.7, if and to
the extent required by the provisions thereof.
"Opinion of Counsel" means an opinion in writing of legal counsel, who may be
an employee of or counsel for the Company, that is delivered to the Trustee in
accordance with the terms hereof. Each such opinion shall include the
statements provided for in Section 15.7, if and to the extent required by the
provisions thereof.
"Outstanding," when used with reference to the Debentures, means, subject to
the provisions of Section 10.4, as of any particular time, all Debentures
theretofore authenticated and delivered by the Trustee under this Indenture,
except (a) Debentures theretofore canceled by the Trustee or any paying agent,
or delivered to the Trustee or any paying agent for cancellation or that have
previously been canceled; (b) Debentures or portions thereof for the payment or
redemption of which moneys or Governmental Obligations in the necessary amount
shall have
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been deposited in trust with the Trustee or with any paying agent (other than
the Company) or shall have been set aside and segregated in trust by the Company
(if the Company shall act as its own paying agent); provided, however, that if
such Debentures or portions of such Debentures are to be redeemed prior to the
maturity thereof, notice of such redemption shall have been given as in Article
III provided, or provision satisfactory to the Trustee shall have been made for
giving such notice; and (c) Debentures in lieu of or in substitution for which
other Debentures shall have been authenticated and delivered pursuant to the
terms of Section 2.7.
"Paying Agent" means any paying agent or co-paying agent appointed pursuant to
Section 5.3.
"Person" means any individual, corporation, partnership, joint-venture, trust,
limited liability company, joint-stock company, unincorporated organization or
government or any agency or political subdivision thereof.
"Predecessor Debenture" means every previous Debenture evidencing all or a
portion of the same debt as that evidenced by such particular Debenture; and,
for the purposes of this definition, any Debenture authenticated and delivered
under Section 2.9 in lieu of a lost, destroyed or stolen Debenture shall be
deemed to evidence the same debt as the lost, destroyed or stolen Debenture.
"Preferred Securities" means undivided beneficial interests in the assets of
the Trust which rank pari passu with Common Securities issued by the Trust;
provided, however, that upon the occurrence of an Event of Default, the rights
of holders of Common Securities to payment in respect of (i) distributions, and
(ii) payments upon liquidation, redemption and otherwise, are subordinated to
the rights of holders of Preferred Securities.
"Preferred Securities Guarantee" means any guarantee that the Company may
enter into with the Trustee or other Persons that operates directly or
indirectly for the benefit of holders of Preferred Securities.
"Property Trustee" has the meaning set forth in the Trust Agreement.
"Responsible Officer" when used with respect to the Trustee means the Chairman
of the Board of Directors, the President, any Vice President, the Secretary, the
Treasurer, any trust officer, any corporate trust officer or any other officer
or assistant officer of the Trustee customarily performing functions similar to
those performed by the Persons who at the time shall be such officers,
respectively, or to whom any corporate trust matter is referred because of his
or her knowledge of and familiarity with the particular subject.
"Scheduled Maturity Date" means ___________, 2028.
"Securities Act" means the Securities Act of 1933, as amended, as in effect
at the date of execution of this instrument.
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"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of this Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Debentures or to other Debt which is pari
passu with, or subordinated to, the Debentures; provided, however, that Senior
Debt shall not be deemed to include (i) any Debt of the Company which when
incurred and without respect to any election under section 1111(b) of the United
States Bankruptcy Code of 1978, as amended, was without recourse to the Company;
(ii) any Debt of the Company to any of its subsidiaries; (iii) Debt to any
employee of the Company; (iv) Debt which by its terms is subordinated to trade
accounts payable or accrued liabilities arising in the ordinary course of
business to the extent that payments made to the holders of such Debt by the
holders of the Debentures as a result of the subordination provisions of this
Indenture would be greater than they otherwise would have been as a result of
any obligation of such holders to pay amounts over to the obligees on such trade
accounts payable or accrued liabilities arising in the ordinary course of
business as a result of subordination provisions to which such Debt is subject;
and (v) Debt which constitutes Subordinated Debt.
"Senior Indebtedness" shall have the meaning set forth in Section 16.1.
"Special Event" means a Tax Event, a Capital Treatment Event or an Investment
Company Event.
"Subordinated Debt" means the principal of (and premium, if any) and interest,
if any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt (other
than the Debentures), whether incurred on or prior to the date of this Indenture
or thereafter incurred, which is by its terms expressly provided to be junior
and subordinate to other Debt of the Company.
"Subsidiary" means, with respect to any Person, (i) any corporation at least a
majority of whose outstanding Voting Stock shall at the time be owned, directly
or indirectly, by such Person or by one or more of its Subsidiaries or by such
Person and one or more of its Subsidiaries; (ii) any general partnership, joint
venture, trust or similar entity, at least a majority of whose outstanding
partnership or similar interests shall at the time be owned by such Person, or
by one or more of its Subsidiaries, or by such Person and one or more of its
Subsidiaries; and (iii) any limited partnership of which such Person or any of
its Subsidiaries is a general partner.
"Tax Event" means the receipt by the Trust of an Opinion of Counsel, rendered
by a law firm having a recognized tax and securities practice, to the effect
that, as a result of any amendment to, or change (including any announced
prospective change) in, the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement or judicial decision
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interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities under the Trust Agreement, there is more
than an insubstantial risk that (i) the Trust is, or shall be within 90 days
after the date of such Opinion of Counsel, subject to United States federal
income tax with respect to income received or accrued on the Debentures; (ii)
interest payable by the Company on the Debentures is not, or within 90 days
after the date of such Opinion of Counsel, shall not be, deductible by the
Company, in whole or in part, for United States federal income tax purposes; or
(iii) the Trust is, or shall be within 90 days after the date of such Opinion of
Counsel, subject to more than a de minimis amount of other taxes, duties,
assessments or other governmental charges. The Trust or the Company shall
request and receive such Opinion of Counsel with regard to such matters within a
reasonable period of time after the Trust or the Company shall have become aware
of any of the events described in clauses (i) through (iii) above.
"Trust" means Independent Capital Trust, a Delaware statutory business trust.
"Trust Agreement" means the Amended and Restated Trust Agreement, dated
________, 1998, of the Trust.
"Trustee" means U.S. Trust Company of Texas, N.A. and, subject to the
provisions of Article IX, shall also include its successors and assigns, and, if
at any time there is more than one Person acting in such capacity hereunder,
"Trustee" shall mean each such Person.
"Trust Indenture Act," means the Trust Indenture Act of 1939, as amended,
subject to the provisions of Sections 11.1, 11.2, and 12.1, as in effect at the
date of execution of this instrument.
"Trust Securities" means the Common Securities and Preferred Securities,
collectively.
"Voting Stock," as applied to stock of any Person, means shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person having ordinary voting power for the election of a majority of
the directors (or the equivalent) of such Person, other than shares, interests,
participations or other equivalents having such power only by reason of the
occurrence of a contingency.
ARTICLE II.
ISSUE, DESCRIPTION, TERMS, CONDITIONS,
REGISTRATION AND EXCHANGE OF DEBENTURES
SECTION 2.1. DESIGNATION AND PRINCIPAL AMOUNT.
There is hereby authorized Debentures designated the "____% Subordinated
Debentures due _________, 2028," limited in aggregate principal amount to
$11,855,670, which amount shall be as set forth in any written order of the
Company for the authentication and delivery of Debentures pursuant to Section
2.6.
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SECTION 2.2. MATURITY.
(a) The Maturity Date shall be either:
(i) the Scheduled Maturity Date; or
(ii) if the Company elects to extend the Maturity Date beyond
the Scheduled Maturity Date in accordance with Section
2.2(b), the Extended Maturity Date; or
(iii) if the Company elects to accelerate the Maturity Date to
be a date prior to the Scheduled Maturity Date in
accordance with Section 2.2(c), the Accelerated Maturity
Date.
(b) The Company may at any time before the day which is 90 days
before the Scheduled Maturity Date, elect to extend the Maturity
Date to the Extended Maturity Date, provided that the Company has
received the prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the
Federal Reserve and further provided that the following
conditions in this Section 2.2(b) are satisfied both at the date
the Company gives notice in accordance with Section 2.2(d) of its
election to extend the Maturity Date and at the Scheduled
Maturity Date:
(i) the Company is not in bankruptcy, otherwise insolvent or
in liquidation;
(ii) the Company is not in default in the payment of interest
or principal on the Debentures; and
(iii) the Trust is not in arrears on payments of Distributions
on the Trust Securities issued by it and no deferred
Distributions are accumulated.
(c) The Company may at any time before the day which is 90 days
before the Scheduled Maturity Date and after ______, elect to
shorten the Maturity Date only once to the Accelerated Maturity
Date provided that the Company has received the prior approval of
the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve.
(d) If the Company elects to extend the Maturity Date in accordance
with Section 2.2(b), the Company shall give notice to the
registered holders of the Debentures, the Property Trustee and
the Trust of the extension of the Maturity Date and the Extended
Maturity Date at least 90 days and no more than 180 days before
the Scheduled Maturity Date.
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(e) If the Company elects to accelerate the Maturity Date in
accordance with Section 2.2(c), the Company shall give notice to
the registered holders of the Debentures, the Property Trustee
and the Trust of the acceleration of the Maturity Date and the
Accelerated Maturity Date at least 90 days and no more than 180
days before the Accelerated Maturity Date.
SECTION 2.3. FORM AND PAYMENT.
The Debentures shall be issued in fully registered certificated form without
interest coupons. Principal and interest on the Debentures issued in
certificated form shall be payable, the transfer of such Debentures shall be
registrable and such Debentures shall be exchangeable for Debentures bearing
identical terms and provisions at the office or agency of the Trustee; provided,
however, that payment of interest may be made at the option of the Company by
check mailed to the holder at such address as shall appear in the Debenture
Register or by wire transfer to an account maintained by the holder as specified
in the Debenture Register, provided that the holder provides proper transfer
instructions by the regular record date. Notwithstanding the foregoing, so long
as the holder of any Debentures is the Property Trustee, the payment of the
principal of and interest (including Compounded Interest and Additional
Payments, if any) on such Debentures held by the Property Trustee shall be made
at such place and to such account as may be designated by the Property Trustee.
SECTION 2.4. [INTENTIONALLY OMITTED].
SECTION 2.5. INTEREST.
(a) Each Debenture shall bear interest at the rate of ___% per annum
(the "Coupon Rate") from the original date of issuance until the principal
thereof becomes due and payable, and on any overdue principal and (to the extent
that payment of such interest is enforceable under applicable law) on any
overdue installment of interest at the Coupon Rate, compounded quarterly,
payable (subject to the provisions of Article IV) quarterly in arrears on March
31, June 30, September 30 and December 31 of each year (each, an "Interest
Payment Date," commencing on December 31, 1998), to the Person in whose name
such Debenture or any Predecessor Debenture is registered, at the close of
business on the regular record date for such interest installment, which shall
be the fifteenth day of the last month of the calendar quarter.
(b) The amount of interest payable for any period shall be computed
on the basis of a 360-day year of twelve 30-day months. The amount of interest
payable for any period shorter than a full quarterly period for which interest
is computed shall be computed on the basis of the number of days elapsed in a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Debentures is not a Business Day, then payment of
interest payable on such date shall be made on the next succeeding day which is
a Business Day (and without any interest or other payment in respect of any such
delay) with the same force and effect as if made on the date such payment was
originally payable.
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(c) If, at any time while the Property Trustee is the holder of any
Debentures, the Trust or the Property Trustee is required to pay any taxes,
duties, assessments or governmental charges of whatever nature (other than
withholding taxes) imposed by the United States, or any other taxing authority,
then, in any case, the Company shall pay as additional interest (the "Additional
Payments") on the Debentures held by the Property Trustee, such additional
amounts as shall be required so that the net amounts received and retained by
the Trust and the Property Trustee after paying such taxes, duties, assessments
or other governmental charges shall be equal to the amounts the Trust and the
Property Trustee would have received had no such taxes, duties, assessments or
other government charges been imposed.
SECTION 2.6. EXECUTION AND AUTHENTICATIONS.
(a) The Debentures shall be signed on behalf of the Company by its
Chief Executive Officer, President or one of its Vice Presidents, under its
corporate seal attested by its Secretary or one of its Assistant Secretaries.
Signatures may be in the form of a manual or facsimile signature. The Company
may use the facsimile signature of any Person who shall have been a Chief
Executive Officer, President or Vice President thereof, or of any Person who
shall have been a Secretary or Assistant Secretary thereof, notwithstanding the
fact that at the time the Debentures shall be authenticated and delivered or
disposed of such Person shall have ceased to be the Chief Executive Officer,
President or a Vice President, or the Secretary or an Assistant Secretary of the
Company. The seal of the Company may be in the form of a facsimile of such seal
and may be impressed, affixed, imprinted or otherwise reproduced on the
Debentures. The Debentures may contain such notations, legends or endorsements
required by law, agreements to which the Company is a party, stock exchange rule
or usage. Each Debenture shall be dated the date of its authentication by the
Trustee. The Debentures shall be issued in minimum denominations of $10 and
integral multiples thereof.
(b) A Debenture shall not be valid until manually authenticated by an
authorized signatory of the Trustee, or by an Authenticating Agent. Such
signature shall be conclusive evidence that the Debenture so authenticated has
been duly authenticated and delivered hereunder and that the holder is entitled
to the benefits of this Indenture. The form of the Trustee's certificate of
authentication to be borne by the Debentures shall be substantially as set forth
in Exhibit A hereto.
---------
(c) At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Debentures executed by the
Company to the Trustee for authentication, together with a written order of the
Company for the authentication and delivery of such Debentures signed by its
Chief Executive Officer, Chief Financial Officer, President or any Vice
President and its Treasurer or any Assistant Treasurer, in a maximum aggregate
amount outstanding at any one time of $11,855,670, and the Trustee in accordance
with such written order shall authenticate and deliver such Debentures.
(d) In authenticating such Debentures and accepting the additional
responsibilities under this Indenture in relation to such Debentures, the
Trustee shall be entitled to receive, and (subject to Section 9.1) shall be
fully protected in relying upon, an Opinion of Counsel stating
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that the form and terms thereof have been established in conformity with the
provisions of this Indenture.
(e) The Trustee shall not be required to authenticate such Debentures
if the issue of such Debentures pursuant to this Indenture shall affect the
Trustee's own rights, duties or immunities under the Debentures and this
Indenture or otherwise in a manner that is not reasonably acceptable to the
Trustee.
SECTION 2.7. REGISTRATION OF TRANSFER AND EXCHANGE.
(a) The Debentures may not be transferred except in compliance with
any applicable law, regulation or legend thereon. Debentures may be exchanged
upon presentation thereof at the office or agency of the Company designated for
such purpose, or at the office of the Debenture Registrar, for other Debentures
and for a like aggregate principal amount, upon payment of a sum sufficient to
cover any tax or other governmental charge in relation thereto, all as provided
in this Section 2.7. In respect of any Debentures so surrendered for exchange,
the Company shall execute, the Trustee shall authenticate and such office or
agency shall deliver in exchange therefor the Debenture or Debentures that the
Debentureholder making the exchange shall be entitled to receive, bearing
numbers not contemporaneously outstanding.
(b) The Company shall keep, or cause to be kept, at its office or
agency designated for such purpose, or at the office of the Debenture Registrar,
or such other location designated by the Company a register or registers (herein
referred to as the "Debenture Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall register the Debentures and
the transfers of Debentures as in this Article II provided and which at all
reasonable times shall be open for inspection by the Trustee. The registrar for
the purpose of registering Debentures and transfer of Debentures as herein
provided shall initially be the Trustee and thereafter as may be appointed by
the Company as authorized by Board Resolution (the "Debenture Registrar"). Upon
surrender for transfer of any Debenture at the office or agency of the Company
designated for such purpose, the Company shall execute, the Trustee shall
authenticate and such office or agency shall deliver in the name of the
transferee or transferees a new Debenture or Debentures for a like aggregate
principal amount. All Debentures presented or surrendered for exchange or
registration of transfer, as provided in this Section 2.7, shall be accompanied
(if so required by the Company or the Debenture Registrar) by a written
instrument or instruments of transfer, in form satisfactory to the Company or
the Debenture Registrar, duly executed by the registered holder or by such
holder's duly authorized attorney in writing.
(c) No service charge shall be made for any exchange or registration
of transfer of Debentures, or issue of new Debentures in case of partial
redemption, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge in relation thereto, other than exchanges
pursuant to Section 2.8, Section 3.5(b) and Section 11.4 not involving any
transfer.
(d) The Company shall not be required (i) to issue, exchange or
register the transfer of any Debentures during a period beginning at the opening
of business 15 days before the day of
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the mailing of a notice of redemption of less than all the Outstanding
Debentures and ending at the close of business on the day of such mailing; nor
(ii) to register the transfer of or exchange any Debentures or portions thereof
called for redemption.
(e) Prior to due presentment for the registration of a transfer of
any Debenture pursuant to this Section 2.7, the Company, the Trustee and any
agent of the Company or the Trustee may deem and treat the Person in whose name
any Debenture is registered as the absolute owner of such Debenture for the
purpose of receiving payment of principal of and premium, if any, and interest
on such Debentures and all other purposes, and neither the Company or the
Trustee nor any agent of the Company or the Trustee shall be affected by notice
to the contrary.
SECTION 2.8. TEMPORARY DEBENTURES.
Pending the preparation of definitive Debentures, the Company may execute, and
the Trustee shall authenticate and deliver, temporary Debentures (printed,
lithographed or typewritten). Such temporary Debentures shall be substantially
in the form of the definitive Debentures in lieu of which they are issued, but
with such omissions, insertions and variations as may be appropriate for
temporary Debentures, all as may be determined by the Company. Every temporary
Debenture shall be executed by the Company and be authenticated by the Trustee
upon the same conditions and in substantially the same manner, and with like
effect, as the definitive Debentures. Without unnecessary delay the Company
shall execute and shall furnish definitive Debentures (printed, lithographed or
typewritten, or provided by any combination thereof, or in any other manner
permitted by the rules and regulations of any applicable securities exchange)
and thereupon any or all temporary Debentures may be surrendered in exchange
therefor (without charge to the holders), at the office or agency of the Company
designated for the purpose, and the Trustee shall authenticate and such office
or agency shall deliver in exchange for such temporary Debentures an equal
aggregate principal amount of definitive Debentures, unless the Company advises
the Trustee to the effect that definitive Debentures need not be executed and
furnished until further notice from the Company. Until so exchanged, the
temporary Debentures shall be entitled to the same benefits under this Indenture
as definitive Debentures authenticated and delivered hereunder.
SECTION 2.9. MUTILATED, DESTROYED, LOST OR STOLEN DEBENTURES.
(a) In case any temporary or definitive Debenture shall become
mutilated or be destroyed, lost or stolen, the Company (subject to the next
succeeding sentence) shall execute, and upon the Company's request the Trustee
(subject as aforesaid) shall authenticate and deliver, a new Debenture bearing a
number not contemporaneously outstanding, in exchange and substitution for the
mutilated Debenture, or in lieu of and in substitution for the Debenture so
destroyed, lost or stolen. In every case the applicant for a substituted
Debenture shall furnish to the Company and the Trustee such security or
indemnity as may be required by them to save each of them harmless, and, in
every case of destruction, loss or theft, the applicant shall also furnish to
the Company and the Trustee evidence to their satisfaction of the destruction,
loss or theft of the applicant's Debenture and of the ownership thereof. The
Trustee shall authenticate
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any such substituted Debenture and deliver the same upon the written request or
authorization of the Chairman, President or any Vice-President and the Treasurer
or any Assistant Treasurer of the Company. Upon the issuance of any substituted
Debenture, the Company may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and any
other expenses (including the fees and expenses of the Trustee) connected
therewith. In case any Debenture that has matured or is about to mature shall
become mutilated or be destroyed, lost or stolen, the Company may, instead of
issuing a substitute Debenture, pay or aut horize the payment of the same
(without surrender thereof except in the case of a mutilated Debenture) if the
applicant for such payment shall furnish to the Company and the Trustee such
security or indemnity as they may require to save them harmless, and, in case of
destruction, loss or theft, evidence to the satisfaction of the Company and the
Trustee of the destruction, loss or theft of such Debenture and of the ownership
thereof.
(b) Every replacement Debenture issued pursuant to the provisions of
this Section 2.9 shall constitute an additional contractual obligation of the
Company whether or not the mutilated, destroyed, lost or stolen Debenture shall
be found at any time, or be enforceable by anyone, and shall be entitled to all
the benefits of this Indenture equally and proportionately with any and all
other Debentures duly issued hereunder. All Debentures shall be held and owned
upon the express condition that the foregoing provisions are exclusive with
respect to the replacement or payment of mutilated, destroyed, lost or stolen
Debentures, and shall preclude (to the extent lawful) any and all other rights
or remedies, notwithstanding any law or statute existing or hereafter enacted to
the contrary with respect to the replacement or payment of negotiable
instruments or other securities without their surrender.
SECTION 2.10. CANCELLATION.
All Debentures surrendered for the purpose of payment, redemption, exchange or
registration of transfer shall, if surrendered to the Company or any paying
agent, be delivered to the Trustee for cancellation, or, if surrendered to the
Trustee, shall be canceled by it, and no Debentures shall be issued in lieu
thereof except as expressly required or permitted by any of the provisions of
this Indenture. On request of the Company at the time of such surrender, the
Trustee shall deliver to the Company canceled Debentures held by the Trustee.
In the absence of such request the Trustee may dispose of canceled Debentures in
accordance with its standard procedures and deliver a certificate of disposition
to the Company. If the Company shall otherwise acquire any of the Debentures,
however, such acquisition shall not operate as a redemption or satisfaction of
the indebtedness represented by such Debentures unless and until the same are
delivered to the Trustee for cancellation.
SECTION 2.11. BENEFIT OF INDENTURE.
Nothing in this Indenture or in the Debentures, express or implied, shall give
or be construed to give to any Person, other than the parties hereto and the
holders of the Debentures (and, with respect to the provisions of Article XVI,
the holders of Senior Indebtedness) any legal or equitable right, remedy or
claim under or in respect of this Indenture, or under any covenant, condition or
provision herein contained; all such covenants, conditions and provisions being
for
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the sole benefit of the parties hereto and of the holders of the Debentures
(and, with respect to the provisions of Article XVI, the holders of Senior
Indebtedness).
SECTION 2.12. AUTHENTICATION AGENT.
(a) So long as any of the Debentures remain Outstanding there may be
an Authenticating Agent for any or all such Debentures, which the Trustee shall
have the right to appoint. Said Authenticating Agent shall be authorized to act
on behalf of the Trustee to authenticate Debentures issued upon exchange,
transfer or partial redemption thereof, and Debentures so authenticated shall be
entitled to the benefits of this Indenture and shall be valid and obligatory for
all purposes as if authenticated by the Trustee hereunder. All references in
this Indenture to the authentication of Debentures by the Trustee shall be
deemed to include authentication by an Authenticating Agent. Each Authenticating
Agent shall be acceptable to the Company and shall be a corporation that has a
combined capital and surplus, as most recently reported or determined by it,
sufficient under the laws of any jurisdiction under which it is organized or in
which it is doing business to conduct a trust business, and that is otherwise
authorized under such laws to conduct such business and is subject to
supervision or examination by federal or state authorities. If at any time any
Authenticating Agent shall cease to be eligible in accordance with these
provisions, it shall resign immediately.
(b) Any Authenticating Agent may at any time resign by giving written
notice of resignation to the Trustee and to the Company. The Trustee may at any
time (and upon request by the Company shall) terminate the agency of any
Authenticating Agent by giving written notice of termination to such
Authenticating Agent and to the Company. Upon resignation, termination or
cessation of eligibility of any Authenticating Agent, the Trustee may appoint an
eligible successor Authenticating Agent acceptable to the Company. Any successor
Authenticating Agent, upon acceptance of its appointment hereunder, shall become
vested with all the rights, powers and duties of its predecessor hereunder as if
originally named as an Authenticating Agent pursuant hereto.
ARTICLE III.
REDEMPTION OF DEBENTURES
SECTION 3.1. REDEMPTION.
Subject to the Company having received prior approval of the Federal Reserve,
if then required under the applicable capital guidelines or policies of the
Federal Reserve, the Company may redeem the Debentures issued hereunder on and
after the dates set forth in and in accordance with the terms of this Article
III.
SECTION 3.2. SPECIAL EVENT REDEMPTION.
Subject to the Company having received the prior approval of the Federal
Reserve, if then required under the applicable capital guidelines or policies of
the Federal Reserve, if a Special
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Event has occurred and is continuing, then, notwithstanding Section 3.3, the
Company shall have the right upon not less than 30 days' nor more than 60 days'
notice to the holders of the Debentures to redeem the Debentures, in whole but
not in part, for cash within 180 days following the occurrence of such Special
Event (the "180-Day Period") at a redemption price equal to 100% of the
principal amount to be redeemed plus any accrued and unpaid interest thereon to
the date of such redemption (the "Redemption Price"), provided that if at the
time there is available to the Company the opportunity to eliminate, within the
180-Day Period, a Tax Event by taking some ministerial action (a "Ministerial
Action"), such as filing a form or making an election, or pursuing some other
similar reasonable measure which has no adverse effect on the Company, the Trust
or the holders of the Trust Securities issued by the Trust, the Company shall
pursue such Ministerial Action in lieu of redemption, and, provided further,
that the Company shall have no right to redeem the Debentures while it is
pursuing any Ministerial Action pursuant to its obligations hereunder, and,
provided further, that, if it is determined that the taking of a Ministerial
Action would not eliminate the Tax Event within the 180-Day Period, the
Company's right to redeem the Debentures shall be restored and it shall have no
further obligations to pursue the Ministerial Action. The Redemption Price shall
be paid prior to 12:00 noon, New York time, on the date of such redemption or
such earlier time as the Company determines, provided that the Company shall
deposit with the Trustee an amount sufficient to pay the Redemption Price by
10:00 a.m., New York time, on the date such Redemption Price is to be paid.
SECTION 3.3. OPTIONAL REDEMPTION BY COMPANY.
(a) Subject to the provisions of Section 3.3(b), except as otherwise
may be specified in this Indenture, the Company shall have the right to redeem
the Debentures, in whole or in part, from time to time, on or after ______, at a
Redemption Price equal to 100% of the principal amount to be redeemed plus any
accrued and unpaid interest thereon to the date of such redemption, plus
Deferred Payments, if any. Any redemption pursuant to this Section 3.3(a) shall
be made upon not less than 30 days nor more than 60 days notice to the holder of
the Debentures, at the Redemption Price. If the Debentures are only partially
redeemed pursuant to this Section 3.3, the Debentures shall be redeemed pro rata
or by lot or in such other manner as the Trustee shall deem appropriate and fair
in its discretion. The Redemption Price shall be paid prior to 12:00 noon, New
York time, on the date of such redemption or at such earlier time as the Company
determines provided that the Company shall deposit with the Trustee an amount
sufficient to pay the Redemption Price by 10:00 a.m., New York time, on the date
such Redemption Price is to be paid.
(b) If a partial redemption of the Debentures would result in the
delisting of the Preferred Securities issued by the Trust from The Nasdaq Stock
Market's National Market or any comparable level or successor listing or any
national securities exchange or other organization on which the Preferred
Securities are then listed or quoted, the Company shall not be permitted to
effect such partial redemption and may only redeem the Debentures in whole.
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SECTION 3.4. NOTICE OF REDEMPTION.
(a) In case the Company shall desire to exercise such right to redeem
all or, as the case may be, a portion of the Debentures in accordance with the
right reserved so to do, the Company shall, or shall cause the Trustee to upon
receipt of 45 days' written notice from the Company (which notice shall, in the
event of a partial redemption, include a representation to the effect that such
partial redemption shall not result in the delisting of the Preferred Securities
as described in Section 3.3(b) above), give notice of such redemption to holders
of the Debentures to be redeemed by mailing, first class postage prepaid, a
notice of such redemption not less than 30 days and not more than 60 days before
the date fixed for redemption to such holders at their last addresses as they
shall appear upon the Debenture Register. Any notice that is mailed in the
manner herein provided shall be conclusively presumed to have been duly given,
whether or not the registered holder receives the notice. In any case, failure
duly to give such notice to the holder of any Debenture designated for
redemption in whole or in part, or any defect in the notice, shall not affect
the validity of the proceedings for the redemption of any other Debentures. In
the case of any redemption of Debentures prior to the expiration of any
restriction on such redemption provided in the terms of such Debentures or
elsewhere in this Indenture, the Company shall furnish the Trustee with an
Officers' Certificate evidencing compliance with any such restriction. Each such
notice of redemption shall specify the date fixed for redemption and the
Redemption Price and shall state that payment of the Redemption Price shall be
made at the Corporate Trust Office, upon presentation and surrender of such
Debentures, that interest accrued to the date fixed for redemption shall be paid
as specified in said notice and that from and after said date interest shall
cease to accrue. If less than all the Debentures are to be redeemed, the notice
to the holders of the Debentures shall specify the particular Debentures to be
redeemed. If the Debentures are to be redeemed in part only, the notice shall
state the portion of the principal amount thereof to be redeemed and shall state
that on and after the redemption date, upon surrender of such Debenture, a new
Debenture or Debentures in principal amount equal to the unredeemed portion
thereof shall be issued.
(b) If less than all the Debentures are to be redeemed, the Company
shall give the Trustee at least 45 days' notice in advance of the date fixed for
redemption as to the aggregate principal amount of Debentures to be redeemed,
and thereupon the Trustee shall select, by lot or in such other manner as it
shall deem appropriate and fair in its discretion, the portion or portions
(equal to the minimum authorized denomination of the Debentures or any integral
multiple thereof) of the Debentures to be redeemed and shall thereafter promptly
notify the Company in writing of the numbers of the Debentures to be redeemed,
in whole or in part. The Company may, if and whenever it shall so elect pursuant
to the terms hereof, by delivery of instructions signed on its behalf by its
President or any Vice President, instruct the Trustee or any Paying Agent to
call all or any part of the Debentures for redemption and to give notice of
redemption in the manner set forth in this Section 3.4, such notice to be in the
name of the Company or its own name as the Trustee or such paying agent may deem
advisable. In any case in which notice of redemption is to be given by the
Trustee or any such paying agent, the Company shall deliver or cause to be
delivered to, or permit to remain with, the Trustee or such paying agent, as the
case may be, such Debenture Register, transfer books or other records, or
suitable copies or extracts
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therefrom, sufficient to enable the Trustee or such Paying Agent to give any
notice by mail that may be required under the provisions of this Section 3.4.
SECTION 3.5. PAYMENT UPON REDEMPTION.
(a) If the giving of notice of redemption shall have been completed
as above provided, the Debentures or portions of Debentures to be redeemed
specified in such notice shall become due and payable on the date and at the
place stated in such notice at the applicable Redemption Price, and interest on
such Debentures or portions of Debentures shall cease to accrue on and after the
date fixed for redemption, unless the Company shall default in the payment of
such Redemption Price with respect to any such Debenture or portion thereof. On
presentation and surrender of such Debentures on or after the date fixed for
redemption at the place of payment specified in the notice, said Debentures
shall be paid and redeemed at the Redemption Price (but if the date fixed for
redemption is an interest payment date, the interest installment payable on such
date shall be payable to the registered holder at the close of business on the
applicable record date pursuant to Section 3.3).
(b) Upon presentation of any Debenture that is to be redeemed in part
only, the Company shall execute and the Trustee shall authenticate and the
office or agency where the Debenture is presented shall deliver to the holder
thereof, at the expense of the Company, a new Debenture of authorized
denomination in principal amount equal to the unredeemed portion of the
Debenture so presented.
SECTION 3.6. NO SINKING FUND.
The Debentures are not entitled to the benefit of any sinking fund.
ARTICLE IV.
EXTENSION OF INTEREST PAYMENT PERIOD
SECTION 4.1. EXTENSION OF INTEREST PAYMENT PERIOD.
So long as no Event of Default has occurred and is continuing, the Company
shall have the right, at any time and from time to time during the term of the
Debentures, to defer payments of interest by extending the interest payment
period of such Debentures for a period not exceeding 20 consecutive quarters
(the "Extended Interest Payment Period"), during which Extended Interest Payment
Period no interest shall be due and payable; provided that no Extended Interest
Payment Period may extend beyond the Maturity Date. To the extent permitted by
applicable law, interest, the payment of which has been deferred because of the
extension of the interest payment period pursuant to this Section 4.1, shall
bear interest thereon at the Coupon Rate compounded quarterly for each quarter
of the Extended Interest Payment Period (the "Compounded Interest"). At the end
of the Extended Interest Payment Period, the Company shall calculate (and
deliver such calculation to the Trustee) and pay all interest accrued and unpaid
on the Debentures, including any Additional Payments and Compounded Interest
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(together, the "Deferred Payments") that shall be payable to the holders of the
Debentures in whose names the Debentures are registered in the Debenture
Register on the first record date after the end of the Extended Interest Payment
Period. Before the termination of any Extended Interest Payment Period, the
Company may further extend such period, provided that such period together with
all such further extensions thereof shall not exceed 20 consecutive quarters, or
extend beyond the Maturity Date of the Debentures. Upon the termination of any
Extended Interest Payment Period and upon the payment of all Deferred Payments
then due, the Company may commence a new Extended Interest Payment Period,
subject to the foregoing requirements. No interest shall be due and payable
during an Extended Interest Payment Period, except at the end thereof, but the
Company may prepay at any time all or any portion of the interest accrued during
an Extended Interest Payment Period.
SECTION 4.2. NOTICE OF EXTENSION.
(a) If the Property Trustee is the only registered holder of the
Debentures at the time the Company selects an Extended Interest Payment Period,
the Company shall give written notice to the Administrative Trustees, the
Property Trustee and the Trustee of its selection of such Extended Interest
Payment Period two Business Days before the earlier of (i) the next succeeding
date on which Distributions on the Trust Securities issued by the Trust are
payable; or (ii) the date the Trust is required to give notice of the record
date, or the date such Distributions are payable, to The Nasdaq Stock Market's
National Market or other applicable self-regulatory organization or to holders
of the Preferred Securities issued by the Trust, but in any event at least one
Business Day before such record date.
(b) If the Property Trustee is not the only holder of the Debentures
at the time the Company selects an Extended Interest Payment Period, the Company
shall give the holders of the Debentures and the Trustee written notice of its
selection of such Extended Interest Payment Period at least two Business Days
before the earlier of (i) the next succeeding Interest Payment Date; or (ii) the
date the Company is required to give notice of the record or payment date of
such interest payment to The Nasdaq Stock Market's National Market or other
applicable self-regulatory organization or to holders of the Debentures.
(c) The quarter in which any notice is given pursuant to paragraphs
(a) or (b) of this Section 4.2 shall be counted as one of the 20 quarters
permitted in the maximum Extended Interest Payment Period permitted under
Section 4.1.
SECTION 4.3. LIMITATION ON TRANSACTIONS.
If (i) the Company shall exercise its right to defer payment of interest as
provided in Section 4.1; or (ii) there shall have occurred any Event of Default,
then (a) the Company shall not declare or pay any dividend or distributions on,
or redeem, purchase, acquire or make a liquidation payment with respect to, any
of its capital stock (other than (i) dividends or distributions in common stock
of the Company, or any declaration of a non-cash dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto,
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and (ii) purchases of common stock of the Company related to the rights under
any of the Company's benefit plans for its directors, officers or employees);
(b) the Company shall not make any payment of principal, interest or premium, if
any, on or repay, repurchase or redeem any debt securities issued by the Company
which rank pari passu with or junior in interest to the Debentures; provided,
however, that notwithstanding the foregoing the Company may make payments
pursuant to its obligations under the Preferred Securities Guarantee; and (c)
the Company shall not redeem, purchase or acquire less than all of the
outstanding Debentures or any of the Preferred Securities.
ARTICLE V.
PARTICULAR COVENANTS OF COMPANY
SECTION 5.1. PAYMENT OF PRINCIPAL AND INTEREST.
The Company shall duly and punctually pay or cause to be paid the principal of
and interest on the Debentures at the time and place and in the manner provided
herein. Each such payment of the principal of or interest on the Debentures
shall relate only to the Debentures, shall not be combined with any other
payment of the principal of or interest on any other obligation of the Company,
and shall be clearly and unmistakably identified as pertaining to the
Debentures.
SECTION 5.2. MAINTENANCE OF AGENCY.
So long as any of the Debentures remain Outstanding, the Company shall
maintain an office or agency at such location or locations as may be designated
as provided in this Section 5.2, where (i) Debentures may be presented for
payment; (ii) Debentures may be presented as hereinabove authorized for
registration of transfer and exchange; and (iii) notices and demands to or upon
the Company in respect of the Debentures and this Indenture may be given or
served, such designation to continue with respect to such office or agency until
the Company shall, by written notice signed by its President or a Vice President
and delivered to the Trustee, designate some other office or agency for such
purposes or any of them. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, notices and demands may be made or served
at the Corporate Trust Office of the Trustee, and the Company hereby appoints
the Trustee as its agent to receive all such presentations, notices and demands.
The Company shall give the Trustee prompt written notice of any such designation
or rescission thereof.
SECTION 5.3. PAYING AGENTS.
(a) The Trustee shall initially act as the Paying Agent. If the
Company shall appoint one or more Paying Agents for the Debentures, other than
the Trustee, the Company shall cause each such Paying Agent to execute and
deliver to the Trustee an instrument in which such agent shall agree with the
Trustee, subject to the provisions of this Section 5.3:
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(i) that it shall hold all sums held by it as such agent for
the payment of the principal of or interest on the Debentures (whether such
sums have been paid to it by the Company or by any other obligor of such
Debentures) in tr ust for the benefit of the Persons entitled thereto;
(ii) that it shall give the Trustee notice of any failure by
the Company (or by any other obligor of such Debentures) to make any
payment of the principal of or interest on the Debentures when the same
shall be due and payable;
(iii) that it shall, at any time during the continuance of any
failure referred to in the preceding paragraph (a)(ii) above, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent; and
(iv) that it shall perform all other duties of Paying Agent as
set forth in this Indenture.
(b) If the Company shall act as its own Paying Agent with respect to
the Debentures, it shall on or before each due date of the principal of or
interest on such Debentures, set aside, segregate and hold in trust for the
benefit of the Persons entitled thereto a sum sufficient to pay such principal
or interest so becoming due on Debentures until such sums shall be paid to such
Persons or otherwise disposed of as herein provided and shall promptly notify
the Trustee of such action, or any failure (by it or any other obligor on such
Debentures) to take such action. Whenever the Company shall have one or more
Paying Agents for the Debentures, it shall, prior to each due date of the
principal of or interest on any Debentures, deposit with the Paying Agent a sum
sufficient to pay the principal or interest so becoming due, such sum to be held
in trust for the benefit of the Persons entitled to such principal or interest,
and (unless such Paying Agent is the Trustee) the Company shall promptly notify
the Trustee of this action or failure so to act.
(c) Notwithstanding anything in this Section 5.3 to the contrary, (i)
the agreement to hold sums in trust as provided in this Section 5.3 is subject
to the provisions of Section 13.3 and 13.4; and (ii) the Company may at any
time, for the purpose of obtaining the satisfaction and discharge of this
Indenture or for any other purpose, pay, or direct any Paying Agent to pay, to
the Trustee all sums held in trust by the Company or such Paying Agent, such
sums to be held by the Trustee upon the same terms and conditions as those upon
which such sums were held by the Company or such Paying Agent; and, upon such
payment by any Paying Agent to the Trustee, such Paying Agent shall be released
from all further liability with respect to such money.
SECTION 5.4. APPOINTMENT TO FILL VACANCY IN OFFICE OF TRUSTEE.
The Company, whenever necessary to avoid or fill a vacancy in the office of
Trustee, shall appoint, in the manner provided in Section 9.11, a Trustee, so
that there shall at all times be a Trustee hereunder.
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SECTION 5.5. COMPLIANCE WITH CONSOLIDATION PROVISIONS.
The Company shall not, while any of the Debentures remain outstanding,
consolidate with, or merge into, or merge into itself, or sell or convey all or
substantially all of its property to any other company unless the provisions of
Article XII hereof are complied with.
SECTION 5.6. LIMITATION ON TRANSACTIONS.
If Debentures are issued to the Trust or a trustee of the Trust in connection
with the issuance of Trust Securities by the Trust and (i) there shall have
occurred any event of which the Company has knowledge and has not taken
reasonable steps to cure that would constitute an Event of Default; (ii) the
Company shall be in default with respect to its payment of any obligations under
the Preferred Securities Guarantee relating to the Trust; or (iii) the Company
shall have given notice of its election to defer payments of interest on such
Debentures by extending the interest payment period as provided in this
Indenture and such period, or any extension thereof, shall be continuing, then
(a) the Company shall not declare or pay any dividends or distributions on, or
redeem, purchase, acquire or make a liquidation payment with respect to, any of
its capital stock (other than (i) dividends or distributions in common stock of
the Company, or any declaration of a non-cash dividend in connection with the
implementation of a shareholders' rights plan, or the issuance of stock under
any such plan in the future, or the redemption or repurchase of any such rights
pursuant thereto, and (ii) purchases of common stock of the Company related to
the rights under any of the Company's benefit plans for its directors, officers
or employees); (b) the Company shall not make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities issued
by the Company which rank pari passu with or junior in interest to the
Debentures; provided, however, that the Company may make payments pursuant to
its obligations under the Preferred Securities Guarantee; and (c) the Company
shall not redeem, purchase or acquire less than all of the outstanding
Debentures or any of the Preferred Securities.
SECTION 5.7. COVENANTS AS TO THE TRUST.
For so long as the Trust Securities of the Trust remain outstanding, the
Company shall (i) maintain 100% direct or indirect ownership of the Common
Securities of the Trust; provided, however, that any permitted successor of the
Company under this Indenture may succeed to the Company's ownership of the
Common Securities; (ii) not voluntarily terminate, wind up or liquidate the
Trust, except upon prior approval of the Federal Reserve if then so required
under applicable capital guidelines or policies of the Federal Reserve; and
(iii) use its reasonable efforts to cause the Trust (a) to remain a business
trust, except in connection with a distribution of Debentures, the redemption of
all of the Trust Securities of the Trust, or certain mergers, consolidations or
amalgamations, each as permitted by the Trust Agreement; and (b) to otherwise
continue not to be treated as a grantor trust and not as an association taxable
as a corporation or partnership for United States federal income tax purposes;
and (iii) use its reasonable efforts to cause each holder of Trust Securities to
be treated as owning an individual beneficial interest in the Debentures. In
connection with the distribution of the Debentures to the holders of the
Preferred Securities issued by the Trust upon a Dissolution Event, the Company
shall use its best
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efforts to list such Debentures on The Nasdaq Stock Market's National Market or
on such other exchange as the Preferred Securities are then listed.
SECTION 5.8. COVENANTS AS TO PURCHASES.
Except upon the exercise by the Company of its right to redeem the Debentures
pursuant to Section 3.2 upon the occurrence and continuation of a Special Event,
the Company shall not purchase any Debentures, in whole or in part, from the
Trust prior to ___________________.
ARTICLE VI.
DEBENTUREHOLDERS' LISTS AND REPORTS
BY COMPANY AND TRUSTEE
SECTION 6.1. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF
DEBENTUREHOLDERS.
The Company shall furnish or cause to be furnished to the Trustee (a) on a
quarterly basis on each regular record date (as described in Section 2.5) a
list, in such form as the Trustee may reasonably require, of the names and
addresses of the holders of the Debentures as of such regular record date,
provided that the Company shall not be obligated to furnish or cause to furnish
such list at any time that the list shall not differ in any respect from the
most recent list furnished to the Trustee by the Company (in the event the
Company fails to provide such list on a quarterly basis, the Trustee shall be
entitled to rely on the most recent list provided by the Company); and (b) at
such other times as the Trustee may request in writing within 30 days after the
receipt by the Company of any such request, a list of similar form and content
as of a date not more than 15 days prior to the time such list is furnished;
provided, however, that, in either case, no such list need be furnished if the
Trustee shall be the Debenture Registrar.
SECTION 6.2. PRESERVATION OF INFORMATION COMMUNICATIONS WITH DEBENTUREHOLDERS.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, all information as to the names and addresses of the holders of
Debentures contained in the most recent list furnished to it as provided in
Section 6.1 and as to the names and addresses of holders of Debentures received
by the Trustee in its capacity as Debenture Registrar for the Debentures (if
acting in such capacity).
(b) The Trustee may destroy any list furnished to it as provided in
Section 6.1 upon receipt of a new list so furnished.
(c) Debentureholders may communicate as provided in Section 312(b) of
the Trust Indenture Act with other Debentureholders with respect to their rights
under this Indenture or under the Debentures.
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SECTION 6.3. REPORTS BY COMPANY.
(a) The Company covenants and agrees to file with the Trustee, within
15 days after the Company is required to file the same with the Commission,
copies of the annual reports and of the information, documents and other reports
(or copies of such portions of any of the foregoing as the Commission may from
time to time by rules and regulations prescribe) that the Company may be
required to file with the Commission pursuant to Section 13 or Section 15(d) of
the Exchange Act; or, if the Company is not required to file information,
documents or reports pursuant to either of such sections, then to file with the
Trustee and the Commission, in accordance with the rules and regulations
prescribed from time to time by the Commission, such of the supplementary and
periodic information, documents and reports that may be required pursuant to
Section 13 of the Exchange Act in respect of a security listed and registered on
a national securities exchange as may be prescribed from time to time in such
rules and regulations.
(b) The Company covenants and agrees to file with the Trustee and the
Commission, in accordance with the rules and regulations prescribed from time to
time by the Commission, such additional information, documents and reports with
respect to compliance by the Company with the conditions and covenants provided
for in this Indenture as may be required from time to time by such rules and
regulations.
(c) The Company covenants and agrees to transmit by mail, first class
postage prepaid, or reputable over-night delivery service that provides for
evidence of receipt, to the Debentureholders, as their names and addresses
appear upon the Debenture Register, within 30 days after the filing thereof with
the Trustee, such summaries of any information, documents and reports required
to be filed by the Company pursuant to subsections (a) and (b) of this Section
6.3 as may be required by rules and regulations prescribed from time to time by
the Commission.
SECTION 6.4. REPORTS BY TRUSTEE.
(a) On or before July 15 in each year in which any of the Debentures
are Outstanding, the Trustee shall transmit by mail, first class postage
prepaid, to the Debentureholders, as their names and addresses appear upon the
Debenture Register, a brief report dated as of the preceding May 15, if and to
the extent required under Section 313(a) of the Trust Indenture Act.
(b) The Trustee shall comply with Section 313(b) and 313(c) of the
Trust Indenture Act.
(c) A copy of each such report shall, at the time of such
transmission to Debentureholders, be filed by the Trustee with the Company, with
each stock exchange upon which any Debentures are listed (if so listed) and also
with the Commission. The Company agrees to notify the Trustee when any
Debentures become listed on any stock exchange.
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ARTICLE VII.
REMEDIES OF TRUSTEE AND DEBENTUREHOLDERS
ON EVENT OF DEFAULT
SECTION 7.1. EVENTS OF DEFAULT.
(a) Whenever used herein with respect to the Debentures, "Event of
Default" means any one or more of the following events that has occurred and is
continuing:
(i) the Company defaults in the payment of any installment of
interest upon any of the Debentures, as and when the same shall become due
and payable, and continuance of such default for a period of 30 days;
provided, however, that a valid extension of an interest payment period by
the Company in accordance with the terms of this Indenture shall not
constitute a default in the payment of interest for this purpose;
(ii) the Company defaults in the payment of the principal on
the Debentures as and when the same shall become due and payable whether at
maturity, upon redemption, by declaration or otherwise; provided, however,
that a valid extension of the maturity of such Debentures in accordance
with the terms of this Indenture shall not constitute a default in the
payment of principal;
(iii) the Company fails to observe or perform any other of its
covenants or agreements with respect to the Debentures for a period of 90
days after the date on which written notice of such failure, requiring the
same to be remedied and stating that such notice is a "Notice of Default"
hereunder, shall have been given to the Company by the Trustee, by
registered or certified mail, or to the Company and the Trustee by the
holders of at least 25% in principal amount of the Debentures at the time
Outstanding;
(iv) the Company pursuant to or within the meaning of any
Bankruptcy Law (i) commences a voluntary case; (ii) consents to the entry
of an order for relief against it in an involuntary case; (iii) consents to
the appointment of a Custodian of it or for all or substantially all of its
property; or (iv) makes a general assignment for the benefit of its
creditors;
(v) a court of competent jurisdiction enters an order under
any Bankruptcy Law that (i) is for relief against the Company in an
involuntary case; (ii) appoints a Custodian of the Company for all or
substantially all of its property; or (iii) orders the liquidation of the
Company, and the order or decree remains unstayed and in effect for 90
days; or
(vi) the Trust shall have voluntarily or involuntarily
dissolved, wound-up its business or otherwise terminated its existence
except in connection with (i) the distribution of Debentures to holders of
Trust Securities in liquidation of their interests in the Trust; (ii) the
redemption of all of the outstanding Trust Securities of the Trust; or
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(iii) certain mergers, consolidations or amalgamations, each as permitted
by the Trust Agreement.
(b) In each and every such case referred to in items (i) through (vi)
of Section 7.1(a), unless the principal of all the Debentures shall have already
become due and payable, either the Trustee or the holders of not less than 25%
in aggregate principal amount of the Debentures then Outstanding hereunder, by
notice in writing to the Company (and to the Trustee if given by such
Debentureholders) may declare the principal of all the Debentures to be due and
payable immediately, and upon any such declaration the same shall become and
shall be immediately due and payable, notwithstanding anything contained in this
Indenture or in the Debentures.
(c) At any time after the principal of the Debentures shall have been
so declared due and payable, and before any judgment or decree for the payment
of the moneys due shall have been obtained or entered as hereinafter provided,
the holders of a majority in aggregate principal amount of the Debentures then
Outstanding hereunder, by written notice to the Company and the Trustee, may
rescind and annul such declaration and its consequences if: (i) the Company has
paid or deposited with the Trustee a sum sufficient to pay all matured
installments of interest upon all the Debentures and the principal of any and
all Debentures that shall have become due otherwise than by acceleration (with
interest upon such principal, and upon overdue installments of interest, at the
rate per annum expressed in the Debentures to the date of such payment or
deposit) and the amount payable to the Trustee under Section 9.7; and (ii) any
and all Events of Default under this Indenture, other than the nonpayment of
principal on Debentures that shall not have become due by their terms, shall
have been remedied or waived as provided in Section 7.6. No such rescission and
annulment shall extend to or shall affect any subsequent default or impair any
right consequent thereon.
(d) In case the Trustee shall have proceeded to enforce any right
with respect to Debentures under this Indenture and such proceedings shall have
been discontinued or abandoned because of such rescission or annulment or for
any other reason or shall have been determined adversely to the Trustee, then
and in every such case the Company and the Trustee shall be restored
respectively to their former positions and rights hereunder, and all rights,
remedies and powers of the Company and the Trustee shall continue as though no
such proceedings had been taken.
SECTION 7.2. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.
(a) The Company covenants that (1) in case it shall default in the
payment of any installment of interest on any of the Debentures, and such
default shall have continued for a period of 30 days; or (2) in case it shall
default in the payment of the principal of any of the Debentures when the same
shall have become due and payable, whether upon maturity of the Debentures or
upon redemption or upon declaration or otherwise, then, upon demand of the
Trustee, the Company shall pay to the Trustee, for the benefit of the holders of
the Debentures, the whole amount that then shall have been become due and
payable on all such Debentures for principal or interest, or both, as the case
may be, with interest upon the overdue principal to the extent that the payment
of such interest is enforceable under applicable law and (if the
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Debentures are held by the Trust or a trustee of the Trust, without duplication
of any other amounts paid by the Trust or trustee in respect thereof) upon
overdue installments of interest at the rate per annum expressed in the
Debentures; and, in addition thereto, such further amount as shall be sufficient
to cover the costs and expenses of collection, and the amount payable to the
Trustee under Section 9.7, other than through its negligence or bad faith.
(b) If the Company shall fail to pay such amounts set forth in
Section 7.2(a) forthwith upon such demand, the Trustee, in its own name and as
trustee of an express trust, shall be entitled and empowered to institute any
action or proceedings at law or in equity for the collection of the sums so due
and unpaid, and may prosecute any such action or proceeding to judgment or final
decree, and may enforce any such judgment or final decree against the Company or
other obligor upon the Debentures and collect the moneys adjudged or decreed to
be payable in the manner provided by law out of the property of the Company or
other obligor upon the Debentures, wherever situated.
(c) In case of any receivership, insolvency, liquidation, bankruptcy,
reorganization, readjustment, arrangement, composition or judicial proceedings
affecting the Company or the creditors or property thereof, the Trustee shall
have power to intervene in such proceedings and take any action therein that may
be permitted by the court and shall (except as may be otherwise provided by law)
be entitled to file such proofs of claim and other papers and documents as may
be necessary or advisable in order to have the claims of the Trustee and of the
holders of the Debentures allowed for the entire amount due and payable by the
Company under this Indenture at the date of institution of such proceedings and
for any additional amount that may become due and payable by the Company after
such date, and to collect and receive any moneys or other property payable or
deliverable on any such claim, and to distribute the same after the deduction of
the amount payable to the Trustee under Section 9.7; and any receiver, assignee
or trustee in bankruptcy or reorganization is hereby authorized by each of the
holders of the Debentures to make such payments to the Trustee, and, in the
event that the Trustee shall consent to the making of such payments directly to
such Debentureholders, to pay to the Trustee any amount due it under Section
9.7.
(d) All rights of action and of asserting claims under this
Indenture, or under any of the terms established with respect to Debentures, may
be enforced by the Trustee without the possession of any of such Debentures, or
the production thereof at any trial or other proceeding relative thereto, and
any such suit or proceeding instituted by the Trustee shall be brought in its
own name as trustee of an express trust, and any recovery of judgment shall,
after provision for payment to the Trustee of any amounts due under Section 9.7,
be for the ratable benefit of the holders of the Debentures. In case of an Event
of Default hereunder, the Trustee may in its discretion proceed to protect and
enforce the rights vested in it by this Indenture by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce any
of such rights, either at law or in equity or in bankruptcy or otherwise,
whether for the specific enforcement of any covenant or agreement contained in
this Indenture or in aid of the exercise of any power granted in this Indenture,
or to enforce any other legal or equitable right vested in the Trustee by this
Indenture or by law. Nothing contained herein shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any
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Debentureholder any plan of reorganization, arrangement, adjustment or
composition affecting the Debentures or the rights of any holder thereof or to
authorize the Trustee to vote in respect of the claim of any Debentureholder in
any such proceeding.
SECTION 7.3. APPLICATION OF MONEYS COLLECTED.
Any moneys collected by the Trustee pursuant to this Article VII with respect
to the Debentures shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such moneys on account
of principal or interest, upon presentation of the Debentures, and notation
thereon of the payment, if only partially paid, and upon surrender thereof if
fully paid:
FIRST: To the payment of costs and expenses of collection and of all
amounts payable to the Trustee under Section 9.7;
SECOND: To the payment of all Senior Indebtedness if and to the extent
required by Article XVI; and
THIRD: To the payment of the amounts then due and unpaid upon the
Debentures for principal and interest, in respect of which or for the
benefit of which such money has been collected, ratably, without preference
or priority of any kind, according to the amounts due and payable on such
Debentures for principal and interest, respectively; and
FOURTH: To the Company.
SECTION 7.4. LIMITATION ON SUITS.
(a) Except as provided in section 15.13 hereof, no holder of any
Debenture shall have any right by virtue or by availing of any provision of this
Indenture to institute any suit, action or proceeding in equity or at law upon
or under or with respect to this Indenture or for the appointment of a receiver
or trustee, or for any other remedy hereunder, unless (i) such holder previously
shall have given to the Trustee written notice of an Event of Default and of the
continuance thereof with respect to the Debentures specifying such Event of
Default, as hereinbefore provided; (ii) the holders of not less than 25% in
aggregate principal amount of the Debentures then Outstanding shall have made
written request upon the Trustee to institute such action, suit or proceeding in
its own name as trustee hereunder; (iii) such holder or holders shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby; and (iv) the
Trustee for 60 days after its receipt of such notice, request and offer of
indemnity shall have failed to institute any such action, suit or proceeding;
and (v) during such 60 day period, the holders of a majority in principal amount
of the Debentures do not give the Trustee a direction inconsistent with the
request; it being understood and intended, and being expressly covenanted by the
holder of every Debenture with every other holder and the Trustee, that no one
or more holders of Debentures shall have any right in any manner whatever by
virtue of or by availing of any provision of this
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Indenture to affect, disturb or prejudice the rights of any other holder of
Debentures, or to obtain or seek to obtain priority over or preference to any
other such holder, or to enforce any right under this Indenture, except in the
manner herein provided and for the equal, ratable and common benefit of all
holders of Debentures.
(b) Notwithstanding anything contained herein to the contrary or any
other provisions of this Indenture, the right of any holder of the Debentures to
receive payment of the principal of and interest on the Debentures, as therein
provided, on or after the respective due dates expressed in such Debenture (or
in the case of redemption, on the redemption date), or to institute suit for the
enforcement of any such payment on or after such respective dates or redemption
date, shall not be impaired or affected without the consent of such holder and
by accepting a Debenture hereunder it is expressly understood, intended and
covenanted by the taker and holder of every Debenture with every other such
taker and holder and the Trustee that no one or more holders of Debentures shall
have any right in any manner whatsoever by virtue or by availing of any
provision of this Indenture to affect, disturb or prejudice the rights of the
holders of any other of such Debentures, or to obtain or seek to obtain priority
over or preference to any other such holder, or to enforce any right under this
Indenture, except in the manner herein provided and for the equal, ratable and
common benefit of all holders of Debentures. For the protection and enforcement
of the provisions of this Section 7.4, each and every Debentureholder and the
Trustee shall be entitled to such relief as can be given either at law or in
equity.
SECTION 7.5. RIGHTS AND REMEDIES CUMULATIVE; DELAY OR OMISSION NOT WAIVER.
(a) All powers and remedies given by this Article VII to the Trustee
or to the Debentureholders shall, to the extent permitted by law, be deemed
cumulative and not exclusive of any other powers and remedies available to the
Trustee or the holders of the Debentures, by judicial proceedings or otherwise,
to enforce the performance or observance of the covenants and agreements
contained in this Indenture or otherwise established with respect to such
Debentures.
(b) No delay or omission of the Trustee or of any holder of any of
the Debentures to exercise any right or power accruing upon any Event of Default
occurring and continuing as aforesaid shall impair any such right or power, or
shall be construed to be a waiver of any such default or an acquiescence
therein; and, subject to the provisions of Section 7.4, every power and remedy
given by this Article VII or by law to the Trustee or the Debentureholders may
be exercised from time to time, and as often as shall be deemed expedient, by
the Trustee or by the Debentureholders.
SECTION 7.6. CONTROL BY DEBENTUREHOLDERS.
The holders of a majority in aggregate principal amount of the Debentures at
the time Outstanding, determined in accordance with Section 10.4, shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee; provided, however, that such direction shall not be in conflict
with any rule of law or with this Indenture. Subject to the provisions of
Section 9.1, the Trustee shall have the right to decline to follow any such
direction if the Trustee
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in good faith shall, by a Responsible Officer or Officers of the Trustee,
determine that the proceeding so directed would involve the Trustee in personal
liability. The holders of a majority in aggregate principal amount of the
Debentures at the time Outstanding affected thereby, determined in accordance
with Section 10.4, may on behalf of the holders of all of the Debentures waive
any past default in the performance of any of the covenants contained herein and
its consequences, except (i) a default in the payment of the principal of or
interest on any of the Debentures as and when the same shall become due by the
terms of such Debentures otherwise than by acceleration (unless such default has
been cured and a sum sufficient to pay all matured installments of interest and
principal has been deposited with the Trustee (in accordance with Section
7.1(c)); (ii) a default in the covenants contained in Section 5.6; or (iii) in
respect of a covenant or provision hereof which cannot be modified or amended
without the consent of the holder of each Outstanding Debenture affected;
provided, however, that if the Debentures are held by the Trust or a trustee of
the Trust, such waiver or modification to such waiver shall not be effective
until the holders of a majority in liquidation preference of Trust Securities of
the Trust shall have consented to such waiver or modification to such waiver;
provided further, that if the Debentures are held by the Trust or a trustee of
the Trust, and if the consent of the holder of each Outstanding Debenture is
required, such waiver shall not be effective until each holder of the Trust
Securities of the Trust shall have consented to such waiver. Upon any such
waiver, the default covered thereby shall be deemed to be cured for all purposes
of this Indenture and the Company, the Trustee and the holders of the Debentures
shall be restored to their former positions and rights hereunder, respectively;
but no such waiver shall extend to any subsequent or other default or impair any
right consequent thereon.
SECTION 7.7. UNDERTAKING TO PAY COSTS.
All parties to this Indenture agree, and each holder of any Debentures by such
holder's acceptance thereof shall be deemed to have agreed, that any court may
in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any action
taken or omitted by it as Trustee, the filing by any party litigant in such suit
of an undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section 7.7 shall not apply to any suit instituted by the
Trustee, to any suit instituted by any Debentureholder, or group of
Debentureholders holding more than 10% in aggregate principal amount of the
Outstanding Debentures, or to any suit instituted by any Debentureholder for the
enforcement of the payment of the principal of or interest on the Debentures, on
or after the respective due dates expressed in such Debenture or established
pursuant to this Indenture.
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ARTICLE VIII.
FORM OF DEBENTURE AND ORIGINAL ISSUE
SECTION 8.1. FORM OF DEBENTURE.
The Debenture and the Trustee's Certificate of Authentication to be endorsed
thereon are to be substantially in the forms contained as Exhibit A attached
hereto and incorporated herein by reference.
SECTION 8.2. ORIGINAL ISSUE OF DEBENTURES.
Debentures in the aggregate principal amount of $______ may, upon execution of
this Indenture, be executed by the Company and delivered to the Trustee for
authentication. In such event, the Trustee shall thereupon authenticate and
deliver said Debentures to or upon the written order of the Company, signed by
its Chairman, its Vice Chairman, its President, or any Vice President and its
Treasurer or an Assistant Treasurer, without any further action by the Company.
ARTICLE IX.
CONCERNING TRUSTEE
SECTION 9.1. CERTAIN DUTIES AND RESPONSIBILITIES OF TRUSTEE.
(a) The Trustee, prior to the occurrence of an Event of Default and
after the curing of all Events of Default that may have occurred, shall
undertake to perform with respect to the Debentures such duties and only such
duties as are specifically set forth in this Indenture, and no implied covenants
shall be read into this Indenture against the Trustee. In case an Event of
Default has occurred that has not been cured or waived, the Trustee shall
exercise such of the rights and powers vested in it by this Indenture, and use
the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that:
(1) prior to the occurrence of an Event of Default and after
the curing or waiving of all such Events of Default that may have occurred:
(i) the duties and obligations of the Trustee shall with
respect to the Debentures be determined solely by the express
provisions of this Indenture, and the Trustee shall not be liable with
respect to the Debentures except for the performance of such duties
and obligations as are specifically set forth in this
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Indenture, and no implied covenants or obligations shall be read into
this Indenture against the Trustee; and
(ii) in the absence of bad faith on the part of the
Trustee, the Trustee may with respect to the Debentures conclusively
rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon any certificates or opinions
furnished to the Trustee and conforming to the requirements of this
Indenture; but in the case of any such certificates or opinions that
by any provision hereof are specifically required to be furnished to
the Trustee, the Trustee shall be under a duty to examine the same to
determine whether or not they conform to the requirements of this
Indenture;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer or Responsible Officers of the Trustee,
unless it shall be proved that the Trustee was negligent in ascertaining
the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction
of the holders of not less than a majority in principal amount of the
Debentures at the time Outstanding relating to the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee under this
Indenture with respect to the Debentures; and
(4) none of the provisions contained in this Indenture shall require
the Trustee to expend or risk its own funds or otherwise incur personal
financial liability in the performance of any of its duties or in the
exercise of any of its rights or powers, if there is reasonable ground for
believing that the repayment of such funds or liability is not reasonably
assured to it under the terms of this Indenture or adequate indemnity
against such risk is not reasonably assured to it.
SECTION 9.2. NOTICE OF DEFAULTS.
Within 90 days after actual knowledge by a Responsible Officer of the Trustee
of the occurrence of any default hereunder with respect to the Debentures, the
Trustee shall transmit by mail to all holders of the Debentures, as their names
and addresses appear in the Debenture Register, notice of such default, unless
such default shall have been cured or waived; provided, however, that, except in
the case of a default in the payment of the principal or interest (including any
Additional Payments) on any Debenture, the Trustee shall be protected in
withholding such notice if and so long as the board of directors, the executive
committee or a trust committee of the directors and/or Responsible Officers of
the Trustee determines in good faith that the withholding of such notice is in
the interests of the holders of such Debentures; and provided, further, that in
the case of any default of the character specified in section 7.1(a)(iii), no
such notice to holders of Debentures need be sent until at least 30 days after
the occurrence thereof. For the purposes of this Section 9.2, the term
"default" means any event which is, or after notice or lapse of time or both,
would become, an Event of Default with respect to the Debentures.
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SECTION 9.3. CERTAIN RIGHTS OF TRUSTEE.
Except as otherwise provided in Section 9.1:
(a) The Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, approval, bond, security or
other paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties;
(b) Any request, direction, order or demand of the Company mentioned
herein shall be sufficiently evidenced by a Board Resolution or an instrument
signed in the name of the Company by the President or any Vice President and by
the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer thereof (unless other evidence in respect thereof is specifically
prescribed herein);
(c) The Trustee shall not be deemed to have knowledge of a default or
an Event of Default, other than an Event of Default specified in Section
7.1(a)(i) or (ii), unless and until it receives written notification of such
Event of Default from the Company or by holders of at least 25% of the aggregate
principal amount of the Debentures at the time Outstanding;
(d) The Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken or suffered or omitted hereunder
in good faith and in reliance thereon;
(e) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Debentureholders, pursuant to the provisions of this
Indenture, unless such Debentureholders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby; nothing contained herein shall,
however, relieve the Trustee of the obligation, upon the occurrence of an Event
of Default (that has not been cured or waived) to exercise with respect to the
Debentures such of the rights and powers vested in it by this Indenture, and to
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs;
(f) The Trustee shall not be liable for any action taken or omitted
to be taken by it in good faith and believed by it to be authorized or within
the discretion or rights or powers conferred upon it by this Indenture;
provided, however, that nothing contained herein shall relieve the Trustee of
the obligation, upon the occurrence of an Event of Default (that has not been
cured or waived), to exercise such of the rights and powers vested in it by this
Indenture, and to use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs;
(g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request,
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consent, order, approval, bond, security, or other papers or documents, unless
requested in writing so to do by the holders of not less than a majority in
principal amount of the Outstanding Debentures (determined as provided in
Section 10.4); provided, however, that if the payment within a reasonable time
to the Trustee of the costs, expenses or liabilities likely to be incurred by it
in the making of such investigation is, in the opinion of the Trustee, not
reasonably assured to the Trustee by the security afforded to it by the terms of
this Indenture, the Trustee may require reasonable indemnity against such costs,
expenses or liabilities as a condition to so proceeding, and the reasonable
expense of every such examination shall be paid by the Company or, if paid by
the Trustee, shall be repaid by the Company upon demand; and
(h) The Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
SECTION 9.4. TRUSTEE NOT RESPONSIBLE FOR RECITALS, ETC.
(a) The Recitals contained herein and in the Debentures shall be
taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same.
(b) The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Debentures.
(c) The Trustee shall not be accountable for the use or application
by the Company of any of the Debentures or of the proceeds of such Debentures,
or for the use or application of any moneys paid over by the Trustee in
accordance with any provision of this Indenture, or for the use or application
of any moneys received by any Paying Agent other than the Trustee.
SECTION 9.5. MAY HOLD DEBENTURES.
The Trustee or any Paying Agent or Debenture Registrar for the Debentures, in
its individual or any other capacity, may become the owner or pledgee of
Debentures with the same rights it would have if it were not Trustee, Paying
Agent or Debenture Registrar.
SECTION 9.6. MONEYS HELD IN TRUST.
Subject to the provisions of Section 13.5, all moneys received by the Trustee
shall, until used or applied as herein provided, be held in trust for the
purposes for which they were received, but need not be segregated from other
funds except to the extent required by law. The Trustee shall be under no
liability for interest on any moneys received by it hereunder except such as it
may agree with the Company to pay thereon.
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SECTION 9.7. COMPENSATION AND REIMBURSEMENT.
(a) The Company covenants and agrees to pay to the Trustee, and the
Trustee shall be entitled to, such reasonable compensation (which shall not be
limited by any provision of law in regard to the compensation of a trustee of an
express trust), as the Company and the Trustee may from time to time agree in
writing, for all services rendered by it in the execution of the trusts hereby
created and in the exercise and performance of any of the powers and duties
hereunder of the Trustee, and, except as otherwise expressly provided herein,
the Company shall pay or reimburse the Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Trustee
in accordance with any of the provisions of this Indenture (including the
reasonable compensation and the expenses and disbursements of its counsel and of
all Persons not regularly in its employ) except any such expense, disbursement
or advance as may arise from its negligence or bad faith. The Company also
covenants to indemnify the Trustee (and its officers, agents, directors and
employees) for, and to hold it harmless against, any loss, liability or expense
incurred without negligence or bad faith on the part of the Trustee and arising
out of or in connection with the acceptance or administration of this trust,
including the costs and expenses of defending itself against any claim of
liability in the premises.
(b) The obligations of the Company under this Section 9.7 to
compensate and indemnify the Trustee and to pay or reimburse the Trustee for
expenses, disbursements and advances shall constitute additional indebtedness
hereunder. Such additional indebtedness shall be secured by a lien prior to that
of the Debentures upon all property and funds held or collected by the Trustee
as such, except funds held in trust for the benefit of the holders of particular
Debentures.
SECTION 9.8. RELIANCE ON OFFICERS' CERTIFICATE.
Except as otherwise provided in Section 9.1, whenever in the administration of
the provisions of this Indenture the Trustee shall deem it necessary or
desirable that a matter be proved or established prior to taking or suffering or
omitting to take any action hereunder, such matter (unless other evidence in
respect thereof be herein specifically prescribed) may, in the absence of
negligence or bad faith on the part of the Trustee, be deemed to be conclusively
proved and established by an Officers' Certificate delivered to the Trustee and
such certificate, in the absence of negligence or bad faith on the part of the
Trustee, shall be full warrant to the Trustee for any action taken, suffered or
omitted to be taken by it under the provisions of this Indenture upon the faith
thereof.
SECTION 9.9. DISQUALIFICATION: CONFLICTING INTERESTS.
If the Trustee has or shall acquire any "conflicting interest" within the
meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the
Company shall in all respects comply with the provisions of Section 310(b) of
the Trust Indenture Act.
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SECTION 9.10. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee with respect to the Debentures issued
hereunder which shall at all times be a corporation organized and doing business
under the laws of the United States of America or any State or Territory thereof
or of the District of Columbia, or a corporation or other Person permitted to
act as trustee by the Commission, authorized under such laws to exercise
corporate trust powers, having a combined capital and surplus of at least
$50,000,000, and subject to supervision or examination by federal, state,
territorial, or District of Columbia authority. If such corporation publishes
reports of condition at least annually, pursuant to law or to the requirements
of the aforesaid supervising or examining authority, then for the purposes of
this Section 9.10, the combined capital and surplus of such corporation shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. The Company may not, nor may any Person
directly or indirectly controlling, controlled by, or under common control with
the Company, serve as Trustee. In case at any time the Trustee shall cease to
be eligible in accordance with the provisions of this Section 9.10, the Trustee
shall resign immediately in the manner and with the effect specified in Section
9.11.
SECTION 9.11. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) The Trustee or any successor hereafter appointed, may at any time
resign by giving written notice thereof to the Company and by transmitting
notice of resignation by mail, first class postage prepaid, to the
Debentureholders, as their names and addresses appear upon the Debenture
Register. Upon receiving such notice of resignation, the Company shall promptly
appoint a successor trustee with respect to Debentures by written instrument, in
duplicate, executed by order of the Board of Directors, one copy of which
instrument shall be delivered to the resigning Trustee and one copy to the
successor trustee. If no successor trustee shall have been so appointed and have
accepted appointment within 60 days after the mailing of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor trustee with respect to
Debentures, or any Debentureholder who has been a bona fide holder of a
Debenture or Debentures for at least six months may, subject to the provisions
of Section 9.10, on behalf of himself and all others similarly situated,
petition any such court for the appointment of a successor trustee. Such court
may thereupon after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
(b) In case at any time any one of the following shall occur
(i) the Trustee shall fail to comply with the provisions of
Section 9.9 after written request therefor by the Company or by any
Debentureholder who has been a bona fide holder of a Debenture or
Debentures for at least six months; or
(ii) the Trustee shall cease to be eligible in accordance with
the provisions of Section 9.10 and shall fail to resign after written
request therefor by the Company or by any such Debentureholder; or
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(iii) the Trustee shall become incapable of acting, or shall be
adjudged a bankrupt or insolvent, or commence a voluntary bankruptcy
proceeding, or a receiver of the Trustee or of its property shall be
appointed or consented to, or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation;
then, in any such case, the Company may remove the Trustee with respect to all
Debentures and appoint a successor trustee by written instrument, in duplicate,
executed by order of the Board of Directors, one copy of which instrument shall
be delivered to the Trustee so removed and one copy to the successor trustee,
or, subject to the provisions of Section 9.10, unless the Trustee's duty to
resign is stayed as provided herein, any Debentureholder who has been a bona
fide holder of a Debenture or Debentures for at least six months may, on behalf
of that holder and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor trustee. Such court may thereupon after such notice, if any, as it
may deem proper and prescribe, remove the Trustee and appoint a successor
trustee.
(c) The holders of a majority in aggregate principal amount of the
Debentures at the time Outstanding may at any time remove the Trustee by so
notifying the Trustee and the Company and may appoint a successor Trustee with
the consent of the Company; provided, however, that if no successor Trustee
shall have been so appointed and shall have accepted appointment within 30 days
after such notice of removal, the Trustee so removed or any Debentureholder,
upon the terms and conditions and otherwise as in subsection (a) of this Section
9.11 provided, may petition any court of competent jurisdiction for the
appointment of a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of a
successor trustee with respect to the Debentures pursuant to any of the
provisions of this Section 9.11 shall become effective upon acceptance of
appointment by the successor trustee as provided in Section 9.12.
SECTION 9.12. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
(a) In case of the appointment hereunder of a successor trustee with
respect to the Debentures, every successor trustee so appointed shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on the request of the
Company or the successor trustee, such retiring Trustee shall, upon payment of
its charges, execute and deliver an instrument transferring to such successor
trustee all the rights, powers, and trusts of the retiring Trustee and shall
duly assign, transfer and deliver to such successor trustee all property and
money held by such retiring Trustee hereunder.
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(b) Upon request of any successor trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor trustee all such rights, powers and trusts referred to in
Section 9.12(a).
(c) No successor trustee shall accept its appointment unless at the
time of such acceptance such successor trustee shall be qualified and eligible
under this Article IX.
(d) Upon acceptance of appointment by a successor trustee as provided
in this Section 9.12, the Company shall transmit notice of the succession of
such trustee hereunder by mail, first class postage prepaid, to the
Debentureholders, as their names and addresses appear upon the Debenture
Register. If the Company fails to transmit such notice within ten days after
acceptance of appointment by the successor trustee, the successor trustee shall
cause such notice to be transmitted at the expense of the Company.
SECTION 9.13. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to the corporate trust business of the Trustee, shall be
the successor of the Trustee hereunder, provided that such corporation shall be
qualified under the provisions of Section 9.9 and eligible under the provisions
of Section 9.10, without the execution or filing of any paper or any further act
on the part of any of the parties hereto, anything herein to the contrary
notwithstanding. In case any Debentures shall have been authenticated, but not
delivered, by the Trustee then in office, any successor by merger, conversion or
consolidation to such authenticating Trustee may adopt such authentication and
deliver the Debentures so authenticated with the same effect as if such
successor Trustee had itself authenticated such Debentures. If at such time any
of the Debentures shall not have been authenticated, any successor to the
Trustee may authenticate such Debentures either in the name of any predecessor
hereunder or in the name of the successor Trustee, and in all such cases such
certificates shall have the full force that the Debentures or this Indenture
elsewhere provides that the certificate of the Trustee shall have; provided,
however, that the right to adopt the certificate of authentication of any
predecessor Trustee or authenticate Debentures in the name of any predecessor
Trustee shall apply only to its successor or successors by merger, conversion or
consolidation.
SECTION 9.14. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY.
The Trustee shall comply with Section 311(a) of the Trust Indenture Act,
excluding any creditor relationship described in Section 311(b) of the Trust
Indenture Act. A Trustee who has resigned or been removed shall be subject to
Section 311(a) of the Trust Indenture Act to the extent included therein.
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ARTICLE X.
CONCERNING DEBENTUREHOLDERS
SECTION 10.1. EVIDENCE OF ACTION BY HOLDERS.
(a) Whenever in this Indenture it is provided that the holders of a
majority or specified percentage in aggregate principal amount of the Debentures
may take any action (including the making of any demand or request, the giving
of any notice, consent or waiver or the taking of any other action), the fact
that at the time of taking any such action the holders of such majority or
specified percentage have joined therein may be evidenced by any instrument or
any number of instruments of similar tenor executed by such holders of
Debentures in Person or by agent or proxy appointed in writing.
(b) If the Company shall solicit from the Debentureholders any
request, demand, authorization, direction, notice, consent, waiver or other
action, the Company may, at its option, as evidenced by an Officers'
Certificate, fix in advance a record date for the determination of
Debentureholders entitled to give such request, demand, authorization,
direction, notice, consent, waiver or other action, but the Company shall have
no obligation to do so. If such a record date is fixed, such request, demand,
authorization, direction, notice, consent, waiver or other action may be given
before or after the record date, but only the Debentureholders of record at the
close of business on the record date shall be deemed to be Debentureholders for
the purposes of determining whether Debentureholders of the requisite proportion
of Outstanding Debentures have authorized or agreed or consented to such
request, demand, authorization, direction, notice, consent, waiver or other
action, and for that purpose the Outstanding Debentures shall be computed as of
the record date; provided, however, that no such authorization, agreement or
consent by such Debentureholders on the record date shall be deemed effective
unless it shall become effective pursuant to the provisions of this Indenture
not later than six months after the record date.
SECTION 10.2. PROOF OF EXECUTION BY DEBENTUREHOLDERS.
Subject to the provisions of Section 9.1, proof of the execution of any
instrument by a Debentureholder (such proof shall not require notarization) or
his agent or proxy and proof of the holding by any Person of any of the
Debentures shall be sufficient if made in the following manner:
(a) The fact and date of the execution by any such Person of any
instrument may be proved in any reasonable manner acceptable to the Trustee.
(b) The ownership of Debentures shall be proved by the Debenture
Register of such Debentures or by a certificate of the Debenture Registrar
thereof.
(c) The Trustee may require such additional proof of any matter
referred to in this Section 10.2 as it shall deem necessary.
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SECTION 10.3. WHO MAY BE DEEMED OWNERS.
Prior to the due presentment for registration of transfer of any Debenture,
the Company, the Trustee, any Paying Agent, any Authenticating Agent and any
Debenture Registrar may deem and treat the Person in whose name such Debenture
shall be registered upon the books of the Company as the absolute owner of such
Debenture (whether or not such Debenture shall be overdue and notwithstanding
any notice of ownership or writing thereon made by anyone other than the
Debenture Registrar) for the purpose of receiving payment of or on account of
the principal of and interest on such Debenture (subject to Section 2.3) and for
all other purposes; and neither the Company nor the Trustee nor any Paying Agent
nor any Authenticating Agent nor any Debenture Registrar shall be affected by
any notice to the contrary. All such payments so made to any holder shall be
valid, and, to the extent of the sum or sums so paid, effectual to satisfy and
discharge the liability for moneys payable upon any such Debenture.
SECTION 10.4. CERTAIN DEBENTURES OWNED BY COMPANY DISREGARDED.
In determining whether the holders of the requisite aggregate principal amount
of Debentures have concurred in any direction, consent or waiver under this
Indenture, the Debentures that are owned by the Company or any other obligor on
the Debentures or by any Person directly or indirectly controlling or controlled
by or under common control with the Company or any other obligor on the
Debentures shall be disregarded and deemed not to be Outstanding for the purpose
of any such determination, except that (i) for the purpose of determining
whether the Trustee shall be protected in relying on any such direction, consent
or waiver, only Debentures that the Trustee actually knows are so owned shall be
so disregarded; and (ii) for purposes of this Section 10.4, the Trust shall be
deemed not to be controlled by the Company. The Debentures so owned that have
been pledged in good faith may be regarded as Outstanding for the purposes of
this Section 10.4, if the pledgee shall establish to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Debentures and that
the pledgee is not a Person directly or indirectly controlling or controlled by
or under direct or indirect common control with the Company or any such other
obligor. In case of a dispute as to such right, any decision by the Trustee
taken upon the advice of counsel shall be full protection to the Trustee.
SECTION 10.5. ACTIONS BINDING ON FUTURE DEBENTUREHOLDERS.
At any time prior to (but not after) the evidencing to the Trustee, as
provided in Section 10.1, of the taking of any action by the holders of the
majority or percentage in aggregate principal amount of the Debentures specified
in this Indenture in connection with such action, any holder of a Debenture that
is shown by the evidence to be included in the Debentures the holders of which
have consented to such action may, by filing written notice with the Trustee,
and upon proof of holding as provided in Section 10.2, revoke such action so far
as concerns such Debenture. Except as aforesaid any such action taken by the
holder of any Debenture shall be conclusive and binding upon such holder and
upon all future holders and owners of such Debenture, and of any Debenture
issued in exchange therefor, on registration of transfer thereof or in place
thereof, irrespective of whether or not any notation in regard thereto is made
upon such Debenture. Any action taken by the holders of the majority or
percentage in aggregate
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principal amount of the Debentures specified in this Indenture in connection
with such action shall be conclusively binding upon the Company, the Trustee and
the holders of all the Debentures.
ARTICLE XI.
SUPPLEMENTAL INDENTURES
SECTION 11.1. SUPPLEMENTAL INDENTURES WITHOUT THE CONSENT OF DEBENTUREHOLDERS.
In addition to any supplemental indenture otherwise authorized by this
Indenture, the Company and the Trustee may from time to time and at any time
enter into an indenture or indentures supplemental hereto (which shall conform
to the provisions of the Trust Indenture Act as then in effect), without the
consent of the Debentureholders, for one or more of the following purposes:
(a) to cure any ambiguity, defect, or inconsistency herein or in the
Debentures;
(b) to provide for uncertificated Debentures in addition to or in
place of certificated Debentures;
(c) to add to the covenants of the Company for the benefit of the
holders of all or any of the Debentures or to surrender any right or power
herein conferred upon the Company;
(d) to make any change that does not adversely affect the rights of
any Debentureholder in any material respect;
(e) to qualify or maintain the qualification of this Indenture under
the Trust Indenture Act; or
(i) to evidence a consolidation or merger involving the Company as
permitted under Section 12.1.
The Trustee is hereby authorized to join with the Company in the execution of
any such supplemental indenture, and to make any further appropriate agreements
and stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into any such supplemental indenture that affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this Section 11.1 may
be executed by the Company and the Trustee without the consent of the holders of
any of the Debentures at the time Outstanding, notwithstanding any of the
provisions of Section 11.2.
SECTION 11.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF DEBENTUREHOLDERS.
With the consent (evidenced as provided in Section 10.1) of the holders of not
less than a majority in aggregate principal amount of the Debentures at the time
Outstanding, the Company,
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when authorized by Board Resolutions, and the Trustee may from time to time and
at any time enter into an indenture or indentures supplemental hereto (which
shall conform to the provisions of the Trust Indenture Act as then in effect)
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of this Indenture or of any supplemental
indenture or of modifying in any manner not covered by Section 11.1 the rights
of the holders of the Debentures under this Indenture; provided, however, that
no such supplemental indenture shall without the consent of the holders of each
Debenture then Outstanding and affected thereby, (i) extend the fixed maturity
of any Debentures, reduce the principal amount thereof, or reduce the rate or
extend the time of payment of interest thereon; or (ii) reduce the aforesaid
percentage of Debentures, the holders of which are required to consent to any
such supplemental indenture; provided further, that if the Debentures are held
by the Trust or a trustee of the Trust, such supplemental indenture shall not be
effective until the holders of a majority in liquidation preference of Trust
Securities of the Trust shall have consented to such supplemental indenture;
provided further, that if the consent of the holder of each Outstanding
Debenture is required, such supplemental indenture shall not be effective until
each holder of the Trust Securities of the Trust shall have consented to such
supplemental indenture. It shall not be necessary for the consent of the
Debentureholders affected thereby under this Section 11.2 to approve the
particular form of any proposed supplemental indenture, but it shall be
sufficient if such consent shall approve the substance thereof.
SECTION 11.3. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture pursuant to the provisions of
this Article XI, this Indenture shall be and be deemed to be modified and
amended in accordance therewith and the respective rights, limitations of
rights, obligations, duties and immunities under this Indenture of the Trustee,
the Company and the holders of Debentures shall thereafter be determined,
exercised and enforced hereunder subject in all respects to such modifications
and amendments, and all the terms and conditions of any such supplemental
indenture shall be and be deemed to be part of the terms and conditions of this
Indenture for any and all purposes.
SECTION 11.4. DEBENTURES AFFECTED BY SUPPLEMENTAL INDENTURES.
Debentures affected by a supplemental indenture, authenticated and delivered
after the execution of such supplemental indenture pursuant to the provisions of
this Article XI, may bear a notation in form approved by the Company, provided
such form meets the requirements of any exchange upon which the Debentures may
be listed, as to any matter provided for in such supplemental indenture. If the
Company shall so determine, new Debentures so modified as to conform, in the
opinion of the Board of Directors of the Company, to any modification of this
Indenture contained in any such supplemental indenture may be prepared by the
Company, authenticated by the Trustee and delivered in exchange for the
Debentures then Outstanding.
SECTION 11.5. EXECUTION OF SUPPLEMENTAL INDENTURES.
(a) Upon the request of the Company, accompanied by its Board
Resolutions authorizing the execution of any such supplemental indenture, and
upon the filing with the
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Trustee of evidence of the consent of Debentureholders required to consent
thereto as aforesaid, the Trustee shall join with the Company in the execution
of such supplemental indenture unless such supplemental indenture affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise, in
which case the Trustee may in its discretion but shall not be obligated to enter
into such supplemental indenture. The Trustee, subject to the provisions of
Sections 9.1, may receive an Opinion of Counsel as conclusive evidence that any
supplemental indenture executed pursuant to this Article XI is authorized or
permitted by, and conforms to, the terms of this Article XI and that it is
proper for the Trustee under the provisions of this Article XI to join in the
execution thereof.
(b) Promptly after the execution by the Company and the Trustee of
any supplemental indenture pursuant to the provisions of this Section 11.5, the
Trustee shall transmit by mail, first class postage prepaid, a notice, setting
forth in general terms the substance of such supplemental indenture, to the
Debentureholders as their names and addresses appear upon the Debenture
Register. Any failure of the Trustee to mail such notice, or any defect therein,
shall not, however, in any way impair or affect the validity of any such
supplemental indenture.
ARTICLE XII.
SUCCESSOR CORPORATION
SECTION 12.1. COMPANY MAY CONSOLIDATE, ETC.
Nothing contained in this Indenture or in any of the Debentures shall prevent
any consolidation or merger of the Company with or into any other corporation or
corporations (whether or not affiliated with the Company, as the case may be),
or successive consolidations or mergers in which the Company, as the case may
be, or its successor or successors shall be a party or parties, or shall prevent
any sale, conveyance, transfer or other disposition of the property of the
Company, as the case may be, or its successor or successors as an entirety, or
substantially as an entirety, to any other corporation (whether or not
affiliated with the Company, as the case may be, or its successor or successors)
authorized to acquire and operate the same; provided, however, that the Company
hereby covenants and agrees that, (i) upon any such consolidation, merger, sale,
conveyance, transfer or other disposition, the due and punctual payment, in the
case of the Company, of the principal of and interest on all of the Debentures,
according to their tenor and the due and punctual performance and observance of
all the covenants and conditions of this Indenture to be kept or performed by
the Company as the case may be, shall be expressly assumed, by supplemental
indenture (which shall conform to the provisions of the Trust Indenture Act, as
then in effect) satisfactory in form to the Trustee executed and delivered to
the Trustee by the entity formed by such consolidation, or into which the
Company, as the case may be, shall have been merged, or by the entity which
shall have acquired such property; (ii) in case the Company consolidates with
or merges into another Person or conveys or transfers its properties and assets
substantially as an entirety to any Person, the successor Person is organized
under the laws of the United States or any state or the District of Columbia;
and (iii) immediately after giving effect thereto, no Event of Default, and no
event which, after notice or lapse of time or both, would become an Event of
Default, shall have occurred and be continuing.
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SECTION 12.2. SUCCESSOR CORPORATION SUBSTITUTED.
(a) In case of any such consolidation, merger, sale, conveyance,
transfer or other disposition and upon the assumption by the successor
corporation, by supplemental indenture, executed and delivered to the Trustee
and satisfactory in form to the Trustee, of the due and punctual payment of the
principal of and interest on all of the Debentures Outstanding and the due and
punctual performance of all of the covenants and conditions of this Indenture to
be performed by the Company, such successor corporation shall succeed to and be
substituted for the Company, with the same effect as if it had been named as the
Company herein, and thereupon the predecessor corporation shall be relieved of
all obligations and covenants under this Indenture and the Debentures.
(b) In case of any such consolidation, merger, sale, conveyance,
transfer or other disposition such changes in phraseology and form (but not in
substance) may be made in the Debentures thereafter to be issued as may be
appropriate.
(c) Nothing contained in this Indenture or in any of the Debentures
shall prevent the Company from merging into itself or acquiring by purchase or
otherwise all or any part of the property of any other Person (whether or not
affiliated with the Company).
SECTION 12.3. EVIDENCE OF CONSOLIDATION, ETC. TO TRUSTEE.
The Trustee, subject to the provisions of Section 9.1, may receive an Opinion
of Counsel as conclusive evidence that any such consolidation, merger, sale,
conveyance, transfer or other disposition, and any such assumption, comply with
the provisions of this Article XII.
ARTICLE XIII.
SATISFACTION AND DISCHARGE
SECTION 13.1. SATISFACTION AND DISCHARGE OF INDENTURE.
If at any time: (a) the Company shall have delivered to the Trustee for
cancellation all Debentures theretofore authenticated (other than any Debentures
that shall have been destroyed, lost or stolen and that shall have been replaced
or paid as provided in Section 2.9) and Debentures for whose payment money or
Governmental Obligations have theretofore been deposited in trust or segregated
and held in trust by the Company (and thereupon repaid to the Company or
discharged from such trust, as provided in Section 13.5); or (b) all such
Debentures not theretofore delivered to the Trustee for cancellation shall have
become due and payable, or are by their terms to become due and payable within
one year or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and the
Company shall deposit or cause to be deposited with the Trustee as trust funds
the entire amount in moneys or Governmental Obligations sufficient, or a
combination thereof, sufficient in the opinion of a recognized firm of
independent public accountants
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expressed in a written certification thereof delivered to the Trustee, to pay at
maturity or upon redemption all Debentures not theretofore delivered to the
Trustee for cancellation, including principal and interest due or to become due
to such date of maturity or date fixed for redemption, as the case may be, and
if the Company shall also pay or cause to be paid all other sums payable
hereunder by the Company; then this Indenture shall thereupon cease to be of
further effect except for the provisions of Sections 2.3, 2.7, 2.9, 5.1, 5.2,
5.3 and 9.10, that shall survive until the date of maturity or redemption date,
as the case may be, and Sections 9.6 and 13.5, that shall survive to such date
and thereafter, and the Trustee, on demand of the Company and at the cost and
expense of the Company, shall execute proper instruments acknowledging
satisfaction of and discharging this Indenture.
SECTION 13.2. DISCHARGE OF OBLIGATIONS.
If at any time all Debentures not heretofore delivered to the Trustee for
cancellation or that have not become due and payable as described in Section
13.1 shall have been paid by the Company by depositing irrevocably with the
Trustee as trust funds moneys or an amount of Governmental Obligations
sufficient in the opinion of a recognized certified public accounting firm to
pay at maturity or upon redemption all Debentures not theretofore delivered to
the Trustee for cancellation, including principal and interest due or to become
due to such date of maturity or date fixed for redemption, as the case may be,
and if the Company shall also pay or cause to be paid all other sums payable
hereunder by the Company, then after the date such moneys or Governmental
Obligations, as the case may be, are deposited with the Trustee, the obligations
of the Company under this Indenture shall cease to be of further effect except
for the provisions of Sections 2.3, 2.7, 2.9, 5.1, 5.2, 5.3, 9.6, 9.10 and 13.5
hereof that shall survive until such Debentures shall mature and be paid.
Thereafter, Sections 9.6 and 13.5 shall survive.
SECTION 13.3. DEPOSITED MONEYS TO BE HELD IN TRUST.
All monies or Governmental Obligations deposited with the Trustee pursuant to
Sections 13.1 or 13.2 shall be held in trust and shall be available for payment
as due, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent), to the holders of the Debentures for the
payment or redemption of which such moneys or Governmental Obligations have been
deposited with the Trustee.
SECTION 13.4. PAYMENT OF MONIES HELD BY PAYING AGENTS.
In connection with the satisfaction and discharge of this Indenture, all
moneys or Governmental Obligations then held by any Paying Agent under the
provisions of this Indenture shall, upon demand of the Company, be paid to the
Trustee and thereupon such Paying Agent shall be released from all further
liability with respect to such moneys or Governmental Obligations.
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SECTION 13.5. REPAYMENT TO COMPANY.
Any monies or Governmental Obligations deposited with any Paying Agent or the
Trustee, or then held by the Company in trust, for payment of principal of or
interest on the Debentures that are not applied but remain unclaimed by the
holders of such Debentures for at least two years after the date upon which the
principal of or interest on such Debentures shall have respectively become due
and payable, shall be repaid to the Company, as the case may be, on May 31 of
each year or (if then held by the Company) shall be discharged from such trust;
and thereupon the Paying Agent and the Trustee shall be released from all
further liability with respect to such moneys or Governmental Obligations, and
the holder of any of the Debentures entitled to receive such payment shall
thereafter, as an unsecured general creditor, look only to the Company for the
payment thereof.
ARTICLE XIV.
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS
AND DIRECTORS
SECTION 14.1. NO RECOURSE.
No recourse under or upon any obligation, covenant or agreement of this
Indenture, or of the Debentures, or for any claim based thereon or otherwise in
respect thereof, shall be had against any incorporator, stockholder, officer or
director, past, present or future, as such, of the Company or of any predecessor
or successor corporation, either directly or through the Company or any such
predecessor or successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment or penalty or
otherwise; it being expressly understood that this Indenture and the obligations
issued hereunder are solely corporate obligations, and that no such personal
liability whatever shall attach to, or is or shall be incurred by, the
incorporators, stockholders, officers or directors, as such, of the Company or
of any predecessor or successor corporation, or any of them, because of the
creation of the indebtedness hereby authorized, or under or by reason of the
obligations, covenants or agreements contained in this Indenture or in any of
the Debentures or implied therefrom; and that any and all such personal
liability of every name and nature, either at common law or in equity or by
constitution or statute, and any and all such rights and claims against, every
such incorporator, stockholder, officer or director as such, because of the
creation of the indebtedness hereby authorized, or under or by reason of the
obligations, covenants or agreements contained in this Indenture or in any of
the Debentures or implied therefrom, are hereby expressly waived and released as
a condition of, and as a consideration for, the execution of this Indenture and
the issuance of such Debentures.
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ARTICLE XV.
MISCELLANEOUS PROVISIONS
SECTION 15.1. EFFECT ON SUCCESSORS AND ASSIGNS.
All the covenants, stipulations, promises and agreements in this Indenture
contained by or on behalf of the Company shall bind its successors and assigns,
whether so expressed or not.
SECTION 15.2. ACTIONS BY SUCCESSOR.
Any act or proceeding by any provision of this Indenture authorized or
required to be done or performed by any board, committee or officer of the
Company shall and may be done and performed with like force and effect by the
corresponding board, committee or officer of any corporation that shall at the
time be the lawful sole successor of the Company.
SECTION 15.3. SURRENDER OF COMPANY POWERS.
The Company by instrument in writing executed by appropriate authority of its
Board of Directors and delivered to the Trustee may surrender any of the powers
reserved to the Company, and thereupon such power so surrendered shall terminate
both as to the Company, as the case may be, and as to any successor corporation.
SECTION 15.4. NOTICES.
Except as otherwise expressly provided herein any notice or demand that by any
provision of this Indenture is required or permitted to be given or served by
the Trustee or by the holders of Debentures to or on the Company may be given or
served by being deposited first class postage prepaid in a post-office letterbox
addressed (until another address is filed in writing by the Company with the
Trustee), as follows: Independent Bankshares, Inc., 547 Chestnut Street,
Abilene, Texas 79602, Attention: Chief Financial Officer. Any notice, election,
request or demand by the Company or any Debentureholder to or upon the Trustee
shall be deemed to have been sufficiently given or made, for all purposes, if
given or made in writing at the Corporate Trust Office of the Trustee.
SECTION 15.5. GOVERNING LAW.
This Indenture and each Debenture shall be deemed to be a contract made under
the internal laws of the State of Delaware and for all purposes shall be
construed in accordance with the laws of said State.
SECTION 15.6. TREATMENT OF DEBENTURES AS DEBT.
It is intended that the Debentures shall be treated as indebtedness and not as
equity for federal income tax purposes. The provisions of this Indenture shall
be interpreted to further this intention.
SECTION 15.7. COMPLIANCE CERTIFICATES AND OPINIONS.
(a) Upon any application or demand by the Company to the Trustee to
take any action under any of the provisions of this Indenture, the Company shall
furnish to the Trustee an
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Officers' Certificate stating that all conditions precedent provided for in this
Indenture relating to the proposed action have been complied with and an Opinion
of Counsel stating that in the opinion of such counsel all such conditions
precedent have been complied with, except that in the case of any such
application or demand as to which the furnishing of such documents is
specifically required by any provision of this Indenture relating to such
particular application or demand, no additional certificate or opinion need be
furnished.
(b) Each certificate or opinion of the Company provided for in this
Indenture and delivered to the Trustee with respect to compliance with a
condition or covenant in this Indenture shall include (1) a statement that the
Person making such certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based; (3) a statement that, in the opinion of such
Person, he has made such examination or investigation as, in the opinion of such
Person, is necessary to enable him to express an informed opinion as to whether
or not such covenant or condition has been complied with; and (4) a statement as
to whether or not, in the opinion of such Person, such condition or covenant has
been complied with.
SECTION 15.8. PAYMENTS ON BUSINESS DAYS.
In any case where the date of maturity of interest or principal of any
Debenture or the date of redemption of any Debenture shall not be a Business
Day, then payment of interest or principal may be made on the next succeeding
Business Day with the same force and effect as if made on the nominal date of
maturity or redemption, and no interest shall accrue for the period after such
nominal date.
SECTION 15.9. CONFLICT WITH TRUST INDENTURE ACT.
If and to the extent that any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by Sections 310 to 317, inclusive, of the
Trust Indenture Act, such imposed duties shall control.
SECTION 15.10. COUNTERPARTS.
This Indenture may be executed in any number of counterparts, each of which
shall be an original, but such counterparts shall together constitute but one
and the same instrument.
SECTION 15.11. SEPARABILITY.
In case any one or more of the provisions contained in this Indenture or in
the Debentures shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Indenture or of the Debentures,
but this Indenture and the Debentures shall be construed as if such invalid or
illegal or unenforceable provision had never been contained herein or therein.
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SECTION 15.12. ASSIGNMENT.
The Company shall have the right at all times to assign any of its respective
rights or obligations under this Indenture to a direct or indirect wholly owned
Subsidiary of the Company, provided that, in the event of any such assignment,
the Company shall remain liable for all such obligations. Subject to the
foregoing, this Indenture is binding upon and inures to the benefit of the
parties thereto and their respective successors and assigns. This Indenture may
not otherwise be assigned by the parties thereto.
SECTION 15.13. ACKNOWLEDGMENT OF RIGHTS; RIGHT OF SETOFF.
(a) The Company acknowledges that, with respect to any Debentures
held by the Trust or a trustee of the Trust, if the Property Trustee fails to
enforce its rights under this Indenture as the holder of the Debentures held as
the assets of the Trust, any holder of Preferred Securities may institute legal
proceedings directly against the Company to enforce such Property Trustee's
rights under this Indenture without first instituting any legal proceedings
against such Property Trustee or any other person or entity. Notwithstanding the
foregoing, and notwithstanding the provisions of Section 7.4(a) hereof, if an
Event of Default has occurred and is continuing and such event is attributable
to the failure of the Company to pay interest or principal on the Debentures on
the date such interest or principal is otherwise payable (or in the case of
redemption, on the redemption date), the Company acknowledges that a holder of
Preferred Securities may directly institute a proceeding for enforcement of
payment to such holder of the principal of or interest on the Debentures having
a principal amount equal to the aggregate liquidation amount of the Preferred
Securities of such holder on or after the respective due date specified in the
Debentures.
(b) Notwithstanding anything to the contrary contained in this
Indenture, the Company shall have the right of setoff any payment it is
otherwise required to make hereunder in respect of any Trust Securities to the
extent that the Company has previously made, or is concurrently making, a
payment to the holder of such Trust Securities under the Preferred Securities
Guarantee or in connection with a proceeding for enforcement of payment of the
principal of or interest on the Debentures directly brought by holders of any
Trust Securities.
(c) For so long as any of the Preferred Securities remain
Outstanding, if, upon an Event of Default, the Property Trustee fails or the
Holders of not less than 25% in principal amount of the outstanding Debentures
fail to declare the principal of all of the Debentures to be immediately due and
payable, the Holders of at least 25% in Liquidation Amount of the Preferred
Securities then Outstanding shall have the right to declare the principal of all
of the Debentures to be immediately due and payable by a notice in writing to
the Depositor and the Property Trustee; and upon any such declaration such
principal amount of and the accrued interest on all of the Debentures shall
become immediately due and payable, provided that the payment of principal and
interest on such Debentures shall remain subordinated to the extent provided in
this Indenture.
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ARTICLE XVI.
SUBORDINATION OF DEBENTURES
SECTION 16.1. AGREEMENT TO SUBORDINATE.
The Company covenants and agrees, and each holder of Debentures issued
hereunder by such holder's acceptance thereof likewise covenants and agrees,
that all Debentures shall be issued subject to the provisions of this Article
XVI; and each holder of a Debenture, whether upon original issue or upon
transfer or assignment thereof, accepts and agrees to be bound by such
provisions. The payment by the Company of the principal of and interest on all
Debentures issued hereunder shall, to the extent and in the manner hereinafter
set forth, be subordinated and junior in right of payment to the prior payment
in full of all Senior Debt, Subordinated Debt and Additional Senior Obligations
of the Company (collectively, "Senior Indebtedness") to the extent provided
herein, whether outstanding at the date of this Indenture or thereafter
incurred. No provision of this Article XVI shall prevent the occurrence of any
default or Event of Default hereunder.
SECTION 16.2. DEFAULT ON SENIOR DEBT, SUBORDINATED DEBT OR ADDITIONAL SENIOR
OBLIGATIONS.
In the event and during the continuation of any default by the Company in the
payment of principal, premium, interest or any other payment due on any Senior
Indebtedness, or in the event that the maturity of any Senior Indebtedness has
been accelerated because of a default, then, in either case, no payment shall be
made by the Company with respect to the principal (including redemption
payments) of or interest on the Debentures. In the event that, notwithstanding
the foregoing, any payment shall be received by the Trustee when such payment is
prohibited by the preceding sentence of this Section 16.2, such payment shall be
held in trust for the benefit of, and shall be paid over or delivered to, the
holders of Senior Indebtedness or their respective representatives, or to the
trustee or trustees under any indenture pursuant to which any of such Senior
Indebtedness may have been issued, as their respective interests may appear, but
only to the extent that the holders of the Senior Indebtedness (or their
representative or representatives or a trustee) notify the Trustee in writing
within 90 days of such payment of the amounts then due and owing on the Senior
Indebtedness and only the amounts specified in such notice to the Trustee shall
be paid to the holders of Senior Indebtedness.
SECTION 16.3. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
(a) Upon any payment by the Company or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any dissolution or winding-up or liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due upon all Senior Indebtedness
shall first be paid in full, or payment thereof provided for in money in
accordance with its terms, before any payment is made by the Company on account
of the principal or interest on the Debentures; and upon any such dissolution or
winding-up or liquidation or reorganization, any payment by the Company, or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, to which the holders of the Debentures or the Trustee
would be entitled to receive from the Company, except for the provisions of this
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<PAGE>
Article XVI, shall be paid by the Company or by any receiver, trustee in ban
kruptcy, liquidating trustee, agent or other Person making such payment or
distribution, or by the holders of the Debentures or by the Trustee under this
Indenture if received by them or it, directly to the holders of Senior
Indebtedness (pro rata to such holders on the basis of the respective amounts of
Senior Indebtedness held by such holders, as calculated by the Company) or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing such Senior Indebtedness
may have been issued, as their respective interests may appear, to the extent
necessary to pay such Senior Indebtedness in full, in money or money's worth,
after giving effect to any concurrent payment or distribution to or for the
holders of such Senior Indebtedness, before any payment or distribution is made
to the holders of Debentures or to the Trustee.
(b) In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, prohibited by the foregoing, shall be received by the
Trustee before all Senior Indebtedness is paid in full, or provision is made for
such payment in money in accordance with its terms, such payment or distribution
shall be held in trust for the benefit of and shall be paid over or delivered to
the holders of such Senior Indebtedness or their representative or
representatives, or to the trustee or trustees under any indenture pursuant to
which any instruments evidencing such Senior Indebtedness may have been issued,
as their respective interests may appear, as calculated by the Company, for
application to the payment of all Senior Indebtedness, as the case may be,
remaining unpaid to the extent necessary to pay such Senior Indebtedness in full
in money in accordance with its terms, after giving effect to any concurrent
payment or distribution to or for the benefit of the holders of such Senior
Indebtedness.
(c) For purposes of this Article XVI, the words "cash, property or
securities" shall not be deemed to include shares of stock of the Company as
reorganized or readjusted, or securities of the Company or any other corporation
provided for by a plan of reorganization or readjustment, the payment of which
is subordinated at least to the extent provided in this Article XVI with respect
to the Debentures to the payment of all Senior Indebtedness, as the case may be,
that may at the time be outstanding, provided that (i) such Senior Indebtedness
is assumed by the new corporation, if any, resulting from any such
reorganization or readjustment; and (ii) the rights of the holders of such
Senior Indebtedness are not, without the consent of such holders, altered by
such reorganization or readjustment. The consolidation of the Company with, or
the merger of the Company into, another corporation or the liquidation or
dissolution of the Company following the conveyance or transfer of its property
as an entirety, or substantially as an entirety, to another corporation upon the
terms and conditions provided for in Article XII shall not be deemed a
dissolution, winding-up, liquidation or reorganization for the purposes of this
Section 16.3 if such other corporation shall, as a part of such consolidation,
merger, conveyance or transfer, comply with the conditions stated in Article
XII. Nothing in Section 16.2 or in this Section 16.3 shall apply to claims of,
or payments to, the Trustee under or pursuant to Section 9.7.
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<PAGE>
SECTION 16.4. SUBROGATION.
(a) Subject to the payment in full of all Senior Indebtedness, the
rights of the holders of the Debentures shall be subrogated to the rights of the
holders of such Senior Indebtedness to receive payments or distributions of
cash, property or securities of the Company, as the case may be, applicable to
such Senior Indebtedness until the principal of and interest on the Debentures
shall be paid in full; and, for the purposes of such subrogation, no payments or
distributions to the holders of such Senior Indebtedness of any cash, property
or securities to which the holders of the Debentures or the Trustee would be
entitled except for the provisions of this Article XVI, and no payment over
pursuant to the provisions of this Article XVI to or for the benefit of the
holders of such Senior Indebtedness by holders of the Debentures or the Trustee,
shall, as between the Company, its creditors other than holders of Senior
Indebtedness of the Company, and the holders of the Debentures, be deemed to be
a payment by the Company to or on account of such Senior Indebtedness. It is
understood that the provisions of this Article XVI are and are intended solely
for the purposes of defining the relative rights of the holders of the
Debentures, on the one hand, and the holders of such Senior Indebtedness on the
other hand.
(b) Nothing contained in this Article XVI or elsewhere in this
Indenture or in the Debentures is intended to or shall impair, as between the
Company, its creditors (other than the holders of Senior Indebtedness), and the
holders of the Debentures, the obligation of the Company, which is absolute and
unconditional, to pay to the holders of the Debentures the principal of and
interest on the Debentures as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of the holders of the Debentures and creditors of the Company, as the
case may be, other than the holders of Senior Indebtedness, as the case may be,
nor shall anything herein or therein prevent the Trustee or the holder of any
Debenture from exercising all remedies otherwise permitted by applicable law
upon default under this Indenture, subject to the rights, if any, under this
Article XVI of the holders of such Senior Indebtedness in respect of cash,
property or securities of the Company, as the case may be, received upon the
exercise of any such remedy.
(c) Upon any payment or distribution of assets of the Company
referred to in this Article XVI, the Trustee, subject to the provisions of
Article IX, and the holders of the Debentures shall be entitled to conclusively
rely upon any order or decree made by any court of competent jurisdiction in
which such dissolution, winding-up, liquidation or reorganization proceedings
are pending, or a certificate of the receiver, trustee in bankruptcy,
liquidation trustee, agent or other Person making such payment or distribution,
delivered to the Trustee or to the holders of the Debentures, for the purposes
of ascertaining the Persons entitled to participate in such distribution, the
holders of Senior Indebtedness and other indebtedness of the Company, as the
case may be, the amount thereof or payable thereon, the amount or amounts paid
or distributed thereon and all other facts pertinent thereto or to this Article
XVI.
SECTION 16.5. TRUSTEE TO EFFECTUATE SUBORDINATION.
Each holder of Debentures by such holder's acceptance thereof authorizes and
directs the Trustee on such holder's behalf to take such action as may be
necessary or appropriate to
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<PAGE>
effectuate the subordination provided in this Article XVI and appoints the
Trustee such holder's attorney-in-fact for any and all such purposes.
SECTION 16.6. NOTICE BY COMPANY.
(a) The Company shall give prompt written notice to a Responsible
Officer of the Trustee of any fact known to the Company that would prohibit the
making of any payment of monies to or by the Trustee in respect of the
Debentures pursuant to the provisions of this Article XVI. Notwithstanding the
provisions of this Article XVI or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts that
would prohibit the making of any payment of monies to or by the Trustee in
respect of the Debentures pursuant to the provisions of this Article XVI, unless
and until a Responsible Officer of the Trustee shall have received written
notice thereof from the Company or a holder or holders of Senior Indebtedness or
from any trustee therefor; and before the receipt of any such written notice,
the Trustee, subject to the provisions of Section 9.1, shall be entitled in all
respects to assume that no such facts exist; provided, however, that if the
Trustee shall not have received the notice provided for in this Section 16.6 at
least two Business Days prior to the date upon which by the terms hereof any
money may become payable for any purpose (including, without limitation, the
payment of the principal of or interest on any Debenture), then, anything herein
contained to the contrary notwithstanding, the Trustee shall have full power and
authority to receive such money and to apply the same to the purposes for which
they were received, and shall not be affected by any notice to the contrary that
may be received by it within two Business Days prior to such date.
(b) The Trustee, subject to the provisions of Section 9.1, shall be
entitled to conclusively rely on the delivery to it of a written notice by a
Person representing himself to be a holder of Senior Indebtedness (or a trustee
on behalf of such holder) to establish that such notice has been given by a
holder of such Senior Indebtedness or a trustee on behalf of any such holder or
holders. In the event that the Trustee determines in good faith that further
evidence is required with respect to the right of any Person as a holder of such
Senior Indebtedness to participate in any payment or distribution pursuant to
this Article XVI, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of such Senior
Indebtedness held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such Person under this Article XVI, and, if such evidence is not
furnished, the Trustee may defer any payment to such Person pending judicial
determination as to the right of such Person to receive such payment.
SECTION 16.7. RIGHTS OF TRUSTEE; HOLDERS OF SENIOR INDEBTEDNESS.
(a) The Trustee in its individual capacity shall be entitled to all
the rights set forth in this Article XVI in respect of any Senior Indebtedness
at any time held by it, to the same extent as any other holder of Senior
Indebtedness, and nothing in this Indenture shall deprive the Trustee of any of
its rights as such holder. The Trustee's right to compensation and reimbursement
of expenses as set forth in Section 9.7 shall not be subject to the
subordination provisions of this Article XVI.
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(b) With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article XVI, and no implied covenants or
obligations with respect to the holders of such Senior Indebtedness shall be
read into this Indenture against the Trustee. The Trustee shall not be deemed to
owe any fiduciary duty to the holders of such Senior Indebtedness and, subject
to the provisions of Section 9.1, the Trustee shall not be liable to any holder
of such Senior Indebtedness if it shall pay over or deliver to holders of
Debentures, the Company or any other Person money or assets to which any holder
of such Senior Indebtedness shall be entitled by virtue of this Article XVI or
otherwise.
SECTION 16.8. SUBORDINATION MAY NOT BE IMPAIRED.
(a) No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any time in
any way be prejudiced or impaired by any act or failure to act on the part of
the Company or by any act or failure to act, in good faith, by any such holder,
or by any noncompliance by the Company with the terms, provisions and covenants
of this Indenture, regardless of any knowledge thereof that any such holder may
have or otherwise be charged with.
(b) Without in any way limiting the generality of Section 16.8(a),
the holders of Senior Indebtedness may, at any time and from time to time,
without the consent of or notice to the Trustee or the holders of the
Debentures, without incurring responsibility to the holders of the Debentures
and without impairing or releasing the subordination provided in this Article
XVI or the obligations hereunder of the holders of the Debentures to the holders
of such Senior Indebtedness, do any one or more of the following: (i) change the
manner, place or terms of payment or extend the time of payment of, or renew or
alter, such Senior Indebtedness, or otherwise amend or supplement in any manner
such Senior Indebtedness or any instrument evidencing the same or any agreement
under which such Senior Indebtedness is outstanding; (ii) sell, exchange,
release or otherwise deal with any property pledged, mortgaged or otherwise
securing such Senior Indebtedness; (iii) release any Person liable in any manner
for the collection of such Senior Indebtedness; and (iv) exercise or refrain
from exercising any rights against the Company and any other Person.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly
executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
INDEPENDENT BANKSHARES, INC.
----------------------------------------
By:
-------------------------------------
------------------------------
------------------------------
-----------------
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<PAGE>
Attest:
- --------------------------------
Name:
---------------------------
_______________ hereby accepts the trust in this Indenture declared and
provided, upon the terms and conditions hereinabove set forth.
U.S. TRUST COMPANY OF TEXAS, N.A., as trustee
---------------------------------
By:
-------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
Attest:
- ------------------------------
Name:
-------------------------
STATE OF )
------------------
)ss:
COUNTY OF )
-----------------
On this _______ day of _______________________________, , before me appeared
, to me personally known, who, being by me duly sworn, did say that he is the
________________________________ of ______________________________, and that the
seal affixed to said instrument is the corporate seal of said corporation, and
that said instrument was signed and sealed in behalf of said corporation by
authority of its board of directors and said __________________, acknowledged
said instrument to be the free act and deed of said corporation.
In testimony whereof I have hereunto set my hand and affixed my official seal
at my office in said county and state the day and year last above written.
--------------------------
Notary Public
[seal] My term expires:
----------
STATE OF )
------------------
)ss:
COUNTY OF )
-----------------
56
<PAGE>
On this _______ day of _______________________________, ____, before me
appeared ______________________________, to me personally known, who, being by
me duly sworn, did say that he is the ____________________________ of
____________________________________, and that the seal affixed to said
instrument is the corporate seal of said corporation, and that said instrument
was signed and sealed in behalf of said corporation by authority of its board of
directors and said ______________________________, acknowledged said instrument
to be the free act and deed of said corporation.
In testimony whereof I have hereunto set my hand and affixed my official seal
at my office in said county and state the day and year last above written.
--------------------------
Notary Public
[seal] My term expires:
----------
57
<PAGE>
EXHIBIT 4.3
EXHIBIT A
[FORM OF DEBENTURE]
No. 1 $_______________
CUSIP No. ____________________
_______________________________
_____% SUBORDINATED DEBENTURE
DUE _____________________
Independent Bankshares, Inc., a Texas corporation (the "Company," which term
includes any successor corporation under the Indenture hereinafter referred to),
for value received, hereby promises to pay to U.S. Trust Company of Texas, N.A.,
as Property Trustee, or registered assigns, the principal sum of
__________________________ ($____________) on ____________, 2028 (the "Stated
Maturity"), and to pay interest on said principal sum from ____________, 1998 or
from the most recent interest payment date (each such date, an "Interest Payment
Date") to which interest has been paid or duly provided for, quarterly (subject
to deferral as set forth herein) in arrears on March 31, June 30, September 30
and December 31 of each year commencing December 31, 1998, at the rate of _____%
per annum until the principal hereof shall have become due and payable, and on
any overdue principal and (without duplication) on any overdue installment of
interest at the same rate per annum compounded quarterly. The amount of
interest payable on any Interest Payment Date shall be computed on the basis of
a 360-day year of twelve 30-day months. The amount of interest for any partial
period shall be computed on the basis of the number of days elapsed in a 360-day
year of twelve 30-day months. In the event that any date on which interest is
payable on this Debenture is not a business day, then payment of interest
payable on such date shall be made on the next succeeding day that is a Business
Day (as defined in the Indenture) (and without any interest or other payment in
respect of any such delay) with the same force and effect as if made on such
date. The interest installment so payable, and punctually paid or duly provided
for, on any Interest Payment Date shall, as provided in the Indenture, be paid
to the person in whose name this Debenture (or one or more Predecessor
Debentures, as defined in the Indenture) is registered at the close of business
on the regular record date for such interest installment, which shall be the
fifteenth day of the last month of the calendar quarter in which such Interest
Payment Date occurs unless otherwise provided in the Indenture. The principal
of and the interest on this Debenture shall be payable at the office or agency
of the Trustee maintained for that purpose in any coin or currency of the United
States of America that at the time of payment is legal tender for payment of
public and private debts; provided, however, that payment of interest may be
made at the option of the Company by check mailed to the registered holder at
such address as shall appear in the Debenture Register. Notwithstanding the
foregoing, so long as the holder of this Debenture is the Property Trustee, the
payment of the principal of and interest on this Debenture shall be made at such
place and to such account as may be designated by the Trustee.
Exhibit A-1
<PAGE>
This Debenture may be redeemed at any time by the Company on any date not
earlier than _____________, 2003, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Such date may also be extended
at any time at the election of the Company for one or more periods, but in no
event to a date later than _____________, 2037, subject to certain limitations
described in the Indenture.
The indebtedness evidenced by this Debenture is, to the extent provided in the
Indenture, subordinate and junior in right of payment to the prior payment in
full of all Senior Indebtedness. This Debenture is issued subject to the
provisions of the Indenture with respect thereto. Each holder of this
Debenture, by accepting the same, (a) agrees to and shall be bound by such
provisions; (b) authorizes and directs the Trustee on his or her behalf to take
such action as may be necessary or appropriate to acknowledge or effectuate the
subordination so provided; and (c) appoints the Trustee his or her attorney-in-
fact for any and all such purposes. Each holder hereof, by his or her
acceptance hereof, hereby waives all notice of the acceptance of the
subordination provisions contained herein and in the Indenture by each holder of
Senior Indebtedness, whether now outstanding or hereafter incurred, and waives
reliance by each such holder upon said provisions.
This Debenture shall not be entitled to any benefit under the Indenture, be
valid or become obligatory for any purpose until the Certificate of
Authentication hereon shall have been signed by or on behalf of the Trustee.
The provisions of this Debenture are continued on the reverse side hereof and
such continued provisions shall for all purposes have the same effect as though
fully set forth at this place.
IN WITNESS WHEREOF, the Company has caused this instrument to be executed.
Dated , 1998
-------------- Independent Bankshares, Inc.,
a Texas corporation
By:
---------------------------------------
-----------------------------
-----------------------------
-----------------------------
Attest:
- ------------------------
Name:
-------------------
Exhibit A-2
<PAGE>
[FORM OF CERTIFICATE OF AUTHENTICATION]
CERTIFICATE OF AUTHENTICATION
This is one of the Debentures described in the within-mentioned Indenture.
Dated:
- -----------------------------------, ------------------------------
as Trustee or Authenticating Agent
By By
--------------------------------- ----------------------------
Authorized Signatory
Exhibit A-3
<PAGE>
% SUBORDINATED DEBENTURE
(CONTINUED)
This Debenture is one of the subordinated debentures of the Company (the
"Debentures"), all issued or to be issued under and pursuant to an Indenture
dated as of _____________, 1998 (the "Indenture"), duly executed and delivered
between the Company and U.S. Trust Company of Texas, N.A., as Trustee (the
"Trustee"), to which Indenture reference is hereby made for a description of the
rights, limitations of rights, obligations, duties and immunities thereunder of
the Trustee, the Company and the holders of the Debentures. The Debentures are
limited in aggregate principal amount as specified in the Indenture.
Company shall have the right, as set forth in the Indenture, to redeem this
Debenture at the option of the Company, without premium or penalty, in whole or
in part at any time on or after ____________, 2003 (an "Optional Redemption"),
or at any time in certain circumstances upon the occurrence of a Special Event
(as defined in the Indenture), at a redemption price (the "Redemption Price")
equal to 100% of the principal amount hereof plus any accrued but unpaid
interest hereon, to the date of such redemption plus Additional Payments, if
any. Any redemption pursuant to this paragraph shall be made upon not less than
30 days nor more than 60 days notice, at the Redemption Price. The Redemption
Price shall be paid at the time and in the manner provided therefor in the
Indenture. If the Debentures are only partially redeemed by the Company
pursuant to an Optional Redemption, the Debentures shall be redeemed pro rata or
by lot or by any other method utilized by the Trustee as described in the
Indenture. In the event of an Optional Redemption of this Debenture in part
only, a new Debenture or Debentures for the unredeemed portion hereof shall be
issued in the name of the holder hereof upon the cancellation hereof.
In case an Event of Default (as defined in the Indenture), shall have occurred
and be continuing, the principal of all of the Debentures may be declared, and
upon such declaration shall become, due and payable, in the manner, with the
effect and subject to the conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the Trustee, with
the consent of the holders of not less than a majority in aggregate principal
amount of the Debentures at the time Outstanding (as defined in the Indenture),
to execute supplemental indentures for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
or of any supplemental indenture or of modifying in any manner the rights of the
holders of the Debentures; provided, however, that no such supplemental
indenture shall without the consent of the holders of each Debenture then
Outstanding and affected thereby, (i) extend the fixed maturity of the
Debentures, reduce the principal amount thereof, or reduce the rate or extend
the time of payment of interest thereon; or (ii) reduce the aforesaid percentage
of Debentures, the holders of which are required to consent to any such
supplemental indenture. The Indenture also contains provisions permitting the
holders of a majority in aggregate principal amount of the Debentures at the
time outstanding, on behalf of all of the holders of the Debentures, to waive
any past default in the performance of any of the covenants contained in the
Indenture, or established pursuant to the Indenture, and its consequences,
except a default in the
<PAGE>
payment of the principal of or interest on any of the Debentures. Any such
consent or waiver by the registered holder of this Debenture (unless revoked as
provided in the Indenture) shall be conclusive and binding upon such holder and
upon all future holders and owners of this Debenture and of any Debenture issued
in exchange herefor or in place hereof (whether by registration of transfer or
otherwise), irrespective of whether or not any notation of such consent or
waiver is made upon this Debenture.
No reference herein to the Indenture and no provision of this Debenture or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal and interest on this Debenture
at the time and place and at the rate and in the money herein prescribed.
The Company, as further described in the Indenture, shall have the right at
any time during the term of the Debentures and from time to time to defer
payments of interest by extending the interest payment period of such Debentures
for up to 20 consecutive quarters (each, an "Extended Interest Payment Period"),
at the end of which period the Company shall calculate (and deliver such
calculation to the Trustee) and pay all interest then accrued and unpaid on the
Debentures, including any Additional Payments and Compounded Interest (as
defined in the Indenture and, together, the "Deferred Payments") that shall be
payable to the holders of the Debentures in whose names the Debentures are
registered in the Debenture Register on the first record date after the end of
the Extended Interest Payment Period. Before the termination of any such
Extended Interest Payment Period, the Company may further extend such Extended
Interest Payment Period, provided that such Extended Interest Payment Period
together with all such further extensions thereof shall not exceed 20
consecutive quarters. At the termination of any such Extended Interest Payment
Period and upon the payment of all Deferred Payments then due, the Company may
commence a new Extended Interest Payment Period subject to the foregoing
requirements.
As provided in the Indenture, and subject to certain limitations therein set
forth, this Debenture is transferable by the registered holder hereof on the
Debenture Register (as defined in the Indenture) of the Company, upon surrender
of this Debenture for registration of transfer at the office or agency of the
Trustee accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company or the Trustee duly executed by the registered
holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Debentures of authorized denominations and for the same aggregate
principal amount shall be issued to the designated transferee or transferees.
No service charge shall be made for any such transfer, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in relation thereto.
Prior to due presentment for registration of transfer of this Debenture, the
Company, the Trustee, any Paying Agent (as defined in the Indenture) and the
Debenture Registrar may deem and treat the registered holder hereof as the
absolute owner hereof (whether or not this Debenture shall be overdue and
notwithstanding any notice of ownership or writing hereon made by anyone other
than the Debenture Registrar) for the purpose of receiving payment of or on
account of the principal hereof and interest due hereon and for all other
purposes, and neither the Company nor
5.
<PAGE>
the Trustee nor any Paying Agent nor any Debentures Registrar shall be affected
by any notice to the contrary.
No recourse shall be had for the payment of the principal of or the interest
on this Debenture, or for any claim based hereon, or otherwise in respect
hereof, or based on or in respect of the Indenture, against any incorporator,
stockholder, officer or director, past, present or future, as such, of the
Company or of any predecessor or successor corporation, whether by virtue of any
constitution, statute or rule of law, or by the enforcement of any assessment or
penalty or otherwise, all such liability being, by the acceptance hereof and as
part of the consideration for the issuance hereof, expressly waived and
released.
The Debentures are issuable only in registered form without coupons in
denominations of $10 and any integral multiple thereof (or such other
denomination and any integral multiple thereof as may be deemed necessary by the
Company for the purpose of maintaining the eligibility of the Debentures for
quotation on the American Stock Exchange, Inc. or any successor thereto).
All terms used in this Debenture that are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
6.
<PAGE>
EXHIBIT 4.4
CERTIFICATE OF TRUST OF
-----------------------
INDEPENDENT CAPITAL TRUST
-------------------------
THIS Certificate of Trust of Independent Capital Trust (the "Trust) is
being duly executed and filed by Wilmington Trust Company, a Delaware banking
corporation, Bryan W. Stephenson and Randal N. Crosswhite, as trustees, to form
a business trust under the Delaware Business Trust Act (12 Del. C. (S)3801 et.
------- ---
seq.).
- ----
1. Name. The name of the business trust formed hereby is Independent
----
Capital Trust.
2. Delaware Trustee. The name and business address of the trustee of
----------------
the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware, 19890-0001, Attention:
Corporate Trust Administration.
IN WITNESS WHEREOF, the undersigned, being the sole initial trustees of the
Trust, have executed this Certificate of Trust.
WILMINGTON TRUST COMPANY
as Trustee
By: /s/ Debra Eberly
--------------------------------------
Name: Debra Eberly
Title: Administrative Account Manager
/s/ Bryan W. Stephenson
------------------------------------------
Bryan W. Stephenson
as Trustee
/s/ Randal N. Crosswhite
------------------------------------------
Randal N. Crosswhite
as Trustee
<PAGE>
EXHIBIT 4.5
DECLARATION OF TRUST
OF
INDEPENDENT CAPITAL TRUST
This DECLARATION OF TRUST is made as of July 29, 1998 (this "Declaration"),
among (i) INDEPENDENT BANKSHARES, INC., a Texas corporation, as depositor (the
"Depositor"), (ii) WILMINGTON TRUST COMPANY, a Delaware banking corporation, as
Delaware trustee (the "Delaware Trustee"), and (iii) BRYAN W. STEPHENSON and
RANDAL N. CROSSWHITE, as individual trustees (the "Individual Trustees" and,
together with the Delaware Trustee, the "Trustees"). The Depositor and the
Trustees hereby agree as follows:
1. The trust created hereby shall be known as "INDEPENDENT CAPITAL TRUST"
(the "Trust") in which name the Trustees or the Depositor to the extent provided
herein, may engage in the transactions contemplated hereby, make and execute
contracts, and sue and be sued.
2. The Depositor hereby assigns, transfers, conveys and sets over to the
Trustees the sum of $10.00. The Trustees hereby acknowledge receipt of such
amount in trust from the Depositor, which amount shall constitute the initial
trust estate. The Trustees hereby declare that they will hold the trust estate
in trust for the Depositor. It is the intention of the parties hereto that the
Trust created hereby constitute a business trust under Chapter 38 of Title 12 of
the Delaware Code, 12 Del. C. Section 3801, et seq. (the "Business Trust Act"),
and that this document constitutes the governing instrument of the Trust. The
Trustees are hereby authorized and directed to execute and file a certificate of
trust with the Delaware Secretary of State in such form as the Trustees may
approve.
3. The Depositor and the Trustees will enter into an amended and restated
Declaration of Trust, satisfactory to each such party and substantially in the
form included as an exhibit to the 1933 Act Registration Statement (as defined
below), to provide for the contemplated operation of the Trust created hereby
and the issuance of the Preferred Securities and Common Securities referred to
therein. Prior to the execution and delivery of such amended and restated
Declaration of Trust, (i) the Delaware Trustee shall not have any duty or
obligation hereunder or with respect to the trust estate, except as otherwise
required by applicable law, and (ii) the Individual Trustees and the Depositor
shall take any action as may be necessary to obtain prior to such execution and
delivery any licenses, consents or approvals required by applicable law or
otherwise. Notwithstanding the foregoing, the Trustees may take all actions
deemed proper as are necessary to effect the transactions contemplated herein.
4. The Depositor hereby agrees to (i) reimburse the Trustees for all
reasonable expenses (including reasonable fees and expenses of counsel and other
experts), (ii) indemnify, defend and hold harmless the Trustees and any of the
officers, directors, employees and agent of the Trustees (collectively,
including the Delaware Trustee in its individual capacity, the "Indemnified
Persons") from and against any and all losses, damages, liabilities, claims
actions, suits, costs, expenses, disbursements (including the reasonable fees
and expenses of counsel), taxes and penalties of any kind and nature whatsoever
(collectively, "Expenses"), to the extent that such Expenses arise out of or are
imposed upon or asserted at any time against such
<PAGE>
Indemnified Persons with respect to the performance of this Declaration, the
creation, operation, administration or termination of the Trust, or the
transactions contemplated hereby; provided, however, that the Depositor shall
not be required to indemnify an Indemnified Person for Expenses to the extent
such Expenses result from the willful misconduct, bad faith or gross negligence
of such Indemnified Person, and (iii) advance to each Indemnified Person
Expenses (including reasonable legal fees) incurred by such Indemnified Person
in defending any claim, demand, action, suit or proceeding prior to the final
disposition of such claim, demand, action, suit or proceeding upon receipt by
the Depositor of an undertaking by or on behalf of the Indemnified Person to
repay such amount if it shall be determined that the Indemnified Person is not
entitled to be indemnified therefor under this Section 4.
5. The Depositor and the Trustees hereby authorize and direct the
Depositor, as the sponsor of the Trust, (i) to file with the Securities and
Exchange Commission (the "Commission") and execute, in each case on behalf of
the Trust, (a) the Registration Statement on Form S-2 (the "1933 Act
Registration Statement"), including any pre-effective or post-effective
amendments to the 1933 Act Registration Statement, relating to, among other
things, the registration under the Securities Act of 1933, as amended, (the
"1933 Act") of the Preferred Securities of the Trust (including any registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the 1933 Act), and (b) to the extent required, a Registration
Statement on Form 8-A (the "1934 Act Registration Statement") (including all
pre-effective and post-effective amendments thereto) relating to the
registration of the Preferred Securities of the Trust under the Securities
Exchange Act of 1934, as amended; (ii) to file with the American Stock Exchange,
Inc. or a stock exchange or other organization (each, an "Exchange") and execute
on behalf of the Trust one or more listing applications and all other
applications, statements, certificates, agreements and other instruments as
shall be necessary or desirable to cause the Preferred Securities to be listed
on any of the Exchanges; (iii) to file and execute on behalf of the Trust such
applications, reports, surety bonds, irrevocable consents, appointments of
attorney for service of process and other papers and documents as shall be
necessary or desirable to register the Preferred Securities under the securities
or blue sky laws of such jurisdictions as the Depositor, on behalf of the Trust,
may deem necessary or desirable; and (iv) to execute on behalf of the Trust that
certain Underwriting Agreement relating to the sale of the Preferred Securities,
among the Trust, the Depositor and the Underwriter named therein, substantially
in the form included as an exhibit to the 1933 Act Registration Statement. In
the event that any filing referred to in clauses (i), (ii) and (iii) above is
required by the rules and regulations of the Commission, an Exchange or state
securities or blue sky laws, to be executed on behalf of the Trust by one or
more of the Trustees, each of the Trustees, in its or his capacity as a Trustee
of the Trust, is hereby authorized and, to the extent so required, directed to
join in any such filing and to execute on behalf of the Trust any and all of the
foregoing, it being understood that Wilmington Trust Company in its capacity as
Delaware Trustee shall not be required to join in any such filing or execute on
behalf of the Trust any such document unless required by the rules and
regulations of the Commission, the Exchange or state securities or blue sky
laws, as stated in a writing delivered to Wilmington Trust Company by the
Depositor. In connection with the filings referred to above, the Depositor and
Wilmington Trust Company, Bryan W. Stephenson and Randal N. Crosswhite, each as
Trustees and not in their individual capacities, hereby constitute and appoint
Bryan W. Stephenson and Randal N. Crosswhite, and
2.
<PAGE>
each of them, as its true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for the Depositor or such Trustee or
in the Depositor's or such Trustees' name, place and stead, to sign any and all
amendments (including post-effective amendments) to the 1933 Act Registration
Statement and the 1934 Act Registration Statement and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Commission, the Exchange and administrators of the state securities or blue sky
laws, granting unto said attorneys-in-fact and agents full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in connection therewith, as fully to all intents and purposes as the
Depositor or such Trustee might or could to in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
respective substitute or substitutes, shall do or cause to be done by virtue
hereof.
6. The Delaware Trustee is authorized to take such action or refrain from
taking such action under this Declaration as it may be directed in writing by
the Depositor from time to time; provided, however, that the Delaware Trustee
shall not be required to take or refrain from taking any such action if it shall
have determined, or shall have been advised by counsel, that such performance is
likely to involve the Delaware Trustee in personal liability or is contrary to
the terms of this Declaration or of any document contemplated hereby to which
the Trust or the Delaware Trustee is a party or is otherwise contrary to law.
If at any time the Delaware Trustee determines that it requires or desires
guidance regarding the application of any provision of this Declaration or any
other document, then the Delaware Trustee may deliver a notice to the Depositor
requesting written instructions as to the course of action desired by the
Depositor, and such instructions shall constitute full and complete
authorization and protection for actions taken by the Delaware Trustee in
reliance thereon. If the Delaware Trustee does not receive such instructions
within five (5) business days after it has delivered to the Depositor such
notice requesting instructions, or such shorter period of time as may be set
forth in such notice, it shall refrain from taking any action with respect to
the matters described in such notice to the Depositor.
7. This Declaration of Trust may be executed in one or more counterparts.
8. The number of trustees of the Trust initially shall be three and
thereafter the number of trustees of the Trust shall be such number as shall be
fixed from time to time by a written instrument signed by the Depositor which
may increase or decrease the number of trustees of the Trust; provided, however,
that to the extent required by the Business Trust Act, one trustee of the Trust
shall either be a natural person who is a resident of the State of Delaware or,
if not a natural person, an entity which has its principal place of business in
the State of Delaware and otherwise meets the requirements of applicable
Delaware law. Subject to the foregoing, the Depositor is entitled to appoint or
remove without cause any trustee of the Trust at any time. Any trustee of the
Trust may resign upon 30 days' prior notice to the Depositor.
9. This Declaration of Trust shall be governed by, and construed in
accordance with, the laws of the State of Delaware (without regard to conflict
of laws of principles).
[Signatures On Next Page]
3.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be
duly executed as of the day and year first above written.
INDEPENDENT BANKSHARES, INC.
as Depositor
By: /s/ Randal N. Crosswhite
--------------------------------------------------
Name: Randal N. Crosswhite
Title: Senior Vice President
WILMINGTON TRUST COMPANY
as Trustee
By:
--------------------------------------------------
Name:
-------------------------------------------
Title:
-------------------------------------------
/s/ Bryan W. Stephenson
--------------------------------------------------
Bryan W. Stephenson
as Trustee
/s/ Randal N. Crosswhite
--------------------------------------------------
Randal N. Crosswhite
as Trustee
<PAGE>
EXHIBIT 4.6
================================================================================
INDEPENDENT CAPITAL TRUST
AMENDED AND RESTATED
TRUST AGREEMENT
AMONG
INDEPENDENT BANKSHARES, INC., AS DEPOSITOR
U.S. TRUST COMPANY OF TEXAS, N.A., AS PROPERTY TRUSTEE
WILMINGTON TRUST COMPANY, AS DELAWARE TRUSTEE
AND
THE ADMINISTRATIVE TRUSTEES NAMED HEREIN
DATED AS OF ___________, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I. DEFINED TERMS.................................................. 2
Section 101. Definitions............................................... 2
ARTICLE II. ESTABLISHMENT OF TRUST.........................................10
Section 201. Name......................................................10
Section 202. Office of Delaware Trustee; Principal Place of Business...10
Section 203. Initial Contribution of Trust Property;
Organizational Expenses............................................10
Section 204. Issuance of Preferred Securities..........................10
Section 205. Issuance of the Common Securities; Subscription and
Purchase of Debentures.............................................11
Section 206. Declaration of Trust......................................11
Section 207. Authorization to Enter into Certain Transactions..........12
Section 208. Assets of Trust...........................................15
Section 209. Title to Trust Property...................................15
ARTICLE III. PAYMENT ACCOUNT................................................15
Section 301. Payment Account...........................................15
ARTICLE IV. DISTRIBUTIONS; REDEMPTION......................................16
Section 401. Distributions.............................................16
Section 402. Redemption; Repurchase....................................16
Section 403. Subordination of Common Securities........................18
Section 404. Payment Procedures........................................19
Section 405. Tax Returns and Reports...................................19
Section 406. Payment of Taxes, Duties, etc. of Trust...................19
Section 407. Payments Under Indenture..................................20
ARTICLE V. TRUST SECURITIES CERTIFICATES....................................20
Section 501. Initial Ownership.........................................20
Section 502. Trust Securities Certificates.............................20
Section 503. Execution, Authentication and Delivery of Trust
Securities Certificates............................................20
Section 504. Registration of Transfer and Exchange of Preferred
Securities Certificates............................................21
Section 505. Mutilated, Destroyed, Lost or Stolen Trust Securities
Certificates.......................................................22
Section 506. Persons Deemed Securityholders............................22
Section 507. Access to List of Securityholders' Names and Addresses....22
Section 508. Maintenance of Office or Agency...........................23
Section 509. Appointment of Paying Agent...............................23
Section 510. Ownership of Common Securities by Depositor...............24
Section 511. Preferred Securities Certificates.........................24
Section 512. [Intentionally Omitted]...................................24
Section 513. [Intentionally Omitted]...................................24
i
<PAGE>
Section 514. Rights of Securityholders.................................24
ARTICLE VI. ACTS OF SECURITY HOLDERS; MEETINGS; VOTING......................25
Section 601. Limitations on Voting Rights..............................25
Section 602. Notice of Meetings........................................26
Section 603. Meetings of Preferred Securityholders.....................26
Section 604. Voting Rights.............................................27
Section 605. Proxies, etc..............................................27
Section 606. Securityholder Action by Written Consent..................27
Section 607. Record Date for Voting and Other Purposes.................28
Section 608. Acts of Securityholders...................................28
Section 609. Inspection of Records.....................................29
ARTICLE VII. REPRESENTATIONS AND WARRANTIES.................................29
Section 701. Representations and Warranties of Bank and
Property Trustee...................................................29
Section 702. Representations and Warranties of Delaware Bank
and Delaware Trustee...............................................30
Section 703. Representations and Warranties of Depositor...............31
ARTICLE VIII. TRUSTEES......................................................32
Section 801. Certain Duties and Responsibilities.......................32
Section 802. Certain Notices...........................................33
Section 803. Certain Rights of Property Trustee........................34
Section 804. Not Responsible for Recitals or Issuance of Securities....36
Section 805. May Hold Securities.......................................36
Section 806. Compensation; Indemnity; Fees.............................36
Section 807. Corporate Property Trustee Required; Eligibility
of Trustees........................................................37
Section 808. Conflicting Interests.....................................37
Section 809. Co-Trustees and Separate Trustee..........................38
Section 810. Resignation and Removal; Appointment of Successor.........39
Section 811. Acceptance of Appointment by Successor....................40
Section 812. Merger, Conversion, Consolidation or Succession
to Business........................................................41
Section 813. Preferential Collection of Claims Against Depositor
or Trust...........................................................41
Section 814. Reports by Property Trustee...............................41
Section 815. Reports to Property Trustee...............................42
Section 816. Evidence of Compliance with Conditions Precedent..........42
Section 817. Number of Trustees........................................42
Section 818. Delegation of Power.......................................42
Section 819. Voting....................................................43
ARTICLE IX. TERMINATION, LIQUIDATION AND MERGER.............................43
Section 901. Termination Upon Expiration Date..........................43
Section 902. Early Termination.........................................43
Section 903. Termination...............................................43
Section 904. Liquidation...............................................44
Section 905. Mergers, Consolidations, Amalgamations or Replacements of
Trust..............................................................45
ii
<PAGE>
ARTICLE X. MISCELLANEOUS PROVISIONS.........................................46
Section 1001. Limitation of Rights of Securityholders..................46
Section 1002. Amendment................................................46
Section 1003. Separability.............................................48
Section 1004. Governing law............................................48
Section 1005. Payments Due on Non-Business Day.........................48
Section 1006. Successors...............................................48
Section 1007. Headings.................................................49
Section 1008. Reports, Notices and Demands.............................49
Section 1009. Agreement Not to Petition................................49
Section 1010. Trust Indenture Act; Conflict with Trust Indenture Act...50
Section 1011. Acceptance of Terms of Trust Agreement, Guarantee and
Indenture..........................................................51
Exhibit A Certificate of Trust
Exhibit B [Intentionally Omitted]
Exhibit C Form of Common Securities Certificate
Exhibit D Form of Expense Agreement
Exhibit E Form of Preferred Securities Certificate
iii
<PAGE>
CROSS-REFERENCE TABLE
Section of Section of
Trust Indenture Act Amended and Restated
of 1939, as amended Trust Agreement
- ------------------- ---------------
310(a)(1)...................................................................807
310(a)(2)...................................................................807
310(a)(3)...................................................................807
310(a)(4)............................................................207(a)(ii)
310(b)......................................................................808
311(a)......................................................................813
311(b)......................................................................813
312(a)......................................................................507
312(b)......................................................................507
312(c)......................................................................507
313(a)...................................................................814(a)
313(a)(4)................................................................814(b)
313(b)...................................................................814(b)
313(c).....................................................................1008
313(d)...................................................................814(c)
314(a)......................................................................815
314(b)...........................................................Not Applicable
314(c)(1)...................................................................816
314(c)(2)...................................................................816
314(c)(3)........................................................Not Applicable
314(d)...........................................................Not Applicable
314(e) 101, 816
315(a)...........................................................801(a), 803(a)
315(b)................................................................802, 1008
315(c)...................................................................801(a)
315(d).................................................................801, 803
316(a)(2)........................................................Not Applicable
316(b)...........................................................Not Applicable
316(c)......................................................................607
317(a)(1)........................................................Not Applicable
317(a)(2)........................................................Not Applicable
317(b)......................................................................509
318(a).....................................................................1010
Note: This Cross-Reference Table does not constitute part of this Agreement and
should not affect the interpretation of any of its terms or provisions.
iv
<PAGE>
AMENDED AND RESTATED TRUST AGREEMENT
AMENDED AND RESTATED TRUST AGREEMENT, dated as of _____________, 1998 among
(i) Independent Bankshares, Inc., a Texas corporation (including any successors
or assigns, the "Depositor"), (ii) U.S. Trust Company of Texas, N.A., a national
bank with trust powers duly organized and existing under the laws of the United
States, as property trustee (the "Property Trustee" and, in its separate
corporate capacity and not in its capacity as Property Trustee, the "Bank"),
(iii) Wilmington Trust Company, a Delaware banking corporation duly organized
and existing under the laws of the State of Delaware, as Delaware trustee (the
"Delaware Trustee," and, in its separate corporate capacity and not in its
capacity as Delaware Trustee, the "Delaware Bank") (iv) Bryan W. Stephenson, an
individual, Randal N. Crosswhite, an individual, and Michael D. Jarrett, an
individual, each of whose address is c/o Independent Bankshares, Inc., 547
Chestnut Street, Abilene, Texas 79602 (each an "Administrative Trustee" and,
collectively, the "Administrative Trustees") (the Property Trustee, the Delaware
Trustee and the Administrative Trustees are referred to collectively as the
"Trustees"), and (v) the several Holders (as hereinafter defined).
RECITALS
WHEREAS, the Depositor, the Delaware Trustee, and Bryan W. Stephenson and
Randal N. Crosswhite, each as an Administrative Trustee, have heretofore duly
declared and established a business trust pursuant to the Delaware Business
Trust Act (as hereinafter defined) by the entering into of that certain Trust
Agreement, dated as of July 29, 1998 (the "Original Trust Agreement"), and by
the execution and filing by the Delaware Trustee, the Depositor and the
Administrative Trustees with the Secretary of State of the State of Delaware of
the Certificate of Trust, filed on July 29, 1998, the form of which is attached
as Exhibit A; and
---------
WHEREAS, the Depositor, the Delaware Trustee, the Property Trustee and the
Administrative Trustees desire to amend and restate the Original Trust Agreement
in its entirety as set forth herein to provide for, among other things, (i) the
issuance of the Common Securities (as defined herein) by the Trust (as defined
herein) to the Depositor; (ii) the issuance and sale of the Preferred Securities
(as defined herein) by the Trust pursuant to the Underwriting Agreement (as
defined herein); (iii) the acquisition by the Trust from the Depositor of all of
the right, title and interest in the Debentures (as defined herein); and (iv)
the appointment of the Trustees.
NOW THEREFORE, in consideration of the agreements and obligations set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, each party, for the benefit of the
other parties and for the benefit of the Securityholders (as defined herein),
hereby amends and restates the Original Trust Agreement in its entirety and
agrees as follows:
<PAGE>
ARTICLE I
DEFINED TERMS
SECTION 101. DEFINITIONS.
For all purposes of this Trust Agreement, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article I have the meanings assigned to them in
this Article I and include the plural as well as the singular;
(b) all other terms used herein that are defined in the Trust Indenture Act,
either directly or by reference therein, have the meanings assigned to them
therein;
(c) unless the context otherwise requires, any reference to an "Article" or a
"Section" refers to an Article or a Section, as the case may be, of this Trust
Agreement; and
(d) the words "herein", "hereof" and "hereunder" and other words of similar
import refer to this Trust Agreement as a whole and not to any particular
Article, Section or other subdivision.
"Act" has the meaning specified in Section 608.
"Additional Amount" means, with respect to Trust Securities of a given
Liquidation Amount and/or a given period, the amount of additional interest
accrued on interest in arrears and paid by the Depositor on a Like Amount of
Debentures for such period.
"Additional Payments" has the meaning specified in Section 1.1 of the
Indenture.
"Administrative Trustee" means each of Bryan W. Stephenson, Randal N.
Crosswhite and Michael D. Jarrett, solely in his capacity as Administrative
Trustee of the Trust formed and continued hereunder and not in his individual
capacity, or such Administrative Trustee's successor in interest in such
capacity, or any successor trustee appointed as herein provided.
"Affiliate" means, with respect to a specified Person, (a) any Person directly
or indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities or other ownership interests of the specified
Person; (b) any Person 10% or more of whose outstanding voting securities or
other ownership interests are directly or indirectly owned, controlled or held
with power to vote by the specified Person; (c) any Person directly or
indirectly controlling, controlled by, or under common control with the
specified Person; (d) a partnership in which the specified Person is a general
partner; (e) any officer or director of the specified Person; and (f) if the
specified Person is an individual, any entity of which the specified Person is
an officer, director or general partner.
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"Authenticating Agent" means an authenticating agent with respect to the
Preferred Securities appointed by the Property Trustee pursuant to Section 503.
"Bank" has the meaning specified in the Preamble to this Trust Agreement.
"Bankruptcy Event" means, with respect to any Person:
(a) the entry of a decree or order by a court having jurisdiction in the
premises adjudging such Person a bankrupt or insolvent, or approving as properly
filed a petition seeking liquidation or reorganization of or in respect of such
Person under the United States Bankruptcy Code of 1978, as amended, or any other
similar applicable federal or state law, and the continuance of any such decree
or order unvacated and unstayed for a period of 90 days; or the commencement of
an involuntary case under the United States Bankruptcy Code of 1978, as amended,
in respect of such Person, which shall continue undismissed for a period of 90
days or entry of an order for relief in such case; or the entry of a decree or
order of a court having jurisdiction in the premises for the appointment on the
ground of insolvency or bankruptcy of a receiver, custodian, liquidator, trustee
or assignee in bankruptcy or insolvency of such Person or of its property, or
for the winding up or liquidation of its affairs, and such decree or order shall
have remained in force unvacated and unstayed for a period of 90 days; or
(b) the institution by such Person of proceedings to be adjudicated a
voluntary bankrupt, or the consent by such Person to the filing of a bankruptcy
proceeding against it, or the filing by such Person of a petition or answer or
consent seeking liquidation or reorganization under the United States Bankruptcy
Code of 1978, as amended, or other similar applicable federal or state law, or
the consent by such Person to the filing of any such petition or to the
appointment on the ground of insolvency or bankruptcy of a receiver or custodian
or liquidator or trustee or assignee in bankruptcy or insolvency of such Person
or of its property, or shall make a general assignment for the benefit of
creditors.
"Bankruptcy Laws" has the meaning specified in Section 1009.
"Board Resolution" means a copy of a resolution certified by the Secretary or
an Assistant Secretary of the Depositor to have been duly adopted by the
Depositor's Board of Directors, or such committee of the Board of Directors or
officers of the Depositor to which authority to act on behalf of the Board of
Directors has been delegated, and to be in full force and effect on the date of
such certification, and delivered to the appropriate Trustee.
"Business Day" means any day other than a Saturday or Sunday or a day on which
federal or state banking institutions in the Borough of Manhattan, The City of
New York, NewYork or City of Dallas, Texas, are authorized or required by law,
executive order or regulation to close, or a day on which the Corporate Trust
Office of the Property Trustee or the Corporate Trust Office of the Debenture
Trustee is closed for business.
"Certificate of Trust" means the certificate of trust filed with the Secretary
of State of the State of Delaware with respect to the Trust, as amended or
restated from time to time.
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"Closing Date" means the date of execution and delivery of this Trust
Agreement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or, if at any time after the
execution of this instrument such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Security" means an undivided beneficial interest in the assets of the
Trust, having a Liquidation Amount of $10 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.
"Common Securities Certificate" means a certificate evidencing ownership of
Common Securities, substantially in the form attached as Exhibit C.
---------
"Corporate Trust Office" means the office at which, at any particular time,
the corporate trust business of the Property Trustee or the Debenture Trustee,
as the case may be, shall be principally administered, which office at the date
hereof, in each such case, is located at U.S. Trust Company of Texas, N.A., 2001
Ross Avenue, Suite 2700, Dallas, TX 75201.
"Debenture Event of Default" means an "Event of Default" as defined in Section
7.1 of the Indenture.
"Debenture Redemption Date" means, with respect to any Debentures to be
redeemed under the Indenture, the date fixed for redemption under the Indenture.
"Debenture Trustee" means U.S. Trust Company, N.A., a national bank with trust
powers organized under the laws of the United States and any successor thereto,
as trustee under the Indenture.
"Debentures" means the $10,309,280 aggregate principal amount (or up to
$11,855,670 aggregate principal amount if the underwriters exercise their Option
and there is an Option Closing Date, as such terms are defined in the
Underwriting Agreement) of the Depositor's ____% Subordinated Debentures due
2028, issued pursuant to the Indenture.
"Delaware Bank" has the meaning specified in the Preamble to this Trust
Agreement.
"Delaware Business Trust Act" means Chapter 38 of Title 12 of the Delaware
Code, 12 Delaware Code Sections 3801 et seq. as it may be amended from time to
time.
"Delaware Trustee" means the commercial bank or trust company identified as
the "Delaware Trustee" in the Preamble to this Trust Agreement solely in its
capacity as Delaware
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Trustee of the Trust formed and continued hereunder and not in its individual
capacity, or its successor in interest in such capacity, or any successor
trustee appointed as herein provided.
"Depositor" has the meaning specified in the Preamble to this Trust Agreement.
"Distribution Date" has the meaning specified in Section 401(a).
"Distributions" means amounts payable in respect of the Trust Securities as
provided in Section 401.
"Early Termination Event" has the meaning specified in Section 902.
"Event of Default" means any one of the following events (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(a) the occurrence of a Debenture Event of Default; or
(b) default by the Trust or the Property Trustee in the payment of any
Distribution when it becomes due and payable, and continuation of such default
for a period of 30 days; or
(c) default by the Trust or the Property Trustee in the payment of any
Redemption Price of any Trust Security when it becomes due and payable; or
(d) default in the performance, or breach, in any material respect, of any
covenant or warranty of the Trustees in this Trust Agreement (other than a
covenant or warranty a default in the performance of which or the breach of
which is dealt with in clause (b) or (c), above) and continuation of such
default or breach for a period of 60 days after there has been given, by
registered or certified mail, to the defaulting Trustee or Trustees by the
Holders of at least 25% in aggregate Liquidation Amount of the Outstanding
Preferred Securities a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice of
Default" hereunder; or
(e) the occurrence of a Bankruptcy Event with respect to the Property Trustee
and the failure by the Depositor to appoint a successor Property Trustee within
60 days thereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expense Agreement" means the Agreement as to Expenses and Liabilities between
the Depositor and the Trust, substantially in the form attached as Exhibit D, as
---------
amended from time to time.
"Expiration Date" has the meaning specified in Section 901.
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"Extended Interest Payment Period" has the meaning specified in Section 4.1 of
the Indenture.
"Federal Reserve" means the Board of Governors of the Federal Reserve System.
"Guarantee" means the Preferred Securities Guarantee Agreement executed and
delivered by the Depositor and U.S. Trust Company of Texas, N.A., as trustee,
contemporaneously with the execution and delivery of this Trust Agreement, for
the benefit of the holders of the Preferred Securities, as amended from time to
time.
"Indenture" means the Indenture, dated as of the date hereof between the
Depositor and the Debenture Trustee, as trustee, as amended or supplemented from
time to time pertaining to the Debentures of the Depositor.
"Investment Company Act," means the Investment Company Act of 1940, as
amended, as in effect at the date of execution of this instrument.
"Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of trust,
adverse ownership interest, hypothecation, assignment, security interest or
preference, priority or other security agreement or preferential arrangement of
any kind or nature whatsoever.
"Like Amount" means (a) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to the principal amount of
Debentures to be contemporaneously redeemed in accordance with the Indenture and
the proceeds of which shall be used to pay the Redemption Price of such Trust
Securities; and (b) with respect to a distribution of Debentures to Holders of
Trust Securities in connection with a termination or liquidation of the Trust,
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the Holder to whom such Debentures are distributed. Each
Debenture distributed pursuant to clause (b) above shall carry with it
accumulated interest in an amount equal to the accumulated and unpaid interest
then due on such Debenture.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
"Liquidation Date" means the date on which Debentures are to be distributed to
Holders of Trust Securities in connection with a termination and liquidation of
the Trust pursuant to Section 904(a).
"Liquidation Distribution" has the meaning specified in Section 904(d).
"Officers' Certificate" means a certificate signed by the President or a Vice
President and by the Treasurer or an Assistant Treasurer or the Controller or an
Assistant Controller or the Secretary or an Assistant Secretary, of the
Depositor, and delivered to the appropriate Trustee. One of the officers
signing an Officers' Certificate given pursuant to Section 816 shall be the
principal executive, financial or accounting officer of the Depositor. Any
Officers' Certificate
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delivered with respect to compliance with a condition or covenant provided for
in this Trust Agreement shall include:
(a) a statement that each officer signing the Officers' Certificate has read
the covenant or condition and the definitions relating thereto;
(b) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(c) a statement as to whether, in the opinion of each such officer, such
condition or covenant has been complied with.
"Opinion of Counsel" means an opinion in writing of legal counsel, who may be
an employee of or counsel for the Trust, the Property Trustee, the Delaware
Trustee or the Depositor, and who shall be reasonably acceptable to the Property
Trustee.
"Option" means the underwriters over-allotment Option as defined in the
Underwriting Agreement.
"Option Closing Date" means the date on which the Underwriters' Option is
consummated and funded.
"Original Trust Agreement" has the meaning specified in the Recitals to this
Trust Agreement.
"Outstanding", when used with respect to Preferred Securities, means, as of
the date of determination, all Preferred Securities theretofore executed and
delivered under this Trust Agreement, except:
(a) Preferred Securities theretofore canceled by the Property Trustee or
delivered to the Property Trustee for cancellation;
(b) Preferred Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Property Trustee or any
Paying Agent for the Holders of such Preferred Securities; provided that, if
such Preferred Securities are to be redeemed, notice of such redemption has been
duly given pursuant to this Trust Agreement; and
(c) Preferred Securities which have been paid or in exchange for or in lieu of
which other Preferred Securities have been executed and delivered pursuant to
Sections 504, 505 and 511; provided, however, that in determining whether the
Holders of the requisite Liquidation Amount of the Outstanding Preferred
Securities have given any request, demand, authorization, direction, notice,
consent or waiver hereunder, Preferred Securities owned by the Depositor, any
Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded
and deemed not to be Outstanding, except that (a) in determining whether any
Trustee shall be protected in relying
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upon any such request, demand, authorization, direction, notice, consent or
waiver, only Preferred Securities that such Trustee knows to be so owned shall
be so disregarded; and (b) the foregoing shall not apply at any time when all of
the outstanding Preferred Securities are owned by the Depositor, one or more of
the Trustees and/or any such Affiliate. Preferred Securities so owned which have
been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Administrative Trustees the pledgee's
right so to act with respect to such Preferred Securities and that the Pledgee
is not the Depositor or any other Obligor upon the Preferred Securities or a
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with the Depositor or any Affiliate of the Depositor.
"Paying Agent" means any paying agent or co-paying agent appointed pursuant to
Section 509 and shall initially be the Bank.
"Payment Account" means a segregated non-interest-bearing corporate trust
account maintained by the Property Trustee with the Bank in its trust department
for the benefit of the Securityholders in which all amounts paid in respect of
the Debentures shall be held and from which the Property Trustee shall make
payments to the Securityholders in accordance with Sections 401 and 402.
"Person" means any individual, corporation, partnership, joint venture, trust,
limited liability company or corporation, unincorporated organization or
government or any agency or political subdivision thereof.
"Preferred Security" means an undivided beneficial interest in the assets of
the Trust, having a Liquidation Amount of $10 and having the rights provided
therefor in this Trust Agreement, including the right to receive Distributions
and a Liquidation Distribution as provided herein.
"Preferred Securities Certificate", means a certificate evidencing ownership
of Preferred Securities, substantially in the form attached as Exhibit E.
---------
"Property Trustee" means the national bank identified as the "Property
Trustee," in the Preamble to this Trust Agreement solely in its capacity as
Property Trustee of the Trust heretofore formed and continued hereunder and not
in its individual capacity, or its successor in interest in such capacity, or
any successor property trustee appointed as herein provided.
"Redemption Date" means, with respect to any Trust Security to be redeemed,
the date fixed for such redemption by or pursuant to this Trust Agreement;
provided that each Debenture Redemption Date and the stated maturity of the
Debentures shall be a Redemption Date for a Like Amount of Trust Securities.
"Redemption Price" means, with respect to any Trust Security, the Liquidation
Amount of such Trust Security, plus accumulated and unpaid Distributions to the
Redemption Date, paid by the Depositor upon the concurrent redemption of a Like
Amount of Debentures, allocated on a pro rata basis (based on Liquidation
Amounts) among the Trust Securities.
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"Relevant Trustee" shall have the meaning specified in Section 810.
"Securities Register" and "Securities Registrar" have the respective meanings
specified in Section 504.
"Securityholder" or "Holder" means a Person in whose name a Trust Security or
Securities is registered in the Securities Register; such Person being a
beneficial owner within the meaning of the Delaware Business Trust Act.
"Trust" means the Delaware business trust created and continued hereby and
identified on the cover page to this Trust Agreement.
"Trust Agreement" means this Amended and Restated Trust Agreement, as the same
may be modified, amended or supplemented in accordance with the applicable
provisions hereof, including all exhibits hereto, including, for all purposes of
this Trust Agreement and any such modification, amendment or supplement, the
provisions of the Trust Indenture Act that are deemed to be a part of and govern
this Trust Agreement and any such modification, amendment or supplement,
respectively.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, as in
force at the date as of which this instrument was executed; provided, however,
that in the event the Trust Indenture Act of 1939, as amended, is amended after
such date, "Trust Indenture Act" means, to the extent required by any such
amendment, the Trust Indenture Act of 1939 as so amended.
"Trust Property" means (a) the Debentures; (b) the rights of the Property
Trustee under the Guarantee; (c) any cash on deposit in, or owing to, the
Payment Account; and (d) all proceeds and rights in respect of the foregoing and
any other property and assets for the time being held or deemed to be held by
the Property Trustee pursuant to the trusts of this Trust Agreement.
"Trust Security" means any one of the Common Securities or the Preferred
Securities.
"Trust Securities Certificate" means any one of the Common Securities
Certificates or the Preferred Securities Certificates.
"Trustees" means, collectively, the Property Trustee, the Delaware Trustee and
the Administrative Trustees.
"Underwriting Agreement" means the Underwriting Agreement, dated as of
____________, 1998, among the Trust, the Depositor and the Underwriter named
therein.
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ARTICLE II
ESTABLISHMENT OF TRUST
SECTION 201. NAME.
The Trust previously created and continued hereby shall be known as
"Independent Capital Trust," as such name may be modified from time to time by
the Administrative Trustees following written notice to the Holders of Trust
Securities and the other Trustees, in which name the Trustees may engage in the
transactions contemplated hereby, make and execute contracts and other
instruments on behalf of the Trust and sue and be sued.
SECTION 202. OFFICE OF DELAWARE TRUSTEE; PRINCIPAL PLACE OF BUSINESS.
The address of the Delaware Trustee in the State of Delaware is Wilmington
Trust Company, 1100 North Market Street, Wilmington, Delaware 19890-0001, or
such other address in the State of Delaware as the Delaware Trustee may
designate by written notice to the Securityholders and the Depositor. The
principal executive office of the Trust is c/o Independent Bankshares, Inc., 547
Chestnut Street, Abilene, Texas 79602.
SECTION 203. INITIAL CONTRIBUTION OF TRUST PROPERTY; ORGANIZATIONAL EXPENSES.
The Trustees acknowledge receipt in trust from the Depositor in connection
with the Original Trust Agreement of the sum of $10, which constituted the
initial Trust Property. The Depositor shall pay organizational expenses of the
Trust as they arise or shall, upon request of any Trustee, promptly reimburse
such Trustee for any such expenses paid by such Trustee. The Depositor shall
make no claim upon the Trust Property for the payment of such expenses.
SECTION 204. ISSUANCE OF PREFERRED SECURITIES.
On ________, 1998, the Depositor and an Administrative Trustee, on behalf of
the Trust and pursuant to the Original Trust Agreement, executed and delivered
the Underwriting Agreement. Contemporaneously with the execution and delivery
of this Trust Agreement, an Administrative Trustee, on behalf of the Trust,
shall execute in accordance with Section 502, and deliver in accordance with the
Underwriting Agreement, Preferred Securities Certificates, registered in the
name of the Persons entitled thereto, in an aggregate amount of 1,000,000
Preferred Securities having an aggregate Liquidation Amount of $10,000,000
against receipt of the aggregate purchase price of such Preferred Securities of
$10,000,000, which amount such Administrative Trustee shall promptly deliver to
the Property Trustee. If the underwriters exercise their Option and there is an
Option Closing Date (as such terms are defined in the Underwriting Agreement),
then an Administrative Trustee, on behalf of the Trust, shall execute in
accordance with Section 502 and deliver in accordance with the Underwriting
Agreement, additional Preferred Securities Certificates, registered in the name
of the Persons entitled thereto, in an aggregate amount of up to 150,000
Preferred Securities having an aggregate Liquidation Amount of up to $1,500,000
against receipt of the aggregate purchase price of such Preferred Securities
equal to the product of $10 multiplied by the number of Preferred Securities
purchased
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pursuant to the Option which amount such Administrative Trustee shall promptly
deliver to the Property Trustee.
SECTION 205. ISSUANCE OF THE COMMON SECURITIES; SUBSCRIPTION AND PURCHASE OF
DEBENTURES.
(a) Contemporaneously with the execution and delivery of this Trust Agreement,
an Administrative Trustee, on behalf of the Trust, shall execute in accordance
with Section 502, and deliver to the Depositor, Common Securities Certificates,
registered in the name of the Depositor, in an aggregate amount of 30,928 Common
Securities having an aggregate Liquidation Amount of $309,280 against payment by
the Depositor of such amount. Contemporaneously therewith, an Administrative
Trustee, on behalf of the Trust, shall subscribe to and purchase from the
Depositor Debentures, registered in the name of the Property Trustee on behalf
of the Trust and having an aggregate principal amount equal to $10,309,280, and,
in satisfaction of the purchase price for such Debentures, the Property Trustee,
on behalf of the Trust, shall deliver to the Depositor the sum of $10,309,280.
(b) If the underwriters exercise the Option and there is an Option Closing
Date, then an Administrative Trustee, on behalf of the Trust, shall execute in
accordance with Section 502 and deliver to the Depositor, additional Common
Securities Certificates, registered in the name of the Depositor, in an
aggregate amount of up to 4,639 Common Securities having an aggregate
Liquidation Amount of up to $46,390 against payment by the Depositor of an
amount equal to the product of $10 multiplied by the number of additional Common
Securities purchased by the Depositor. Contemporaneously therewith, an
Administrative Trustee, on behalf of the Trust, shall subscribe to and purchase
from the Depositor, Debentures, registered in the name of the Property Trustee
on behalf of the Trust and having an aggregate principal amount of up to
$1,546,390, and, in satisfaction of the purchase price of such Debentures, the
Property Trustee, on behalf of the Trust, shall deliver to the Depositor an
amount equal to the sum of the amounts received from one of the Administrative
Trustees pursuant to the first sentence of this Section 205(b) and the last
sentence of Section 204.
SECTION 206. DECLARATION OF TRUST.
The exclusive purposes and functions of the Trust are (a) to issue and sell
Trust Securities and use the proceeds from such sale to acquire the Debentures;
and (b) to engage in those activities necessary, convenient or incidental
thereto. The Depositor hereby appoints the Trustees as trustees of the Trust,
to have all the rights, powers and duties to the extent set forth herein, and
the Trustees hereby accept such appointment. The Property Trustee hereby
declares that it shall hold the Trust Property in trust upon and subject to the
conditions set forth herein for the benefit of the Securityholders. The
Administrative Trustees shall have all rights, powers and duties set forth
herein and in accordance with applicable law with respect to accomplishing the
purposes of the Trust. The Delaware Trustee shall not be entitled to exercise
any powers, nor shall the Delaware Trustee have any of the duties and
responsibilities, of the Property Trustee or the Administrative Trustees set
forth herein. The Delaware Trustee shall be one of the Trustees
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of the Trust for the sole and limited purpose of fulfilling the requirements of
Section 3807 of the Delaware Business Trust Act.
SECTION 207. AUTHORIZATION TO ENTER INTO CERTAIN TRANSACTIONS.
(a) The Trustees shall conduct the affairs of the Trust in accordance with the
terms of this Trust Agreement. Subject to the limitations set forth in paragraph
(b) of this Section 207 and Article VIII, and in accordance with the following
provisions (i) and (ii), the Administrative Trustees shall have the authority to
enter into all transactions and agreements determined by the Administrative
Trustees to be appropriate in exercising the authority, express or implied,
otherwise granted to the Administrative Trustees under this Trust Agreement, and
to perform all acts in furtherance thereof, including without limitation, the
following:
(i) As among the Trustees, each Administrative Trustee, acting singly or
jointly, shall have the power and authority to act on behalf of the Trust with
respect to the following matters:
(A) the issuance and sale of the Trust Securities;
(B) to cause the Trust to enter into, and to execute, deliver and
perform on behalf of the Trust, the Expense Agreement and such other agreements
or documents as may be necessary or desirable in connection with the purposes
and function of the Trust;
(C) assisting in the registration of the Preferred Securities under
the Securities Act of 1933, as amended, and under state securities or blue sky
laws, and the qualification of this Trust Agreement as a trust indenture under
the Trust Indenture Act;
(D) assisting in the listing of the Preferred Securities upon the
American Stock Exchange, Inc. or such securities exchange or exchanges or other
organizations as shall be determined by the Depositor and the registration of
the Preferred Securities under the Exchange Act, and the preparation and filing
of all periodic and other reports and other documents pursuant to the foregoing
(to the extent a waiver therefrom has not been previously obtained);
(E) the sending of notices (other than notices of default) and other
information regarding the Trust Securities and the Debentures to the
Securityholders in accordance with this Trust Agreement;
(F) the appointment of a Paying Agent, Authenticating Agent and
Securities Registrar in accordance with this Trust Agreement;
(G) to the extent provided in this Trust Agreement, the winding up of
the affairs of and liquidation of the Trust and the preparation, execution and
filing of the certificate of cancellation with the Secretary of State of the
State of Delaware;
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(H) to take all action that may be necessary or appropriate for the
preservation and the continuation of the Trust's valid existence, rights,
franchises and privileges as a statutory business trust under the laws of the
State of Delaware and of each other jurisdiction in which such existence is
necessary to protect the limited liability of the Holders of the Preferred
Securities or to enable the Trust to effect the purposes for which the Trust was
created; and
(I) the taking of any action incidental to the foregoing as the
Administrative Trustees may from time to time determine is necessary or
advisable to give effect to the terms of this Trust Agreement for the benefit of
the Securityholders (without consideration of the effect of any such action on
any particular Securityholder).
(ii) As among the Trustees, the Property Trustee shall have the power, duty
and authority to act on behalf of the Trust with respect to the following
matters:
(A) the establishment of the Payment Account;
(B) the receipt of the Debentures;
(C) the collection of interest, principal and any other payments made
in respect of the Debentures in the Payment Account;
(D) the distribution of amounts owed to the Securityholders in respect
of the Trust Securities in accordance with the terms of this Trust Agreement;
(E) the exercise of all of the rights, powers and privileges of a
holder of the Debentures;
(F) the sending of notices of default and other information regarding
the Trust Securities and the Debentures to the Securityholders in accordance
with this Trust Agreement;
(G) the distribution of the Trust Property in accordance with the
terms of this Trust Agreement;
(H) to the extent provided in this Trust Agreement, the winding up of
the affairs of and liquidation of the Trust;
(I) after an Event of Default, the taking of any action incidental to
the foregoing as the Property Trustee may from time to time determine is
necessary or advisable to give effect to the terms of this Trust Agreement and
protect and conserve the Trust Property for the benefit of the Securityholders
(without consideration of the effect of any such action on any particular
Securityholder);
(J) registering transfers of the Trust Securities in accordance with
this Trust Agreement; and
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(K) except as otherwise provided in this Section 207(a)(ii), the
Property Trustee shall have none of the duties, liabilities, powers or the
authority of the Administrative Trustees set forth in Section 207(a)(i).
(b) So long as this Trust Agreement remains in effect, the Trust (or the
Trustees acting on behalf of the Trust) shall not undertake any business,
activities or transaction except as expressly provided herein or contemplated
hereby. In particular, the Trustees shall not (i) acquire any investments or
engage in any activities not authorized by this Trust Agreement; (ii) sell,
assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of
any of the Trust Property or interests therein, including to Securityholders,
except as expressly provided herein; (iii) take any action that would cause the
Trust to fail or cease to qualify as a "grantor trust" for United States federal
income tax purposes; (iv) incur any indebtedness for borrowed money or issue any
other debt; or (v) take or consent to any action that would result in the
placement of a Lien on any of the Trust Property. The Administrative Trustees
shall defend all claims and demands of all Persons at any time claiming any Lien
on any of the Trust Property adverse to the interest of the Trust or the
Securityholders in their capacity as Securityholders.
(c) In connection with the issue and sale of the Preferred Securities, the
Depositor shall have the right and responsibility to assist the Trust with
respect to, or effect on behalf of the Trust, the following (and any actions
taken by the Depositor in furtherance of the following prior to the date of this
Trust Agreement are hereby ratified and confirmed in all respects):
(i) the preparation and filing by the Trust with the Commission and
the execution on behalf of the Trust of a registration statement on the
appropriate form in relation to the Preferred Securities and the Debentures,
including any amendments thereto;
(ii) the determination of the States in which to take appropriate
action to qualify or register for sale all or part of the Preferred Securities
and to do any and all such acts, other than actions which must be taken by or on
behalf of the Trust, and advise the Trustees of actions they must take on behalf
of the Trust, and prepare for execution and filing any documents to be executed
and filed by the Trust or on behalf of the Trust, as the Depositor deems
necessary or advisable in order to comply with the applicable laws of any such
States;
(iii) the preparation for filing by the Trust and execution on behalf
of the Trust of an application to American Stock Exchange, Inc. or a securities
exchange or exchanges or other organizations for listing upon notice of issuance
of any Preferred Securities and to file or cause an Administrative Trustee to
file thereafter with such exchange or organization such notifications and
documents as may be necessary from time to time;
(iv) the preparation for filing by the Trust with the Commission and
the execution on behalf of the Trust of a registration statement on Form 8-A
relating to the registration of the Preferred Securities under Section 12(b) or
12(g) of the Exchange Act, including any amendments thereto;
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(v) the negotiation of the terms of, and the execution and delivery
of, the Underwriting Agreement providing for the sale of the Preferred
Securities; and
(vi) the taking of any other actions necessary or desirable to carry
out any of the foregoing activities.
(d) Notwithstanding anything herein to the contrary, the Administrative
Trustees are authorized and directed to conduct the affairs of the Trust and to
operate the Trust so that the Trust shall not be deemed to be an "investment
company" required to be registered under the Investment Company Act, shall be
classified as a "grantor trust" and not as an association taxable as a
corporation for United States federal income tax purposes and so that the
Debentures shall be treated as indebtedness of the Depositor for United States
federal income tax purposes. In this connection, subject to Section 1002, the
Depositor and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law or this Trust Agreement, that each of the
Depositor and the Administrative Trustees determines in their discretion to be
necessary or desirable for such purposes.
SECTION 208. ASSETS OF TRUST.
The assets of the Trust shall consist of the Trust Property.
SECTION 209. TITLE TO TRUST PROPERTY.
Legal title to all Trust Property shall be vested at all times in the Property
Trustee (in its capacity as such) and shall be held and administered by the
Property Trustee for the benefit of the Securityholders in accordance with this
Trust Agreement.
ARTICLE III
PAYMENT ACCOUNT
SECTION 301. PAYMENT ACCOUNT.
(a) On or prior to the Closing Date, the Property Trustee shall establish the
Payment Account. The Property Trustee and any agent of the Property Trustee
shall have exclusive control and sole right of withdrawal with respect to the
Payment Account for the purpose of making deposits and withdrawals from the
Payment Account in accordance with this Trust Agreement. All monies and other
property deposited or held from time to time in the Payment Account shall be
held by the Property Trustee in the Payment Account for the exclusive benefit of
the Securityholders and for distribution as herein provided, including (and
subject to) any priority of payments provided for herein.
(b) The Property Trustee shall deposit in the Payment Account, promptly upon
receipt, all payments of principal of or interest on, and any other payments or
proceeds with
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respect to, the Debentures. Amounts held in the Payment Account shall not be
invested by the Property Trustee pending distribution thereof.
ARTICLE IV
DISTRIBUTIONS; REDEMPTION
SECTION 401. DISTRIBUTIONS.
(a) Distributions on the Trust Securities shall be cumulative, and shall
accumulate whether or not there are funds of the Trust available for the payment
of Distributions. Distributions shall accumulate from ________, 1998, and,
except during any Extended Interest Payment Period with respect to the
Debentures, shall be payable quarterly in arrears on March 31, June 30,
September 30 and December 31 of each year, commencing on December 31, 1998. If
any date on which a Distribution is otherwise payable on the Trust Securities is
not a Business Day, then the payment of such Distribution shall be made on the
next succeeding day that is a Business Day (and without any interest or other
payment in respect of any such delay) with the same force and effect as if made
on such date (each date on which distributions are payable in accordance with
this Section 401(a), a "Distribution Date").
(b) The Trust Securities represent undivided beneficial interests in the
Trust Property. The Distributions on the Trust Securities shall be at a rate of
_______% per annum of the Liquidation Amount of the Trust Securities. The amount
of Distributions payable for any full period shall be computed on the basis of a
360-day year of twelve 30-day months. The amount of Distributions for any
partial period shall be computed on the basis of the number of days elapsed in a
360-day year of twelve 30 day months. During any Extended Interest Payment
Period with respect to the Debentures, Distributions on the Preferred Securities
shall be deferred for a period equal to the Extended Interest Payment Period.
The amount of Distributions payable for any period shall include the Additional
Amounts, if any.
(c) Distributions on the Trust Securities shall be made by the Property
Trustee solely from the Payment Account and shall be payable on each
Distribution Date only to the extent that the Trust has funds then on hand and
immediately available by 11:30 a.m., Dallas, Texas time, on each Distribution
Date in the Payment Account for the payment of such Distributions.
(d) Distributions on the Trust Securities with respect to a Distribution Date
shall be payable to the Holders thereof as they appear on the Securities
Register for the Trust Securities on the relevant record date, which shall be
the 15th day of the month in which the Distribution is payable.
SECTION 402. REDEMPTION; REPURCHASE.
(a) On each Debenture Redemption Date and at maturity of the Debentures, the
Trust shall be required to redeem a Like Amount of Trust Securities at the
Redemption Price.
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(b) Notice of redemption shall be given by the Property Trustee by first-
class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior
to the Redemption Date to each Holder of Trust Securities to be redeemed, at
such Holder's address appearing in the Securities Register. The Property Trustee
shall have no responsibility for the accuracy of any CUSIP number contained in
such notice. All notices of redemption shall state:
(i) the Redemption Date;
(ii) the Redemption Price;
(iii) the CUSIP number;
(iv) if less than all the Outstanding Trust Securities are to be
redeemed, the identification and the aggregate Liquidation Amount of the
particular Trust Securities to be redeemed; and
(v) that, on the Redemption Date, the Redemption Price shall become due
and payable upon each such Trust Security to be redeemed and that Distributions
thereon shall cease to accumulate on and after said date.
(c) The Trust Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the proceeds from the contemporaneous redemption of
Debentures. Redemptions of the Trust Securities shall be made and the Redemption
Price shall be payable on each Redemption Date only to the extent that the Trust
has immediately available funds then on hand and available in the Payment
Account for the payment of such Redemption Price.
(d) If the Property Trustee gives a notice of redemption in respect of any
Trust Securities, then, by 11:00 a.m., Dallas, Texas time, on the Redemption
Date, subject to Section 402(c), the Property Trustee shall deposit with the
Paying Agent funds sufficient to pay the applicable Redemption Price and shall
give the Paying Agent irrevocable instructions and authority to pay the
Redemption Price to the Holders thereof upon surrender of their Trust Securities
Certificates. Notwithstanding the foregoing, Distributions payable on or prior
to the Redemption Date for any Trust Securities called for redemption shall be
payable to the Holders of such Trust Securities as they appear on the Securities
Register for the Trust Securities on the relevant record dates for the related
Distribution Dates. If notice of redemption shall have been given and funds
deposited as required, then upon the date of such deposit, all rights of
Securityholders holding Trust Securities so called for redemption shall cease,
except the right of such Securityholders to receive the Redemption Price and any
Distribution payable on or prior to the Redemption Date, but without interest,
and such Trust Securities shall cease to be Outstanding. In the event that any
date on which any Redemption Price is payable is not a Business Day, then
payment of the Redemption Price payable on such date shall be made on the next
succeeding day that is a Business Day (and without any interest or other payment
in respect of any such delay) with the same force and effect as if made on such
date. In the event that payment of the Redemption Price in respect of any Trust
Securities called for redemption is improperly withheld or refused and not paid
either by the Trust or by the Depositor pursuant to
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the Guarantee, Distributions on such Trust Securities shall continue to
accumulate, at the then applicable rate, from the Redemption Date originally
established by the Trust for such Trust Securities to the date such Redemption
Price is actually paid, in which case the actual payment date shall be the date
fixed for redemption for purposes of calculating the Redemption Price.
(e) Payment of the Redemption Price on the Trust Securities shall be made to
the record holders thereof as they appear on the Securities Register for the
Trust Securities on the relevant record date, which shall be the date 15 days
prior to the relevant Redemption Date.
(f) Subject to Section 403(a), if less than all the Outstanding Trust
Securities are to be redeemed on a Redemption Date, then the aggregate
Liquidation Amount of Trust Securities to be redeemed shall be allocated on a
pro rata basis (based on Liquidation Amounts) among the Common Securities and
the Preferred Securities. The particular Preferred Securities to be redeemed
shall be selected not more than 60 days prior to the Redemption Date by the
Property Trustee from the Outstanding Preferred Securities not previously called
for redemption, by such method (including, without limitation, by lot) as the
Property Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to the Liquidation Amount or an
integral multiple thereof) of the Liquidation Amount of Preferred Securities of
a denomination larger than such Liquidation Amount. The Property Trustee shall
promptly notify the Securities Registrar in writing of the Preferred Securities
selected for redemption and, in the case of any Preferred Securities selected
for partial redemption, the Liquidation Amount thereof to be redeemed. For all
purposes of this Trust Agreement, unless the context otherwise requires, all
provisions relating to the redemption of Preferred Securities shall relate, in
the case of any Preferred Securities redeemed or to be redeemed only in part, to
the portion of the Liquidation Amount of Preferred Securities which has been or
is to be redeemed.
(g) Subject to the foregoing and applicable law (including, without
limitation, United States federal securities laws), the Depositor or any of its
subsidiaries may at any time and from time to time purchase Outstanding
Preferred Securities by tender, in the open market or by private agreement;
provided, however, the Depositor shall not effect any such purchase to the
extent that such action would disqualify the Preferred Securities from listing
on the American Stock Exchange, Inc. unless after the consummation of such event
no Preferred Securities would then be outstanding.
SECTION 403. SUBORDINATION OF COMMON SECURITIES.
(a) Payment of Distributions (including Additional Amounts, if applicable)
on, and the Redemption Price of, the Trust Securities, as applicable, shall be
made, subject to Section 402(f), pro rata among the Common Securities and the
Preferred Securities based on the Liquidation Amount of the Trust Securities;
provided, however, that if on any Distribution Date or Redemption Date any Event
of Default resulting from a Debenture Event of Default shall have occurred and
be continuing, no payment of any Distribution (including Additional Amounts, if
applicable) on, or Redemption Price of, any Common Security, and no other
payment on account of the redemption, liquidation or other acquisition of Common
Securities, shall be made unless payment in full in cash of all accumulated and
unpaid Distributions (including Additional Amounts, if applicable) on all
Outstanding Preferred Securities for all Distribution periods terminating on or
prior thereto, or in the case of payment of the Redemption Price the full
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amount of such Redemption Price on all Outstanding Preferred Securities then
called for redemption, shall have been made or provided for, and all funds
immediately available to the Property Trustee shall first be applied to the
payment in full in cash of all Distributions (including Additional Amounts, if
applicable) on, or the Redemption Price of, Preferred Securities then due and
payable.
(b) In the case of the occurrence of any Event of Default resulting from a
Debenture Event of Default, the Holder of Common Securities shall be deemed to
have waived any right to act with respect to any such Event of Default under
this Trust Agreement until the effect of all such Events of Default with respect
to the Preferred Securities shall have been cured, waived or otherwise
eliminated. Until any such Event of Default under this Trust Agreement with
respect to the Preferred Securities shall have been so cured, waived or
otherwise eliminated, the Property Trustee shall act solely on behalf of the
Holders of the Preferred Securities and not the Holder of the Common Securities,
and only the Holders of the Preferred Securities shall have the right to direct
the Property Trustee to act on their behalf.
SECTION 404. PAYMENT PROCEDURES.
Payments of Distributions (including Additional Amounts, if applicable) in
respect of the Preferred Securities shall be made by check mailed to the address
of the Person entitled thereto as such address shall appear on the Securities
Register. Payments in respect of the Common Securities shall be made in such
manner as shall be mutually agreed between the Property Trustee and the holder
of the Common Security.
SECTION 405. TAX RETURNS AND REPORTS.
The Administrative Trustees shall prepare (or cause to be prepared), at the
Depositor's expense, and file all United States federal, state and local tax and
information returns and reports required to be filed by or in respect of the
Trust. In this regard, the Administrative Trustees shall (a) prepare and file
(or cause to be prepared and filed) the appropriate Internal Revenue Service
form required to be filed in respect of the Trust in each taxable year of the
Trust; and (b) prepare and furnish (or cause to be prepared and furnished) to
each Securityholder the appropriate Internal Revenue Service form required to be
furnished to such Securityholder or the information required to be provided on
such form. The Administrative Trustees shall provide the Depositor with a copy
of all such returns and reports promptly after such filing or furnishing. The
Property Trustee shall comply with United States federal withholding and backup
withholding tax laws and information reporting requirements with respect to any
payments to Securityholders under the Trust Securities.
SECTION 406. PAYMENT OF TAXES, DUTIES, ETC. OF TRUST.
Upon receipt under the Debentures of Additional Payments, the Property
Trustee, at the direction of an Administrative Trustee or the Depositor, shall
promptly pay any taxes, duties or governmental charges of whatsoever nature
(other than withholding taxes) imposed on the Trust by the United States or any
other taxing authority.
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SECTION 407. PAYMENTS UNDER INDENTURE.
Any amount payable hereunder to any Holder of Preferred Securities shall be
reduced by the amount of any corresponding payment such Holder has directly
received under the Indenture pursuant to Section 514(b) or (c) hereof.
ARTICLE V
TRUST SECURITIES CERTIFICATES
SECTION 501. INITIAL OWNERSHIP.
Upon the creation of the Trust and the contribution by the Depositor pursuant
to Section 203 and until the issuance of the Trust Securities, and at any time
during which no Trust Securities are outstanding, the Depositor shall be the
sole beneficial owner of the Trust.
SECTION 502. TRUST SECURITIES CERTIFICATES.
The Preferred Securities Certificates shall be issued in minimum denominations
of the Liquidation Amount and integral multiples of such Liquidation Amount in
excess thereof, and the Common Securities Certificates shall be issued in
denominations of the Liquidation Amount and integral multiples thereof. The
Trust Securities Certificates shall be executed on behalf of the Trust by manual
or facsimile signature of at least one Administrative Trustee. Trust Securities
Certificates bearing the manual or facsimile signatures of individuals who were,
at the time when such signatures shall have been affixed, authorized to sign on
behalf of the Trust, shall be validly issued and entitled to the benefits of
this Trust Agreement, notwithstanding that such individuals or any of them shall
have ceased to be so authorized prior to the delivery of such Trust Securities
Certificates or did not hold such offices at the date of delivery of such Trust
Securities Certificates. A transferee of a Trust Securities Certificate shall
become a Securityholder, and shall be entitled to the rights and subject to the
obligations of a Securityholder hereunder, upon due registration of such Trust
Securities Certificate in such transferee's name pursuant to Sections 504 and
511.
SECTION 503. EXECUTION, AUTHENTICATION AND DELIVERY OF TRUST SECURITIES
CERTIFICATES.
(a) On the Closing Date and the Option Closing Date, as the case may be, the
Administrative Trustees shall cause Trust Securities Certificates, in an
aggregate Liquidation Amount as provided in Sections 204 and 205, to be executed
on behalf of the Trust by the manual or facsimile signature of at least one of
the Administrative Trustees and delivered to or upon the written order of the
Depositor, signed by its Chief Executive Officer, Chief Financial Officer,
President, any Vice President, the Treasurer or any Assistant Treasurer without
further corporate action by the Depositor, in authorized denominations.
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(b) A Trust Securities Certificate shall not be valid until authenticated by
the manual signature of an authorized signatory of the Property Trustee. The
signature shall be conclusive evidence that the Trust Securities Certificate has
been authenticated under this Trust Agreement. Each Trust Security Certificate
shall be dated the date of its authentication.
(c) Upon the written order of the Trust signed by an Administrative Trustee,
the Property Trustee shall authenticate and make available for delivery the
Trust Securities Certificates.
(d) The Property Trustee may appoint an Authenticating Agent acceptable to
the Trust to authenticate the Trust Securities. An Authenticating Agent may
authenticate the Trust Securities whenever the Property Trustee may do so. Each
reference in this Trust Agreement to authentication by the Property Trustee
includes authentication by such agent. An Authenticating Agent has the same
rights as the Property Trustee to deal with the Depositor or the Trust.
SECTION 504. REGISTRATION OF TRANSFER AND EXCHANGE OF PREFERRED SECURITIES
CERTIFICATES.
(a) The Depositor shall keep or cause to be kept, at the office or agency
maintained pursuant to Section 508, a register or registers for the purpose of
registering Trust Securities Certificates and transfers and exchanges of
Preferred Securities Certificates (herein referred to as the "Securities
Register") in which the registrar designated by the Depositor (the "Securities
Registrar"), subject to such reasonable regulations as it may prescribe, shall
provide for the registration of Preferred Securities Certificates and Common
Securities Certificates (subject to Section 510 in the case of the Common
Securities Certificates) and registration of transfers and exchanges of
Preferred Securities Certificates as herein provided. The Property Trustee shall
be the initial Securities Registrar.
(b) Upon surrender for registration of transfer of any Preferred Securities
Certificate at the office or agency maintained pursuant to Section 508, the
Administrative Trustees or any one of them shall execute and deliver, in the
name of the designated transferee or transferees, one or more new Preferred
Securities Certificates in authorized denominations of a like aggregate
Liquidation Amount dated the date of execution by the manual or facsimile
signature of such Administrative Trustee or Trustees. The Securities Registrar
shall not be required to register the transfer of any Preferred Securities that
have been called for redemption. At the option of a Holder, Preferred Securities
Certificates may be exchanged for other Preferred Securities Certificates in
authorized denominations of the same class and of a like aggregate Liquidation
Amount upon surrender of the Preferred Securities Certificates to be exchanged
at the office or agency maintained pursuant to Section 508.
(c) Every Preferred Securities Certificate presented or surrendered for
registration of transfer or exchange shall be accompanied by a written
instrument of transfer in form satisfactory to the Property Trustee and the
Securities Registrar duly executed by the Holder or his attorney duly authorized
in writing. Each Preferred Securities Certificate surrendered for registration
of transfer or exchange shall be canceled and subsequently disposed of by the
Property Trustee in
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accordance with its customary practice. The Trust shall not be required to (i)
issue, register the transfer of, or exchange any Preferred Securities during a
period beginning at the opening of business 15 calendar days before the date of
mailing of a notice of redemption of any Preferred Securities called for
redemption and ending at the close of business on the day of such mailing; or
(ii) register the transfer of or exchange any Preferred Securities so selected
for redemption, in whole or in part, except the unredeemed portion of any such
Preferred Securities being redeemed in part.
(d) No service charge shall be made for any registration of transfer or
exchange of Preferred Securities Certificates, but the Securities Registrar may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer or exchange of Preferred
Securities Certificates.
SECTION 505. MUTILATED, DESTROYED, LOST OR STOLEN TRUST SECURITIES
CERTIFICATES.
If (a) any mutilated Trust Securities Certificate shall be surrendered to the
Securities Registrar, or if the Securities Registrar shall receive evidence to
its satisfaction of the destruction, loss or theft of any Trust Securities
Certificate; and (b) there shall be delivered to the Securities Registrar, the
Property Trustee and the Administrative Trustees such security or indemnity as
may be required by them to save each of them harmless, then in the absence of
notice that such Trust Securities Certificate shall have been acquired by a bona
fide purchaser, the Administrative Trustees, or any one of them, on behalf of
the Trust shall execute and make available for delivery, in exchange for or in
lieu of any such mutilated, destroyed, lost or stolen Trust Securities
Certificate, a new Trust Securities Certificate of like class, tenor and
denomination. In connection with the issuance of any new Trust Securities
Certificate under this Section 505, the Administrative Trustees or the
Securities Registrar may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in connection therewith.
Any duplicate Trust Securities Certificate issued pursuant to this Section 505
shall constitute conclusive evidence of an undivided beneficial interest in the
assets of the Trust, as if originally issued, whether or not the lost, stolen or
destroyed Trust Securities Certificate shall be found at any time.
SECTION 506. PERSONS DEEMED SECURITYHOLDERS.
The Trustees, the Paying Agent and the Securities Registrar shall treat the
Person in whose name any Trust Securities Certificate shall be registered in the
Securities Register as the owner of such Trust Securities Certificate for the
purpose of receiving Distributions and for all other purposes whatsoever, and
neither the Trustees nor the Securities Registrar shall be bound by any notice
to the contrary.
SECTION 507. ACCESS TO LIST OF SECURITYHOLDERS' NAMES AND ADDRESSES.
At any time when the Property Trustee is not also acting as the Securities
Registrar, the Administrative Trustees or the Depositor shall furnish or cause
to be furnished to the Property Trustee (a) semi-annually on or before January
15 and July 15 in each year, a list, in such form as
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the Property Trustee may reasonably require, of the names and addresses of the
Securityholders as of the most recent record date; and (b) promptly after
receipt by any Administrative Trustee or the Depositor of a request therefor
from the Property Trustee in order to enable the Property Trustee to discharge
its obligations under this Trust Agreement, in each case to the extent such
information is in the possession or control of the Administrative Trustees or
the Depositor and is not identical to a previously supplied list or has not
otherwise been received by the Property Trustee in its capacity as Securities
Registrar. The rights of Securityholders to communicate with other
Securityholders with respect to their rights under this Trust Agreement or under
the Trust Securities, and the corresponding rights of the Trustee shall be as
provided in the Trust Indenture Act. Each Holder, by receiving and holding a
Trust Securities Certificate, and each owner of a Trust Security shall be deemed
to have agreed not to hold the Depositor, the Property Trustee or the
Administrative Trustees accountable by reason of the disclosure of its name and
address, regardless of the source from which such information was derived.
SECTION 508. MAINTENANCE OF OFFICE OR AGENCY.
The Administrative Trustees shall maintain in a location or locations
designated by the Administrative Trustees, an office or offices or agency or
agencies where Preferred Securities Certificates may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Trustees in respect of the Trust Securities Certificates may be served. The
Administrative Trustees initially designate the Corporate Trust Office of the
Property Trustee, U.S. Trust Company of Texas, N.A., 2001 Ross Avenue, Suite
2700, Dallas, Texas 75201, as the principal corporate trust office for such
purposes. The Administrative Trustees shall give prompt written notice to the
Depositor and to the Securityholders of any change in the location of the
Securities Register or any such office or agency.
SECTION 509. APPOINTMENT OF PAYING AGENT.
The Paying Agent shall initially be the Property Trustee, and any co-paying
agent chosen by the Property Trustee, and acceptable to the Administrative
Trustees and the Depositor. The Paying Agent shall make Distributions to
Securityholders from the Payment Account and shall report the amounts of such
Distributions to the Property Trustee and the Administrative Trustees. Any
Paying Agent shall have the revocable power to withdraw funds from the Payment
Account for the purpose of making the Distributions referred to above. The
Administrative Trustees may revoke such power and remove the Paying Agent if
such Trustees determine in their sole discretion that the Paying Agent shall
have failed to perform its obligations under this Trust Agreement in any
material respect. Any Person acting as Paying Agent shall be permitted to
resign as Paying Agent upon 30 days' written notice to the Administrative
Trustees, the Property Trustee and the Depositor. In the event that the
Property Trustee shall no longer be the Paying Agent or a successor Paying Agent
shall resign or its authority to act be revoked, the Administrative Trustees
shall appoint a successor that is acceptable to the Property Trustee and the
Depositor to act as Paying Agent (which shall be a bank or trust company). The
Administrative Trustees shall cause such successor Paying Agent or any
additional Paying Agent appointed by the Administrative Trustees to execute and
deliver to the Trustees an instrument in which such successor Paying Agent or
additional Paying Agent shall agree with the Trustees that
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as Paying Agent, such successor Paying Agent or additional Paying Agent shall
hold all sums, if any, held by it for payment to the Securityholders in trust
for the benefit of the Securityholders entitled thereto until such sums shall be
paid to such Securityholders. The Paying Agent shall return all unclaimed funds
to the Property Trustee and, upon removal of a Paying Agent, such Paying Agent
shall also return all funds in its possession to the Property Trustee. The
provisions of Sections 801, 803 and 806 shall apply to the Property Trustee also
in its role as Paying Agent, for so long as the Property Trustee shall act as
Paying Agent and, to the extent applicable, to any other paying agent appointed
hereunder. Any reference in this Trust Agreement to the Paying Agent shall
include any co-paying agent unless the context requires otherwise.
SECTION 510. OWNERSHIP OF COMMON SECURITIES BY DEPOSITOR.
In accordance with the terms of the Underwriting Agreement, on the Closing
Date and the Option Closing Date, as the case may be, the Depositor shall
acquire and retain beneficial and record ownership of the Common Securities. To
the fullest extent permitted by law, any attempted transfer of the Common
Securities (other than a transfer in connection with a merger or consolidation
of the Depositor into another corporation pursuant to Section 12.1 of the
Indenture) shall be void. The Administrative Trustees shall cause each Common
Securities Certificate issued to the Depositor to contain a legend stating "THIS
CERTIFICATE IS NOT TRANSFERABLE".
SECTION 511. PREFERRED SECURITIES CERTIFICATES.
(a) Each owner of a Preferred Security shall receive a Preferred Securities
Certificate representing such owner's interest in such Preferred Securities.
Upon the issuance of Preferred Securities Certificates, the Trustees shall
recognize the record holders of the Preferred Securities Certificates as
Securityholders. The Preferred Securities Certificates shall be printed,
lithographed or engraved or may be produced in any other manner as is reasonably
acceptable to the Administrative Trustees, as evidenced by the execution thereof
by the Administrative Trustees or any one of them.
(b) A single Common Securities Certificate representing the Common Securities
sold by the Trust to the Depositor on the Closing Date shall be issued to the
Depositor in the form of a definitive Common Securities Certificate. A separate
single Common Securities Certificate representing the Common Securities sold by
the Trust to the Depositor on the Option Closing Date shall be issued to the
Depositor in the form of a definitive Common Securities Certificate.
SECTION 512. [INTENTIONALLY OMITTED].
SECTION 513. [INTENTIONALLY OMITTED].
SECTION 514. RIGHTS OF SECURITYHOLDERS.
(a) The legal title to the Trust Property is vested exclusively in the
Property Trustee (in its capacity as such) in accordance with Section 209, and
the Securityholders shall not have
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any right or title therein other than the undivided beneficial interest in the
assets of the Trust conferred by their Trust Securities and they shall have no
right to call for any partition or division of property, profits or rights of
the Trust except as described below. The Trust Securities shall be personal
property giving only the rights specifically set forth therein and in this Trust
Agreement. The Trust Securities shall have no preemptive or similar rights. When
issued and delivered to Holders of the Preferred Securities against payment of
the purchase price therefor, the Preferred Securities shall be fully paid and
nonassessable interests in the Trust. The Holders of the Preferred Securities,
in their capacities as such, shall be entitled to the same limitation of
personal liability extended to stockholders of private corporations for profit
organized under the General Corporation Law of the State of Delaware.
(b) For so long as any Preferred Securities remain Outstanding, if, upon a
Debenture Event of Default, the Debenture Trustee fails or the holders of not
less than 25% in principal amount of the outstanding Debentures fail to declare
the principal of all of the Debentures to be immediately due and payable, the
Holders of at least 25% in Liquidation Amount of the Preferred Securities then
Outstanding shall have such right by a notice in writing to the Depositor and
the Debenture Trustee; and upon any such declaration such principal amount of
and the accrued interest on all of the Debentures shall become immediately due
and payable, provided that the payment of principal and interest on such
Debentures shall remain subordinated to the extent provided in the Indenture.
(c) For so long as any Preferred Securities remain outstanding, upon a
Debenture Event of Default arising from the failure to pay interest or principal
on the Debentures, the Holders of any Preferred Securities then Outstanding
shall, to the fullest extent permitted by law, have the right to directly
institute proceedings for enforcement of payment to such Holders of principal of
or interest on the Debentures having a principal amount equal to the Liquidation
Amount of the Preferred Securities of such Holders.
ARTICLE VI
ACTS OF SECURITY HOLDERS; MEETINGS; VOTING
SECTION 601. LIMITATIONS ON VOTING RIGHTS.
(a) Except as provided in this Section 601, in Sections 514, 810, 905 and
1002 and in the Indenture and as otherwise required by law, no Holder of
Preferred Securities shall have any right to vote or in any manner otherwise
control the administration, operation and management of the Trust or the
obligations of the parties hereto; nor shall anything herein set forth, or
contained in the terms of the Trust Securities Certificates, be construed so as
to constitute the Securityholders from time to time as partners or members of an
association.
(b) So long as any Debentures are held by the Property Trustee, the Trustees
shall not (i) direct the time, method and place of conducting any proceeding for
any remedy available to the Debenture Trustee, or executing any trust or power
conferred on the Debenture Trustee with respect to such Debentures; (ii) waive
any past default which is waivable under Article VII of the
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Indenture; (iii) exercise any right to rescind or annul a declaration that the
principal of all the Debentures shall be due and payable; or (iv) consent to any
amendment, modification or termination of the Indenture or the Debentures, where
such consent shall be required, without, in each case, obtaining the prior
approval of the Holders of at least a majority in Liquidation Amount of all
Outstanding Preferred Securities; provided, however, that where a consent under
the Indenture would require the consent of each Holder of outstanding Debentures
affected thereby, no such consent shall be given by the Property Trustee without
the prior written consent of each holder of Preferred Securities. The Trustees
shall not revoke any action previously authorized or approved by a vote of the
Holders of the Outstanding Preferred Securities, except when authorized by a
subsequent vote of the Holders of the Outstanding Preferred Securities. The
Property Trustee shall notify each Holder of the Outstanding Preferred
Securities of any notice of default received from the Debenture Trustee with
respect to the Debentures. In addition to obtaining the foregoing approvals of
the Holders of the Preferred Securities, prior to taking any of the foregoing
actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion
of Counsel experienced in such matters to the effect that the Trust shall
continue to be classified as a grantor trust and not as an association taxable
as a corporation for United States federal income tax purposes on account of
such action.
(c) If any proposed amendment to the Trust Agreement provides for, or the
Trustees otherwise propose to effect, (i) any action that would adversely affect
in any material respect the powers, preferences or special rights of the
Preferred Securities, whether by way of amendment to the Trust Agreement or
otherwise; or (ii) the dissolution, winding-up or termination of the Trust,
other than pursuant to the terms of this Trust Agreement including Section
902(b) hereof, then the Holders of Outstanding Preferred Securities as a class
shall be entitled to vote on such amendment or proposal and such amendment or
proposal shall not be effective except with the approval of the Holders of at
least a majority in Liquidation Amount of the Outstanding Preferred Securities.
No amendment to this Trust Agreement may be made if, as a result of such
amendment, the Trust would cease to be classified as a grantor trust or would be
classified as an association taxable as a corporation for United States federal
income tax purposes.
SECTION 602. NOTICE OF MEETINGS.
Notice of all meetings of the Preferred Securityholders, stating the time,
place and purpose of the meeting, shall be given by the Property Trustee
pursuant to Section 1008 to each Preferred Securityholder of record, at his
registered address, at least 15 days and not more than 90 days before the
meeting. At any such meeting, any business properly before the meeting may be
so considered whether or not stated in the notice of the meeting. Any adjourned
meeting may be held as adjourned without further notice.
SECTION 603. MEETINGS OF PREFERRED SECURITYHOLDERS.
(a) No annual meeting of Securityholders is required to be held. The
Administrative Trustees, however, shall call a meeting of Securityholders to
vote on any matter in respect of which Preferred Securityholders are entitled to
vote upon the written request of the Preferred Securityholders of 25% of the
Outstanding Preferred Securities (based upon their aggregate
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Liquidation Amount) and the Administrative Trustees or the Property Trustee may,
at any time in their discretion, call a meeting of Preferred Securityholders to
vote on any matters as to which the Preferred Securityholders are entitled to
vote.
(b) Preferred Securityholders of record of 50% of the Outstanding Preferred
Securities (based upon their aggregate Liquidation Amount), present in person or
by proxy, shall constitute a quorum at any meeting of Securityholders.
(c) If a quorum is present at a meeting, an affirmative vote by the Preferred
Securityholders of record present, in person or by proxy, holding more than a
majority of the Preferred Securities (based upon their aggregate Liquidation
Amount) held by the Preferred Securityholders of record present, either in
person or by proxy, at such meeting shall constitute the action of the
Securityholders, unless this Trust Agreement requires a greater number of
affirmative votes.
SECTION 604. VOTING RIGHTS.
Securityholders shall be entitled to one vote for each dollar value of
Liquidation Amount represented by their Trust Securities in respect of any
matter as to which such Securityholders are entitled to vote (and such dollar
value shall be $10 per Preferred Security until such time, if any, as the
Liquidation Amount is changed as provided herein).
SECTION 605. PROXIES, ETC.
At any meeting of Securityholders, any Securityholder entitled to vote thereat
may vote by proxy, provided that no proxy shall be voted at any meeting unless
it shall have been placed on file with the Administrative Trustees, or with such
other officer or agent of the Trust as the Administrative Trustees may direct,
for verification prior to the time at which such vote shall be taken. When
Trust Securities are held jointly by several persons, any one of them may vote
at any meeting in person or by proxy in respect of such Trust Securities, but if
more than one of them shall be present at such meeting in person or by proxy,
and such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Trust Securities. A
proxy purporting to be executed by or on behalf of a Securityholder shall be
deemed valid unless challenged at or prior to its exercise, and the burden of
proving invalidity shall rest on the challenger. No proxy shall be valid more
than three years after its date of execution.
SECTION 606. SECURITYHOLDER ACTION BY WRITTEN CONSENT.
Any action which may be taken by Securityholders at a meeting may be taken
without a meeting if Securityholders holding more than a majority of all
Outstanding Trust Securities (based upon their aggregate Liquidation Amount)
entitled to vote in respect of such action (or such larger proportion thereof as
shall be required by any express provision of this Trust Agreement) shall
consent to the action in writing.
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SECTION 607. RECORD DATE FOR VOTING AND OTHER PURPOSES.
For the purposes of determining the Securityholders who are entitled to notice
of and to vote at any meeting or by written consent, or to participate in any
Distribution on the Trust Securities in respect of which a record date is not
otherwise provided for in this Trust Agreement, or for the purpose of any other
action, the Administrative Trustees may from time to time fix a date, not more
than 90 days prior to the date of any meeting of Securityholders or the payment
of Distribution or other action, as the case may be, as a record date for the
determination of the identity of the Securityholders of record for such
purposes.
SECTION 608. ACTS OF SECURITYHOLDERS.
(a) Any request, demand, authorization, direction, notice, consent, waiver or
other action provided or permitted by this Trust Agreement to be given, made or
taken by Securityholders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Securityholders in
person or by an agent duly appointed in writing; and, except as otherwise
expressly provided herein, such action shall become effective when such
instrument or instruments are delivered to an Administrative Trustee. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Securityholders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Trust Agreement and (subject to Section 801) conclusive in favor
of the Trustees, if made in the manner provided in this Section 608.
(b) The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by a
certificate of a notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
a signer acting in a capacity other than his individual capacity, such
certificate or affidavit shall also constitute sufficient proof of his
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the Person executing the same, may also be proved in any
other manner which any Trustee receiving the same deems sufficient.
(c) The ownership of Preferred Securities shall be proved by the Securities
Register.
(d) Any request, demand, authorization, direction, notice, consent, waiver or
other Act of the Securityholder of any Trust Security shall bind every future
Securityholder of the same Trust Security and the Securityholder of every Trust
Security issued upon the registration of transfer thereof or in exchange
therefor or in lieu thereof in respect of anything done, omitted or suffered to
be done by the Trustees or the Trust in reliance thereon, whether or not
notation of such action is made upon such Trust Security.
(e) Without limiting the foregoing, a Securityholder entitled hereunder to
take any action hereunder with regard to any particular Trust Security may do so
with regard to all or any
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part of the Liquidation Amount of such Trust Security or by one or more duly
appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such Liquidation Amount.
(f) A Securityholder may institute a legal proceeding directly against the
Depositor under the Guarantee to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee (as defined
in the Guarantee), the Trust or any Person.
SECTION 609. INSPECTION OF RECORDS.
Upon reasonable notice to the Administrative Trustees and the Property
Trustee, the records of the Trust shall be open to inspection and copying by any
Securityholder and its authorized representatives during normal business hours
for any purpose reasonably related to such Securityholder's interest as a
Securityholder.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
SECTION 701. REPRESENTATIONS AND WARRANTIES OF BANK AND PROPERTY TRUSTEE.
The Bank and the Property Trustee, each severally on behalf of and as to
itself, as of the date hereof and as of the Option Closing Date, and each
successor Property Trustee at the time of the successor Property Trustee's
acceptance of its appointment as Property Trustee hereunder (the term "Bank"
being used to refer to such successor Property Trustee in its separate corporate
capacity) hereby represents and warrants (as applicable) for the benefit of the
Depositor and the Securityholders that:
(a) each of the Bank and the Property Trustee is a national bank with trust
powers, duly organized, validly existing and in good standing under the laws of
its jurisdiction of organization;
(b) each the Bank and the Property Trustee has full corporate power,
authority and legal right to execute, deliver and perform its obligations under
this Trust Agreement and has taken all necessary action to authorize the
execution, delivery and performance by it of this Trust Agreement;
(c) this Trust Agreement has been duly authorized, executed and delivered by
the Bank and the Property Trustee and constitutes the valid and legally binding
agreement of each enforceable against each in accordance with its terms, subject
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting creditors, rights
and to general equity principles;
(d) the execution, delivery and performance by the Bank and the Property
Trustee of this Trust Agreement has been duly authorized by all necessary
corporate or other action on the
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part of each and does not require any approval of stockholders of the Bank or
Property Trustee and such execution, delivery and performance shall not (i)
violate the Bank's or the Property Trustee's charter or bylaws; (ii) violate any
provision of, or constitute, with or without notice or lapse of time, a default
under, or result in the creation or imposition of, any Lien on any properties
included in the Trust Property pursuant to the provisions of, any indenture,
mortgage, credit agreement, license or other agreement or instrument to which
the Property Trustee or the Bank is a party or by which either is bound; (iii)
violate any law, governmental rule or regulation of the United States or its
jurisdiction of incorporation, as the case may be, governing the banking or
trust powers of the Bank or the Property Trustee (as appropriate in context) or
any order, judgment or decree applicable to the Bank or the Property Trustee; or
(iv) require any consent, approval or authorization of, or registration or
filing with or notice to, any federal or state banking authority or any other
person;
(e) neither the authorization, execution or delivery by the Bank or the
Property Trustee of this Trust Agreement nor the consummation of any of the
transactions by the Bank or the Property Trustee contemplated herein requires
the consent or approval of, the giving of notice to, the registration with or
the taking of any other action with respect to any governmental authority or
agency under any existing federal or state law governing the banking or trust
powers of the Bank or the Property Trustee, as the case may be, under the laws
of the United States or its jurisdiction of incorporation; and
(f) there are no proceedings pending or, to the best of the Bank's or the
Property Trustee's knowledge, threatened against or affecting the Bank or the
Property Trustee in any court or before any governmental authority, agency or
arbitration board or tribunal which, individually or in the aggregate, would
materially and adversely affect the Trust or would question the right, power and
authority of the Bank or the Property Trustee to enter into or perform its
obligations as one of the Trustees under this Trust Agreement.
SECTION 702. REPRESENTATIONS AND WARRANTIES OF DELAWARE BANK AND DELAWARE
TRUSTEE.
The Delaware Bank and the Delaware Trustee, each severally on behalf of and as
to itself, as of the date hereof and as of the Option Closing Date, and each
successor Delaware Trustee at the time of the successor Delaware Trustee's
acceptance of appointment as Delaware Trustee hereunder (the term "Delaware
Bank" being used to refer to such successor Delaware Trustee in its separate
corporate capacity), hereby represents and warrants (as applicable) for the
benefit of the Depositor and the Securityholders that:
(a) each of the Delaware Bank and the Delaware Trustee is a Delaware banking
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware;
(b) each of the Delaware Bank and the Delaware Trustee has full corporate
power, authority and legal right to execute, deliver and perform its obligations
under this Trust
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Agreement and has taken all necessary action to authorize the execution,
delivery and performance by it of this Trust Agreement;
(c) this Trust Agreement has been duly authorized, executed and delivered by
the Delaware Bank and the Delaware Trustee and constitutes the valid and legally
binding agreement of each enforceable against each in accordance with its terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors, rights and to general equity principles;
(d) the execution, delivery and performance by the Delaware Bank and the
Delaware Trustee of this Trust Agreement has been duly authorized by all
necessary corporate or other action on the part of each and does not require any
approval of stockholders of the Delaware Bank or the Delaware Trustee and such
execution, delivery and performance shall not (i) violate the Delaware Bank's or
the Delaware Trustee's charter or by-laws; (ii) violate any provision of, or
constitute, with or without notice or lapse of time, a default under, or result
in the creation or imposition of, any Lien on any properties included in the
Trust Property pursuant to the provisions of, any indenture, mortgage, credit
agreement, license or other agreement or instrument to which the Delaware Bank
or the Delaware Trustee is a party or by which it either bound; (iii) violate
any law, governmental rule or regulation of the United States or the State of
Delaware, as the case may be, governing the banking or trust powers of the
Delaware Bank or the Delaware Trustee (as appropriate in context) or any order,
judgment or decree applicable to the Delaware Bank or the Delaware Trustee; or
(iv) require any consent, approval or authorization of, or registration or
filing with or notice to, any federal or state banking authority or any other
person;
(e) neither the authorization, execution or delivery by the Delaware Bank or
the Delaware Trustee of this Trust Agreement nor the consummation of any of the
transactions by the Delaware Bank or the Delaware Trustee contemplated herein or
therein requires the consent or approval of, the giving of notice to, the
registration with or the taking of any other action with respect to any
governmental authority or agency under any existing federal law governing the
banking or trust powers of the Delaware Bank or the Delaware Trustee, as the
case may be, under the laws of the United States or the State of Delaware; and
(f) there are no proceedings pending or, to the best of the Delaware Bank's
or Delaware Trustee's knowledge, threatened against or affecting the Delaware
Bank or the Delaware Trustee in any court or before any governmental authority,
agency or arbitration board or tribunal which, individually or in the aggregate,
would materially and adversely affect the Trust or would question the right,
power and authority of the Delaware Bank or the Delaware Trustee to enter into
or perform its obligations as one of the Trustees under this Trust Agreement.
SECTION 703. REPRESENTATIONS AND WARRANTIES OF DEPOSITOR.
The Depositor hereby represents and warrants for the benefit of the
Securityholders that:
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(a) the Trust Securities Certificates issued on the Closing Date or the
Option Closing Date, if applicable, on behalf of the Trust have been duly
authorized and shall be, as of such date or dates, if applicable, duly and
validly executed, issued and delivered by the Administrative Trustees pursuant
to the terms and provisions of, and in accordance with the requirements of, this
Trust Agreement and the Securityholders shall be, as of such date or dates, if
applicable, entitled to the benefits of this Trust Agreement; and
(b) there are no taxes, fees or other governmental charges payable by the
Trust (or the Trustees on behalf of the Trust) under the laws of the State of
Delaware or any political subdivision thereof in connection with the execution,
delivery and performance by the Bank, the Property Trustee, the Delaware Bank or
the Delaware Trustee, as the case may be, of this Trust Agreement.
ARTICLE VIII
TRUSTEES
SECTION 801. CERTAIN DUTIES AND RESPONSIBILITIES.
(a) The duties and responsibilities of the Trustees shall be as provided by
this Trust Agreement and, in the case of the Property Trustee, by the Trust
Indenture Act. Notwithstanding the foregoing, no provision of this Trust
Agreement shall require the Trustees to expend or risk their own funds or
otherwise incur any financial liability in the performance of any of their
duties hereunder, or in the exercise of any of their rights or powers, if they
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it. No Administrative Trustee nor the Delaware Trustee shall be liable for its
act or omissions hereunder except as a result of its own gross negligence or
willful misconduct. The Property Trustee's liability shall be determined under
the Trust Indenture Act. Whether or not therein expressly so provided, every
provision of this Trust Agreement relating to the conduct or affecting the
liability of or affording protection to the Trustees shall be subject to the
provisions of this Section 801. To the extent that, at law or in equity, the
Delaware Trustee or an Administrative Trustee has duties (including fiduciary
duties) and liabilities relating thereto to the Trust or to the Securityholders,
the Delaware Trustee or such Administrative Trustee shall not be liable to the
Trust or to any Securityholder for such Trustee's good faith reliance on the
provisions of this Trust Agreement. The provisions of this Trust Agreement, to
the extent that they restrict the duties and liabilities of the Delaware Trustee
or the Administrative Trustees otherwise existing at law or in equity, are
agreed by the Depositor and the Securityholders to replace such other duties and
liabilities of the Delaware Trustee and the Administrative Trustees, as the case
may be.
(b) All payments made by the Property Trustee or a Paying Agent in respect of
the Trust Securities shall be made only from the revenue and proceeds from the
Trust Property and only to the extent that there shall be sufficient revenue or
proceeds from the Trust Property to enable the Property Trustee or a Paying
Agent to make payments in accordance with the terms hereof. With respect to the
relationship of each Securityholder and the Trustee, each
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Securityholder, by its acceptance of a Trust Security, agrees that it shall look
solely to the revenue and proceeds from the Trust Property to the extent legally
available for distribution to it as herein provided and that the Trustees are
not personally liable to it for any amount distributable in respect of any Trust
Security or for any other liability in respect of any Trust Security. This
Section 801(b) does not limit the liability of the Trustees expressly set forth
elsewhere in this Trust Agreement or, in the case of the Property Trustee, in
the Trust Indenture Act.
(c) No provision of this Trust Agreement shall be construed to relieve the
Property Trustee from liability for its own negligent action, its own negligent
failure to act, or its own willful misconduct, except that:
(i) the Property Trustee shall not be liable for any error of judgment
made in good faith by an authorized officer of the Property Trustee, unless it
shall be proved that the Property Trustee was negligent in ascertaining the
pertinent facts;
(ii) the Property Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of not less than a majority in Liquidation Amount of
the Trust Securities relating to the time, method and place of conducting any
proceeding for any remedy available to the Property Trustee, or exercising any
trust or power conferred upon the Property Trustee under this Trust Agreement;
(iii) the Property Trustee's sole duty with respect to the custody, safe
keeping and physical preservation of the Debentures and the Payment Account
shall be to deal with such property in a similar manner as the Property Trustee
deals with similar property for its own account, subject to the protections and
limitations on liability afforded to the Property Trustee under this Trust
Agreement and the Trust Indenture Act;
(iv) the Property Trustee shall not be liable for any interest on any
money received by it except as it may otherwise agree with the Depositor and
money held by the Property Trustee need not be segregated from other funds held
by it except in relation to the Payment Account maintained by the Property
Trustee pursuant to Section 301 and except to the extent otherwise required by
law; and
(v) the Property Trustee shall not be responsible for monitoring the
compliance by the Administrative Trustees or the Depositor with their respective
duties under this Trust Agreement, nor shall the Property Trustee be liable for
the negligence, default or misconduct of the Administrative Trustees or the
Depositor.
SECTION 802. CERTAIN NOTICES.
(a) Within 5 Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit, in
the manner and to the extent provided in Section 1008, notice of such Event of
Default to the Securityholders, the Administrative Trustees and the Depositor,
unless such Event of Default shall have been cured or
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waived. For purposes of this Section 802 the term "Event of Default" means any
event that is, or after notice or lapse of time or both would become, an Event
of Default.
(b) The Administrative Trustees shall transmit to the Securityholders, in the
manner and to the extent provided in Section 1008, notice of the Depositor's
election to begin or further extend an Extended Interest Payment Period on the
Debentures (unless such election shall have been revoked), and of any election
by the Depositor to extend or accelerate the Maturity Date of the Debentures
within the time specified for transmitting such notice to the holders of the
Debentures pursuant to the Indenture as originally executed.
SECTION 803. CERTAIN RIGHTS OF PROPERTY TRUSTEE.
Subject to the provisions of Section 801:
(a) the Property Trustee may rely and shall be protected in acting or
refraining from acting in good faith upon any resolution, Opinion of Counsel,
certificate, written representation of a Holder or transferee, certificate of
auditors or any other certificate, statement, instrument, opinion, report,
notice, request, consent, order, appraisal, bond, debenture, note, other
evidence of indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;
(b) if (i) in performing its duties under this Trust Agreement the Property
Trustee is required to decide between alternative courses of action; or (ii) in
construing any of the provisions of this Trust Agreement the Property Trustee
finds the same ambiguous or inconsistent with other provisions contained herein;
or (iii) the Property Trustee is unsure of the application of any provision of
this Trust Agreement, then, except as to any matter as to which the Preferred
Securityholders are entitled to vote under the terms of this Trust Agreement,
the Property Trustee shall deliver a notice to the Depositor requesting written
instructions of the Depositor as to the course of action to be taken and the
Property Trustee shall take such action, or refrain from taking such action, as
the Property Trustee shall be instructed in writing to take, or to refrain from
taking, by the Depositor; provided, however, that if the Property Trustee does
not receive such instructions of the Depositor within 10 Business Days after it
has delivered such notice, or such reasonably shorter period of time set forth
in such notice (which to the extent practicable shall not be less than 2
Business Days), it may, but shall be under no duty to, take or refrain from
taking such action not inconsistent with this Trust Agreement as it shall deem
advisable and in the best interests of the Securityholders, in which event the
Property Trustee shall have no liability except for its own bad faith,
negligence or willful misconduct;
(c) any direction or act of the Depositor or the Administrative Trustees
contemplated by this Trust Agreement shall be sufficiently evidenced by an
Officers' Certificate;
(d) whenever in the administration of this Trust Agreement, the Property
Trustee shall deem it desirable that a matter be established before undertaking,
suffering or omitting any action hereunder, the Property Trustee (unless other
evidence is herein specifically prescribed) may, in the absence of bad faith on
its part, request and conclusively rely upon an Officer's
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Certificate which, upon receipt of such request, shall be promptly delivered by
the Depositor or the Administrative Trustees;
(e) the Property Trustee shall have no duty to see to any recording, filing
or registration of any instrument (including any financing or continuation
statement, any filing under tax or securities laws or any filing under tax or
securities laws) or any rerecording, refiling or reregistration thereof;
(f) the Property Trustee may consult with counsel of its choice (which
counsel may be counsel to the Depositor or any of its Affiliates) and the advice
of such counsel shall be full and complete authorization and protection in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in reliance thereon and, in accordance with such advice, such counsel may be
counsel to the Depositor or any of its Affiliates, and may include any of its
employees; the Property Trustee shall have the right at any time to seek
instructions concerning the administration of this Trust Agreement from any
court of competent jurisdiction;
(g) the Property Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Trust Agreement at the request, order or
direction of any of the Securityholders, pursuant to this Trust Agreement,
unless such Securityholders shall have offered to the Property Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby; nothing contained herein shall,
however, relieve the Property Trustee of the obligation, upon the occurrence of
an Event of Default (that has not been cured or waived), to exercise the rights
and powers vested in it by this Trust Agreement, and to use the same degree of
care and skill in their exercise as a prudent man would exercise or use under
the circumstances in the conduct of his own affairs;
(h) the Property Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval, bond,
debenture, note or other evidence of indebtedness or other paper or document,
unless requested in writing to do so by the Holders of not less than a majority
in Liquidation Amount of the Securities, but the Property Trustee may make such
further inquiry or investigation into such facts or matters as it may see fit;
(i) the Property Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through its agents or
attorneys, provided that the Property Trustee shall be responsible for its own
negligence or recklessness with respect to selection of any agent or attorney
appointed by it hereunder;
(j) whenever in the administration of this Trust Agreement the Property
Trustee shall deem it desirable to receive instructions with respect to
enforcing any remedy or right or taking any other action hereunder the Property
Trustee (i) may request instructions from the Holders of the Trust Securities
which instructions may only be given by the Holders of the same proportion in
Liquidation Amount of the Trust Securities as would be entitled to direct the
Property Trustee under the terms of the Trust Securities in respect of such
remedy, right or action; (ii) may refrain
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from enforcing such remedy or right or taking such other action until such
instructions are received; and (iii) shall be protected in acting in accordance
with such instructions; and
(k) except as otherwise expressly provided by this Trust Agreement, the
Property Trustee shall not be under any obligation to take any action that is
discretionary under the provisions of this Trust Agreement. No provision of this
Trust Agreement shall be deemed to impose any duty or obligation on the Property
Trustee to perform any act or acts or exercise any right, power, duty or
obligation conferred or imposed on it, in any jurisdiction in which it shall be
illegal, or in which the Property Trustee shall be unqualified or incompetent in
accordance with applicable law, to perform any such act or acts, or to exercise
any such right, power, duty or obligation. No permissive power or authority
available to the Property Trustee shall be construed to be a duty.
SECTION 804. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.
The Recitals contained herein and in the Trust Securities Certificates shall
be taken as the statements of the Trust, and the Trustees do not assume any
responsibility for their correctness. The Trustees shall not be accountable for
the use or application by the Depositor of the proceeds of the Debentures.
SECTION 805. MAY HOLD SECURITIES.
Any Trustee or any other agent of any Trustee or the Trust, in its individual
or any other capacity, may become the owner or pledgee of Trust Securities and,
subject to Sections 808 and 813 and except as provided in the definition of the
term "Outstanding" in Article I, may otherwise deal with the Trust with the same
rights it would have if it were not a Trustee or such other agent.
SECTION 806. COMPENSATION; INDEMNITY; FEES.
The Depositor agrees:
(a) to pay to the Trustees from time to time reasonable compensation for all
services rendered by them hereunder (which compensation shall not be limited by
any provision of law in regard to the compensation of a trustee of an express
trust);
(b) except as otherwise expressly provided herein, to reimburse the Trustees
upon request for all reasonable expenses, disbursements and advances incurred or
made by the Trustees in accordance with any provision of this Trust Agreement
(including the reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance as may be
attributable to such Trustee's negligence, bad faith or willful misconduct (or,
in the case of the Administrative Trustees or the Delaware Trustee, any such
expense, disbursement or advance as may be attributable to its, his or her gross
negligence, bad faith or willful misconduct); and
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(c) to indemnify each of the Trustees or any predecessor Trustee for, and to
hold the Trustees harmless against, any loss, damage, claims, liability, penalty
or expense incurred without negligence, bad faith or willful misconduct on its
part, arising out of or in connection with the acceptance or administration of
this Trust Agreement, including the reasonable costs and expenses of defending
itself against any claim or liability in connection with the exercise or
performance of any of its powers or duties hereunder, except any such expense,
disbursement or advance as may be attributable to such Trustee's negligence, bad
faith or willful misconduct (or, in the case of the Administrative Trustees or
the Delaware Trustee, any such expense, disbursement or advance as may be
attributable to its, his or her gross negligence, bad faith or willful
misconduct).
No Trustee may claim any Lien or charge on Trust Property as a result of any
amount due pursuant to this Section 806.
SECTION 807. CORPORATE PROPERTY TRUSTEE REQUIRED; ELIGIBILITY OF TRUSTEES.
(a) There shall at all times be a Property Trustee hereunder with respect to
the Trust Securities. The Property Trustee shall be a Person that is eligible
pursuant to the Trust Indenture Act to act as such and has a combined capital
and surplus of at least $50,000,000 (or being a member or subsidiary of a bank
holding system with aggregate combined capital and surplus of at least
$50,000,000). If any such Person publishes reports of condition at least
annually, pursuant to law or to the requirements of its supervising or examining
authority, then for the purposes of this Section 807, the combined capital and
surplus of such Person shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time
the Property Trustee with respect to the Trust Securities shall cease to be
eligible in accordance with the provisions of this Section 807, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article VIII.
(b) There shall at all times be one or more Administrative Trustees hereunder
with respect to the Trust Securities. Each Administrative Trustee shall be
either a natural person who is at least 21 years of age or a legal entity that
shall act through one or more persons authorized to bind that entity.
(c) There shall at all times be a Delaware Trustee with respect to the Trust
Securities. The Delaware Trustee shall either be (i) a natural person who is at
least 21 years of age and a resident of the State of Delaware; or (ii) a legal
entity with its principal place of business in the State of Delaware and that
otherwise meets the requirements of applicable Delaware law that shall act
through one or more persons authorized to bind such entity.
SECTION 808. CONFLICTING INTERESTS.
If the Property Trustee has or shall acquire a conflicting interest within the
meaning of the Trust Indenture Act, the Property Trustee shall either eliminate
such interest or resign, to the extent and in the manner provided by, and
subject to the provisions of, the Trust Indenture Act and this Trust Agreement.
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SECTION 809. CO-TRUSTEES AND SEPARATE TRUSTEE.
(a) Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of the Trust Property may
at the time be located, the Depositor shall have power to appoint, and upon the
written request of the Property Trustee, the Depositor shall for such purpose
join with the Property Trustee in the execution, delivery and performance of all
instruments and agreements necessary or proper to appoint, one or more Persons
approved by the Property Trustee either to act as co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to the extent
required by law to act as separate trustee of any such property, in either case
with such powers as may be provided in the instrument of appointment, and to
vest in such Person or Persons in the capacity aforesaid, any property, title,
right or power deemed necessary or desirable, subject to the other provisions of
this Section 809. If the Depositor does not join in such appointment within 15
days after the receipt by it of a request so to do, or in case a Debenture Event
of Default has occurred and is continuing, the Property Trustee alone shall have
power to make such appointment. Any co-trustee or separate trustee appointed
pursuant to this Section 809 shall either be (i) a natural person who is at
least 21 years of age and a resident of the United States; or (ii) a legal
entity with its principal place of business in the United States that shall act
through one or more persons authorized to bind such entity.
(b) Should any written instrument from the Depositor be required by any co-
trustee or separate trustee so appointed for more fully confirming to such co-
trustee or separate trustee such property, title, right, or power, any and all
such instruments shall, on request, be executed, acknowledged, and delivered by
the Depositor.
(c) Every co-trustee or separate trustee shall, to the extent permitted by
law, but to such extent only, be appointed subject to the following terms,
namely:
(i) The Trust Securities shall be executed and delivered and all
rights, powers, duties and obligations hereunder in respect of the custody of
securities, cash and other personal property held by, or required to be
deposited or pledged with, the Trustees specified hereunder, shall be exercised,
solely by such Trustees and not by such co-trustee or separate trustee.
(ii) The rights, powers, duties and obligations hereby conferred or
imposed upon the Property Trustee in respect of any property covered by such
appointment shall be conferred or imposed upon and exercised or performed by the
Property Trustee or by the Property Trustee and such co-trustee or separate
trustee jointly, as shall be provided in the instrument appointing such co-
trustee or separate trustee, except to the extent that under any law of any
jurisdiction in which any particular act is to be performed, the Property
Trustee shall be incompetent or unqualified to perform such act, in which event
such rights, powers, duties and obligations shall be exercised and performed by
such co-trustee or separate trustee.
(iii) The Property Trustee at any time, by an instrument in writing
executed by it, with the written concurrence of the Depositor, may accept the
resignation of or remove any
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co-trustee or separate trustee appointed under this Section 809, and, in case a
Debenture Event of Default has occurred and is continuing, the Property Trustee
shall have the power to accept the resignation of, or remove, any such
co-trustee or separate trustee without the concurrence of the Depositor. Upon
the written request of the Property Trustee, the Depositor shall join with the
Property Trustee in the execution, delivery and performance of all instruments
and agreements necessary or proper to effectuate such resignation or removal. A
successor to any co-trustee or separate trustee so resigned or removed may be
appointed in the manner provided in this Section 809.
(iv) No co-trustee or separate trustee hereunder shall be personally
liable by reason of any act or omission of the Property Trustee or any other
trustee hereunder.
(v) The Property Trustee shall not be liable by reason of any act of a
co-trustee or separate trustee.
(vi) Any Act of Holders delivered to the Property Trustee shall be
deemed to have been delivered to each such co-trustee and separate trustee.
SECTION 810. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(a) No resignation or removal of any Trustee (the "Relevant Trustee") and no
appointment of a successor Trustee pursuant to this Article VIII shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 811.
(b) Subject to the immediately preceding paragraph, the Relevant Trustee may
resign at any time with respect to the Trust Securities by giving written notice
thereof to the Securityholders. If the instrument of acceptance by the successor
Trustee required by Section 811 shall not have been delivered to the Relevant
Trustee within 30 days after the giving of such notice of resignation, the
Relevant Trustee may petition, at the expense of the Depositor, any court of
competent jurisdiction for the appointment of a successor Relevant Trustee with
respect to the Trust Securities.
(c) Unless a Debenture Event of Default shall have occurred and be
continuing, any Trustee may be removed at any time by Act of the Common
Securityholder. If a Debenture Event of Default shall have occurred and be
continuing, the Property Trustee or the Delaware Trustee, or both of them, may
be removed at such time by Act of the Holders of a majority in Liquidation
Amount of the Preferred Securities, delivered to the Relevant Trustee (in its
individual capacity and on behalf of the Trust). An Administrative Trustee may
be removed by the Common Securityholder at any time.
(d) If any Trustee shall resign, be removed or become incapable of acting as
Trustee, or if a vacancy shall occur in the office of any Trustee for any cause,
at a time when no Debenture Event of Default shall have occurred and be
continuing, the Common Securityholder, by Act of the Common Securityholder
delivered to the retiring Trustee, shall promptly appoint a
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successor Trustee or Trustees with respect to the Trust Securities and the
Trust, and the successor Trustee shall comply with the applicable requirements
of Section 811. If the Property Trustee or the Delaware Trustee shall resign, be
removed or become incapable of continuing to act as the Property Trustee or the
Delaware Trustee, as the case may be, at a time when a Debenture Event of
Default shall have occurred and is continuing, the Preferred Securityholders, by
Act of the Securityholders of a majority in Liquidation Amount of the Preferred
Securities then Outstanding delivered to the retiring Relevant Trustee, shall
promptly appoint a successor Relevant Trustee or Trustees with respect to the
Trust Securities and the Trust, and such successor Trustee shall comply with the
applicable requirements of Section 811. If an Administrative Trustee shall
resign, be removed or become incapable of acting as Administrative Trustee, at a
time when a Debenture Event of Default shall have occurred and be continuing,
the Common Securityholder, by Act of the Common Securityholder delivered to an
Administrative Trustee, shall promptly appoint a successor Administrative
Trustee or Administrative Trustees with respect to the Trust Securities and the
Trust, and such successor Administrative Trustee or Administrative Trustees
shall comply with the applicable requirements of Section 811. If no successor
Relevant Trustee with respect to the Trust Securities shall have been so
appointed by the Common Securityholder or the Preferred Securityholders and
accepted appointment in the manner required by Section 811, any Securityholder
who has been a Securityholder of Trust Securities for six (6) consecutive months
on behalf of himself and all others similarly situated may petition a court of
competent jurisdiction for the appointment of a successor Relevant Trustee with
respect to the Trust Securities.
(e) The Property Trustee shall give notice of each resignation and each
removal of a Trustee and each appointment of a successor Trustee to all
Securityholders in the manner provided in Section 1008 and shall give notice to
the Depositor. Each notice shall include the name of the successor Relevant
Trustee and the address of its Corporate Trust Office if it is the Property
Trustee.
(f) Notwithstanding the foregoing or any other provision of this Trust
Agreement, in the event any Administrative Trustee or a Delaware Trustee who is
a natural person dies or becomes, in the opinion of the Depositor, incompetent
or incapacitated, the vacancy created by such death, incompetence or incapacity
may be filled by (a) the unanimous act of remaining Administrative Trustees if
there are at least two of them; or (b) otherwise by the Depositor (with the
successor in each case being a Person who satisfies the eligibility requirement
for Administrative Trustees set forth in Section 807).
SECTION 811. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
(a) In case of the appointment hereunder of a successor Relevant Trustee with
respect to the Trust Securities and the Trust, the retiring Relevant Trustee and
each successor Relevant Trustee with respect to the Trust Securities shall
execute and deliver an instrument hereto wherein each successor Relevant Trustee
shall accept such appointment and which shall contain such provisions as shall
be necessary or desirable to transfer and confirm to, and to vest in, each
successor Relevant Trustee all the rights, powers, trusts and duties of the
retiring Relevant Trustee with respect to the Trust Securities and the Trust and
upon the execution and delivery of
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such instrument the resignation or removal of the retiring Relevant Trustee
shall become effective to the extent provided therein and each such successor
Relevant Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Relevant
Trustee with respect to the Trust Securities and the Trust; but, on request of
the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall
duly assign, transfer and deliver to such successor Relevant Trustee all Trust
Property, all proceeds thereof and money held by such retiring Relevant Trustee
hereunder with respect to the Trust Securities and the Trust.
(b) Upon request of any such successor Relevant Trustee, the Trust shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Relevant Trustee all such rights, powers and trusts
referred to in the immediately preceding paragraph, as the case may be.
(c) No successor Relevant Trustee shall accept its appointment unless at the
time of such acceptance such successor Relevant Trustee shall be qualified and
eligible under this Article VIII.
SECTION 812. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS.
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee may be merged or converted or with which it may be
consolidated, or any Person resulting from any merger, conversion or
consolidation to which such Relevant Trustee shall be a party, or any
corporation succeeding to all or substantially all the corporate trust business
of such Relevant Trustee, shall be the successor of such Relevant Trustee
hereunder, provided such Person shall be otherwise qualified and eligible under
this Article VIII, without the execution or filing of any paper or any further
act on the part of any of the parties hereto.
SECTION 813. PREFERENTIAL COLLECTION OF CLAIMS AGAINST DEPOSITOR OR TRUST.
If and when the Property Trustee or the Delaware Trustee shall be or become a
creditor of the Depositor or the Trust (or any other obligor upon the Debentures
or the Trust Securities), the Property Trustee or the Delaware Trustee, as the
case may be, shall be subject to and shall take all actions necessary in order
to comply with the provisions of the Trust Indenture Act regarding the
collection of claims against the Depositor or Trust (or any such other obligor).
SECTION 814. REPORTS BY PROPERTY TRUSTEE.
(a) The Property Trustee shall transmit to Securityholders such reports
concerning the Property Trustee, its actions under this Trust Agreement and the
property and funds in its possession as Property Trustee as may be required
pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant thereto.
(b) A copy of each such report shall, at the time of such transmission to
Holders, be filed by the Property Trustee with the American Stock Exchange,
Inc., and each securities
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exchange or other organization upon which the Trust Securities are listed, and
also with the Commission and the Depositor.
SECTION 815. REPORTS TO PROPERTY TRUSTEE.
The Depositor and the Administrative Trustees on behalf of the Trust shall
provide to the Property Trustee such documents, reports and information as
required by Section 314 of the Trust Indenture Act (if any) and the compliance
certificate required by Section 314(a) of the Trust Indenture Act in the form,
in the manner and at the times required by Section 314 of the Trust Indenture
Act.
SECTION 816. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT.
Each of the Depositor and the Administrative Trustees on behalf of the Trust
shall provide to the Property Trustee such evidence of compliance with any
conditions precedent, if any, provided for in this Trust Agreement that relate
to any of the matters set forth in Section 314(c) of the Trust Indenture Act.
Any certificate or opinion required to be given by an officer pursuant to
Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an
Officers' Certificate.
SECTION 817. NUMBER OF TRUSTEES.
(a) The number of Trustees shall be five, provided that the Holder of all of
the Common Securities by written instrument may increase or decrease the number
of Administrative Trustees. The Property Trustee and the Delaware Trustee may be
the same Person.
(b) If a Trustee ceases to hold office for any reason and the number of
Administrative Trustees is not reduced pursuant to Section 817(a), or if the
number of Trustees is increased pursuant to Section 817(a), a vacancy shall
occur. The vacancy shall be filled with a Trustee appointed in accordance with
Section 810.
(c) The death, resignation, retirement, removal, bankruptcy, incompetence or
incapacity to perform the duties of a Trustee shall not operate to annul the
Trust. Whenever a vacancy in the number of Administrative Trustees shall occur,
until such vacancy is filled by the appointment of an Administrative Trustee in
accordance with Section 810, the Administrative Trustees in office, regardless
of their number (and notwithstanding any other provision of this Agreement),
shall have all the powers granted to the Administrative Trustees and shall
discharge all the duties imposed upon the Administrative Trustees by this Trust
Agreement.
SECTION 818. DELEGATION OF POWER.
(a) Any Administrative Trustee may, by power of attorney consistent with
applicable law, delegate to any other natural person over the age of 21 his or
her power for the purpose of executing any documents contemplated in Section
207(a); and
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(b) The Administrative Trustees shall have power to delegate from time to
time to such of their number or to the Depositor the doing of such things and
the execution of such instruments either in the name of the Trust or the names
of the Administrative Trustees or otherwise as the Administrative Trustees may
deem expedient, to the extent such delegation is not prohibited by applicable
law or contrary to the provisions of the Trust, as set forth herein.
SECTION 819. VOTING.
Except as otherwise provided in this Trust Agreement, the consent or approval
of the Administrative Trustees shall require consent or approval by not less
than a majority of the Administrative Trustees, unless there are only two, in
which case both must consent.
ARTICLE IX
TERMINATION, LIQUIDATION AND MERGER
SECTION 901. TERMINATION UPON EXPIRATION DATE.
Unless earlier dissolved, the Trust shall automatically dissolve on ________,
2053 (the "Expiration Date") subject to distribution of the Trust Property in
accordance with Section 904.
SECTION 902. EARLY TERMINATION.
The first to occur of any of the following events is an "Early Termination
Event:"
(a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or
liquidation of, the Depositor;
(b) delivery of written direction to the Property Trustee by the Depositor at
any time (which direction is wholly optional and within the discretion of the
Depositor) to dissolve the Trust and distribute the Debentures to
Securityholders in exchange for the Preferred Securities in accordance with
Section 904;
(c) the redemption of all of the Preferred Securities in connection with the
redemption of all of the Debentures; and
(d) the entrance of an order for dissolution of the Trust by a court of
competent jurisdiction.
SECTION 903. TERMINATION.
The respective obligations and responsibilities of the Trustees and the Trust
created and continued hereby shall terminate upon the latest to occur of the
following: (a) the distribution by the Property Trustee to Securityholders upon
the liquidation of the Trust pursuant to Section 904,
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or upon the redemption of all of the Trust Securities pursuant to Section 402,
of all amounts required to be distributed hereunder upon the final payment of
the Trust Securities; (b) the payment of any expenses owed by the Trust; (c) the
discharge of all administrative duties of the Administrative Trustees, including
the performance of any tax reporting obligations with respect to the Trust or
the Securityholders; and (d) the filing of a Certificate of Cancellation by the
Administrative Trustee under the Delaware Business Trust Act.
SECTION 904. LIQUIDATION.
(a) If an Early Termination Event specified in clause (a), (b), or (d) of
Section 902 occurs or upon the Expiration Date, the Trust shall be liquidated by
the Trustees as expeditiously as the Trustees determine to be possible by
distributing, after satisfaction of liabilities to creditors of the Trust as
provided by applicable law, to each Securityholder a Like Amount of Debentures,
subject to Section 904(d). Notice of liquidation shall be given by the Property
Trustee by first-class mail, postage prepaid, mailed not later than 30 nor more
than 60 days prior to the Liquidation Date to each Holder of Trust Securities at
such Holder's address appearing in the Securities Register. All notices of
liquidation shall:
(i) state the Liquidation Date;
(ii) state that from and after the Liquidation Date, the Trust
Securities shall no longer be deemed to be Outstanding and any Trust Securities
Certificates not surrendered for exchange shall be deemed to represent a Like
Amount of Debentures; and
(iii) provide such information with respect to the mechanics by which
Holders may exchange Trust Securities Certificates for Debentures, or, if
Section 904(d) applies, receive a Liquidation Distribution, as the
Administrative Trustees or the Property Trustee shall deem appropriate.
(b) Except where Section 902(c) or 904(d) applies, in order to effect the
liquidation of the Trust and distribution of the Debentures to Securityholders,
the Property Trustee shall establish a record date for such distribution (which
shall be not more than 45 days prior to the Liquidation Date) and, either itself
acting as exchange agent or through the appointment of a separate exchange
agent, shall establish such procedures as it shall deem appropriate to effect
the distribution of Debentures in exchange for the Outstanding Trust Securities
Certificates.
(c) Except where Section 902(c) or 904(d) applies, after the Liquidation
Date, (i) the Trust Securities shall no longer be deemed to be outstanding; (ii)
certificates representing a Like Amount of Debentures shall be issued to holders
of Trust Securities Certificates upon surrender of such certificates to the
Administrative Trustees or their agent for exchange; (iii) the Depositor shall
use its reasonable efforts to have the Debentures listed on the American Stock
Exchange, Inc. or on such other securities exchange or other organization as the
Preferred Securities are then listed or traded; (iv) any Trust Securities
Certificates not so surrendered for exchange shall be deemed to represent a Like
Amount of Debentures, accruing interest at the rate provided for in the
Debentures from the last Distribution Date on which a Distribution was made on
such Trust
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Securities Certificates until such certificates are so surrendered (and until
such certificates are so surrendered, no payments of interest or principal shall
be made to holders of Trust Securities Certificates with respect to such
Debentures); and (v) all rights of Securityholders holding Trust Securities
shall cease, except the right of such Securityholders to receive Debentures upon
surrender of Trust Securities Certificates.
(d) In the event that, notwithstanding the other provisions of this Section
904, whether because of an order for dissolution entered by a court of competent
jurisdiction or otherwise, distribution of the Debentures in the manner provided
herein is determined by the Property Trustee not to be practical, the Trust
Property shall be liquidated, and the Trust shall be dissolved, wound-up or
terminated, by the Property Trustee in such manner as the Property Trustee
determines. In such event, on the date of the dissolution, winding-up or other
termination of the Trust, Securityholders shall be entitled to receive out of
the assets of the Trust available for distribution to Securityholders, after
satisfaction of liabilities to creditors of the Trust as provided by applicable
law, an amount equal to the Liquidation Amount per Trust Security plus
accumulated and unpaid Distributions thereon to the date of payment (such amount
being the "Liquidation Distribution"). If, upon any such dissolution, winding-up
or termination, the Liquidation Distribution can be paid only in part because
the Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then, subject to the next succeeding sentence, the
amounts payable by the Trust on the Trust Securities shall be paid on a pro rata
basis (based upon Liquidation Amounts, subject to Section 407). The holder of
the Common Securities shall be entitled to receive Liquidation Distributions
upon any such dissolution, winding-up or termination pro rata (determined as
aforesaid) with Holders of Preferred Securities, except that, if a Debenture
Event of Default has occurred and is continuing, the Preferred Securities shall
have a priority over the Common Securities.
SECTION 905. MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF TRUST.
The Trust may not merge with or into, consolidate, amalgamate, or be replaced
by, or convey, transfer or lease its properties and assets substantially as an
entirety to any corporation or other Person, except pursuant to this Section
905. At the request of the Depositor, with the consent of the Administrative
Trustees and without the consent of the holders of the Preferred Securities, the
Property Trustee or the Delaware Trustee, the Trust may merge with or into,
consolidate, amalgamate, be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to a trust organized as such
under the laws of the U.S. or any State; provided, that (i) such successor
entity either (a) expressly assumes all of the obligations of the Trust with
respect to the Preferred Securities; or (b) substitutes for the Preferred
Securities other securities having substantially the same terms as the Preferred
Securities (the "Successor Securities") so long as the Successor Securities rank
the same as the Preferred Securities rank in priority with respect to
distributions and payments upon liquidation, redemption and otherwise; (ii) the
Depositor expressly appoints a trustee of such successor entity possessing
substantially the same powers and duties as the Property Trustee as the holder
of the Debentures; (iii) the Successor Securities are listed or traded, or any
Successor Securities shall be listed or traded upon notification of issuance, on
any securities exchange or other organization on which the Preferred Securities
are then listed, if any; (iv) such merger, consolidation, amalgamation,
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replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect; (v) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, the
Depositor has received an Opinion of Counsel to the effect that (a) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Preferred Securities (including any Successor Securities) in any material
respect; and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither the Trust nor such successor
entity shall be required to register as an "investment company" under the
Investment Company Act; and (vi) the Depositor owns all of the Common Securities
of such successor entity and guarantees the obligations of such successor entity
under the Successor Securities at least to the extent provided by the Guarantee.
Notwithstanding the foregoing, the Trust shall not, except with the consent of
holders of 100% in Liquidation Amount of the Preferred Securities, consolidate,
amalgamate, merge with or into, or be replaced by or convey, transfer or lease
its properties and assets substantially as an entirety to any other Person or
permit any other Person to consolidate, amalgamate, merge with or into, or
replace it if such consolidation, amalgamation, merger or replacement would
cause the Trust or the successor entity to be classified as other than a grantor
trust for United States federal income tax purposes.
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 1001. LIMITATION OF RIGHTS OF SECURITYHOLDERS.
The death or incapacity of any Person having an interest, beneficial or
otherwise, in Trust Securities shall not operate to terminate this Trust
Agreement, nor entitle the legal representatives or heirs of such Person or any
Securityholder for such Person to claim an accounting, take any action or bring
any proceeding in any court for a partition or winding-up of the arrangements
contemplated hereby, nor otherwise affect the rights, obligations and
liabilities of the parties hereto or any of them.
SECTION 1002. AMENDMENT.
(a) This Trust Agreement may be amended from time to time by the Trustees and
the Depositor, without the consent of any Securityholders, (i) as provided in
Section 811 with respect to acceptance of appointment by a successor Trustee;
(ii) to cure any ambiguity, correct or supplement any provision herein or
therein which may be inconsistent with any other provision herein or therein, or
to make any other provisions with respect to matters or questions arising under
this Trust Agreement, that shall not be inconsistent with the other provisions
of this Trust Agreement; (iii) to modify, eliminate or add to any provisions of
this Trust Agreement to such extent as shall be necessary to ensure that the
Trust shall be classified for United States federal income tax purposes as a
grantor trust at all times that any Trust Securities are outstanding or to
ensure that the Trust shall not be required to register as an "investment
company" under the Investment Company Act or (iv) to reduce or increase the
Liquidation
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Amount per Trust Security and simultaneously to correspondingly increase or
decrease the number of Trust Securities issued and outstanding solely for the
purpose of maintaining the eligibility of the Preferred Securities for quotation
or listing on any securities exchange or other organization on which the
Preferred Securities are then quoted or listed (including, if applicable, the
American Stock Exchange, Inc.); provided, however, that in the case of clause
(ii), such action shall not adversely affect in any material respect the
interests of any Securityholder and provided further, that in the case of clause
(iv), the aggregate Liquidation Amount of the Trust Securities outstanding upon
completion of any such reduction must be the same as the aggregate Liquidation
Amount of the Trust Securities outstanding immediately prior to such reduction
or increase, and any amendments of this Trust Agreement shall become effective
when notice thereof is given to the Securityholders (or, in the case of an
amendment pursuant to clause (iv), as of the date specified in the notice).
(b) Except as provided in Section 601(c) or Section 1002(c) hereof, any
provision of this Trust Agreement may be amended by the Trustees and the
Depositor (i) with the consent of Trust Securityholders representing not less
than a majority (based upon Liquidation Amounts) of the Trust Securities then
Outstanding; and (ii) upon receipt by the Trustees of an Opinion of Counsel to
the effect that such amendment or the exercise of any power granted to the
Trustees in accordance with such amendment shall not affect the Trust's status
as a grantor trust for United States federal income tax purposes or the Trust's
exemption from status of an "investment company" under the Investment Company
Act.
(c) In addition to and notwithstanding any other provision in this Trust
Agreement, without the consent of each affected Securityholder (such consent
being obtained in accordance with Section 603 or 606 hereof), this Trust
Agreement may not be amended to (i) change the amount or timing of any
Distribution on the Trust Securities or otherwise adversely affect the amount of
any Distribution required to be made in respect of the Trust Securities as of a
specified date; or (ii) restrict the right of a Securityholder to institute suit
for the enforcement of any such payment on or after such date; notwithstanding
any other provision herein, without the unanimous consent of the Securityholders
(such consent being obtained in accordance with Section 603 or 606 hereof), this
paragraph (c) of this Section 1002 may not be amended.
(d) Notwithstanding any other provisions of this Trust Agreement, no Trustee
shall enter into or consent to any amendment to this Trust Agreement which would
cause the Trust to fail or cease to qualify for the exemption from status of an
"investment company" under the Investment Company Act or to fail or cease to be
classified as a grantor trust for United States federal income tax purposes.
(e) Notwithstanding anything in this Trust Agreement to the contrary, without
the consent of the Depositor, this Trust Agreement may not be amended in a
manner which imposes any additional obligation on the Depositor.
(f) In the event that any amendment to this Trust Agreement is made, the
Administrative Trustees shall promptly provide to the Depositor a copy of such
amendment.
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(g) Upon the request of the Depositor, accompanied by its Board Resolutions
authorizing the execution of any such amendments to this Trust Agreement, and
upon the filing with the Property Trustee and the Delaware Trustee of evidence
of the consent of Securityholders required to consent thereto as aforesaid, the
Property Trustee and the Delaware Trustee shall join with the Depositor in the
execution of such amendment to this Trust Agreement unless such amendment
affects the Property Trustee's or the Delaware Trustee's own rights, duties,
immunities under this Trust Agreement or otherwise in which case the Property
Trustee and Delaware Trustee may in their own discretion but shall not be
obligated to enter into such amendment to this Trust Agreement. The Property
Trustee and Delaware Trustee, subject to the provisions of Section 801, may
receive an Opinion of Counsel as conclusive evidence that any amendment to this
Trust Agreement executed pursuant to this Article X is authorized or permitted
by, and conforms to, the terms of this Article X and that it is proper for the
Property Trustee and Delaware Trustee under the provisions of this Article X to
join in the execution thereof.
SECTION 1003. SEPARABILITY.
In case any provision in this Trust Agreement or in the Trust Securities
Certificates shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
SECTION 1004. GOVERNING LAW.
THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE
SECURITYHOLDERS, THE TRUST AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT
AND THE TRUST SECURITIES SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF DELAWARE (WITHOUT REGARD TO CONFLICT OF LAWS
PRINCIPLES).
SECTION 1005. PAYMENTS DUE ON NON-BUSINESS DAY.
If the date fixed for any payment on any Trust Security shall be a day that is
not a Business Day, then such payment need not be made on such date but may be
made on the next succeeding day which is a Business Day, with the same force and
effect as though made on the date fixed for such payment, and no distribution
shall accumulate thereon for the period after such date.
SECTION 1006. SUCCESSORS.
This Trust Agreement shall be binding upon and shall inure to the benefit of
any successor to the Depositor, the Trust or the Relevant Trustee(s), including
any successor by operation of law. Except in connection with a consolidation,
merger or sale involving the Depositor that is permitted under Article XII of
the Indenture and pursuant to which the assignee agrees in writing to perform
the Depositor's obligations hereunder, the Depositor shall not assign its
obligations hereunder.
48
<PAGE>
SECTION 1007. HEADINGS.
The Article and Section headings are for convenience only and shall not affect
the construction of this Trust Agreement.
SECTION 1008. REPORTS, NOTICES AND DEMANDS.
(a) Any report, notice, demand or other communication which by any provision
of this Trust Agreement is required or permitted to be given or served to or
upon any Securityholder or the Depositor may be given or served in writing by
deposit thereof, first-class postage prepaid, in the United States mail, hand
delivery or facsimile transmission, in each case, addressed, (i) in the case of
a Preferred Securityholder, to such Preferred Securityholder as such
Securityholder's name and address may appear on the Securities Register; and
(ii) in the case of the Common Securityholder or the Depositor, to Independent
Bankshares, Inc., at 547 Chestnut Street, Abilene, Texas 79602. Any notice to
Preferred Securityholders shall also be given to such owners as have, within two
years preceding the giving of such notice, filed their names and addresses with
the Property Trustee for that purpose. Such notice, demand or other
communication to or upon a Securityholder shall be deemed to have been
sufficiently given or made, for all purposes, upon hand delivery, mailing or
transmission.
(b) Any notice, demand or other communication which by any provision of this
Trust Agreement is required or permitted to be given or served to or upon the
Trust, the Property Trustee or the Administrative Trustees shall be given in
writing addressed (until another address is published by the Trust) as follows:
(i) with respect to the Property Trustee to U.S. Trust Company of Texas, N.A.,
2001 Ross Avenue, Suite 2700, Dallas, Texas 75201, Attention: Corporate Trust
Department; (ii) with respect to the Delaware Trustee, to Wilmington Trust
Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001; and (iii) with respect to the Administrative Trustees, to them at
the address above for notices to the Depositor, marked "Attention:
Administrative Trustees of Independent Capital Trust." Such notice, demand or
other communication to or upon the Trust or the Property Trustee shall be deemed
to have been sufficiently given or made only upon actual receipt of the writing
by the Trust or the Property Trustee.
SECTION 1009. AGREEMENT NOT TO PETITION.
Each of the Trustees and the Depositor agrees for the benefit of the
Securityholders that, until at least one year and 1 day after the Trust has been
terminated in accordance with Article IX, they shall not file, or join in the
filing of, a petition against the Trust under any bankruptcy, insolvency,
reorganization or other similar law (including, without limitation, the United
States Bankruptcy Code of 1978, as amended) (collectively, "Bankruptcy Laws") or
otherwise join in the commencement of any proceeding against the Trust under any
Bankruptcy Law. In the event the Depositor takes action in violation of this
Section 1009, the Property Trustee agrees, for the benefit of Securityholders,
that at the expense of the Depositor (which expense shall be paid prior to the
filing), it shall file an answer with the bankruptcy court or
49
<PAGE>
otherwise properly contest the filing of such petition by the Depositor against
the Trust or the commencement of such action and raise the defense that the
Depositor has agreed in writing not to take such action and should be stopped
and precluded therefrom. The provisions of this Section 1009 shall survive the
termination of this Trust Agreement.
SECTION 1010. TRUST INDENTURE ACT; CONFLICT WITH TRUST INDENTURE ACT.
(a) This Trust Agreement is subject to the provisions of the Trust Indenture
Act that are required to be part of this Trust Agreement and shall, to the
extent applicable, be governed by such provisions.
(b) The Property Trustee shall be the only Trustee which is a trustee for the
purposes of the Trust Indenture Act.
(c) If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Trust Agreement by any
of the provisions of the Trust Indenture Act, such required provision shall
control. If any provision of this Trust Agreement modifies or excludes any
provision of the Trust Indenture Act which may be so modified or excluded, the
latter provision shall be deemed to apply to this Trust Agreement as so modified
or to be excluded, as the case may be.
(d) The application of the Trust Indenture Act to this Trust Agreement shall
not affect the nature of the Trust Securities as equity securities representing
undivided beneficial interests in the assets of the Trust.
[Remainder of page intentionally left blank]
50
<PAGE>
SECTION 1011. ACCEPTANCE OF TERMS OF TRUST AGREEMENT, GUARANTEE AND
INDENTURE.
THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR
ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR
FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE
BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST
SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT
TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE
INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER
AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE
BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER
AND SUCH OTHERS.
INDEPENDENT BANKSHARES, INC., as Depositor
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
U.S. TRUST COMPANY OF TEXAS, N.A.,
as Property Trustee
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
WILMINGTON TRUST COMPANY, as Delaware Trustee
By:
----------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------
-------------------------------------------
Bryan W. Stephenson, as Administrative Trustee
-------------------------------------------
Randal N. Crosswhite, as Administrative Trustee
-------------------------------------------
Michael D. Jarrett, as Administrative Trustee
51
<PAGE>
EXHIBIT A
CERTIFICATE OF TRUST OF
-----------------------
INDEPENDENT CAPITAL TRUST
-------------------------
THIS Certificate of Trust of Independent Capital Trust (the "Trust) is
being duly executed and filed by Wilmington Trust Company, a Delaware banking
corporation, Bryan W. Stephenson and Randal N. Crosswhite, as trustees, to form
a business trust under the Delaware Business Trust Act (12 Del. C. (S)3801 et.
------- ---
seq.).
- ----
1. Name. The name of the business trust formed hereby is Independent
----
Capital Trust.
2. Delaware Trustee. The name and business address of the trustee of
----------------
the Trust in the State of Delaware is Wilmington Trust Company, Rodney Square
North, 1100 North Market Street, Wilmington, Delaware, 19890-0001, Attention:
Corporate Trust Administration.
IN WITNESS WHEREOF, the undersigned, being the sole initial trustees of the
Trust, have executed this Certificate of Trust.
WILMINGTON TRUST COMPANY
as Trustee
By: /s/ Wilmington Trust Company
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
/s/ Bryan W. Stephenson
---------------------------------------
Bryan W. Stephenson
as Trustee
/s/ Randal N. Crosswhite
---------------------------------------
Randal N. Crosswhite
as Trustee
A-1
<PAGE>
EXHIBIT B
[Intentionally Omitted]
<PAGE>
EXHIBIT C
THIS CERTIFICATE IS NOT TRANSFERABLE
CERTIFICATE NUMBER NUMBER OF COMMON SECURITIES: ________
C-
CERTIFICATE EVIDENCING COMMON SECURITIES
OF
INDEPENDENT CAPITAL TRUST
COMMON SECURITIES
___% CUMULATIVE TRUST
(LIQUIDATION AMOUNT $10.00 PER COMMON SECURITY)
Independent Capital Trust, a statutory business trust created under the laws
of the State of Delaware (the "Trust"), hereby certifies that Independent
Bankshares, Inc. (the "Holder") is the registered owner of _____________________
____________________________ (_____) common securities (the "Common Securities")
of the Trust representing undivided beneficial interests in the assets of the
Trust and designated the ____% Common Securities (liquidation amount $10.00 per
Common Security). In accordance with Section 510 of the Trust Agreement (as
defined below), the Common Securities are not transferable and any attempted
transfer hereof shall be void. The designations, rights, privileges,
restrictions, preferences, and other terms and provisions of the Common
Securities are set forth in, and this certificate and the Common Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of _____________, 1998, as the same may be amended from time to time (the
"Trust Agreement"), including the designation of the terms of the Common
Securities as set forth therein. The Trust shall furnish a copy of the Trust
Agreement to the Holder without charge upon written request to the Trust at its
principal place of business or registered office.
Upon receive of this certificate, the Holder is bound by the Trust Agreement
and is entitled to the benefits thereunder.
IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has
executed this certificate this ___ day of __________, 1998.
INDEPENDENT CAPITAL TRUST
By
-------------------------------------
--------------------------
Administrative Trustee
C-1
<PAGE>
EXHIBIT D
AGREEMENT AS TO EXPENSES AND LIABILITIES
AGREEMENT AS TO EXPENSES AND LIABILITIES (this "Agreement") dated as of
_____________, 1998, between Independent Bankshares, Inc., a Texas corporation
("the Company"), and Independent Capital Trust, a Delaware business trust (the
"Trust").
RECITALS
WHEREAS, the Trust intends to issue its common securities (the "Common
Securities") to, and receive Debentures from, the Company and to issue and sell
up to 1,150,000 ____% Cumulative Trust Preferred Securities (the "Preferred
Securities") with such powers, preferences and special rights and restrictions
as are set forth in the Amended and Restated Trust Agreement of the Trust dated
as of _____________, 1998, as the same may be amended from time to time (the
"Trust Agreement");
WHEREAS, the Company shall directly or indirectly own all of the Common
Securities of the Trust and shall issue the Debentures;
NOW, THEREFORE, in consideration of the purchase by each holder of the
Preferred Securities, which purchase the Company hereby agrees shall benefit the
Company and which purchase the Company acknowledges shall be made in reliance
upon the execution and delivery of this Agreement, the Company, including in its
capacity as holder of the Common Securities, and the Trust hereby agree as
follows:
ARTICLE I
SECTION 1.1. GUARANTEE BY THE COMPANY.
Subject to the terms and conditions hereof, the Company, including in its
capacity as holder of the Common Securities, hereby irrevocably and
unconditionally guarantees to each person or entity to whom the Trust is now or
hereafter becomes indebted or liable (the "Beneficiaries") the full payment,
when and as due, of any and all Obligations (as hereinafter defined) to such
Beneficiaries. As used herein, "Obligations" means any costs, expenses or
liabilities of the Trust other than obligations of the Trust to pay to holders
of any Preferred Securities or other similar interests in the Trust the amounts
due such holders pursuant to the terms of the Preferred Securities or such other
similar interests, as the case may be. This Agreement is intended to be for the
benefit of, and to be enforceable by, all such Beneficiaries, whether or not
such Beneficiaries have received notice hereof.
D-1
<PAGE>
SECTION 1.2. TERM OF AGREEMENT.
This Agreement shall terminate and be of no further force and effect upon the
later of (a) the date on which full payment has been made of all amounts payable
to all holders of all the Preferred Securities (whether upon redemption,
liquidation, exchange or otherwise); and (b) the date on which there are no
Beneficiaries remaining; provided, however, that this Agreement shall continue
to be effective or shall be reinstated, as the case may be, if at any time any
holder of Preferred Securities or any Beneficiary must restore payment of any
sums paid under the Preferred Securities, under any obligation under the
Preferred Securities Guarantee Agreement dated the date hereof by the Company
and U.S. Trust Company of Texas, N.A., as guarantee trustee, or under this
Agreement for any reason whatsoever. This Agreement is continuing, irrevocable,
unconditional and absolute.
SECTION 1.3. WAIVER OF NOTICE.
The Company hereby waives notice of acceptance of this Agreement and of any
obligation to which it applies or may apply, and the Company hereby waives
presentment, demand for payment, protest, notice of nonpayment, notice of
dishonor, notice of redemption and all other notices and demands.
SECTION 1.4. NO IMPAIRMENT.
The obligations, covenants, agreements and duties of the Company under this
Agreement shall in no way be affected or impaired by reason of the happening
from time to time of any of the following:
(a) the extension of time for the payment by the Trust of all or any portion
of the obligations or for the performance of any other obligation under, arising
out of, or in connection with, the Obligations;
(b) any failure, omission, delay or lack of diligence on the part of the
Beneficiaries to enforce, assert or exercise any right, privilege, power or
remedy conferred on the Beneficiaries with respect to the Obligations or any
action on the part of the Trust granting indulgence or extension of any kind; or
(c) the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement composition or readjustment of debt of,
or other similar proceedings affecting, the Trust or any of the assets of the
Trust.
There shall be no obligation of the Beneficiaries to give notice to, or obtain
the consent of, the Company with respect to the happening of any of the
foregoing.
D-2
<PAGE>
SECTION 1.5. ENFORCEMENT.
A Beneficiary may enforce this Agreement directly against the Company, and the
Company waives any right or remedy to require that any action be brought against
the Trust or any other person or entity before proceeding against the Company.
ARTICLE II
SECTION 2.1. BINDING EFFECT.
All guarantees and agreements contained in this Agreement shall bind the
successors, assigns, receivers, trustees and representatives of the Company and
shall inure to the benefit of the Beneficiaries.
SECTION 2.2. AMENDMENT.
So long as there remains any Beneficiary or any Preferred Securities are
outstanding, this Agreement shall not be modified or amended in any manner
adverse to such Beneficiary or to the holders of the Preferred Securities.
SECTION 2.3. NOTICES.
Any notice, request or other communication required or permitted to be given
hereunder shall be given in writing by delivering the same by facsimile
transmission (confirmed by mail), telex, or by registered or certified mail,
addressed as follows (and if so given, shall be deemed given when mailed or upon
receipt of an answer back, if sent by telex):
Independent Bankshares, Inc.
547 Chestnut Street
Abilene, TX 79602
Facsimile: 915-677-5943
Independent Capital Trust
547 Chestnut Street
Abilene, TX 79602
Facsimile: 915-677-5943
SECTION 2.4. This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Texas (without regard to
conflict of laws principles).
D-3
<PAGE>
THIS AGREEMENT is executed as of the day and year first above written.
INDEPENDENT BANKSHARES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
INDEPENDENT CAPITAL TRUST
By:
------------------------------------
-------------------------
Administrative Trustee
D-4
<PAGE>
EXHIBIT E
CERTIFICATE NUMBER NUMBER OF PREFERRED SECURITIES
P- ---------
CERTIFICATE EVIDENCING PREFERRED SECURITIES
OF
INDEPENDENT CAPITAL TRUST
_____% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
CUSIP NO.
-----------
Independent Capital Trust, a statutory business trust created under the laws
of the State of Delaware (the "Trust"), hereby certifies that ________________
(the "Holder") is the registered owner of _____ preferred securities (the
"Preferred Securities") of the Trust representing undivided beneficial interests
in the assets of the Trust and designated the ____% Cumulative Trust Preferred
Securities (liquidation amount $10 per Preferred Security). The Preferred
Securities are transferable on the books and records of the Trust, in person or
by a duly authorized attorney, upon surrender of this Certificate duly endorsed
and in proper form for transfer as provided in Section 504 of the Trust
Agreement (as defined herein). The designations, rights, privileges,
restrictions, preferences, and other terms and provisions of the Preferred
Securities are set forth in, and this Certificate and the Preferred Securities
represented hereby are issued and shall in all respects be subject to the terms
and provisions of, the Amended and Restated Trust Agreement of the Trust dated
as of _____________, 1998 as the same may be amended from time to time (the
"Trust Agreement"), including the designation of the terms of Preferred
Securities as set forth therein. The Holder is entitled to the benefits of the
Preferred Securities Guarantee Agreement entered into by Independent Bankshares,
Inc., a Texas corporation, and U.S. Trust Company of Texas, N.A., as guarantee
trustee, dated as of _____________, 1998 (the "Guarantee"), to the extent
provided therein. The Trust shall furnish a copy of the Trust Agreement and the
Guarantee to the Holder without charge upon written request to the Trust at its
principal place of business or registered office.
Upon receipt of this Certificate, the Holder is bound by the Trust Agreement
and is entitled to the benefits thereunder.
Unless the Certificate of Authentication has been manually executed by the
Authentication Agent, this Certificate is not valid or effective.
IN WITNESS WHEREOF, the Administrative Trustees of the Trust have executed this
Certificate as of the date hereof.
E-1
<PAGE>
Dated:
----------------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the _____% Cumulative By:
-------------------------------
Trust Preferred Securities referred to Bryan W. Stephenson, Trustee
in the within-mentioned Amended and
Restated Trust Agreement.
By:
- -----------------------------------, -------------------------------
as Authentication Agent and Registrar Randal N. Crosswhite, Trustee
By:
-------------------------------
Michael D. Jarrett, Trustee
By
------------------------------------
Authorized Signature
E-2
<PAGE>
[FORM ON REVERSE OF CERTIFICATE]
The Trust will furnish without charge to any registered owner of Preferred
Securities who so requests, a copy of the Trust Agreement and the Guarantee.
Any such request should be in writing and addressed to
___________________________________________ or to the Registrar named on the
face of this Certificate.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
TOD - transfer on death direction in event of owner's death,
to person named on face and subject to TOD rules referenced
UNIF GIFT MIN ACT.............Custodian.............
(Cust) (Minor)
under Uniform Gifts to Minors
Act.............................
(State)
UNIF TRF MIN ACT........Custodian (until age).......
(Cust)
........under Uniform Transfers
(Minor)
to Minors Act.......................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------
- ----------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred Securities
- ------------------------------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
-------------------------------------------------------------------------
Attorney to transfer the said Preferred Securities on the books of the within
named Trust with full power of substitution in the premises.
Dated,
------------------------------
------------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERNATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
- --------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE GUARANTEE PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
E-3
<PAGE>
EXHIBIT 4.8
================================================================================
PREFERRED SECURITIES GUARANTEE AGREEMENT
by and between
INDEPENDENT BANKSHARES, INC.
and
U.S. TRUST COMPANY OF TEXAS, N.A.
Dated as of ________________, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
Page No.
ARTICLE I. DEFINITIONS AND INTERPRETATION................................... 1
Section 1.1. Definitions and Interpretation ............................ 1
ARTICLE II. TRUST INDENTURE ACT............................................. 5
Section 2.1. Trust Indenture Act; Application.......................... 5
Section 2.2. Lists of Holders of Securities............................ 5
Section 2.3. Reports by Preferred Guarantee Trustee.................... 5
Section 2.4. Periodic Reports to Preferred Guarantee Trustee........... 5
Section 2.5. Evidence of Compliance with Conditions Precedent.......... 6
Section 2.6. Events of Default; Waiver................................. 6
Section 2.7. Event of Default; Notice.................................. 6
Section 2.8. Conflicting Interests..................................... 6
ARTICLE III. POWERS, DUTIES AND RIGHTS OF PREFERRED
GUARANTEE TRUSTEE....................................................... 7
Section 3.1. Powers and Duties of Preferred Guarantee Trustee.......... 7
Section 3.2. Certain Rights of Preferred Guarantee Trustee............. 8
Section 3.3. Not Responsible for Recitals or Issuance of Guarantee.....10
ARTICLE IV. PREFERRED GUARANTEE TRUSTEE.....................................10
Section 4.1. Preferred Guarantee Trustee; Eligibility..................10
Section 4.2. Appointment, Removal and Resignation of Preferred
Guarantee Trustee.........................................11
ARTICLE V. GUARANTEE.........................................................12
Section 5.1. Guarantee.................................................12
Section 5.2. Waiver of Notice and Demand...............................12
Section 5.3. Obligations not Affected..................................12
Section 5.4. Rights of Holders.........................................13
Section 5.5. Guarantee of Payment......................................14
Section 5.6. Subrogation...............................................14
Section 5.7. Independent Obligations...................................14
ARTICLE VI. LIMITATION OF TRANSACTIONS; SUBORDINATION.......................14
Section 6.1. Limitation of Transactions................................14
Section 6.2 Ranking...................................................15
ARTICLE VII. TERMINATION....................................................15
Section 7.1. Termination...............................................15
ARTICLE VIII. INDEMNIFICATION...............................................15
Section 8.1. Exculpation...............................................15
Section 8.2. Indemnification...........................................16
ARTICLE IX. MISCELLANEOUS...................................................16
Section 9.1. Successors and Assigns....................................16
Section 9.2. Amendments................................................16
Section 9.3. Notices...................................................17
Section 9.4. Benefit...................................................17
Section 9.5. Governing Law.............................................17
i
<PAGE>
CROSS REFERENCE TABLE
<TABLE>
<CAPTION>
Section of Trust Section of
Indenture Act of Guarantee
1939, as amended Agreement
- ------------------ -----------------
<S> <C>
310(a) 4.1(a)
310(b) 4.1(c), 2.8
310(c) Not Applicable
311(a) 2.2(b)
311(b) 2.2(b)
311(c) Not Applicable
312(a) 2.2(a)
312(b) 2.2(b)
313 2.3
314(a) 2.4
314(b) Not Applicable
314(c) 2.5
314(d) Not Applicable
314(e) 1.1, 2.5, 3.2
314(f) 2.1, 3.2
315(a) 3.1(d)
315(b) 2.7
315(c) 3.1
315(d) 3.1(d)
316(a) 1.1, 2.6, 5.4
316(b) 5.3
317(a) 3.1
317(b) Not Applicable
318(a) 2.1(a)
318(b) 2.1
318(c) 2.1(b)
</TABLE>
Note: This Cross-Reference Table does not constitute part of this
Agreement and shall not affect the interpretation of any of its terms
or provisions.
ii
<PAGE>
PREFERRED SECURITIES GUARANTEE AGREEMENT
THIS PREFERRED SECURITIES GUARANTEE AGREEMENT (this "Preferred
Securities Guarantee"), dated as of _______________, 1998 is executed and
delivered by Independent Bankshares, Inc., a Texas corporation (the
"Guarantor"), and U.S. Trust Company of Texas, N.A., a national bank with trust
powers, as trustee (the "Preferred Guarantee Trustee"), for the benefit of the
Holders (as defined herein) from time to time of the Preferred Securities (as
defined herein) of Independent Capital Trust, a Delaware statutory business
trust (the "Trust").
RECITALS
WHEREAS, pursuant to an Amended and Restated Trust Agreement (the
"Trust Agreement"), dated as of _____________, 1998 among the trustees of the
Trust named therein, the Guarantor, as depositor, and the holders from time to
time of undivided beneficial interests in the assets of the Trust, the Trust is
issuing on the date hereof up to 1,000,000 preferred securities, having an
aggregate liquidation amount of $10,000,000, designated the ______% Cumulative
Trust Preferred Securities (the "Preferred Securities");
WHEREAS, as an incentive for the Holders to purchase the Preferred
Securities, the Guarantor desires irrevocably and unconditionally to agree, to
the extent set forth in this Preferred Securities Guarantee, to pay to the
Holders of the Preferred Securities the Guarantee Payments (as defined herein)
and to make certain other payments on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the purchase by each Holder of
Preferred Securities, which purchase the Guarantor hereby agrees shall benefit
the Guarantor, the Guarantor executes and delivers this Preferred Securities
Guarantee for the benefit of the Holders.
ARTICLE I
DEFINITIONS AND INTERPRETATION
SECTION 1.1. DEFINITIONS AND INTERPRETATION.
In this Preferred Securities Guarantee, unless the context otherwise
requires:
(a) capitalized terms used in this Preferred Securities Guarantee but
not defined in the preamble above have the respective meanings assigned to them
in this Section 1.1;
(b) terms defined in the Trust Agreement as at the date of execution
of this Preferred Securities Guarantee have the same meaning when used in this
Preferred Securities Guarantee;
<PAGE>
(c) a term defined anywhere in this Preferred Securities Guarantee has
the same meaning throughout;
(d) all references to "the Preferred Securities Guarantee" or "this
Preferred Securities Guarantee" are to this Preferred Securities Guarantee as
modified, supplemented or amended from time to time;
(e) all references in this Preferred Securities Guarantee to Articles
and Sections are to Articles and Sections of this Preferred Securities
Guarantee, unless otherwise specified;
(f) a term defined in the Trust Indenture Act has the same meaning
when used in this Preferred Securities Guarantee, unless otherwise defined in
this Preferred Securities Guarantee or unless the context otherwise requires;
and
(g) a reference to the singular includes the plural and vice versa.
"Affiliate" has the same meaning as given to that term in Rule 405 of
the Securities Act of 1933, as amended, or any successor rule thereunder.
"Business Day" means any day other than a Saturday or a Sunday or a
day on which federal or state banking institutions in the Borough of Manhattan,
The City of New York, New York, or City of Dallas, Texas, are authorized or
required by law, executive order or regulation to close, or a day on which the
Corporate Trust Office of the Preferred Guarantee Trustee is closed for
business.
"Corporate Trust Office" means the office of the Preferred Guarantee
Trustee at which the corporate trust business of the Preferred Guarantee Trustee
shall, at any particular time, be principally administered, which office at the
date of execution of this Preferred Securities Guarantee is located at U.S.
Trust Company of Texas, N.A., 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201.
"Covered Person" means any Holder or beneficial owner of Preferred
Securities.
"Debentures" means the _____% Subordinated Debentures due ___________,
2028, of the Debenture Issuer held by the Property Trustee of the Trust.
"Debenture Issuer" means the Guarantor.
"Event of Default" means a default by the Guarantor on any of its
payment or other obligations under this Preferred Securities Guarantee.
"Guarantor" means Independent Bankshares, Inc., a Texas corporation.
"Guarantee Payments" means the following payments or distributions,
without duplication, with respect to the Preferred Securities, to the extent not
paid or made by the Trust:
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(i) any accrued and unpaid Distributions that are required to be paid on such
Preferred Securities, to the extent the Trust then shall have funds legally
available therefor, (ii) the redemption price, including all accrued and unpaid
Distributions to the date of redemption (the "Redemption Price"), to the extent
the Trust then has funds legally available therefor, with respect to any
Preferred Securities called for redemption by the Trust, and (iii) upon a
voluntary or involuntary dissolution, winding-up or termination of the Trust
(other than in connection with the distribution of Debentures to the Holders in
exchange for Preferred Securities as provided in the Trust Agreement), the
lesser of (a) the aggregate of the Liquidation Amount and all accrued and unpaid
Distributions on the Preferred Securities to the date of payment, to the extent
the Trust then shall have funds legally available therefor and (b) the amount of
assets of the Trust remaining available for distribution to Holders in
liquidation of the Trust (in either case, the "Liquidation Distribution").
"Holder" shall mean a Person in whose name a Preferred Security or
Securities is registered in the Securities Register; provided, however, that, in
determining whether the holders of the requisite percentage of Preferred
Securities have given any request, notice, consent or waiver hereunder, "Holder"
shall not include the Guarantor or any Affiliate of the Guarantor.
"Indemnified Person" means the Preferred Guarantee Trustee, any
Affiliate of the Preferred Guarantee Trustee, or any officers, directors,
shareholders, members, partners, employees, representatives, nominees,
custodians or agents of the Preferred Guarantee Trustee.
"Indenture" means the Indenture dated as of ________, 1998 among the
Debenture Issuer and U.S. Trust Company of Texas, N.A., as trustee, and any
indenture supplemental thereto pursuant to, which Debentures of the Debenture
Issuer are to be issued to the Property Trustee of the Trust.
"Liquidation Distribution" has the meaning provided therefor in the
definition of Guarantee Payments.
"List of Holders" has the meaning set forth in Section 2.2 of this
Preferred Securities Guarantee.
"Majority in Liquidation Amount of the Preferred Securities" means the
Holders entitled to more than 50% of the Guaranteed Payments.
"Officers' Certificate" means, with respect to any Person, a
certificate signed by two authorized officers of such Person. Any Officers'
Certificate delivered with respect to compliance with a condition or covenant
provided for in this Preferred Securities Guarantee shall include:
(a) a statement that each officer signing the Officers' Certificate
has read the covenant or condition and the definition relating thereto;
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(b) a statement that each such officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(c) a statement as to whether, in the opinion of each such officer,
such condition or covenant has been complied with.
"Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.
"Preferred Guarantee Trustee" means U.S. Trust Company of Texas, N.A.,
until a Successor Preferred Guarantee Trustee has been appointed and has
accepted such appointment pursuant to the terms of this Preferred Securities
Guarantee and thereafter means each such Successor Preferred Guarantee Trustee.
"Redemption Price" has the meaning provided therefor in the definition
of Guarantee Payments.
"Responsible Officer" means, with respect to the Preferred Guarantee
Trustee, any officer within the Corporate Trust Office of the Preferred
Guarantee Trustee, including any vice-president, any assistant vice-president,
any assistant secretary, the treasurer, any assistant treasurer or other officer
of the Corporate Trust Office of the Preferred Guarantee Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of that officer's
knowledge of and familiarity with the particular subject.
"Successor Preferred Guarantee Trustee" means a successor Preferred
Guarantee Trustee possessing the qualifications to act as Preferred Guarantee
Trustee under Section 4.1.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, as in force at the date as of which this instrument was executed;
provided, however, that in the event the Trust Indenture Act of 1939, as
amended, is amended after such date, "Trust Indenture Act" means, to the extent
required by any such amendment, the Trust Indenture Act of 1939 as so amended.
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ARTICLE II
TRUST INDENTURE ACT
SECTION 2.1. TRUST INDENTURE ACT; APPLICATION.
(a) This Preferred Securities Guarantee is subject to the provisions
of the Trust Indenture Act that are required to be part of this Preferred
Securities Guarantee and shall, to the extent applicable, be governed by such
provisions.
(b) If and to the extent that any provision of this Preferred
Securities Guarantee limits, qualifies or conflicts with the duties imposed by
Section 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties
shall control.
SECTION 2.2. LISTS OF HOLDERS OF SECURITIES.
(a) In the event the Preferred Guarantee Trustee is not also the
Securities Registrar, the Guarantor shall provide the Preferred Guarantee
Trustee with a list, in such form as the Preferred Guarantee Trustee may
reasonably require, of the names and addresses of the Holders of the Preferred
Securities (the "List of Holders") as of such date, (i) within 1 Business Day
after January 1 and June 30 of each year, and (ii) at any other time within 30
days of receipt by the Guarantor of a written request for a List of Holders as
of a date no more than 15 days before such List of Holders is given to the
Preferred Guarantee Trustee; provided, that the Guarantor shall not be obligated
to provide such List of Holders at any time the List of Holders does not differ
from the most recent List of Holders given to the Preferred Guarantee Trustee by
the Guarantor. The Preferred Guarantee Trustee may destroy any List of Holders
previously given to it on receipt of a new List of Holders.
(b) The Preferred Guarantee Trustee shall comply with its obligations
under Sections 311(a), 311(b) and Section 312(b) of the Trust Indenture Act.
SECTION 2.3. REPORTS BY PREFERRED GUARANTEE TRUSTEE.
On or before July 15 of each year, the Preferred Guarantee Trustee
shall provide to the Holders of the Preferred Securities such reports as are
required by Section 313 of the Trust Indenture Act, if any, in the form and in
the manner provided by Section 313 of the Trust Indenture Act. The Preferred
Guarantee Trustee shall also comply with the requirements of Section 313(d) of
the Trust Indenture Act.
SECTION 2.4. PERIODIC REPORTS TO PREFERRED GUARANTEE TRUSTEE.
The Guarantor shall provide to the Preferred Guarantee Trustee such
documents, reports and information as required by Section 314 (if any) and the
compliance certificate required by Section 314 of the Trust Indenture Act in the
form, in the manner and at the times required by Section 314 of the Trust
Indenture Act.
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SECTION 2.5. EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT.
The Guarantor shall provide to the Preferred Guarantee Trustee such
evidence of compliance with any conditions precedent, if any, provided for in
this Preferred Securities Guarantee that relate to any of the matters set forth
in Section 314(c) of the Trust Indenture Act. Any certificate or opinion
required to be given by an officer pursuant to Section 314(c)(1) may be given in
the form of an Officers' Certificate.
SECTION 2.6. EVENTS OF DEFAULT; WAIVER.
The Holders of a Majority in Liquidation Amount of Preferred
Securities may, by vote, on behalf of the Holders of all of the Preferred
Securities, waive any past Event of Default and its consequences. Upon such
waiver, any such Event of Default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been cured, for every purpose of this
Preferred Securities Guarantee, but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon.
SECTION 2.7. EVENT OF DEFAULT; NOTICE.
(a) The Preferred Guarantee Trustee shall, within 90 days after the
occurrence of an Event of Default, transmit by mail, first class postage
prepaid, to the Holders of the Preferred Securities, notices of all Events of
Default actually known to a Responsible Officer of the Preferred Guarantee
Trustee, unless such defaults have been cured or waived before the giving of
such notice; provided, that the Preferred Guarantee Trustee shall be protected
in withholding such notice if and so long as a Responsible Officer of the
Preferred Guarantee Trustee in good faith determines that the withholding of
such notice is in the interests of the Holders of the Preferred Securities.
(b) The Preferred Guarantee Trustee shall not be deemed to have
knowledge of any Event of Default unless the Preferred Guarantee Trustee shall
have received written notice, or of which a Responsible Officer of the Preferred
Guarantee Trustee charged with the administration of the Trust Agreement shall
have obtained actual knowledge of such Event of Default.
SECTION 2.8. CONFLICTING INTERESTS.
The Trust Agreement shall be deemed to be specifically described in
this Preferred Securities Guarantee for the purposes of clause (i) of the first
proviso contained in Section 310(b) of the Trust Indenture Act.
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ARTICLE III
POWERS, DUTIES AND RIGHTS OF PREFERRED GUARANTEE TRUSTEE
SECTION 3.1. POWERS AND DUTIES OF PREFERRED GUARANTEE TRUSTEE.
(a) This Preferred Securities Guarantee shall be held by the Preferred
Guarantee Trustee for the benefit of the Holders of the Preferred Securities,
and the Preferred Guarantee Trustee shall not transfer this Preferred Securities
Guarantee to any Person except a Holder of Preferred Securities exercising his
or her rights pursuant to Section 5.4(b) or to a Successor Preferred Guarantee
Trustee on acceptance by such Successor Preferred Guarantee Trustee of its
appointment to act as Successor Preferred Guarantee Trustee. The right, title
and interest of the Preferred Guarantee Trustee shall automatically vest in any
Successor Preferred Guarantee Trustee, and such vesting and succession of title
shall be effective whether or not conveyancing documents have been executed and
delivered pursuant to the appointment of such Successor Preferred Guarantee
Trustee.
(b) If an Event of Default actually known to a Responsible Officer of
the Preferred Guarantee Trustee has occurred and is continuing, the Preferred
Guarantee Trustee shall enforce this Preferred Securities Guarantee for the
benefit of the Holders of the Preferred Securities.
(c) The Preferred Guarantee Trustee, before the occurrence of any
Event of Default and after the curing of all Events of Default that may have
occurred, shall undertake to perform only such duties as are specifically set
forth in this Preferred Securities Guarantee, and no implied covenants shall be
read into this Preferred Securities Guarantee against the Preferred Guarantee
Trustee. In case an Event of Default has occurred (that has not been cured or
waived pursuant to Section 2.6) and is actually known to a Responsible Officer
of the Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall
exercise such of the rights and powers vested in it by this Preferred Securities
Guarantee, and use the same degree of care and skill in its exercise thereof, as
a prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs.
(d) No provision of this Preferred Securities Guarantee shall be
construed to relieve the Preferred Guarantee Trustee from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) prior to the occurrence of any Event of Default and after
the curing or waiving of all such Events of Default that may have occurred:
(A) the duties and obligations of the Preferred Guarantee
Trustee shall be determined solely by the express provisions of this Preferred
Securities Guarantee, and the Preferred Guarantee Trustee shall not be liable
except for the performance of such duties and obligations as are specifically
set forth in this Preferred Securities Guarantee, and no implied covenants or
obligations shall be read into this Preferred Securities Guarantee against the
Preferred Guarantee Trustee; and
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(B) in the absence of bad faith on the part of the
Preferred Guarantee Trustee, the Preferred Guarantee Trustee may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon any certificates or opinions furnished to the Preferred
Guarantee Trustee and conforming to the requirements of this Preferred
Securities Guarantee; but in the case of any such certificates or opinions that
by any provision hereof are specifically required to be furnished to the
Preferred Guarantee Trustee, the Preferred Guarantee Trustee shall be under a
duty to examine the same to determine whether or not they conform to the
requirements of this Preferred Securities Guarantee;
(ii) the Preferred Guarantee Trustee shall not be liable for any
error of judgment made in good faith by a Responsible Officer of the Preferred
Guarantee Trustee, unless it shall be proved that the Preferred Guarantee
Trustee was negligent in ascertaining the pertinent facts upon which such
judgment was made;
(iii) the Preferred Guarantee Trustee shall not be liable with
respect to any action taken or omitted to be taken by it in good faith in
accordance with the direction of the Holders of not less than a Majority in
Liquidation Amount of the Preferred Securities relating to the time, method and
place of conducting any proceeding for any remedy available to the Preferred
Guarantee Trustee, or exercising any trust or power conferred upon the Preferred
Guarantee Trustee under this Preferred Securities Guarantee; and
(iv) no provision of this Preferred Securities Guarantee shall
require the Preferred Guarantee Trustee to expend or risk its own funds or
otherwise incur personal financial liability in the performance of any of its
duties or in the exercise of any of its rights or powers, if the Preferred
Guarantee Trustee shall have reasonable grounds for believing that the repayment
of such funds or liability is not reasonably assured to it under the terms of
this Preferred Securities Guarantee or indemnity, reasonably satisfactory to the
Preferred Guarantee Trustee, against such risk or liability is not reasonably
assured to it.
SECTION 3.2. CERTAIN RIGHTS OF PREFERRED GUARANTEE TRUSTEE.
(a) Subject to the provisions of Section 3.1:
(i) the Preferred Guarantee Trustee may conclusively rely, and
shall be fully protected in acting or refraining from acting upon, any
resolution, certificate, statement, instrument, opinion, report, notice,
request, direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document believed by it to be genuine and to have
been signed, sent or presented by the proper party or parties;
(ii) any direction or act of the Guarantor contemplated by this
Preferred Securities Guarantee shall be sufficiently evidenced by an Officers'
Certificate;
(iii) whenever, in the administration of this Preferred
Securities Guarantee, the Preferred Guarantee Trustee shall deem it desirable
that a matter be proved or established before taking, suffering or omitting any
action hereunder, the Preferred Guarantee Trustee (unless other
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evidence is herein specifically prescribed) may, in the absence of bad faith on
its part, request and conclusively rely upon an Officers' Certificate which,
upon receipt of such request, shall be promptly delivered by the Guarantor;
(iv) the Preferred Guarantee Trustee shall have no duty to see
to any recording, filing or registration of any instrument (or any rerecording,
refiling or registration thereof);
(v) the Preferred Guarantee Trustee may consult with counsel,
and the written advice or opinion of such counsel with respect to legal matters
shall be full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in accordance with
such advice or opinion. Such counsel may be counsel to the Guarantor or any of
its Affiliates and may include any of its employees. The Preferred Guarantee
Trustee shall have the right at any time to seek instructions concerning the
administration of this Preferred Securities Guarantee from any court of
competent jurisdiction;
(vi) the Preferred Guarantee Trustee shall be under no
obligation to exercise any of the rights or powers vested in it by this
Preferred Securities Guarantee at the request or direction of any Holder, unless
such Holder shall have provided to the Preferred Guarantee Trustee such security
and indemnity, reasonably satisfactory to the Preferred Guarantee Trustee,
against the costs, expenses (including attorneys' fees and expenses and the
expenses of the Preferred Guarantee Trustee's agents, nominees or custodians)
and liabilities that might be incurred by it in complying with such request or
direction, including such reasonable advances as may be requested by the
Preferred Guarantee Trustee; provided that, nothing contained in this Section
3.2(a)(vi) shall be taken to relieve the Preferred Guarantee Trustee, upon the
occurrence of an Event of Default, of its obligation to exercise the rights and
powers vested in it by this Preferred Securities Guarantee;
(vii) the Preferred Guarantee Trustee shall not be bound to make
any investigation into the facts or matters stated in any resolution,
certificate, statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness or other
paper or document, but the Preferred Guarantee Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters as it may
see fit;
(viii) the Preferred Guarantee Trustee may execute any of the
trusts or powers hereunder or perform any duties hereunder either directly or by
or through agents, nominees, custodians or attorneys, and the Preferred
Guarantee Trustee shall not be responsible for any misconduct or negligence on
the part of any agent or attorney appointed with due care by it hereunder;
(ix) any action taken by the Preferred Guarantee Trustee or its
agents hereunder shall bind the Holders of the Preferred Securities, and the
signature of the Preferred Guarantee Trustee or its agents alone shall be
sufficient and effective to perform any such action; and no third party shall be
required to inquire as to the authority of the Preferred Guarantee Trustee to so
act or as to its compliance with any of the terms and provisions of this
Preferred
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Securities Guarantee, both of which shall be conclusively evidenced by the
Preferred Guarantee Trustee's or its agent's taking such action; and
(x) whenever in the administration of this Preferred Securities
Guarantee the Preferred Guarantee Trustee shall deem it desirable to receive
instructions with respect to enforcing any remedy or right or taking any other
action hereunder, the Preferred Guarantee Trustee (i) may request instructions
from the Holders of a Majority in Liquidation Amount of the Preferred
Securities, (ii) may refrain from enforcing such remedy or right or taking such
other action until such instructions are received, and (iii) shall be protected
in conclusively relying on or acting in accordance with such instructions.
(b) No provision of this Preferred Securities Guarantee shall be
deemed to impose any duty or obligation on the Preferred Guarantee Trustee to
perform any act or acts or exercise any right, power, duty or obligation
conferred or imposed on it in any jurisdiction in which it shall be illegal, or
in which the Preferred Guarantee Trustee shall be unqualified or incompetent in
accordance with applicable law, to perform any such act or acts or to exercise
any such right, power, duty or obligation. No permissive power or authority
available to the Preferred Guarantee Trustee shall be construed to be a duty.
SECTION 3.3. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF GUARANTEE.
The Recitals contained in this Guarantee shall be taken as the
statements of the Guarantor, and the Preferred Guarantee Trustee does not assume
any responsibility for their correctness. The Preferred Guarantee Trustee makes
no representation as to the validity or sufficiency of this Preferred Securities
Guarantee.
ARTICLE IV
PREFERRED GUARANTEE TRUSTEE
SECTION 4.1. PREFERRED GUARANTEE TRUSTEE; ELIGIBILITY.
(a) There shall at all times be a Preferred Guarantee Trustee which
shall:
(i) not be an Affiliate of the Guarantor; and
(ii) be a corporation organized and doing business under the
laws of the United States of America or any state or territory thereof or of the
District of Columbia, or a corporation or Person permitted by the Securities and
Exchange Commission to act as an institutional trustee under the Trust Indenture
Act, authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $50,000,000 (or being a member or
subsidiary of a bank holding system with aggregate combined capital and surplus
of at least $50,000,000), and subject to supervision or examination by federal,
state, territorial or District of Columbia authority. If such corporation
publishes reports of condition at least annually, pursuant to law or to the
requirements of the supervising or examining authority
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referred to above, then, for the purposes of this Section 4.1(a)(ii), the
combined capital and surplus of such corporation shall be deemed to be its
combined capital and surplus as set forth in its most recent report of condition
so published.
(b) If at any time the Preferred Guarantee Trustee shall cease to be
eligible to so act under Section 4.1(a), the Preferred Guarantee Trustee shall
immediately resign in the manner and with the effect set out in Section 4.2(c).
(c) If the Preferred Guarantee Trustee has or shall acquire any
"conflicting interest" within the meaning of Section 310(b) of the Trust
Indenture Act, the Preferred Guarantee Trustee and Guarantor shall in all
respects comply with the provisions of Section 310(b) of the Trust Indenture
Act.
SECTION 4.2. APPOINTMENT, REMOVAL AND RESIGNATION OF PREFERRED GUARANTEE
TRUSTEE.
(a) Subject to Section 4.2(b), the Preferred Guarantee Trustee may be
appointed or removed without cause at any time by the Guarantor.
(b) The Preferred Guarantee Trustee shall not be removed in accordance
with Section 4.2(a) until a Successor Preferred Guarantee Trustee has been
appointed and has accepted such appointment by written instrument executed by
such Successor Preferred Guarantee Trustee and delivered to the Guarantor.
(c) The Preferred Guarantee Trustee appointed to office shall hold
office until a Successor Preferred Guarantee Trustee shall have been appointed
or until its removal or resignation. The Preferred Guarantee Trustee may resign
from office (without need for prior or subsequent accounting) by an instrument
in writing executed by the Preferred Guarantee Trustee and delivered to the
Guarantor, which resignation shall not take effect until a Successor Preferred
Guarantee Trustee has been appointed and has accepted such appointment by
instrument in writing executed by such Successor Preferred Guarantee Trustee and
delivered to the Guarantor and the resigning Preferred Guarantee Trustee.
(d) If no Successor Preferred Guarantee Trustee shall have been
appointed and accepted appointment as provided in this Section 4.2 within 60
days after delivery to the Guarantor of an instrument of resignation, the
resigning Preferred Guarantee Trustee may petition any court of competent
jurisdiction for appointment of a Successor Preferred Guarantee Trustee. Such
court may thereupon, after prescribing such notice, if any, as it may deem
proper, appoint a Successor Preferred Guarantee Trustee.
(e) No Preferred Guarantee Trustee shall be liable for the acts or
omissions to act of any Successor Preferred Guarantee Trustee.
(f) Upon termination of this Preferred Securities Guarantee or removal
or resignation of the Preferred Guarantee Trustee pursuant to this Section 4.2,
the Guarantor shall pay to the
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Preferred Guarantee Trustee all fees and expenses accrued to the date of such
termination, removal or resignation.
ARTICLE V
GUARANTEE
SECTION 5.1. GUARANTEE.
The Guarantor irrevocably and unconditionally agrees to pay in full to
the Holders the Guarantee Payments (without duplication of amounts theretofore
paid by the Trust), as and when due, regardless of any defense, right of set-off
or counterclaim that the Trust may have or assert. The Guarantor's obligation
to make a Guarantee Payment may be satisfied by direct payment of the required
amounts by the Guarantor to the Holders or by causing the Trust to pay such
amounts to the Holders.
SECTION 5.2. WAIVER OF NOTICE AND DEMAND.
The Guarantor hereby waives notice of acceptance of this Preferred
Securities Guarantee and of any liability to which it applies or may apply,
presentment, demand for payment, any right to require a proceeding first against
the Trust or any other Person before proceeding against the Guarantor, protest,
notice of nonpayment, notice of dishonor, notice of redemption and all other
notices and demands.
SECTION 5.3. OBLIGATIONS NOT AFFECTED.
The obligations, covenants, agreements and duties of the Guarantor
under this Preferred Securities Guarantee shall in no way be affected or
impaired by reason of the happening from time to time of any of the following:
(a) the release or waiver, by operation of law or otherwise, of the
performance or observance by the Trust of any express or implied agreement,
covenant, term or condition relating to the Preferred Securities to be performed
or observed by the Trust;
(b) the extension of time for the payment by the Trust of all or any
portion of the Distributions, Redemption Price, Liquidation Distribution or any
other sums payable under the terms of the Preferred Securities or the extension
of time for the performance of any other obligation under, arising out of, or in
connection with, the Preferred Securities (other than an extension of time for
payment of Distributions, Redemption Price, Liquidation Distribution or other
sum payable that results from the extension of any interest payment period on
the Debentures or any extension of the maturity date of the Debentures permitted
by the Indenture);
(c) any failure, omission, delay or lack of diligence on the part of
the Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders
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pursuant to the terms of the Preferred Securities, or any action on the part of
the Trust granting indulgence or extension of any kind;
(d) the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition or readjustment of debt of,
or other similar proceedings affecting, the Trust or any of the assets of the
Trust;
(e) any invalidity of, or defect or deficiency in, the Preferred
Securities;
(f) any failure or omission to receive any regulatory approval or
consent required in connection with the Preferred Securities (or the common
equity securities issued by the Trust), including the failure to receive any
approval of the Board of Governors of the Federal Reserve System required for
the redemption of the Preferred Securities;
(g) the settlement or compromise of any obligation guaranteed hereby
or hereby incurred; or
(h) any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of a guarantor, it being the intent of
this Section 5.3 that the obligations of the Guarantor with respect to the
Guaranteed Payments shall be absolute and unconditional under any and all
circumstances.
There shall be no obligation of the Holders to give notice to, or
obtain consent of, the Guarantor with respect to the happening of any of the
foregoing.
SECTION 5.4. RIGHTS OF HOLDERS.
(a) If the Preferred Guarantee Trustee fails to enforce this Preferred
Securities Guarantee, the Holders of a Majority in Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting of any proceeding for any remedy available to the Preferred Guarantee
Trustee in respect of this Preferred Securities Guarantee or exercising any
trust or power conferred upon the Preferred Guarantee Trustee under this
Preferred Securities Guarantee.
(b) If the Preferred Guarantee Trustee fails to enforce this Preferred
Securities Guarantee, any Holder of Preferred Securities may institute a legal
proceeding directly against the Guarantor to enforce the Preferred Guarantee
Trustee's rights under this Preferred Securities Guarantee, without first
instituting a legal proceeding against the Trust, the Preferred Guarantee
Trustee or any other Person.
SECTION 5.5. GUARANTEE OF PAYMENT.
This Preferred Securities Guarantee creates a guarantee of payment and
not of collection.
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SECTION 5.6. SUBROGATION.
The Guarantor shall be subrogated to all (if any) rights of the
Holders of Preferred Securities against the Trust in respect of any amounts paid
to such Holders by the Guarantor under this Preferred Securities Guarantee;
provided, however, that the Guarantor shall not (except to the extent required
by mandatory provisions of law) be entitled to enforce or exercise any right
that it may acquire by way of subrogation or any indemnity, reimbursement or
other agreement, in all cases as a result of payment under this Preferred
Securities Guarantee, if, at the time of any such payment, any amounts are due
and unpaid under this Preferred Securities Guarantee. If any amount shall be
paid to the Guarantor in violation of the preceding sentence, the Guarantor
agrees to hold such amount in trust for the Holders and to pay over such amount
to the Holders.
SECTION 5.7. INDEPENDENT OBLIGATIONS.
The Guarantor acknowledges that its obligations hereunder are
independent of the obligations of the Trust with respect to the Preferred
Securities, and that the Guarantor shall be liable as principal and as debtor
hereunder to make Guarantee Payments pursuant to the terms of this Preferred
Securities Guarantee notwithstanding the occurrence of any event referred to in
subsections (a) through (h), inclusive, of Section 5.3 hereof.
ARTICLE VI
LIMITATION OF TRANSACTIONS; SUBORDINATION
SECTION 6.1. LIMITATION OF TRANSACTIONS.
So long as any Preferred Securities remain outstanding, if any of the
circumstances described in Section 5.6 of the Indenture shall have occurred and
in respect of which the Guarantor shall not have taken reasonable steps to cure,
then (a) the Guarantor shall not declare or pay any dividends or distributions
on, or redeem, purchase, acquire or make a liquidation payment with respect to,
any of its capital stock (other than (i) dividends or distributions in common
stock of the Guarantor or any declaration of a non-cash dividend in connection
with the implementation of a shareholders' rights plan, or the issuance of stock
under any such plan in the future, or the redemption or repurchase of any such
rights pursuant thereto, and (ii) purchases of common stock of the Guarantor
related to the rights under any of the Guarantor's benefit plans for its
directors, officers or employees), (b) the Guarantor shall not make any payment
of principal or interest on or repay, repurchase or redeem any debt securities
issued by the Guarantor which rank pari passu with or junior in interest to the
Debentures and (c) the Guarantor shall not redeem, purchase or acquire less than
all of the Outstanding Debentures or any of the Preferred Securities.
14
<PAGE>
SECTION 6.2 RANKING.
This Preferred Securities Guarantee will constitute an unsecured
obligation of the Guarantor and will rank (i) subordinate and junior in right of
payment to all Senior Debt, Subordinated Debt and Additional Senior Obligations
(as defined in the Indenture) of the Guarantor, (ii) pari passu with the most
senior preferred securities or preference stock now or hereafter issued by the
Guarantor and with any guarantee now or hereafter entered into by the Guarantor
in respect of any preferred securities or preference stock of any Affiliate of
the Guarantor, and (iii) senior to the Guarantor's common stock.
ARTICLE VII
TERMINATION
SECTION 7.1. TERMINATION.
This Preferred Securities Guarantee shall terminate and be of no
further force and effect upon (i) full payment of the Redemption Price of all
Preferred Securities, (ii) full payment of the amounts payable in accordance
with the Trust Agreement upon liquidation of the Trust, or (iii) distribution of
the Debentures to the Holders of the Preferred Securities. Notwithstanding the
foregoing, this Preferred Securities Guarantee shall continue to be effective or
shall be reinstated, as the case may be, if at any time any Holder of Preferred
Securities must restore payment of any sums paid under the Preferred Securities
or under this Preferred Securities Guarantee.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1. EXCULPATION.
(a) No Indemnified Person shall be liable, responsible or accountable
in damages or otherwise to the Guarantor or any Covered Person for any loss,
damage or claim incurred by reason of any act or omission performed or omitted
by such Indemnified Person in good faith in accordance with this Preferred
Securities Guarantee and in a manner that such Indemnified Person reasonably
believed to be within the scope of the authority conferred on such Indemnified
Person by this Preferred Securities Guarantee or by law, except that an
Indemnified Person shall be liable for any such loss, damage or claim incurred
by reason of such Indemnified Person's negligence or willful misconduct with
respect to such acts or omissions.
(b) An Indemnified Person shall be fully protected in relying in good
faith upon the records of the Guarantor and upon such information, opinions,
reports or statements presented to the Guarantor by any Person as to matters the
Indemnified Person reasonably believes are within such other Person's
professional or expert competence and who has been selected with reasonable care
by or on behalf of the Guarantor, including information, opinions, reports or
statements as to
15
<PAGE>
the value and amount of the assets, liabilities, profits, losses, or any other
facts pertinent to the existence and amount of assets from which Distributions
to Holders of Preferred Securities might properly be paid.
SECTION 8.2. INDEMNIFICATION.
The Guarantor agrees to indemnify each Indemnified Person for, and to
hold each Indemnified Person harmless against, any loss, liability or expense
incurred without negligence or bad faith on its part, arising out of or in
connection with the acceptance or administration of the trust or trusts
hereunder, including the costs and expenses (including reasonable legal fees and
expenses) of defending itself against, or investigating, any claim or liability
in connection with the exercise or performance of any of its powers or duties
hereunder. The obligation to indemnify as set forth in this Section 8.2 shall
survive the termination of this Preferred Securities Guarantee.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1. SUCCESSORS AND ASSIGNS.
All guarantees and agreements contained in this Preferred Securities
Guarantee shall bind the successors, assigns, receivers, trustees and
representatives of the Guarantor and shall inure to the benefit of the Holders
of the Preferred Securities then outstanding.
SECTION 9.2. AMENDMENTS.
Except with respect to any changes that do not materially adversely
affect the rights of Holders (in which case no consent of Holders will be
required), this Preferred Securities Guarantee may only be amended with the
prior approval of the Holders of at least a Majority in Liquidation Amount of
the Preferred Securities. The provisions of Article VI of the Trust Agreement
with respect to meetings of Holders of the Preferred Securities apply to the
giving of such approval.
SECTION 9.3. NOTICES.
All notices provided for in this Preferred Securities Guarantee shall
be in writing, duly signed by the party giving such notice, and shall be
delivered, telecopied or mailed by registered or certified mail, as follows:
(a) If given to the Preferred Guarantee Trustee, at the Preferred
Guarantee Trustee's mailing address set forth below (or such other address as
the Preferred Guarantee Trustee may give notice of to the Holders of the
Preferred Securities):
16
<PAGE>
U.S. Trust Company of Texas, N.A.
2001 Ross Avenue, Suite 2700
Dallas, TX 75201
(b) If given to the Guarantor, at the Guarantor's mailing address set
forth below (or such other address as the Guarantor may give notice of to the
Holders of the Preferred Securities):
Independent Bankshares, Inc.
547 Chestnut Street
Abilene, TX 79602
(c) If given to any Holder of Preferred Securities, at the address set
forth on the books and records of the Trust.
All such notices shall be deemed to have been given when received in
person, telecopied with receipt confirmed, or three Business Days after being
mailed by registered or certified mail, except that if a notice or other
document is refused delivery or cannot be delivered because of a changed address
of which no valid notice was given, such notice or other document shall be
deemed to have been delivered on the date of such refusal or inability to
deliver.
SECTION 9.4. BENEFIT.
This Preferred Securities Guarantee is solely for the benefit of the
Holders of the Preferred Securities and, subject to Section 3.1(a), is not
separately transferable from the Preferred Securities.
SECTION 9.5. GOVERNING LAW.
THIS PREFERRED SECURITIES GUARANTEE SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS.
[Remainder of page intentionally left blank.]
17
<PAGE>
This Preferred Securities Guarantee is executed as of the day and year
first above written.
INDEPENDENT BANKSHARES, INC.,
as Guarantor
By:
--------------------------------------------
--------------------------------------------
--------------------------------------------
U.S. TRUST COMPANY OF TEXAS, N.A.
as Preferred Guarantee Trustee
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
18
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-2 (File No.
333-____________) of our report dated February 2, 1998, on our audits of the
consolidated financial statements of Independent Bankshares, Inc. as of December
31, 1997 and 1996 and for each of the two years in the period ended December 31,
1997. We consent to the reference to our firm under the caption "Experts".
/s/ Pricewaterhouse Coopers LLP
Fort Worth, Texas
August _____, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-2 (File No.
333- ) of our report dated March 6, 1998 on our audit of the consolidated
financial statements of Azle Bancorp and Subsidiaries as of and for this year
ended December 31, 1997. We consent to the reference to our firm under the
caption "Experts".
/s/ STOVALL, GRANDEY & WHATLEY, L.L.P.
Fort Worth, Texas
August 4, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 11, 1997, with respect to the 1996 financial
statements of Azle State Bank included in the Registration Statement (Form 333-
______) and related Prospectus of Independent Bankshares, Inc. and Independent
Capital Trust for the registration of 320,000 shares of common stock and
$10,000,000 of preferred securities, respectively.
/s/ Ernst & Young LLP
Fort Worth, Texas
July 31, 1998
<PAGE>
EXHIBIT 25.2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)_________
_______________
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
2001 Ross Ave, Suite 2700 75201
Dallas, Texas (Zip Code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Ave, Suite 2700
Dallas, Texas 75201
(214) 754-1200
(Name, address and telephone number of agent for service)
_______________
Independent Capital
(Exact name of obligor as specified in its charter)
Delaware Being Applied For
(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)
_______________
__% Preferred Securities
(Title of the indenture securities)
- --------------------------------------------------------------------------------
<PAGE>
GENERAL
1. General Information.
--------------------
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. Affiliations with Obligor and Underwriters.
-------------------------------------------
If the obligor or any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
None.
3. Voting Securities of the Trustee.
---------------------------------
Furnish the following information as to each class of voting securities of
the Trustee:
As of May 28, 1998
- --------------------------------------------------------------------------------
Col A. Col B.
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Capital Stock - par value $100 per share 5,000 shares
4. Trusteeships under Other Indentures.
------------------------------------
Not Applicable
5. Interlocking Directorates and Similar Relationships with the Obligor or
-----------------------------------------------------------------------
Underwriters.
-------------
Not Applicable
<PAGE>
6. Voting Securities of the Trustee Owned by the Obligor or its Officials.
-----------------------------------------------------------------------
Not Applicable
7. Voting Securities of the Trustee Owned by Underwriters or their Officials.
--------------------------------------------------------------------------
Not Applicable
8. Securities of the Obligor Owned or Held by the Trustee.
-------------------------------------------------------
Not Applicable
9. Securities of Underwriters Owned or Held by the Trustee.
--------------------------------------------------------
Not Applicable
10. Ownership or Holdings by the Trustee of Voting Securities of Certain
--------------------------------------------------------------------
Affiliates or Security Holders of the Obligor.
----------------------------------------------
Not Applicable
11. Ownership or Holdings by the Trustee of any Securities of a Person Owning
-------------------------------------------------------------------------
50 Percent or More of the Voting Securities of the Obligor.
-----------------------------------------------------------
Not Applicable
12. Indebtedness of the Obligor to the Trustee.
-------------------------------------------
Not Applicable
13. Defaults by the Obligor.
------------------------
Not Applicable
14. Affiliations with the Underwriters.
-----------------------------------
Not Applicable
15. Foreign Trustee.
----------------
Not Applicable
16. List of Exhibits.
-----------------
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
Texas, N.A.; incorporated herein by reference to Exhibit T-1.1
filed with Form T-1 Statement, Registration No. 22-21897.
<PAGE>
16. (con't.)
T-1.2 - A copy of the certificate of authority of the Trustee to commence
business; incorporated herein by reference to Exhibit T-1.2 filed
with Form T-1 Statement, Registration No. 22-21897.
T-1.3 - A copy of the authorization of the Trustee to exercise corporate
trust powers; incorporated herein by reference to Exhibit T-1.3
filed with Form T-1 Statement, Registration No. 22-21897.
T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas, N.A., as
amended to date; incorporated herein by reference to Exhibit T-1.4
filed with Form T-1 Statement, Registration No. 22-21897.
T-1.6 - The consent of the Trustee required by Section 321(b) of the
Trust Indenture Act of 1939.
T-1.7 - A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
As of May 28, 1998, the Trustee had 5,000 shares of Capital Stock outstanding,
all of which are owned by U.S. T.L.P.O. Corp. As of May 28, 1998, U.S.
T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of which are
owned by U.S. Trust Corporation. U.S. Trust Corporation had outstanding
19,142,000.00 shares of $5 par value Common Stock as of May 28, 1998.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
In as much as this Form T-1 is filed prior to the ascertainment by the Trustee
of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.
_______________
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S
Trust Company of Texas, N.A., a national banking association organized under the
laws of the United States of America, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
31st day of July, 1998.
U.S. Trust Company
of Texas, N.A., Trustee
By: /s/ Melissa Scott
--------------------
Melissa Scott
Vice President
<PAGE>
Exhibit T-1.6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Independent Capital __%
Preferred Securities, we hereby consent that reports of examination by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefore.
U.S. Trust Company of Texas, N.A.
By: /s/ Melissa Scott
---------------------------
Melissa Scott
Vice President
<PAGE>
EXHIBIT 25.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)_________
_______________
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
2001 Ross Ave, Suite 2700 75201
Dallas, Texas (Zip Code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Ave, Suite 2700
Dallas, Texas 75201
(214) 754-1200
(Name, address and telephone number of agent for service)
_______________
Independent Bankshares, Inc.
(Exact name of obligor 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)
_______________
Guarantee Pursuant to the Preferred Securities Guarantee Agreement
(Title of the indenture securities)
- --------------------------------------------------------------------------------
<PAGE>
GENERAL
1. General Information.
--------------------
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. Affiliations with Obligor and Underwriters.
-------------------------------------------
If the obligor or any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
None.
3. Voting Securities of the Trustee.
---------------------------------
Furnish the following information as to each class of voting securities of
the Trustee:
As of May 28, 1998
- --------------------------------------------------------------------------------
Col A. Col B.
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Capital Stock - par value $100 per share 5,000 shares
4. Trusteeships under Other Indentures.
------------------------------------
Not Applicable
5. Interlocking Directorates and Similar Relationships with the Obligor or
-----------------------------------------------------------------------
Underwriters.
-------------
Not Applicable
<PAGE>
6. Voting Securities of the Trustee Owned by the Obligor or its Officials.
-----------------------------------------------------------------------
Not Applicable
7. Voting Securities of the Trustee Owned by Underwriters or their Officials.
--------------------------------------------------------------------------
Not Applicable
8. Securities of the Obligor Owned or Held by the Trustee.
-------------------------------------------------------
Not Applicable
9. Securities of Underwriters Owned or Held by the Trustee.
--------------------------------------------------------
Not Applicable
10. Ownership or Holdings by the Trustee of Voting Securities of Certain
--------------------------------------------------------------------
Affiliates or Security Holders of the Obligor.
----------------------------------------------
Not Applicable
11. Ownership or Holdings by the Trustee of any Securities of a Person Owning
-------------------------------------------------------------------------
50 Percent or More of the Voting Securities of the Obligor.
-----------------------------------------------------------
Not Applicable
12. Indebtedness of the Obligor to the Trustee.
-------------------------------------------
Not Applicable
13. Defaults by the Obligor.
------------------------
Not Applicable
14. Affiliations with the Underwriters.
-----------------------------------
Not Applicable
15. Foreign Trustee.
----------------
Not Applicable
16. List of Exhibits.
-----------------
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
Texas, N.A.; incorporated herein by reference to Exhibit T-1.1
filed with Form T-1 Statement, Registration No. 22-21897.
<PAGE>
16. (con't.)
T-1.2 - A copy of the certificate of authority of the Trustee to commence
business; incorporated herein by reference to Exhibit T-1.2 filed
with Form T-1 Statement, Registration No. 22-21897.
T-1.3 - A copy of the authorization of the Trustee to exercise corporate
trust powers; incorporated herein by reference to Exhibit T-1.3
filed with Form T-1 Statement, Registration No. 22-21897.
T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas, N.A., as
amended to date; incorporated herein by reference to Exhibit T-1.4
filed with Form T-1 Statement, Registration No. 22-21897.
T-1.6 - The consent of the Trustee required by Section 321(b) of the
Trust Indenture Act of 1939.
T-1.7 - A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
As of May 28, 1998, the Trustee had 5,000 shares of Capital Stock outstanding,
all of which are owned by U.S. T.L.P.O. Corp. As of May 28, 1998, U.S.
T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of which are
owned by U.S. Trust Corporation. U.S. Trust Corporation had outstanding
19,142,000.00 shares of $5 par value Common Stock as of May 28, 1998.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
In as much as this Form T-1 is filed prior to the ascertainment by the Trustee
of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.
_______________
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S
Trust Company of Texas, N.A., a national banking association organized under the
laws of the United States of America, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
31st day of July, 1998.
U.S. Trust Company
of Texas, N.A., Trustee
By: /s/ Melissa Scott
------------------------
Melissa Scott
Vice President
<PAGE>
Exhibit T-1.6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Independent Bankshares,
Inc. Guarantee Pursuant to the Preferred Securities Guarantee Agreement, we
hereby consent that reports of examination by Federal, State, Territorial or
District authorities may be furnished by such authorities to the Securities and
Exchange Commission upon request therefore.
U.S. Trust Company of Texas, N.A.
By: /s/ Melissa Scott
-------------------------
Melissa Scott
Vice President
<PAGE>
EXHIBIT 25.4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A
TRUSTEE PURSUANT TO SECTION 305(b)(2)_________
_______________
U.S. TRUST COMPANY OF TEXAS, N.A.
(Exact name of trustee as specified in its charter)
75-2353745
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
2001 Ross Ave, Suite 2700 75201
Dallas, Texas (Zip Code)
(Address of trustee's
principal executive offices)
Compliance Officer
U.S. Trust Company of Texas, N.A.
2001 Ross Ave, Suite 2700
Dallas, Texas 75201
(214) 754-1200
(Name, address and telephone number of agent for service)
_______________
Independent Bankshares, Inc.
(Exact name of obligor 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)
_______________
__% Subordinated Debentures
(Title of the indenture securities)
- --------------------------------------------------------------------------------
<PAGE>
GENERAL
1. General Information.
--------------------
Furnish the following information as to the Trustee:
(a) Name and address of each examining or supervising authority to which
it is subject.
Federal Reserve Bank of Dallas (11th District), Dallas, Texas
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Dallas, Texas
The Office of the Comptroller of the Currency, Dallas, Texas
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
2. Affiliations with Obligor and Underwriters.
-------------------------------------------
If the obligor or any underwriter for the obligor is an affiliate of the
Trustee, describe each such affiliation.
None.
3. Voting Securities of the Trustee.
---------------------------------
Furnish the following information as to each class of voting securities of
the Trustee:
As of May 28, 1998
- --------------------------------------------------------------------------------
Col A. Col B.
- --------------------------------------------------------------------------------
Title of Class Amount Outstanding
- --------------------------------------------------------------------------------
Capital Stock - par value $100 per share 5,000 shares
4. Trusteeships under Other Indentures.
------------------------------------
Not Applicable
5. Interlocking Directorates and Similar Relationships with the Obligor or
-----------------------------------------------------------------------
Underwriters.
-------------
Not Applicable
<PAGE>
6. Voting Securities of the Trustee Owned by the Obligor or its Officials.
-----------------------------------------------------------------------
Not Applicable
7. Voting Securities of the Trustee Owned by Underwriters or their Officials.
--------------------------------------------------------------------------
Not Applicable
8. Securities of the Obligor Owned or Held by the Trustee.
-------------------------------------------------------
Not Applicable
9. Securities of Underwriters Owned or Held by the Trustee.
--------------------------------------------------------
Not Applicable
10. Ownership or Holdings by the Trustee of Voting Securities of Certain
--------------------------------------------------------------------
Affiliates or Security Holders of the Obligor.
----------------------------------------------
Not Applicable
11. Ownership or Holdings by the Trustee of any Securities of a Person Owning
-------------------------------------------------------------------------
50 Percent or More of the Voting Securities of the Obligor.
-----------------------------------------------------------
Not Applicable
12. Indebtedness of the Obligor to the Trustee.
-------------------------------------------
Not Applicable
13. Defaults by the Obligor.
------------------------
Not Applicable
14. Affiliations with the Underwriters.
-----------------------------------
Not Applicable
15. Foreign Trustee.
----------------
Not Applicable
16. List of Exhibits.
-----------------
T-1.1 - A copy of the Articles of Association of U.S. Trust Company of
Texas, N.A.; incorporated herein by reference to Exhibit T-1.1
filed with Form T-1 Statement, Registration No. 22-21897.
<PAGE>
16. (con't.)
T-1.2 - A copy of the certificate of authority of the Trustee to commence
business; incorporated herein by reference to Exhibit T-1.2 filed
with Form T-1 Statement, Registration No. 22-21897.
T-1.3 - A copy of the authorization of the Trustee to exercise corporate
trust powers; incorporated herein by reference to Exhibit T-1.3
filed with Form T-1 Statement, Registration No. 22-21897.
T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas, N.A., as
amended to date; incorporated herein by reference to Exhibit T-1.4
filed with Form T-1 Statement, Registration No. 22-21897.
T-1.6 - The consent of the Trustee required by Section 321(b) of the
Trust Indenture Act of 1939.
T-1.7 - A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or
examining authority.
NOTE
As of May 28, 1998, the Trustee had 5,000 shares of Capital Stock outstanding,
all of which are owned by U.S. T.L.P.O. Corp. As of May 28, 1998, U.S.
T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of which are
owned by U.S. Trust Corporation. U.S. Trust Corporation had outstanding
19,142,000.00 shares of $5 par value Common Stock as of May 28, 1998.
The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S
Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation.
In as much as this Form T-1 is filed prior to the ascertainment by the Trustee
of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10
and 11, the answers to said Items are based upon incomplete information. Items
2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by
an amendment to this Form T-1.
In answering any items in this Statement of Eligibility and Qualification which
relates to matters peculiarly within the knowledge of the obligors or their
directors or officers, or an underwriter for the obligors, the Trustee has
relied upon information furnished to it by the obligors and will rely on
information to be furnished by the obligors or such underwriter, and the Trustee
disclaims responsibility for the accuracy or completeness of such information.
_______________
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S
Trust Company of Texas, N.A., a national banking association organized under the
laws of the United States of America, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of Dallas, and State of Texas on the
31st day of July, 1998.
U.S. Trust Company
of Texas, N.A., Trustee
By: /s/ Melissa Scott
------------------------
Melissa Scott
Vice President
<PAGE>
Exhibit T-1.6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 as amended in connection with the proposed issue of Independent Bankshares,
Inc. __% Subordinated Debentures, we hereby consent that reports of examination
by Federal, State, Territorial or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon request therefore.
U.S. Trust Company of Texas, N.A.
By: /s/ Melissa Scott
---------------------------
Melissa Scott
Vice President
