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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1998
REGISTRATION NO. 333-60649
REGISTRATION NO. 333-60649-01
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
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. [ ]
------------------------
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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
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 SEPTEMBER 1, 1998
PROSPECTUS
320,000 SHARES
INDEPENDENT BANKSHARES, INC.
COMMON STOCK
--------------------
[LOGO] 1,000,000 PREFERRED SECURITIES
INDEPENDENT CAPITAL TRUST
% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT OF $10 PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
INDEPENDENT BANKSHARES, INC.
--------------------
$10,000,000% Subordinated Debentures of
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 (or $10,000,000 aggregate
liquidation amount) of its % Cumulative Trust Preferred Securities,
liquidation amount $10.00 per preferred security (the "Preferred Securities"),
which are fully and unconditionally guaranteed, as described herein, by the
Company. The Preferred Securities represent preferred beneficial interests in
the assets of the Trust.
(continued on next page.)
The Common Stock is traded on the American Stock Exchange, Inc. (the "AMEX")
under the symbol "IBK." See "Price Range of Common Stock and Dividends." On
August 27, 1998, the last sale price of the Common Stock as reported on AMEX was
$12. The Preferred Securities have been approved for listing on the AMEX under
the symbol "IBK.Pr," subject to notice of official issuance. (The Common Stock
and the Preferred Securities may sometimes be referred to herein as the
"Securities").
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"). The separate offerings
of the Preferred Securities and the Common Stock (sometimes referred to herein
collectively as the "Offering") are contingent upon the successful completion of
each other and the consummation of the Pending Acquisition. See "Use of
Proceeds" and "Pending Acquisition."
--------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 12 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>
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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2) TRUST(2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Common Stock..................... $ $ $ N/A
- ----------------------------------------------------------------------------------------------------------------
Total Common Stock(3)...................... $ $ $ N/A
- ----------------------------------------------------------------------------------------------------------------
Per Preferred Security..................... $ 10.00 $ N/A $ 10.00
- ----------------------------------------------------------------------------------------------------------------
Total Preferred Securities (3)............. $10,000,000 $ N/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 30-day options 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
, 1998
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(continued from previous page)
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").
U.S. Trust Company of Texas, N.A. ("U.S. Trust") 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 September , 2028, which
date may be (i) shortened to a date not earlier than September , 2003, or
(ii) extended to a date not later than September , 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 (the "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
September , 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 WHICH 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."
(continued on next page)
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(continued from previous page)
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 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 September , 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.
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[EDGAR: 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
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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% common stock dividend paid to
shareholders in May 1995 and the 25% common stock dividend paid to shareholders
in May 1997.
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 Company's principal subsidiary,
First State Bank, National Association (the "Bank"), currently operates 11 full-
service banking locations in and around four of the major markets in West Texas.
These markets, which serve as regional medical and retail centers, are Abilene
(three locations), Lubbock, Odessa (four locations) and San Angelo. Abilene,
with a metropolitan statistical area ("MSA") of approximately 125,000 and a
diversified economy, is home to five universities and colleges, two regional
medical complexes and Dyess Air Force Base. Lubbock, the ninth largest city in
Texas with a MSA of approximately 235,000, is home to Texas Tech University and
a regional medical center. The Lubbock area produces approximately 3% of
worldwide cotton production. Odessa, with a MSA of approximately 246,000, has
an energy-related economy and over 500 manufacturing businesses. San Angelo,
with a MSA of approximately 102,000, has a diversified economy centered around
health care, 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 shareholders' 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 announced on May 29, 1998 that it had agreed to acquire Azle
Bancorp for cash of approximately $19 million. Azle Bancorp and its subsidiary,
Azle State Bank ("Azle State"), are located in Azle, Texas, which is northwest
of the Dallas-Fort Worth metroplex. 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 total shareholders' equity of $9,699,000.
The Company expects that the Pending Acquisition will enhance its West and North
Central Texas banking franchise and provide an entry into the Dallas-Fort Worth
metropolitan area. The net proceeds of the Offering will be used to finance a
portion of the Pending Acquisition. See "Use of Proceeds" and "Pending
Acquisition."
The Bank operates a community banking business through its branch network and
provides a wide variety of commercial, consumer and trust services. It has a
stable deposit base from customers located within its West Texas market area and
focuses on long-term customer relationships and on providing individualized,
quality service. The recent financial performance of the Bank has been
characterized by consistent core earnings, an increasingly diversified loan
portfolio and strong asset quality.
Although the Bank's loan growth has historically been driven by its activity
in the indirect auto lending business, which currently accounts for
approximately 28% of its loan portfolio, management has determined to reduce the
Bank's dependence on indirect auto loans due to, among other things, an increase
in competition among financial institutions for such loans and a corresponding
decrease in the interest rates on such loans. Management intends, instead, to
focus its future growth strategy on commercial loans in the range of $750,000 to
$2,000,000, which
4
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management believes are too large for smaller local institutions to accommodate
given their lending limits and too small to attract the attention of large
regional banks. Management also expects to increase its focus on local
residential loans.
The principal services provided by the Bank include the following:
COMMERCIAL SERVICES. The Bank provides a full range of commercial banking
services for its 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 provides a wide range of consumer banking
services to its customers, including checking, savings and money market
accounts, savings programs and installment and personal loans. It makes
automobile and other installment loans directly to customers, as well as
indirectly through automobile dealers. The Bank also makes home improvement,
home equity and real estate loans and provides safe deposit services. It
provides automated teller machine ("ATM") accessibility throughout the United
States through the Pulse automated teller machine system network and also offers
investment services and banking by telephone and personal computer.
TRUST SERVICES. The Bank provides trust and agency services to individuals,
partnerships and corporations from its offices in Abilene, Lubbock and Odessa.
Services provided include investment management, administration and advisory
services for agency and trust accounts, and trustee services for pension and
profit sharing plans.
The Company's address is 547 Chestnut Street, Abilene, Texas 79602 and its
telephone number is (915) 677-5550.
BUSINESS OBJECTIVES AND STRATEGY
The Company's principal business objectives are to increase its profitability
and shareholder value by building a valuable West Texas banking franchise using
core deposits as a funding base to support local commercial and consumer lending
programs. The Company employs several strategies, including the following, to
accomplish its objectives:
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 the local appeal of a community bank. The Company
believes that, as a result of consolidation in the financial industry within the
Company's marketplace, there are few financial institutions in its market area
that have larger lending limits than the Company that are willing to provide the
personal customer service that the Company is committed to providing to its
customers.
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. The Company's attention to credit quality standards
has allowed it 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's efforts to maintain
and expand efficient and convenient delivery systems for its products and
services have included the recent expansion of its branch network by locating
banking centers in a leading supermarket chain in Abilene (one location) and
Odessa (two locations) and the introduction of computer and telephone home
banking. The Company also maintains 15 ATMs throughout its market area.
ACQUISITION ACTIVITY. The Company's strategy of opportunistically acquiring
banks in its West Texas market has resulted in its acquisition of three banks
and one branch in the last five years. 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.
5
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PENDING ACQUISITION
Azle Bancorp owns and manages Azle State, a community bank located in Azle,
Texas 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 total shareholders' equity of $9,699,000.
Azle State had 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 31, 1998, Azle Bancorp had 52 full-time equivalent employees, 11 of whom
were officers.
Management expects that the Pending Acquisition will increase its market share
in West and North Central Texas and provide an entry into the attractive Dallas-
Fort Worth metropolitan area. Management believes that the Pending Acquisition
presents an excellent opportunity for increased earnings through expected
increases in the combined organization's operating efficiencies and loan to
deposit ratio. The Pending Acquisition also should allow the Company to cross-
sell a more expansive product line to newly acquired customers through enhanced
marketing efforts, employee training and personal service. Such expansion
should increase the geographic diversity of the Company's loan portfolio and, as
a result, should decrease the Company's overall lending risks. See "Use of
Proceeds," "Pending Acquisition" and "Business and Properties of the Company--
Business Strategy."
The purchase price for Azle Bancorp is $19,025,000, subject to certain
possible adjustments. The obligations of the parties to complete the Pending
Acquisition are subject to certain conditions and there can be no assurance that
the conditions will be satisfied or that the Pending Acquisition will be
completed. The net proceeds of the Offering will be used to finance a portion
of the Pending Acquisition and the Offering is contingent upon the consummation
of the Pending Acquisition.
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 "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 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 will
be the Property Trustee until removed or replaced by the holder of the Common
Securities. 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.
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.
6
<PAGE>
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, including 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.
OFFERING
GENERAL
Securities Offered... 320,000 shares of Common Stock and 1,000,000 ($10,000,000
aggregate Liquidation Amount) Preferred Securities.
Use of Proceeds...... The Company will use all of the net proceeds from the
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 upon the consummation of the Pending
Acquisition.
Risk Factors......... See "Risk Factors" for a discussion of certain
considerations relevant to an investment in the Securities
offered hereby.
COMMON STOCK OFFERING
The Issuer........... Independent Bankshares, Inc., a Texas corporation.
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 on
August 27, 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 (the "Series C Preferred Stock").
7
<PAGE>
PREFERRED SECURITIES OFFERING
The Issuer.......... Independent Capital Trust, a Delaware statutory business
trust.
Price to Public..... $10.00 per Preferred Security.
Preferred Securities
Offered............. 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.
AMEX Symbol......... The Preferred Securities have been approved for listing on
the AMEX under the symbol "IBK.Pr," subject to notice of
official issuance.
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 September , 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 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."
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 September , 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
8
<PAGE>
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 purpose entity, has no operating history or independent operations and
is not engaged in and does not propose to engage in any activity other than
holding as trust assets the Subordinated Debentures and issuing the Trust
Securities.
9
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data
for the Company and 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 Discussion and
Analysis of Financial Condition and Results of Operations." The data set forth
below 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 data set forth below as of, and
for the six-month periods ended, June 30, 1998, and June 30, 1997, is unaudited
and, in the opinion of management of the Company, reflects all adjustments
considered necessary for a fair presentation of the results for such interim
periods. The interim results are not necessarily indicative of results which may
be expected for future periods, including the year ending December 31, 1998. The
data set forth below includes the accounts of Winters State Bank, Winters, Texas
("Winters State"), Peoples National Bank, 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. Each of the completed acquisitions was accounted for under the
purchase method of accounting.
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Interest income............ $ 9,224 $ 8,974 $ 18,324 $ 13,556 $ 11,962 $ 10,131 $ 9,221
Interest expense........... 4,287 4,249 8,659 6,441 5,309 3,452 3,176
-------- -------- -------- -------- -------- -------- --------
Net interest income........ 4,937 4,725 9,665 7,115 6,653 6,679 6,045
Provision for loan losses.. 300 60 250 201 206 147 154
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses. 4,637 4,665 9,415 6,914 6,447 6,532 5,891
Noninterest income......... 1,337 886 1,909 1,551 1,509 1,497 1,884
Noninterest expenses....... 4,437 3,958 8,237 6,290 6,242 7,352 6,222
-------- -------- -------- -------- -------- -------- --------
Income before federal
income taxes and
cumulative effect of
accounting change........ 1,537 1,593 3,087 2,175 1,714 677 1,553
Federal income taxes....... 564 538 977 753 582 227 524
-------- -------- -------- -------- -------- -------- --------
Income before cumulative
effect of
accounting change......... 973 1,055 2,110 1,422 1,132 450 1,029
Cumulative effect of
change in accounting
for income taxes.......... 0 0 0 0 0 0 200
-------- -------- -------- -------- -------- -------- --------
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 $ 0.82 $ 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(1)................. 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
Shareholders' equity....... 21,310 19,586 20,527 14,937 13,818 11,073 10,845
EARNINGS RATIOS:
Return on average total
assets.................... 0.73% 0.83% 0.82% 0.72% 0.67% 0.28% 0.81%
Return on average
shareholders' equity...... 9.26 11.42 10.95 9.89 8.99 3.98 12.50
ASSET QUALITY RATIOS:
Nonperforming loans to
loans..................... 0.16% 0.22% 0.21% 0.21% 0.36% 0.19% 3.06%
Nonperforming assets to
loans and other real
estate and other
repossessed assets....... 0.34 0.77 0.73 0.63 0.76 0.96 4.17
Net loan charge-offs
(recoveries) to average
loans..................... 0.50 (0.13) 0.20 0.37 0.32 0.30 0.18
Allowance for possible
loan losses to loans...... 0.80 0.97 0.83 0.86 0.93 1.00 1.29
Allowance for possible
loan losses to
nonperforming loans....... 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%
Tier 1 capital to
risk-weighted assets...... 11.86 11.13 11.26 13.85 15.23 13.02 15.29
Total capital to
risk-weighted assets...... 12.59 12.04 12.02 14.64 16.08 13.97 16.54
Leverage ratio............. 6.93 6.22 6.71 6.86 7.65 7.03 7.23
RATIO OF EARNINGS TO FIXED
CHARGES(2):
Including interest on
deposits................. 1.36x 1.37x 1.35x 1.33x 1.32x 1.19x 1.48x
Excluding interest on
deposits................. 47.58 22.81 26.30 16.32 9.66 4.80 8.92
- ----------------------
</TABLE>
(1) Before allowance for possible loan losses.
(2) The ratio of earnings to fixed charges is computed by dividing (x) the sum
of income before federal income taxes and cumulative effect of accounting
change by (y) fixed charges. Fixed charges consist of interest on
borrowings, amortization of debt expense, interest on deposits, implicit
interest on leases and dividends on Series C Preferred Stock.
10
<PAGE>
SUMMARY PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents summary pro forma consolidated financial data
for the Company as of June 30, 1998, and for the six month period ended June 30,
1998 and the year ended December 31, 1997, as if consummation of the Pending
Acquisition and the Offering had occurred, in the case of the income statement
data, as of January 1, 1997, and in the case of the balance sheet data, as of
June 30, 1998 (and assumes a public offering price of $12.125 per share of
Common Stock). The pro forma data set forth below has been prepared under the
purchase method of accounting and does not purport to be indicative of the
Company's financial condition and results of operations at any future date or
for any future period and should be read in conjunction with the respective
financial statements, and the notes thereto, of the Company, Azle Bancorp and
Azle State, the pro forma consolidated financial statements of the Company, and
the notes thereto, and the other financial information included elsewhere
herein. In the opinion of management of the Company, the pro forma data set
forth below includes all adjustments considered necessary for a fair
representation of the results for such periods.
<TABLE>
<CAPTION>
AZLE PRO FORMA
COMPANY BANCORP CONSOLIDATED
-------------- ------------- -------------------
<S> <C> <C> <C>
INCOME STATEMENT DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Six-months ended June 30, 1998:
Total interest income........................ $ 9,224 $ 3,528 $ 12,612
Net interest income.......................... 4,937 2,213 6,969
Net income................................... 973 715 1,150
Year ended December 31, 1997:
Total interest income........................ $ 18,324 $ 6,867 $ 24,908
Net interest income.......................... 9,665 4,252 13,552
Net income................................... 2,110 1,454 2,488
COMMON SHARE DATA:
Six-months ended June 30, 1998:
Earnings per share:
Basic....................................... $ 0.49 $ 1.09 $ 0.50
Diluted..................................... 0.47 1.09 0.48
Adjusted shares outstanding (in thousands):
Basic....................................... 1,964 659 2,284
Diluted..................................... 2,087 659 2,407
Year ended December 31, 1997:
Earnings per share:
Basic....................................... $ 1.12 $ 2.21 $ 1.13
Diluted..................................... 1.03 2.21 1.05
Adjusted shares outstanding (in thousands):
Basic....................................... 1,842 659 2,162
Diluted..................................... 2,048 659 2,368
BALANCE SHEET DATA:
At June 30, 1998:
Assets....................................... $263,501 $91,660 $359,475
Loans, net of unearned income................ 140,809 45,102 185,911
Deposits..................................... 240,964 80,816 321,780
Notes payable................................ 4 0 971(1)
Shareholders' equity......................... 21,310 9,699 24,668
CAPITAL RATIOS:
At June 30, 1998:
Tier 1 capital to risk-weighted assets....... 11.86% 18.38% 10.46%
Total capital to risk-weighted assets........ 12.59 19.63 12.21
Leverage ratio............................... 6.93 10.57 6.23
RATIO OF EARNINGS TO FIXED CHARGES(2):
Six-months ended June 30, 1998:
Including interest on deposits............... 1.36x 1.77x 1.22x
Excluding interest on deposits............... 47.58 203.00 3.68
Year ended December 31, 1997:
Including interest on deposits............... 1.35x 1.78x 1.23x
Excluding interest on deposits............... 26.30 229.56 3.59
- ----------------------
</TABLE>
(1) Gives effect to the repayment of $5,100,000 of the $6,067,000 of total
indebtedness incurred by the Company to fund a portion of the purchase
price and related expenses of the Pending Acquisition which the Company
intends to repay after the incurrence thereof with the proceeds of a cash
dividend from Azle State.
(2) The ratio of earnings to fixed charges is computed by dividing (x) the sum
of income before federal income taxes and cumulative effect of accounting
change by (y) fixed charges. Fixed charges consist of interest on
borrowings, amortization of debt expense, interest on deposits, implicit
interest on leases, dividends on Series C Preferred Stock and distributions
on the Subordinated Debentures.
11
<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. Prospective investors
should carefully consider the following factors and cautionary statements, which
could contribute to such differences, in determining whether to purchase
Securities in the Offering. All factors should be considered in conjunction
with the other information and financial data appearing elsewhere in this
Prospectus. See "Cautionary Statements Regarding Forward-Looking Statements."
RISK FACTORS RELATING TO THE COMPANY
INTEGRATION OF THE PENDING ACQUISITION. The Company's asset size will
substantially increase as a result of the Pending Acquisition. The future
prospects of the Company will depend, in significant part, on a number of
factors, including, without limitation, its ability to integrate the Pending
Acquisition; its ability to compete effectively in the Azle, Texas market area;
its success in retaining earning assets and generating new earning assets while
minimizing nonperforming assets, including loans, acquired in the Pending
Acquisition; its ability to attract and retain qualified management and other
necessary personnel; and its ability to consummate the Pending Acquisition. No
assurance can be given as to the Company's ability to accomplish any of the
foregoing, the compatibility of the two organizations, the Company's ability to
achieve results in the future similar to those achieved in the past or its
ability to manage effectively the growth resulting from the Pending Acquisition.
There also are significant back office operations that must be integrated in
connection with the Pending Acquisition, including the combination of employee
benefit plans, the creation of joint account and lending products, the
development of unified marketing plans and other related issues. The additional
expenditures required to accomplish such goals, together with any unexpected
costs in connection with integration of the Pending Acquisition, could
negatively impact the Company's net income, and 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. 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 the 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 can be no assurance that the Company would 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.
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.
12
<PAGE>
ADVERSE CHANGES IN THE ECONOMY. The Company's profitability is dependent upon
the profitability of its operating subsidiary, the Bank. The Bank's
profitability, in turn, is dependent upon the economic vitality of its West
Texas service area and, upon consummation of the Pending Acquisition, its North
Central Texas service area. 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 West and North Central
Texas economy should such changes 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
POSSIBLE LOAN LOSSES. As of June 30, 1998, total nonperforming assets were
$475,000, or 0.2%, of total assets as of such 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 for possible loan losses and incur additional other real estate
related expenses.
At June 30, 1998, the Company's allowance for possible loan losses was
$1,121,000, or 505%, of total nonperforming loans and 0.80% of net loans. The
Company's allowance for possible 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 possible 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 possible loan losses in the future.
The Company believes that its policies and procedures related to its
monitoring and resolution of problem assets are adequate. The Company monitors
its 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 that 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 can be 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 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.
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<PAGE>
COMPETITION. The Company encounters significant competition from other 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 such as the Company and the
Bank 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 can be no assurance that such modifications or
new laws would 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 to the same regulations and supervision. See "Regulation and
Supervision."
GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income and net
income of the Company depends to a substantial extent on "rate differentials,"
(i.e., the differences between the income that the Company receives from loans,
securities and other earning assets, and the interest expense that 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 usually 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--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 the 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 upon general economic and market conditions over
which the Company has no control. While the Company believes that the Offering,
by increasing the number of shares of Common Stock outstanding, should improve
the liquidity of the market for the Common Stock, no assurance can be given that
the 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 upon the
Bank's (and upon consummation of the Pending Acquisition also will depend upon
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 the Year 2000 issue. At this
time, the Company does not anticipate incurring significant costs related to the
Year 2000 issue. The Company does, however, anticipate an
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<PAGE>
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 customer of the Bank or Azle State 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 ($971,000 on a pro forma
basis giving effect to the indebtedness to be incurred by the Company in
connection with the Pending Acquisition). 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 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
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<PAGE>
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 September , 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 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
16
<PAGE>
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 September , 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 September , 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 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 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 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
17
<PAGE>
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. These proposals,
however, 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 Internal Revenue Service (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,
September , 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 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
18
<PAGE>
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 listing on the AMEX subject to
notice of official issuance, 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 and the
Distribution rate for the Preferred Securities have been determined through
negotiations between the Company 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
("SAIF") of the FDIC or by any other governmental agency.
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<PAGE>
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated herein by reference include
"forward-looking statements" within the meaning of the Securities Act of 1933,
as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are based upon the current beliefs and
assumptions of 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," "Pending Acquisition,"
"Pro Forma Consolidated Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties of the Company" regarding the Company's financial position, business
strategy and plans and objectives of management for future operations, are
forward-looking statements. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect," "should" and "intend" and words
or phrases of similar import, as they relate to the Company or its subsidiaries
or management, are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations will
prove to have been correct. Important factors that could cause actual results
to differ materially from the Company's expectations (the "cautionary
statements") include, but are not limited to: (i) specific matters referred to
herein, including, without limitation, those noted under the caption "Risk
Factors," (ii) results of the Company's efforts to implement its business
strategy, (iii) cost savings expected to result from future and completed
acquisitions, including Azle Bancorp, which may not be fully realized and/or
revenues following such acquisitions which may be lower than expected and/or
expenses following such acquisitions which may be higher than expected, (iv)
changes in the interest rate environment which could reduce margins, (vii)
legislation or regulatory requirements or changes which 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 which could
increase significantly, (xi) changes in the securities markets, (xii) actions of
the Company's competitors and the possible inability of the Company 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"). 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 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.
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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 August 27, 1998).. 15 9/16 12 0.05(1)
- --------------------
</TABLE>
(1) The Board of Directors of the Company has approved the payment of a cash
dividend of $0.05 per share to be paid on August 31, 1998 to each holder of
record on August 17, 1998.
The last reported sales price for the Common Stock on the AMEX on August 27,
1998 was $12.125. On August 27, 1998, there were 1,670 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 (i.e.,
an annual rate of 10%). 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."
21
<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 shareholders'
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
The Preferred Securities have been approved for listing on the AMEX under the
symbol "IBK.Pr," subject to notice of official issuance. 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 public offering price and
Distribution rate have been determined by negotiations among representatives of
the Company and the Underwriter, and the public 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.
22
<PAGE>
PENDING ACQUISITION
Azle Bancorp owns and manages 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 total shareholders' 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 $164,000 (0.4% of the
total loan portfolio). The allowance for possible loan losses was $660,000, or
402.4% of total nonperforming loans, and 1.5% of the total loan portfolio. Real
estate and other repossessed assets of Azle State was $316,000 at June 30, 1998.
Azle State had 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 respective financial
statements of Azle Bancorp and Azle State included elsewhere in this Prospectus.
At July 31, 1998, Azle Bancorp had 52 full-time equivalent employees, 11 of whom
were officers.
Management expects that the Pending Acquisition will increase its market share
in West and North Central Texas and provide an entry into the attractive Dallas-
Fort Worth metropolitan area. Management believes that the Pending Acquisition
presents an excellent opportunity for increased earnings through expected
increases in the combined organization's operating efficiencies and loan to
deposit ratio. The Pending Acquisition also should allow the Company to cross-
sell a more expansive product line to newly acquired customers through enhanced
marketing efforts, employee training and personal service. Such expansion
should increase the geographic diversity of the Company's loan portfolio and, as
a result, should decrease the Company's overall lending risks. See "Use of
Proceeds" and "Business and Properties of the Company--Business Strategy."
The Company and Azle Bancorp have entered into a 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 newly created subsidiary of
the Company. The shareholders of Azle Bancorp and the minority shareholders of
Azle State will receive merger consideration consisting of cash in the aggregate
amount of $19,025,000; 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). The shareholders
of Azle Bancorp also 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.
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) 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 such
minority shareholders will receive an aggregate consideration of $593,580; (ii)
neither Azle Bancorp nor Azle State will have suffered any material adverse
change in their financial condition, assets, properties, liabilities, reserves,
business, or results of operations or prospects; (iii) the Chairman of the
board, the President and the directors of Azle State will have entered into
noncompetition and nonsolicitation agreements with the Company, each having a
term of two years, providing that 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,
(c) charter, operate or enter into any franchise or other operating agreement
with any financial institution or financial institution holding company, (d)
serve as an officer, director, employee, agent or consultant to any financial
institution or financial institution holding company if an office of such
23
<PAGE>
institution or holding company is located within a ten mile radius of Azle,
Texas (e) establish or operate a branch or other office of a financial
institution if an office of such institution is located within a ten mile radius
of Azle, Texas, (f) engage in financial service, banking or banking related
business within a ten mile radius of Azle, Texas or (g) recruit, hire, assist
others in recruiting or hiring, discuss employment with or refer others
concerning the employment of any person who is, or within the preceding 12
months was, an employee of Azle State; and (iv) all accounting and tax
treatment, entries and adjustments for the Pending Acquisition must be
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 the closing. The Federal Reserve Bank of
Dallas, the Texas Department of Banking and the shareholders of Azle Bancorp
each have approved the Pending Acquisition. There can be no assurance, however,
that the other conditions to the Pending Acquisition will be satisfied or that
the Pending Acquisition will be completed. The Offering is conditioned upon the
prior or simultaneous consummation of the Pending Acquisition.
Azle Bancorp is a defendant in various litigation matters arising in the
ordinary course of its business, including a suit pending in the United States
District Court for the Northern District of Texas - Lubbock Division in which
the plaintiffs allege, among other things, that Azle Bancorp may be indebted to
the City National Bank of Plainview in connection with the participation in a
standby letter of credit in the amount of approximately $221,000, plus
unspecified attorneys' fees under Texas law. In a consolidated companion suit
involving the same subject matter, certain additional allegations were made
against Azle Bancorp, including violations of federal and state securities laws
and violations of fraud statutes under Texas law. By order dated December 13,
1988, the court affirmed the stay as to the claims involving certain parties,
including Azle Bancorp. Management of Azle Bancorp has advised the Company that
no material developments have occurred in this suit since that date. While the
outcome of the referenced proceeding cannot be predicted with certainty, in the
opinion of management of the Company, based on its understanding of this suit to
date, ultimate resolution of the matter will not have a material adverse effect
on the Company upon consummation of the Pending Acquisition.
24
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated financial statements set forth the
Company's pro forma consolidated 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
the 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 (and assumes a public offering of $12.125 per share of Common
Stock). The pro forma consolidated financial statements set forth below 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 and should be read in
conjunction with the respective financial statements, and the notes thereto, of
the Company, Azle Bancorp and Azle State and the other financial information
included elsewhere herein. In the opinion of management of the Company, the pro
forma consolidated financial statements set forth below reflect all adjustments
considered necessary for a fair presentation of the results for such periods.
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------- PRO FORMA
COMPANY AZLE BANCORP DEBITS CREDITS CONSOLIDATED
-------- --------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash and Due from Banks...... $ 13,111 $ 5,553 $ 3,358(A) $ 5,100(C) $ 13,564
9,600(B) 19,025(D)
6,067(C)
Federal Funds Sold........... 29,200 1,000 30,200
-------- ------- ------- ------- --------
Total Cash and Cash
Equivalents................. 42,311 6,553 19,025 24,125 43,764
-------- ------- ------- ------- --------
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(D) 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 $24,125 $359,475
======== ======= ======= ======= ========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------- PRO FORMA
COMPANY AZLE BANCORP DEBITS CREDITS CONSOLIDATED
--------- --------------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
LIABILITIES:
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 5,100(C) 6,067(C) 971
Other Liabilities 355 612 967
Minority Interest........... 312 312(D) 0
-------- ------- ------- ------- --------
Total Liabilities.......... 242,191 81,961 5,412 6,067 324,807
-------- ------- ------- ------- --------
Guaranteed preferred
beneficial interests
in the Company's
Subordinated
Debentures................. 10,000(B) 10,000
-------- ------- ------- ------- --------
SHAREHOLDERS' EQUITY:
Series C Preferred Stock 51 51
Common Stock 497 659 659(D) 80(A) 577
Additional Paid-in Capital 13,923 827 827(D) 3,278(A) 17,201
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 Shareholders'
Equity..................... 21,310 9,699 9,699 3,358 24,668
-------- ------- ------- ------- --------
Total Liabilities and
Shareholders' Equity....... $263,501 $91,660 $15,111 $19,425 $359,475
======== ======= ======= ======= ========
</TABLE>
___________________
(A) Gives effect to the sale of 320,000 shares of Common Stock at an assumed
public offering price of $12.125 per share, less a 7% underwriting
commission ($272,000) and estimated offering expenses ($250,000).
(B) Gives effect to the sale of 1,000,000 Preferred Securities at $10.00 per
share, less a 4% underwriting commission ($400,000).
(C) Gives effect to the borrowing of $6,067,000 and the repayment of $5,100,000
of such borrowing after the Pending Acquisition is consummated by means of
a dividend from Azle State.
(D) Gives effect to 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 at this date because the Company believes that any such adjustment
would be immaterial.
26
<PAGE>
PRO FORMA CONSOLIDATED INCOME STATEMENT
SIX-MONTH PERIOD ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------- PRO FORMA
COMPANY AZLE BANCORP DEBITS CREDITS CONSOLIDATED
------- ------------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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 41 140(A) 819
------ ------ ------- ------- -------
Total Interest Income............................ 9,224 3,528 140 0 12,612
------ ------ ------- ------- -------
Interest Expense:
Interest on Deposits............................... 4,286 1,315 5,601
Interest on Notes Payable.......................... 1 41(B) 42
------ ------ ------- ------- -------
Total Interest Expense........................... 4,287 1,315 41 0 5,643
------ ------ ------- ------- -------
Net Interest Income 4,937 2,213 181 0 6,969
Provision for Loan Losses.......................... 300 36 336
------ ------ ------- ------- -------
Net Interest Income After Provision for Loan Losses 4,637 2,177 181 0 6,633
------ ------ ------- ------- -------
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
Distributions on guaranteed preferred beneficial
interests in the Company's Subordinated
Debentures......................................... 432(D) 432
Other Expenses..................................... 1,422 471 202(E) 75(F) 2,020
------ ------ ------- ------- -------
Total Noninterest Expenses....................... 4,437 1,565 640 75 6,567
------ ------ ------- ------- -------
Income Before Federal Income Taxes 1,537 1,010 821 75 1,801
Federal Income Taxes 564 272 25(G) 210(G) 651
------ ------ ------- ------- -------
Income Before Minority Interest.................... 973 738 846 285 1,150
Minority Interest.................................... 23 23(H) 0
------ ------ ------- ------- -------
Net Income....................................... $ 973 $ 715 $ 846 $ 308 $ 1,150
====== ====== ======= ======= =======
Earnings Per Share:
Basic Earnings per Share........................... $ 0.49 $ 0.50
Diluted Earnings per Share......................... 0.47 0.48
- --------------------
</TABLE>
(A) Gives effect to interest income on federal funds sold at the rate of 5.49%
lost as a result of the repayment of $5,100,000 in debt immediately after
the Pending Acquisition.
(B) Gives effect to interest expense at the rate of 8.50% on $967,000 of
borrowings remaining after the repayment of $5,100,000 noted above.
(C) Gives effect to depreciation on the write-up of bank premises by $375,000
over an estimated remaining useful life of 30 years.
(D) Gives effect to distributions on 1,000,000 Preferred Securities
($10,000,000 Liquidation Amount) at the assumed rate of 8.50% ($425,000 for
six months) and amortization of $400,000 underwriting commissions for
issuance of Subordinated Debentures over a life of 30 years ($7,000 for six
months).
(E) Gives effect to amortization of $8,066,000 of intangible assets over an
average life of 20 years ($202,000).
(F) Gives effect to anticipated annual cost savings of $150,000 per year,
including cost savings from professional fees, directors' fees, stationery,
printing and supplies expense and other miscellaneous expenses.
(G) Gives effect to tax effect of the above entries, excluding the amortization
of intangibles, which is not deductible.
(H) Gives effect to deletion of minority interest due to acquisition of 100% of
Azle State.
27
<PAGE>
PRO FORMA CONSOLIDATED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------- PRO FORMA
COMPANY AZLE BANCORP DEBITS CREDITS CONSOLIDATED
------- ------------- ------------ ----------- ------------
(DOLLARS 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 Notes Payable.......................... 59 82(B) 141
------- ------ ------ ------- -------
Total Interest Expense........................... 8,659 2,615 82 0 11,356
------- ------ ------ ------- -------
Net Interest Income 9,665 4,252 365 0 13,552
Provision for Loan Losses.......................... 250 60 310
------- ------ ------ ------- -------
Net Interest Income After Provision for Loan Losses 9,415 4,192 365 0 13,242
------- ------ ------ ------- -------
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 1,610 5,586
Net Occupancy Expense.............................. 857 203 13(C) 1,071
Equipment Expense.................................. 834 235 1,070
Interest on guaranteed preferred beneficial
interests in the Company's Subordinated
Debentures......................................... 863(D) 863
Other Expenses..................................... 2,576 845 403(E) 150(F) 3,669
------- ------ ------ ------- -------
Total Noninterest Expenses....................... 8,237 2,893 1,279 150 12,259
------- ------ ------ ------- -------
Income Before Federal Income Taxes 3,087 2,057 1,644 150 3,650
Federal Income Taxes............................... 977 556 51(G) 422(G) 1,162
------- ------ ------ ------- -------
Income Before Minority Interest 2,110 1,501 1,695 572 2,488
Minority Interest.................................... 47 47(H) 0
------- ------ ------ ------- -------
Net Income....................................... $ 2,110 $1,454 $1,695 $ 619 $ 2,488
======= ====== ====== ======= =======
Earnings Per Share:
Basic Earnings per Share........................... $ 1.12 $ 1.13
Diluted Earnings per Share......................... 1.03 1.05
- -------------------
</TABLE>
(A) Gives effect to interest income on federal funds sold at the rate of 5.55%
lost as a result of the repayment of $5,100,000 in debt immediately after
the Pending Acquisition.
(B) Gives effect to interest expenses at the rate of 8.50% on $967,000 of
borrowings remaining after the repayment of $5,100,000 noted above.
(C) Gives effect to depreciation on the write-up of bank premises by $375,000
over an estimated remaining useful life of 30 years.
(D) Gives effect to interest expense on 1,000,000 Preferred Securities
($10,000,000 Liquidation Amount) at the assumed rate of 8.50% ($850,000 per
year) and amortization of $400,000 underwriting commissions for issuance of
Debentures over a life of 30 years ($13,000 per year).
(E) Gives effect to amortization of $8,066,000 of intangible assets over an
average life of 20 years ($403,000 per year).
(F) Gives effect to anticipated annual cost savings of $150,000 per year,
including cost savings from professional fees, directors' fees, stationery,
printing and supplies expense and other miscellaneous expenses.
(G) Gives effect to tax effect of the above entries, excluding the amortization
of intangibles, which is not deductible.
(H) Gives effect to deletion of minority interest due to acquisition of 100% of
Azle State.
28
<PAGE>
PRO FORMA CAPITAL RATIOS
AT JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
AZLE CONSOLIDATED
COMPANY BANCORP ADJUSTMENTS BALANCE
--------- -------- --------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
TIER 1 CAPITAL:
Preferred shareholders' equity............. $ 213 $ $ $ 213
Common shareholders' equity................ 21,058 9,679 (6,135)(A) 24,316
Guaranteed preferred beneficial
interests in the Company's
Subordinated Debentures................... -- -- 8,176 (B) 8,176
Intangible Assets.......................... (3,046) (8,066)(C) (11,112)
-------- ------- ----------- --------
Total Tier 1 Capital..................... 18,225 9,679 (6,311) 21,593
-------- ------- ----------- --------
TIER 2 CAPITAL:
Guaranteed preferred beneficial interests
in the Company's Subordinated
Debentures................................ -- -- 1,824 (B) 1,824
Allowance for Possible Loan Losses......... 1,121 658 2 (D) 1,781
-------- ------- ----------- --------
Total Tier 2 Capital..................... 1,121 658 1,826 3,605
-------- ------- ----------- --------
Total Capital........................... $ 19,346 $10,337 $ (4,485) $ 25,198
======== ======= =========== ========
Adjusted Quarterly Average Assets.......... $262,857 $91,542 $ (8,066)(C) $346,333
======== ======= =========== ========
Total Risk-weighted Assets................. $153,697 $52,669 $ -- $206,366
======== ======= =========== ========
Tier 1 Capital to Adjusted Quarterly
Average Assets............................ 6.93% 10.57% 6.23%
======== ======= ========
Tier 1 Capital to Total Risk-weighted
Assets.................................... 11.86% 18.38% 10.46%
======== ======= ========
Total Capital to Total Risk-weighted
Assets.................................... 12.59% 19.63% 12.21%
======== ======= ========
</TABLE>
___________________
(A) Gives effect to the elimination of the equity accounts of Azle Bancorp in
conjunction with the Pending Acquisition and the sale of $3,880,000 in
additional Common Stock (an assumed public offering price of $12.125 per
share), less underwriting commissions and expenses.
(B) Gives effect to the sale of 1,000,000 shares of Preferred Securities
($10,000,000 Liquidation Amount) which qualify as regulatory Tier 1 capital
up to 25% of total Tier 1 capital, including the Preferred Securities.
Giving effect to such limitations, $8,176,000 of the Preferred Securities
would have qualified as Tier 1 capital as of June 30, 1998. The remaining
$1,824,000 of the Preferred Securities would have qualified as Tier 2
capital as of June 30, 1998.
(C) Gives effect to the elimination of the amount of intangible assets recorded
in conjunction with the Pending Acquisition and the elimination of the
intangible assets recorded from adjusted quarterly average assets.
(D) Gives effect to the adjustment of the allowance for possible loan losses
for the amount of the allowance for possible loan losses of Azle Bancorp
which could not be utilized as Tier 2 capital on a stand-alone bank basis
but could be utilized after the Pending Acquisition .
29
<PAGE>
[This Page Intentionally Left Blank]
30
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the Common Stock (at an
assumed public offering price of $12.125 per share ) and the Preferred
Securities offered in the Offering are estimated to be $13.0 million (or $15.0
million if the Underwriter's over-allotment options are exercised in full), in
each case, after deducting the Underwriting discounts, commissions and other
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 $12,958,000 in the aggregate, 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 $6,067,000, 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% per
annum (based upon an amortization of principal over a period of not less than
six years) and a maturity of not less than one year. The Company has received
two commitments from unaffiliated banks to provide financing for the Pending
Acquisition which generally satisfy these parameters, but has not yet accepted
either of these commitments. The Company is currently analyzing the outstanding
commitments and negotiating with these and other prospective lenders. The
Company intends to repay $5,100,000 of the $6,067,000 of total indebtedness
incurred in connection with the Pending Acquisition immediately after the
incurrence thereof with the proceeds of a cash dividend from Azle State. See
"Capitalization" and "Pending Acquisition."
31
<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 $12.125 per share of
Common Stock). See "Use of Proceeds," "Pending Acquisition," "Pro Forma
Consolidated Financial Statements" and notes thereto and the respective
financial statements, and notes thereto, of the Company, Azle Bancorp and Azle
State appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------
AS ADJUSTED
FOR OFFERING
AND PENDING
ACTUAL ACQUISITION
------------ -------------
<S> <C> <C>
LONG-TERM DEBT:
Notes payable...................................................................... $ 4,000 $ 971,000(1)
----------- -----------
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S SUBORDINATED
DEBENTURES(2):..................................................................... 0 10,000,000
----------- -----------
SHAREHOLDERS' 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(3).......... 497,000 577,000
Additional paid-in capital......................................................... 13,923,000 17,201,000
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 shareholders' equity....................................................... 21,310,000 24,668,000
----------- -----------
Total capitalization............................................................. $21,314,000 $35,639,000
=========== ===========
Capital Ratios:
Shareholders' equity to total assets............................................... 8.09% 6.86%
Leverage ratio(4)(5)............................................................... 6.93% 6.23%
Risk-based capital ratio(5)(6)
Tier 1 capital to risk-weighted assets............................................ 11.86% 10.46%
Total risk-based capital to risk-weighted assets.................................. 12.59% 12.21%
- ---------------
</TABLE>
(1) Gives effect to the repayment of $5,100,000 of the $6,067,000 of total
indebtedness incurred by the Company to fund a portion of the purchase
price and related expenses of the Pending Acquisition which the Company
intends to repay after the incurrence thereof with the proceeds of a cash
dividend from Azle State.
(2) 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 September , 2028.
(3) Does not include an aggregate of 116,360 shares of Common Stock issuable
upon conversion of outstanding shares of Series C Preferred Stock.
(4) 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.
(5) The capital ratios, as adjusted, are computed including the total estimated
net proceeds from the sale of the Common Stock and the Preferred
Securities, in a manner consistent with Federal Reserve guidelines.
(6) Federal Reserve guidelines for calculation of Tier 1 capital to risk-
weighted assets limit 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 ($8,176,000) will be included as
Tier 1 capital for the Company and the remaining portion ($1,824,000) will
be included as Tier 2 capital for the Company.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial data
for the Company and 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." The data set forth
below 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 data set forth below as of, and
for the six-month periods ended, June 30, 1998, and June 30, 1997, is unaudited
and, in the opinion of management of the Company, reflects all adjustments
considered necessary for fair presentation of the results for such periods. The
data set forth below includes the accounts of Winters State, Peoples National,
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. Each of the completed acquisitions was accounted for under the
purchase method of accounting.
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- ----------- ----------- ----------- ---------- --------- --------
INCOME STATEMENT DATA: (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C><C>
Interest income............................ $ 9,224 $ 8,974 $ 18,324 $ 13,556 $ 11,962 $ 10,131 $ 9,221
Interest expense........................... 4,287 4,249 8,659 6,441 5,309 3,452 3,176
-------- -------- -------- -------- -------- -------- --------
Net interest income........................ 4,937 4,725 9,665 7,115 6,653 6,679 6,045
Provision for loan losses.................. 300 60 250 201 206 147 154
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for
loan losses............................... 4,637 4,665 9,415 6,914 6,447 6,532 5,891
Noninterest income......................... 1,337 886 1,909 1,551 1,509 1,497 1,884
Noninterest expenses....................... 4,437 3,958 8,237 6,290 6,242 7,352 6,222
-------- -------- -------- -------- -------- -------- --------
Income before federal income taxes and
cumulative effect of accounting change.... 1,537 1,593 3,087 2,175 1,714 677 1,553
Federal income taxes....................... 564 538 977 753 582 227 524
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of
accounting change......................... 973 1,055 2,110 1,422 1,132 450 1,029
Cumulative effect of change in accounting
for income taxes........................... 0 0 0 0 0 0 200
-------- -------- -------- -------- -------- -------- --------
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(1)........... 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
Shareholders' equity....................... 21,310 19,586 20,527 14,937 13,818 11,073 10,845
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
AT JUNE 30, OR FOR
THE SIX-MONTH
PERIOD ENDED AT DECEMBER 31, OR FOR THE
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 shareholders' equity.............. 9.26 11.42 10.95 9.89 8.99 3.98 12.50
Net interest margin(2).............................. 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(1)................... 57.44 54.11 55.98 47.71 53.25 50.97 42.56
Efficiency ratio(3)................................. 68.17 69.45 69.09 72.78 76.56 89.97 77.77
EARNINGS RATIOS:
Return on average total assets....................... 0.73% 0.83% 0.82% 0.72% 0.67% 0.28% 0.81%
Return on average shareholders' equity............... 9.26 11.42 10.95 9.89 8.99 3.98 12.50
ASSET QUALITY RATIOS:
Nonperforming loans to loans......................... 0.16% 0.22% 0.21% 0.21% 0.36% 0.19% 3.06%
Nonperforming assets to total assets(4).............. 0.18 0.40 0.39 0.28 0.35 0.49 1.83
Nonperforming loans to total loans, net of unearned
income(1)(4)........................................ 0.16 0.22 0.21 0.21 0.36 0.19 3.06
Nonperforming assets to loans and other real
estate and other repossessed assets................. 0.34 0.77 0.73 0.63 0.76 0.96 4.17
Net loan charge-offs (recoveries) to average loans,
net of unearned income (annualized for interim
periods)(1)......................................... 0.50 (0.13) 0.20 0.37 0.32 0.30 0.18
Allowance for possible loan losses to total loans,
net of unearned income(1)(4)........................ 0.80 0.97 0.83 0.86 0.93 1.00 1.29
Allowance for possible loan losses to
nonperforming loans(4).............................. 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%
Tier 1 capital to risk-weighted assets............... 11.86 11.13 11.26 13.85 15.23 13.02 15.29
Total capital to risk-weighted asset (4)............. 12.59 12.04 12.02 14.64 16.08 13.97 16.54
Leverage ratio (4)................................... 6.93 6.22 6.71 6.86 7.65 7.03 7.23
RATIO OF EARNINGS TO FIXED CHARGES(5):
Including interest on deposits....................... 1.36x 1.37x 1.35x 1.33x 1.32x 1.19x 1.48x
Excluding interest on deposits....................... 47.58 22.81 26.30 16.32 9.66 4.80 8.92
- -----------------
</TABLE>
(1) Before allowance for possible loan losses.
(2) Fully taxable-equivalent basis.
(3) 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.
(4) At period end.
(5) The ratio of earnings to fixed charges is computed by dividing (x) the sum
of income before federal income taxes and cumulative effect of accounting
change by (y) fixed charges. Fixed charges consist of interest on
borrowings, amortization of debt expense, interest on deposits, implicit
interest on leases and dividends on Series C Preferred Stock.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations 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 also,
"Cautionary Statements 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 consolidated financial statements and notes thereto of the Company and the
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. On the date of the acquisition, Crown Park had, on a
consolidated basis, total assets of $60,420,000, total loans, net of unearned
income, of $41,688,000, total deposits of $53,604,000 and total shareholders'
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 total deposits of
$14,895,000 and total loans of $155,000.
On January 1, 1996, the Bank completed the acquisition of Peoples National.
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
total shareholders' equity of $525,000.
The foregoing 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 acquisition. 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 the foregoing acquisitions.
35
<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, was $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 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 shareholders' 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% (on an
annualized basis), 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% (on an
annualized basis) and 0.75%, respectively.
ROE is determined by dividing net income by average shareholders' equity
and indicates how effectively a company can generate net income on the capital
invested by its shareholders. During the six-month period ended June 30, 1998,
the Company's ROE was 9.26% (on an annualized basis), 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% (on an annualized basis) 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.
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,
36
<PAGE>
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 should 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.
37
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES
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 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 SHAREHOLDERS' 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
Shareholders' equity...................... 21,023 18,478
-------- -----------
Total liabilities and
shareholders' 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.
38
<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 SHAREHOLDERS' 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
-------- -------- --------
Shareholders' equity..................... 19,275 14,375 12,594
-------- -------- --------
Total liabilities and
shareholders' 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 companies), 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.
39
<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) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN: DUE TO CHANGES IN:
--------------------- ---------------------- ---------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- ----- ------ ---- -----
(DOLLARS 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.
40
<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.
41
<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.
42
<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 interest-earning assets and interest-bearing liabilities to determine the
difference between the two in specific time frames. This difference is
43
<PAGE>
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
CUMULATIVE VOLUMES SUBJECT 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.
44
<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. Also,
45
<PAGE>
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.
46
<PAGE>
The following table presents the Company's loan balances at the dates
indicated separated by loan type:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- ------- ------- ------- -------
(DOLLARS 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
-------- ------- ------- --------
(DOLLARS 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 30, 1998, substandard loans totaled $757,000, of which
$135,000 were loans designated as nonaccrual or 90 days past due,
47
<PAGE>
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.
48
<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.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------------------------
1998 1997 1996 1995 1994 1993
-------- ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
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
===== ====== ===== ===== ===== ======
</TABLE>
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 16 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 19
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
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.
49
<PAGE>
The amount of the allowance equals the cumulative total of the provisions
made from time to time, reduced by loan charge-offs and increased by recoveries
of loans previously charged off. The Company's allowance was $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.
50
<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>
DECEMBER
JUNE 30, ----------------------------------------------------------
1998 1997(1) 1996(2) 1995 1994 1993(3)
--------- -------- -------- -------- -------- --------
Analysis of allowance for possible (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
loan losses:
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.
51
<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
====== ====== ====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT OF LOANS BY AMOUNT OF LOANS BY AMOUNT OF LOANS BY
ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO ALLOWANCE CATEGORY TO
ALLOCATED LOANS, NET ALLOCATED LOANS, NET ALLOCATED LOANS, NET
TO OF UNEARNED TO OF UNEARNED TO OF UNEARNED
CATEGORY INCOME CATEGORY INCOME CATEGORY INCOME
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals............. $ 136 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>
52
<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.
53
<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 %
------- ------ ------- ------ ------- ------ ------- ------
(DOLLARS 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.
54
<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
PRINCIPAL CARRYING FAIR AVERAGE
TYPE AND MATURITY GROUPING 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
55
<PAGE>
utilization of a portion of the Company's tax credit carryforwards. The balance
of other assets decreased $194,000, or 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
PERIOD ENDED YEAR ENDED DECEMBER 31,
----------------------------------------------------------
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 companies) 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
------------- -----------------
(DOLLARS 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>
56
<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 shareholders' 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 shareholders' equity................... 1.88 1.82 1.89 1.37 0.93
Average shareholders' 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 companies) 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.
57
<PAGE>
LIQUIDITY
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
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.
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
58
<PAGE>
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 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
59
<PAGE>
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, shareholders' equity totaled $21,310,000, or 8.1%, of
total assets. At December 31, 1997, shareholders' 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.
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
shareholders' 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 at June 30, 1998, and December 31, 1997 and on a pro forma basis giving
effect to the Offering (at an assumed public offering price of $12.125 per share
of Common Stock) and the Pending Acquisition:
<TABLE>
<CAPTION>
PRO FORMA AT
JUNE 30, 1998
GIVING EFFECT
TO OFFERING
AT AT AND PENDING
JUNE 30, 1998 DECEMBER 31, 1997 ACQUISITION
-------------- ----------------------- --------------
Tier 1 capital: (DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Common shareholders' equity, excluding
unrealized gain on available-for-sale
securities....................................... $ 21,058 $ 20,261 $ 24,316
Preferred shareholders' equity (1)................ 213 235 213
Guaranteed preferred beneficial interests in
the Company's Subordinated Debentures(1)......... 0 0 8,176
Goodwill.......................................... (3,046) (3,159) (11,112)
-------- -------- --------
Total Tier 1 capital............................ 18,225 17,337 21,593
-------- -------- --------
Tier 2 capital:
Guaranteed preferred beneficial interests in the
Company's Subordinated Debentures(1)............. 0 0 1,824
Allowance for possible loan losses (2)............ 1,121 1,173 1,781
-------- -------- --------
Total Tier 2 capital............................ 1,121 1,173 3,605
-------- -------- --------
Total capital................................. $ 19,346 $ 18,510 $ 25,198
======== ======== ========
Risk-weighted assets............................... $153,697 $154,036 $206,366
======== ======== ========
Adjusted quarterly average assets.................. $262,857 $258,496 $346,333
======== ======== ========
</TABLE>
- -----------------------
(1) Limited to 25% of total Tier 1 capital, with any remainder qualifying as
Tier 2 capital.
(2) Limited to 1.25% of risk-weighted assets.
60
<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 (giving effect to the Offering (at an assumed public
offering price of $12.125 per share of Common Stock) and the Pending
Acquisition) 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
AT JUNE 30, 1998 JUNE 30, 1998
--------------------------------------------------------- AT DECEMBER 31, 1997 GIVING EFFECT TO
REGULATORY MINIMUMS MINIMUMS FOR WELL --------------------- OFFERING AND
HOLDING COMPANIES HOLDING COMPANIES ACTUAL ACTUAL PENDING ACQUISITION
-------------------- ------------------ --------------- --------------------- --------------------
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% $ 9,222 6.00% $18,225 11.86% $17,337 11.26% $21,593 10.46%
Total capital to
risk-weighted
assets............ 12,296 8.00 15,370 10.00 19,346 12.59 18,510 12.02 25,198 12.21
Tier 1 capital to
adjusted
quarterly
average assets.... 10,514 4.00 13,143 5.00 18,225 6.93 17,337 6.71 21,593 6.23
</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 (giving effect to the Offering and the Pending Acquisition) 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
AT JUNE 30, 1998 JUNE 30, 1998
--------------------------------------------------------- AT DECEMBER 31, 1997 GIVING EFFECT TO
REGULATORY MINIMUMS MINIMUMS FOR WELL --------------------- OFFERING AND
FOR BANKS CAPITALIZED BANKS ACTUAL ACTUAL PENDING ACQUISITION
-------------------- ------------------ --------------- --------------------- --------------------
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% $ 9,277 6.00% $16,900 10.93% $15,855 10.24% $16,900 10.93%
Total capital to
risk-weighted
assets............ 12,368 8.00 15,455 10.00 18,021 11.66 17,028 11.00 18,021 11.66
Tier 1 capital to
adjusted
quarterly
average assets.... 10,481 4.00 13,100 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. See "Regulation and Supervision."
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.
61
<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 discouraging 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% 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 the
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 "Use of Proceeds" and "Pending
Acquisition."
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 systems 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 systems by outside
hardware and software suppliers is substantially complete. 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 plans on completing the testing
process of all significant systems by December 31, 1998.
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
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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.
The Company has prepared a contingency plan for Year 2000 should the
Company's data processing systems or other third-party systems fail to perform.
The Company believes that this plan will allow the Company to carry on normal
daily business for at least a short period of time.
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.
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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 Company's principal
subsidiary, the Bank, currently operates 11 full-service banking locations in
and around four of the major markets in West Texas. These markets, which serve
as regional medical and retail centers, are Abilene (three locations), Lubbock,
Odessa (four locations) and San Angelo. Abilene, with a MSA of approximately
125,000 and a diversified economy, is home to five universities and colleges,
two regional medical complexes and Dyess Air Force Base. Lubbock, the ninth
largest city in Texas with a MSA of approximately 235,000, is home to Texas Tech
University and a regional medical center. The Lubbock area produces
approximately 3% of worldwide cotton production. Odessa, with a MSA of
approximately 246,000, has an energy-related economy and over 500 manufacturing
businesses. San Angelo, with a MSA of approximately 102,000, has a diversified
economy centered around health care, 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 shareholders' 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 announced on May 29, 1998, that it had agreed to acquire Azle
Bancorp for approximately $19 million. Azle Bancorp and its subsidiary, Azle
State, are located in Azle, Texas which is northwest of Dallas-Fort Worth
metroplex. 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 total shareholders' equity of $9,699,000. The Company expects that the
Pending Acquisition will enhance its West and North Central Texas banking
franchise 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 "Use of Proceeds" and "Pending Acquisition."
The Bank operates a community banking business through its branch network
and provides a wide variety of commercial, consumer and trust services. It has a
stable deposit base from customers located within its West Texas market area and
focuses on long-term customer relationships and on providing individualized,
quality service. The recent financial performance of the Bank has been
characterized by consistent core earnings, an increasingly diversified loan
portfolio and strong asset quality.
Although the Bank's loan growth has historically been driven by its
activity in the indirect auto lending business, which currently accounts for
approximately 28% of its loan portfolio, management has determined to reduce the
Bank's dependence on indirect auto loans due to, among other things, an increase
in competition among financial institutions for such loans and a corresponding
decrease in the interest rates on such loans. Management intends, instead, to
focus its future growth strategy on commercial loans in the range of $750,000 to
$2,000,000, which management believes is too large for smaller local
institutions to accommodate given their lending limits and too small to attract
the attention of large regional banks. Management also expects to increase its
focus on local residential loans.
The principal services provided by the Bank include the following:
COMMERCIAL SERVICES. The Bank provides a full range of commercial banking
services for its 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 provides a wide range of consumer banking
services to its customers, including checking, savings and money market
accounts, savings programs and installment and personal loans. It makes
automobile and other installment loans directly to customers, as well as
indirectly through automobile
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dealers. The Bank also makes home improvement, home equity and real estate loans
and provides safe deposit services. It provides ATM accessibility throughout the
United States through the Pulse automated teller machine system network and also
offers investment services and banking by telephone and personal computer.
TRUST SERVICES. The Bank provides trust and agency services to individuals,
partnerships and corporations from its offices in Abilene, Lubbock and Odessa.
Services provided include investment management, administration and advisory
services for agency and trust accounts, and trustee services 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." The 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
shareholders' 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 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. The 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
(the "Comptroller") to establish four additional branch banking facilities. 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.
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BUSINESS OBJECTIVES AND STRATEGY
The Company's principal business objectives are to increase its
profitability and shareholder value by building a valuable West Texas banking
franchise using core deposits as a funding base to support local commercial and
consumer lending programs. The Company employs several strategies, including the
following, to accomplish its objectives:
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 the local appeal of a community bank. The
Company believes that, as a result of consolidation in the financial industry
within the Company's marketplace, there are few financial institutions in its
market area that have larger lending limits than the Company that are willing to
provide the personal customer service that the Company is committed to providing
to its customers.
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. The Company's attention to credit quality
standards has allowed it 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's efforts to
maintain and expand efficient and convenient delivery systems for its products
and services have included the recent expansion of its branch network by
locating banking centers in a leading supermarket chain in Abilene (one
location) and Odessa (two locations) and the introduction of computer and
telephone home banking. The Company also maintains 15 ATMs throughout its market
area.
ACQUISITION ACTIVITY. The Company's strategy of opportunistically acquiring
banks in its West Texas market has resulted in its acquisition of three banks
and one branch in the last five years. 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.
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 organizations
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 July 31, 1998, the Company and the Bank had 131 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 July 31, 1998, the Company occupied approximately 600 square feet of
space for its corporate offices at 547 Chestnut Street, Abilene, Texas. The main
office of the Bank occupies approximately 8,000 square feet at this same
facility. The following table sets forth, at July 31, 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 for 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 office of the 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."
Azle, Texas(4) 20,400(5) Owned by Azle State and two other condominium owners; occupied and leased by Azle State.
Azle, Texas(4) 3,900 Owned and occupied by Azle State.
</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.
(4) Pending Acquisition.
(5) Azle State owns condominium interests totaling approximately 17,100 square
feet, of which it leases out approximately 300 square feet. Two other
condominium owners own units totaling approximately 3,300 square feet.
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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 (which 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).
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 (the "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 the 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 other litigation proceedings incidental
to the ordinary course of business. In the opinion of management, however, the
ultimate liability, if any, resulting from such other litigation would not be
material in relation to the Company's financial condition.
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REGULATION AND SUPERVISION
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 Comptroller. 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).
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
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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 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)
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"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 of Financial
Condition and Results of Operations--Capital Resources," both the Company and
the Bank were "well capitalized" at June 30, 1998 and December 31, 1997.
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.
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<PAGE>
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). 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.
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
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<PAGE>
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 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.
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.
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<PAGE>
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 of Financial Condition and
Results of Operations--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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<PAGE>
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
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<PAGE>
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 policies and the effect of such policies on the
future business and earnings of the Company and the Bank cannot be predicted.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company and the 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 (49) 1998 Executive Director of the Community Foundation of Abilene.
Marshal M. Kellar (66) 1981 Chairman of the Board 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 Of Counsel, Whitten & Young, P.C. (1997 to present); previously, Senior Vice
President, General Counsel and Corporate Secretary of Pittencrieff Communications,
Inc. (telecommunications).
John A. Wright (79) 1980 Bank Consultant.
</TABLE>
In addition, Messrs. Stephenson, Crosswhite, Darden, Fitzhugh and
Jarrett serve as directors of the Bank.
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<PAGE>
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 resignation or removal 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 resignation or removal or until their respective successors are duly
elected and have qualified.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table and notes thereto set forth certain information as
August 27, 1998, and as adjusted to reflect the Offering of the Common Stock
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 Common Stock of the
Company, (ii) each director, advisory director and named executive officer of
the Company and (iii) all current directors and executive officers of the
Company as a group.
<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)
- ------------------------------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
5% Shareholders
- ---------------
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
c/o First National Bank Trust Department
P.O. Box 701
Abilene, Texas 79604
Directors and Executive Officers
- --------------------------------
John L. Beckham.................................... 1,500 0.08 1,500 0.07
Lee Caldwell....................................... 13,706 0.69 13,706 0.59
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..................................... 300 0.02 300 0.01
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*....................................... 55,039 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)........................ 486,955(16) 24.24% 486,955(16) 0.91%
</TABLE>
- ------------------
* Advisory Director.
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<PAGE>
(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 August 27, 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
(assuming no exercise of the underwriter's over-allotment option).
(4) Includes 15,808 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.
(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.
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<PAGE>
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 August 27, 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 (as defined herein).
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 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 August 27, 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 shareholders' equity 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
product of the number of then outstanding shares of Series C Preferred Stock
multiplied by $42.00 ($298,000 at June 30, 1998), and (ii) 140% of the product
of the number of then outstanding shares of stock
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<PAGE>
senior to the Series C Preferred Stock with respect to dividends multiplied by
the liquidation amount thereof (none at June 30, 1998).
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 would 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 would 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 August 27, 1998, each share 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 the Restated Bylaws (the "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
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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 of
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
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
shareholders 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
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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.
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.
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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, 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, as Guarantee Trustee, will
hold the Guarantee for the benefit of the holders of the Preferred Securities.
See "Description of the Guarantee."
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 September , 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 federal or state banking
institutions in the Borough of Manhattan, The City of New York, New York or the
City of Dallas, Texas are authorized or required by law or executive order or
regulation to close or a day on which the corporate trust office of the Property
Trustee or the Debenture Trustee is closed for business.
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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 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 September , 2028. The Company
will have the right to redeem the Subordinated Debentures (i) on or after
September , 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
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Company will not have the right to purchase the Subordinated Debentures, in
whole or in part, from the Trust until after September , 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.
"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.
Except in the case of the redemption on all the Preferred Securities in
connection with the redemption of all the Subordinated Debentures, or in the
case that such Distribution is determined by the Property Trustee not to
be
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practical, 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, Dallas, Texas time, on the Redemption Date, to
the extent funds are available, the Property Trustee will 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 and any Distribution payable on or prior to the Redemption
Date, 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 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; provided, however, that the Company shall
not effect any such purchase to the extent that such action would disqualify the
Preferred Securities from listing on the AMEX (or such stock exchanges or other
organizations, if any, on which the Preferred Securities are then listed or
quoted) unless after the consummation of such event no Preferred Securities
would then be outstanding.
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
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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 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,
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(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
lesser of (a) the aggregate of the Liquidation Amount plus accrued and unpaid
Distributions thereon to the date of payment, to the extent the Trustee 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"). 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."
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
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(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 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. If the Company does
not join in such appointment within 15 days after it receives a request to do
so, or in case a Debenture Event of Default has occurred and is continuing, the
Property Trustee alone will have power to make such appointment.
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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 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 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.
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
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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 affected 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 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.
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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) 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
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.
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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 September , 1998 (the "Indenture"), between the
Company and U.S. Trust 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 $10,309,279 (or $11,855,671 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 September , 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 September , 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
September , 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 effectiveness thereof. The Company will not have the right to purchase
the Subordinated Debentures, in whole or in part, from the Trust until after
September , 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 the Bank, upon the 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 the Bank,
except
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to the extent that the Company may itself be recognized as a creditor of the
Bank. The Subordinated Debentures will, therefore, be effectively subordinated
to all existing and future liabilities of the Bank, 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 (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.
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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 September , 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 Trust or the Company must request
and receive an opinion with regard to such matters within a reasonable period of
time after the Trust or the Company 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.
"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 under the Trust Agreement.
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
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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 or any
bankruptcy, insolvency 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 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 maturity 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.
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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.
"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
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(4) 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 ($971,000 on a pro
forma basis giving effect to the indebtedness to be incurred by the Company in
connection with the Pending Acquisition). Because the Company is a holding
company, the
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Subordinated Debentures are effectively subordinated to all existing and future
liabilities of the Company subsidiaries, including obligations to depositors of
the Bank.
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 Dallas, 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, the Company will not 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 mailing a
notice for redemption of Subordinated Debentures and ending at the close of
business on the day of mailing of such notice of redemption, or (ii) register
the 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 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
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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
(subject to a valid extension of the maturity date in accordance with
the Indenture); 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.
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
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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 and pay all other
sums payable under the Indenture by the Company.
GOVERNING LAW
The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Delaware.
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 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
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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, 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; provided, however, that only
when the Guarantee is taken together with the obligations of the Company under
the Trust Agreement, the Subordinated Debentures, the Indenture and the Expense
Agreement do the Company and the Trust believe that the Company's guarantee of
the obligations of the Trust under the Preferred Securities constitutes a full
and unconditional guarantee. See "Relationship Among the Preferred Securities--
The Subordinated Debentures and the Guarantee--Full and Unconditional
Guarantee." 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 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 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.
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
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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 the
Bank upon the Bank's liquidation or reorganization or otherwise is subject to
the prior claims of creditors of the Bank, except to the extent the Company may
itself be recognized as a creditor of the 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.
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
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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 Delaware.
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 the 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 the 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.
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
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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.
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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 conclusions,
reflects the opinion of Arter & Hadden LLP, special counsel to the Company. 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 IRS 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.
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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 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 IRS, it is possible that the IRS 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.
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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 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. These proposals, however, 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,
September , 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."
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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 IRS 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 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 IRS.
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 many 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
the event of 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
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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 UNDERWRITER 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
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.
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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 forms 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 90 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 90 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 forms 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.
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
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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 $ per Preferred
Security (or $ 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 90 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 the Preferred Securities
have been approved for listing on the AMEX, subject to notice of official
issuance, 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," and "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. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the registrant pursuant to the foregoing
provisions, the Company 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.
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 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
113
<PAGE>
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, the Subordinated Debentures and the
Guarantee will be passed upon for the Company by Arter & Hadden LLP, Dallas,
Texas, counsel to the Company. 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. Certain
matters relating to United States federal income tax consideration will be
passed upon for the Company by Arter & Hadden LLP. Certain legal matters will be
passed upon for the Underwriter by Lewis, Rice & Fingersh, L.C., St. Louis,
Missouri.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996, of
Independent Bankshares, Inc. and the related consolidated income statements,
statements of changes in shareholders' 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,
included in this Prospectus 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 and Preferred Securities 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 and the Preferred
Securities 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 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 the AMEX at 86 Trinity Place, New
York, New York 10006.
114
<PAGE>
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 as amended by the Company's Annual Report on
Form 10-K/A filed April 30, 1998;
(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.
115
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT BANKSHARES, INC.
Consolidated Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997................................................ 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
Consolidated Balance Sheets at June 30, 1998 and 1997 (unaudited)...... F-33
Consolidated Statements of Income for the Periods of Six Months
ended June 30, 1998 and 1997 (unaudited)............................. F-34
Consolidated Statements of Cash Flows for the Periods of
Six Months ended June 30, 1998 and 1997 (unaudited).................. F-35
Notes to Consolidated Financial Statements (unaudited)................. F-36
Independent Auditor's Report........................................... F-42
Consolidated Balance Sheet at December 31, 1997........................ F-43
Consolidated Statement of Income for the Year Ended
December 31, 1997.................................................... F-44
Consolidated Statement of Changes in Shareholders' Equity
for the Year ended December 31, 1997................................. F-45
Consolidated Statement of Cash Flow for the Year ended
December 31, 1997.................................................... F-46
Notes to Consolidated Financial Statements............................. F-47
F-1
<PAGE>
AZLE STATE BANK
Report of Independent Auditors......................................... F-54
Balance Sheets at December 31, 1996 and 1995........................... F-55
Statements of Income for the Years Ended December 31, 1996 and 1995.... F-56
Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1996 and 1995........................... F-57
Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995........................................... F-58
Notes to Financial Statements.......................................... F-59
F-2
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
AT JUNE 30, 1998 AND DECEMBER 31, 1997
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
- ------ ------------ ------------
Cash and Cash Equivalents: (UNAUDITED)
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
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans $6,333,000 $5,833,000
Interest on Securities 1,973,000 2,699,000
Interest on Federal Funds Sold 918,000 442,000
---------- ----------
Total Interest Income 9,224,000 8,974,000
---------- ----------
Interest Expense:
Interest on Deposits 4,286,000 4,214,000
Interest on Notes Payable 1,000 35,000
---------- ----------
Total Interest Expense 4,287,000 4,249,000
---------- ----------
Net Interest Income 4,937,000 4,725,000
Provision for Loan Losses 300,000 60,000
---------- ----------
Net Interest Income After Provision for Loan Losses 4,637,000 4,665,000
---------- ----------
Noninterest Income:
Service Charges 974,000 739,000
Trust Fees 104,000 94,000
Other Income 259,000 53,000
---------- ----------
Total Noninterest Income 1,337,000 886,000
---------- ----------
Noninterest Expenses:
Salaries and Employee Benefits 2,145,000 1,926,000
Net Occupancy Expense 468,000 411,000
Equipment Expense 402,000 415,000
Stationery, Printing and Supplies Expense 206,000 184,000
Professional Fees 141,000 182,000
Litigation Settlement Expense 125,000 0
Goodwill Amortization 113,000 101,000
Net Cost (Revenues) Applicable to Real Estate and Other Repossessed Assets 47,000 (40,000)
Other Expenses 790,000 779,000
---------- ----------
Total Noninterest Expenses 4,437,000 3,958,000
---------- ----------
Income Before Federal Income Taxes 1,537,000 1,593,000
Federal Income Taxes 564,000 538,000
---------- ----------
Net Income 973,000 1,055,000
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains (Losses) on Available-for-sale Securities Arising
During the Period 8,000 (1,000)
---------- ----------
Comprehensive Income $ 981,000 $1,054,000
========== ==========
Preferred Stock Dividends $ 12,000 $ 28,000
========== ==========
Net Income Available to Common Stockholders $ 961,000 $1,027,000
========== ==========
Basic Earnings per Common Share Available to Common Stockholders $0.49 $0.59
========== ==========
Diluted Earnings Per Common Share Available to Common Stockholders $0.47 $0.52
========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
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)
</TABLE>
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.
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.
F-6
<PAGE>
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 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 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 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 six-month
periods ended June 30, 1998 and 1997, is as follows:
Unrealized Gains,
Net of Taxes, on
Available-for-sale Securities
------------------------------
Six-month Period
Ended June 30,
------------------------------
1998 1997
-------------- --------------
(In thousands)
Balance, beginning of period $ 31 $ 25
Current period change 8 (1)
----- -----
Balance, end of period $ 39 $ 24
===== =====
(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
F-7
<PAGE>
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 AT
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------ ------------
<S> <C> <C>
ASSETS:
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
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE 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
FOR THE 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:
<TABLE>
<CAPTION>
1997
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
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
=========== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1996
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $27,166,000 $76,000 $41,000 $27,201,000
Mortgage-backed securities 126,000 1,000 0 127,000
Other securities 443,000 0 0 443,000
----------- ------- ------- -----------
Total available-for-sale securities $27,735,000 $77,000 $41,000 $27,771,000
=========== ======= ======= ===========
</TABLE>
The amortized cost and estimated fair value of held-to-maturity securities
at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
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
=========== ======== ======== ===========
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
1996
------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 7,942,000 $ 25,000 $ 0 $ 7,967,000
Obligations of U.S. Government agencies
and corporations 29,928,000 129,000 140,000 29,917,000
Mortgage-backed securities 9,311,000 1,000 111,000 9,201,000
Obligations of states and political
subdivisions 200,000 6,000 0 206,000
----------- -------- -------- -----------
Total held-to-maturity securities $47,381,000 $161,000 $251,000 $47,291,000
=========== ======== ======== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
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
============ ===========
</TABLE>
Nonperforming assets at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
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
============ ===========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
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
=========== ========== ==========
</TABLE>
NOTE 5: PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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% 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% 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:
Exercise or
Shares Conversion
Reserved for Price
Issuance Per Share
------------- ------------
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
======== ======
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% 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
========= ========= =========
</TABLE>
<TABLE>
<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
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
F-29
<PAGE>
INDEPENDENT BANKSHARES, INC. CONDENSED
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 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
=========== ========== ==========
</TABLE>
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.
<TABLE>
<CAPTION>
1997
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income $3,223 $3,284 $3,502 $3,547 $13,556
Interest expense 1,485 1,544 1,693 1,719 6,441
Net interest income 1,738 1,740 1,809 1,828 7,115
Provision for loan losses 50 71 40 40 201
Income before federal income taxes 547 479 558 591 2,175
Net income 361 299 355 407 1,422
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
</TABLE>
The above unaudited financial information reflects all adjustments that
are, in the opinion of management, necessary to present a fair statement of the
results of operations for the interim periods presented.
F-32
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
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 Notes to Consolidated Financial Statements.
F-33
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<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)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
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) 164,175
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
transactionaccounts 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
</TABLE>
See Notes to Consolidated Financial Statements.
F-35
<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 possible 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 POSSIBLE LOAN LOSSES
Loans are stated at the principal amount outstanding less unearned discount,
fees and the allowance for possible 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 POSSIBLE LOAN LOSSES
The allowance for possible 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
F-36
<PAGE>
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 possible 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 possible 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 possible 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-37
<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
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available-For-Sale
- ------------------
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-38
<PAGE>
There were no sales of investment securities in 1998 or 1997.
NOTE 3: LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of loan categories at June 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
Transactions in the allowance for possible loan losses are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
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,
1998 and 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-39
<PAGE>
Depreciation on bank premises and equipment charged to expense totaled $88,422
and $84,038 for the periods of six months ended June 30, 1998 and 1997,
respectively.
NOTE 5: INCOME TAXES
The components of the income tax provision were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Federal Income Tax Provision:
Current $296,785 $287,300
Deferred (benefit) (38,194) (15,750)
-------- --------
Total Federal Income Tax Provision $258,591 $271,550
======== ========
</TABLE>
The principal factors causing a variation from the statutory tax rate are
as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
At June 30, 1998 and 1997, the net deferred tax asset is comprised of the
following temporary differences and carryforward items:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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-40
<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-41
<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.
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.
/s/ STOVALL, GRANDEY & WHATLEY
Fort Worth, Texas
March 6, 1998
F-42
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and Due From Banks $ 3,486,926
Federal Funds Sold 3,500,000
Investment Securities--Note 2:
Available-for-sale 3,875,813
Held-to-maturity 32,058,024
-----------
Total Investment Securities 35,933,837
Loans, Net of unearned discount and allowance for loan losses--Note 3 43,524,479
Bank Premises and Equipment, Net of accumulated depreciation--Note 4 1,661,122
Other Real Estate 216,104
Accrued Interest Receivable and Other Assets 1,101,623
-----------
Total Assets $89,424,091
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand $14,907,467
Interest bearing transaction accounts 21,289,951
Savings 9,017,008
Time 33,618,823
-----------
Total Deposits 78,833,249
Other Liabilities
Accrued interest and other payables 446,175
Income taxes--Note 5:
Current 92,730
Net deferred tax liability 435,074
Minority interest in consolidated subsidiary 299,711
-----------
Total Other Liabilities 1,273,690
-----------
Total Liabilities 80,106,939
Commitments and Contingencies--Notes 7 and 9
Shareholders' Equity--Note 10
Capital stock, par value--$1 a share:
Authorized--1,000,000 shares, Issued and outstanding--662,595 shares 662,595
Capital surplus 827,115
Retained earnings 7,807,215
Unrealized gain on available-for-sale securities,
net of deferred taxes: $12,782 24,038
-----------
9,320,963
Less capital stock held in treasury, 3,811 shares (3,811)
-----------
Total Shareholders' Equity 9,317,152
-----------
Total Liabilities and Shareholders' Equity $89,424,091
===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-43
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Interest Income
Interest and fees on loans $4,490,814
Interest on investment securities:
Taxable 1,802,131
Nontaxable 477,740
----------
2,279,871
Interest on federal funds sold 96,149
----------
Total Interest Income 6,866,834
Interest Expense--on deposits 2,614,750
----------
Net Interest Income 4,252,084
Provision for Loan Losses--Note 3 60,002
----------
Net Interest Income after Provision for Loan Losses 4,192,082
Noninterest Income
Service charges on deposit accounts 643,873
Other 113,977
----------
Total Noninterest Income 757,850
----------
4,949,932
Noninterest Expense 2,892,569
----------
Income before Federal Income Taxes and Minority Interest 2,057,363
Federal Income Taxes--Note 5 556,091
----------
Income before Minority Interest 1,501,272
Minority Interest 47,286
----------
Net Income $1,453,986
==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-44
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED 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 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>
See Notes to Consolidated Financial Statements.
F-45
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net income $ 1,453,986
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 176,425
Provision for loan losses 60,002
Deferred income tax benefit (46,396)
Net premium amortization or (discount accretion) on investment securities (8,035)
(Increase) decrease in accrued income and other assets 777,336
Increase (decrease) in accrued expenses and other liabilities (55,931)
Minority interest in subsidiary income 47,286
-----------
Total adjustments 950,687
-----------
Net Cash Provided by Operating Activities 2,404,673
Cash Flows from Investing Activities:
Net increase in federal funds sold (1,000,000)
Purchase of investment securities
Available-for-sale -
Held-to-maturity (9,890,844)
Proceeds from maturities of investment securities
Available-for-sale 937,667
Held-to-maturity 9,835,000
Net increase in loans (3,996,274)
Proceeds from sales of other real estate -
Purchase of premises and equipment 149,086
Proceeds from sale of equipment -
Purchase of capital stock of subsidiary (5,421)
-----------
Net Cash Used by Investing Activities (3,970,786)
Cash Flows from Financing Activities:
Net decrease in demand deposits, interest-bearing
transaction accounts and savings $ (993,919)
Net increase in certificates of deposit 1,748,682
Dividends paid (391,547)
-----------
Net Cash Provided by Financing Activities 363,216
-----------
Net Decrease in Cash and Due From Banks (1,202,897)
Cash and Due from Banks at Beginning of Year 4,689,823
-----------
Cash and Due from Banks at End of Year $ 3,486,926
===========
Supplemental Schedule of Noncash Investing and Financing Activities:
(1) Interest paid $ 2,594,000
(2) Income taxes paid 525,000
(3) Other real estate acquired through loan foreclosures 121,000
</TABLE>
See Notes to Consolidated Financial Statements.
F-46
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 possible 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 POSSIBLE LOAN LOSSES
Loans are stated at the principal amount outstanding less unearned discount,
fees and the allowance for possible 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-47
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible 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 possible 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 possible 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 possible 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-48
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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".
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair values of investment securities at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Available-For-Sale
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
=========== ======== ======== ===========
</TABLE>
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.
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.
<TABLE>
<CAPTION>
Securities Available-For-Sale Securities Held-To-Maturity
----------------------------- ---------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Amounts maturing in:
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
========== ========== =========== ===========
</TABLE>
F-49
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 2 - INVESTMENT SECURITIES (continued)
Securities with amortized cost of $6,753,000 and fair value of $6,869,000 at
December 31, 1997, 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.
NOTE 3 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of loan categories at December 31, 1997, is as follows:
<TABLE>
<S> <C>
Commercial, farm and industrial loans $16,389,822
Real estate loans 19,884,821
Installment loans 9,008,942
Overdrafts 80,590
-----------
45,364,175
Less: Unearned discount and fees (1,199,100)
Allowance for loan losses (640,596)
-----------
Loans, Net $43,524,479
===========
</TABLE>
Transactions in the allowance for possible loan losses are summarized as
follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 668,053
Provisions, charged to income 60,002
-----------
728,055
Loans charged off (146,313)
Recoveries of loans previously charged off 58,854
-----------
Net (87,459)
-----------
Balance at end of year $ 640,596
===========
</TABLE>
At December 31, 1997 the Bank had loans in the amount of $70,500 that were
specifically classified as impaired. The allowance for possible 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.
F-50
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 4 - BANK PREMISES AND EQUIPMENT
The investment in bank premises and equipment stated at cost at December
31, 1997, is as follows:
<TABLE>
<S> <C>
Land $ 264,092
Buildings and improvements 1,827,833
Furniture, fixtures and equipment 1,647,123
----------
3,739,048
Less accumulated depreciation 2,077,926
----------
Bank Premises and Equipment--Net $1,661,122
==========
</TABLE>
Depreciation on bank premises and equipment charged to expense totaled
$176,425 for the year ended December 31, 1997.
NOTE 5 - INCOME TAXES
The components of the income tax provision for the year ended December 31,
1997, is as follows:
<TABLE>
<S> <C>
Federal Income Tax Provision:
Current $ 602,487
Deferred (benefit) (46,396)
----------
Total Federal Income Tax Provision $ 556,091
==========
</TABLE>
The principal factors causing a variation from the statutory tax rate are
as follows:
<TABLE>
<S> <C>
Statutory tax on income $ 699,602
Reduction in taxes resulting from:
Tax exempt interest (160,018)
Disallowance of interest expense related to tax exempt securities 16,031
Other 476
----------
Total Income Tax Provision $ 556,091
==========
</TABLE>
F-51
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 5 - INCOME TAXES (continued)
At December 31, 1997, the net deferred tax asset is comprised of the
following temporary differences and carryforward items:
<TABLE>
<S> <C>
Write down of other real estate not deductible for tax purposes $ 31,146
Deferred compensation 67,331
---------
Total Deferred Tax Asset 98,477
---------
Excess of depreciation taken for tax reporting purposes
over the amount for financial purposes 132,369
Loan loss provisions and allowances for tax purposes
in excess of amounts allowed for financial purposes 296,643
Accretion on securities recognized for financial purposes
but not realized for tax purposes 38,618
Unrealized gain on available-for-sale securities 12,782
Other, net 53,139
---------
Total Deferred Tax Liability (533,551)
---------
Net Deferred Tax Liability $(435,074)
=========
</TABLE>
NOTE 6 - RELATED PARTY TRANSACTIONS
During 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 prevailing at the time
for comparable transactions with other persons. The balances of these loans
were approximately $1,229,000 at December 31, 1997.
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 outstanding letters of credit were $132,000 at December 31,
1997. 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.
F-52
<PAGE>
AZLE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
Capital Adequacy
------------------
Required Actual
Ratio Ratio
--------- -------
Tier I Capital (to Average Assets) 4.0% 10.6%
Tier I Capital (to Risk Weighted Assets) 4.0% 18.0%
Total Capital (to Risk Weighted Assets) 8.0% 19.2%
Management believes, as of December 31, 1997, that the Bank meets all capital
requirements to which it is subject.
F-53
<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
Fort Worth, Texas
April 11, 1997
F-54
<PAGE>
AZLE STATE BANK
BALANCE SHEETS
AT DECEMBER 31, 1996 AND 1995
<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-55
<PAGE>
AZLE STATE BANK
STATEMENTS OF INCOME
FOR YEARS ENDED DECEMBER 31, 1996 AND 1995
<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-56
<PAGE>
AZLE STATE BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities Total
Capital Capital Accumulated Available Stockholders'
Stock Surplus Earnings for-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-57
<PAGE>
AZLE STATE BANK
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<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-58
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS
NOTE 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 possible 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).
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.
F-59
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The allowance for possible 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.
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.
F-60
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 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
======= ==== ======= =======
Held-to-Maturity Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ---------
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
======= ==== ======= =======
The following is a summary of AFS securities and HTM securities at December 31, 1995 (dollars in thousands):
Available-for-Sale Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ---------
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
======= ==== ======= =======
Held-to-Maturity Securities
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ----------- ---------
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>
F-61
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
--------------------- ---------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair 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.
NOTE 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.
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.
F-62
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996: smaller than smaller than smaller than smaller than
Total capital (to risk weighted or equal to or equal to or equal to or equal to
assets) $9,084,000 19.0% $3,828,160 8.0% $4,785,200 10.0%
smaller than smaller than smaller than smaller than
Tier 1 capital(to risk weighted or equal to or equal to or equal to or equal to
assets) 8,485,000 17.7% 1,914,080 4.0% 2,871,120 6.0%
smaller than smaller than smaller than smaller than
or equal to or equal to or equal to or equal to
Tier 1 capital (to average assets) 8,485,000 9.9% 3,437,360 4.0% 4,296,700 5.0%
</TABLE>
NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
Loans are comprised of the following at December 31, 1996 and 1995
(dollars in thousands):
1996 1995
----------- ----------
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 possible loan losses (668) (674)
----------- ----------
$ 39,935 $ 35,500
=========== ==========
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.
F-63
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Transactions in the allowance for possible loan losses for the years
ended December 31, 1996 and 1995, were as follows (dollars in thousands):
1996 1995
-------- --------
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
======= =======
NOTE 5 - PREMISES AND EQUIPMENT
The composition of premises and equipment at December 31, 1996 and
1995, follows (dollars in thousands):
1996 1995
------- -------
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
======= =======
F-64
<PAGE>
AZLE STATE BANK
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 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 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).
NOTE 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-65
<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-66
<PAGE>
<TABLE>
<CAPTION>
======================================= =======================================
TABLE OF CONTENTS
Page [LOGO]
----
<S> <C> <C>
Prospectus Summary 4
Risk Factors 12 320,000 SHARES
Cautionary Statements Regarding
Forward-Looking Statements 20
Price Range of Common Stock and INDEPENDENT
Dividends 21 BANKSHARES, INC.
Market for the Preferred
Securities 22
Accounting Treatment 22 COMMON STOCK
Pending Acquisition 23 ---------------------
Pro Forma Consolidated Financial
Statements 25 1,000,000 PREFERRED SECURITIES
Use of Proceeds 31
Capitalization 32 INDEPENDENT
Selected Consolidated Financial CAPITAL TRUST
Data 33
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 35 % CUMULATIVE TRUST PREFERRED
Business and Properties of the SECURITIES (LIQUIDATION AMOUNT $10
Company 64 PER PREFERRED SECURITY)
Regulation and Supervision 69 GUARANTEED, AS DESCRIBED HEREIN, BY
Management 77
Security Ownership of Management INDEPENDENT
and Certain Beneficial Owners 79 BANKSHARES, INC.
Description of Capital Stock 81 ---------------------
Description of the Preferred
Securities 85 $10,000,000 % SUBORDINATED
Description of the Subordinated DEBENTURES OF
Debentures 95 INDEPENDENT BANKSHARES, INC.
Description of the Guarantee 103
Relationship Among the Preferred
Securities, the Subordinated
Debentures and the Guarantee 105
Certain Federal Income Tax
Consequences 107
ERISA Considerations 110
Underwriting 112
Legal Matters 114
Experts 114
Available Information 114
Incorporation of Certain Documents
by Reference 115
Index to Financial Statements F-1
------------------
NO DEALER, SALESPERSON OR OTHER ---------------------
PERSON HAS BEEN AUTHORIZED TO GIVE ANY Prospectus
INFORMATION OR TO MAKE ANY , 1998
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 STIFEL, NICOLAUS & COMPANY
SOLICITATION WOULD BE UNLAWFUL. INCORPORATED
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>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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 Company in connection with the
issuance and distribution of the securities being offered.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration fee........................ $ 5,055
NASD filing fee............................. 2,000
American Stock Exchange, Inc. listing fees.. 22,360
Blue Sky qualification fees and expenses.... 1,000
Accounting fees and expenses................ 45,000
Legal fees and expenses..................... 110,000
Trustee's fees and expenses................. 25,000
Printing and engraving...................... 35,000
Transfer agent's and registrar's fees....... 3,000
Miscellaneous............................... 1,585
--------
Total.................................. $250,000
========
</TABLE>
ITEM 15. 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
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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
II-1
<PAGE>
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 (filed herewith)
1.2 Form of Underwriting Agreement for Preferred Securities (filed
herewith)
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
(previously filed)
4.3 Form of Subordinated Debenture of the Company (previously filed)
4.4 Certificate of Trust of Independent Capital Trust (previously
filed)
4.5 Declaration of Trust of Independent Capital Trust (previously
filed)
4.6 Form of Amended and Restated Trust Agreement (previously filed)
4.7 Form of Preferred Security Certificate (included as an exhibit to
Exhibit 4.6)
4.8 Form of Preferred Securities Guarantee Agreement (previously filed)
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, the Subordinated Debentures
and the Guarantee being offered hereby (filed herewith)
5.2 Opinion of Prickett, Jones, Elliot, Kristol & Schnee, special Delaware
counsel, as to the validity of the Preferred Securities being offered
hereby (filed herewith)
8.1 Opinion of Arter & Hadden LLP as to certain federal income tax matters
(filed herewith)
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 (filed herewith)
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)
II-2
<PAGE>
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
(filed herewith)
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 opinions filed as
Exhibits 5.1 and 8.1)
23.2 Consent of Prickett, Jones, Elliott, Kristol & Schnee (included as part
of its opinion 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 previously filed)
25.2 Form T-1 Statement of Eligibility of U.S. Trust Company of Texas, N.A.
to act as trustee under the Indenture (previously filed)
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
(previously filed)
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
(previously filed)
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 six-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 Registrants pursuant to the Registrants'
Articles of Incorporation or otherwise, the Registrants have 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 Registrants of expenses incurred or paid by a director, officer or
controlling person of the Registrants 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 Registrants 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.
II-3
<PAGE>
B. The undersigned Registrants hereby undertake 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 Company and the Trust hereby undertake to provide to the
Underwriter at the closing specified in the underwriting agreements,
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 Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Abilene, Texas on August 31, 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 Amendment No. 1
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in Abilene, Texas on August 31, 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 Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Abilene, State of Texas, on August 31, 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, this
Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
August 31, 1998 /s/ Bryan W. Stephenson
------------------------------------------
Bryan W. Stephenson, President, Chief
Executive Officer and Director (Principal
Executive Officer)
August 31, 1998 /s/ Randal N. Crosswhite
------------------------------------------
Randal N. Crosswhite, Senior Vice President,
Chief Financial Officer, Corporate Secretary
and Director (Chief Financial and Accounting
Officer)
August 31, 1998 /s/ John L. Beckham*
------------------------------------------
John L. Beckham, Director
August 31, 1998 /s/ Lee Caldwell*
------------------------------------------
Lee Caldwell, Director
August 31, 1998 /s/ Mrs. Wm. R. (Amber) Cree*
------------------------------------------
Mrs. Wm. R. (Amber) Cree, Director
August __, 1998
------------------------------------------
Louis S. Gee, Director
August __, 1998
------------------------------------------
Nancy E. Jones, Director
August 31, 1998 /s/ Marshal M. Kellar*
------------------------------------------
Marshal M. Kellar, Director
II-6
<PAGE>
August 31, 1998 /s/ Tommy McAlister*
------------------------------------------
Tommy McAlister, Director
August 31, 1998 /s/ Scott L. Taliaferro*
------------------------------------------
Scott L. Taliaferro, Director
August 31, 1998 /s/ James D. Webster*
------------------------------------------
James D. Webster, M.D., Director
August 31, 1998 /s/ C.G. Whitten*
------------------------------------------
C.G. Whitten, Director
August 31, 1998 /s/ John A. Wright*
------------------------------------------
John A. Wright, Director
* By: /s/ Bryan W. Stephenson
----------------------------------
Bryan W. Stephenson, Agent and
Attorney-in-Fact
II-7
<PAGE>
EXHIBIT 1.1
-----------
320,000 Shares of Common Stock
(Par value $0.25 per share)
UNDERWRITING AGREEMENT
__________________, 1998
STIFEL, NICOLAUS & COMPANY, INCORPORATED
500 North Broadway
St. Louis, Missouri 63102
Ladies and Gentlemen:
Independent Bankshares, Inc., a Texas corporation (the "Company"), proposes
to issue and sell to Stifel, Nicolaus & Company, Incorporated (sometimes
referred to herein as the "Underwriter"), pursuant to the terms of this
Agreement, 320,000 shares of the Company's common stock, par value $0.25 per
share (the "Common Stock"). The aforementioned 320,000 shares of Common Stock
to be sold to you are herein called the "Firm Shares." Solely for the purpose
of covering over-allotments in the sale of the Firm Shares, the Company further
proposes to issue and sell to you, at your option (the "Option"), up to an
additional 48,000 shares of Common Stock (the "Option Shares") upon exercise of
the over-allotment option granted in Section 1 hereof. The Firm Shares and any
Option Shares are herein collectively referred to as the "Designated Shares" and
are more fully described in the Prospectus hereinafter defined.
The Company hereby confirms as follows its agreement with you in
connection with the proposed purchase of the Designated Shares.
1. SALE, PURCHASE AND DELIVERY OF DESIGNATED SHARES; DESCRIPTION OF
DESIGNATED SHARES.
On the basis of the representations, warranties and agreements herein
contained, and subject to the terms and conditions herein set forth, the Company
hereby agrees to issue and sell to the Underwriter, and the Underwriter agrees
to purchase at a purchase price of $____ per share (the "Purchase Price"), the
Firm Shares.
<PAGE>
In addition, on the basis of the representations, warranties and
agreements herein contained and subject to the terms and conditions herein set
forth, the Company hereby grants to the Underwriter the Option to purchase all
or any portion of the 48,000 Option Shares, and upon the exercise of such Option
in accordance with this Section 1, the Company hereby agrees to issue and sell
to the Underwriter all or any portion of the Option Shares at the same Purchase
Price per share paid for the Firm Shares. The Option hereby granted shall
expire at 5:00 p.m. St. Louis time 30 days after the Effective Date (as
hereinafter defined) and may be exercised only for the purpose of covering over-
allotments which may be made in connection with the offering and distribution of
the Firm Shares. The Option may be exercised in whole or in part at any time
(but not more than once) by the Underwriter giving notice (confirmed in writing)
to the Company setting forth the number of Option Shares as to which the
Underwriter is exercising the Option and the time and date at the offices of
Arter & Hadden, LLP, 1717 Main Street, Suite 4100, Dallas, Texas 75201 for
payment and delivery of certificates for such Option Shares. Such time and date
of payment and delivery for the Option Shares (the "Option Closing Date") shall
be determined by the Underwriter, but shall not be earlier than two nor later
than five business days after the exercise of such Option, nor in any event
prior to the Closing Date (as hereinafter defined). The Option Closing Date may
be the same as the Closing Date.
Payment of the Purchase Price and delivery of certificates for the
Firm Shares shall be made at the offices of Arter & Hadden, LLP, 1717 Main
Street, Suite 4100, Dallas, Texas 75201, or such other place as shall be agreed
to by the Underwriter and the Company, at 10:00 a.m., St. Louis time, on ______,
1998, or at such other time not more than five full business days thereafter as
the Company and the Underwriter shall determine (the "Closing Date"). If the
Underwriter exercises the Option to purchase any or all of the Option Shares,
payment of the Purchase Price and delivery of certificates for such Option
Shares shall be made on the Option Closing Date at the offices of Arter &
Hadden, LLP, 1717 Main Street, Suite 4100, Dallas, Texas 75201, or at such
other place as the Company and the Underwriter shall determine. Such payments
shall be made to an account designated by the Company by wire transfer, in same
day funds, in the amount of the aggregate Purchase Price therefor, against
delivery by or on behalf of the Company to the Underwriter of certificates for
the Designated Shares to be purchased by the Underwriter.
The Agreement contained herein with respect to the timing of the
Closing Date and Option Closing Date is intended to, and does, constitute an
express agreement, as described in Rule 15c6-1(c) and (d) promulgated under the
1934 Act (as defined herein), for a settlement date other than three or four
business days after the date of the contract, as the case may be.
Certificates for Designated Shares to be purchased by the Underwriter
shall be delivered by the Company in fully registered form in such authorized
denominations and registered in such names as the Underwriter shall request in
writing not later than 12:00 noon, St. Louis time, two business days prior to
the Closing Date and, if applicable, the Option Closing Date. Certificates for
Designated Shares to be purchased by the Underwriter shall be made available by
the Company to the Underwriter for inspection, checking and packaging at such
office as the Underwriter may designate in writing not later than 1:00 p.m., St.
Louis time, on the last business day prior to the Closing Date and, if
applicable, on the last business day prior to the Option Closing Date.
2
<PAGE>
Time shall be of the essence, and delivery of the certificates for the
Designated Shares at the time and place specified pursuant to this Agreement is
a further condition of the obligations of the Underwriter hereunder.
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees
with, the Underwriter, that:
(i) The reports filed with the Securities and Exchange
Commission (the "Commission") by the Company under the Securities Exchange
Act of 1934, as amended (the "1934 Act") and the rules and regulations
thereunder (the "1934 Act Regulations") at the time they were filed with
the Commission, complied as to form in all material respects with the
requirements of the 1934 Act and the 1934 Act Regulations and did not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading.
(ii) The Company, with Independent Capital Trust, has prepared
and filed with the Commission a registration statement on Form S-2 (File
Numbers 333-60649 and 333-60649-01) for the registration of, among other
securities, the Designated Shares under the Securities Act of 1933, as
amended (the "1933 Act"), including the related prospectus subject to
completion, and one or more amendments to such registration statement may
have been so filed, in each case in conformity in all material respects
with the requirements of the 1933 Act and the rules and regulations
promulgated thereunder (the "1933 Act Regulations"). Copies of such
registration statement, including any amendments thereto, each Preliminary
Prospectus (as defined herein) contained therein and the exhibits,
financial statements and schedules to such registration statement, as
finally amended and revised, have heretofore been delivered by the Company
to the Underwriter. After the execution of this Agreement, the Company
will file with the Commission (A) if such registration statement, as it may
have been amended, has been declared by the Commission to be effective
under the 1933 Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall
have been filed, in such registration statement), with such changes or
insertions as are required by Rule 430A of the 1933 Act Regulations ("Rule
430A") or permitted by Rule 424(b) of the 1933 Act Regulations ("Rule
424(b)") and as have been provided to and not objected to by the
Underwriter prior to (or as are agreed to by the Underwriter subsequent to)
the execution of this Agreement, or (B) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the 1933 Act, an amendment to such registration statement,
including a form of final prospectus, necessary to permit such registration
statement to become effective, a copy of which amendment has been furnished
to and not objected to by the Underwriter prior to (or is agreed to by the
Underwriter subsequent to) the execution of this Agreement. As used in
this Agreement, the term
3
<PAGE>
"Registration Statement" means such registration statement, as amended at
the time when it was or is declared effective under the 1933 Act, including
(1) all financial schedules and exhibits thereto, (2) all documents (or
portions thereof) incorporated by reference therein filed under the 1934
Act, and (3) any information omitted therefrom pursuant to Rule 430A and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto including all documents (or
portions thereof) incorporated by reference therein under the 1934 Act
(including the prospectus subject to completion, if any, included in the
Registration Statement and each prospectus filed pursuant to Rule 424(a)
under the 1933 Act); and the term "Prospectus" means the prospectus first
filed with the Commission pursuant to Rule 424(b)(1) or (4) or, if no
prospectus is required to be filed pursuant to Rule 424(b)(1) or (4), the
prospectus included in the Registration Statement, in each case including
the financial schedules and all documents (or portions thereof)
incorporated by reference therein under the 1934 Act. The date on which the
Registration Statement becomes effective is hereinafter referred to as the
"Effective Date."
(iii) The documents incorporated by reference in the Preliminary
Prospectus or Prospectus or from which information is so incorporated by
reference, when they became effective or were filed with the Commission, as
the case may be, complied in all material respects with the requirements of
the 1934 Act and the 1934 Act Regulations, and when read together and with
the other information in the Preliminary Prospectus or Prospectus, as the
case may be, at the time the Registration Statement became or becomes
effective and at the Closing Date and any Option Closing Date, did not or
will not, as the case may be, contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(iv) No order preventing or suspending the use of any Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) has been issued by the Commission, nor has the Commission, to
the knowledge of the Company, threatened to issue such an order or
instituted proceedings for that purpose. Each Preliminary Prospectus, at
the time of filing thereof, (A) complied in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations, and (B) did not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that this representation and
warranty does not apply to statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Company by
the Underwriter expressly for inclusion in the Preliminary Prospectus or
the Prospectus (the "Underwriter's Information"). The Underwriter's
Information includes only the statements with respect to the public
offering of Designated Shares by the Underwriter set forth on the cover
page of the Prospectus, the legend concerning over-allotments and other
stabilizing activities on the inside front cover page of the Prospectus and
the first paragraph and the third sentence of the second paragraph under
the heading "Underwriting Sale of Common Stock" in the
4
<PAGE>
Prospectus and the third paragraph under the heading "Underwriting General"
in the Prospectus.
(v) At the Effective Date and at all times subsequent thereto,
up to and including the Closing Date and, if applicable, the Option Closing
Date, the Registration Statement and any post-effective amendment thereto
(A) complied and will comply in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations, and (B) did not and will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. At the Effective Date and at all times when the Prospectus is
required to be delivered in connection with offers and sales of Designated
Shares, including, without limitation, the Closing Date and, if applicable,
the Option Closing Date, the Prospectus, as amended or supplemented, (A)
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations, and (B) did not contain and will
not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that this representation and
warranty does not apply to the Underwriter's Information.
(vi) The Company and Azle Bancorp ("Bancorp") are duly
organized, validly existing and in good standing under the laws of the
State of Texas, with full power and authority to own, lease and operate
their properties and conduct their business as described in and
contemplated by the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
as currently being conducted and are duly registered as bank holding
companies under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The Company has the power and authority to issue and sell the
Designated Shares, to enter into and perform its obligations under this
Agreement and to consummate the transactions herein contemplated; the
Company and Bancorp are duly qualified to transact business and are in good
standing in each jurisdiction in which the conduct of their respective
businesses or the ownership of their respective properties requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the
financial condition, stockholders equity or results of operations of the
Company, Bancorp or the Subsidiaries (as hereinafter defined) taken as a
whole ("Material Adverse Effect");
(vii) The Company has the direct and indirect subsidiaries
identified on Exhibit A-1 hereto (the "Company Subsidiaries"), and Bancorp
has the direct and indirect subsidiaries identified on Exhibit A-2 hereto
(the "Bancorp Subsidiaries") (the Company Subsidiaries and the Bancorp
Subsidiaries are sometimes referred to herein collectively as the
"Subsidiaries" and individually as a "Subsidiary"). The Company's
Subsidiary, First State Bank, National Association, and Bancorp's
Subsidiary, Azle State Bank ("ASB"), are hereinafter referred to
collectively as the "Banks." The Company and Bancorp do not own or control,
directly or indirectly, more than 5% of any
5
<PAGE>
class of equity security of any corporation, association or other entity
other than the Subsidiaries. Each Subsidiary is a bank, corporation or
business trust duly organized, validly existing and in good standing under
the laws of its respective jurisdiction of incorporation or organization.
Each such Subsidiary has full corporate and other power and authority to
own, lease and operate its properties and to conduct its business as
described in and contemplated by the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and as currently being conducted. The deposit
accounts of the Banks are insured by the Bank Insurance Fund administered
by the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum
amount provided by law; and, to the knowledge of the Company, no
proceedings for the modification, termination or revocation of any such
insurance are pending or threatened.
(viii) Each of the Subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing in each other
jurisdiction in which it owns or leases property or conducts its business
so as to require such qualification except where the failure to so qualify
would not have a Material Adverse Effect. All of the issued and
outstanding shares of capital stock of the Subsidiaries (A) have been duly
authorized and are validly issued, (B) are fully paid and nonassessable
except to the extent such shares may be deemed assessable under 12 U.S.C.
Section 55 or 12 U.S.C. Section 1831o, and (C) except as disclosed in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), are owned by the Company or Bancorp, as the case
may be, free and clear of any security interest, mortgage, pledge, lien,
encumbrance, restriction upon voting or transfer, preemptive rights, claim
or equity. Except as disclosed in the Prospectus (or if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding rights, warrants or options to acquire or instruments
convertible into or exchangeable for any capital stock or equity securities
of the Company, Bancorp or the Subsidiaries.
(ix) The capital stock of the Company conforms to the
description thereof contained in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) in all material
respects. The outstanding shares of capital stock and equity securities of
the Company have been duly authorized and validly issued and are fully paid
and nonassessable, and no such shares were issued in violation of the
preemptive or similar rights of any security holder of the Company; no
person has any preemptive or similar right to purchase any shares of
capital stock or equity securities of the Company. Except as disclosed in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there are no outstanding rights, options or
warrants to acquire any securities of the Company, and there are no
restrictions upon the voting or transfer of any capital stock of the
Company pursuant to the Company's articles of incorporation or bylaws or
any agreement or other instrument to which the Company is a party or by
which the Company is bound.
(x) The Company has all requisite power and authority to
issue, sell and deliver the Designated Shares in accordance with and upon
the terms and conditions set
6
<PAGE>
forth in this Agreement, the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus). All corporate action required to be taken by the Company for
the authorization, issuance, sale and delivery of the Designated Shares in
accordance with such terms and conditions has been validly and sufficiently
taken. The Designated Shares, when delivered in accordance with this
Agreement, will be duly and validly issued and outstanding and will be
fully paid and nonassessable, will not be issued in violation of or subject
to any preemptive or similar rights, and will conform in all material
respects to the description thereof in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). None of the Designated Shares, immediately prior
to delivery, will be subject to any security interest, lien, mortgage,
pledge, encumbrance, restriction upon voting or transfer, preemptive
rights, claim, equity or other defect.
(xi) The Company, Bancorp and the Subsidiaries have complied in
all material respects with all federal, state and local statutes,
regulations, ordinances and rules applicable to the ownership and operation
of their properties or the conduct of their businesses as described in and
contemplated by the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
as currently being conducted.
(xii) The Company, Bancorp and the Subsidiaries have all
material permits, easements, consents, licenses, franchises and other
governmental and regulatory authorizations from all appropriate federal,
state, local or other public authorities ("Permits") as are necessary to
own and lease their properties and conduct their businesses in the manner
described in and contemplated by the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and as currently being conducted in all material
respects. All such Permits are in full force and effect and each of the
Company, Bancorp and the Subsidiaries are in all material respects
complying therewith, and no event has occurred that allows, or after notice
or lapse of time would allow, revocation or termination thereof or will
result in any other material impairment of the rights of the holder of any
such Permit, subject in each case to such qualification as may be
adequately disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). Such Permits contain no
restrictions that would materially impair the ability of the Company,
Bancorp or the Subsidiaries to conduct their businesses in the manner
consistent with their past practices. Neither the Company, Bancorp nor any
of the Subsidiaries has received notice or otherwise has knowledge of any
proceeding or action relating to the revocation or modification of any such
Permit.
(xiii) Neither the Company, Bancorp nor any of the Subsidiaries
is in breach or violation of its corporate articles of incorporation or
charter, by-laws or other governing documents in any material respect.
Neither the Company, Bancorp nor any of the Subsidiaries is, and to the
knowledge of the Company no other party is, in violation, breach or default
(with or without notice or lapse of time or both) in the performance or
observance of any term, covenant, agreement, obligation, representation,
warranty or condition
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contained in (A) any contract, indenture, mortgage, deed of trust, loan or
credit agreement, note, lease, franchise, license, Permit or any other
agreement or instrument to which it is a party or by which it or any of its
properties may be bound, which breach, violation or default would
reasonably be expected to have a Material Adverse Effect, and to the
knowledge of the Company, no other party has threatened that the Company,
Bancorp or any of the Subsidiaries is in such violation, breach or default,
or (B) except as disclosed in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), any order, decree,
judgment, rule or regulation of any court, arbitrator, government, or
governmental agency or instrumentality, domestic or foreign, having
jurisdiction over the Company, Bancorp or the Subsidiaries or any of their
respective properties the breach, violation or default of which would
reasonably be expected to have a Material Adverse Effect.
(xiv) The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by
this Agreement, the Registration Statement and the Prospectus (or, if
the Prospectus in not in existence, the most recent Preliminary
Prospectus) do not and will not conflict with, result in the creation
or imposition of any material lien, claim, charge, encumbrance or
restriction upon any property or assets of the Company or the Company
Subsidiaries or the Designated Shares pursuant to, constitute a breach
or violation of, or constitute a default under, with or without notice
or lapse of time or both, any of the terms, provisions or conditions
of the articles of incorporation or by-laws of the Company or the
Company Subsidiaries, any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease, Permit or any other
agreement or instrument to which the Company or the Company
Subsidiaries is a party or by which any of them or any of their
respective properties may be bound or any order, decree, judgment,
rule or regulation of any court, arbitrator, government, or
governmental agency or instrumentality, domestic or foreign, having
jurisdiction over the Company or the Company Subsidiaries or any of
their respective properties which conflict, creation, imposition,
breach, violation or default would, either singly or in the aggregate,
have a Material Adverse Effect. No authorization, approval, consent or
order of or filing, registration or qualification with, any person
(including, without limitation, any court, governmental body or
authority) is required in connection with the transactions
contemplated by this Agreement, the Registration Statement and the
Prospectus, except for the registration of the Designated Shares,
under the 1933 Act and the qualification for listing of the Designated
Shares by the American Stock Exchange, Inc. relating to the listing of
the Designated Shares, and such as may be required under state
securities laws or Interpretations or Rules of the National
Association of Securities Dealers, Inc. ("NASD") in connection with
the purchase and distribution of the Designated Shares by the
Underwriter.
(xv) The Company has all requisite corporate power and
authority to enter into this Agreement, and this Agreement has been
duly and validly
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authorized, executed and delivered by the Company and constitutes the
legal, valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, except as the enforcement
thereof may be limited by general principles of equity and by
bankruptcy or other laws relating to or affecting creditors' rights
generally and except as any indemnification or contribution provisions
thereof may be limited under applicable securities laws.
(xvi) The Company, Bancorp and the Subsidiaries have good and
marketable title in fee simple to all real property and good title to all
personal property owned by them and material to their business, in each
case free and clear of all security interests, liens, mortgages, pledges,
encumbrances, restrictions, claims, equities and other defects except such
as are referred to in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or such as do not
materially affect the value of such property in the aggregate and do not
materially interfere with the use made or proposed to be made of such
property; and all of the leases under which the Company, Bancorp or the
Subsidiaries hold real or personal property are valid, existing and
enforceable leases and in full force and effect with such exceptions as are
not material and do not materially interfere with the use made or proposed
to be made of such real or personal property by the Company, and neither
the Company, Bancorp nor any of the Subsidiaries is in default in any
material respect of any of the terms or provisions of any material leases.
(xvii) PricewaterhouseCoopers LLP, who have certified certain of
the consolidated financial statements of the Company and the Company
Subsidiaries, including the notes thereto, included by incorporation by
reference or otherwise in the Registration Statement and Prospectus, are
independent public accountants with respect to the Company, Bancorp and the
Subsidiaries as required by the 1933 Act and the 1933 Act Regulations.
Ernst & Young LLP, who have certified certain of the financial statements
of ASB, including the notes thereto, included in the Registration Statement
and Prospectus, are independent public accountants with respect to the
Company, Bancorp and the Subsidiaries as required by the 1933 Act and the
1933 Act Regulations. Stovall, Grandey & Whatley, who have certified
certain of the consolidated financial statements of Bancorp and the Bancorp
Subsidiaries, including the notes thereto, included in the Registration
Statement and Prospectus, are independent public accounts with respect to
the Company, Bancorp and the Subsidiaries as required by the 1933 Act and
the 1933 Act Regulations.
(xviii) (A) The consolidated financial statements, including the
notes thereto, included by incorporation by reference or otherwise in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) with respect to the
Company, Bancorp and the Subsidiaries, comply in all material respects with
the 1933 Act and the 1933 Act Regulations and present fairly the
consolidated financial position of the entities covered thereby as of the
dates indicated and the consolidated results of operations, cash flows and
changes in shareholders' equity of the entities covered thereby for the
periods specified and have been prepared in conformity with generally
accepted
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<PAGE>
accounting principles. The selected and summary consolidated financial data
concerning the Company, Bancorp and the Subsidiaries included in the
Registration Statement and the Prospectus (or such Preliminary Prospectus)
comply in all material respects with the 1933 Act and the 1933 Act
Regulations, present fairly the information set forth therein, and have
been compiled on a basis consistent with that of the consolidated financial
statements of the Company, Bancorp and the Subsidiaries in the Registration
Statement and the Prospectus (or such Preliminary Prospectus). The other
financial, statistical and numerical information included in the
Registration Statement and the Prospectus (or such Preliminary Prospectus)
complies in all material respects with the 1933 Act and the 1933 Act
Regulations, presents fairly the information shown therein, and to the
extent applicable has been compiled on a basis consistent with the
financial statements of the Company, Bancorp and the Subsidiaries included
in the Registration Statement and the Prospectus (or such Preliminary
Prospectus).
(B) The pro forma financial information of the
Company and the Company Subsidiaries included in the Registration Statement
presents fairly in all material respects the information shown therein, has
been compiled on a basis consistent with that of the audited consolidated
financial statements of the Company, Bancorp and the Subsidiaries included
in the Registration Statement, has been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and the assumptions used in the preparation thereof are
reasonable.
(xix) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), except as
otherwise stated therein:
(A) neither the Company, Bancorp nor any of the Subsidiaries
has sustained any loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree except for such loss or interference or labor dispute
or court or governmental action, order or decree as would not have a
Material Adverse Effect;
(B) there has not been any material adverse change in the
Company, Subsidiaries, and Bancorp taken as a whole, or any
development which is reasonably likely to have a Material Adverse
Effect;
(C) neither the Company, Bancorp nor any of the Subsidiaries
has incurred any liabilities or obligations, direct or contingent, or
entered into any material transactions, other than in the ordinary
course of business which is material to the Company, Subsidiaries, and
Bancorp taken as a whole;
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<PAGE>
(D) neither the Company nor Bancorp has declared or paid
any dividend, and neither the Company, Bancorp nor any of the
Subsidiaries has become delinquent in the payment of principal or
interest on any outstanding borrowings; and
(E) there has not been any change in the capital stock,
equity securities, long-term debt, obligations under capital leases
or, other than in the ordinary course of business, short-term
borrowings of the Company, Bancorp or the Subsidiaries.
(xx) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), no charge, investigation, action, suit or
proceeding is pending or, to the knowledge of the Company, threatened,
against or affecting the Company, Bancorp or the Subsidiaries or any of
their respective properties before or by any court or any regulatory,
administrative or governmental official, commission, board, agency or other
authority or body, or any arbitrator, wherein an unfavorable decision,
ruling or finding would reasonably be expected to have a material adverse
effect on the consummation of this Agreement or the transactions
contemplated herein or the Company, Subsidiaries, and Bancorp taken as a
whole or which is required to be disclosed in the Registration Statement or
the Prospectus (or such Preliminary Prospectus) and is not so disclosed.
(xxi) There are no contracts or other documents required to be
filed as exhibits to the Registration Statement by the 1933 Act or the 1933
Act Regulations which have not been filed as exhibits or incorporated by
reference into the Registration Statement, or that are required to be
summarized in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) that are not so summarized.
(xxii) Neither the Company nor Bancorp has taken, directly or
indirectly, any action designed to result in or which has constituted or
which would reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Designated Shares, and the Company has no knowledge
that any such action has been taken or will be taken by any affiliate of
the Company or Bancorp.
(xxiii) The Company, Bancorp and the Subsidiaries own, or possess
adequate rights to use, all patents, copyrights, trademarks, service marks,
trade names and other rights necessary to conduct the businesses now
conducted by them in all material respects or as described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and neither the Company, Bancorp nor the
Subsidiaries have received any notice of infringement or conflict with
asserted rights of others with respect to any patents, copyrights,
trademarks, service marks, trade names or other rights which, individually
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a Material Adverse Effect, and the Company does not
know of any basis for such infringement or conflict.
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<PAGE>
(xxiv) Except as adequately disclosed in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), no labor dispute involving the Company, Bancorp or the
Subsidiaries exists or, to the knowledge of the Offerors, is imminent which
would reasonably be expected to have a Material Adverse Effect or which is
required to be disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). Neither the Offerors,
Bancorp nor any of the Subsidiaries have knowledge of any existing or
threatened labor dispute by the employees of any of its principal suppliers
or contractors which would reasonably be expected to have a Material
Adverse Effect.
(xxv) The Offerors, Bancorp and the Subsidiaries have timely
and properly prepared and filed all necessary federal, state, local and
foreign tax returns which are required to be filed and have paid all taxes
shown as due thereon and have paid all other taxes and assessments to the
extent that the same shall have become due, except such as are being
contested in good faith or where the failure to so timely and properly
prepare and file would not have a Material Adverse Effect. The Company has
no knowledge of any tax deficiency which has been or might be assessed
against the Company, Bancorp or the Subsidiaries which, if the subject of
an unfavorable decision, ruling or finding, would have a Material Adverse
Effect.
(xxvi) Each of the material contracts, agreements and
instruments described or referred to in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and each contract, agreement and instrument filed
as an exhibit to the Registration Statement is in full force and effect and
is the legal, valid and binding agreement of the Offerors, Bancorp or the
Subsidiaries, enforceable in accordance with its terms, except (A) to the
extent set forth in the Prospectus (or such Preliminary Prospectus, (B) as
the enforcement thereof may be limited by general principles of equity and
by bankruptcy or other laws relating to or affecting creditors' rights
generally, (C) to the extent such unenforceability would not have a
Material Adverse Effect or (D) with respect to any indemnification or
contribution provision thereof, as may be limited by applicable securities
laws. Except as disclosed in the Prospectus (or such Preliminary
Prospectus), to the knowledge of the Offerors, no other party to any such
agreement is (with or without notice or lapse of time or both) in breach or
default in any material respect thereunder.
(xxvii) No relationship, direct or indirect, exists between or
among the Company, Bancorp or the Subsidiaries, on the one hand, and the
directors, officers, shareholders, customers or suppliers of the Company,
Bancorp or the Subsidiaries, on the other hand, which is required to be
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus)
which is not adequately described therein.
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<PAGE>
(xxviii) No person has the right to request or require the
Company or the Company Subsidiaries to register any securities for offering
and sale under the 1933 Act by reason of the filing of the Registration
Statement with the Commission or the issuance and sale of the Designated
Shares except as adequately disclosed in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxix) The Designated Shares have been approved for listing on
the American Stock Exchange, Inc., subject to official notice of issuance.
(xxx) Except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no contractual encumbrances or restrictions or
material legal restrictions required to be described therein, on the
ability of the Subsidiaries (A) to pay dividends or make any other
distributions on its capital stock or to pay any indebtedness owed to the
Company or Bancorp, (B) to make any loans or advances to, or investments
in, the Company or Bancorp or (C) to transfer any of its property or assets
to the Company or Bancorp.
(xxxi) Neither the Company nor Bancorp is an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(xxxii) The Company has not distributed and will not distribute
prior to the Closing Date any prospectus in connection with the offering
contemplated hereby, other than a Preliminary Prospectus, the Prospectus,
the Registration Statement and the other materials permitted by the 1933
Act and the 1933 Act Regulations and supplied to the Underwriter.
(xxxiii) The Company, Bancorp and each of the Subsidiaries
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance with
management's general or specific authorizations, (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in
accordance with management's general or specific authorization, and (D) the
recorded accounts for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect thereto.
(xxxiv) The Company, Bancorp and the Subsidiaries maintain
insurance covering in all material respects their properties, personnel and
business. Such insurance insures against such losses and risks as, in the
judgment of the executive officers of the Company, are adequate to protect
in all material respects the Company, Bancorp and the Subsidiaries and
their businesses. Neither the Company, Bancorp nor any of the Subsidiaries
has received notice from any insurer or agent of such insurer that
substantial
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<PAGE>
capital improvements or other expenditures will have to be made in order to
continue such insurance. All such insurance is outstanding and duly in
force on the date hereof and will be outstanding and duly in force on the
Closing Date, with such exceptions as would not have a Material Adverse
Effect.
(xxxv) All of the representations and warranties of the
Company contained in the Reorganization Agreement and any Ancillary
Agreement are true and correct in all material respects, and the
Company has no reason to believe that (A) any of the representations
and warranties of Bancorp contained in the Reorganization Agreement
and any Ancillary Agreement are not true and correct in all material
respects, or (B) that any condition to consummation of the
transactions contemplated by the Reorganization Agreement and the
Ancillary Agreements will not be satisfied or that such transactions
will not close as contemplated in the Reorganization Agreement and the
Ancillary Agreements.
3. OFFERING BY THE UNDERWRITER. After the Registration Statement becomes
effective or, if the Registration Statement is already effective, after this
Agreement becomes effective, the Underwriter shall, subject to the terms and
conditions hereof, offer the Firm Shares for sale to the public upon the terms
and conditions set forth in the Prospectus. The Underwriter may from time to
time thereafter reduce the public offering price and change the other selling
terms, provided the proceeds to the Company shall not be reduced as a result of
such reduction or change.
The Underwriter may reserve and sell such of the Designated Shares
purchased by the Underwriter as the Underwriter may elect to dealers chosen by
it (the "Selected Dealers") at the public offering price set forth in the
Prospectus less the applicable Selected Dealers' concessions set forth therein,
for re-offering by Selected Dealers to the public at the public offering price.
The Underwriter may allow, and Selected Dealers may re-allow, a concession set
forth in the Prospectus to certain other brokers and dealers.
4. CERTAIN COVENANTS OF THE COMPANY. The Company covenants with the
Underwriter as follows:
(a) The Company shall use its best efforts to cause the Registration
Statement and any amendments thereto, if not effective at the time of execution
of this Agreement, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule 430A and
information has been omitted therefrom in reliance on Rule 430A, then the
Company will prepare and file in accordance with Rule 430A and Rule 424(b)
copies of the Prospectus or, if required by Rule 430A, a post-effective
amendment to the Registration Statement (including the Prospectus) containing
all information so omitted.
(b) The Company shall notify the Underwriter immediately, and confirm
such notice in writing:
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<PAGE>
(i) when the Registration Statement, or any post-effective
amendment to the Registration Statement, has become effective, or when the
Prospectus or any supplement to the Prospectus or any amended Prospectus
has been filed;
(ii) of the receipt of any comments or requests from the
Commission relating to the Registration Statement or the Prospectus;
(iii) of any request of the Commission to amend or supplement the
Registration Statement, any Preliminary Prospectus or the Prospectus or for
additional information; and
(iv) of the issuance by the Commission or any state or other
regulatory body of any stop order or other order suspending the
effectiveness of the Registration Statement, preventing or suspending the
use of any Preliminary Prospectus or the Prospectus, or suspending the
qualification of any of the Designated Shares for offering or sale in any
jurisdiction or the institution or threat of institution of any proceedings
for any of such purposes. The Company shall use its best efforts to
prevent the issuance of any such stop order or of any other such order and,
if any such order is issued, to cause such order to be withdrawn or lifted
as soon as possible.
(c) The Company shall furnish to the Underwriter, from time to time
without charge, as soon as available, as many copies as the Underwriter may
reasonably request of (i) the registration statement as originally filed and of
all amendments thereto including exhibits, whether filed before or after the
Registration Statement becomes effective, (ii) all exhibits and documents
incorporated therein or filed therewith, (iii) all consents and certificates of
experts in executed form, (iv) each Preliminary Prospectus and all amendments
and supplements thereto, and (v) the Prospectus, and all amendments and
supplements thereto.
(d) During the time when a prospectus is required to be delivered
under the 1933 Act, the Company shall comply to the best of its ability with the
1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act
Regulations so as to permit the completion of the distribution of the Designated
Shares as contemplated herein and in the Prospectus. The Company shall not file
any amendment to the registration statement as originally filed or to the
Registration Statement and shall not file any amendment thereto or make any
amendment or supplement to any Preliminary Prospectus or to the Prospectus of
which the Underwriter shall not previously have been advised in writing and
provided a copy a reasonable time prior to the proposed filings thereof or to
which the Underwiter or counsel for the Underwriter shall object. If it is
necessary, in the Company's reasonable opinion or in the reasonable opinion of
the Company's counsel, to amend or supplement the Registration Statement or the
Prospectus in connection with the distribution of the Designated Shares, the
Company shall forthwith amend or supplement the Registration Statement or the
Prospectus, as the case may be, by preparing and filing with the Commission
(provided the Underwriter or counsel for the Underwriter does not reasonably
object), and furnishing to the Underwriter, such number of copies as the
Underwriter may reasonably request of an amendment or
15
<PAGE>
amendments of, or a supplement or supplements to, the Registration Statement or
the Prospectus, as the case may be (in form and substance reasonably
satisfactory to the Underwriter and counsel for the Underwriter). If any event
shall occur as a result of which it is necessary to amend or supplement the
Prospectus to correct an untrue statement of a material fact or to include a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if for any reason
it is necessary at any time to amend or supplement the Prospectus to comply with
the 1933 Act and the 1933 Act Regulations, the Company shall, subject to the
second sentence of this subsection (d), forthwith amend or supplement the
Prospectus by preparing and filing with the Commission, and furnishing to the
Underwriter, such number of copies as the Underwriter may reasonably request of
an amendment or amendments of, or a supplement or supplements to, the Prospectus
(in form and substance reasonably satisfactory to the Underwriter and counsel
for the Underwriter) so that, as so amended or supplemented, the Prospectus
shall not contain an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(e) The Company shall cooperate with the Underwriter and counsel for
the Underwriter in order to qualify the Designated Shares for offering and sale
under the securities or blue sky laws of such jurisdictions within the United
States of America as the Underwriter may reasonably request and shall continue
such qualifications in effect so long as may be advisable for distribution of
the Designated Shares; provided, however, that the Company shall not be required
to qualify to do business as a foreign corporation or file a general consent to
service of process in any jurisdiction in connection with the foregoing. The
Company shall file such statements and reports as may be required by the laws of
each jurisdiction in which the Designated Shares have been qualified as above.
The Company will notify the Underwriter immediately of, and confirm in writing,
the suspension of qualification of the Designated Shares or threat thereof in
any jurisdiction.
(f) The Company shall make generally available to its security holders
in the manner contemplated by Rule 158 of the 1933 Act Regulations and furnish
to the Underwriter as soon as practicable, but in any event not later than 16
months after the Effective Date, a consolidated earnings statement of the
Company conforming with the requirements of Section 11(a) of the 1933 Act and
Rule 158.
(g) The Company shall use the proceeds from the sale of the Designated
Shares to be sold hereunder in the manner specified in the Prospectus under the
caption "Use of Proceeds."
(h) For five years from the Effective Date, the Company shall furnish
to the Underwriter copies of all reports and communications (financial or
otherwise) furnished by the Company to the holders of the Designated Shares as a
class, copies of all reports and financial statements filed with or furnished to
the Commission (other than portions for which confidential treatment has been
obtained from the Commission) or with any other national securities exchange or
self-regulatory organization, and such other documents, reports and information
concerning the business and financial condition of the Company as the
Underwriter may reasonably request, other
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<PAGE>
than such documents, reports and information for which the Company has the legal
obligation not to reveal to the Underwriter.
(i) For a period of 90 days from the Effective Date, the Company shall
not, without the Underwriter's prior written consent, 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, other
than (A) Designated Shares issued and sold to the Underwriter pursuant to this
Agreement, (B) Common Stock issued upon exercises of employee stock options
outstanding on the date hereof, and (C) Common Stock issued upon conversion of
the Company's outstanding Series C Preferred Stock, as described in the
Prospectus. The Company will cause each of its executive officers and
directors, and beneficial owners of more than five percent of the Common Stock
(other that the Independent Bankshares, Inc. Employee Stock Ownership Plan) to
deliver to the Underwriter on or before the date of this Agreement, an agreement
satisfactory in form and substance to the Underwriter and counsel for the
Underwriter whereby each such person agrees, for a period of 90 days from the
Effective Date, 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.
(j) The Company shall use its best efforts to cause the Designated
Shares to become listed on the American Stock Exchange, Inc. or in lieu thereof
a national securities exchange or self-regulatory organization, and to remain so
listed for at least five years from the Effective Date or for such shorter
period as may be specified in a written consent of the Underwriter.
(k) Subsequent to the date of this Agreement and through the date
which is the later of (i) the day following the date on which the Underwriter's
Option to purchase the Option Shares shall expire, or (ii) the day following the
Option Closing Date with respect to any Option Shares that the Underwriter shall
elect to purchase, except as described in or contemplated by the Prospectus,
neither the Company, Bancorp nor any of the Subsidiaries shall take any action
(or refrain from taking any action) which will result in the Company, Bancorp or
the Subsidiaries incurring any material liability or obligation, direct or
contingent, or enter into any material transaction, except in the ordinary
course of business, and there will not be any material change in the financial
position, capital stock, or any material increase in long-term debt, obligations
under capital leases or short-term borrowings (except for repurchase agreements
in the ordinary course of business consistent with past practice) of the Company
and the Company Subsidiaries, or Bancorp and the Bancorp Subsidiaries, as the
case may be, on a consolidated basis.
(l) Neither the Company nor Bancorp shall take, directly or
indirectly, any action designed to result in or which has constituted or which
would reasonably be expected to (i) cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Designated Shares, or (ii) otherwise violate the Commission's
Regulation M.
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(m) Prior to the Closing Date (and, if applicable, the Option Closing
Date), the Company will not issue any press release or other communication
directly or indirectly or hold any press conference with respect to the Company,
Bancorp, the Subsidiaries or the offering of the Designated Shares without the
Underwriter's prior written consent.
5. PAYMENT OF EXPENSES. Whether or not this Agreement is terminated or
the sale of the Designated Shares to the Underwriter is consummated, the Company
covenants and agrees that it will pay or cause to be paid (directly or by
reimbursement) all costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including:
(a) the preparation, printing, filing, delivery and shipping of the
initial registration statement, the Preliminary Prospectus or Prospectuses, the
Registration Statement and the Prospectus and any amendments or supplements
thereto, and the printing, delivery and shipping of this Agreement and any other
underwriting documents (including, without limitation, selected dealers
agreements), and the certificates for the Designated Shares;
(b) all fees, expenses and disbursements of counsel and accountants
for the Company and Bancorp;
(c) all fees and expenses incurred in connection with the
qualification of the Designated Shares under the securities or blue sky laws of
such jurisdictions as the Underwriter may request, including all filing fees and
fees and disbursements of counsel to the Underwriter in connection therewith,
including, without limitation, in connection with the preparation of the
Preliminary and Final Blue Sky Memoranda and any legal investment surveys and
any supplements thereto (all such fees and expenses in this subparagraph (c) the
"Blue Sky Fees"); provided, however, such Blue Sky Fees shall not exceed $3,000
in the aggregate;
(d) all fees and expenses incurred in connection with filings made
with the NASD;
(e) any applicable fees and other expenses incurred in connection with
the listing of the Designated Shares on the American Stock Exchange, Inc.
(f) the cost of furnishing to the Underwriter copies of the initial
registration statements, any Preliminary Prospectus, the Registration Statement
and the Prospectus and all amendments or supplements thereto;
(g) the costs and charges of any transfer agent or registrar and the
fees and disbursements of counsel to any transfer agent or registrar;
(h) all costs and expenses (including stock transfer taxes) incurred
in connection with the printing, issuance and delivery of the Designated Shares
to the Underwriter; and
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(i) all other costs and expenses incident to the performance of the
obligations of the Company hereunder that are not otherwise specifically
provided for in this Section 5; provided, however, that the Underwriter shall
pay its own costs and expenses, including (A) the costs and expenses of its
counsel, (B) the Blue Sky Fees which are not paid by the Company pursuant to
Section 5(c) above, (C) the expenses of advertising any offering of the
Designated Shares made by the Underwriter and (D) stabilization costs, if any.
If the sale of Designated Shares contemplated by this Agreement is not
completed due to the termination of this Agreement pursuant to the terms hereof,
the Company will pay the Underwriter its accountable out-of-pocket expenses in
connection herewith or in contemplation of the performance of the Underwriter's
obligations hereunder, including without limitation travel expenses, reasonable
fees, expenses and disbursements of counsel or other out-of-pocket expenses
incurred by the Underwriter in connection with any discussion of the offering of
the Designated Shares or the contents of the Registration Statement, any
investigation of the Company and the Subsidiaries, or any preparation for the
marketing, purchase, sale or delivery of the Designated Shares, in each case
following presentation of reasonably detailed invoices therefor, provided,
however, that if the sale of the Designated Shares is not completed, the Company
will in no event be obligated to pay in excess of $50,000 of such fees and
expenses without prior approval by the Company.
If the sale of Designated Shares contemplated by this Agreement is
completed, the Company shall not be responsible for payment of fees or
disbursements of counsel to the Underwriter other than in accordance with
paragraph (c) above, or for the reimbursement of any expenses of the
Underwriter.
6. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Firm Shares and, following exercise of
the Option granted by the Company in Section 1 of this Agreement, the Option
Shares, are subject, in the Underwriter's reasonable discretion, to the accuracy
of and compliance with the representations and warranties and agreements of the
Company herein as of the date hereof and as of the Closing Date (or in the case
of the Option Shares, if any, as of the Option Closing Date), to the accuracy of
the written statements of the Company made pursuant to the provisions hereof, to
the performance by the Company of their covenants and obligations hereunder and
to the following additional conditions:
(a) If the Registration Statement or any amendment thereto filed prior
to the Closing Date has not been declared effective prior to the time of
execution hereof, the Registration Statement shall become effective not later
than 10:00 a.m., St. Louis time, on the first business day following the time of
execution of this Agreement, or at such later time and date as the Underwriter
may agree to in writing. If required, the Prospectus and any amendment or
supplement thereto shall have been timely filed in accordance with Rule 424(b)
and Rule 430A under the 1933 Act and Section 4(a) hereof. No stop order
suspending the effectiveness of the Registration Statement or any amendment or
supplement thereto shall have been issued under the 1933 Act or any applicable
state securities laws and no proceedings for that purpose shall have been
instituted or shall be
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pending, or, to the knowledge of the Company or the Underwriter, shall be
contemplated by the Commission or any state authority. Any request on the part
of the Commission or any state authority for additional information (to be
included in the Registration Statement or Prospectus or otherwise) shall have
been disclosed to the Underwriter and complied with to the satisfaction of the
Underwriter and to the satisfaction of counsel for the Underwriter.
(b) The Underwriter shall not have advised the Company in writing at
or before the Closing Date (and, if applicable, the Option Closing Date) that
the Registration Statement or any post-effective amendment thereto, or the
Prospectus or any amendment or supplement thereto, contains an untrue statement
of a fact which, in the Underwriter's opinion, is material or omits to state a
fact which, in the Underwriter's opinion, is material and is required to be
stated therein or is necessary to make statements therein (in the case of the
Prospectus or any amendment or supplement thereto, in light of the circumstances
under which they were made) not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement and the Designated Shares,
and the authorization and form of the Registration Statement and Prospectus,
other than financial statements and other financial data, and all other legal
matters relating to this Agreement and the transactions contemplated hereby
shall be satisfactory in all material respects to counsel to the Underwriter,
and the Company and the Company Subsidiaries shall have furnished to such
counsel all documents and information relating thereto that they may reasonably
request to enable them to pass upon such matters.
(d) Arter & Hadden LLP, counsel to the Company, shall have furnished
to the Underwriter its signed opinion, dated the Closing Date or the Option
Closing Date, as the case may be, in form and substance satisfactory to counsel
to the Underwriter as to the matters set forth in as Exhibit B hereto.
(e) Lewis, Rice & Fingersh, L.C., counsel to the Underwriter, shall
have furnished to the Underwriter its signed opinion, dated the Closing Date or
the Option Closing Date, as the case may be, with respect to the sufficiency of
all corporate procedures and other legal matters relating to this Agreement, the
validity of the Designated Shares, the Registration Statement, the Prospectus
and such other related matters as the Underwriter may reasonably request and
there shall have been furnished to such counsel such documents and other
information as they may request to enable them to pass on such matters. In
giving such opinion, Lewis, Rice & Fingersh, L.C. may rely as to matters of fact
upon statements and certifications of officers of the Company and of other
appropriate persons and may rely as to matters of law, other than law of the
United States and the State of Missouri, upon the opinion of Arter & Hadden, LLP
described herein.
(f) On the date of this Agreement and on the Closing Date (and, if
applicable, any Option Closing Date), the Underwriter shall have received from
PricewaterhouseCoopers LLP and Ernst & Young LLP and Stoval, Grandey & Whatley,
L.L.P. letters, dated the date of this Agreement and the Closing Date (and, if
applicable, the Option Closing Date), respectively, in form and substance
satisfactory to the Underwriter, confirming that, with respect
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PricewaterhouseCoopers LLP, they are independent public accountants with respect
to the Company and the Company Subsidiaries (for purposes of this Section 6(f)
only, the "Company") within the meaning of the 1933 Act and the 1933 Act
Regulations, and, with respect to Ernst & Young, LLP and Stoval, Grandey &
Whatley, L.L.P., they are independent public accountants with respect to Bancorp
and the Bancorp Subsidiaries (for purposes of this Section 6(f) only, "Bancorp")
within the meaning of the 1933 Act and the 1933 Act Regulations, and stating in
effect that:
(i) In their opinion, the consolidated financial statements of
the Company or Bancorp, as the case may be, audited by them and included in
the Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations.
(ii) On the basis of the procedures specified by the American
Institute of Certified Public Accountants as described in SAS No. 71,
"Interim Financial Information," inquiries of officials of the Company or
Bancorp, as the case may be, responsible for financial and accounting
matters, and such other inquiries and procedures as may be specified in
such letter, which procedures do not constitute an audit in accordance with
U.S. generally accepted auditing standards, nothing came to their attention
that caused them to believe that, if applicable, the unaudited interim
consolidated financial statements of the Company or Bancorp, as the case
may be, included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act and 1933 Act Regulations or are not in conformity with U.S.
generally accepted accounting principles applied on a basis substantially
consistent, except as noted in the Registration Statement, with the basis
for the audited consolidated financial statements of the Company or
Bancorp, as the case may be included in the Registration Statement.
(iii) On the basis of limited procedures, not constituting an
audit in accordance with U.S. generally accepted auditing standards,
consisting of a reading of the unaudited interim financial statements and
other information referred to below, a reading of the latest available
unaudited condensed consolidated financial statements of the Company or
Bancorp, as the case may be, inspection of the minute books of the Company
or Bancorp, as the case may be, since the date of the latest audited
financial statements of the Company or Bancorp, as the case may be,
included or incorporated by reference in the Registration Statement,
inquiries of officials of the Company or Bancorp, as the case may be,
responsible for financial and accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) as of a specified date not more than five days prior
to the date of such letter, there have been any changes in the
consolidated capital stock of the Company or Bancorp, as the case may
be, any increase in the consolidated debt of the Company or Bancorp,
as the case may be, any decreases in consolidated total assets or
shareholders equity of the Company or Bancorp, as the case may be, or
any changes, decreases or increases in other items specified by the
Underwriter, in each case as compared with amounts shown in the latest
unaudited interim consolidated
21
<PAGE>
statement of financial condition of the Company or Bancorp, as the
case may be, included in the Registration Statement except in each
case for changes, increases or decreases which the Registration
Statement specifically discloses, have occurred or may occur or which
are described in such letter; and
(B) for the period from the date of the latest unaudited
interim consolidated financial statements of the Company or Bancorp,
as the case may be, included in the Registration Statement to the
specified date referred to in Clause (iii)(A), there were any
decreases in the consolidated interest income, net interest income, or
net income of the Company or Bancorp, as the case may be, or in the
per share amount of net income of the Company or Bancorp, as the case
may be, or any changes, decreases or increases in any other items
specified by the Underwriter, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Underwriter, except in each case
for increases or decreases which the Registration Statement discloses
have occurred or may occur, or which are described in such letter;
(iv) In addition to the audit referred to in their report
included in the Registration Statement and the limited procedures,
inspection of minute books, inquiries and other procedures referred to in
paragraphs (ii) and (iii) above, they have carried out certain specified
procedures, not constituting an audit in accordance with U.S. generally
accepted auditing standards, with respect to certain amounts, percentages
and financial information specified by the Underwriter which are derived
from the general accounting records and consolidated financial statements
of the Company or Bancorp, as the case may be, which appear in the
Registration Statement and have compared such amounts, percentages and
financial information with the accounting records and the material derived
from such records and consolidated financial statements of the Company or
Bancorp, as the case may be, and have found them to be in agreement.
In the event that the letters to be delivered referred to above set
forth any such changes, decreases or increases as specified in Clauses (iii)(A)
or (iii)(B), above, or any exceptions from such agreement specified in Clause
(iv) above, it shall be a further condition to the obligations of the
Underwriter that the Underwriter shall have determined, after discussions with
officers of the Company, responsible for financial and accounting matters, that
such changes, decreases, increases or exceptions as are set forth in such
letters do not (x) reflect a material adverse change in the items specified in
Clause (iii)(A) above as compared with the amounts shown in the latest unaudited
consolidated statement of financial condition of the Company or Bancorp, as the
case may be, included in the Registration Statement, (y) reflect a material
adverse change in the items specified in Clause (iii)(B) above as compared with
the corresponding periods of the prior year or other period specified by the
Underwriter, or (z) reflect a material change in items specified in Clause (iv)
above from the amounts shown in the Preliminary Prospectus distributed by the
Underwriter in connection with the offering contemplated hereby or from the
amounts shown in the Prospectus.
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<PAGE>
(g) At the Closing Date and, if applicable, the Option Closing Date, the
Underwriter shall have received certificates of the chief executive officer and
the chief financial and accounting officer of the Company, which certificates
shall be deemed to be made on behalf of the Company dated as of the Closing Date
and, if applicable, the Option Closing Date, evidencing satisfaction of the
conditions of Section 6(a) and stating that (i) the representations and
warranties of the Company set forth in Section 2(a) hereof are accurate as of
the Closing Date and, if applicable, the Option Closing Date, and that the
Company has complied with all agreements and satisfied all conditions on their
part to be performed or satisfied at or prior to such Closing Date and, if
applicable, the Option Closing Date, (ii) since the respective dates as of which
information is given in the Registration Statement and the Prospectus, there has
not been any material adverse change in the condition (financial or otherwise),
earnings, affairs, business, prospects or results of operations of the Company,
Bancorp and the Subsidiaries on a consolidated basis, (iii) since such dates
there has not been any material transaction entered into by the Company or the
Company Subsidiaries other than transactions in the ordinary course of business,
(iv) they have carefully examined the Registration Statement and the Prospectus
as amended or supplemented and nothing has come to their attention that would
lead them to believe that either the Registration Statement or the Prospectus,
or any amendment or supplement thereto as of their respective effective or issue
dates, contained, and the Prospectus as amended or supplemented at such Closing
Date (and, if applicable, the Option Closing Date), contains any untrue
statement of a material fact, or omits to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, and (v)
covering such other matters as the Underwriter may reasonably request. The
officers' certificate of the Company shall further state that no stop order
affecting the Registration Statement is in effect or, to their knowledge,
threatened.
(h) The NASD, upon review of the terms of the public offering of the
Designated Shares, shall not have objected to the Underwriter's participation
in such offering.
(i) The Underwriter shall have received on or before the date of this
Agreement agreements of the executive officers, directors and five percent
shareholders of the Company (other than the Independent Bankshares, Inc.
Employee Stock Ownership Plan) that, as described in Section 4(i) hereof.
(j) Prior to the Closing Date and, if applicable, the Option Closing
Date, the Company shall have furnished to the Underwriter and counsel for the
Underwriter all such other documents, certificates and opinions as they have
reasonably requested.
(k) On or prior to the Closing Date, the Company shall have completed
its acquisition of Bancorp and any other transactions contemplated by the
Reorganization Agreement and the Company and the Trust shall have completed the
offering of 1,000,000 ____% Cumulative Trust Preferred Securities as provided in
that certain Underwriting Agreement among the Underwriter, the Company and the
Trust of even date herewith relating to the sale of such securities.
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All opinions, certificates, letters and other documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to the Underwriter. The Company shall furnish the
Underwriter with conformed copies of such opinions, certificates, letters and
other documents as the Underwriter shall reasonably request.
If any of the conditions referred to in this Section 6 shall not have
been fulfilled when and as required by this Agreement, this Agreement and all of
the Underwriter's obligations hereunder may be terminated by the Underwriter on
notice to the Company at, or at any time before, the Closing Date or the Option
Closing Date, as applicable. Any such termination shall be without liability of
the Underwriter to the Company.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless the Underwriter,
each of its directors, officers and agents, and each person, if any, who
controls the Underwriter within the meaning of the 1933 Act, against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs of
investigation and reasonable attorney fees and expenses), joint or several,
arising out of or based (i) upon any untrue statement or alleged untrue
statement of a material fact made by the Company contained in Section 2(a) of
this Agreement (or any certificate delivered by the Company pursuant to Sections
6(g) or 6(j) hereof) or the registration statement as originally filed or the
Registration Statement, any Preliminary Prospectus or the Prospectus, or in any
amendment or supplement thereto, (ii) upon any blue sky application or other
document executed by the Company specifically for that purpose or based upon
written information furnished by the Company filed in any state or other
jurisdiction in order to qualify any of the Designated Shares under the
securities laws thereof (any such application, document or information being
hereinafter referred to as a "Blue Sky Application"), (iii) any omission or
alleged omission to state a material fact in the registration statement as
originally filed or the Registration Statement, the Preliminary Prospectus or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application required to be stated therein or necessary to make the statements
therein in light of the circumstances under which they were madenot misleading,
and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation and attorney fees), joint or
several, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus or the
Prospectus, or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading or
(iv) the enforcement of this indemnification provision or the contribution
provisions of Section 7(d); and shall reimburse each such indemnified party for
any reasonable legal or other expenses as incurred, but in no event less
frequently than 30 days after each invoice is submitted, incurred by them in
connection with investigating or defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action,
notwithstanding the possibility that payments for such expenses might later be
held to be improper, in which case such payments shall be promptly refunded;
provided, however, that the Company shall not be liable in any such
24
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case to the extent, but only to the extent, that any such losses, claims,
damages, liabilities and expenses arise out of or are based upon any untrue
statement or omission or allegation thereof that has been made therein or
omitted therefrom in reliance upon and in conformity with the Underwriter's
Information; provided, that the indemnification contained in this paragraph with
respect to any Preliminary Prospectus shall not inure to the benefit of the
Underwriter (or of any person controlling the Underwriter) to the extent any
such losses, claims, damages, liabilities or expenses directly results from the
fact that the Underwriter sold Designated Shares to a person to whom there was
not sent or given, at or prior to the written confirmation of such sale, a copy
of the Prospectus (as amended or supplemented if any amendments or supplements
thereto shall have been furnished to the Underwriter consistent with the
provisions hereof, if required by law, and if such loss, claim, damage,
liability or expense would not have arisen but for the failure to give or send
such person such document. The foregoing indemnity agreement is in addition to
any liability the Company may otherwise have to any such indemnified party.
(b) The Underwriter agrees to indemnify and hold harmless the Company,
each of its directors, each of its officers and each person, if any, who
controls the Company within the meaning of the 1933 Act, to the same extent as
required by the foregoing indemnity from the Company to the Underwriter, but
only with respect to the Underwriter's Information or information related to the
Underwriter furnished in writing to the Company through the Underwriter by or on
its behalf expressly for use in a Blue Sky Application. The foregoing indemnity
agreement is in addition to any liability which the Underwriter may otherwise
have to any such indemnified party.
(c) If any action or claim shall be brought or asserted against any
indemnified party or any person controlling an indemnified party in respect of
which indemnity may be sought from the indemnifying party, such indemnified
party or controlling person shall promptly notify the indemnifying party in
writing, and the indemnifying party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all expenses; provided, however, that the failure so to notify
the indemnifying party shall not relieve it from any liability which it may have
to an indemnified party otherwise than under such paragraph, and further, shall
only relieve it from liability under such paragraph to the extent materially
prejudiced thereby. Any indemnified party or any such controlling person shall
have the right to employ separate counsel in any such action and to participate
in the defense thereof, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or such controlling person unless (i) the
employment thereof has been specifically authorized by the indemnifying party in
writing, (ii) the indemnifying party has failed to assume the defense or to
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
such indemnified party or such controlling person and the indemnifying party and
such indemnified party or such controlling person shall have been advised by
such counsel that there may be one or more legal defenses available to it that
are different from or in addition to those available to the indemnifying party
(in which case, if such indemnified party or controlling person notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party
or such controlling person) it being understood, however, that the indemnifying
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party shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys at any time and for all
such indemnified parties and controlling persons, which firm shall be designated
in writing by the indemnified party and shall be reasonably satisfactory to the
indemnifying party. Each indemnified party and each controlling person, as a
condition of such indemnity, shall use reasonable efforts to cooperate with the
indemnifying party in the defense of any such action or claim. The indemnifying
party shall not be liable for any settlement of any such action effected without
its written consent, but if there be a final judgment for the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party and any such controlling person from and against any loss,
claim, damage, liability or expense by reason of such settlement or judgment.
An indemnifying party shall not, without the prior written consent of
each indemnified party, settle, compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnity may be sought hereunder (whether or not such
indemnified party or any person who controls such indemnified party within the
meaning of the 1933 Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes a release of each such
indemnified party reasonably satisfactory to each such indemnified party and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding or unless the indemnifying party shall confirm in a
written agreement with each indemnified party, that notwithstanding any federal,
state or common law, such settlement, compromise or consent shall not alter the
right of any indemnified party or controlling person to indemnification or
contribution as provided in this Agreement.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriter on the other from the offering of the Designated Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and the Underwriter on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The benefits
received by the Underwriter on the one hand and the Company on the other shall
be deemed to be allocated pro rata on the basis of the total underwriting
discounts, commissions and compensation received by the Underwriter relative to
the total net proceeds from the offering of the Designated Shares (before
deducting expenses) received by the Company, in each case as set forth in the
table on the cover page of the Prospectus. The relative fault of the Company on
the one hand and of the Underwriter on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information
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supplied by the Company or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this paragraph (d)
were determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in the first sentence of
this paragraph (d) shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph (d), the Underwriter shall not
be required to contribute any amount in excess of the amount by which the total
price at which the Designated Shares underwritten by the Underwriter and
distributed to the public were offered to the public exceeds the amount of any
damages that the Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the 1933 Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
For purposes of this paragraph (d), each person who controls the
Underwriter within the meaning of the 1933 Act shall have the same rights to
contribution as the Underwriter, and each person who controls the Company within
the meaning of the 1933 Act, each officer of the Company and each director of
the Company shall have the same rights to contribution as the Company subject in
each case to the preceding paragraph. The obligations of the Company under this
paragraph (d) shall be in addition to any liability which the Company may
otherwise have and the obligations of the Underwriter under this paragraph (d)
shall be in addition to any liability that the Underwriter may otherwise have.
(e) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter or by or on behalf of the Company, or such
directors, trustees or officers (or any person controlling the Company), (ii)
acceptance of any Designated Shares and payment therefor hereunder and (iii) any
termination of this Agreement. A successor of the Underwriter or of the
Company, such directors, trustees or officers (or of any person controlling the
Underwriter or the Company) shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 7.
8. TERMINATION. The Underwriter shall have the right to terminate this
Agreement at any time at or prior to the Closing Date or, with respect to the
Underwriter's obligation to purchase the Option Shares, at any time at or prior
to the Option Closing Date, without liability on the part of the Underwriter to
the Company, if:
(a) The Company shall have failed, refused, or been unable to perform
any agreement on its part to be performed under this Agreement, or any of the
conditions referred to in Section 6 shall not have been fulfilled, when and as
required by this Agreement;
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(b) The Company, Bancorp or any of the Subsidiaries shall have
sustained any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree which in the
judgment of the Underwriter materially impairs the investment quality of the
Designated Shares;
(c) There has been since the respective dates as of which information
is given in the Registration Statement or the Prospectus, any materially adverse
change in, or any development which is reasonably likely to have a Material
Adverse Effect on the Company, Bancorp and the Subsidiaries taken as a whole;
(d) There has occurred any outbreak of hostilities or other calamity
or crisis or material change in general economic, political or financial
conditions, or internal conditions, the effect of which on the financial markets
of the United States is such as to make it, in the Underwriter's reasonable
judgment, impracticable to market the Designated Shares or enforce contracts for
the sale of the Designated Shares;
(e) Trading generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq Stock Market's National Market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, by any of
said exchanges or market system or by the Commission or any other governmental
authority;
(f) A banking moratorium shall have been declared by either federal or
Texas authorities; or
(g) Any action shall have been taken by any government in respect of
its monetary affairs which, in the Underwriter's reasonable judgment, has a
material adverse effect on the United States securities markets.
If this Agreement shall be terminated pursuant to this Section 8, the
Company shall not then be under any liability to the Underwriter except as
provided in Sections 5 and 7 hereof.
9. CERTAIN DEFINITIONS. The following terms shall have the following
meanings:
"Business day." Means any day on which the American Stock Exchange, Inc.
is open for trading.
"Knowledge." Whenever a phrase herein is qualified by "the knowledge of
the Company," or a similar phrase, it is intended to refer to the actual
knowledge, after reasonable inquiry, of the directors and executive officers of
the Company.
28
<PAGE>
"Threatened." Any matter or thing will be deemed to have been "threatened"
when used herein with respect to any party if that party has received notice, in
writing, from the person whom the threat is attributable, or such person's
agent, which makes specific reference to and clearly identifies the matter or
thing being threatened.
10. EFFECTIVE DATE OF AGREEMENT. If the Registration Statement is not
effective at the time of execution of this Agreement, this Agreement shall
become effective on the Effective Date at the time the Commission declares the
Registration Statement effective. The Company shall immediately notify the
Underwriter when the Registration Statement becomes effective.
If the Registration Statement is effective at the time of execution of
this Agreement, this Agreement shall become effective at the earlier of 11:00
a.m. St. Louis time, on the first full business day following the day on which
this Agreement is executed, or at such earlier time as the Underwriter shall
release the Designated Shares for initial public offering. The Underwriter
shall notify the Company immediately after it has taken any action which causes
this Agreement to become effective.
Until such time as this Agreement shall have become effective, it may
be terminated by the Company, by notifying the Underwriter, or by the
Underwriter, by notifying the Company, except that the provisions of Sections 5
and 7 shall at all times be effective.
11. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
representations, warranties, indemnities, agreements and other statements of the
Company and its officers set forth in or made pursuant to this Agreement and the
agreements of the Underwriter contained in Section 7 hereof shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of the Company or controlling persons of the Company, or by or on
behalf of the Underwriter or controlling persons of the Underwriter or any
termination or cancellation of this Agreement and shall survive delivery of and
payment for the Designated Shares.
12. NOTICES. Except as otherwise provided in this Agreement, all notices
and other communications hereunder shall be in writing and shall be deemed to
have been duly given if delivered by hand, mailed by registered or certified
mail, return receipt requested, or transmitted by any standard form of
telecommunication and confirmed. Notices to the Company shall be sent to 547
Chestnut Street, Abilene, Texas 79602, Attention: Randal N. Crosswhite, Chief
Financial Officer (with a copy to Arter & Hadden, LLP, 1717 Main Street, Suite
4100, Dallas, Texas 75201, Attention: Joseph A. Hoffman); and notices to the
Underwriter shall be sent to Stifel, Nicolaus & Company, Incorporated, 500 North
Broadway, Suite 1500, St. Louis, Missouri 63102, Attention: Rick E. Maples
(with a copy to Lewis, Rice & Fingersh, L.C., 500 North Broadway, Suite 2000,
St. Louis, Missouri 63102, Attention: Thomas C. Erb, Esq.).
Any such notices and other communications shall take effect at the
time of receipt thereof (except in the case of any such notice or other
communication given via standard
29
<PAGE>
from of telecommunication and confirmed wherein it shall take effect at the time
of confirmation thereof).
13. PARTIES. The Agreement herein set forth is made solely for the
benefit of the Underwriter and the Company and, to the extent expressed,
directors, trustees and officers of the Company, any person controlling the
Company or the Underwriter, and their respective successors and assigns. No
other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser,
in its status as such purchaser, from the Underwriter of the Designated Shares.
14. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Missouri, without giving effect to the choice of law or conflicts of
law principles thereof.
15. FACSIMILE EXECUTION AND COUNTERPARTS. This Agreement may be executed
by facsimile and in one or more counterparts, and when a counterpart has been
executed by each party hereto all such counterparts taken together shall
constitute one and the same Agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
shall become a binding agreement between the Company and you in accordance with
its terms.
Very truly yours,
INDEPENDENT BANKSHARES, INC.
By:
-------------------------------------
Print Name:
-----------------------------
Its:
------------------------------------
CONFIRMED AND ACCEPTED,
as of _________, 1998.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
By:
------------------------------------
Print Name:
----------------------------
Its:
-----------------------------------
30
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EXHIBIT A-1 COMPANY SUBSIDIARIES
Independent Financial Corp.
First State Bank, National Association
New Azle, Inc.
Independent Capital Trust I
<PAGE>
EXHIBIT A-2 BANCORP SUBSIDIARIES
Azle Holdings, Inc.
Azle State Bank
32.
<PAGE>
EXHIBIT B ARTER & HADDEN LLP OPINION MATTERS
(i) The Company has been duly incorporated under the laws of
the State of Texas, and each of the Company and Bancorp is validly
existing and in good standing under the laws of the State of Texas,
and is duly registered as a bank holding company under the BHC Act.
Each of the Subsidiaries is duly incorporated, validly existing and in
good standing under the laws of its jurisdiction of incorporation.
Each of the Company, Bancorp and the Subsidiaries has full corporate
power and authority to own or lease its properties and to conduct its
business as such business is described in the Prospectus and is
currently conducted in all material respects. To counsel's knowledge,
all outstanding shares of capital stock of the Subsidiaries have been
duly authorized and validly issued and are fully paid and
nonassessable except to the extent such shares may be deemed
assessable under 12 U.S.C. Sections 55 and 1831o and, to such
counsel's knowledge, except as disclosed in the Prospectus, there are
no outstanding rights, options or warrants to purchase any such shares
or securities convertible into or exchangeable for any such shares.
(ii) The capital stock of the Company conforms to the description
thereof contained in the Prospectus in all material respects. To counsel's
knowledge, the capital stock of the Company authorized and issued as of
June 30, 1998 is as set forth under the caption "Capitalization" in the
Prospectus, has been duly authorized and validly issued, and is fully paid
and nonassessable. To counsel's knowledge, there are no outstanding rights,
options or warrants to purchase, no other outstanding securities
convertible into or exchangeable for, and no commitments, plans or
arrangements to issue, any shares of capital stock of the Company, except
as described in the Prospectus.
(iii) The issuance, sale and delivery of the Designated Shares in
accordance with the terms and conditions of this Agreement have been duly
authorized by all necessary actions of the Company. All of the Designated
Shares have been duly and validly authorized and, when delivered in
accordance with this Agreement, will be duly and validly issued, fully paid
and nonassessable, and will conform to the description thereof in the
Registration Statement and the Prospectus in all material respects. Such
counsel has been advised that the Designated Shares have been approved for
listing on the American Stock Exchange, Inc., subject to official notice of
issuance. There are no preemptive or other rights to subscribe for or to
purchase, and, other than as disclosed in the Prospectus, no restrictions
upon the voting or transfer of, any shares of capital stock or equity
securities of the Company or the Company Subsidiaries pursuant to the
corporate articles of incorporation or charter, by-laws or other governing
documents of the Company or the Company Subsidiaries, or, to counsel's
knowledge, any agreement or other instrument to which the Company or any of
the Company Subsidiaries is a party or by which the Company or any of the
Company Subsidiaries may be bound.
33.
<PAGE>
(iv) The Company has all requisite corporate power to enter into
and perform its obligations under this Agreement, and this Agreement has
been duly and validly authorized, executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company
enforceable in accordance with its terms, except as the enforcement hereof
or thereof may be limited by general principles of equity and by bankruptcy
or other laws relating to or affecting creditors' rights generally, and
except as the indemnification and contribution provisions hereof may be
limited under applicable laws and certain remedies may not be available in
the case of a non-material breach.
(v) To counsel's knowledge, neither the Company, Bancorp nor any
of the Subsidiaries is in breach or violation of, or default under, with or
without notice or lapse of time or both, its corporate charter, by-laws or
governing document. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by this
Agreement do not and will not conflict with, result in the creation or
imposition of any material lien, claim, charge, encumbrance or restriction
upon any property or assets of the Company or the Company Subsidiaries or
the Designated Shares pursuant to, or constitute a material breach or
violation of, or constitute a material default under, with or without
notice or lapse of time or both, any of the terms, provisions or conditions
of the articles of incorporation or charter, by-laws or governing document
of the Company or the Company Subsidiaries, or to counsel's knowledge, any
material contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease, franchise, license or any other agreement or
instrument to which the Company or the Company Subsidiaries is a party or
by which any of them or any of their respective properties may be bound or
any order, decree, judgment, franchise, license, Permit, rule or regulation
of any court, arbitrator, government, or governmental agency or
instrumentality, domestic or foreign, known to such counsel having
jurisdiction over the Company or the Company Subsidiaries or any of their
respective properties which, in each case, is material to the Company and
the Company Subsidiaries on a consolidated basis. No authorization,
approval, consent or order of, or filing, registration or qualification
with, any person (including, without limitation, any court, governmental
body or authority) is required under Texas law in connection with the
transactions contemplated by this Agreement in connection with the purchase
and distribution of the Designated Shares by the Underwriter.
(vi) To counsel's knowledge, holders of securities of the
Company either (A) do not have any right that, if exercised, would
require the Company to cause such securities to be included in the
Registration Statement or (B) have waived such right. To counsel's
knowledge, neither the Company nor any of the Company Subsidiaries is
a party to any agreement or other instrument which grants rights for
or relating to the registration of any securities of the Company.
34.
<PAGE>
(vii) Except as set forth in the Registration Statement and the
Prospectus, to such counsel's knowledge, (i) no action, suit or proceeding
at law or in equity is pending or threatened in writing to which the
Company, Bancorp or the Subsidiaries is or may be a party, and (ii) no
action, suit or proceeding is pending or threatened in writing against or
affecting the Company, Bancorp or the Subsidiaries or any of their
properties, before or by any court or governmental official, commission,
board or other administrative agency, authority or body, or any arbitrator,
wherein an unfavorable decision, ruling or finding would reasonably be
expected to have a material adverse effect on the consummation of this
Agreement or the issuance and sale of the Designated Shares as contemplated
herein or a Material Adverse Effect or which is required to be disclosed in
the Registration Statement or the Prospectus and is not so disclosed.
(viii) No authorization, approval, consent or order of or
filing, registration or qualification with, any person (including, without
limitation, any court, governmental body or authority) is required in
connection with the transactions contemplated by this Agreement, the
Registration Statement and the Prospectus, except such as have been
obtained under the 1933 Act, the American Stock Exchange, Inc. relating to
the listing of the Designated Shares and except such as may be required
under state securities laws or Interpretations or Rules of the NASD in
connection with the purchase and distribution of the Designated Shares by
the Underwriter.
(ix) The Registration Statement and the Prospectus and any
amendments or supplements thereto and any documents incorporated therein by
reference (other than the financial statements or other financial data
included therein or omitted therefrom and Underwriter's Information, as to
which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations as of their respective dates of effectiveness.
(x) To counsel's knowledge, there are no contracts,
agreements, leases or other documents of a character required to be
disclosed in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement that are not so disclosed or filed.
(xi) The statements under the captions "Pending Acquisition,"
"Regulation and Supervision," "Description of Capital Stock" and "Certain
Relationships and Related Transactions" in the Prospectus or incorporated
therein by reference, insofar as such statements constitute a summary of
legal and regulatory matters, documents or instruments referred to therein,
are accurate descriptions of the matters summarized therein in all material
respects and fairly present the information called for with respect to such
legal matters, documents and instruments, other than financial and
statistical data, as to which said counsel shall not be required to express
any opinion or belief.
(xii) Such counsel has been advised by the staff of the
Commission that the Registration Statement has become effective under the
1933 Act; any required
35.
<PAGE>
filing of the Prospectus pursuant to Rule 424(b) has been made within the
time period required by Rule 424(b); to the counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for a stop order are pending or threatened by the
Commission.
(xiii) Except as described in or contemplated by the Prospectus,
to the best of such counsel's knowledge, there are no contractual
encumbrances or restrictions, or material legal restrictions, required to
be described therein on the ability of the Company Subsidiaries (A) to pay
dividends or make any other distributions on its capital stock or to pay
indebtedness owed to the Company, (B) to make any loans or advances to, or
investments in, the Company, or (C) to transfer any of its property or
assets to the Company.
(xiv) To counsel's knowledge, (A) the business and operations
of the Company, Bancorp and the Subsidiaries comply in all material
respects with all statutes, ordinances, laws, rules and regulations
applicable thereto and which are material to the Company and the Company
Subsidiaries, or Bancorp and the Bancorp Subsidiaries, as the case may be,
on a consolidated basis, except in those instances where non-compliance
would not materially impair the ability of the Company and the Company
Subsidiaries, or Bancorp and the Bancorp Subsidiaries, as the case may be,
to conduct their business, and (B) the Company, Bancorp and the
Subsidiaries possess and are operating in all material respects in
compliance with the terms, provisions and conditions of all Permits that
are required to conduct their businesses as described in the Prospectus and
that are material to the Company and the Company Subsidiaries, or Bancorp
and the Bancorp Subsidiaries, as the case may be, on a consolidated basis,
except in those instances where the loss thereof or non-compliance
therewith would not have a Material Adverse Effect; to counsel's knowledge,
all such Permits are valid and in full force and effect, and, to counsel's
knowledge, no action, suit or proceeding is pending or threatened which may
lead to the revocation, termination, suspension or non-renewal of any such
Permit, except in those instances where the loss thereof or non-compliance
therewith would not materially impair the ability of the Company or the
Company Subsidiaries, or Bancorp and the Bancorp Subsidiaries, as the case
may be, to conduct their businesses.
(xv) Each of the Reorganization Agreement and the Ancillary
Agreements, and the transactions contemplated thereby, has been
authorized by all necessary corporate action on the part of the
Company and/or the Company Subsidiaries, has been executed and
delivered by the Company and/or the Company Subsidiaries and the other
parties thereto and constitutes a valid and binding obligation of the
Company and/or the Company Subsidiaries (assuming the due
authorization, execution and delivery thereof by the other parties
thereto) enforceable against the Company and/or the Company
Subsidiaries in accordance with its terms, except as the enforcement
hereof or thereof may be limited by general principles of equity and
by bankruptcy or other laws relating to or affecting creditors' rights
generally.
36.
<PAGE>
In giving the above opinion, such counsel may state (1) that, insofar
as such opinion involves factual matters, it has relied upon certificates of
officers of the Company and Bancorp including, without limitation, certificates
as to the identity of any and all material contracts, indentures, mortgages,
deeds of trust, loans or credit agreements, notes, leases, franchises, licenses
or other agreements or instruments, and all material permits, easements,
consents, licenses, franchises and government regulatory authorizations, for
purposes of paragraphs (v), (x) and (xiv) hereof, (2) that its opinion is
limited to matters governed by the federal laws of the United States of America
and the laws of the state of Texas and (3) that it has, to the extent it deems
proper, relied upon written statements or certificates of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and the Subsidiaries.
Such counsel shall also confirm that, in connection with the
preparation of the Registration Statement and Prospectus, such counsel has
participated in conferences with certain officers and representatives of the
Company and with their independent public accountants and with the Underwriter
and counsel for the Underwriters, at which conferences such counsel made
inquiries of such officers, representatives and accountants and discussed the
contents of the Registration Statement and Prospectus and the documents
incorporated therein by reference (without taking further action to verify
independently the statements made in the Registration Statement and the
Prospectus, and without assuming responsibility for the accuracy or completeness
of such statements, except to the extent expressly provided above) and such
counsel has no reason to believe (A) that the Registration Statement or any
amendment thereto (except for the financial statements, notes thereto and the
related schedules and other financial, accounting and statistical data included
therein or omitted therefrom or the Underwriter's Information, as to which such
counsel need express no opinion), at the time the Registration Statement or any
such amendment became effective, contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or (B) that the Prospectus or any
amendment or supplement thereto or the documents incorporated therein by
reference (except for the financial statements, the notes thereto and the
related schedules and other financial, accounting and statistical data included
therein or omitted therefrom or the Underwriter's Information, as to which such
counsel need express no opinion), at the time the Registration Statement became
effective (or, if the term "Prospectus" refers to the prospectus first filed
pursuant to Rule 424(b) of the 1933 Act Regulations, at the time the Prospectus
was issued), at the time any such amended or supplemented Prospectus was issued,
at the Closing Date and, if applicable, the Option Closing Date, contained or
contains any untrue statement of a material fact or omitted or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made, or (C) that there is any amendment to the Registration Statement
required to be filed that has not already been filed.
37.
<PAGE>
EXHIBIT 1.2
-----------
1,000,000 Preferred Securities
Independent Capital Trust
______% Cumulative Trust Preferred Securities
(Liquidation Amount of $10.00 per Preferred Security)
UNDERWRITING AGREEMENT
----------------------
______________________, 1998
STIFEL, NICOLAUS & COMPANY, INCORPORATED
500 North Broadway
St. Louis, Missouri 63102
Ladies and Gentlemen:
Independent Bankshares, Inc., a Texas corporation (the "Company"), and its
financing subsidiary, Independent Capital Trust, a Delaware business trust (the
"Trust," and hereinafter together with the Company, the "Offerors"), propose
that the Trust issue and sell to Stifel, Nicolaus & Company, Incorporated (the
"Underwriter"), pursuant to the terms of this Agreement, 1,000,000 of the
Trust's ____% Cumulative Trust Preferred Securities, with a liquidation amount
of $10.00 per preferred security (the "Preferred Securities"), to be issued
under the Trust Agreement (as hereinafter defined), the terms of which are more
fully described in the Prospectus (as hereinafter defined). The aforementioned
1,000,000 Preferred Securities to be sold to the Underwriter are herein called
the "Firm Preferred Securities." Solely for the purpose of covering over-
allotments in the sale of the Firm Preferred Securities, the Offerors further
propose that the Trust issue and sell to the Underwriter, at the Underwriter's
option (the "Option"), up to an additional 15,000 Preferred Securities (the
"Option Preferred Securities") upon exercise of the over-allotment option
granted in Section 1 hereof. The Firm Preferred Securities and any Option
Preferred Securities are herein collectively referred to as the "Designated
Preferred Securities."
The Offerors hereby confirm as follows their agreement with the
Underwriter in connection with the proposed purchase of the Designated Preferred
Securities.
1. SALE, PURCHASE AND DELIVERY OF DESIGNATED PREFERRED SECURITIES;
DESCRIPTION OF DESIGNATED PREFERRED SECURITIES.
(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set forth, the
Offerors hereby agree that the Trust shall issue and sell to the Underwriter,
and the Underwriter agrees to purchase from the Trust, at a purchase price of
$______ per share (the "Purchase Price"), the Firm Preferred
<PAGE>
Securities. Because the proceeds from the sale of the Firm Preferred Securities
will be used to purchase from the Company its Debentures (as hereinafter defined
and as described in the Prospectus), the Company shall pay to the Underwriter a
commission of $_____ per Firm Preferred Security purchased (the "Firm Preferred
Securities Commission").
In addition, on the basis of the representations, warranties and
agreements herein contained and subject to the terms and conditions herein set
forth, the Trust hereby grants to the Underwriter the Option to purchase all or
any portion of the 15,000 Option Preferred Securities, and upon the exercise of
the Option in accordance with this Section 1, the Offerors hereby agree that the
Trust shall issue and sell to the Underwriter all or any portion of the Option
Preferred Securities at the same Purchase Price per share paid for the Firm
Preferred Securities. Because the proceeds from the sale of the Option Preferred
Securities will be used to purchase from the Company its Debentures, the Company
shall pay to the Underwriter a commission of $______ per Option Preferred
Security for each Option Preferred Security purchased (the "Option Preferred
Securities Commission"). The Option shall expire at 5:00 p.m. St. Louis time 30
days after the Effective Date (as hereinafter defined) and may be exercised only
for the purpose of covering over-allotments which may be made in connection with
the offering and distribution of the Firm Preferred Securities. The Option may
be exercised in whole or in part at any time (but not more than once) by the
Underwriter giving notice (confirmed in writing) to the Trust setting forth the
number of Option Preferred Securities as to which the Underwriter is exercising
the Option and the time and date for payment and delivery of certificates for
such Option Preferred Securities. Such time and date of payment and delivery
for the Option Preferred Securities (the "Option Closing Date") shall be
determined by the Underwriter, but shall not be earlier than two nor later than
five business days after the exercise of the Option, nor in any event prior to
the Closing Date (as hereinafter defined). The Option Closing Date may be the
same as the Closing Date.
Payment of the Purchase Price and the Firm Preferred Securities
Commission and delivery of certificates for the Firm Preferred Securities shall
be made at the offices of Arter & Hadden LLP, or such other place as shall be
agreed to by the Underwriter and the Offerors, at 10:00 a.m., St. Louis time, on
______________________, 1998, or at such other time not more than five full
business days thereafter as the Offerors and the Underwriter shall determine
(the "Closing Date"). If the Underwriter exercises the Option to purchase any or
all of the Option Preferred Securities, payment of the Purchase Price and Option
Preferred Securities Commission and delivery of certificates for such Option
Preferred Securities shall be made on the Option Closing Date at the offices of
Arter & Hadden LLP, or at such other place as the Offerors and the Underwriter
shall determine. Such payments shall be made to an account designated by the
Trust by wire transfer, in same day funds, in the amount of the aggregate
Purchase Price therefor, against delivery by or on behalf of the Trust to the
Underwriter of certificates for the Designated Preferred Securities to be
purchased by the Underwriter.
The Agreement contained herein with respect to the timing of the
Closing Date and Option Closing Date is intended to, and does, constitute an
express agreement, as described in Rule 15c6-1(c) and (d) promulgated under the
1934 Act (as defined herein), for a settlement date other than three or four
business days after the date of the contract, as the case may be.
2
<PAGE>
Certificates for Designated Preferred Securities to be purchased by
the Underwriter shall be delivered by the Offerors in fully registered form in
such authorized denominations and registered in such names as the Underwriter
shall request in writing not later than 12:00 noon, St. Louis time, two business
days prior to the Closing Date and, if applicable, the Option Closing Date.
Certificates for Designated Preferred Securities to be purchased by the
Underwriter shall be made available by the Offerors to the Underwriter for
inspection, checking and packaging at such office as the Underwriter may
designate in writing not later than 1:00 p.m., St. Louis time, on the last
business day prior to the Closing Date and, if applicable, on the last business
day prior to the Option Closing Date.
Time shall be of the essence, and delivery of the certificates for the
Designated Preferred Securities at the time and place specified pursuant to this
Agreement is a further condition of the obligations of the Underwriter
hereunder.
(b) The Offerors propose that the Trust issue the Designated
Preferred Securities pursuant to an Amended and Restated Trust Agreement among
U.S Trust Company of Texas, N.A., as Property Trustee, Wilmington Trust Company,
as Delaware Trustee, the Administrative Trustees named therein (collectively,
the "Trustees"), and the Company, in substantially the form heretofore delivered
to the Underwriter, said Agreement being hereinafter referred to as the "Trust
Agreement." In connection with the issuance of the Designated Preferred
Securities, the Company proposes (i) to issue its Subordinated Debentures ( the
"Debentures") pursuant to an Indenture, to be dated as of ______________, 1998,
between the Company and U.S Trust Company of Texas, N.A., as Trustee (the
"Indenture"), and (ii) to guarantee certain payments on the Designated Preferred
Securities pursuant to a Guarantee Agreement between the Company and U.S. Trust
Company of Texas, N.A., as guarantee trustee (the "Guarantee"), to the extent
described therein.
2. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to, and agrees with, the
Underwriter that:
(i) The reports filed with the Securities and Exchange
Commission (the "Commission") by the Company under the Securities Exchange
Act of 1934, as amended (the "1934 Act") and the rules and regulations
thereunder (the "1934 Act Regulations") at the time they were filed with
the Commission, complied as to form in all material respects with the
requirements of the 1934 Act and the 1934 Act Regulations and did not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading.
(ii) The Offerors haave prepared and filed with the Commission
a registration statement on Form S-2 (File Numbers 333-60649 and 333-60649-
01) for the registration of, among other securities, the Designated
Preferred Securities, the Guarantee and $__________ aggregate principal
amount of Debentures Shares under the Securities Act of 1933, as amended
(the "1933 Act"), including the related prospectus subject to completion,
and one or more amendments to such registration statement may have been so
3
<PAGE>
filed, in each case in conformity in all material respects with the
requirements of the 1933 Act, the rules and regulations promulgated
thereunder (the "1933 Act Regulations") and the Trust Indenture Act of 1939
and the rules and regulations promulgated thereunder. Copies of such
registration statement, including any amendments thereto, each Preliminary
Prospectus (as defined herein) contained therein and the exhibits,
financial statements and schedules to such registration statement, as
finally amended and revised, have heretofore been delivered by the Company
to the Underwriter. After the execution of this Agreement, the Company
will file with the Commission (A) if such registration statement, as it may
have been amended, has been declared by the Commission to be effective
under the 1933 Act, a prospectus in the form most recently included in an
amendment to such registration statement (or, if no such amendment shall
have been filed, in such registration statement), with such changes or
insertions as are required by Rule 430A of the 1933 Act Regulations ("Rule
430A") or permitted by Rule 424(b) of the 1933 Act Regulations ("Rule
424(b)") and as have been provided to and not objected to by the
Underwriter prior to (or as are agreed to by the Underwriter subsequent to)
the execution of this Agreement, or (B) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the 1933 Act, an amendment to such registration statement,
including a form of final prospectus, necessary to permit such registration
statement to become effective, a copy of which amendment has been furnished
to and not objected to by the Underwriter prior to (or is agreed to by the
Underwriter subsequent to) the execution of this Agreement. As used in
this Agreement, the term "Registration Statement" means such registration
statement, as amended at the time when it was or is declared effective
under the 1933 Act, including (1) all financial schedules and exhibits
thereto, (2) all documents (or portions thereof) incorporated by reference
therein filed under the 1934 Act, and (3) any information omitted therefrom
pursuant to Rule 430A and included in the Prospectus (as hereinafter
defined); the term "Preliminary Prospectus" means each prospectus subject
to completion filed with such registration statement or any amendment
thereto including all documents (or portions thereof) incorporated by
reference therein under the 1934 Act (including the prospectus subject to
completion, if any, included in the Registration Statement and each
prospectus filed pursuant to Rule 424(a) under the 1933 Act); and the term
"Prospectus" means the prospectus first filed with the Commission pursuant
to Rule 424(b)(1) or (4) or, if no prospectus is required to be filed
pursuant to Rule 424(b)(1) or (4), the prospectus included in the
Registration Statement, in each case including the financial schedules and
all documents (or portions thereof) incorporated by reference therein under
the 1934 Act. The date on which the Registration Statement becomes
effective is hereinafter referred to as the "Effective Date." A
registration statement with respect to the Preferred Securities and the
Guarantee has been prepared by the Offerors pursuant to and in conformity
in all material respects with the 1934 Act and the 1934 Regulations, and
has been filed with the Commission under the 1934 Act, and such
registration statement will become effective under the 1934 Act when the
Registration Statement is declared effective.
(iii) The documents incorporated by reference in the Preliminary
Prospectus or Prospectus or from which information is so incorporated by
reference, when they became effective or were filed with the Commission, as
the case may be, complied in all material respects with the requirements of
the 1934 Act and the 1934 Act Regulations,
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and when read together and with the other information in the Preliminary
Prospectus or Prospectus, as the case may be, at the time the Registration
Statement became or becomes effective and at the Closing Date and any
Option Closing Date, did not or will not, as the case may be, contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(iv) No order preventing or suspending the use of any
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) has been issued by the Commission, nor has the
Commission, to the knowledge of the Offerors, threatened to issue such an
order or instituted proceedings for that purpose. Each Preliminary
Prospectus, at the time of filing thereof, (A) complied in all material
respects with the requirements of the 1933 Act and the 1933 Act Regulations
and (B) did not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that this representation and
warranty does not apply to statements or omissions made in reliance upon
and in conformity with information furnished in writing to the Offerors by
the Underwriter expressly for inclusion in the Preliminary Prospectus or
the Prospectus (the "Underwriter's Information"). The Underwriter's
Information includes only the statements with respect to the public
offering of Designated Preferred Securities by the Underwriter set forth on
the cover page of the Prospectus, the legend concerning over-allotments and
other stabilizing activities on the inside front cover page of the
Prospectus and the first paragraph and the third sentence of the second
paragraph under the heading "Underwriting Sale of Preferred Securities" in
the Prospectus and the third paragraph under the heading "Underwriting
General" in the Prospectus.
(v) At the Effective Date and at all times subsequent thereto,
up to and including the Closing Date and, if applicable, the Option Closing
Date, the Registration Statement and any post-effective amendment thereto
(A) complied and will comply in all material respects with the requirements
of the 1933 Act, the 1933 Act Regulations, and the Trust Indenture Act (and
the rules and regulations thereunder) and (B) did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
At the Effective Date and at all times when the Prospectus is required to
be delivered in connection with offers and sales of Designated Preferred
Securities, including, without limitation, the Closing Date and, if
applicable, the Option Closing Date, the Prospectus, as amended or
supplemented, (A) complied and will comply in all material respects with
the requirements of the 1933 Act, the 1933 Act Regulations and the Trust
Indenture Act (and the rules and regulations thereunder), and (B) did not
contain and will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; provided, however, that this representation and
warranty does not apply to the Underwriter's Information.
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(vi) (A) The Company and Azle Bancorp ("Bancorp") are duly
organized, validly existing and in good standing under the laws of the
State of Texas, with full power and authority to own, lease and operate
their properties and conduct their business as described in and
contemplated by the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
as currently being conducted and are duly registered as bank holding
companies under the Bank Holding Company Act of 1956, as amended (the "BHC
Act").
(B) The Trust has been duly created and is validly
existing as a statutory business trust in good standing under the Delaware
Business Trust Act with the power and authority (trust and other) to own
its property and conduct its business as described in the Registration
Statement and Prospectus, to issue and sell its common securities (the
"Common Securities") to the Company pursuant to the Trust Agreement, to
issue and sell the Designated Preferred Securities, to enter into and
perform its obligations under this Agreement and to consummate the
transactions herein contemplated; the Trust has no subsidiaries and is duly
qualified to transact business and is in good standing in each jurisdiction
in which the conduct of its business or the ownership of its property
requires such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Trust; the Trust has conducted and will conduct no business other
than the transactions contemplated by this Agreement and described in the
Prospectus; the Trust is not a party to or bound by any agreement or
instrument other than this Agreement and the Trust Agreement among the
Administrative Trustees and Wilmington Trust Company dated ______________,
1998 (the "Original Trust Agreement"); at the Closing Date or any Option
Closing Date, the Trust will not be a party to or be bound by any agreement
or instrument other than the Trust Agreement and the agreements and
instruments contemplated by the Trust Agreement and described in the
Prospectus; the Trust has no liabilities or obligations other than those
arising out of the transactions contemplated by this Agreement and the
Trust Agreement and described in the Prospectus; the Trust is not a party
to or subject to any action, suit or proceeding of any nature; the Trust is
not, and at the Closing Date or any Option Closing Date will not be, to the
knowledge of the Offerors, classified as an association taxable as a
corporation for United States federal income tax purposes; and the Trust
is, and as of the Closing Date or any Option Closing Date will be, treated
as a consolidated subsidiary of the Company pursuant to generally accepted
accounting principles.
(vii) The Company has the direct and indirect subsidiaries
identified on Exhibit A-1 hereto (the "Company Subsidiaries"), and Bancorp
has the direct and indirect subsidiaries identified on Exhibit A-2 hereto
(the "Bancorp Subsidiaries") (the Company Subsidiaries and the Bancorp
Subsidiaries are sometimes referred to herein collectively as the
"Subsidiaries" and individually as a "Subsidiary"). The Company's
Subsidiary, First State Bank, National Association, and Bancorp's
Subsidiary, Azle State Bank ("ASB"), are hereinafter referred to
collectively as the "Banks." The Company and Bancorp do not own or
control, directly or indirectly, more than 5% of any class of equity
security of any corporation, association or other entity other than the
Subsidiaries. Each Subsidiary is a bank, corporation or business trust
duly organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation or organization. Each such
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Subsidiary has full corporate and other power and authority to own, lease
and operate its properties and to conduct its business as described in and
contemplated by the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
as currently being conducted. The deposit accounts of the Banks are
insured by the Bank Insurance Fund administered by the Federal Deposit
Insurance Corporation (the "FDIC") up to the maximum amount provided by
law; and, to the knowledge of the Company, no proceedings for the
modification, termination or revocation of any such insurance are pending
or, to the knowledge of the Offerors, threatened.
(viii) Each of the Subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing in each other
jurisdiction in which it owns or leases property or conducts its business
so as to require such qualification except where the failure to so qualify
would have a material adverse effect on the financial condition,
stockholders equity or results of operations of the Offerors, Bancorp or
the Subsidiaries, taken as a whole ("Material Adverse Effect"). All of the
issued and outstanding shares of capital stock of the Subsidiaries (A) have
been duly authorized and are validly issued, (B) are fully paid and
nonassessable except to the extent such shares may be deemed assessable
under 12 U.S.C. Section 55 or 12 U.S.C. Section 1831o, and (C) except as
disclosed in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), are owned by the Company or Bancorp,
as the case may be, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, restriction upon voting or transfer, preemptive
rights, claim or equity. Except as disclosed in the Prospectus (or if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
there are no outstanding rights, warrants or options to acquire or
instruments convertible into or exchangeable for any capital stock or
equity securities of the Company, Bancorp or the Subsidiaries.
(ix) The capital stock of the Company and the equity securities
of the Trust conform to the description thereof contained in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) in all material respects. The outstanding shares of capital
stock and equity securities of each Offeror have been duly authorized and
validly issued and are fully paid and nonassessable, and no such shares
were issued in violation of the preemptive or similar rights of any
security holder of an Offeror; no person has any preemptive or similar
right to purchase any shares of capital stock or equity securities of the
Offerors. Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding rights, options or warrants to acquire any securities of the
Offerors, and there are no restrictions upon the voting or transfer of any
capital stock of the Company or equity securities of the Trust pursuant to
the Company's articles of incorporation or bylaws, the Trust Agreement or
any agreement or other instrument to which an Offeror is a party or by
which an Offeror is bound.
(x) (A) The Trust has all requisite power and authority to
issue, sell and deliver the Designated Preferred Securities in accordance
with and upon the terms and conditions set forth in this Agreement, the
Trust Agreement, the Registration Statement and
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<PAGE>
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). All corporate and trust action required to be
taken by the Offerors for the authorization, issuance, sale and delivery of
the Designated Preferred Securities in accordance with such terms and
conditions has been validly and sufficiently taken. The Designated
Preferred Securities, when delivered in accordance with this Agreement,
will be duly and validly issued and outstanding, will be fully paid and
nonassessable undivided beneficial interests in the assets of the Trust,
will be entitled to the benefits of the Trust Agreement, will not be issued
in violation of or subject to any preemptive or similar rights, and will
conform to the description thereof in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and the Trust Agreement. None of the Designated
Preferred Securities, immediately prior to delivery, will be subject to any
security interest, lien, mortgage, pledge, encumbrance, restriction upon
voting or transfer, preemptive rights, claim, equity or other defect.
(B) The Debentures have been duly and validly authorized,
and, when duly and validly executed, authenticated and issued as provided
in the Indenture and delivered to the Trust pursuant to the Trust
Agreement, will constitute valid and legally binding obligations of the
Company entitled to the benefits of the Indenture and will conform to the
description thereof contained in the Prospectus in all material respects.
(C) The Guarantee has been duly and validly authorized,
and, when duly and validly executed and delivered to the guarantee trustee
for the benefit of the Trust, will constitute a valid and legally binding
obligation of the Company and will conform to the description thereof
contained in the Prospectus in all material respects.
(D) The Agreement as to Expenses and Liabilities between
the Company and the Trust (the "Expense Agreement") has been duly and
validly authorized, and, when duly and validly executed and delivered by
the Company, will constitute a valid and legally binding obligation of the
Company and will conform to the description thereof contained in the
Prospectus in all material respects.
(xi) The Offerors, Bancorp and the Subsidiaries have complied
in all material respects with all federal, state and local statutes,
regulations, ordinances and rules applicable to the ownership and operation
of their properties or the conduct of their businesses as described in and
contemplated by the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
as currently being conducted.
(xii) The Offerors, Bancorp and the Subsidiaries have all
material permits, easements, consents, licenses, franchises and other
governmental and regulatory authorizations from all appropriate federal,
state, local or other public authorities ("Permits") as are necessary to
own and lease their properties and conduct their businesses in the manner
described in and contemplated by the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and as currently being conducted in all material
respects. All such Permits are in full force and effect and
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<PAGE>
each of the Offerors, Bancorp and the Subsidiaries are in all material
respects complying therewith, and no event has occurred that allows, or
after notice or lapse of time would allow, revocation or termination
thereof or will result in any other material impairment of the rights of
the holder of any such Permit, subject in each case to such qualification
as may be adequately disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus). Such Permits
contain no restrictions that would materially impair the ability of the
Company, Bancorp or the Subsidiaries to conduct their businesses in the
manner consistent with their past practices. Neither the Offerors, Bancorp
nor any of the Subsidiaries has received notice or otherwise has knowledge
of any proceeding or action relating to the revocation or modification of
any such Permit.
(xiii) Neither the Offerors, Bancorp nor any of the Subsidiaries
is in breach or violation of its corporate articles of incorporation or
charter, by-laws or other governing documents (including without
limitation, the Original Trust Agreement) in any material respect. Neither
the Offerors, Bancorp nor any of the Subsidiaries is, and to the knowledge
of the Offerors no other party is, in violation, breach or default (with or
without notice or lapse of time or both) in the performance or observance
of any term, covenant, agreement, obligation, representation, warranty or
condition contained in (A) any contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease, franchise, license, Permit or
any other agreement or instrument to which it is a party or by which it or
any of its properties may be bound, which breach, violation or default
could have a Material Adverse Effect, and to the knowledge of the Company,
no other party has asserted that the Offerors, Bancorp or any of the
Subsidiaries is in such violation, breach or default, or (B) except as
disclosed in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), any order, decree, judgment, rule or
regulation of any court, arbitrator, government, or governmental agency or
instrumentality, domestic or foreign, having jurisdiction over the
Offerors, Bancorp or the Subsidiaries or any of their respective properties
the breach, violation or default of which could have a Material Adverse
Effect
(xiv) The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated by this Agreement,
the Trust Agreement, the Registration Statement and the Prospectus (or, if
the Prospectus in not in existence, the most recent Preliminary Prospectus)
do not and will not conflict with, result in the creation or imposition of
any material lien, claim, charge, encumbrance or restriction upon any
property or assets of the Offerors or the Company Subsidiaries or the
Designated Preferred Securities pursuant to, constitute a breach or
violation of, or constitute a default under, with or without notice or
lapse of time or both, any of the terms, provisions or conditions of the
articles of incorporation or by-laws of the Company or the Company
Subsidiaries, the Trust Agreement, the Guarantee, the Indenture, any
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease, Permit or any other agreement or instrument to which the
Offerors or the Company Subsidiaries is a party or by which any of them or
any of their respective properties may be bound or any order, decree,
judgment, rule or regulation of any court, arbitrator, government, or
governmental agency or instrumentality, domestic or foreign, having
jurisdiction over the Offerors or the Company Subsidiaries or any of their
respective properties which conflict, creation, imposition, breach,
violation or default would have either singly or in the aggregate a
Material Adverse Effect. No authorization, approval,
9
<PAGE>
consent or order of or filing, registration or qualification with, any
person (including, without limitation, any court, governmental body or
authority) is required in connection with the transactions contemplated by
this Agreement, the Trust Agreement, the Indenture, the Guarantee, the
Registration Statement and the Prospectus, except for the registration of
the Designated Preferred Securities under the 1933 Act and the
qualification for listing of the Designated Preferred Securities by the
American Stock Exchange, Inc. relating to the listing of the Designated
Preferred Securities, and such as may be required under state securities
laws or Interpretations or Rules of the National Association of Securities
Dealers, Inc. ("NASD") in connection with the purchase and distribution of
the Designated Preferred Securities by the Underwriter.
(xv) The Offerors have all requisite corporate power and
authority to enter into this Agreement and this Agreement has been duly and
validly authorized, executed and delivered by the Company and constitutes
the legal, valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms, except as the enforcement thereof
may be limited by general principles of equity and by bankruptcy or other
laws relating to or affecting creditors' rights generally and except as any
indemnification or contribution provisions thereof may be limited under
applicable securities laws. Each of the Indenture, the Trust Agreement,
the Guarantee and the Expense Agreement has been duly authorized by the
Company, and, when executed and delivered by the Company on the Closing
Date, each of said agreements will constitute a valid and legally binding
obligation of the Company and will be enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be limited
by general principles of equity and by bankruptcy or other laws relating to
or affecting creditors' rights generally and except as any indemnification
or contribution provisions thereof may be limited under applicable
securities laws. Each of the Indenture, the Trust Agreement and the
Guarantee has been duly qualified under the Trust Indenture Act and will
conform to the description thereof contained in the Prospectus in all
material respects.
(xvi) The Company, Bancorp and the Subsidiaries have good and
marketable title in fee simple to all real property and good title to all
personal property owned by them and material to their business, in each
case free and clear of all security interests, liens, mortgages, pledges,
encumbrances, restrictions, claims, equities and other defects except such
as are referred to in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or such as do not
materially affect the value of such property in the aggregate and do not
materially interfere with the use made or proposed to be made of such
property; and all of the leases under which the Company, Bancorp or the
Subsidiaries hold real or personal property are valid, existing and
enforceable leases and in full force and effect with such exceptions as are
not material and do not materially interfere with the use made or proposed
to be made of such real or personal property by the Company, and neither
the Company, Bancorp nor any of the Subsidiaries is in default in any
material respect of any of the terms or provisions of any material leases.
(xvii) PricewaterhouseCoopers L.L.P., who have certified certain
of the consolidated financial statements of the Company and the Company
Subsidiaries, including the notes thereto, included by incorporation by
reference or otherwise in the Registration
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Statement and Prospectus, are independent public accountants with respect
to the Company, Bancorp and the Subsidiaries as required by the 1933 Act
and the 1933 Act Regulations. Ernst & Young LLP, who have certified certain
of the financial statements of ASB, including the notes thereto, included
in the Registration Statement and Prospectus, are independent public
accountants with respect to the Company, Bancorp and the Subsidiaries as
required by the 1933 Act and the 1933 Act Regulations. Stovall, Grandey &
Whatley, who have certified certain of the consolidated financial
statements of Bancorp and the Bancorp Subsidiaries, including the notes
thereto, included in the Registration Statement and Prospectus, are
independent public accountants with respect to the Company, Bancorp and the
Subsidiaries as required by the 1933 Act and the 1933 Act Regulations.
(xviii) (A) The consolidated financial statements, including
the notes thereto, included by incorporation by reference or otherwise in
the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) with respect to the
Company, Bancorp and the Subsidiaries, comply in all material respects with
the 1933 Act and the 1933 Act Regulations and present fairly the
consolidated financial position of the entities covered thereby as of the
dates indicated and the consolidated results of operations, cash flows and
changes in shareholders' equity of the entities covered thereby for the
periods specified and have been prepared in conformity with generally
accepted accounting principles. The selected and summary consolidated
financial data concerning the Company, Bancorp and the Subsidiaries
included in the Registration Statement and the Prospectus (or such
Preliminary Prospectus) comply in all material respects with the 1933 Act
and the 1933 Act Regulations, present fairly the information set forth
therein, and have been compiled on a basis consistent with that of the
consolidated financial statements of the Company, Bancorp and the
Subsidiaries in the Registration Statement and the Prospectus (or such
Preliminary Prospectus). The other financial, statistical and numerical
information included in the Registration Statement and the Prospectus (or
such Preliminary Prospectus) complies in all material respects with the
1933 Act and the 1933 Act Regulations, presents fairly the information
shown therein, and to the extent applicable has been compiled on a basis
consistent with the financial statements of the Company, Bancorp and the
Subsidiaries included in the Registration Statement and the Prospectus (or
such Preliminary Prospectus).
(B) The pro forma financial information of the Company
and the Company Subsidiaries included in the Registration Statement
presents fairly in all material respects the information shown therein, has
been compiled on a basis consistent with that of the audited consolidated
financial statements of the Company, Bancorp and the Subsidiaries included
in the Registration Statement, has been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and the assumptions used in the preparation thereof are
reasonable.
(xix) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
except as otherwise stated therein:
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(A) neither the Offerors, Bancorp nor any of the
Subsidiaries has sustained any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree except for such loss or interference or labor
dispute or court or a governmental action, order or decree as would
not have a Material Adverse Effect;
(B) there has not been any material adverse change in the
Offerors, Subsidiaries, and Bancorp taken as a whole, or any
development which is reasonably likely to have a Material Adverse
Effect;
(C) neither the Offerors, Bancorp nor any of the
Subsidiaries has incurred any liabilities or obligations, direct or
contingent, or entered into any material transactions, other than in
the ordinary course of business which is material to the Offerors,
Subsidiaries, or Bancorp taken as a whole;
(D) neither the Offerors nor Bancorp has declared or paid
any dividend, and neither the Offerors, Bancorp nor any of the
Subsidiaries has become delinquent in the payment of principal or
interest on any outstanding borrowings; and
(E) there has not been any change in the capital stock,
equity securities, long-term debt, obligations under capital leases
or, other than in the ordinary course of business, short-term
borrowings of the Offerors, Bancorp or the Subsidiaries.
(xx) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), no charge, investigation, action, suit or
proceeding is pending or, to the knowledge of the Offerors, threatened,
against or affecting the Offerors, Bancorp or the Subsidiaries or any of
their respective properties before or by any court or any regulatory,
administrative or governmental official, commission, board, agency or other
authority or body, or any arbitrator, wherein an unfavorable decision,
ruling or finding would reasonably be expected to have a material adverse
effect on the consummation of this Agreement or the transactions
contemplated herein or a Material Adverse Effect or which is required to be
disclosed in the Registration Statement or the Prospectus (or such
Preliminary Prospectus) and is not so disclosed.
(xxi) There are no contracts or other documents required to be
filed as exhibits to the Registration Statement by the 1933 Act or the 1933
Act Regulations which have not been filed as exhibits or incorporated by
reference to the Registration Statement, or that are required to be
summarized in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) that are not so summarized.
(xxii) Neither the Offerors nor Bancorp has taken, directly or
indirectly, any action designed to result in or which has constituted or
which would reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the
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<PAGE>
Offerors to facilitate the sale or resale of the Designated Preferred
Securities, and the Offerors have no knowledge that any such action has
been taken or will be taken by any affiliate of the Offerors or Bancorp.
(xxiii) The Offerors, Bancorp and the Subsidiaries own, or possess
adequate rights to use, all patents, copyrights, trademarks, service marks,
trade names and other rights necessary to conduct the businesses now
conducted by them in all material respects or as described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and neither the Offerors, Bancorp nor the
Subsidiaries have received any notice of infringement or conflict with
asserted rights of others with respect to any patents, copyrights,
trademarks, service marks, trade names or other rights which, individually
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a Material Adverse Effect, and the Offerors do not know
of any basis for such infringement or conflict.
(xxiv) Except as adequately disclosed in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), no labor dispute involving the Company, Bancorp or the
Subsidiaries exists or, to the knowledge of the Company, is imminent which
would reasonably be expected to have a Material Adverse Effect which is
required to be disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). Neither the Company,
Bancorp nor any of the Subsidiaries have knowledge of any existing or
threatened labor dispute by the employees of any of its principal suppliers
or contractors which would reasonably be expected to have a Material
Adverse Effect.
(xxv) The Company, Bancorp and the Subsidiaries have timely and
properly prepared and filed all necessary federal, state, local and foreign
tax returns which are required to be filed and have paid all taxes shown as
due thereon and have paid all other taxes and assessments to the extent
that the same shall have become due, except such as are being contested in
good faith or where the failure to so timely and properly prepare and file
would not have a Material Adverse Effect. The Company has no knowledge of
any tax deficiency which has been or might be assessed against the Company,
Bancorp or the Subsidiaries which, if the subject of an unfavorable
decision, ruling or finding, would have a Material Adverse Effect.
(xxvi) Each of the material contracts, agreements and instruments
described or referred to in the Registration Statement or the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and each contract, agreement and instrument filed as an exhibit
to the Registration Statement is in full force and effect and is the legal,
valid and binding agreement of the Offerors, Bancorp or the Subsidiaries,
enforceable in accordance with its terms, except (1) to the extent set
forth in the Prospectus (or such Preliminary Prospectus (2) as the
enforcement thereof may be limited by general principles of equity and by
bankruptcy or other laws relating to or affecting creditors' rights
generally (3) to the extent such unenforceability would not have a Material
Adverse Effect or (4) with respect to any indemnification or contribution
provision thereof may be limited by applicable securities laws. Except as
disclosed in the Prospectus (or such Preliminary
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<PAGE>
Prospectus), to the knowledge of the Offerors, no other party to any such
agreement is (with or without notice or lapse of time or both) in breach or
default in any material respect thereunder.
(xxvii) No relationship, direct or indirect, exists between or
among theOfferors, Bancorp or the Subsidiaries, on the one hand, and the
directors, officers, trustees, shareholders, customers or suppliers of the
Offerors, Bancorp or the Subsidiaries, on the other hand, which is required
to be described in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus)
which is not adequately described therein.
(xxviii) No person has the right to request or require the
Offerors or the Company Subsidiaries to register any securities for
offering and sale under the 1933 Act by reason of the filing of the
Registration Statement with the Commission or the issuance and sale of the
Designated Preferred Securities except as adequately disclosed in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxix) The Designated Preferred Securities have been approved for
listing on the American Stock Exchange, Inc. subject to official notice of
issuance.
(xxx) Except as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), there are no contractual encumbrances or restrictions or
material legal restrictions required to be described therein, on the
ability of the Subsidiaries (A) to pay dividends or make any other
distributions on its capital stock or to pay any indebtedness owed to the
Offerors or Bancorp, (B) to make any loans or advances to, or investments
in, the Offerors or Bancorp or (C) to transfer any of its property or
assets to the Offerors or Bancorp.
(xxxi) Neither the Offerors nor Bancorp is an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(xxxii) The Offerors have not distributed and will not distribute
prior to the Closing Date any prospectus in connection with the offering
contemplated hereby, other than a Preliminary Prospectus, the Prospectus,
the Registration Statement and the other materials permitted by the 1933
Act and the 1933 Act Regulations and supplied to the Underwriter.
(xxxiii) The Company, Bancorp and each of the Subsidiaries
maintains a system of internal accounting controls sufficient to provide
reasonable assurance that (A) transactions are executed in accordance with
management's general or specific authorizations, (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain
accountability for assets, (C) access to assets is permitted only in
accordance with management's general or specific authorization, and (D) the
recorded accounts for assets is
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compared with the existing assets at reasonable intervals and appropriate
action is taken with respect thereto.
(xxxiv) The Company, Bancorp and the Subsidiaries maintain
insurance covering in all material respects their properties, personnel and
business. Such insurance insures against such losses and risks as, in the
judgment of the executive officers of the Company, are adequate to protect
in all material respects the Offerors, Bancorp and the Subsidiaries and
their businesses. Neither the Company, Bancorp nor any of the Subsidiaries
has received notice from any insurer or agent of such insurer that
substantial capital improvements or other expenditures will have to be made
in order to continue such insurance. All such insurance is outstanding and
duly in force on the date hereof and will be outstanding and duly in force
on the Closing Date, with such exceptions as would not have a Material
Adverse Effect.
(xxxv) All of the representations and warranties of the Company
contained in the Reorganization Agreement and any Ancillary Agreement are
true and correct in all material respects, and the Company has no reason to
believe that (A) any of the representations and warranties of Bancorp
contained in the Reorganization Agreement and any Ancillary Agreement are
not true and correct in all material respects, or (B) that any condition to
consummation of the transactions contemplated by the Reorganization
Agreement and the Ancillary Agreements will not be satisfied or that such
transactions will not close as contemplated in the Reorganization Agreement
and the Ancillary Agreements.
3. OFFERING BY THE UNDERWRITER. After the Registration Statement becomes
effective or, if the Registration Statement is already effective, after this
Agreement becomes effective, the Underwriter shall, subject to the terms and
conditions hereof, offer the Firm Preferred Securities for sale to the public
upon the terms and conditions set forth in the Prospectus. The Underwriter may
from time to time thereafter reduce the public offering price and change the
other selling terms, provided the proceeds to the Trust shall not be reduced as
a result of such reduction or change. Because the NASD is expected to view the
Preferred Securities as interests in a direct participation program, the
offering of the Preferred Securities is being made in compliance with the
applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Underwriter may reserve and sell such of the Designated Preferred
Securities purchased by the Underwriter as the Underwriter may elect to dealers
chosen by it (the "Selected Dealers") at the public offering price set forth in
the Prospectus less the applicable Selected Dealers' concessions set forth
therein, for re-offering by Selected Dealers to the public at the public
offering price. The Underwriter may allow, and Selected Dealers may re-allow, a
concession set forth in the Prospectus to certain other brokers and dealers.
4. CERTAIN COVENANTS OF THE OFFERORS. The Offerors jointly and severally
covenant with the Underwriter as follows:
(a) The Offerors shall use their best efforts to cause the
Registration Statement and any amendments thereto, if not effective at the time
of execution of this Agreement, to become effective as promptly as possible. If
the Registration Statement has become or becomes effective
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pursuant to Rule 430A and information has been omitted therefrom in reliance on
Rule 430A, then the Offerors will prepare and file in accordance with Rule 430A
and Rule 424(b) copies of the Prospectus or, if required by Rule 430A, a post-
effective amendment to the Registration Statement (including the Prospectus)
containing all information so omitted.
(b) The Offerors shall notify the Underwriter immediately, and
confirm such notice in writing:
(i) when the Registration Statement, or any post-effective
amendment to the Registration Statement, has become effective, or when the
Prospectus or any supplement to the Prospectus or any amended Prospectus
has been filed;
(ii) of the receipt of any comments or requests from the
Commission relating to the Registration Statement or the Prospectus;
(iii) of any request of the Commission to amend or supplement
the Registration Statement, any Preliminary Prospectus or the Prospectus or
for additional information; and
(iv) of the issuance by the Commission or any state or other
regulatory body of any stop order or other order suspending the
effectiveness of the Registration Statement, preventing or suspending the
use of any Preliminary Prospectus or the Prospectus, or suspending the
qualification of any of the Designated Preferred Securities for offering or
sale in any jurisdiction or the institution or threat of institution of any
proceedings for any of such purposes. The Offerors shall use their best
efforts to prevent the issuance of any such stop order or of any other such
order and, if any such order is issued, to cause such order to be withdrawn
or lifted as soon as possible.
(c) The Offerors shall furnish to the Underwriter, from time to time
without charge, as soon as available, as many copies as the Underwriter may
reasonably request of (i) the registration statement as originally filed and of
all amendments thereto, including exhibits, whether filed before or after the
Registration Statement becomes effective, (ii) all exhibits and documents
incorporated therein or filed therewith, (iii) all consents and certificates of
experts in executed form, (iv) each Preliminary Prospectus and all amendments
and supplements thereto, and (v) the Prospectus, and all amendments and
supplements thereto.
(d) During the time when a prospectus is required to be delivered
under the 1933 Act, the Offerors shall comply to the best of their ability with
the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act
Regulations so as to permit the completion of the distribution of the Designated
Preferred Securities as contemplated herein and in the Trust Agreement and the
Prospectus. The Offerors shall not file any amendment to the registration
statement as originally filed or to the Registration Statement and shall not
file any amendment thereto or make any amendment or supplement to any
Preliminary Prospectus or to the Prospectus of which the Underwriter shall not
previously have been advised in writing and provided a copy a reasonable time
prior to the proposed filings thereof or to which the Underwriter or counsel for
the Underwriter shall object. If it is necessary, in the Company's reasonable
opinion or in the
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reasonable opinion of the Company's counsel, to amend or supplement the
Registration Statement or the Prospectus in connection with the distribution of
the Designated Preferred Securities, the Offerors shall forthwith amend or
supplement the Registration Statement or the Prospectus, as the case may be, by
preparing and filing with the Commission (provided the Underwriter or counsel
for the Underwriter does not reasonably object), and furnishing to the
Underwriter, such number of copies as the Underwriter may reasonably request of
an amendment or amendments of, or a supplement or supplements to, the
Registration Statement or the Prospectus, as the case may be (in form and
substance reasonably satisfactory to the Underwriter and counsel for the
Underwriter). If any event shall occur as a result of which it is necessary to
amend or supplement the Prospectus to correct an untrue statement of a material
fact or to include a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, or if for
any reason it is necessary at any time to amend or supplement the Prospectus to
comply with the 1933 Act and the 1933 Act Regulations, the Offerors shall,
subject to the second sentence of this subsection (d), forthwith amend or
supplement the Prospectus by preparing and filing with the Commission, and
furnishing to the Underwriter, such number of copies as the Underwriter may
reasonably request of an amendment or amendments of, or a supplement or
supplements to, the Prospectus (in form and substance reasonably satisfactory to
the Underwriter and counsel for the Underwriter) so that, as so amended or
supplemented, the Prospectus shall not contain an untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(e) The Offerors shall cooperate with the Underwriter and counsel for
the Underwriter in order to qualify the Designated Preferred Securities for
offering and sale under the securities or blue sky laws of such jurisdictions
within the United States of America as the Underwriter may reasonably request
and shall continue such qualifications in effect so long as may be advisable for
distribution of the Designated Preferred Securities; provided, however, that the
Offerors shall not be required to qualify to do business as a foreign
corporation or file a general consent to service of process in any jurisdiction
in connection with the foregoing. The Offerors shall file such statements and
reports as may be required by the laws of each jurisdiction in which the
Designated Preferred Securities have been qualified as above. The Offerors will
notify the Underwriter immediately of, and confirm in writing, the suspension of
qualification of the Designated Preferred Securities or threat thereof in any
jurisdiction.
(f) The Offerors shall make generally available to their security
holders in the manner contemplated by Rule 158 of the 1933 Act Regulations and
furnish to the Underwriter as soon as practicable, but in any event not later
than 16 months after the Effective Date, a consolidated earnings statement of
the Offerors conforming with the requirements of Section 11(a) of the 1933 Act
and Rule 158.
(g) The Offerors shall use the proceeds from the sale of the
Designated Preferred Securities to be sold by the Trust hereunder in the manner
specified in the Prospectus under the caption "Use of Proceeds."
(h) For five years from the Effective Date, the Offerors shall
furnish to the Underwriter copies of all reports and communications (financial
or otherwise) furnished by the Offerors to the holders of the Designated
Preferred Securities as a class, copies of all reports and
17
<PAGE>
financial statements filed with or furnished to the Commission (other than
portions for which confidential treatment has been obtained from the Commission)
or with or any other national securities exchange or self-regulatory
organization, and such other documents, reports and information concerning the
business and financial condition of the Offerors as the Underwriter may
reasonably request, other than such documents, reports and information for which
the Offerors has the legal obligation not to reveal to the Underwriter.
(i) For a period of 90 days from the Effective Date, the Offerors
shall not, without the Underwriter's prior written consent, directly or
indirectly offer, sell, contract to sell or otherwise dispose of Designated
Preferred Securities other than pursuant to this 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 Designated Preferred Securities or
the 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.
(j) The Offerors shall use their best efforts to cause the Designated
Preferred Securities to become listed on the American Stock Exchange, Inc., or
in lieu thereof another national securities exchange or self-regulatory
organization, and to remain so listed for at least five years from the Effective
Date or for such shorter period as may be specified in a written consent of the
Underwriter, provided this shall not prevent the Company from redeeming the
Designated Preferred Securities pursuant to the terms of the Trust Agreement.
If the Designated Preferred Securities are exchanged for Debentures, the Company
will use its best efforts to have the Debentures promptly listed on the American
Stock Exchange, Inc. or another organization on which the Designated Preferred
Securities are then listed, and to have the Debentures promptly registered under
the 1934 Act.
(k) Subsequent to the date of this Agreement and through the date
which is the later of (i) the day following the date on which the Underwriter's
Option to purchase the Option Preferred Securities shall expire or (ii) the day
following the Option Closing Date with respect to any Option Preferred
Securities that the Underwriter shall elect to purchase, except as described in
or contemplated by the Prospectus, neither the Offerors, Bancorp nor any of the
Subsidiaries shall take any action (or refrain from taking any action) which
will result in the Offerors, Bancorp or the Subsidiaries incurring any material
liability or obligation, direct or contingent, or enter into any material
transaction, except in the ordinary course of business, and there will not be
any material change in the financial position, capital stock, or any material
increase in long-term debt, obligations under capital leases or short-term
borrowings (except for repurchase agreements in the ordinary course of business
consistent with past practice) of the Offerors and the Company Subsidiaries, or
Bancorp and the Bancorp Subsidiaries, as the case may be, on a consolidated
basis.
(l) Neither Offerors nor Bancorp shall take, directly or indirectly,
any action designed to result in or which has constituted or which would
reasonably be expected to (i) cause or result in stabilization or manipulation
of the price of any security of the Offerors to facilitate the sale or resale of
the Designated Preferred Securities or (ii) otherwise violate the Commission's
Regulation M.
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<PAGE>
(m) Prior to the Closing Date (and, if applicable, the Option Closing
Date), the Offerors will not issue any press release or other communication
directly or indirectly or hold any press conference with respect to the
Offerors, Bancorp, the Subsidiaries or the offering of the Designated Preferred
Securities without the Underwriter's prior written consent.
5. PAYMENT OF EXPENSES. Whether or not this Agreement is terminated or
the sale of the Designated Preferred Securities to the Underwriter is
consummated, the Company covenants and agrees that it will pay or cause to be
paid (directly or by reimbursement) all costs and expenses incident to the
performance of the obligations of the Offerors under this Agreement, including:
(a) the preparation, printing, filing, delivery and shipping of the
initial registration statement, the Preliminary Prospectus or Prospectuses, the
Registration Statement and the Prospectus and any amendments or supplements
thereto, and the printing, delivery and shipping of this Agreement and any other
underwriting documents (including, without limitation, selected dealers
agreements) and the certificates for the Designated Preferred Securities;
(b) all fees, expenses and disbursements of the counsel and
accountants for the Offerors and Bancorp;
(c) all fees and expenses incurred in connection with the
qualification of the Designated Preferred Securities, Debentures and the
Guarantee under the securities or blue sky laws of such jurisdictions as the
Underwriter may request, including all filing fees and fees and disbursements of
counsel to the Underwriter in connection therewith, including, without
limitation, in connection with the preparation of the Preliminary and Final Blue
Sky Memoranda and any legal investment surveys and any supplements thereto (all
such fees and expenses in this subparagraph (c) (the "Preferred Blue Sky Fees");
provided, however, such Preferred Blue Sky Fees together with the Blue Sky Fees
(as defined in the Underwriting Agreement dated the date hereof between the
parties hereto and relating to the issuance and sale of 320,000 shares of the
Company's Common Stock (the "Common Stock Underwriting Agreement") shall not
exceed $3,000 in the aggregate;
(d) all fees and expenses incurred in connection with filings made
with the NASD;
(e) any applicable fees and other expenses incurred in connection
with the listing of the Designated Preferred Securities and, if applicable, the
Guarantee and the Debentures on the American Stock Exchange, Inc.;
(f) the cost of furnishing to the Underwriter copies of the initial
registration statements, any Preliminary Prospectus, the Registration Statement
and the Prospectus and all amendments or supplements thereto;
(g) the costs and charges of any transfer agent or registrar and the
fees and disbursements of counsel to any transfer agent or registrar;
(h) all costs and expenses (including stock transfer taxes) incurred
in connection with the printing, issuance and delivery of the Designated
Preferred Securities to the Underwriter;
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(i) all expenses incident to the preparation, execution and delivery
of the Trust Agreement, the Indenture, the Guarantee and the Expense Agreement;
and
(j) all other costs and expenses incident to the performance of the
obligations of the Company hereunder and under the Trust Agreement that are not
otherwise specifically provided for in this Section 5; provided, however, that
the Underwriter shall pay its own costs and expenses, including (A) the costs
and expenses of its counsel, (B) the Blue Sky Fees which are not paid by the
Company pursuant to Section 5(c) above, (C) the expenses of advertising any
offering of the Designated Preferred Securities made by the Underwriter and (D)
stabilization costs, if any
If the sale of Designated Preferred Securities contemplated by this
Agreement is not completed due to the termination of this Agreement pursuant to
the terms hereof the Company will pay the Underwriter its accountable out-of-
pocket expenses in connection herewith or in contemplation of the performance of
the Underwriter's obligations hereunder, including without limitation travel
expenses, reasonable fees, expenses and disbursements of counsel or other out-
of-pocket expenses incurred by the Underwriter in connection with any discussion
of the offering of the Designated Preferred Securities or the contents of the
Registration Statement, any investigation of the Offerors and the Subsidiaries,
or any preparation for the marketing, purchase, sale or delivery of the
Designated Preferred Securities, in each case following presentation of
reasonably detailed invoices therefor; provided, however, that if the sale of
the Designated Preferred Securities is not completed, the Company will in no
event be obligated to pay in excess of $50,000 of such fees and expenses without
prior approval by the Company.
If the sale of Designated Preferred Securities contemplated by this
Agreement is completed, the Company shall not be responsible for payment of fees
or disbursements of counsel to the Underwriter other than in accordance with
paragraph (c) above, or for the reimbursement of any expenses of the
Underwriter.
6. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Firm Preferred Securities and, following
exercise of the Option granted by the Offerors in Section 1 of this Agreement,
the Option Preferred Securities, are subject, in the Underwriter's reasonable
discretion, to the accuracy of and compliance with the representations and
warranties and agreements of the Offerors herein as of the date hereof and as of
the Closing Date (or in the case of the Option Preferred Securities, if any, as
of the Option Closing Date), to the accuracy of the written statements of the
Offerors made pursuant to the provisions hereof, to the performance by the
Offerors of their covenants and obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement or any amendment thereto filed
prior to the Closing Date has not been declared effective prior to the time of
execution hereof, the Registration Statement shall become effective not later
than 10:00 a.m., St. Louis time, on the first business day following the time of
execution of this Agreement, or at such later time and date as the Underwriter
may agree to in writing. If required, the Prospectus and any amendment or
supplement thereto shall have been timely filed in accordance with Rule 424(b)
and Rule 430A under the 1933 Act and
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<PAGE>
Section 4(a) hereof. No stop order suspending the effectiveness of the
Registration Statement or any amendment or supplement thereto shall have been
issued under the 1933 Act or any applicable state securities laws and no
proceedings for that purpose shall have been instituted or shall be pending, or,
to the knowledge of the Offerors or the Underwriter, shall be contemplated by
the Commission or any state authority. Any request on the part of the Commission
or any state authority for additional information (to be included in the
Registration Statement or Prospectus or otherwise) shall have been disclosed to
the Underwriter and complied with to the satisfaction of the Underwriter and to
the satisfaction of counsel for the Underwriter.
(b) The Underwriter shall not have advised the Company in writing at
or before the Closing Date (and, if applicable, the Option Closing Date) that
the Registration Statement or any post-effective amendment thereto, or the
Prospectus or any amendment or supplement thereto, contains an untrue statement
of a fact which, in the Underwriter's opinion, is material or omits to state a
fact which, in the Underwriter's opinion, is material and is required to be
stated therein or is necessary to make statements therein (in the case of the
Prospectus or any amendment or supplement thereto, in light of the circumstances
under which they were made) not misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Trust Agreement, and the
Designated Preferred Securities, and the authorization and form of the
Registration Statement and Prospectus, other than financial statements and other
financial data, and all other legal matters relating to this Agreement and the
transactions contemplated hereby or by the Trust Agreement shall be satisfactory
in all material respects to counsel to the Underwriter, and the Offerors and the
Subsidiaries shall have furnished to such counsel all documents and information
relating thereto that they may reasonably request to enable them to pass upon
such matters.
(d) Arter & Hadden, LLP, counsel to the Offerors, shall have
furnished to the Underwriter its signed opinion, dated the Closing Date or the
Option Closing Date, as the case may be, in form and substance satisfactory to
counsel to the Underwriter as to the matters set forth in as Exhibit B hereto.
(e) Prickett Jones, special Delaware counsel to the Offerors, shall
have furnished to the Underwriter its signed opinion, dated as of Closing Date
or the Option Closing Date, as the case may be, in form and substance
satisfactory to such counsel, to the effect that:
(i) The Trust has been duly created and is validly existing in
good standing as a business trust under the Delaware Business Trust Act
and, under the Trust Agreement and the Delaware Business Trust Act, has the
trust power and authority to conduct its business as described in the
Prospectus.
(ii) The Trust Agreement is a legal, valid and binding
agreement of the Trust and the Trustees, and is enforceable against the
Company, as depositor, and the Trustees, in accordance with its terms.
(iii) Under the Trust Agreement and the Delaware Business Trust
Act, the execution and delivery of this Agreement by the Trust, and the
performance by the Trust
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of its obligations thereunder, have been authorized by all requisite trust
action on the part of the Trust.
(iv) The Designated Preferred Securities have been duly
authorized by the Trust Agreement, and when issued and sold in accordance
with the Trust Agreement, the Designated Preferred Securities will be,
subject to the qualifications set forth in paragraph (v) below, fully paid
and nonassessable beneficial interests in the assets of the Trust and
entitled to the benefits of the Trust Agreement. The form of certificates
to evidence the Designated Preferred Securities has been approved by the
Trust and is in due and proper form and complies with all applicable
requirements of the Delaware Business Trust Act.
(v) Holders of Designated Preferred Securities, as beneficial
owners of the Trust, will be entitled to the same limitation on personal
liability extended to shareholders of private, for-profit corporations
organized under the General Corporation Law of the State of Delaware. Such
opinion may note that the holders of Designated Preferred Securities may be
obligated to make payments as set forth in the Trust Agreement.
(vi) Under the Delaware Business Trust Act and the Trust
Agreement, the issuance of the Designated Preferred Securities is not
subject to preemptive rights.
(vii) The issuance and sale by the Trust of the Designated
Preferred Securities and the Common Securities, the execution, delivery and
performance by the Trust of this Agreement, and the consummation of the
transactions contemplated by this Agreement, do not violate (a) the Trust
Agreement, or (b) any applicable Delaware law, rule or regulation.
Such opinion may state that it is limited to the laws of the State of
Delaware and that the opinion expressed in paragraph (ii) above is subject to
the effect upon the Trust Agreement of (i) bankruptcy, insolvency, moratorium,
receivership, reorganization, liquidation, fraudulent conveyance and other
similar laws relating to or affecting the rights and remedies of creditors
generally, (ii) principles of equity, including applicable law relating to
fiduciary duties (regardless of whether considered and applied in a proceeding
in equity or at law), and (iii) the effect of applicable public policy on the
enforceability of provisions relating to indemnification or contribution.
(f) Lewis, Rice & Fingersh, L.C., counsel to the Underwriter, shall
have furnished to the Underwriter its signed opinion, dated the Closing Date or
the Option Closing Date, as the case may be, with respect to the sufficiency of
all corporate procedures and other legal matters relating to this Agreement, the
validity of the Designated Preferred Securities, the Registration Statement, the
Prospectus and such other related matters as the Underwriter may reasonably
request and there shall have been furnished to such counsel such documents and
other information as they may request to enable them to pass on such matters.
In giving such opinion, Lewis, Rice & Fingersh, L.C. may rely as to matters of
fact upon statements and certifications of officers of the Offerors and of other
appropriate persons and may rely as to matters of law, other than law of the
United States and the State of Missouri, upon the opinions of Arter & Hadden,
LLP, and Pricket Jones described herein.
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(g) On the date of this Agreement and on the Closing Date (and, if
applicable, any Option Closing Date), the Underwriter shall have received from
PricewaterhouseCoopers LLP, Ernst & Young LLP and Stovall, Grandey & Whatley,
L.L.P. letters, dated the date of this Agreement and the Closing Date (and, if
applicable, the Option Closing Date), respectively, in form and substance
satisfactory to the Underwriter, confirming that, with respect
PricewaterhouseCoopers LLP, they are independent public accountants with respect
to the Company and the Company Subsidiaries (for purposes of this Section 6(g)
only, the "Company") within the meaning of the 1933 Act and the 1933 Act
Regulations, and, with respect to Ernst & Young LLP and Stovall, Grandey &
Whatley, L.L.P., they are independent public accountants with respect to Bancorp
and the Bancorp Subsidiaries (for purposes of this Section 6(g) only, "Bancorp")
within the meaning of the 1933 Act and the 1933 Act Regulations, and stating in
effect that:
(i) In their opinion, the consolidated financial statements of
the Company or Bancorp, as the case may be, audited by them and included in
the Registration Statement comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations.
(ii) On the basis of the procedures specified by the American
Institute of Certified Public Accountants as described in SAS No. 71,
"Interim Financial Information," inquiries of officials of the Company or
Bancorp, as the case may be, responsible for financial and accounting
matters, and such other inquiries and procedures as may be specified in
such letter, which procedures do not constitute an audit in accordance with
U.S. generally accepted auditing standards, nothing came to their attention
that caused them to believe that, if applicable, the unaudited interim
consolidated financial statements of the Company or Bancorp, as the case
may be, included in the Registration Statement do not comply as to form in
all material respects with the applicable accounting requirements of the
1933 Act and 1933 Act Regulations or are not in conformity with U.S.
generally accepted accounting principles applied on a basis substantially
consistent, except as noted in the Registration Statement, with the basis
for the audited consolidated financial statements of the Company or
Bancorp, as the case may be included in the Registration Statement.
(iii) On the basis of limited procedures, not constituting an
audit in accordance with U.S. generally accepted auditing standards,
consisting of a reading of the unaudited interim financial statements and
other information referred to below, a reading of the latest available
unaudited condensed consolidated financial statements of the Company or
Bancorp, as the case may be, inspection of the minute books of the Company
or Bancorp, as the case may be, since the date of the latest audited
financial statements of the Company or Bancorp, as the case may be,
included or incorporated by reference in the Registration Statement,
inquiries of officials of the Company or Bancorp, as the case may be,
responsible for financial and accounting matters and such other inquiries
and procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) as of a specified date not more than five days prior
to the date of such letter, there have been any changes in the
consolidated capital stock of the Company or Bancorp, as the case may
be, any increase in the consolidated debt of
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the Company or Bancorp, as the case may be, any decreases in
consolidated total assets or shareholders equity of the Company or
Bancorp, as the case may be, or any changes, decreases or increases in
other items specified by the Underwriter, in each case as compared
with amounts shown in the latest unaudited interim consolidated
statement of financial condition of the Company or Bancorp, as the
case may be, included in the Registration Statement except in each
case for changes, increases or decreases which the Registration
Statement specifically discloses, have occurred or may occur or which
are described in such letter; and
(B) for the period from the date of the latest unaudited
interim consolidated financial statements of the Company or Bancorp,
as the case may be, included in the Registration Statement to the
specified date referred to in Clause (iii)(A), there were any
decreases in the consolidated interest income, net interest income, or
net income of the Company or Bancorp, as the case may be, or in the
per share amount of net income of the Company or Bancorp, as the case
may be, or any changes, decreases or increases in any other items
specified by the Underwriter, in each case as compared with the
comparable period of the preceding year and with any other period of
corresponding length specified by the Underwriter, except in each case
for increases or decreases which the Registration Statement discloses
have occurred or may occur, or which are described in such letter;
(iv) In addition to the audit referred to in their report
included in the Registration Statement and the limited procedures,
inspection of minute books, inquiries and other procedures referred to in
paragraphs (ii) and (iii) above, they have carried out certain specified
procedures, not constituting an audit in accordance with U.S. generally
accepted auditing standards, with respect to certain amounts, percentages
and financial information specified by the Underwriter which are derived
from the general accounting records and consolidated financial statements
of the Company or Bancorp, as the case may be, which appear in the
Registration Statement and have compared such amounts, percentages and
financial information with the accounting records and the material derived
from such records and consolidated financial statements of the Company or
Bancorp, as the case may be, and have found them to be in agreement.
In the event that the letters to be delivered referred to above set
forth any such changes, decreases or increases as specified in Clauses (iii)(A)
or (iii)(B), above, or any exceptions from such agreement specified in Clause
(iv) above, it shall be a further condition to the obligations of the
Underwriter that the Underwriter shall have determined, after discussions with
officers of the Company, responsible for financial and accounting matters, that
such changes, decreases, increases or exceptions as are set forth in such
letters do not (x) reflect a material adverse change in the items specified in
Clause (iii)(A) above as compared with the amounts shown in the latest unaudited
consolidated statement of financial condition of the Company or Bancorp, as the
case may be, included in the Registration Statement, (y) reflect a material
adverse change in the items specified in Clause (iii)(B) above as compared with
the corresponding periods of the prior year or other period specified by the
Underwriter, or (z) reflect a material change in items specified in Clause (iv)
above from the amounts shown in the Preliminary Prospectus distributed by the
Underwriter in connection with the offering contemplated hereby or from the
amounts shown in the Prospectus.
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(h) At the Closing Date and, if applicable, the Option Closing Date,
the Underwriter shall have received certificates of the chief executive officer
and the chief financial and accounting officer of the Company, which
certificates shall be deemed to be made on behalf of the Company dated as of the
Closing Date and, if applicable, the Option Closing Date, evidencing
satisfaction of the conditions of Section 6(a) and stating that (i) the
representations and warranties of the Offerors set forth in Section 2(a) hereof
are accurate as of the Closing Date and, if applicable, the Option Closing Date,
and that the Offerors have complied with all agreements and satisfied all
conditions on their part to be performed or satisfied at or prior to such
Closing Date and, if applicable, the Option Closing Date, (ii) since the
respective dates as of which information is given in the Registration Statement
and the Prospectus, there has not been any material adverse change in the
condition (financial or otherwise), earnings, affairs, business, prospects or
results of operations of the Offerors, Bancorp and the Subsidiaries on a
consolidated basis, (iii) since such dates there has not been any material
transaction entered into by the Offerors or the Subsidiaries other than
transactions in the ordinary course of business, (iv) they have carefully
examined the Registration Statement and the Prospectus as amended or
supplemented and nothing has come to their attention that would lead them to
believe that either the Registration Statement or the Prospectus, or any
amendment or supplement thereto as of their respective effective or issue dates,
contained, and the Prospectus as amended or supplemented at such Closing Date
(and, if applicable, the Option Closing Date), contains any untrue statement of
a material fact, or omits to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and (v) covering such
other matters as the Underwriter may reasonably request. The officers'
certificate of the Company shall further state that no stop order affecting the
Registration Statement is in effect or, to their knowledge, threatened.
(i) At the Closing Date and, if applicable, the Option Closing Date,
the Underwriter shall have received a certificate of an authorized
representative of the Trust to the effect that to the best of his or her
knowledge based upon a reasonable investigation, the representations and
warranties of the Trust in this Agreement are true and correct as though made on
and as of the Closing Date (and, if applicable, the Option Closing Date), the
Trust has complied with all the agreements and satisfied all the conditions
required by this Agreement to be performed or satisfied by the Trust on or prior
to the Closing Date and since the most recent date as of which information is
given in the Prospectus, except as contemplated by the Prospectus, the Trust has
not incurred any material liabilities or obligations, direct or contingent, or
entered into any material transactions not in the ordinary course of business
and there has not been any material adverse change in the condition (financial
or otherwise) of the Trust.
(j) On the Closing Date, the Underwriter shall have received duly
executed counterparts of the Trust Agreement, the Guarantee, the Indenture and
the Expense Agreement.
(k) The NASD, upon review of the terms of the public offering of the
Designated Preferred Securities, shall not have objected to the Underwriter's
participation in such offering.
(l) Prior to the Closing Date and, if applicable, the Option Closing
Date, the Offerors shall have furnished to the Underwriter and counsel for the
Underwriter all such other documents, certificates and opinions as they have
reasonably requested.
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(m) On or prior to the Closing Date, (1) the Company shall have
completed its acquisition of Bancorp and any other transactions contemplated by
the Reorganization Agreement and (2) the Company shall have completed the
offering of 320,000 shares of its common stock as provided in that certain
Underwriting Agreement between the Underwriter and the Company of even date
herewith relating to the sale of such common stock.
All opinions, certificates, letters and other documents shall be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to the Underwriter. The Offerors shall furnish the
Underwriter with conformed copies of such opinions, certificates, letters and
other documents as the Underwriter shall reasonably request.
If any of the conditions referred to in this Section 6 shall not have
been fulfilled when and as required by this Agreement, this Agreement and all of
the Underwriter's obligations hereunder may be terminated by the Underwriter on
notice to the Company at, or at any time before, the Closing Date or the Option
Closing Date, as applicable. Any such termination shall be without liability of
the Underwriter to the Offerors.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Offerors agree to jointly and severally indemnify and hold
harmless the Underwriter, each of its directors, officers and agents, and each
person, if any, who controls the Underwriter within the meaning of the 1933 Act,
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and reasonable attorney fees and expenses),
joint or several, arising out of or based (i) upon any untrue statement or
alleged untrue statement of a material fact made by the Company or the Trust
contained in Section 2(a) of this Agreement (or any certificate delivered by the
Company or the Trust pursuant to Sections 6(h), 6(i) or 6(l) hereof) or the
registration statement as originally filed or the Registration Statement, any
Preliminary Prospectus or the Prospectus, or in any amendment or supplement
thereto, (ii) upon any blue sky application or other document executed by the
Company or the Trust specifically for that purpose or based upon written
information furnished by the Company or the Trust filed in any state or other
jurisdiction in order to qualify any of the Designated Preferred Securities
under the securities laws thereof (any such application, document or information
being hereinafter referred to as a "Blue Sky Application"), (iii) any omission
or alleged omission to state a material fact in the registration statement as
originally filed or the Registration Statement, the Preliminary Prospectus or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application required to be stated therein, in light of the circumstances under
which they were made, or necessary to make the statements therein not
misleading, and against any and all losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation and attorney fees), joint
or several, arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus or the
Prospectus, or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading or
(iv) the enforcement of this indemnification provision or the contribution
provisions of Section 7(d); and shall reimburse each such indemnified party for
any reasonable legal or other expenses as incurred, but in no event less
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<PAGE>
frequently than 30 days after each invoice is submitted, incurred by them in
connection with investigating or defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action,
notwithstanding the possibility that payments for such expenses might later be
held to be improper, in which case such payments shall be promptly refunded;
provided, however, that the Offerors shall not be liable in any such case to the
extent, but only to the extent, that any such losses, claims, damages,
liabilities and expenses arise out of or are based upon any untrue statement or
omission or allegation thereof that has been made therein or omitted therefrom
in reliance upon and in conformity with the Underwriter's Information; provided,
that the indemnification contained in this paragraph with respect to any
Preliminary Prospectus shall not inure to the benefit of the Underwriter (or of
any person controlling the Underwriter) to the extent any such losses, claims,
damages, liabilities or expenses directly results from the fact that the
Underwriter sold Designated Preferred Securities to a person to whom there was
not sent or given, at or prior to the written confirmation of such sale, a copy
of the Prospectus (as amended or supplemented if any amendments or supplements
thereto shall have been furnished to the Underwriter consistent with the
provisions hereof), if required by law, and if such loss, claim, damage,
liability or expense would not have arisen but for the failure to give or send
such person such document. The foregoing indemnity agreement is in addition to
any liability the Company or the Trust may otherwise have to any such
indemnified party.
(b) The Underwriter agrees to indemnify and hold harmless each
Offeror, each of its directors, each of its officers who signed the Registration
Statement and each person, if any, who controls an Offeror within the meaning of
the 1933 Act, to the same extent as required by the foregoing indemnity from the
Company to the Underwriter, but only with respect to the Underwriter's
Information or information related to the Underwriter furnished in writing to an
Offeror through the Underwriter by or on its behalf expressly for use in a Blue
Sky Application. The foregoing indemnity agreement is in addition to any
liability which the Underwriter may otherwise have to any such indemnified
party.
(c) If any action or claim shall be brought or asserted against any
indemnified party or any person controlling an indemnified party in respect of
which indemnity may be sought from the indemnifying party, such indemnified
party or controlling person shall promptly notify the indemnifying party in
writing, and the indemnifying party shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all expenses; provided, however, that the failure so to notify
the indemnifying party shall not relieve it from any liability which it may have
to an indemnified party otherwise than under such paragraph, and further, shall
only relieve it from liability under such paragraph to the extent prejudiced
thereby. Any indemnified party or any such controlling person shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such indemnified party or such controlling person unless (i) the
employment thereof has been specifically authorized by the indemnifying party in
writing, (ii) the indemnifying party has failed to assume the defense or to
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
such indemnified party or such controlling person and the indemnifying party and
such indemnified party or such controlling person shall have been advised by
such counsel that there may be one or more legal defenses available to it that
are different from or in addition to those available to the indemnifying party
(in
27
<PAGE>
which case, if such indemnified party or controlling person notifies the
indemnifying party in writing that it elects to employ separate counsel at the
expense of the indemnifying party, the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party
or such controlling person) it being understood, however, that the indemnifying
party shall not, in connection with any one such action or separate but
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for the reasonable fees
and expenses of more than one separate firm of attorneys at any time and for all
such indemnified parties and controlling persons, which firm shall be designated
in writing by the indemnified party and shall be reasonably satisfactory to the
indemnifying party. Each indemnified party and each controlling person, as a
condition of such indemnity, shall use reasonable efforts to cooperate with the
indemnifying party in the defense of any such action or claim. The indemnifying
party shall not be liable for any settlement of any such action effected without
its written consent, but if there be a final judgment for the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party and any such controlling person from and against any loss,
claim, damage, liability or expense by reason of such settlement or judgment.
An indemnifying party shall not, without the prior written consent of
each indemnified party, settle, compromise or consent to the entry of any
judgment in any pending or threatened claim, action, suit or proceeding in
respect of which indemnity may be sought hereunder (whether or not such
indemnified party or any person who controls such indemnified party within the
meaning of the 1933 Act is a party to such claim, action, suit or proceeding),
unless such settlement, compromise or consent includes a release of each such
indemnified party reasonably satisfactory to each such indemnified party and
each such controlling person from all liability arising out of such claim,
action, suit or proceeding or unless the indemnifying party shall confirm in a
written agreement with each indemnified party, that notwithstanding any federal,
state or common law, such settlement, compromise or consent shall not alter the
right of any indemnified party or controlling person to indemnification or
contribution as provided in this Agreement.
(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraphs (a), (b) or (c) hereof in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative benefits received by the Offerors on the one hand and the
Underwriter on the other from the offering of the Designated Preferred
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Offerors on the one hand and the Underwriter on the other in
connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The benefits received by the Underwriter on the one
hand and the Offerors on the other shall be deemed to be allocated pro rata on
the basis of the total underwriting discounts, commissions and compensation
received by the Underwriter relative to the total net proceeds from the offering
of the Designated Preferred Securities (before deducting expenses) received by
the Offerors, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Offerors on the one hand and of the
28
<PAGE>
Underwriter on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Offerors or by the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. Each Offeror and the Underwriter agree that it
would not be just and equitable if contribution pursuant to this paragraph (d)
were determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to herein. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in the first sentence of
this paragraph (d) shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Designated Preferred Securities underwritten by the
Underwriter and distributed to the public were offered to the public exceeds the
amount of any damages that the Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this paragraph (d), each person who controls the
Underwriter within the meaning of the 1933 Act shall have the same rights to
contribution as the Underwriter, and each person who controls an Offeror within
the meaning of the 1933 Act, each officer and trustee of an Offeror and each
director of an Offeror shall have the same rights to contribution as the
Offerors subject in each case to the preceding paragraph. The obligations of
the Offerors under this paragraph (d) shall be in addition to any liability
which the Offerors may otherwise have and the obligations of the Underwriter
under this paragraph (d) shall be in addition to any liability that the
Underwriter may otherwise have.
(e) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Offerors set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of the Underwriter or any person
controlling the Underwriter or by or on behalf of the Offerors, or such
directors, trustees or officers (or any person controlling an Offeror), (ii)
acceptance of any Designated Preferred Securities and payment therefor hereunder
and (iii) any termination of this Agreement. A successor of the Underwriter or
of an Offeror, such directors, trustees or officers (or of any person
controlling the Underwriter or an Offeror) shall be entitled to the benefits of
the indemnity, contribution and reimbursement agreements contained in this
Section 7.
(f) The Company agrees to indemnify the Trust against any and all
losses, claims, damages or liabilities that may become due from the Trust under
this Section 7.
8. TERMINATION. The Underwriter shall have the right to terminate this
Agreement at any time at or prior to the Closing Date or, with respect to the
Underwriter's obligation to purchase the Option Preferred Securities, at any
time at or prior to the Option Closing Date, without liability on the part of
the Underwriter to the Offerors, if:
29
<PAGE>
(a) Either Offeror shall have failed, refused, or been unable to
perform any agreement on its part to be performed under this Agreement, or any
of the conditions referred to in Section 6 shall not have been fulfilled, when
and as required by this Agreement;
(b) The Offerors, Bancorp or any of the Subsidiaries shall have
sustained any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree which in the
judgment of the Underwriter materially impairs the investment quality of the
Designated Preferred Securities;
(c) There has been since the respective dates as of which information
is given in the Registration Statement or the Prospectus, any materially adverse
change in, or any development which is reasonably likely to have a material
adverse effect on, the condition (financial or otherwise), earnings, affairs,
business, prospects or results of operations of the Offerors, Bancorp and the
Subsidiaries on a consolidated basis, whether or not arising in the ordinary
course of business;
(d) There has occurred any outbreak of hostilities or other calamity
or crisis or material change in general economic, political or financial
conditions, or internal conditions, the effect of which on the financial markets
of the United States is such as to make it, in the Underwriter's reasonable
judgment, impracticable to market the Designated Preferred Securities or enforce
contracts for the sale of the Designated Preferred Securities;
(e) Trading generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq Stock Market's National Market shall have been
suspended, or minimum or maximum prices for trading shall have been fixed, or
maximum ranges for prices for securities shall have been required, by any of
said exchanges or market system or by the Commission or any other governmental
authority;
(f) A banking moratorium shall have been declared by either federal
or Texas authorities; or
(g) Any action shall have been taken by any government in respect of
its monetary affairs which, in the Underwriter's reasonable judgment, has a
material adverse effect on the United States securities markets.
The Offerors shall have the right to terminate this Agreement at any
time at or prior to the Closing Date or, with respect to the sale of the Option
Preferred Securities, at any time at or prior to the Option Closing Date, if a
Tax Event, Investment Company Event or a Capital Treatment Event, as such terms
are defined in the Registration Statement, shall have occurred.
If this Agreement shall be terminated pursuant to this Section 8, the
Offerors shall not then be under any liability to the Underwriter except as
provided in Sections 5 and 7 hereof.
30
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9. CERTAIN DEFINITIONS. The following terms shall have the following
meanings:
"Business day." Means any day on which the American Stock Exchange, Inc.
is open for trading.
"Knowledge." Whenever a phrase herein is qualified by "the knowledge of
the Company," or a similar phrase, it is intended to refer to the actual
knowledge, after reasonable inquiry, of the directors and executive officers of
the Company.
"Threatened." Any matter or thing will be deemed to have been "threatened"
when used herein with respect to any party if that party has received notice, in
writing, from the person whom the threat is attributable, or such person's
agent, which makes specific reference to and clearly identifies the matter or
thing being threatened.
10. EFFECTIVE DATE OF AGREEMENT. If the Registration Statement is not
effective at the time of execution of this Agreement, this Agreement shall
become effective on the Effective Date at the time the Commission declares the
Registration Statement effective. The Company shall immediately notify the
Underwriter when the Registration Statement becomes effective.
If the Registration Statement is effective at the time of execution of
this Agreement, this Agreement shall become effective at the earlier of 11:00
a.m. St. Louis time, on the first full business day following the day on which
this Agreement is executed, or at such earlier time as the Underwriter shall
release the Designated Preferred Securities for initial public offering. The
Underwriter shall notify the Offerors immediately after it has taken any action
which causes this Agreement to become effective.
Until such time as this Agreement shall have become effective, it may
be terminated by the Offerors, by notifying the Underwriter, or by the
Underwriter, by notifying either Offeror, except that the provisions of Sections
5 and 7 shall at all times be effective.
11. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
representations, warranties, indemnities, agreements and other statements of the
Offerors and their officers and trustees set forth in or made pursuant to this
Agreement and the agreements of the Underwriter contained in Section 7 hereof
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Offerors or controlling persons of
either Offeror, or by or on behalf of the Underwriter or controlling persons of
the Underwriter or any termination or cancellation of this Agreement and shall
survive delivery of and payment for the Designated Preferred Securities.
12. NOTICES. Except as otherwise provided in this Agreement, all notices
and other communications hereunder shall be in writing and shall be deemed to
have been duly given if delivered by hand, mailed by registered or certified
mail, return receipt requested, or transmitted by any standard form of
telecommunication and confirmed. Notices to either Offeror shall be sent to 547
Chestnut Street, Abilene, Texas 79602, Attention: Randal N. Crosswhite, Chief
Financial Officer (with a copy to Arter & Hadden, LLP, 1717 Main Street, Suite
4100, Dallas, Texas 75201,
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Attention: Joseph A. Hoffman); and notices to the Underwriter shall be sent to
Stifel, Nicolaus & Company, Incorporated, 500 North Broadway, Suite 1500, St.
Louis, Missouri 63102, Attention: Rick E. Maples (with a copy to Lewis, Rice &
Fingersh, L.C., 500 North Broadway, Suite 2000, St. Louis, Missouri 63102,
Attention: Thomas C. Erb, Esq.).
Any such notices and other communications shall take effect at the
time of receipt thereof (except in the case of any such notice or other
communication given via standard from of telecommunication and confirmed wherein
it shall take effect at the time of confirmation thereof).
13. PARTIES. The Agreement herein set forth is made solely for the
benefit of the Underwriter and the Offerors and, to the extent expressed,
directors, trustees and officers of the Offerors, any person controlling the
Offerors or the Underwriter, and their respective successors and assigns. No
other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser,
in its status as such purchaser, from the Underwriter of the Designated
Preferred Securities.
14. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Missouri, without giving effect to the choice of law or conflicts of
law principles thereof.
15. FACSIMILE EXECUTION AND COUNTERPARTS. This Agreement may be executed
by facsimile and in one or more counterparts, and when a counterpart has been
executed by each party hereto all such counterparts taken together shall
constitute one and the same Agreement.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us a counterpart hereof, whereupon this
shall become a binding agreement between the Company, the Trust and you in
accordance with its terms.
Very truly yours,
INDEPENDENT BANKSHARES, INC.
By:
-----------------------------------------------
Print Name:
---------------------------------------
Its:
----------------------------------------------
INDEPENDENT CAPITAL TRUST
By:
-----------------------------------------------
Print Name:
---------------------------------------
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Its: Administrative Trustee
----------------------------------------------
CONFIRMED AND ACCEPTED,
as of _____________________, 1998.
STIFEL, NICOLAUS & COMPANY, INCORPORATED
By:
-------------------------------------
Print Name:
-----------------------------
Its:
------------------------------------
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EXHIBIT A-1 COMPANY SUBSIDIARIES
Independent Financial Corp.
First State Bank, National Association
New Azle, Inc.
Independent Capital Trust
<PAGE>
EXHIBIT A-2 BANCORP SUBSIDIARIES
Azle Holdings, Inc.
Azle State Bank
35.
<PAGE>
EXHIBIT B ARTER & HADDEN LLP OPINION MATTERS
(i) The Company has been duly incorporated under the laws of
the State of Texas. Each of the Company and Bancorp is validly existing and
in good standing under the laws of the State of Texas, and is duly
registered as a bank holding company under the BHC Act. Each of the
Subsidiaries is duly incorporated, validly existing and in good standing
under the laws of its jurisdiction of incorporation. Each of the Company,
Bancorp and the Subsidiaries has full corporate power and authority to own
or lease its properties and to conduct its business as such business is
described in the Prospectus and is currently conducted in all material
respects. To counsel's knowledge, all outstanding shares of capital stock
of the Subsidiaries have been duly authorized and validly issued and are
fully paid and nonassessable except to the extent such shares may be deemed
assessable under 12 U.S.C. Sections 55 and 1831o and, to the counsel's
knowledge, except as disclosed in the Prospectus, there are no outstanding
rights, options or warrants to purchase any such shares or securities
convertible into or exchangeable for any such shares .
(ii) The capital stock, Debentures and Guarantee of the Company
and the equity securities of the Trust conform to the description thereof
contained in the Prospectus in all material respects. To such counsel's
knowledge, the capital stock of the Company authorized and issued as of
June 30, 1998 is as set forth under the caption "Capitalization" in the
Prospectus, has been duly authorized and validly issued, and is fully paid
and nonassessable. To the best of such counsel's knowledge, there are no
outstanding rights, options or warrants to purchase, no other outstanding
securities convertible into or exchangeable for, and no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or
equity securities of the Trust, except as described in the Prospectus.
(iii) The issuance, sale and delivery of the Designated
Preferred Securities and Debentures in accordance with the terms and
conditions of this Agreement and the Indenture have been duly authorized by
all necessary actions of the Offerors. All of the Designated Preferred
Securities have been duly and validly authorized and, when delivered in
accordance with this Agreement, will be duly and validly issued, fully paid
and nonassessable, and will conform to the description thereof in the
Registration Statement, the Prospectus and the Trust Agreement in all
material respects. Such counsel has been advised that the Designated
Preferred Securities have been approved for listing on the American Stock
Exchange, Inc. subject to official notice of issuance. There are no
preemptive or other rights to subscribe for or to purchase, and, other than
as disclosed in the Prospectus, no restrictions upon the voting or transfer
of, any shares of capital stock or equity securities of the Offerors or the
Company Subsidiaries pursuant to the corporate articles of incorporation or
charter, by-laws or other governing documents (including without
limitation, the Trust Agreement) of the Offerors or the Company
Subsidiaries, or, to counsel's knowledge, any agreement or other instrument
to which either Offeror or any of the Company Subsidiaries is a party or by
which either Offeror or any of the Company Subsidiaries may be bound.
36.
<PAGE>
(iv) The Offerors have all requisite corporate and trust power,
as applicable, to enter into and perform their obligations under this
Agreement, and this Agreement has been duly and validly authorized,
executed and delivered by the Offerors and constitutes the legal, valid and
binding obligations of the Offerors enforceable in accordance with its
terms, except as the enforcement hereof or thereof may be limited by
general principles of equity and by bankruptcy or other laws relating to or
affecting creditors' rights generally, and except as the indemnification
and contribution provisions hereof may be limited under applicable laws and
certain remedies may not be available in the case of a non-material breach.
(v) Each of the Indenture, the Trust Agreement and the
Guarantee has been duly qualified under the Trust Indenture Act, has been
duly authorized, executed and delivered by the Company, and is a valid and
legally binding obligation of the Company enforceable in accordance with
its terms, subject to the effect of bankruptcy, insolvency, reorganization,
receivership, moratorium and other laws affecting the rights and remedies
of creditors generally and of general principles of equity.
(vi) The Debentures have been duly authorized, executed,
authenticated and delivered by the Company, are entitled to the benefits of
the Indenture and are legal, valid and binding obligations of the Company
enforceable against the Company in accordance with their terms, subject to
the effect of bankruptcy, insolvency, reorganization, receivership,
moratorium and other laws affecting the rights and remedies of creditors
generally and of general principles of equity.
(vii) The Expense Agreement has been duly authorized, executed
and delivered by the Company, and is a valid and legally binding obligation
of the Company enforceable in accordance with its terms, subject to the
effect of bankruptcy, insolvency, reorganization, receivership, moratorium
and other laws affecting the rights and remedies of creditors generally and
of general principles of equity.
(viii) To such counsel's knowledge, neither the Offerors, Bancorp
nor any of the Subsidiaries is in breach or violation of, or default under,
with or without notice or lapse of time or both, its corporate charter, by-
laws or governing document (including without limitation, the Trust
Agreement). The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated by this Agreement and the
Trust Agreement do not and will not conflict with, result in the creation
or imposition of any material lien, claim, charge, encumbrance or
restriction upon any property or assets of the Offerors or the Company
Subsidiaries or the Designated Preferred Securities pursuant to, or
constitute a material breach or violation of, or constitute a material
default under, with or without notice or lapse of time or both, any of the
terms, provisions or conditions of the articles of incorporation or
charter, by-laws or governing document (including without limitation, the
Trust Agreement) of the Offerors or the Company Subsidiaries, or to
counsel's knowledge, any material contract, indenture, mortgage, deed of
trust, loan or credit agreement, note, lease, franchise, license
37.
<PAGE>
or any other agreement or instrument to which the Offerors or the Company
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound or any order, decree, judgment, franchise, license,
Permit, rule or regulation of any court, arbitrator, government, or
governmental agency or instrumentality, domestic or foreign, known to such
counsel having jurisdiction over the Offerors or the Company Subsidiaries
or any of their respective properties which, in each case, is material to
the Offerors and the Company Subsidiaries on a consolidated basis. No
authorization, approval, consent or order of, or filing, registration or
qualification with, any person (including, without limitation, any court,
governmental body or authority) is required under Texas law in connection
with the transactions contemplated by this Agreement in connection with the
purchase and distribution of the Designated Preferred Securities by the
Underwriter.
(ix) To counsel's knowledge, holders of securities of the
Offerors either (A) do not have any right that, if exercised, would require
the Offerors to cause such securities to be included in the Registration
Statement or (B) have waived such right. To counsel's knowledge, neither
the Offerors nor any of the Subsidiaries is a party to any agreement or
other instrument which grants rights for or relating to the registration of
any securities of the Offerors.
(x) Except as set forth in the Registration Statement and the
Prospectus, to counsel's knowledge, (i) no action, suit or proceeding at
law or in equity is pending or threatened in writing to which the Offerors,
Bancorp or the Subsidiaries is or may be a party, and (ii) no action, suit
or proceeding is pending or threatened in writing against or affecting the
Offerors, Bancorp or the Subsidiaries or any of their properties, before or
by any court or governmental official, commission, board or other
administrative agency, authority or body, or any arbitrator, wherein an
unfavorable decision, ruling or finding could reasonably be expected to
have a material adverse effect on the consummation of this Agreement or the
issuance and sale of the Designated Preferred Securities as contemplated
herein or a Material Adverse Effect or which is required to be disclosed in
the Registration Statement or the Prospectus and is not so disclosed.
(xi) No authorization, approval, consent or order of or filing,
registration or qualification with, any person (including, without
limitation, any court, governmental body or authority) is required in
connection with the transactions contemplated by this Agreement, the Trust
Agreement, the Registration Statement and the Prospectus, except such as
have been obtained under the 1933 Act, the Trust Indenture Act, the
American Stock Exchange, Inc. relating to the listing of the Designated
Preferred Securities and except such as may be required under state
securities laws or Interpretations or Rules of the NASD in connection with
the purchase and distribution of the Designated Preferred Securities by the
Underwriter.
(xii) The Registration Statement and the Prospectus and any
amendments or supplements thereto and any documents incorporated therein by
reference (other than the financial statements or other financial data
included therein or omitted
38.
<PAGE>
therefrom and Underwriter's Information, as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations as of their
respective dates of effectiveness.
(xiii) To counsel's knowledge, there are no contracts,
agreements, leases or other documents of a character required to be
disclosed in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement that are not so disclosed or filed.
(xiv) The statements under the captions "Description of the
Preferred Securities," "Description of the Subordinated Debentures,"
"Description of the Guarantee," "Relationship Among the Preferred
Securities, the Subordinated Debentures and the Guarantee," "Certain
Federal Income Tax Consequences," "ERISA Considerations," "Pending
Acquisition," "Regulation and Supervision," "Certain Relationships and
Related Transactions," and "Description of Capital Stock" and in the
Prospectus or incorporated therein by reference, insofar as such statements
constitute a summary of legal and regulatory matters, documents or
instruments referred to therein, are accurate descriptions of the matters
summarized therein in all material respects and fairly present the
information called for with respect to such legal matters, documents and
instruments, other than financial and statistical data, as to which said
counsel shall not be required to express any opinion or belief.
(xv) Such counsel has been advised by the staff of the
Commission that the Registration Statement has become effective under the
1933 Act; any required filing of the Prospectus pursuant to Rule 424(b) has
been made within the time period required by Rule 424(b); to counsel's
knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for a stop order are pending
or threatened by the Commission.
(xvi) Except as described in or contemplated by the Prospectus,
to such counsel's knowledge, there are no contractual encumbrances or
restrictions, or material legal restrictions, required to be described
therein on the ability of the Company Subsidiaries (A) to pay dividends or
make any other distributions on its capital stock or to pay indebtedness
owed to the Offerors, (B) to make any loans or advances to, or investments
in, the Offerors or (C) to transfer any of its property or assets to the
Offerors.
(xvii) To counsel's knowledge, (A) the business and operations
of the Offerors, Bancorp and the Subsidiaries comply in all material
respects with all statutes, ordinances, laws, rules and regulations
applicable thereto and which are material to the Offerors and the Company
Subsidiaries, or Bancorp and the Bancorp Subsidiaries, as the case may be,
on a consolidated basis, except in those instances where non-compliance
would not materially impair the ability of the Company and the Company
Subsidiaries, or Bancorp and the Bancorp Subsidiaries, as the case may be,
to conduct their business, and (B) the Offerors, Bancorp and the
Subsidiaries possess and are operating in all material respects in
compliance with the terms, provisions and conditions of all Permits that
are
39.
<PAGE>
required to conduct their businesses as described in the Prospectus and
that are material to the Offerors and the Company Subsidiaries, or Bancorp
and the Bancorp Subsidiaries, as the case may be, on a consolidated basis,
except in those instances where the loss thereof or non-compliance
therewith would not have a Material Adverse Effect; to counsel's knowledge,
all such Permits are valid and in full force and effect, and, to counsel's
knowledge, no action, suit or proceeding is pending or threatened which may
lead to the revocation, termination, suspension or non-renewal of any such
Permit, except in those instances where the loss thereof or non-compliance
therewith would not materially impair the ability of the Offerors or the
Company Subsidiaries, or Bancorp and the Bancorp Subsidiaries, as the case
may be, to conduct their businesses.
(xviii) Each of the Reorganization Agreement and the
Ancillary Agreements, and the transactions contemplated thereby, has
been authorized by all necessary corporate action on the part of the
Company and/or the Company Subsidiaries, has been executed and
delivered by the Company and/or the Company Subsidiaries and the other
parties thereto and constitutes a valid and binding obligation of the
Company and/or the Company Subsidiaries (assuming the due
authorization, execution and delivery thereof by the other parties
thereto) enforceable against the Company and/or the Company
Subsidiaries in accordance with its terms, except as the enforcement
hereof or thereof may be limited by general principles of equity and
by bankruptcy or other laws relating to or affecting creditors' rights
generally.
In giving the above opinion, such counsel may state (1) that, insofar
as such opinion involves factual matters, they have relied upon certificates of
officers of the Offerors and Bancorp including, without limitation, certificates
as to the identity of any and all material contracts, indentures, mortgages,
deeds of trust, loans or credit agreements, notes, leases, franchises, licenses
or other agreements or instruments, and all material permits, easements,
consents, licenses, franchises and government regulatory authorizations for
purposes of paragraphs (viii), (xiii) and (xvii) hereof, (2) that its opinion is
limited to matters governed by the federal laws of the United State of America
and the laws of the State of Texas and (3) that it has, to the extent it deems
proper, relied upon written statements or certificates of officers of
departments of various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and the Subsidiaries.
and upon certificates of public officials. In giving such opinion, such counsel
may rely upon the opinion of Pricket Jones described herein as to matters of
Delaware law.
Such counsel shall also confirm that, in connection with the
preparation of the Registration Statement and Prospectus, such counsel has
participated in conferences with certain officers and representatives of the
Offerors and with their independent public accountants and with the Underwriter
and counsel for the Underwriters, at which conferences such counsel made
inquiries of such officers, representatives and accountants and discussed the
contents of the Registration Statement and Prospectus and the documents
incorporated therein by reference (without taking further action to verify
independently the
40.
<PAGE>
statements made in the Registration Statement and the Prospectus, and without
assuming responsibility for the accuracy or completeness of such statements,
except to the extent expressly provided above) and such counsel has no reason to
believe (A) that the Registration Statement or any amendment thereto (except for
the financial statements, notes thereto and the related schedules and other
financial, accounting and statistical data included therein or omitted therefrom
or the Underwriter's Information, as to which such counsel need express no
opinion), at the time the Registration Statement or any such amendment became
effective, contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or (B) that the Prospectus or any amendment or supplement
thereto or the documents incorporated therein by reference (except for the
financial statements, the notes thereto and the related schedules and other
financial, accounting and statistical data included therein or omitted therefrom
or the Underwriter's Information, as to which such counsel need express no
opinion), at the time the Registration Statement became effective (or, if the
term "Prospectus" refers to the prospectus first filed pursuant to Rule 424(b)
of the 1933 Act Regulations, at the time the Prospectus was issued), at the time
any such amended or supplemented Prospectus was issued, at the Closing Date and,
if applicable, the Option Closing Date, contained or contains any untrue
statement of a material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made, or (C) that
there is any amendment to the Registration Statement required to be filed that
has not already been filed.
41.
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EXHIBIT 5.1
ARTER & HADDEN LLP
1717 Main Street, Suite 4100
Dallas, Texas 75201
Tel: 214.761.2100
Fax: 214.741.7139
September 1, 1998
Independent Bankshares, Inc.
Independent Capital Trust
547 Chestnut Street
Abilene, Texas 79602
Re: Registration Statement on Form S-2
Ladies and Gentlemen:
On August 4, 1998, Independent Bankshares, Inc., a Texas corporation (the
"Company"), and Independent Capital Trust, a statutory business trust formed
under the laws of the State of Delaware (the "Trust"), filed with the Securities
and Exchange Commission a Registration Statement (Registration Statement Nos.
333-60649 and 333-60649-01) on Form S-2 under the Securities Act of 1933, as
amended (the "Act"). Such Registration Statement, as amended by Amendment No. 1
on Form S-2 filed on September 1, 1998 (as so amended, the "Registration
Statement") relates to the offering (the "Offering") of (i) up to 368,000 shares
(including shares subject to an over-allotment option) of the common stock, par
value $0.25 per share (the "Common Stock"), by the Company, (ii) up to 1,150,000
(or $11,500,000 aggregate) liquidation amount of the Cumulative Trust Preferred
Securities (the "Preferred Securities") of the Trust (including securities
subject to an over-allotment option), (iii) up to $11,855,671 aggregate
principal amount of Subordinated Debentures of the Company (the "Debentures")
and (iv) the Preferred Securities Guarantee of the Company associated therewith
(the "Guarantee.") This firm has acted as counsel to the Company and the Trust
in connection with the preparation and filing of the Registration Statement, and
the Company has requested our opinion with respect to certain legal aspects of
the Offering.
In rendering our opinion, we have examined and relied upon the original or
copies, certified to our satisfaction, of (i) the Restated Articles of
Incorporation and the Bylaws, as amended, of the Company; (ii) copies of
resolutions of the Board of Directors of the Company authorizing the Offering,
the issuance of the shares of Common Stock, the Preferred Securities, the
Debentures and the Guarantee and related matters; (iii) the Registration
Statement and exhibits thereto; (iv) the Certificate of Trust of the Trust, as
filed in the office of the Secretary of State of the State of
<PAGE>
Independent Bankshares, Inc.
September 1, 1998
Page 2
Delaware (the "Secretary of State") on July 29, 1998; (v) the Declaration of
Trust of the Trust, dated as of July 29, 1998, among the Company and the
trustees of the Trust named therein; (vi) a form of Amended and Restated Trust
Agreement of the Trust, to be entered into among the Company, the trustees of
the Trust named therein, and the holders, from time to time, of undivided
beneficial interests in the Trust (the "Trust Agreement"), attached as an
exhibit to the Registration Statement; (vii) a form of Indenture to be entered
between the Company and U.S. Trust Company of Texas, N.A. ("U.S. Trust") with
respect to the Debentures (the "Indenture") and including as Exhibit A thereto a
form of Debenture; (viii) a form of the Guarantee by and between the Company and
U.S. Trust; (ix) such other documents and instruments as we have deemed
necessary. In our examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity to original documents of all documents submitted to us as
certified or reproduction copies; and (x) that certain opinion provided to us by
Prickett, Jones, Elliott, Kristol and Schnee, special Delaware counsel to the
Company, regarding, among other matters, the validity of the Debentures and the
Guarantee pursuant to Delaware law. As to various questions of fact material to
this opinion, we have relied, to the extent we deem reasonably appropriate, upon
representations or certificates of officers or directors of the Company and
trustees of the Trust and upon documents, records and instruments furnished to
us by the Company and the Trust, without independent check or verification of
their accuracy.
Based on the foregoing examination and subject to the comments and
assumptions noted below, we are of the opinion that:
1. The Common Stock to be issued in the Offering has been duly authorized
for issuance and, when issued by the Company against payment therefor, will be
validly issued, fully paid and nonassessable.
2. After the Indenture has been duly authorized, executed and delivered,
the Debentures, when duly executed, delivered, authenticated and issued in
accordance with the Indenture and delivered and paid for as contemplated by the
Registration Statement, will be valid and binding obligations of the Company,
entitled to the benefits of the Indenture and enforceable against the Company in
accordance with their terms.
3. The Guarantee, when duly executed and delivered by the parties thereto,
will be a valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms.
Insofar as the foregoing opinions relate to the legality, validity, binding
effect or enforceability of any agreement or obligation of the Company, we have
assumed and have not verified that (a) each other party to such agreement or
obligation has satisfied those legal requirements that are applicable to it to
the extent necessary to make such agreement or obligation enforceable against it
and (b) that the Debentures will be duly authenticated under the Indenture. The
foregoing opinions are subject to the following qualifications: (a) any
applicable
<PAGE>
Independent Bankshares, Inc.
September 1, 1998
Page 3
bankruptcy, receivership, insolvency, reorganization, liquidation, moratorium,
fraudulent conveyance or other laws affecting the rights and remedies of
creditors generally from time to time in effect; (b) the discretion of any court
as to the enforcement of remedies and the judicial imposition of an implied
covenant of good faith and fair dealing; (c) the possibility that certain
indemnification or exculpation provisions may be construed to indemnify or
exculpate to an extent greater than permissible under applicable law or public
policy; (d) the rules of equity governing specific performance, injunctive
relief or other equitable remedies or involving the exercise of judicial
discretion in any proceedings at law or in equity; and (e) notwithstanding
Section 15.5 of the Indenture, the possibility that a court may determine that
the law of another jurisdiction has a materially greater interest in the outcome
of the transaction than the State of Delaware.
This opinion is limited in all respects to the Texas Business Corporation
Act of the State of Texas, the General Corporation Law of the State of Delaware
and applicable federal laws, each as in effect on the date hereof.
We bring to your attention the fact that this legal opinion is an
expression of professional judgment and not a guaranty of result. This opinion
is given as of the date hereof, and we assume no obligation to update or
supplement such opinion to reflect any facts or circumstances that may hereafter
come to our attention or any changes in laws or judicial decisions that may
hereafter occur.
We hereby consent to the filing of this option as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement. In
giving such consent, we do not admit that we come within the category of persons
whose consent is required by Section 7 of the Act or the rules and regulations
of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ ARTER & HADDEN LLP
<PAGE>
EXHIBIT 5.2
PRICKETT, JONES, ELLIOTT, KRISTOL & SCHNEE
1310 King Street
Box 1328
Wilmington, Delaware 19899
Tel: (302)888-6500
Fax: (302)658-8111
September 1, 1998
Independent Capital Trust
c/o Independent Bankshares, Inc.
547 Chestnut Street
Abilene, Texas 79602
RE: Independent Capital Trust
Ladies and Gentlemen:
We have acted as special Delaware counsel for Independent Capital Trust, a
Delaware business trust (the "Trust"), in connection with the matters set forth
herein. At your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination
of documents have been limited to the examination of originals or copies of the
following:
(a) The Certificate of Trust of the Trust (the "Certificate"), as filed in
the office of the Secretary of State of the State of Delaware (the "Secretary of
State") on July 29, 1998;
(b) The Declaration of Trust of the Trust, dated as of July 29, 1998, among
Independent Bankshares, Inc., a Texas corporation(the "Company"), and the
trustees of the Trust named therein;
(c) The Registration Statement (the "Registration Statement") on Form S-2,
including a prospectus (the "Prospectus") relating to the __________% Cumulative
Trust Preferred Securities of the Trust representing preferred undivided
beneficial interests in the Trust (each, a "Preferred Security" and
collectively, the "Preferred Securities"), as filed by the Company and the Trust
as set forth therein with the Securities and Exchange Commission on August
4,1998, as amended by Amendment No. 1 thereto;
<PAGE>
Independent Capital Trust September 1, 1998
Page 2
(d) A form of Amended and Restated Trust Agreement of the Trust, to be
entered into among the Company, the trustees of the Trust named therein, and the
holders, from time to time, of undivided beneficial interests in the Trust (the
"Trust Agreement"), attached as an exhibit to the Registration Statement; and
(e) A Certificate of Good Standing for the Trust, dated the date hereof,
obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are used
as defined in the Trust Agreement.
For purposes of this opinion, we have not reviewed any documents other than
the documents listed above, and we have assumed that there exists no provision
in any document that we have not reviewed that bears upon or is inconsistent
with the opinions stated herein. We have conducted no independent factual
investigation of our own but rather have relied solely upon the foregoing
documents, the statements and information set forth therein and the additional
matters recited or assumed herein, all of which we have assumed to be true,
complete and accurate in all material respects.
With respect to all documents examined by us, we have assumed (i) the
authenticity of all documents submitted to us as authentic originals, (ii) the
conformity with the originals of all documents submitted to us as copies or
forms, and (iii) the genuineness of all signatures.
For purposes of this opinion, we have assumed (i) that the Trust Agreement
constitutes the entire agreement among the parties thereto with respect to the
subject matter thereof, including with respect to the creation, operation and
termination of the Trust, and that the Trust Agreement and the Certificate are
in full force and effect and have not been amended, (ii) except to the extent
provided in paragraph 1 below, the due creation or due organization or due
formation, as the case may be, and valid existence in good standing of each
party to the documents examined by us under the laws of the jurisdiction
governing its creation, organization or formation, (iii) the legal capacity of
natural persons who are parties to the documents examined by us, (iv) no action
has been taken to dissolve or terminate the Trust, (v) that each of the parties
to the documents examined by us has the power and authority to execute and
deliver, and to perform its obligations under, such documents, (vi) the due
authorization, execution and delivery by all parties thereto of all documents
examined by us, (vii) the
<PAGE>
Independent Capital Trust September 1, 1998
Page 3
receipt by each Person to whom a Preferred Security is to be issued by the Trust
(collectively, the "Preferred Security Holders") of a Preferred Security
Certificate for such Preferred Security and the payment for the Preferred
Security acquired by it, in accordance with the Trust Agreement and the
Prospectus, and (viii) that the Preferred Securities are issued and sold to the
Preferred Security Holders in accordance with the Trust Agreement and the
Prospectus. We have not participated in the preparation of the Registration
Statement and assume no responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. This opinion is expressed only as
of the date hereof and is rendered only with respect to Delaware laws and rules,
regulations and orders thereunder which are currently in effect. We disclaim
any undertaking to advise you of any subsequent changes in the facts or in the
applicable law.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that:
1. The Trust has been duly created and is validly existing in good
standing as a business trust under the Delaware Business Trust Act, 12 Del.
C.(S) 3801, et seq.
2. The Preferred Securities, when issued in accordance with the Trust
Agreement and the Prospectus, will represent valid and, subject to the
qualifications set forth in paragraph 3 below, fully paid and nonassessable
undivided beneficial interests in the assets of the Trust.
3. The Preferred Security Holders, as beneficial owners of the Trust, will
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. We note that the Preferred Security
Holders may be obligated to make payments as set forth in the Trust Agreement.
We consent to the filing of this opinion with the Securities and Exchange
Commission as an exhibit to the Registration Statement. In addition, we hereby
consent to the use of our name under the heading "Validity of Securities" in the
Prospectus. In
<PAGE>
Independent Capital Trust September 1, 1998
Page 4
giving the foregoing consents, we do not thereby admit that we come within the
category of Persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations of the Securities and
Exchange Commission thereunder. Except as stated above, without our prior
written consent, this opinion may not be furnished or quoted to, or relied upon
by, any other Person for any purpose.
Very truly yours,
/s/ PRICKETT, JONES, ELLIOTT,
KRISTOL & SCHNEE
<PAGE>
EXHIBIT 8.1
-----------
ARTER & HADDEN LLP
1717 Main Street, Suite 4100
Dallas, Texas 75201
Tel: 214.761.2100
Fax: 214.741.7139
August 26, 1998
Independent Bankshares, Inc.
547 Chestnut Street
Abilene, Texas 79602
Gentlemen:
We have acted as tax counsel to Independent Bankshares, Inc., a Texas
corporation (the "Company"), in connection with the proposed issuance of (i)
Preferred Securities (the "Preferred Securities") of Independent Capital Trust,
a statutory business trust created under the laws of Delaware (the "Trust"),
pursuant to the terms of the Amended and Restated Trust Agreement between the
Company and U.S. Trust Company of Texas, N.A., as Property Trustee, Wilmington
Trust Company, as Delaware Trustee, and certain individuals named therein as
Administrative Trustees (the "Trust Agreement"), to be offered in an
underwritten public offering, (ii) Subordinated Debentures (the "Debentures") of
the Company pursuant to the terms of an indenture from the Company to U.S. Trust
Company of Texas, N.A., as trustee (the "Indenture"), to be sold by the Company
to the Trust, and (iii) the Preferred Securities Guarantee Agreement of the
Company with respect to the Preferred Securities (the "Guarantee") between the
Company and U.S. Trust Company of Texas, N.A., as trustee. The Preferred
Securities and the Debentures are to be issued as contemplated by the
registration statement on Form S-2 (the "Registration Statement") to be filed by
the Company and the Trust to register the issuance of the Preferred Securities,
the Debentures and the Guarantee under the Securities Act of 1933, as amended
(the "Act").
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of documents, corporate records and other
instruments as we have deemed necessary or appropriate for purposes of this
opinion including (i) the Registration Statement, (ii) the Form of Indenture
attached as an exhibit to the Registration Statement, (iii) the Form of the
Debentures
<PAGE>
Independent Bankshares, Inc.
August 26, 1998
Page 2
attached as an exhibit to the Registration Statement, (iv) the Form of Trust
Agreement attached as an exhibit to the Registration Statement, (v) the form of
Guarantee attached as an exhibit to the Registration Statement, and (vi) the
Form of Preferred Security Certificate attached as an exhibit to the
Registration Statement (collectively the "Documents"). In such examination, we
have assumed the authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as certified
or photostatic copies, the authenticity of the originals of such latter
documents, the genuineness of all signatures and the correctness of all
representations made therein. We have further assumed that there are no
agreements or understandings contemplated therein other than those contained in
the Documents.
Based upon the foregoing, and assuming (i) the final Documents will be
substantially identical to the forms attached as exhibits to the Registration
Statement and (ii) full compliance with all the terms of the final Documents, we
are of the opinion that the statements contained in the preliminary prospectus
constituting part of the Registration Statement under the caption "Certain
Federal Income Tax Consequences," insofar as such statements constitute matters
of law or legal conclusions, as qualified therein, constitute an accurate
description, in general terms, of the indicated United States federal income tax
consequences to such holders.
The opinion expressed above is based on existing provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing Treasury
Regulations, published interpretations of the Code and such Treasury Regulations
by the Internal Revenue Service, and existing court decisions published at least
three days prior to the date hereof, any of which could be changed at any time.
Any such changes may or may not be retroactively applied. We note that there is
no authority directly on point dealing with securities such as the Preferred
Securities or of transactions of the type described herein. Further, you should
be aware that opinions of counsel are not binding on the Internal Revenue
Service or the courts. We express no opinion as to any matters not specifically
covered by the foregoing opinions or as to the effect on the matters covered by
this opinion of the laws of any other jurisdiction. Additionally, we undertake
no obligation to update this opinion in the event there is either a change in
the legal authorities, in the facts (including the taking of any action by any
party to any of the transactions described in the Documents relating to such
transactions) or in the Documents on which this opinion is based, or an
inaccuracy in any of the representations or warranties upon which we have relied
in rendering this opinion.
This letter is not being delivered for the benefit of, nor may it be
relied upon by, the holders of the Debentures, the Guarantee or the Preferred
Securities or any other party to which it is not specifically addressed or on
which reliance is not expressly permitted hereby.
<PAGE>
Independent Bankshares, Inc.
August 26, 1998
Page 3
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to reference to our Firm under the caption "Certain
Federal Income Tax Consequences" and "Legal Matters" in the preliminary
prospectus constituting a part of the Registration Statement.
Very truly yours,
/s/ Arter & Hadden LLP
ARTER & HADDEN LLP
<PAGE>
Exhibit 10.2
------------
(LOGO) NCR
MASTER EQUIPMENT LEASE AGREEMENT
LESSEE: Independent Bankshares, Inc. and First State Bank, N.A., jointly &
severally liable as Co-Lessees.
Street Address: 547 Chestnut
City/State/Zip: Abilene, Texas 79602
LESSOR: AT&T Credit Corporation
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Lease Number: A2071
1. AGREEMENT. Lessor agrees to lease to Lessee and Lessee agrees to lease from
Lessor the equipment (Equipment) described in any schedule (Schedule)that
incorporates this Master Equipment Lease Agreement (Agreement) by reference. A
Schedule shall incorporate this Agreement by reference by listing the above-
referenced Lease Number thereon. Such lease shall be governed by the terms and
conditions of this Agreement, as well as by the terms and conditions set forth
in the applicable Schedule. Each Schedule shall constitute an agreement separate
and distinct from this Agreement and any other Schedule. In the event of a
conflict between the provisions of this Agreement and a Schedule, the provisions
of the Schedule shall govern.
2. ASSIGNMENT OF PURCHASE DOCUMENTS. Lessee shall execute and deliver to
Lessor a writing acceptable to Lessor whereby Lessor is assigned all of Lessee's
rights and interest in and to; (a) the Equipment described in the applicable
Schedule and (b) any purchase order, contract or other documents (collectively,
Purchase Documents) relating thereto that Lessee has entered into with the
Seller (as specified in the applicable Schedule). If Seller is not an affiliate
of Lessor, Lessee shall deliver to Lessor a writing acceptable to Lessor whereby
Seller acknowledges, and provides any required consent to, such assignment. If
Lessee has not entered into any Purchase Document for the Equipment with Seller,
Lessee authorizes Lessor to act as Lessee's agent to issue a purchase order to
Seller for the Equipment and for associated matters, and such purchase order
shall be subject to this Section 2 and all references in this Agreement to
Purchase Documents shall include such purchase order. By executing the
applicable Schedule, Lessee represents and warrants that Lessee either (y) has
reviewed, approved and received a copy of the applicable Purchase Documents or
(z) has been informed by Lessor (i) of the identity of the Seller, (ii) that
Lessee may have rights under the Purchase Documents and (iii) that Lessee may
contact Seller for a description of such rights.
3. DELIVERY; ACCEPTANCE. Lessee shall cause the Equipment to be delivered to
Lessee at the Equipment Location (as specified in the applicable Schedule) and
Lessee shall accept the Equipment as soon as it is delivered or, if acceptance
criteria is specified in the applicable Purchase Documents, as soon as it has
met such criteria. Lessee shall evidence its acceptance of the Equipment and
commencement of the Lease with respect thereto by executing and delivering to
Lessor a commencement certificate (Commencement Certificate) in a form
acceptable to Lessor. By executing and delivering a Commencement Certificate to
Lessor, (a) Lessee represents and warrants that it has selected the Equipment
and Seller specified on the applicable Schedule and (b) Lessee shall irrevocably
accept such Equipment under lease.
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4. PURCHASE OF EQUIPMENT. Provided that no Event of Default (as defined in
Section 19) exists, and no event has occurred and is continuing that with notice
or the lapse of time or both would constitute an Event of Default, Lessor shall
be obligated to purchase the Equipment from Seller and to lease the Equipment to
Lessee if (and only if) Lessor receives on or before the Latest Commencement
Date (as specified in the applicable Schedule) the related Commencement
Certificate and Schedule (both executed by Lessee), and such other documents or
assurances as Lessor may reasonably request.
5. TERM. The initial term of each Schedule (initial Term) shall begin on the
date specified as the Commencement Date on the Commencement Certificate with
respect to such Schedule and shall continue for the period specified in such
Schedule. Any renewal term of a Schedule (Renewal Term) shall begin on the
expiration of, as applicable, the Initial Term or any preceding Renewal Term
(collectively, Term).
6. RENT; ADVANCE RENT; LATE CHARGES. Lessee shall pay Lessor the first Rental
Payment (as specified in the applicable Schedule) for the Equipment on or before
the Commencement Date of the applicable Schedule, and shall pay Lessor the
remaining periodic Rental Payments on or before the periodic payment dates
specified in the applicable Schedule or, if periodic payment dates are not
specified, on or before the corresponding day of each subsequent period during
the Initial Term of the applicable Schedule, regardless of whether Lessee has
received notice that such Rental Payments are due. Additionally, if pursuant to
this Agreement or the applicable Schedule the Term is extended or a renewal
option exercised, Lessee shall also pay all Rental Payments required with
respect thereto. All Rental Payments will be sent to Lessor's above-referenced
address, or to such other address as specified by Lessor in writing. Lessee
shall also pay Lessor Advance Rent (as specified in the applicable Schedule) for
the Equipment when it signs the applicable Schedule, and such Advance Rent shall
be refunded without interest to Lessee only if Lessor declines to sign the
applicable Schedule. Advance Rent shall be credited to Lessee's first Rental
Payment under the applicable Schedule, and any excess Advance Rent shall be
credited to Lessee's final Rental Payment(s). Lessee agrees to pay Lessor a
late charge of 5% of any Rental Payment (or other amount due hereunder) that is
not paid within 10 days of its due date, plus interest at the rate of 1-1/2% per
month on any such amounts (or such lesser rate as is the maximum rate allowable
under applicable law). Also, in the event that more than one Schedule is
entered into hereunder, the parties will use their best efforts to implement a
common billing date for all Schedules.
7. ADJUSTMENTS. The Total Purchase Price (as specified in the applicable
Schedule) and Rental Payment set forth in each Schedule are estimates, and if
the final invoice from Seller specifies a Total Purchase Price (including taxes,
delivery, installation and other charges) that is greater or less than such
estimated Total Purchase Price, Lessee hereby authorizes Lessor to adjust the
Total Purchase Price and Rental Price, Lessee hereby authorizes Lessor to adjust
the Total Purchase Price and Rental Payment on the applicable Schedule to
reflect the final invoice amount (Final Invoice Amount). If Option B in the
Schedule has been selected, Lessee also authorizes Lessor to adjust such
purchase and renewal options to reflect the Final Invoice Amount. However, if
the Final Invoice Amount exceeds the estimated Total Purchase Price by more than
10%, Lessor will notify Lessee and obtain Lessee's prior written approval of the
aforementioned adjustments; provided, however that such written approval shall
not be required when such adjustments are caused by Equipment changes or system
reconfigurations requested or caused by Lessee. Additionally, if Lessor
financed any down payment for the Equipment pursuant to an Interim financing
agreement (Financing Agreement) with Lessee, Lessor may also adjust the Total
Purchase Price and Rental Payment with respect to such Equipment to reflect any
accrued interest that Lessee elects to finance.
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All references in this Agreement and any Schedule to Total Purchase Price and
Rental Payment shall mean the estimates thereof specified in the applicable
Schedule, as adjusted pursuant to this Section 7.
8. INSURANCE. At its own expense, Lessee shall provide and maintain the
following insurance: (a) Insurance against the loss or theft of or damage to the
Equipment for the greater of the Stipulated Loss Value (computed as described in
the applicable Schedule) or full replacement value thereof, naming Lessor as a
loss payee; and (b) public liability and third party property damage insurance,
naming Lessor as an additional insured. Such insurance shall be in a form,
amount and with companies reasonably satisfactory to Lessor, shall contain the
Insurer's agreement to give Lessor 30 days prior written notice before
cancellation or material change thereof, and shall be payable to Lessor
regardless of any act, omission or breach by Lessee. Lessee shall deliver to
Lessor the insurance policies or copies thereof or certificates of such
insurance on or before the Commencement Date of the applicable Schedule, and at
such other times as Lessor may reasonably request. If no Event of Default
exists, and no event has occurred and is continuing that with notice or the
lapse of time or both would constitute an Event of Default, the proceeds of any
insurance required under clause (a) hereof that have been paid to Lessor shall
be applied against Lessee's obligations to Lessor under Section 13 hereof.
9. TAXES. Lessee shall reimburse Lessor for (or pay directly, but only if
instructed by Lessor) all taxes, fees, and assessments that may be imposed by
any taxing authority on the Equipment or on its purchase, ownership, delivery,
possession, operation, rental, return to Lessor or purchase by Lessee
(collectively, Taxes); provided, however, that Lessee shall not be liable for
any such Taxes (whether imposed by the United States of America or by any other
domestic or foreign taxing authority) imposed on or measured by Lessor's net
income or tax preference items. Lessee's obligation includes, but is not
limited to, the obligation to pay all license and registration fees and all
sales, use, personal property and other taxes and governmental charges, together
with any penalties, fines and interest thereon, that may be imposed during the
Term of the applicable Schedule. Lessee is liable for these Taxes whether they
are imposed upon Lessor, Lessee, the Equipment, this Agreement, the applicable
Schedule or any Financing Agreement. If Lessee is required by law or
administrative practice to make any report or return with respect to such Taxes,
Lessee shall promptly advise Lessor thereof in writing and shall cooperate with
Lessor to ensure that such reports are properly filed and accurately reflect
Lessor's interest in the Equipment. Lessor has no obligation to contest any
such Taxes, however Lessee may do so provided that: (a) Lessee does so in its
own name and at its own expense; (b) the contest does not and will not result in
any lien attaching to any Equipment or otherwise jeopardize Lessor's right to
any Equipment; and (c) Lessee indemnifies Lessor for all expenses (including
legal fees and costs), liabilities and losses that Lessor incurs as a result of
any such contest.
10. REPAIRS; USE; LOCATION; LABELS. Lessee shall: (a) at its own expense, keep
the Equipment in good repair, condition and working order and maintained in
accordance with the manufacturer's recommended engineering and maintenance
standards; (b) use the Equipment lawfully and exclusively in connection with its
business operations and for the purpose for which the Equipment was designed and
intended; and (c) with Lessor's prior written consent, not move the Equipment
from the Equipment Location. If Lessor supplies Lessee with labels stating that
the Equipment is owned by Lessor, Lessee shall affix such labels to the
Equipment pursuant to Lessor's instructions.
11. MAINTENANCE; INSPECTION; ALTERATIONS. At its own expense, Lessee shall:
(a) enter into and maintain a maintenance agreement for the Equipment with the
manufacturer or other party acceptable to Lessor; (b) maintain the Equipment
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in the same condition as when delivered, subject only to ordinary wear and tear,
and in good operating order and appearance; (c) make all alterations or
additions to the Equipment that may be required or supplied by the Seller or
legally necessary; and (d) make no other alterations or additions to the
Equipment (except for alterations or additions that will not impair the value or
performance of the Equipment and that are readily removable without damage to
the Equipment). Any modifications, alterations or additions that Lessee makes to
the Equipment (except as permitted by Section 11(d) above) shall become Lessor's
property and shall also be deemed to be Equipment. Upon request, Lessor, or any
party designated by Lessor, shall have the right to inspect the Equipment and
Lessee's applicable maintenance agreement and records at any reasonable time.
12. PERSONAL PROPERTY; LIENS AND ENCUMBRANCES; TITLE. The Equipment shall at
all times remain personal property, notwithstanding that the Equipment, or any
part thereof, may be (or becomes) affixed or attached to real property or any
improvements thereon. Except for the interest of Lessor, Lessee shall keep the
Equipment free and clear of all levies, liens and encumbrances of any nature
whatsoever. Except as expressly set forth in this Agreement, the Equipment
shall at all times remain the property of Lessor and Lessee shall have no right,
title or interest therein.
13. RISK OF LOSS. As between Lessor and Lessee, Lessee shall bear the entire
risk of loss, theft, destruction or damage to the Equipment from any cause
whatsoever or requisition of the Equipment by any governmental entity or the
taking of title to the Equipment by eminent domain or otherwise (collectively,
Loss). Lessee shall advise Lessor in writing within 10 days of any such Loss.
Except as provided below, no such Loss shall relieve Lessee of the obligation to
pay Lessor Rental Payments and all other amounts owed hereunder. In the event
of any such Loss, Lessor, at its option, may: (a) if the Loss has not materially
impaired the Equipment (in Lessor's reasonable judgment), require Lessee, upon
Lessor's demand, to place the Equipment in good condition and repair reasonably
satisfactory to Lessor; or (b) if the Loss has materially impaired the Equipment
(in Lessor's reasonable judgment), require Lessee, upon Lessor's demand, to pay
Lessor its anticipated return (Lessor's Return), which shall consist of the
following amounts: (i) the Rental Payments (and other amounts) then due and
owing under the applicable Schedule; plus (ii) the Stipulated Loss Value
(computed as described in the applicable Schedule) of the Equipment; plus (iii)
all other amounts that become due and owing under the applicable Schedule, but
only to the extent such amounts are not included in the moneys paid to Lessor
pursuant to clauses (i) and (ii) above. Upon Lessor's full receipt of such
Lessor's Return: (y) the applicable Schedule shall terminate, and except as
provided in Section 25, Lessee shall be relieved of all obligations under the
applicable Schedule; and (z) Lessor shall transfer all of its interest in the
Equipment to Lessee "AS IS, WHERE IS," and without any warranty, express or
implied from Lessor, other than the absence of any liens or claims by, through,
or under Lessor.
14. NON-CANCELLABLE NET LEASE. ALL LEASES HEREUNDER SHALL BE NON-CANCELLABLE
NET LEASES, AND LESSEE AGREES THAT IT HAS AN UNCONDITIONAL OBLIGATION TO PAY ALL
RENTAL PAYMENTS AND OTHER AMOUNTS WHEN DUE. LESSEE IS NOT ENTITLED TO ABATE OR
REDUCE RENTAL PAYMENTS OR ANY OTHER AMOUNTS DUE, OR TO SET OFF ANY CHARGES
AGAINST THOSE AMOUNTS. LESSEE IS NOT ENTITLED TO RECOUPMENTS, CROSS-CLAIMS,
COUNTERCLAIMS OR ANY OTHER DEFENSES TO ANY RENTAL PAYMENTS OTHER AMOUNTS DUE
HEREUNDER, WHETHER THOSE DEFENSES ARISE OUT OF CLAIMS BY LESSEE AGAINST LESSOR,
SELLER. THIS AGREEMENT, ANY SCHEDULE OR OTHERWISE, NEITHER DEFECTS IN EQUIPMENT,
DAMAGE TO IT, NOR ITS LOSS, DESTRUCTION OR LATE DELIVERY SHALL TERMINATE THIS
AGREEMENT OR ANY SCHEDULE, OR AFFECT LESSEE'S OBLIGATIONS HEREUNDER, UNLESS
LESSEE'S OBLIGATION TO PAY RENTAL PAYMENTS AND OTHER AMOUNTS HAS BEEN TERMINATED
PURSUANT TO THE EXPRESS
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TERMS OF THIS AGREEMENT, ALL RENTAL PAYMENTS AND OTHER AMOUNTS SHALL CONTINUE TO
BE DUE AND PAYABLE HEREUNDER.
15. LESSOR DISCLAIMERS; LIMITATION OF REMEDIES. IT IS SPECIFICALLY UNDERSTOOD
AND AGREED THAT: (A) LESSOR SHALL NOT BE DEEMED TO HAVE MADE ANY REPRESENTATION,
WARRANTY OR PROMISE MADE BY SELLER, NEITHER SELLER NOR LESSOR SHALL ACT AS, OR
BE DEEMED TO BE, AN AGENT OF THE OTHER, AND LESSOR SHALL NOT BE BOUND BY, OR
LIABLE FOR, ANY REPRESENTATION OR PROMISE MADE BY SELLER (EVEN LIABLE FOR, ANY
REPRESENTATION OR PROMISE MADE BY SELLER (EVEN IF LESSOR IS AFFILIATED WITH
SELLER); (B) LESSOR SHALL NOT BE LIABLE FOR ANY FAILURE OF ANY EQUIPMENT OR ANY
DELAY IN ITS DELIVERY OR INSTALLATION; (C) LESSOR SHALL NOT BE LIABLE FOR ANY
BREACH OF ANY WARRANTY THAT SELLER MAY HAVE MADE; (D) LESSEE HAS SELECTED ALL
EQUIPMENT WITHOUT LESSOR'S ASSISTANCE; (E) LESSOR IS NOT A MANUFACTURER OF ANY
EQUIPMENT; AND (F) LESSOR HAS NOT MADE ANY DOES NOT NOW MAKE ANY REPRESENTATION
OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE DESIGN, COMPLIANCE WITH
SPECIFICATIONS, OPERATION, OR CONDITION OF ANY EQUIPMENT (OR ANY PART THEREOF),
THE MERCHANTABILITY OR FITNESS OF EQUIPMENT FOR A PARTICULAR PURPOSE, OR ISSUES
REGARDING PATENT INFRINGEMENT, TITLE AND THE LIKE. IT IS FURTHER AGREED THAT
LESSOR SHALL HAVE NO LIABILITY TO LESSEE, LESSEE'S CUSTOMERS, OR ANY THIRD
PARTIES FOR ANY DIRECT, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT
OF THIS AGREEMENT OR ANY SCHEDULE OR CONCERNING ANY EQUIPMENT, OR FOR ANY
DAMAGES BASED ON STRICT OR ABSOLUTE TORT LIABILITY OR LESSOR'S NEGLIGENCE;
PROVIDED, HOWEVER, THAT NOTHING IN THIS AGREEMENT SHALL DEPRIVE LESSEE OF ANY
RIGHTS IT MAY HAVE AGAINST ANY PERSON OTHER THAN LESSOR. LESSEE SHALL LOOK
SOLELY TO SELLER FOR ANY AND ALL CLAIMS AND WARRANTIES RELATING TO THE
EQUIPMENT. Lessor hereby assigns to Lessee for the Term of the applicable
Schedule the right to enforce, provided no Event of Default then exists under
this Agreement and such enforcement is pursued in Lessee's name, any
representations, warranties and agreements made by Seller pursuant to the
Purchase Documents and Lessee may retain any recovery resulting from any such
enforcement efforts. TO THE EXTENT PERMITTED BY APPLICABLE LAW. LESSEE WAIVES
ANY AND ALL RIGHTS AND REMEDIES CONFERRED UPON A LESSEE BY ARTICLE 2A OF THE UCC
AND ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE THAT MAY LIMIT
OR MODIFY LESSOR'S RIGHTS AS DESCRIBED IN THIS SECTION OR OTHER SECTIONS OF THIS
AGREEMENT.
16. LESSEE WARRANTIES. Lessee represents, warrants and covenants to Lessor
that: (a) unless it is an individual, Lessee is duly organized, validly existing
and in good standing under applicable law; (b) Lessee has the power and
authority to enter into this Agreement, all Schedules and all other related
instruments or documents hereunder (collectively, Fundamental Agreements); (c)
such Fundamental Agreements are enforceable against Lessee in accordance with
their terms and do not violate or create a default under any instrument or
agreement binding on Lessee; (d) there are no pending or threatened actions or
proceedings before any court or administrative agency that could have a material
adverse affect on Lessee or any Fundamental Agreement, unless such actions are
disclosed to Lessor and consented to in writing by Lessor; (e) Lessee shall
comply in all material respects with all Federal, state and municipal laws and
regulations the violation of which could have a material adverse effect upon the
Equipment or Lessee's performance of its obligations under any Fundamental
Agreement; (f) Lessee shall obtain all governmental approvals necessary for it
to enter into and perform each Fundamental Agreement; (g) each Fundamental
Agreement shall be effective against all creditors of Lessee under applicable
law, including fraudulent conveyance and bulk transfer laws, and shall raise no
presumption of fraud; (h) financial statements and other related information
furnished by Lessee shall be prepared in accordance with generally accepted
accounting principles and shall present Lessee's financial position as of the
dates given on such statements: (i) Lessee shall furnish Lessor with its
certified financial statements, opinions of counsel, resolutions, and such other
information and documents as Lessor may reasonably request; (j) ALL EQUIPMENT IS
LEASED FOR
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BUSINESS PURPOSES ONLY, AND NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES; and
(k) all Equipment is tangible personal property and shall not become a fixture
or real property under Lessee's use thereof. Lessee shall be deemed to have
reaffirmed the foregoing warranties each time it executes any Fundamental
Agreement.
17. GENERAL INDEMNITY. Lessee shall indemnify, hold harmless, and, if so
requested by Lessor, defend Lessor against all claims (Claims) directly or
indirectly arising out of or connected with the Equipment or any Fundamental
Agreement. Claims refers to all losses, liabilities, damages, penalties,
expenses (including legal fees and costs), claims, actions, and suits, whether
based on a theory of strict liability of Lessor or otherwise, and includes, but
is not limited to, matters regarding (a) the selection, manufacture, purchase,
acceptance, rejection, ownership, delivery, lease, possession, maintenance, use,
condition, return or operation of the Equipment; (b) any latent defects or other
defects in any Equipment, whether or not discoverable by Lessor or by Lessee;
(c) any patent, trademark or copyright infringement; and (d) the condition of
any Equipment arising or existing during Lessee's use.
18. SURRENDER; EXTENSION OF TERM. Unless Lessee purchases the Equipment or
renews the Term pursuant to the applicable Schedule, or acquires the Equipment
pursuant to Section 13 hereof, Lessee shall, at its expense, deinstall, inspect,
test and property pack the Equipment at the expiration of the Term, free of all
liens and rights of others, by delivering it on board such common carrier as
Lessor may specify with freight prepaid to any destination within the United
States of America specified by Lessor. If Lessor so requests, Lessor and its
agents shall have the right to enter upon any premises where Equipment may be
located to perform any of Lessee's tasks noted above in this Section 18, and
Lessee shall reimburse Lessor for all costs and expenses Lessor incurs in
fulfilling such tasks. Lessee agrees that the Equipment when returned to
Lessor, shall be in the same condition as when delivered to Lessee, reasonable
wear and tear excepted, and certified as being eligible for Seller's or the
manufacturer's generally available maintenance contract at then prevailing
rates, without Lessor incurring any expense to repair, rehabilitate or certify
such Equipment (Lessee shall be liable for all costs and expenses Lessor incurs
to place the Equipment in such condition). If requested by Lessor, Lessee, at
its expense, shall store the Equipment on its premises for a reasonable period,
during which period the Equipment shall be subject to all of the terms and
conditions hereof, except for the obligation to make Rental Payments. In all
instances where Lessee is returning Equipment to Lessor, Lessee shall give
Lessor written notice thereof in accordance with the terms of the applicable
Schedule. If Lessee fails to provide the aforementioned notice or return the
Equipment to Lessor in the time and manner provided above, the Term shall be
extended in accordance with the terms of the applicable Schedule. If any
Schedule is extended pursuant to the preceding sentence, Lessee shall continue
to pay the higher of the periodic Rental Payments in effect prior to the
expiration of the then existing term of the applicable Schedule (whether it be
the Initial Term or any Renewal Term (Applicable Term)) or such other periodic
rental payment amount as is specified for such extension period in the Schedule,
and all other provisions of this Agreement shall continue to apply.
19. EVENTS OF DEFAULT. Any of the following shall constitute an Event of
Default under this Agreement and all Schedules: (a) Lessee fails to pay any
Rental Payment or any other amount payable to Lessor hereunder within 10 days
after its due date; or (b) Lessee fails to perform or observe any other
representation, warranty, covenant, condition or agreement to be performed or
observed by lessee hereunder or in any other agreement with Lessor, or in any
agreement with any other person that in Lessor's sole opinion is a material
agreement, and Lessee fails to cure any such breach within 10 days after
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notice thereof; or (c) any representation or warranty made by Lessee hereunder,
or in any other instrument provided to Lessor by Lessee, proves to be incorrect
in any material respect when made; or (d) Lessee makes an assignment for the
benefit of creditors, whether voluntary or involuntary; or (e) a preceding under
any bankruptcy, reorganization, arrangements of debts, insolvency or
receivership law is filed by or against Lessee or Lessee takes any action to
authorize any of the foregoing matters; or (f) Lessee becomes insolvent or fails
generally to pay its debts as they become due, the Equipment is levied against,
seized, or attached, or Lessee seeks to effectuate a bulk sale of Lessee's
inventory or assets; or (g) Lessee voluntarily or involuntarily dissolves or is
dissolved, or terminates or is terminated; or (h) any guarantor dies or revokes
a guaranty provided to Lessor under this Agreement; or (i) any guarantor under
this Agreement is the subject of an event listed in clauses (b) through (g)
above; or (j) any letter of credit required pursuant to any Schedule is
breached, cancelled, terminated or not renewed during the Term of any such
Schedule.
20. REMEDIES. If an Event of Default occurs, Lessor may, in its sole
discretion, exercise one or more of the following remedies: (a) terminate this
Agreement or any or all Schedules; or (b) take possession of, or render
unusable, any Equipment wherever the Equipment may be located, without demand or
notice, without any court order or other process of law and without liability to
Lessee for any damages occasioned by such action, and no such action shall
constitute a termination of any Schedule; or (c) require Lessee to deliver the
Equipment at a location designated by Lessor; or (d) declare the Lessor's Return
(as defined in Section 13 hereof and calculated by Lessor as of the date of the
Event of Default) for each applicable Schedule due and payable as liquidated
damages for loss of a bargain and not as a penalty and in lieu of any further
Rental Payments under the applicable Schedule; or (e) proceed by court action to
enforce performance by Lessee of any Schedule and/or to recover all damages and
expenses incurred by Lessor by reason of any Event of Default; or (f) terminate
any other agreement that Lessor may have with Lessee; or (g) exercise any other
right or remedy available to Lessor at law or in equity. Also, Lessee shall pay
Lessor all costs and expenses (including legal fees and costs, and fees of
collection agencies) incurred by Lessor in enforcing any of the terms,
conditions or provisions of this Agreement. Upon repossession or surrender of
any Equipment, Lessor shall lease, sell or otherwise dispose of the Equipment in
a commercially reasonable manner, with or without notice and at public or
private sale, and apply the net proceeds thereof (after deducting all expenses
(including legal fees and costs) incurred in connection therewith) to the
amounts owed to Lessor hereunder; provided, however, that Lessee shall remain
liable to Lessor for any deficiency that remains after any sale or lease of such
Equipment. Lessee agrees that with respect to any notice of a sale required by
law to be given, 10 days notice shall constitute reasonable notice. These
remedies are cumulative of every other right or remedy given hereunder or now or
hereafter existing at law or in equity or by statute or otherwise, and may be
enforced concurrently therewith or from time to time.
21. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to perform
any of its obligations hereunder, Lessor may perform any act or make any payment
that Lessor deems reasonably necessary for the maintenance and preservation of
the Equipment and Lessor's interests therein; provided, however, that the
performance of any act or payment by Lessor shall not be deemed a waiver of, or
release Lessee from, the obligation at issue. All sums so paid by Lessor,
together with expenses (including legal fees and costs) incurred by Lessor in
connection therewith, shall be paid to Lessor by Lessee immediately upon demand.
22. FINANCING OF ADDITIONS. If, under any Schedule, Lessee intends to make any
addition to the Equipment, Lessee shall, in writing, request Lessor to
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finance the costs of such addition. Lessee shall provide Lessor with the terms
under which it hopes to obtain the financing, and upon receiving such a request,
Lessor shall determine, in its sole discretion, whether to provide such
financing. If Lessor does not, within 20 days after receiving Lessee's request,
offer to finance the addition upon the terms requested by Lessee, Lessee may
obtain offers from third parties for financing the addition, and Lessee shall
notify Lessor of the details of any third party financing offer Lessee would
like to accept (Third Party Offer). If Lessor has not made a financing offer to
Lessee on terms substantially similar to the Third Party Offer within 20 days of
receiving Lessee's notice, Lessee may accept the Third Party Offer unless: (a)
the aggregate cost to Lessee of obtaining financing from the Third Party Offer
is greater than the aggregate cost under Lessor's financing offer; (b) the Third
Party Offer would create a security interest in, or a lien on, the Equipment; or
(c) the addition is not permitted under Section 11(d) hereof.
23. ASSIGNMENT BY LESSOR. Lessor shall have the unqualified right to assign,
pledge, transfer, mortgage or otherwise convey any of its interests hereunder or
in any Schedule or any Equipment, in whole or in part, without notice to, or
consent of, Lessee, if any Schedule is assigned, Lessee shall: (a) unless
otherwise specified by the Lessor and the assignee (Assignee) specified by
Lessor, pay all amounts due under the applicable Schedule to such Assignee,
notwithstanding any defense, setoff or counterclaim whatsoever that Lessee may
have against Lessor or Assignee; (b) not permit the applicable Schedule to be
amended or the terms thereof waived without the prior written consent of the
Assignee; (c) not require the Assignee to perform any obligations of Lessor,
other than those that are expressly assumed in writing by such Assignee; and (d)
execute such acknowledgments thereto as may be requested by Lessor. It is
further agreed that: (x) each Assignee shall be entitled to all of Lessor's
rights, powers and privileges under the applicable Schedule, to the extent
assigned; (y) any Assignee may reassign its rights and interests under the
applicable Schedule with the same force and effect as the assignment described
herein; and (z) any payments received by the Assignee from Lessee with respect
to the assigned portion of the Schedule shall, to the extent thereof, discharge
the obligations of Lessee to Lessor with respect to the assigned portion of the
Schedule. LESSEE ACKNOWLEDGES THAT ANY ASSIGNMENT OR TRANSFER BY LESSOR OR ANY
ASSIGNEE SHALL NOT MATERIALLY CHANGE LESSEE'S OBLIGATIONS UNDER THE ASSIGNED
SCHEDULE.
24. ASSIGNMENT OR SUBLEASE BY LESSEE. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT,
LESSEE SHALL NOT ASSIGN THIS AGREEMENT OR ANY SCHEDULE OR ASSIGN ITS RIGHTS IN
OR SUBLET THE EQUIPMENT OR ANY INTEREST THEREIN; provided, however, that Lessee
may sublease or assign a Schedule to an affiliate or a wholly-owned subsidiary
of Lessee if: (a) Lessee and such sublessee or assignee execute and deliver to
Lessor a writing (to be provided by Lessor) whereby the sublessee or assignee
agrees to assume joint and several liability with Lessee for the full and prompt
payment, observance and performance when due of all of the obligations of the
Lessee under such Schedule; and (b) Lessor consents to such sublease or
assignment, which consent shall not be unreasonably withheld, in no event,
however, shall any such sublease or assignment discharge or diminish any of
Lessee's obligations to Lessor under such Schedule.
25. SURVIVAL; QUIET ENJOYMENT. All representations, warranties and covenants
made by Lessee hereunder shall survive the termination of this Agreement and
shall remain in full force and affect. All of Lessor's rights, privileges and
indemnities, to the extent they are fairly attributable to events or conditions
occurring or existing on or prior to the termination of this Agreement, shall
survive such termination and be enforceable by Lessor and any successors and
assigns. So long as no Event of Default exists, and no event has occurred and
is continuing that with notice or the lapse of time or
<PAGE>
both would constitute an Event of Default, neither Lessor nor any Assignee will
interfere with Lessee's quiet enjoyment of the Equipment.
26. FILING FEES; FURTHER ASSURANCES; NOTICES. Lessee will promptly reimburse
Lessor for any filing or recordation fees or expenses (including lien search
fees, legal fees and costs) incurred by Lessor in perfecting or protecting its
interests in the Equipment and under this Agreement. Lessee shall promptly
execute and deliver to Lessor such documents and take such further action as
Lessor may from time to time reasonably request in order to carry out the intent
and purpose of this Agreement and to protect the rights and remedies of Lessor
created or intended to be created hereunder. All notices under this Agreement
shall be sent to the respective party at its address set forth on the front page
of this Agreement or on the applicable Schedule or at such other address as the
parties may provide to each other in writing from time to time. Any such notice
mailed to said address shall be effective when deposited in the United States
mail, duly addressed and with first class postage prepaid.
27. WAIVER OF JURY TRIAL; SUCCESSORS. LESSEE AND LESSOR EACH IRREVOCABLY WAIVE
ALL RIGHT TO TRIAL BY JURY IN ANY LAWSUIT, PROCEEDING COUNTERCLAIM OR ANY OTHER
LITIGATION OR PROCEEDING UPON, ARISING OUT OF OR RELATED TO THIS AGREEMENT, ANY
OTHER FUNDAMENTAL AGREEMENT, OR THE DEALING OR RELATIONSHIP BETWEEN OR AMONG
LESSOR, LESSEE, SELLER OR ANY OTHER PERSON. This Agreement and all Schedules
inure to the benefit of and are binding upon the permitted successors or assigns
of Lessor and Lessee.
28. NO WAIVER; LESSOR APPROVAL. Any failure of Lessor to require strict
performance by Lessee, or any written waiver by Lessor of any provision hereof,
shall not constitute consent or waiver of any other breach of the same or any
other provision hereof. Neither this Agreement nor any other Fundamental
Agreement shall be binding upon Lessor unless and until executed by Lessor.
29. CAPTIONS; COUNTERPARTS; LESSOR'S AFFILIATES. The captions contained in
this Agreement are for convenience only and shall not affect the interpretation
of this Agreement. Only one counterpart of the Schedule shall be marked
"Original" (Original), and all other counterparts thereof shall be marked as,
and shall be, duplicates. To the extent that any Schedule constitutes chattel
paper (as such term is defined in the Uniform Commercial Code in effect in any
applicable jurisdiction), no security interest in such Schedule may be created
through the transfer or possession of any counterpart other than the Original.
Lessee understands and agrees that AT&T Capital Corporation or any affiliate or
subsidiary thereof may, as lessor, execute Schedules under this Agreement, in
which event the terms and conditions of the applicable Schedule and this
Agreement as it relates to the lessor under such Schedule shall be binding upon
and shall inure to the benefit of such entity executing such Schedule as lessor,
as well as any successors or assigns of such entity.
30. CHOICE OF LAW; INTEGRATION; ENTIRE AGREEMENT. EACH LEASE UNDER THIS
AGREEMENT SHALL BE GOVERNED BY THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW
PROVISIONS) OF THE STATE OF NEW JERSEY (STATE). If any provision of this
Agreement or such Schedule shall be prohibited by or invalid under that law,
such provision shall be ineffective only to the extend of such prohibition or
invalidity, without invalidating the remainder of such provisions or the
remaining provisions of this Agreement or such Schedule. Lessor and Lessee
consent to the jurisdiction of any local, state or Federal court located within
the State, and waive any objection relating to improper venue or forum non
conveniens to the conduct of any proceeding in any such court. This Agreement
and all other Fundamental Agreements executed by both Lessor and Lessee
constitute the entire agreement between Lessor and Lessee relating to
<PAGE>
the leasing of the Equipment, and supersede all prior agreements relating
thereto, whether written or oral, and may not be amended or modified except in a
writing signed by the parties hereto.
LESSEE: INDEPENDENT BANKSHARES, INC.
BY: /s/Bryan W. Stephenson
--------------------------------
Lessee Authorized Signature
Bryan W. Stephenson, President/CEO
- -------------------------------------
Print Name and Title
June 23, 1998
- -------------------------------------
Date
FIRST STATE BANK, N.A.
BY: /s/Bryan W. Stephenson
- -------------------------------------
Lessee Authorized Signature
Bryan W. Stephenson, President/CEO
- -------------------------------------
Print Name and Title
June 23, 1998
- -------------------------------------
Date
LESSOR: AT&T CREDIT CORPORATION
By: /s/Dominick Longo
--------------------------------
Lessee Authorized Signature
Dominick Long, Senior Credit Officer
- -------------------------------------
Print Name and Title
June 30, 1998
- -------------------------------------
Date
[Page]
[LOGO] AT&T Capital Corporation
AMENDMENT TO MASTER EQUIPMENT LEASE AGREEMENT
LESSEE: Independent Bankshares, Inc.
Street Address: 547 Chestnut
City, State, Zip: Abilene, Texas 79602
LESSOR: AT&T CREDIT CORPORATION
Address: 2 Gatehall Drive, Parsippany, NJ 07054
<PAGE>
Lease Number A2071
Lessor and Lessee hereby amend, as specified below, the Master
Equipment Lease Agreement (Agreement) identified by the Lease Number specified
above. Capitalized terms used in this Amendment that are not otherwise defined
herein shall have the meanings ascribed to them in the Agreement.
1. Lessor and Lessee hereby agree that in connection with certain
leases of Equipment, Lease Number "A2071" or "A207100" may be used to refer to
the Agreement between Lessee and Lessor. Accordingly, any Master Equipment
Lease Agreement Schedule or any other related document entered into in
connection with the Agreement shall incorporate the Agreement by reference by
listing either "A2071" or "A207100" on such document.
Lessor and Lessee hereby make this Amendment an integral part of the
Agreement.
Independent Bankshares, Inc.
By: /s/Bryan W. Stephenson
-----------------------------
(Lessee Authorized Signature)
Bryan W. Stephenson
- ----------------------------------
(Type/Print Name)
President/CEO
- ----------------------------------
(Title)
June 23, 1998
- ----------------------------------
(Date)
AT&T CREDIT CORPORATION
By:
-----------------------------
(Lessor Authorized Signature)
- ----------------------------------
(Type/Print Name)
- ----------------------------------
(Title)
- ----------------------------------
(Date)
[Page]
[LOGO] NCR
Amendment to Master Equipment Lease Agreement
<PAGE>
LESSEE: Independent Bankshares, Inc.
Street Address: 547 Chestnut
City, State, Zip: Abilene, Texas 79602
LESSOR: AT&T CREDIT CORPORATION
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Lease Number A2071
Lessor and Lessee hereby amend, as specified below, the Master
Equipment Lease Agreement (Agreement) identified by the Lease Number specified
above. Capitalized terms used in this Amendment that are not otherwise defined
herein shall have the meanings ascribed to them in the Agreement.
1. In order to induce Lessor to enter into the Agreement and to
provide Lessor with assurance of Lessee's performance of all obligations set
forth therein, Lessee hereby agrees to serve as a Co-Lessee with First State
Bank, N.A. (all of such parties together with Lessee collectively referred to as
"Co-Lessees") under the Agreement. Each Co-Lessee shall be jointly and
severally liable and responsible for fulfilling all obligations of Lessee under
the Agreement, and each hereby waives any and all claims of contribution or
recoupment that may arise with respect to its status as Co-Lessee. It is
specifically understood and agreed that Lessor shall discharge its obligations
to all Co-Lessees under the Agreement by rendering performance to any one of the
Co-Lessees, provided that such performance is rendered to the actual user of the
Equipment.
2. Schedules executed under the Agreement, by referencing the above
specified Lease Number, shall be deemed to be executed by all Co-Lessees and
shall be enforceable by Lessor against any or all Co-Lessees.
Lessor and Lessee make this Amendment an integral part of the
Agreement.
LESSEE: Independent Bankshares, Inc.
By: /s/Bryan W. Stephenson
-----------------------------
(Lessee Authorized Signature)
Bryan W. Stephenson
- ----------------------------------
(Type/Print Name)
Chairman of the Board
- ----------------------------------
(Title)
June 23, 1998
- ----------------------------------
(Date)
LESSOR: AT&T CREDIT CORPORATION
By:
-----------------------------
<PAGE>
(Lessor Authorized Signature)
- ----------------------------------
(Type/Print Name)
- ----------------------------------
(Title)
- ----------------------------------
(Date)
[Page]
CO-LESSEE: First State Bank, N.A.
By: /s/Bryan W. Stephenson
-----------------------------
(Lessee Authorized Signature)
Bryan W. Stephenson
- ----------------------------------
(Type/Print Name)
Chairman of the Board/CEO
- ----------------------------------
(Title)
June 23, 1998
- ----------------------------------
(Date)
[Page]
[LOGO] NCR
Master Equipment Lease Agreement Schedule
NCR Credit
LESSEE: Independent Bankshares, Inc. and First State Bank, N.A. jointly and
severally liable as Co-Lessees
Street Address: 547 Chestnut
City/State/Zip: Abilene, Texas 79602
LESSOR: AT&T Credit Corporation
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Lease Number: A2071
Schedule Number: 50840
SELLER: BancTec USA, CompUSA and NCR Corporation
<PAGE>
Description of Items to be Leased (the Equipment): Equipment subject hereto
shall include, but not be limited to: NCR 4300 Server equipment and all other
items of equipment, including all attachments, alterations, and additions
thereto, and any and all parts thereof, and a right to use license for any
software related thereto, and related documentation, as such are and/or will be
more particularly described in the equipment order(s) as reflected in the
invoices of the seller or supplier.
Total Price Including Installation/One-Time Charges: $49,100.00
Total Purchase Price (Sum of total prices including installation/one-time
charges): $49,100.00
Option A: [X] Yes [ ] No
Lessee selects a fair market value purchase option and a fair rental value
renewal option.
Option B: [ ] Yes [X] No
Lessee selects (i) a fixed price purchase option of either $ N/A or N/A% of the
Total Purchase Price, and (ii) a fixed price renewal option of N/A% of the
periodic Rental Payment.
THE TERMS AND CONDITIONS OF THE FOREGOING OPTIONS AND OTHER IMPORTANT PROVISIONS
ARE SET FORTH ON THE BACK OF THIS SCHEDULE.
PAYMENTS IN ARREARS YES [X]
If this payments in arrears option is selected, Lessee shall pay Lessor the
first Rental Payment for the Equipment on the last day of the First Rental
Payment Period, which shall begin at Lessor's option on either the Commencement
Date or the first day of the month following the month in which the Commencement
Date occurs, and shall pay Lessor the remaining periodic Rental Payments on or
before the last day of each subsequent Rental Payment Period.
Equipment Location: 547 Chestnut, Abilene, Texas 79602
Advance Rent: $0.00
Rental Payment: $1,133.72
Rental Payment Period: Monthly
Latest Commencement Date: 6/30/98
Length of Initial Term: 48 Months
THIS SCHEDULE SHALL BE GOVERNED BY THE TERMS AND CONDITIONS OF THE MASTER
EQUIPMENT LEASE AGREEMENT REFERENCED BY THE LEASE NUMBER SPECIFIED ABOVE
(AGREEMENT) BY AND BETWEEN LESSEE, AS LESSEE, AND LESSOR OR AT&T CAPITAL
CORPORATION OR ANY AFFILIATE OR SUBSIDIARY THEREOF, AS LESSOR, AND BY THE TERMS
AND CONDITIONS SET FORTH ON THE FRONT AND BACK OF THIS SCHEDULE. PURSUANT TO
SUCH TERMS AND CONDITIONS (WHICH LESSEE ACKNOWLEDGES THAT IT HAS READ AND
UNDERSTANDS), LESSEE AGREES TO LEASE FROM LESSOR (AS SPECIFIED BELOW) AND LESSOR
AGREES TO LEASE TO LESSEE THE ABOVE REFERENCED EQUIPMENT. IT IS UNDERSTOOD AND
AGREED THAT THE TERMS AND CONDITIONS OF THIS SCHEDULE MAY BE DIFFERENT FROM THE
TERMS AND CONDITIONS OF PRIOR SCHEDULES AND THAT ANY ASSIGNMENT OR TRANSFER
PURSUANT TO SECTION 23 OF THE AGREEMENT BY LESSOR OR ANY ASSIGNEE SHALL NOT
MATERIALLY CHANGE LESSEE'S OBLIGATIONS HEREUNDER, LESSEE REPRESENTS AND WARRANTS
THAT IT SHALL LOOK ONLY TO THE SELLER FOR ANY AND ALL CLAIMS AND WARRANTIES
RELATING TO THE EQUIPMENT AND THAT IT ETHER HAS
<PAGE>
REVIEWED, APPROVED AND RECEIVED A COPY OF THE APPLICABLE PURCHASE DOCUMENTS OR
HAS BEEN INFORMED BY THE LESSOR THAT IT MAY HAVE RIGHTS UNDER THE PURCHASE
DOCUMENTS AND MAY CONTACT SELLER FOR A DESCRIPTION OF SUCH RIGHTS, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, LESSEE WAIVES ANY AND ALL RIGHTS AND REMEDIES
CONFERRED UPON LESSEE BY ARTICLE 2A OF THE UCC AND ANY RIGHTS NOW OR HEREAFTER
CONFERRED BY STATUTE OR OTHERWISE THAT MAY LIMIT OR MODIFY THE LESSOR'S RIGHTS
AS DESCRIBED IN THE AGREEMENT, THIS SCHEDULE OR ANY OTHER FUNDAMENTAL AGREEMENT,
(AS DEFINED IN THE AGREEMENT).
Lessee: Independent Bankshares, Inc.
By: /s/Bryan W. Stephenson
-----------------------------
Lessee Authorized Signature
Bryan W. Stephenson, President/CEO
- ----------------------------------
Print Name and Title
June 23, 1998
- ----------------------------------
Date
First State Bank, N.A.
By: /s/Bryan W. Stephenson
-----------------------------
Lessee Authorized Signature
Bryan W. Stephenson, Chairman of the Board/CEO
- ----------------------------------
Print Name and Title
June 23, 1998
- ----------------------------------
Date
AT&T CREDIT CORPORATION
By:
-----------------------------
Lessor Authorized Signature
- ----------------------------------
Print Name and Title
- ----------------------------------
Date
ORIGINAL
[Page]
[LOGO] NCR
Master Equipment Lease Agreement Commencement Certificate
<PAGE>
NCR Credit
LESSEE: Independent Bankshares, Inc. and First State Bank, N.A. jointly and
severally liable as Co-Lessees
Street Address: 547 Chestnut
City/State/Zip: Abilene, Texas 79602
LESSOR: AT&T Credit Corporation
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Lease Number: A2071
Schedule Number: 50840
Capitalized terms used herein that are not otherwise defined herein shall have
the meanings ascribed to them in the Master Equipment Lease Agreement
(Agreement) identified by the Lease Number specified above.
In accordance with the terms and provisions of the Agreement and the Schedule
identified by the Schedule Number specified above, the Lessee hereby certifies
and states that: (a) all Equipment listed in the above-referenced Schedule, as
amended through the date hereof, has been delivered and fully installed; (b)
Lessee has inspected the Equipment, and all testing as it deems necessary has
been performed by Lessee, the manufacturer or Seller; (c) Lessee irrevocably
accepts the Equipment for all purposes of the Agreement, the Purchase Documents
and all related documents; (d) on the date hereof the Equipment has become for
the first time operational and available to be placed in service for its
specifically assigned function; (e) any insurance policies required by Section 8
of the Agreement have been obtained and are in full force and effect; (f) the
Equipment is located at the Equipment Location specified in the Schedule (and
such location is also set forth below); and (g) Lessee selected the Equipment
and the Seller thereof, as identified in the Schedule.
Lessee hereby acknowledges and agrees that the above-referenced Schedule and all
other Fundamental Agreements relating thereto executed by both Lessor and Lessee
constitute the entire agreement between Lessor and Lessee relating to the
leasing of the equipment described in the Schedule, and supersede all prior
agreements relating thereto, whether written or oral, and may not be amended or
modified except in a writing signed by the parties hereto.
Equipment Location: 547 Chestnut, Abilene, Texas 79602
Lessee: Independent Bankshares, Inc.
By: /s/Bryan W. Stephenson
-----------------------------
Lessee Authorized Signature
Bryan W. Stephenson, President/CEO
- ----------------------------------
Print Name and Title
June 23, 1998
- ----------------------------------
Date
<PAGE>
First State Bank, N.A.
By: /s/Bryan W. Stephenson
-----------------------------
Lessee Authorized Signature
Bryan W. Stephenson, Chairman of the Board/CEO
- ----------------------------------
Print Name and Title
June 23, 1998
- ----------------------------------
(Date)
ORIGINAL
[Page]
[LOGO] NCR
Master Equipment Lease Agreement Schedule
NCR Credit
LESSEE: Independent Bankshares, Inc.
Street Address: 547 Chestnut
City/State/Zip: Abilene, Texas 79602
LESSOR: AT&T Credit Corporation
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Lease Number: A207100
Schedule Number: 50850
SELLER: BancTec USA and NCR Corporation
Description of Items to be Leased (the Equipment): Equipment subject hereto
shall include, but not be limited to: NCR 7780 Proof Encoders equipment and all
other items of equipment, including all attachments, alterations, and additions
thereto, and any and all parts thereof, and a right to use license for any
software related thereto, and related documentation, as such are and/or will be
more particularly described in the equipment order(s) as reflected in the
invoices of the seller or supplier.
Total Price Including Installation/One-Time Charges: $881,909.62
Total Purchase Price (Sum of total prices including installation/one-time
charges): $881,909.62
Option A: [X] Yes [ ] No
Lessee selects a fair market value purchase option and a fair rental value
renewal option.
Option B: [ ] Yes [X] No
<PAGE>
Lessee selects (i) a fixed price purchase option of either $ N/A or N/A% of the
Total Purchase Price, and (ii) a fixed price renewal option of N/A% of the
periodic Rental Payment.
THE TERMS AND CONDITIONS OF THE FOREGOING OPTIONS AND OTHER IMPORTANT PROVISIONS
ARE SET FORTH ON THE BACK OF THIS SCHEDULE.
PAYMENTS IN ARREARS YES [X]
If this payments in arrears option is selected, Lessee shall pay Lessor the
first Rental Payment for the Equipment on the last day of the First Rental
Payment Period, which shall begin at Lessor's option on either the Commencement
Date or the first day of the month following the month in which the Commencement
Date occurs, and shall pay Lessor the remaining periodic Rental Payments on or
before the last day of each subsequent Rental Payment Period.
Equipment Location: See Attached Exhibit A
Advance Rent: $0.00
Rental Payment: $17,452.99
Rental Payment Period: Monthly
Latest Commencement Date: June 30, 1998
Length of Initial Term: 60 Months
THIS SCHEDULE SHALL BE GOVERNED BY THE TERMS AND CONDITIONS OF THE MASTER
EQUIPMENT LEASE AGREEMENT REFERENCED BY THE LEASE NUMBER SPECIFIED ABOVE
(AGREEMENT) BY AND BETWEEN LESSEE, AS LESSEE, AND LESSOR OR AT&T CAPITAL
CORPORATION OR ANY AFFILIATE OR SUBSIDIARY THEREOF, AS LESSOR, AND BY THE TERMS
AND CONDITIONS SET FORTH ON THE FRONT AND BACK OF THIS SCHEDULE. PURSUANT TO
SUCH TERMS AND CONDITIONS (WHICH LESSEE ACKNOWLEDGES THAT IT HAS READ AND
UNDERSTANDS), LESSEE AGREES TO LEASE FROM LESSOR (AS SPECIFIED BELOW) AND LESSOR
AGREES TO LEASE TO LESSEE THE ABOVE REFERENCED EQUIPMENT. IT IS UNDERSTOOD AND
AGREED THAT THE TERMS AND CONDITIONS OF THIS SCHEDULE MAY BE DIFFERENT FROM THE
TERMS AND CONDITIONS OF PRIOR SCHEDULES AND THAT ANY ASSIGNMENT OR TRANSFER
PURSUANT TO SECTION 23 OF THE AGREEMENT BY LESSOR OR ANY ASSIGNEE SHALL NOT
MATERIALLY CHANGE LESSEE'S OBLIGATIONS HEREUNDER, LESSEE REPRESENTS AND WARRANTS
THAT IT SHALL LOOK ONLY TO THE SELLER FOR ANY AND ALL CLAIMS AND WARRANTIES
RELATING TO THE EQUIPMENT AND THAT IT ETHER HAS REVIEWED, APPROVED AND RECEIVED
A COPY OF THE APPLICABLE PURCHASE DOCUMENTS OR HAS BEEN INFORMED BY THE LESSOR
THAT IT MAY HAVE RIGHTS UNDER THE PURCHASE DOCUMENTS AND MAY CONTACT SELLER FOR
A DESCRIPTION OF SUCH RIGHTS, TO THE EXTENT PERMITTED BY APPLICABLE LAW, LESSEE
WAIVES ANY AND ALL RIGHTS AND REMEDIES CONFERRED UPON LESSEE BY ARTICLE 2A OF
THE UCC AND ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE THAT
MAY LIMIT OR MODIFY THE LESSOR'S RIGHTS AS DESCRIBED IN THE AGREEMENT, THIS
SCHEDULE OR ANY OTHER FUNDAMENTAL AGREEMENT, (AS DEFINED IN THE AGREEMENT).
Lessee: Independent Bankshares, Inc.
By: /s/Bryan W. Stephenson
-----------------------------
Lessee Authorized Signature
Bryan W. Stephenson, President/CEO
- ----------------------------------
Print Name and Title
<PAGE>
June 23, 1998
- ----------------------------------
Date
AT&T CREDIT CORPORATION
By:
-----------------------------
Lessor Authorized Signature
- ----------------------------------
Print Name and Title
- ----------------------------------
Date
ORIGINAL
[Page]
MASTER EQUIPMENT LEASE AGREEMENT: A207100 SCHEDULE 50850
EXHIBIT A
EQUIPMENT LOCATIONS:
1. First State Bank
547 Chestnut Street
Abilene, Texas 79602
2. First State Bank, N.A.
1330 East Eighth Avenue
Odessa, Texas 79760
3. First State Bank, NA
82nd & Nashville Avenue
Lubbock, Texas 79424
[Page]
[LOGO] NCR
Master Equipment Lease Agreement Commencement Certificate
NCR Credit
LESSEE: Independent Bankshares, Inc.
Street Address: 547 Chestnut
City/State/Zip: Abilene, Texas 79602
LESSOR: AT&T Credit Corporation
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Lease Number: A207100
<PAGE>
Schedule Number: 50850
Capitalized terms used herein that are not otherwise defined herein shall have
the meanings ascribed to them in the Master Equipment Lease Agreement
(Agreement) identified by the Lease Number specified above.
In accordance with the terms and provisions of the Agreement and the Schedule
identified by the Schedule Number specified above, the Lessee hereby certifies
and states that: (a) all Equipment listed in the above-referenced Schedule, as
amended through the date hereof, has been delivered and fully installed; (b)
Lessee has inspected the Equipment, and all testing as it deems necessary has
been performed by Lessee, the manufacturer or Seller; (c) Lessee irrevocably
accepts the Equipment for all purposes of the Agreement, the Purchase Documents
and all related documents; (d) on the date hereof the Equipment has become for
the first time operational and available to be placed in service for its
specifically assigned function; (e) any insurance policies required by Section 8
of the Agreement have been obtained and are in full force and effect; (f) the
Equipment is located at the Equipment Location specified in the Schedule (and
such location is also set forth below); and (g) Lessee selected the Equipment
and the Seller thereof, as identified in the Schedule.
Lessee hereby acknowledges and agrees that the above-referenced Schedule and all
other Fundamental Agreements relating thereto executed by both Lessor and Lessee
constitute the entire agreement between Lessor and Lessee relating to the
leasing of the equipment described in the Schedule, and supersede all prior
agreements relating thereto, whether written or oral, and may not be amended or
modified except in a writing signed by the parties hereto.
Equipment Location: See Attached Exhibit A
Lessee: Independent Bankshares, Inc.
By: /s/Bryan W. Stephenson
-----------------------------
Lessee Authorized Signature
Bryan W. Stephenson, President/CEO
- ----------------------------------
Print Name and Title
June 23, 1998
- ----------------------------------
Date
ORIGINAL
[Page]
MASTER EQUIPMENT LEASE AGREEMENT: A207100 SCHEDULE 50850
EXHIBIT A
EQUIPMENT LOCATIONS:
1. First State Bank
547 Chestnut Street
Abilene, Texas 79602
<PAGE>
2. First State Bank, N.A.
1330 East Eighth Avenue
Odessa, Texas 79760
3. First State Bank, NA
82nd & Nashville Avenue
Lubbock, Texas 79424
[Page]
[LOGO] NCR
BILL OF SALE
NCR Credit
SELLER: INDEPENDENT BANKSHARES, INC.
Address: 547 Chestnut, Abilene, Texas 79602
Equipment: NCR 4300 Server
PURCHASER: AT&T CREDIT CORPORATION
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Purchase Price: $49,100.00
Dated as of: June 22, 1998
Seller hereby transfers to Purchaser, as of the date set forth above, all of
Seller's right, title and interest in and to the Equipment described above.
Seller hereby acknowledges the receipt and the sufficiency of the Purchase Price
set forth above. Seller represents, warrants and covenants to Purchaser that
(1) Purchaser is receiving from the Seller good and marketable title to the
Equipment free and clear of any and all liens, encumbrances or claims of any
party whatsoever, and (2) any manufacturers' warranties are in full force and
effect. Seller agrees to pay any and all sales, use, property or other taxes
due on the Equipment through the date set forth above (whether known as of such
date or not) and/or in connection with the transfer of the Equipment to
Purchaser.
SELLER: INDEPENDENT BANKSHARES, INC.
By: /s/Brian W. Stephenson
---------------------------
Bryan W. Stephenson
- --------------------------------
(Type/Print Name)
President/CEO
- --------------------------------
(Title)
June 23, 1998
- --------------------------------
(Date)
[Page]
<PAGE>
[LOGO] NCR
ASSIGNMENT OF PURCHASE DOCUMENTS
LESSEE: Independent Bankshares, Inc. and First State Bank, N.A., jointly and
severally liable as Co-Lessees
Address: 547 Chestnut, Abilene, Texas 79602
LESSOR: AT&T CREDIT CORPORATION
Address: 2 Gatehall Drive, Parsippany, NJ 07054
Lease Number: A2071
1. AGREEMENT. Lessee and Lessor have entered into a Master Equipment Lease
Agreement (Agreement), identified by the Lease Number specified above, pursuant
to which Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor
the equipment (Equipment) described in any schedule (Schedule) that incorporates
the Agreement by reference. The Equipment is subject to a purchase order,
contract or other documents (collectively, Purchase Documents) that Lessee has
entered into with the seller for the Equipment (Seller). This assignment,
relating to such Equipment and Purchase Documents, is delivered by Lessee
pursuant to section 2 of the Agreement.
2. ASSIGNMENTS. Lessee hereby assigns to Lessor all of Lessee's rights and
interests in and to the Equipment and the Purchase Documents (as the same
relates to such Equipment).
3. LESSEE'S CONTINUING OBLIGATIONS. Except for the obligation to pay Seller
for the Equipment if (and only if) the Equipment is accepted by Lessee pursuant
to the Agreement, Lessee's assignment to Lessor shall not include any of
Lessee's obligations under the Purchase Documents, and Lessee shall at all times
remain liable to Seller to perform all of the duties and obligations of the
purchaser under such Purchase Documents to the same extent as if an assignment
had not occurred. The exercise by Lessor of any of the rights assigned
hereunder shall not release Lessee from any of Lessee's duties or obligations to
the Seller under the Purchase Documents.
This assignment may not be amended or modified except in a writing signed by the
parties hereto.
Lessee: Independent Bankshares, Inc.
By: /s/Bryan W. Stephenson
----------------------------
(Lessee Authorized Signature)
Bryan W. Stephenson
- ---------------------------------
(Type/Print Name)
President/CEO
- ---------------------------------
(Title)
June 23, 1998
- ---------------------------------
AT&T CREDIT CORPORATION
<PAGE>
By:
----------------------------
(Lessor Authorized Signature)
- ---------------------------------
(Type/Print Name)
- ---------------------------------
(Title)
- ---------------------------------
(Date)
[Page]
Co-Lessee: First State Bank, N.A.
By: Bryan W. Stephenson
/s/ Bryan W. Stephenson
----------------------------
(Co-Lessee Authorized Signature)
Bryan W. Stephenson
- ---------------------------------
(Type/Print Name)
Chairman of the Board/CEO
- ---------------------------------
(Title)
June 23, 1998
- ---------------------------------
[Page]
<PAGE>
INDEPENDENT BANKSHARES, INC. EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SIX-MONTH PERIOD SIX-
ENDED JUNE 30, 1998 MONTHS
----------------------- ENDED
PRO 06/30/97
ACTUAL FORMA ACTUAL
------------------------------------
(In thousands)
------------------------------------
<S> <C> <C> <C>
Fixed Charges:
Interest expense - borrowings $ 1 $ 1 $ 35
Implicit interest - leases 20 20 10
Distributions of Trust Preferred
Securities 0 432 0
------------------------------------
Fixed charges excluding interest
expense on deposits (A) 21 453 45
Interest expense - deposits 4,286 5,601 4,214
------------------------------------
Total Fixed Charges (B) $ 4,307 $ 6,054 $ 4,259
====================================
Earnings:
Income before federal income taxes
and cumulative effect of
accounting change $ 1,537 $ 1,841 $ 1,592
Interest expense - borrowings 1 1 35
Implicit interest - leases 20 20 10
------------------------------------
Earnings before interest expense on
borrowings and implicit interest
on leases (C) 1,558 1,862 1,637
Interest expense - deposits 4,286 5,601 4,214
------------------------------------
Earnings Before Fixed Charges (D) $ 5,844 $ 7,463 $ 5,851
====================================
Ratio of Earnings to Fixed Charges:
Excluding interest on deposits
(C)/(A) 74.19 4.11 36.38
====================================
Including interest on deposits (D)/(B) 1.36 1.23 1.37
====================================
<CAPTION>
YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997
---------------------------------------------------------------------------
PRO 1996 1995 1994 1993
ACTUAL FORMA ACTUAL ACTUAL ACTUAL ACTUAL
---------------------------------------------------------------------------
(In thousands)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest expense - borrowings $ 59 $ 59 $ 59 $ 108 $ 88 $ 104
Implicit interest - leases 22 22 20 20 20 17
Distributions of Trust Preferred
Securities 0 863 0 0 0 0
---------------------------------------------------------------------------
Fixed charges excluding interest
expense on deposits (A) 81 944 79 128 108 121
Interest expense - deposits 8,600 11,215 6,382 5,201 3,364 3,072
---------------------------------------------------------------------------
Total Fixed Charges (B) $ 8,681 $ 12,159 $ 6,461 $ 5,329 $ 3,472 $ 3,193
===========================================================================
Earnings:
Income before federal income taxes
and cumulative effect of
accounting change $ 3,087 $ 3,732 $ 2,175 $ 1,714 $ 677 $ 1,553
Interest expense - borrowings 59 59 59 108 88 104
Implicit interest - leases 22 22 20 20 20 17
---------------------------------------------------------------------------
Earnings before interest expense on
borrowings and implicit interest
on leases (C) 3,168 3,813 2,254 1,842 785 1,674
Interest expense - deposits 8,600 11,215 6,382 5,201 3,364 3,072
---------------------------------------------------------------------------
Earnings Before Fixed Charges (D) $ 11,768 $ 15,028 $ 8,636 $ 7,043 $ 4,149 $ 4,746
===========================================================================
Ratio of Earnings to Fixed Charges:
Excluding interest on deposits
(C)/(A) 39.11 4.04 28.53 14.39 7.27 13.83
===========================================================================
Including interest on deposits (D)/(B) 1.36 1.24 1.34 1.32 1.19 1.49
===========================================================================
</TABLE>
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-2 (File No.
333-60649) 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 three years in the period ended December
31, 1997. We consent to the reference to our firm under the caption "Experts."
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
August 31, 1998
<PAGE>
EXHIBIT 23.4
------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-2 (File No.
333-60649-01) of our report dated March 6, 1998 on our audit of the consolidated
financial statements of Azle Bancorp and Subsidiaries as of and for the year
ended December 31, 1997. We consent to the reference to our firm under the
capital "Experts."
/s/ STOVALL, GRANDEY & WHATLEY, L.L.P.
Fort Worth, Texas
August 27, 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 Amendment No. 1 to the
Registration Statement (Form S-2 No. 333-60649-01) and related Prospectus of
Independent Bankshares, Inc. and Independent Capital Trust for the registration
of 320,000 shares of common stock and 1,000,000 shares of preferred securities,
respectively.
/s/ Ernst & Young LLP
Fort Worth, Texas
August 27, 1998
