-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NeM/Xg+s4zTBlgdLBPppjSPo3s92eolIex/+qoDHLDohzgsJj8FFux8dh1G17rYI 8mKmhTcPDNGB5Ol1tK675g== 0000909143-97-000059.txt : 19970401 0000909143-97-000059.hdr.sgml : 19970401 ACCESSION NUMBER: 0000909143-97-000059 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT BANKSHARES INC CENTRAL INDEX KEY: 0000318870 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 751717279 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11531 FILM NUMBER: 97568230 BUSINESS ADDRESS: STREET 1: 547 CHESTNUT ST STREET 2: PO BOX 3296 CITY: ABILENE STATE: TX ZIP: 79604 BUSINESS PHONE: 9156775550 10-K 1 ================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to Commission File Number: 0-10196 INDEPENDENT BANKSHARES, INC. (Exact Name of Registrant as Specified in its Charter) Texas 75-1717279 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 547 Chestnut Street Abilene, Texas 79602 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (915) 677-5550 Securities Registered Pursuant to Section 12(b) of the Act: Common Stock, par value $0.25 per share Securities Registered Pursuant to Section 12(g) of the Act: None ______________________________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant, based on the market value of such stock on March 17, 1997, was $18,982,000. For purposes of this computation, all executive officers, directors and 5% beneficial owners of the Registrant are deemed to be affiliates. Such determination should not be deemed an admission that such executive officers, directors and beneficial owners are, in fact, affiliates of the Registrant. At March 17, 1997, 1,420,894 shares of the Registrant's common stock, $0.25 par value per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the indicated part or parts of this report: (1) Annual Report to Shareholders for the fiscal year ended December 31, 1996, furnished to the Commission pursuant to Rule 14a-3(b) - Part II and Part IV. (2) Definitive proxy statement to be filed with the Commission pursuant to Regulation 14A in connection with the Annual Meeting of Shareholders to be held April 29, 1997 - Part III. ================================================================= PART I OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD- LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS OF INDEPENDENT BANKSHARES, INC. AND ITS SUBSIDIARIES MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. CERTAIN FACTORS THAT COULD CONTRIBUTE TO SUCH DIFFERENCES ARE DISCUSSED WITH THE FORWARD-LOOKING STATEMENTS THROUGHOUT THIS REPORT AND ARE SUMMARIZED IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE." ITEM 1. BUSINESS General - ------- Independent Bankshares, Inc., a Texas corporation (the "Company"), is a bank holding company headquartered in Abilene, Texas. The Company indirectly owns through a Delaware subsidiary, Independent Financial Corp. ("Independent Financial"), 100% of the stock of First State Bank, National Association, Abilene, Texas (the "Bank"). The Bank currently operates full-service banking locations in the West Texas cities of Abilene (2 locations), Lubbock (acquired in January 1997), Odessa (2 locations), San Angelo, Stamford and Winters. In connection with its recent acquisition of Crown Park Bancshares, Inc. ("Crown Park") and its subsidiary Western National Bank ("Western National"), the Company merged, on December 30, 1996, its former subsidiary bank, First State Bank, National Association, Odessa, Texas ("First State, N.A., Odessa"), with and into the Bank in order to recognize certain cost savings and to utilize the banks' capital more effectively than on a stand alone basis. The Company's primary activities are to assist the Bank in the management and coordination of its financial resources and to provide capital, business development, long range planning and public relations for the Bank. The Bank operates under the day-to-day management of its own officers and board of directors and formulates its own policies with respect to banking matters. At December 31, 1996, the Company had, on a consolidated basis, total assets of $205,968,000, total deposits of $189,575,000, total loans, net of unearned income, of $92,017,000 and total stockholders' equity of $14,937,000. The Company's net income has grown from $224,000 in 1991 to $1,422,000 in 1996. Additionally, since 1991, the Company's total loans have grown at a 12% average annual rate, resulting from a combination of internal growth and the Company's acquisition of community banks. The Company's complete mailing address and telephone number is 547 Chestnut Street, Abilene, Texas 79602, (915) 677-5550. The Bank - -------- The Company conducts substantially all of its business through the Bank and its various branches in West Texas. Each of the Bank's branches is an established franchise with a significant presence in its respective service area. The main branch in Abilene was the third largest of four commercial banks headquartered in Abilene, Texas, in terms of total deposits at June 30, 1996, the latest date for which information is available, and was the fifth largest of ten banks in Abilene in terms of total branch deposits at the same time. The branches in Stamford and Winters were the largest bank branches in those cities in terms of total deposits at June 30, 1996. The Odessa branch was the sixth largest of eight banks in Odessa in terms of total branch deposits at June 30, 1996. The branch in San Angelo was the eighth largest of ten banks in terms of total branch deposits in that city at June 30, 1996. The branch in Lubbock, acquired in January 1997, was the ninth largest of twelve banks in terms of total branch deposits in that city at June 30, 1996. The Bank operates through its branches as a community bank that focuses on long-term relationships with customers and provides individualized, quality service. Reflecting its community banking heritage, the Bank has a stable deposit base from customers located within its West Texas market area. Its recent financial performance is characterized by consistent core earnings, an increasingly diversified loan portfolio and strong asset quality. The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent provided by law. -2- At December 31, 1996, the Bank had total assets of $204,625,000, total deposits of $189,904,000, total loans, net of unearned income of $92,017,000, and total stockholders' equity of $13,487,000. The principal services provided by the Bank are as follows: Commercial Services. The Bank provides a full range of banking services for its commercial customers. Commercial lending activities include short-term and medium-term loans, revolving credit arrangements, inventory and accounts receivable financing, equipment financing and interim and permanent real estate lending. Other services include cash management programs and federal tax depository and night depository services. Consumer Services. The Bank also provides a wide range of consumer banking services, including checking, savings and money market accounts, savings programs and installment and personal loans. The Bank makes automobile and other installment loans directly to customers, as well as indirectly through automobile dealers. The Bank makes home improvement and real estate loans and provide safe deposit services. As a result of sharing arrangements with the Pulse automated teller machine system network, the Bank provides 24-hour routine banking services through automated teller machines ("ATMs"). The Pulse network provides ATM accessibility throughout the United States. Trust Services. The Bank provides trust and agency services to individuals, partnerships and corporations from its offices in Abilene, Lubbock and Odessa. The trust division also provides investment management, administration and advisory services for agency and trust accounts, and acts as trustee for pension and profit sharing plans. Acquisition of Subsidiary Banks - ------------------------------- Crown Park and Western National. On January 28, 1997, the Company consummated the acquisition of Crown Park and its wholly owned subsidiary bank, Western National, for an aggregate cash purchase price of $7,510,000. The purchase price was initially $7,425,000, but was adjusted to increase by the amount of interest earned on the purchase price from December 1, 1996, through January 27, 1997, at a rate equal to the 26-week United States Treasury Bill rate plus 2% (i.e., $85,000). The aggregate purchase price included $143,000 that was paid to Crown Park's financial advisor. On the closing date, Crown Park was merged with and into a wholly owned subsidiary of the Company and Western National was merged with and into the Bank. To obtain funding for the acquisition, simultaneously with the closing, the Company consummated an underwritten public offering of an aggregate of 316,250 shares of its common stock at a price of $14.25 per share (the "Offering"). This included 41,250 shares covered by the Underwriter's over- allotment option. The Company borrowed $800,000 from a financial institution in Amarillo, Texas (the "Amarillo Bank") to finance the remaining cost of acquiring Crown Park. The $800,000 of borrowings was later reduced to $400,000 with the proceeds of the sale of the over-allotment shares. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." This acquisition will be accounted for under the purchase method of accounting. A total of $2,486,000 of goodwill was recorded in 1997 as a result of this transaction. Western National is a community bank that offers interest and noninterest-bearing depository accounts, and makes consumer and commercial loans. At the date of acquisition, on a consolidated basis, Crown Park had total assets of $60,420,000, total loans, net of unearned income, of $41,688,000, total deposits of $53,618,000 and stockholders' equity of $4,238,000. The Company intends to increase the profitability of Western National by expanding its loan portfolio and deposit base. The Company believes enhanced marketing efforts, expanded loan and deposit products and increased employee training and personal attention to customers will promote this growth. The Company also believes that savings can be realized in the area of noninterest expenses through consolidation of operations. In addition to the immediate increase in asset size and the potential for improved future profitability, the Crown Park acquisition will allow the Company to expand its market area into what the Company believes are desirable banking locations. This expansion will increase the geographic diversity of the Company's loan portfolio, which is expected to decrease the Company's overall lending risks. -3- San Angelo Branch. On May 27, 1996, First State, N.A., Abilene assumed the deposits and certain other liabilities and purchased the loans and certain other assets of the San Angelo, Texas branch of Coastal Banc ssb ("Coastal Banc - San Angelo") in a cash transaction. On the date of the acquisition, Coastal Banc - San Angelo had approximately $14,895,000 in total deposits and $155,000 in total loans. The acquisition was accounted for under the purchase method of accounting, and the assets and liabilities of this branch were recorded at their estimated fair value. A total of $743,000 of goodwill was recorded as a result of the acquisition. Coastal Banc - San Angelo became a branch of the Bank. Peoples National. The Bank completed the acquisition of Peoples National Bank, Winters, Texas ("Peoples National") effective January 1, 1996, and Peoples National became part of the Winters branch of the Bank. At December 31, 1995, Peoples National had total assets of $5,505,000, total loans, net of unearned income, of $2,767,000, total deposits of $4,958,000 and stockholders' equity of $525,000. These amounts are not included in the Consolidated Balance Sheet for the Company at December 31, 1995. The acquisition was accounted for under the purchase method of accounting, and the assets and liabilities of Peoples National were recorded at their estimated fair value. A total of $260,000 of goodwill was recorded as a result of this acquisition. Other Subsidiaries At the present time, the Company does not have any subsidiaries other than Independent Financial and the Bank. Business Strategy The Company's strategic plan contemplates an increase in profitability and shareholder value through the building of a valuable West Texas banking franchise consisting of low cost core deposits as a funding base to support local consumer and commercial lending programs. The Company's acquisition activities have been designed to augment this franchise by increasing market share and expanding into contiguous markets demographically similar to its current service areas. Following the recent acquisition of Crown Park and its subsidiary Western National, the Company has locations in four of the fastest growing consumer markets in West Texas. Management believes that it can increase the profitability of the Company through increased operating efficiencies, an increase in the loan to deposit ratio and cross-selling a more expansive product line to newly acquired customers. The Company's operating strategy is to provide customers with the business sophistication and breadth of products of a regional financial services company, while retaining the special attention to personal service and the local appeal of a community bank. Decentralized decision making authority vested in the presidents and senior officers of the Abilene, Lubbock and Odessa branches allows for rapid response time and flexibility in dealing with customer requests and credit needs. The participation of the Company's directors, officers and employees in area civic and service organizations demonstrates the Company's continuing commitment to the communities it serves. Management believes that these qualities distinguish the Company from its competitors and will allow the Company to compete successfully in its market against larger regional and out-of-state institutions. Supervision and Regulation References in this report to applicable statutes, regulations and policies are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such statutes, regulations and policies. REGULATION AND SUPERVISION THE COMPANY General ------- The Company is a bank holding company registered with, and subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Federal law subjects bank holding companies to particular restrictions on the types of -4- activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and policies. Scope of Permissible Activities ------------------------------- The BHCA prohibits a bank holding company, with certain limited exceptions, from acquiring direct or indirect ownership or control of any voting shares of any company that is not a bank or from engaging in any activities other than those of banking. One principal exception to these prohibitions allows the acquisition of interests in companies whose activities are found by the Federal Reserve Board, by order or regulation, to be so closely related to banking as to be a proper incident thereto. Some of the activities that have been determined by regulation to be closely related to banking are making or servicing loans, performing certain data processing services, acting as an investment or financial advisor to certain investment trusts and investment companies and providing certain securities brokerage services. In approving acquisitions by the Company of entities engaged in banking-related activities, the Federal Reserve Board would consider a number of factors, including the expected benefits to the public, such as greater convenience and increased competition or gains in efficiency, which would be weighed against the risk of potential negative effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The Federal Reserve Board may also differentiate between activities commenced DE NOVO and activities commenced through the acquisition of a going concern. The Company has no current plans to form or acquire any non-banking subsidiaries. The Federal Reserve Board has approved applications by bank holding companies to engage, through nonbank subsidiaries, in certain securities-related activities (underwriting of municipal revenue bonds, commercial paper, consumer-receivable-related securities and certain mortgage-backed securities), provided that the subsidiaries would not be "principally engaged" in such activities for purposes of Section 20 of the Glass-Steagall Act. In very limited situations, holding companies may be able to use such subsidiaries to underwrite and deal in corporate debt and equity securities. Bills from time to time have been introduced in both the U.S. Senate and House of Representatives that would, if enacted, remove many of the restraints imposed by the Glass-Steagall Act, although no comprehensive bill has been enacted to date. On March 26, 1996 the U.S. Supreme Court ruled that Section 92 of the National Bank Act preempts state insurance laws which prevent banks from exercising insurance powers granted under those laws. Section 92 grants national banks located and doing business in a place with a population not exceeding 5,000 inhabitants the authority to act as insurance agent for any insurance company authorized to do business in a state where the bank is located. In response to this decision, on June 20, 1996, the Texas Department of Insurance ("TDI") issued its "Interim Procedures for Banks Selling Insurance" which contain licensing and consumer protection guidance that apply to banks and savings associations located in Texas. The TDI has stressed that these are only interim guidelines intended to be in effect until the Texas Legislature or Congress resolves some remaining issues which serve as impediments to the ability of the banks to take full advantage of this activity. In addition, the Comptroller has issued an advisory letter which provides guidance to national banks regarding insurance and annuity sales activities. The Comptroller has subsequently approved applications by banks to engage in such general insurance agency activities through operating subsidiaries. Bank holding companies are not permitted to engage in unsafe or unsound banking practices. For example, the Federal Reserve Board's Regulation Y requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding twelve-month period, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board may oppose the transaction if it would constitute an unsafe or unsound practice or would violate any law or regulation. Additionally, a holding company may not impair the financial soundness of a subsidiary bank by causing it to make funds available to nonbanking subsidiaries or their customers when such a transaction would not be prudent. The Federal Reserve Board may exercise several administrative remedies including cease-and-desist powers over parent holding companies and nonbanking subsidiaries when the actions of such companies would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") expanded the Federal Reserve Board's authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that -5- represent unsafe and unsound banking practices or that constitute violations of laws or regulations. FIRREA authorizes the appropriate banking agency to issue cease and desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnification or guarantee against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets or take other appropriate action as determined by the ordering agency. FIRREA increased the amount of civil money penalties that the Federal Reserve Board may assess for certain activities conducted on a knowing and reckless basis, if those activities cause a substantial loss to a depository institution. The penalties may reach as much as $1,000,000 per day. FIRREA also expanded the scope of individuals and entities or "institution-affiliated parties" against which such penalties may be assessed. In addition, FIRREA contains a "cross-guarantee" provision that makes commonly controlled insured depository institutions liable to the FDIC for any losses incurred, or reasonably anticipated to be incurred, in connection with the failure of an affiliated insured depository institution. The FDIC must present its claim within two years of incurring such loss and may require either immediate or installment payments. Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extensions of credit, to certain other services offered by a holding company or its affiliates. The Company is required to file quarterly and annual reports with the Federal Reserve Bank of Dallas (the "Federal Reserve Bank") and such additional information as the Federal Reserve Bank may require pursuant to the BHCA. The Federal Reserve Bank may examine a bank holding company or any of its subsidiaries and charge the examined institution for the cost of such an examination. The Company is also subject to reporting and disclosure requirements under state and federal securities laws. Capital Adequacy Requirements ----------------------------- The Federal Reserve Board monitors the capital adequacy of bank holding companies. The Federal Reserve Board has adopted a system using a combination of risk-based guidelines and leverage ratios to evaluate the capital adequacy of bank holding companies. Under the risk-based capital guidelines, each category of assets is assigned a different risk weight, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. Certain off-balance sheet items, which previously were not expressly considered in capital adequacy computations, are added to the risk-weighted asset base by converting them to a balance sheet equivalent and assigning to them the appropriate risk weight. In addition, the guidelines define the capital components. Total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to 100% of "Tier 1." For bank holding companies, "Tier 1" capital includes, with certain restrictions, common stockholders' equity and qualifying perpetual preferred stock and minority interests in consolidated subsidiaries, reduced by goodwill and net deferred tax assets in excess of regulatory capital limits. "Tier 2" capital includes, with certain limitations, certain other preferred stock, as well as qualifying debt instruments and all or part of the allowance for possible loan losses. The guidelines require a minimum ratio of qualifying total capital to total risk-weighted assets of 8.0% (of which at least 4.0% is required to be in the form of "Tier 1" capital elements). At December 31, 1996, the Company's ratios of "Tier 1" and total capital to risk-weighted assets were 13.85% and 14.64%, respectively. At such date, both ratios exceeded regulatory minimums. The pro forma calculation of the Company's ratios of "Tier 1" and total capital to risk-weighted assets would have been 10.99% and 12.15%, respectively, had the acquisition of Crown Park occurred at December 31, 1996. In addition to the risk-based capital guidelines, the Federal Reserve Board and the FDIC have adopted the use of a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies and banks. The leverage ratio is defined to be a company's "Tier 1" capital divided by its adjusted quarterly average total assets. The leverage ratio adopted by the federal banking agencies requires a minimum 6.0% "Tier 1" capital to adjusted quarterly average total assets ratio for a banking organization to be considered well capitalized. The Company's and the Bank's leverage ratios at December 31, 1996, were 6.86% and 6.19%, respectively, and each was considered to be well capitalized. However, the pro forma calculation of the Company's and the Bank's leverage ratios would have been 5.95% and 5.45%, respectively, had the acquisition of Crown Park occurred at December 31, 1996. As a result, the -6- Company and the Bank would have been considered to be at least adequately capitalized under the risk-based capital guidelines. A bank holding company that fails to meet the applicable capital standards will be at a disadvantage. For example, Federal Reserve Board policy discourages the payment of dividends by a bank holding company from borrowed funds as well as payments that would adversely affect capital adequacy. Failure to meet the capital guidelines may result in institution by the Federal Reserve Board of appropriate supervisory or enforcement actions. Imposition of Liability for Undercapitalized Subsidiaries --------------------------------------------------------- The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became effective at various times through January 1994. FDICIA requires bank regulators to take "prompt corrective action" to resolve problems associated with insured depository institutions. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. The capital restoration plan will not be accepted by applicable regulators unless each company "having control of" the undercapitalized institution "guarantees" the subsidiary's compliance with the capital restoration plan until it becomes "adequately capitalized." The Company has control of the Bank for purposes of this statute. Under FDICIA, the aggregate liability of all companies controlling a particular institution is generally limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with applicable capital standards. FDICIA grants greater powers to regulatory authorities in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution may be required to obtain prior Federal Reserve Board approval of proposed dividends or could be required to consent to a merger or to divest the troubled institution or other affiliates. Acquisitions by Bank Holding Companies -------------------------------------- Subject to certain exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors. The Attorney General of the United States may, within 30 days after approval of an acquisition by the Federal Reserve Board, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Currently, the Federal Reserve Board will only allow the acquisition by a bank holding company of an interest in any bank located in another state if the statutory laws of the state in which the target bank is located expressly authorize such acquisition. The Texas Banking Act permits, in certain circumstances, out-of-state bank holding companies to acquire certain existing banks and bank holding companies in Texas. However, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Interstate Act"), permits bank holding companies to acquire banks located in any state without regard to whether the transaction is prohibited under any state law, except that states may establish the minimum age of their local banks subject to interstate acquisition by out-of-state bank holding companies. The minimum age of local banks subject to interstate acquisition is limited to a maximum of five years. FDICIA eased restrictions on cross-industry mergers. Members of the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") are generally allowed to merge, assume each other's deposits, and transfer assets in exchange for an assumption of deposit liabilities. A formula applies to treat insurance assessments relating to acquired deposits as if they were still insured through the acquired institution's insurance fund. The transaction must be approved by the appropriate federal banking regulator. In considering such approval, the regulators take into account applicable capital requirements, certain interstate banking restrictions and other factors. -7- The Competitive Equality Banking Act of 1987 ("CEBA") amended the Federal Deposit Insurance Act and certain other statutes to provide federal regulatory agencies with expanded authority to deal with troubled institutions. Among other things, CEBA expanded the ability of out-of-state holding companies to acquire certain financial institutions that are in danger of closing and permits the FDIC, in certain circumstances, to establish a "bridge bank" to assume the deposits or liabilities of one or more closed banks or to perform certain other functions. THE BANK General ------- The Bank is a national banking association organized under the National Bank Act of 1864, as amended (the "National Bank Act"), and is subject to regulatory supervision and examination by the Office of the Comptroller of the Currency (the "Comptroller"). Pursuant to such regulation, the Bank is subject to special restrictions, supervisory requirements and potential enforcement actions. Permissible Activities for National Banks ----------------------------------------- The National Bank Act delineates the rights, privileges and powers of national banks and defines the activities in which national banks may engage. National banks are authorized to engage in the following: make, arrange, purchase or sell loans or extensions of credit secured by liens on interests in real estate; purchase, hold and convey real estate under certain conditions; offer certain trust services to the public; deal in investment securities in certain circumstances; and, more broadly, engage in the "business of banking" and activities that are "incidental" to banking. Specifically, the following are a few of the activities deemed incidental to the business of banking: the borrowing and lending of money; receiving deposits, including deposits of public funds; holding or selling stock or other property acquired in connection with security on a loan; discounting and negotiating evidences of debt; acting as guarantor, if the bank has a "substantial interest in the performance of the transaction"; issuing letters of credit to or on behalf of its customers; operating a safe deposit business; providing check guarantee plans; issuing credit cards; operating a loan production office; selling loans under repurchase agreements; selling money orders at offices other than bank branches; providing consulting services to banks; and verifying and collecting checks. In general, statutory restrictions on the activities of banks are aimed at protecting the safety and soundness of such depository institutions. Many of the statutory restrictions limit the participation of national banks in the securities and insurance product markets. These restrictions do not now affect the Bank, because the Bank is not presently involved in the types of transactions covered by the restrictions. Branching --------- National banks may establish a branch anywhere in Texas provided that the branch is approved in advance by the Comptroller, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers. The Interstate Banking Act, which expands the authority of bank holding companies and banks to engage in interstate bank acquisitions and interstate banking, allows each state the option of "opting out" of the interstate branching (but not banking) provisions. The Texas Legislature opted out of the interstate branching provisions during its 1995 Session. Interstate banking was effective on September 29, 1995, and interstate branching would have become effective in Texas in June of 1997, if Texas had not elected to "opt out." The Texas Legislature "opt-out" legislation prohibiting interstate branching is effective until September of 1999. Restrictions on Transactions with Affiliates -------------------------------------------- Certain provisions of FDICIA applicable to the Bank enhance safeguards against insider abuse by recodifying current law restricting transactions among related parties. One set of restrictions is found in Section 23A of the Federal Reserve Act, which affects loans to and investments in "affiliates" of the Bank. The term "affiliates" include the Company and any of its subsidiaries. Section 23A imposes limits on the amount of such transactions and also requires certain levels of collateral for such loans. In addition, Section 23A limits the amount of advances to third parties that are collateralized by the securities or obligations of the Company or its subsidiaries. -8- Another set of restrictions is found in Section 23B of the Federal Reserve Act. Among other things, Section 23B requires that certain transactions between the Bank and its affiliates must be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated companies. In the absence of such comparable transactions, any transaction between the Bank and its affiliates must be on terms and under circumstances, including credit underwriting standards and procedures, that in good faith would be offered to or would apply to nonaffiliated companies. The Bank is also subject to certain prohibitions against advertising that suggests that the Bank is responsible for the obligations of its affiliates. The restrictions on loans to insiders contained in the Federal Reserve Act and Regulation O of the Federal Reserve Board now apply to all insured institutions and their subsidiaries and holding companies. The aggregate amount of an institution's loans to insiders is limited to the amount of its unimpaired capital and surplus, unless the FDIC determines that a lesser amount is appropriate. The Bank may pay, on behalf of any executive officer or director, an amount exceeding funds on deposit in that individual's personal account only if there is a written, preauthorized, interest-bearing extension of credit specifying a method of repayment and a written preauthorized transfer of funds from another account of the executive officer or director at the Bank. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. Interest Rate Limits and Lending Regulations -------------------------------------------- The Bank is subject to various state and federal statutes relating to the extension of credit and the making of loans. The maximum legal rate of interest that the Bank may charge on a loan depends on a variety of factors such as the type of borrower, purpose of the loan, amount of the loan and date the loan is made. Texas statutes establish maximum legal rates of interest for various lending situations. Loans made by banks located in Texas are subject to numerous other federal and state laws and regulations, including truth-in-lending statutes, the Texas Consumer Credit Code, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act. These laws provide remedies to the borrower and penalties to the lender for failure of the lender to comply with such laws. The scope and requirements of these laws and regulations have expanded in recent years, and claims by borrowers under these laws and regulations may increase. Restrictions on Subsidiary Bank Dividends ----------------------------------------- Dividends payable by the Bank to Independent Financial are restricted under the National Bank Act. The Bank's ability to pay dividends is further restricted by the requirement that it maintain adequate capital in accordance with capital adequacy guidelines promulgated from time to time by the Comptroller. See "Dividend Policy." Moreover, the prompt corrective provisions of FDICIA and implementing regulations prohibit a bank from paying a dividend if, following the payment, the bank would be in any of the three capital categories for undercapitalized institutions. See "Capital Adequacy Requirements" below. Examinations ------------ The Comptroller periodically examines and evaluates national banks. Based upon such evaluations, the Comptroller may revalue certain assets of an institution and require that it establish specific reserves to compensate for the difference between the regulatory-determined value and the book value of such assets. The Comptroller is authorized to assess the institution an annual fee based upon deposits for, among other things, the costs of conducting the examinations. Capital Adequacy Requirements ----------------------------- FDICIA, among other things, substantially revised existing statutory capital standards, restricted certain powers of state banks, gave regulators the authority to limit officer and director compensation and required holding companies to guarantee the capital compliance of their banks in certain instances. Among other things, FDICIA requires the federal banking agencies to take "prompt corrective action" with respect to banks that do not meet minimum capital requirements. FDICIA established five capital tiers: "well capitalized," "adequately capitalized," -9- "undercapitalized," "significantly undercapitalized" and "critically undercapitalized," as defined by regulations adopted by the Federal Reserve Board, the FDIC and the other federal depository institution regulatory agencies. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below such measure and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. The critical capital level must be a level of tangible equity capital equal to the greater of 2% of total tangible assets or 65% of the minimum leverage ratio to be prescribed by regulation. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. At December 31, 1996, the Bank was well capitalized. Banks with capital ratios below the required minimum are subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital. Corrective Measures for Capital Deficiencies -------------------------------------------- FDICIA requires the federal banking regulators to take "prompt corrective action" with respect to capital-deficient institutions with the overall goal to reduce losses to the depository insurance fund. In addition to requiring the submission of a capital restoration plan (as discussed above), FDICIA contains broad restrictions on certain activities of undercapitalized institutions involving asset growth, acquisitions, branch establishment and expansion into new lines of business. With certain exceptions, an insured depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment. As an institution's capital decreases, the FDIC's powers and scrutiny become greater. A significantly under-capitalized institution is subject to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management, and other restrictions. Under proposed regulations, an institution will be considered critically undercapitalized if its tangible equity to assets ratio falls below 2%. The FDIC has only very limited discretion in dealing with a critically undercapitalized institution and is virtually required to appoint a receiver or conservator. Real Estate Lending Evaluations and Appraisal Requirements ---------------------------------------------------------- The FDIC is required by the Federal Deposit Insurance Act to assess all banks in order to adequately fund the BIF so as to resolve any insured institution that is declared insolvent by its primary regulator. FDICIA required the federal banking regulators to adopt uniform standards for evaluations by the regulators of loans collateralized by real estate or made to finance improvements to real estate. In formulating the standards, the banking agencies were required to take into consideration the risk posed to the insurance funds by real estate loans, the need for safe and sound operation of insured depository institutions and the availability of credit. FDICIA also prohibits the regulators from adversely evaluating a real estate loan or investment solely on the grounds that the investment involves commercial, residential or industrial property, unless the safety and soundness of an institution may be affected. The federal agencies adopted a number of regulatory standards with regard to real estate lending. These standards require banking institutions to establish and maintain written internal real estate lending policies. These policies must not only be consistent with safe and sound banking practices, but must also be appropriate to the size of the institution and the nature and scope of its operations. The policies must establish loan portfolio diversification standards, prudent underwriting standards, including clear and measurable loan-to-value limits (although such limits should not exceed specific supervisory limits), loan administration procedures and comprehensive documentation, approval and reporting requirements to ensure compliance with these policies. Additionally, the institution's policies must be reviewed and approved by that institution's Board of Directors on at least an annual basis and such policies must be continually monitored by the institutions to ensure compatibility with current market conditions. In addition, banks are required to secure appraisals for real estate-collateralized loans with a transaction value of $250,000 or more. -10- Deposit Insurance Assessments ----------------------------- The FDIC is required by the Federal Deposit Insurance Act to assess all banks in order to adequately fund the BIF so as to resolve any insured institution that is declared insolvent by its primary regulator. FDICIA required the FDIC to establish a risk-based deposit insurance premium schedule. The risk-based assessment system is used to calculate a depository institution's semi-annual deposit insurance assessment based upon the designated reserve ratio for the deposit insurance fund and the probability and extent to which the deposit insurance fund will incur a loss with respect to this institution. In addition, the FDIC can impose special assessments to cover the cost of borrowings from the U.S. Treasury, the Federal Financing Bank and BIF member banks. On September 15, 1992, the FDIC issued a rule revising its assessment regulations from the existing flat-rate system for deposit insurance assessments (or "premiums") to a new, risk-based assessment system. This system became effective for the assessment period beginning January 1, 1993. Under this system, each depository institution will be placed in one of nine assessment categories based on certain capital and supervisory measures. Institutions assigned to higher-risk categories - that is, institutions that pose a greater risk of loss to their respective deposit insurance funds - pay assessments at higher rates than would institutions that pose a lower risk. The Bank (including First State, N.A., Odessa) was assessed a weighted average premium of 0.006% of deposits for the year ended December 31, 1996. On August 8, 1995, the FDIC amended its regulations to change the range of deposit insurance assessments charged to members of the BIF from the then-prevailing range of 0.23% to 0.31% of deposits, to a range of 0.04% to 0.31% of deposits. On November 14, 1995, the FDIC further reduced the deposit insurance assessments for BIF-member institutions, such that the range of BIF assessments is currently between 0% and 0.27% of deposits. BIF-member institutions which qualified for the 0% assessment category were, until September 30, 1996, required to pay the $1,000 minimum semi-annual assessment required by federal statute. In connection with the new rate schedule, the FDIC established a process for raising or lowering all rates for BIF-insured institutions semi-annually if conditions warrant a change. Under this new system, the FDIC will have the flexibility to adjust the entire BIF assessment rate schedule twice a year without seeking public comment first, but only within a range of five cents per $100 above or below the premium schedule adopted. Changes in the rate schedule outside the five cent range above or below the current schedule can be made by the FDIC only after a full rulemaking with opportunity for public comment. On September 30, 1996, President Clinton signed into law an act that contained a comprehensive approach to recapitalizing the SAIF and to assure the payment of the Financing Corporation's ("FICO") bond obligations. Under this new act, banks insured under the BIF are required to pay a portion of the interest due on bonds that were issued by FICO in 1987 to help shore up the ailing Federal Savings and Loan Insurance Corporation ("FSLIC"). The amount of FICO debt service to be paid by all BIF-insured institutions is currently estimated to be approximately $320,343,000 per year, or 0.013% of deposits from 1997 until the year 2000, when the obligation of BIF-insured institutions increases to approximately $598,500,000 or 0.024% of deposits per year through the year 2019. Community Reinvestment Act -------------------------- The Community Reinvestment Act of 1977 ("CRA") and the regulations issued by the Comptroller to implement that law are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations also provide for regulatory assessment of a bank's record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. FIRREA requires federal banking agencies to make public a rating of a bank's performance under the CRA. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. The bank regulatory agencies in 1995 adopted final regulations implementing the CRA. These regulations affect extensive changes to the existing procedures for determining compliance with the CRA and the full effect of these new regulations cannot be determined at this time. -11- Changing Regulatory Structure ----------------------------- Other legislative and regulatory proposals regarding changes in banking, and regulations of banks, thrifts and other financial institutions, are being considered by the executive branch of the federal government, Congress and various state governments, including Texas. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. The Company cannot predict accurately whether any of these proposals will be adopted or, if adopted, how these proposals will affect the Company or the Bank. Expanding Enforcement Authority ------------------------------- One of the major additional burdens imposed on the banking industry by FDICIA is the increased ability of banking regulators to monitor the activities of banks and their holding companies. In addition, the Federal Reserve Board and FDIC are possessed of extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and other holding companies. For example, the FDIC may terminate the deposit insurance of any institution that it determines has engaged in an unsafe or unsound practice. The regulatory agencies can also assess civil money penalties, issue cease and desist or removal orders, seek injunctions and publicly disclose such actions. FDICIA, FIRREA and other laws have expanded the agencies' authority in recent years, and the agencies have not yet fully tested the limits of their powers. Effect on Economic Environment ------------------------------ The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, control of borrowings at the "discount window," changes in the discount rate on member bank borrowings, changes in reserve requirements against member bank deposits and against certain borrowings by banks and their affiliates and the placing of limits on interest rates that member banks may pay on time and savings deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The Company cannot predict the nature of future monetary policies and the effect of such policies on the business and earnings of the Company and the Bank. COMPETITION The activities in which the Company and the Bank engage are highly competitive. Each activity engaged in and the geographic market served involves competition with other banks and savings and loan associations as well as with nonbanking financial institutions and nonfinancial enterprises. In Texas, savings and loan associations and banks are allowed to establish statewide branch offices. The Bank actively competes with other banks in its effort to obtain deposits and make loans, in the scope and type of services offered, in interest rates paid on time deposits and charged on loans and in other aspects of banking. In addition to competing with other commercial banks within and without its primary service areas, the Bank competes with other financial institutions engaged in the business of making loans or accepting deposits, such as savings and loan associations, credit unions, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, factors, certain governmental agencies, credit card organizations and other enterprises. Additional competition for deposits comes from government and private issues of debt obligations and other investment alternatives for depositors such as money market funds. The Bank also competes with suppliers of equipment in providing equipment financing. EMPLOYEES At February 28, 1997, the Company and the Bank had 128 full-time equivalent employees. Employees are provided with employee benefits, such as an employee stock ownership/401(k) plan and life, health and long-term disability insurance plans. The Company considers the relationship of the Bank with its employees to be excellent. -12- ITEM 2. PROPERTIES At February 28, 1997, the Company occupied approximately 600 square feet of space for its corporate offices at 547 Chestnut Street, Abilene, Texas. The Central Branch of the Bank occupies approximately 8,000 square feet at this same facility. The following table sets forth, at February 28, 1997, certain information with respect to the banking premises owned or leased by the Company and the Bank. The Company considers such premises adequate for its needs and the needs of the Bank.
Approximate Location Square Footage Ownership and Occupancy - ---------------- -------------- ------------------------------ Abilene, Texas 8,600 Owned by the Bank and occupied by the Central Branch of the Bank and the Company Abilene, Texas 3,500 Owned by the Bank and occupied by the Wylie Branch Lubbock, Texas 24,300(1) Owned by the Bank; occupied and leased by the Lubbock Branch Odessa, Texas 62,400(2) Owned by the Bank; occupied and leased by the Odessa Branch Odessa, Texas 2,400 Leased by the Bank and occupied by the Winwood Branch San Angelo, Texas 6,800(3) Owned by the Bank; occupied and leased by the San Angelo Branch Stamford, Texas 14,000 Owned by the Bank and occupied by the Stamford Branch Winters, Texas 9,500 Owned by the Bank and occupied by the Winters Branch _________________________ (1) The Lubbock Branch occupies approximately 14,600 square feet, leases 6,700 square feet and is attempting to lease the remaining 3,000 square feet. (2) The Odessa Branch occupies approximately 20,400 square feet, leases 25,100 square feet and is attempting to lease the remaining 16,900 square feet. (3) The San Angelo Branch occupied approximately 3,400 square feet, leases 2,400 square feet and is attempting to lease the remaining 1,000 square feet.
The Bank owns or leases certain additional tracts of land for parking, drive-in facilities and for future expansion or construction of new premises. Aggregate annual rentals of the Company and the Bank for all leased premises during the year ended December 31, 1996, were $40,000. This amount represents rentals paid for the lease of land by the Wylie Branch and of banking premises by the Winwood Branch of the Bank. ITEM 3. LEGAL PROCEEDINGS In CONNIE POLLARD V. FIRST STATE BANK, N.A., ODESSA, TEXAS (Cause No. A-100,846) brought in the 70th District Court of Ector County, Texas, the plaintiff, the former Senior Vice President, Manager of Trust Operations of First State, N.A., Odessa, alleges, among other things, that she was discriminated against on the basis of her sex, she was repeatedly passed over for promotion to the Trust Department Manager, she was paid less than male employees and that she was constructively discharged. The plaintiff alleges damages for past and future wages, emotional distress and constructive discharge, actual damages, exemplary damages, attorneys' fees, reinstatement and promotion and pre-judgment and post-judgment interest. The Company believes the plaintiff's claims to be without merit and intends to vigorously defend this action. Discovery is ongoing, and the case is currently scheduled for trial in mid-1997. -13- The Company is involved in various other litigation proceedings incidental to the ordinary course of business. In the opinion of management, however, the ultimate liability, if any, resulting from such other litigation would not be material in relation to the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year, no matter was submitted by the Company to a vote of its shareholders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Since September 12, 1995, the Company's Common Stock has traded on the American Stock Exchange (the "AMEX") under the symbol "IBK." Prior to September 12, 1995, the Common Stock was quoted on Nasdaq's Small-Cap Market system under the symbol "IBKS." The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock as reported by the AMEX and by Nasdaq Small-Cap Market, as the case may be, and the amount of dividends per share, adjusted for the 33-1/3% stock dividend paid to stockholders in May 1995. Cash Dividends High Low Per Share ------ ----- ---------- 1995 -------------- First Quarter $ 6 $ 5-1/4 $ 0.0225 Second Quarter 7-1/2 5-1/4 0.03 Third Quarter 11-1/4 7-1/4 0.03 Fourth Quarter 10-7/8 10-1/4 0.03 1996 -------------- First Quarter $ 10-1/2 $ 9-3/4 $ 0.03 Second Quarter 11 9 0.05 Third Quarter 12 10-7/8 0.05 Fourth Quarter 17-1/2 12-1/8 0.05 1997 -------------- First Quarter (through March 17, 1997) $ 17 $ 14-3/8 $ 0.05 The Nasdaq Small-Cap Market quotations represent prices between dealers, without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions. SHAREHOLDERS At March 17, 1997, there were 1,558 stockholders who were individual participants in security position listings. -14- DIVIDEND POLICY The Company. In May 1994, the Company instituted the payment of a $.03 per share quarterly cash dividend, which was raised to $0.05 per share in May 1996. The Board of Directors presently intends to continue the payment of a small cash dividend on the Common Stock. The continued payment of dividends and the amount and timing of any future dividend payments, however, will be determined by the Board of Directors and will depend upon a number of factors, including the extent of funds legally available therefor, dividend requirements of the Company's Series C Cumulative Convertible Preferred Stock ("Series C Preferred Stock"), and the earnings, business prospects, acquisition opportunities, cash needs, financial condition, regulatory and capital requirements of the Company and the Bank and provisions of current and future loan or financing agreements, including the Company's existing loan agreement with the Amarillo Bank that restricts dividends if total debt to the Amarillo Bank exceeds $1,200,000. At the date of the filing of this report, the Company had outstanding borrowings of $200,000 under the Amarillo Bank loan, which borrowings financed a portion of the cost of acquiring Crown Park. Accordingly, no dividend restriction is currently in effect. The Company's ability to pay cash dividends is restricted by the requirement that it and the Bank maintain certain levels of capital in accordance with regulatory guidelines promulgated by, in the case of the Company, the Federal Reserve Board and, in the case of the Bank, the Comptroller. See "Item 1. Business - Regulation and Supervision - the Company - Capital Adequacy Requirements." Holders of the Series C Preferred Stock are entitled to receive, if, as and when declared by the Company's Board of Directors, out of funds legally available therefor, in preference to the holders of Common Stock and any other stock ranking junior to the Series C Preferred Stock in respect of dividends, quarterly cumulative cash dividends at the annual rate of $4.20 per share. The aggregate annual dividend payment on the 13,478 shares of the Series C Preferred Stock outstanding at December 31, 1996, was approximately $57,000. If earnings and cash flow from ordinary operations of the Company are not sufficient to enable it to pay the full amount of the dividend on the Series C Preferred Stock, the Company may cumulate all or a portion of the annual dividend. The Company can cause the mandatory conversion of the Series C Preferred Stock into Common Stock beginning in December 1997. The Series C Preferred Stock is the Company's only outstanding preferred issue. The Company may not, among other things, declare or pay any cash dividend in respect of the Common Stock or any stock junior to the Series C Preferred Stock with respect to dividends or liquidation rights unless, on the date of payment, all accumulated dividends in respect of the Series C Preferred Stock are paid or set aside. Furthermore, the Company may not declare or pay any dividends in respect of the Common Stock or purchase, redeem or otherwise acquire shares of Common Stock if, on the record date for such payment, or on the date of such purchase, redemption or acquisition, such action would cause stockholders' equity (including mandatorily redeemable preferred stock) of the Company, as reported in the most recent quarterly or annual financial statements filed by the Company with the Securities and Exchange Commission, to be less than an amount equal to the sum of (i) 140% of the number of then outstanding shares of Series C Preferred Stock multiplied by its liquidation value and (ii) 140% of the number of then outstanding shares of any stock ranking senior as to dividends to the Series C Preferred Stock multiplied by the liquidation value of such senior stock. Dividend payments on any other stock junior to the Series C Preferred Stock with respect to dividends or liquidation rights would be similarly limited. The Federal Reserve Board has a policy prohibiting bank holding companies from paying dividends on common stock except out of current earnings. The Federal Reserve Board has asserted that this policy, originally only applicable to common stock, also limits dividends on preferred stocks. As expanded, the Federal Reserve Board policy would limit dividends on the Series C Preferred Stock to an amount equal to current earnings. To date, the Company's earnings have been sufficient to cover dividends on the Common Stock and the Series C Preferred Stock. The Bank. The funds used by the Company to meet its operational expenses and debt service obligations, to maintain the necessary level of capital for itself and the Bank, and to pay cash dividends on the Common Stock and the Series C Preferred Stock will be derived primarily from dividends, management fees and tax liabilities paid to the Company by Independent Financial and to Independent Financial by the Bank. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity." The ability of the Bank to pay dividends is -15- restricted by the requirement that the Bank maintain an adequate level of capital in accordance with regulatory guidelines and by statute. The Federal Deposit Insurance Corporation ("FDIC") requires insured banks, such as the Bank, to maintain certain minimum capital ratios. The FDIC is permitted to require higher ratios if it believes that the financial condition and operations of a particular bank mandates such a higher ratio. The Comptroller has substantially similar requirements. See "Item 1. Business - Regulation and Supervision - The Bank - Capital Adequacy Requirements" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company - Capital Resources." The National Bank Act of 1864, as amended (the "National Bank Act"), provides that, prior to declaring a dividend, a bank must transfer to its surplus account an amount equal to or greater than 10% of the net profits earned by the bank since its last dividend was declared, unless such transfer would increase the surplus of the bank to an amount greater than the bank's stated capital. Moreover, the approval of the Comptroller is required for any dividend to a bank holding company by a national bank if the total of all dividends, including the proposed dividend, declared by the bank in any calendar year exceeds the total of its net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus. In addition, the prompt corrective provisions of FDICIA and implementing regulations prohibit a bank from paying a dividend if, following the payment, the bank would be in any of the three capital categories for undercapitalized institutions. See "Item 1. Business - Regulation and Supervision - The Bank - Capital Adequacy Requirements." Dividends paid by the Bank (including First State, N.A., Odessa) to Independent Financial and by Independent Financial to the Company each totaled $1,000,000 during 1996. At December 31, 1996, there were approximately $1,561,000 in dividends available for payment to Independent Financial by the Bank without regulatory approval. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference from page 28 of the Company's 1996 Annual Report to Shareholders under the caption "Selected Consolidated Financial Information." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference from pages 30 through 52, inclusive, of the Company's 1996 Annual Report to Shareholders under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference from pages 7 through 27, inclusive, of the Company's 1996 Annual Report to Shareholders under the captions "Report of Coopers & Lybrand, L.L.P., Independent Auditors," "Consolidated Balance Sheets," "Consolidated Income Statements," "Consolidated Statements of Changes in Stockholders' Equity," "Consolidated Statements of Cash Flows," "Notes to Consolidated Financial Statements" and "Quarterly Data (Unaudited)." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -16- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required for by this item is incorporated herein by reference from pages 6 through 10, inclusive, of the Company's definitive proxy statement to be filed pursuant to Regulation 14A with the Securities and Exchange Commission relating to its Annual Meeting of Shareholders to be held April 29, 1997 (the "Definitive Proxy Statement"), under the respective captions "Item 1. Election of Directors" and "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference from pages 10 and 11 of the Company's Definitive Proxy Statement under the caption "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference from pages 3 through 6, inclusive, of the Company's Definitive Proxy Statement under the caption "Voting Securities and Principal Shareholders." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference from pages 11 and 12 of the Company's Definitive Proxy Statement under the caption "Executive Compensation - Transactions with Management." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of Report. 1. Financial Statements The following Consolidated Financial Statements of the Company included in PART II of this report are incorporated by reference from the Company's Annual Report to Shareholders for the year ended December 31, 1996, furnished to the Securities and Exchange Commission pursuant to Rule 14a-3(b):
Page Reference to Item Annual Report ------------------------------------------------------------ ------------- Report of Coopers & Lybrand, L.L.P., Independent Auditors 7 Consolidated Balance Sheets as of December 31, 1996 and 1995 8 Consolidated Income Statements for the three years in the period ended December 31, 1996 9 Consolidated Statements of Changes in Stockholders' Equity for the three years in the period ended December 31, 1996 10 Consolidated Statements of Cash Flows for the three years in the period ended December 31, 1996 11 Notes to Consolidated Financial Statements 12-26
-17- 2. Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions or are inapplicable or because the information required is included in the Company's Consolidated Financial Statements or notes thereto. 3. Exhibits The exhibits listed below are filed as part of or incorporated by reference in this report. Where such filing is made by incorporation by reference to a previously filed document, such document is identified in parenthesis. See the Index of Exhibits included with the exhibits filed as part of this report. No. Description --- ----------- 3.1 Restated Articles of Incorporation of Independent Bankshares, Inc. (Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 3.2 Restated Bylaws of Independent Bankshares, Inc. (Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 4.1 Specimen Stock Certificate for Common Stock of the Company (Exhibit 4.1 to the Company's Registration Statement on Form S-1, SEC File No. 333-16419) 10.1 Form of Nonqualified Option Agreement (Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10.2 Loan Agreement dated January 23, 1997, by and among Independent Bankshares, Inc. and Boatmen's First National Bank of Amarillo and related Variable Rate Promissory Note dated January 23, 1997, Security Agreement dated January 23, 1997 and Third Party Pledge Agreement dated January 23, 1997, executed by Independent Financial Corp. (filed herewith) 10.3 Master Equipment Lease Agreement, dated December 24, 1992, between Independent Bankshares, Inc. and NCR Credit Corporation, Amendment to Master Equipment Lease Agreement dated concurrently therewith, and related form of Schedule and Commencement Certificate (Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.4 Asset Purchase and Account Assumption Agreement dated March 4, 1996, between the Company and Coastal Banc ssb (Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.5 Agreement and Plan of Reorganization dated July 11, 1996, between the Company and Crown Park Bancshares, Inc. and Agreement and Plan of Merger dated July 11, 1996 between Western National Bank and First State, N.A. Abilene (Exhibit 1.1 to the Company's Current Report on Form 8-K dated July 11, 1996) 13.1 Annual Report to Shareholders for the year ended December 31, 1996 (filed herewith) -18- 21.1 Subsidiaries of Independent Bankshares, Inc. (Exhibit 21.1 to the Company's Registration Statement on Form S-1, SEC File No. 333-16419) 23.1 Consent of Coopers & Lybrand, L.L.P. (filed herewith) 27.1 Financial Data Schedule (filed herewith) (b) Current Reports on Form 8-K. Current Report on Form 8-K dated February 10, 1997, relating to the Company's acquisition of Crown Park Bancshares, Inc. and its subsidiary, Western National Bank -19- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDEPENDENT BANKSHARES, INC. By: /s/ Bryan W. Stephenson Bryan W. Stephenson, President and Chief Executive Officer Date: March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- --------------------------- -------------- /s/ Bryan W. Stephenson President, Chief Executive March 28, 1997 - ---------------------------- Officer and Director Bryan W. Stephenson /s/ Randal N. Crosswhite Senior Vice President, Chief March 28, 1997 - ---------------------------- Financial Officer, Corporate Randal N. Crosswhite Secretary and Director /s/ Lee Caldwell - ----------------------------- Director March 28, 1997 Lee Caldwell /s/ Mrs. Wm. R. (Amber) Cree Director March 28, 1997 - ---------------------------- Mrs. Wm. R. (Amber) Cree - ---------------------------- Director March __, 1997 Louis S. Gee /s/ Marshal M. Kellar Director March 28, 1997 - ---------------------------- Marshal M. Kellar -20- /s/ Tommy McAlister Director March 28, 1997 - ---------------------------- Tommy McAlister /s/ Scott L. Taliaferro Director March 28, 1997 - ---------------------------- Scott L. Taliaferro /s/ James D. Webster, M.D. Director March 28, 1997 - ---------------------------- James D. Webster, M.D. /s/ C. G. Whitten Director March 28, 1997 - ---------------------------- C.G. Whitten /s/ John A. Wright Director March 28, 1997 - ---------------------------- John A. Wright
-21- INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 3.1 Restated Articles of Incorporation of Independent Bankshares, Inc. (Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 3.2 Restated Bylaws of Independent Bankshares, Inc. (Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994) 4.1 Specimen Stock Certificate for Common Stock of the Company (Exhibit 4.1 to the Company's Registration Statement on Form S-1, SEC File No. 333-16419) 10.1 Form of Nonqualified Option Agreement (Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 10.2 Loan Agreement dated January 23, 1997, by and among Independent Bankshares, Inc. and Boatmen's First National Bank of Amarillo and related Variable Rate Promissory Note dated January 23, 1997, Security Agreement dated January 23, 1997 and Third Party Pledge Agreement dated January 23, 1997, executed by Independent Financial Corp. (filed herewith) 10.3 Master Equipment Lease Agreement, dated December 24, 1992, between Independent Bankshares, Inc. and NCR Credit Corporation, Amendment to Master Equipment Lease Agreement dated concurrently therewith, and related form of Schedule and Commencement Certificate (Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993) 10.4 Asset Purchase and Account Assumption Agreement dated March 4, 1996, between the Company and Coastal Banc ssb (Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) 10.5 Agreement and Plan of Reorganization dated July 11, 1996, between the Company and Crown Park Bancshares, Inc. and Agreement and Plan of Merger dated July 11, 1996 between Western National Bank and First State, N.A. Abilene (Exhibit 1.1 to the Company's Current Report on Form 8-K dated July 11, 1996) 13.1 Annual Report to Shareholders for the year ended December 31, 1996 (filed herewith) 21.1 Subsidiaries of Independent Bankshares, Inc. (Exhibit 21.1 to the Company's Registration Statement on Form S-1, SEC File No. 333-16419) 23.1 Consent of Coopers & Lybrand, L.L.P. (filed herewith) 27.1 Financial Data Schedule (filed herewith) -22- EX-10.2 2 EXHIBIT 10.2 LOAN AGREEMENT BY AND BETWEEN INDEPENDENT BANKSHARES, INC. AND BOATMEN'S FIRST NATIONAL BANK OF AMARILLO JANUARY 23, 1997 LOAN AGREEMENT TABLE OF CONTENTS ARTICLE 1. GENERAL TERMS ...................................... 1 1.1 Terms Defined Above ................................ 1 1.2 Certain Definitions ................................ 1 1.3 Accounting Principles .............................. 5 ARTICLE 2. AMOUNTS AND TERMS OF LOANS ......................... 5 2.1 The Loans and Commitments .......................... 5 2.2 Payment Procedure .................................. 5 2.3 Interest Rate ...................................... 6 2.4 Prepayment ......................................... 6 2.5 Business Days ...................................... 6 ARTICLE 3. COLLATERAL.......................................... 6 ARTICLE 4. REPRESENTATIONS AND WARRANTIES ..................... 7 4.1 Corporate Existence ................................ 7 4.2 Corporate Power and Authorization .................. 7 4.3 Binding Obligations ................................ 7 4.4 No Legal Bar or Resultant Lien ..................... 7 4.5 No Consent ......................................... 8 4.6 Financial Statements ............................... 8 4.7 Investments and Guaranties ......................... 8 4.8 Liabilities; Litigation ............................ 8 4.9 Taxes; Governmental Charges ........................ 8 4.10 Title to Properties ................................ 8 4.11 Defaults ........................................... 9 4.12 Use of Proceeds; Margin Stock ...................... 9 4.13 Compliance with the Law ............................ 9 4.14 No Misstatement .....................................9 4.15 Subsidiaries ........................................9 4.16 Location of Business and Offices ....................9 4.17 Fiscal Year .........................................10 4.18 Agreements ..........................................10 ARTICLE 5. AFFIRMATIVE COVENANTS ..............................10 5.1 Financial Statements and Reports ...................10 (a) Annual Reports ................................10 (b) Quarterly Reports .............................10 (c) Audit Reports .................................11 (d) Other Reports .................................11 5.2 Quarterly Certificates of Compliance ...............11 5.3 Taxes and Other Liens ..............................11 i 5.4 Maintenance ........................................12 5.5 Further Assurances .................................12 5.6 Performance of Obligations .........................12 5.7 Reimbursement of Expenses ..........................12 5.8 Insurance ..........................................12 5.9 Right of Inspection ................................13 5.10 Notice of Certain Events ...........................13 ARTICLE 6. NEGATIVE COVENANTS .................................14 6.1 Debt ...............................................14 6.2 Liens ..............................................14 6.3 Investments, Loans and Advances ....................14 6.4 Dividends, Distributions and Redemptions ...........14 6.5 Nature of Business .................................15 6.6 Acquisitions and Mergers ...........................15 6.7 Sale of Assets .....................................15 6.8 Proceeds of Notes ..................................15 6.9 Purchase of Assets .................................15 6.10 Judicial Actions ...................................15 6.11 Minimum Capital ....................................15 6.12 Minimum Capital to Assets Ratio ....................15 6.13 Maximum Classified Assets ..........................15 6.14 Minimum Income .....................................16 6.15 Non Performing Loans ...............................16 6.16 Non Performing Assets ..............................16 ARTICLE 7. EVENTS OF DEFAULT ..................................16 7.1 Events .............................................16 (a) Payments ......................................16 (b) Representations and Warranties ................16 (c) Covenants .....................................16 (d) Other Security Instrument Obligations .........16 (e) Involuntary Bankruptcy or Other Proceedings ...16 (f) Voluntary Petitions, etc. .....................17 (g) Discontinuance of Business ....................17 (h) Undischarged Judgments ........................17 (i) Default on Other Agreements ...................17 (j) Material Adverse Effect .......................17 (k) Shares ........................................17 (l) Dividends .....................................18 7.2 Remedies ...........................................18 7.3 Right of Set-off ...................................18 7.4 Collateral .........................................18 7.5 Bank Not in Control ................................19 7.6 Diminution in Value of Collateral ..................19 7.7 Delegation of Duties and Rights ....................19 ii ARTICLE 8. CONDITIONS OF LENDING ..............................19 8.1 Loans ..............................................19 (a) Notes .........................................19 (b) Secretary's Certificates ......................19 (c) Security Instruments ..........................20 (d) No Default ....................................20 (e) Representations and Warranties ................20 (f) No Material Adverse Change ....................20 (g) Other .........................................20 ARTICLE 9. MISCELLANEOUS ......................................20 9.1. Notices ............................................20 9.2 Amendments and Waivers .............................21 9.3 Invalidity .........................................21 9.4 Survival of Agreements .............................21 9.5 Successors and Assigns .............................21 9.6 Renewal, Extension or Rearrangement ................22 9.7 Waivers ............................................22 9.8 Cumulative Rights ..................................22 9.9 Time ...............................................22 9.10 Singular and Plural ................................22 9.11 Construction .......................................22 9.12 Interest ...........................................22 9.13 References .........................................23 9.14 Taxes, Etc. ........................................23 9.15 Governmental Regulation ............................23 9.16 Titles of Articles, Sections and Subsections .......23 9.17 Counterparts .......................................24 9.18 Entirety ...........................................24 SIGNATURES .....................................................25 EXHIBITS Note ....................................................Exhibit A Certificate of Compliance ...............................Exhibit B Opinion of Counsel ......................................Exhibit C iii LOAN AGREEMENT This Loan Agreement ("Agreement") made and effective as of January 23, 1997, between INDEPENDENT BANKSHARES, INC. A Texas corporation (the "Borrower"), whose address is 547 Chestnut, Abilene, Texas 79604 and BOATMEN'S FIRST NATIONAL BANK OF AMARILLO, a national banking association, (the "Bank"), whose address is P. O. Box 1331, Amarillo, Potter County, Texas 79180, evidences that the Borrower desires to borrow from the Bank and the Bank desires to loan to the Borrower certain funds on the terms and conditions hereinafter specified and that therefore, in consideration of the premises and of the mutual covenants and obligations specified in this Agreement, the parties to the Agreement agree as follows: ARTICLE 1 GENERAL TERMS 1.1 Terms Defined Above. As used herein, the terms "Borrower" and "Bank" shall have the meanings indicated above. 1.2 CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings, unless the context otherwise requires: "Agreement" shall mean this Loan agreement, as the same from time to time may be amended or supplemented. "Bank Liens" shall mean Liens in favor of the Bank securing all or any of the Indebtedness, including, but not limited to, rights in any Collateral created in favor of the Bank, whether by mortgage, pledge, hypothecation, assignment, transfer or other granting or creation of Liens. "Base Rate" shall mean the rate of interest established by Boatmen's First National Bank of Amarillo, Amarillo, Texas, from time to time as its general reference rate, whether or not actually charged in each instance. "Business Day" shall mean a day of the year on which banks are not required or authorized to close in Amarillo, Texas. "Cash Flow" shall mean for any period the Borrower's net profit after provision for federal income tax less any items of income which are of a non-recurring nature. PAGE 2 "Classified Assets" shall mean the sum of all assets of FSBA which are classified as substandard, doubtful or as a loss by any examiner of the Comptroller of the Currency, Federal Deposit Insurance, Corporation, Federal Reserve, any other regulatory authority, or by Bank or a third party pursuant to Section 5.9 hereof. "Collateral" shall mean all property which is subject to Bank Liens pursuant to Article 3 hereof. "Commitments" shall mean, collectively, the obligations of the Bank to make loans to the Borrower pursuant to Section 2.1 hereof. "Debt" shall mean, for any Person, without duplication: (i) all indebtedness of such Person for borrowed money or for the deferred purchase price of property of services for which such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which such Person otherwise assures a creditor against loss; and (ii) all obligations of such Person under leases which shall have been, or should have been, in accordance with generally accepted accounting principles in effect on the date of this Agreement, recorded as capital leases for which such Person is liable, contingently or otherwise, as obligor, guarantor or otherwise, or in respect of which such Person otherwise assures a creditor against loss. "Default" shall mean the occurrence of any of the events specified in section 7.1 hereof, whether or not any requirement for notice or lapse of time or other condition precedent has been satisfied. "Event of Default" shall mean the occurrence of any of the events specified in section 7.1 hereof, whether or not any requirement for notice or lapse of time of any condition precedent has been satisfied. "Financial Statements" shall mean the financial statements of the Borrower described or referred to in Section 4.6 hereof. "FSBA" shall mean First State Bank, N.A. Abilene, Texas PAGE 3 "Governmental Requirement" shall mean any law, statute, code, ordinance, order, rule, regulation, judgment, decree, injunction, franchise, permit, certificate, license, without limitation, any of the foregoing which relate to environmental standards or controls, energy regulations and occupational, safety and health standards or controls) of any (domestic or foreign) federal, state, county, municipal or other government, department, commission, board, court, agency or other instrumentality of any of them, which exercises jurisdiction over the Borrower or any of its property. "Highest Lawful Rate" shall mean the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on this Note or on other Indebtedness, as the case may be, under laws applicable to the Bank which are presently in effect or, to the extent allowed by law, under such applicable laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable laws now allow. To the extent that Texas Revised Civil Statutes Art, 5069-1.4 of determining the Highest Lawful Rate, the Bank hereby elects to determine the applicable rate ceiling under such Article by the indicated (weekly) rate ceiling from time to time in effect, subject to the Bank's right to subsequently change such method in accordance with applicable law. "Indebtedness" shall mean any and all amounts owing or to be owing by the Borrower to the Bank in connection with the Notes or this Agreement, and all other liabilities of the Borrower to the Bank from time to time existing, whether in connection with this or other transactions. "Lien" shall mean any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on the common law, statute or contract, and including but not limited to the lien or security interest arising from mortgage, encumbrance, pledge, security agreement, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. PAGE 4 "Material Adverse Effect" shall mean any material and adverse effect on (i) the assets, liabilities, financial condition, business, operations, affairs or circumstances of the Borrower from those reflected in the Financial Statements or from the facts represented or warranted in this Agreement or any Security Instrument, or (ii) the ability of the Borrower to carry out its or his business as at the date of this Agreement or as proposed at the date of this Agreement to be conducted or meet its or his obligations under the Notes, this Agreement or Security Instruments on a timely basis. "Notes" shall mean, collectively, the Advancing Note/Term Note together with any and all renewals, extensions for any period, increases or rearrangements of said promissory notes. "Permitted Liens" shall mean: (i) Liens for taxes, assessments or other governmental charges or levies not yet due or which are being contested in good faith by appropriate action by or on behalf of the Borrower, (ii) Liens in connection with workmen's compensation, unemployment insurance or other social security, old age pension or public liability obligations, and (iii) vendors', carriers', warehousemen's, repairmen's, mechanic's, workmen's, materialmen's, construction or improvement of any property in respect of obligations which are not yet due. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof, or any other form of entity. "Security Instruments" shall mean the instruments described in section 8.1 (c) of this Agreement and any and all other instruments now or hereafter executed in connection with or as security for the payment of the Notes. "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the issued and outstanding securities having ordinary voting power for the election of directors is owned or controlled, directly or indirectly, by the Borrower and/or one or more of its subsidiaries. "Term Commitment" shall mean the commitments of the Bank to make the Term Loan provided for in Section 2.1 of this Agreement. PAGE 5 "Term Loan" shall mean the loan made by the Bank pursuant to the Term Commitment of the Bank as set forth in Section 2.1 of this Agreement. "Term Note" shall mean the promissory note of the Borrower described in Section 2.1 hereof and being in the form of the note attached as Exhibit A hereto. "Advancing Loan" shall mean the loan made by the Bank pursuant to the Term Commitment of the Bank as set forth in Section 2.1 of this Agreement. "UCC" means the Uniform Commercial Code as enacted by the State of Texas or other applicable jurisdiction, as amended. 1.3 ACCOUNTING PRINCIPLES. Where the character or amount of any asset or liability or item of income or expense is required to be determined or any other accounting computation is required to be made for the purposes of this Agreement, this shall be done in accordance with generally accepted accounting principles applied on a basis consistent with those reflected by the Financial Statements, except where such principles are inconsistent with the requirements of this Agreement. ARTICLE 2 AMOUNTS AND TERMS OF LOANS 2.1 THE LOANS AND COMMITMENTS. Subject to the terms and conditions and relying on the representations and warranties contained in this Agreement, the Bank agrees to make the following loan to the Borrower: ADVANCING LOAN. The Bank agrees to make a loan to the Borrower in the amount of $1,200,000.00 which shall be evidenced by the Borrower's issuance, execution and delivery of the Note dated as of the date of such loan. The Note shall be due and payable as provided therein. Principal and all accrued interest shall be finally due and payable on April 23, 1997. The Loan is an advancing loan and shall not be construed as a revolving line of credit as reborrowings are not permitted. At maturity of the Advancing Note, Bank agrees to renew the Advancing Note into a Term Note, in an amount not to exceed the outstanding balance. The term note will be repaid in equal annual installments over a seven year period. Interest will be payable quarterly. 2.2 PAYMENT PROCEDURE. All payments and prepayments made by the Borrower under the Notes or this Agreement shall be made to the Bank at its office at the address indicated in the first paragraph PAGE 6 of this Agreement and shall be made in immediately available funds in Amarillo, Texas prior to 3:00 o'clock p.m., Amarillo time, on the date that such payment is required or permitted to be made. Any payment received by the Bank after 3:00 o'clock p.m., Amarillo time, on any day shall be considered for all purposes (including the calculation of interest, to the extent permitted by applicable law) as having been made on the next following Business Day. 2.3 INTEREST RATE. Prior to maturity, the unpaid principal amount of the Note shall bear interest at a rate per annum equal to the lesser of (a) the Base Rate calculated as if a year consisted of 360 days, with adjustments in such varying rate of interest to be made as and when the Base Rate changes, or (b) the Highest Lawful Rate. From and after maturity, the unpaid principal amount of the Notes shall, respectively, bear interest at the Highest Lawful Rate. No notice shall issue to Borrower when the Base Rate or Highest Lawful Rate may change. 2.4 PREPAYMENT. The Borrower may at its option prepay any of the Notes either in whole at any time, or in part from time to time, without premium or penalty, but with accrued interest to the date of prepayment on the amount being prepaid. All partial prepayments of principal of the Notes shall be applied to the principal installments in the inverse order of maturity; provided, however, that at Borrower's option, it may prepay at anytime principal in an amount not to exceed the principal amount of the installment next coming due on the note and have such prepayment applied to the reduction of the principal of that next due installment. 2.5 BUSINESS DAY. If the date of any payment of principal or interest on any of the Notes falls on a day which is not a Business Day, then for all purposes of such Note and this Agreement the same shall be deemed to have fallen on the next following Business Day and such extension of time shall in such case be included in the computation of payment of interest for the period for which such payment is due and not included for the period for which the next such payment is due. ARTICLE 3 COLLATERAL To secure full and complete payment and performance of the Indebtedness, Borrower shall cause to be granted and conveyed to, and create in favor of, the Bank, Bank Liens in, to and on all of the following items and types of property: (a) 250,000 shares of common stock of FSBA and all other stock in said bank now owned or hereafter acquired by Borrower or any entity owned or controlled by Borrower, together with all cash and stock dividends and splits declared thereon; PAGE 7 (b) 1,000 shares of common stock of Independent Financial, Corp. and all other stock in said Bank now owned or hereafter acquired by Borrower or any entity owned or controlled by Borrower, together with all cash and stock dividends and splits declared thereon; (c) All replacements, accessions, substitutions and proceeds of any of the above. ARTICLE 4 REPRESENTATIONS AND WARRANTIES As a material inducement to the Bank to enter into this Agreement, the Borrower represents and warrants to the Bank (which representations and warranties shall survive the delivery of the Notes) that: 4.1 CORPORATE EXISTENCE. The Borrower is a corporation duly organized and legally existing under the laws of the State of Texas and is duly qualified as a foreign corporation in all jurisdictions wherein the property owned or the business transacted makes such qualification necessary or advisable. 4.2 CORPORATE POWER AND AUTHORIZATION. The Borrower is duly authorized and empowered to create and issue the Notes; and to execute, deliver and perform this Agreement and the Security Instruments and all corporate action on the Borrower's part requisite for the due creation and issuance of the Notes and for the due execution, delivery and performance of the Security Instruments has been duly and effectively taken. 4.3 BINDING OBLIGATION. This Agreement, the Notes and the Security Instruments upon their creation, issuance, execution and delivery will, constitute valid and binding obligations of the Borrower enforceable in accordance with their terms subject to applicable bankruptcy, insolvency or other similar law affecting the enforceability of creditors' rights. 4.4 NO LEGAL BAR OR RESULTANT LIEN. This Agreement, the Notes and the Security Instruments do not and will not violate any provisions of the articles or certificate of incorporation or bylaws of the Borrower, or any contract, agreement, instrument or Governmental Requirement to which the Borrower is subject, or result in the creation or imposition of any Lien upon any properties of the Borrower other than in favor of the Bank. PAGE 8 4.5 NO CONSENT. The Borrower's execution, delivery and performance of this Agreement and the Notes and the Security Instruments do not require the consent or approval of any other Person which has not been previously obtained, including, without limitation, any regulatory authority or governmental body of the United States of America or any state thereof or any political subdivision of the United States of America or any state thereof. 4.6 FINANCIAL STATEMENTS. The annual financial statements of the Borrower for Borrower's fiscal year ended December 31, 1995 (including any related schedules or notes) which have been delivered to the Bank, have been prepared in accordance with generally accepted accounting principles, consistently applied, and present fairly the financial condition and changes in financial position of the Borrower as of the date or dates and for the period or periods stated (subject only to normally year-end audit adjustments with respect to such unaudited interim statement). No material change, either in any case or in the aggregate, has since occurred in the condition, financial or otherwise, of the Borrower. 4.7 INVESTMENTS AND GUARANTIES. At the date of this Agreement, the Borrower has not made investments in, advances to or guaranties of the obligations of any Person not otherwise disclosed in the Financial Statements. 4.8 LIABILITIES; LITIGATION. Except for liabilities incurred in the normal course of business, the Borrower has no (individually or in the aggregate) liabilities, direct or contingent, except as disclosed or referred to in the Financial Statements. At the date of this Agreement, there is no litigation, legal, administrative or arbitral proceeding, investigation or other action of any nature pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower which involves the possibility of any judgment or liability not fully covered by insurance. To the best of the Borrower's knowledge, no unusual or unduly burdensome restriction, restraint or hazard exists by contract, law or governmental regulation or otherwise relative to the business or properties of the Borrower. 4.9 TAXES: GOVERNMENTAL CHARGES. The Borrower has filed all tax returns and reports required to be filed and has paid all taxes, assessments, fees and other governmental charges levied upon it or upon its properties or income which are due and payable, including interest and penalties,or has provided adequate reserves for the payment thereof. 4.10 TITLE TO PROPERTIES. The Borrower has good and marketable title to all of its properties, free and clear of all Liens except Permitted Liens, and has full authority to create Bank Liens thereon. PAGE 9 4.11 DEFAULTS. The Borrower is not in default and no event or circumstance has occurred which, but for the passage of time or the giving of notice, or both, would constitute a default by the Borrower under any loan or credit agreement, indenture, mortgage, deed of trust, security agreement or other agreement evidencing or pertaining to any Debt of the Borrower, or under any agreement or instrument to which the Borrower is a party or by which the Borrower is bound. No Default hereunder has occurred or is continuing. 4.12 USE OF PROCEEDS: MARGIN STOCK. The proceeds of the loan made pursuant to Section 2.1 and evidenced by the Notes will be used by the Borrower to purchase outstanding shares of Crown Park Bancshares. None of such proceeds will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. Part 221), or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry a margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of such Regulation U. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. Neither the Borrower nor any person acting on behalf of the Borrower has taken or will take any action which might cause the Notes or any of the Security Instruments to violate Regulation U or any other regulation of the Board of Governors of the Federal Reserve System or to violate Section 7 of the Securities Exchange Act of 1934 or any rule or regulation thereunder, in each case as now in effect or as the same may hereinafter be in effect. 4.13 COMPLIANCE WITH THE LAW. The Borrower is not in violation of any Governmental Requirement and has not failed to obtain any license, permit, franchise or other governmental authorization necessary to the ownership of any of its properties or the conduct of its business. 4.14 NO MISSTATEMENT. No information, exhibit or report furnished to the Bank by the Borrower in connection with the negotiation of this Agreement contains any misstatement of fact or omitted to state any fact necessary to make the statement continued therein not misleading. 4.15 SUBSIDIARIES. Borrower has no Subsidiaries, other than FSBA and Independent Financial, Corp., a Delaware Corporation. 4.16 LOCATION OF BUSINESS AND OFFICE. The Borrower's principal place of business and chief executive offices are located at the address indicated in the initial paragraph of this Agreement. PAGE 10 4.17 FISCAL YEAR. Borrower's fiscal year ends December 31 of each calendar year. 4.18 AGREEMENTS. Borrower has furnished to Bank copies of all buy-sell agreements, stock redemption agreements and all other agreements and contracts involving the stock of FSBA. ARTICLE 5 AFFIRMATIVE COVENANTS As a material inducement to the Bank to enter into this Agreement, the Borrower agrees that it will at all times comply with the covenants contained in this Article 5, from the date hereof and for so long as any part of the Indebtedness or the Commitments are outstanding. 5.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will promptly furnish to the Bank from time to time upon request such information regarding the business and affairs and financial condition of the Borrower as the Bank may reasonably request, including but not limited to: (a) ANNUAL REPORTS - promptly after becoming available and in any event within ninety (90) days after the close of each fiscal year of the Borrower: (i) the annual report of Borrower; and (ii) the Form 10-K of Borrower, if Borrower is required to file such reports pursuant to applicable law; and (iii) the annual call report of FSBA. (b) QUARTERLY REPORTS - promptly after becoming available and in any event within forty-five (45) days after the end of each calendar quarter: (i) the Form 10-Q of the Borrower as of the end of such quarter, if Borrower is required to file such reports pursuant to applicable law. (ii) copies of the call report for FSBA for the previous quarter; (iii) a list of all Classified Assets of FSBA or assets which are on a watch list showing any loan loss reserves allocated to each such loan; PAGE 11 (iv) a list of non-performing assets of FSBA showing the amount carried on each bank's book's respectively, and any loan loss reserves allocated by bank in connection therewith. (c) REPORTS - promptly upon receipt thereof, each other report submitted to the Borrower by independent accountants in connection with any annual, interim or special audit made by them of the books of the Borrower or FSBA; (d) OTHER REPORTS - promptly upon their becoming available, each financial statement, report or notice sent by the Borrower to its stockholders and all Federal Reserve reports of FSBA or Borrower, including, but not limited to, any FRY-6, FRY-6A, FRY-9LP, FRY-9C and any agreement, order or decree issued by the Federal Reserve (or regional bank), the FDIC, or the Comptroller of the Currency under which FSBA may operate now or in the future. 5.2 QUARTERLY CERTIFICATES OF COMPLIANCE. On or before the forty-fifth (45th) day following the end of each calendar quarter (or the first Business Day thereafter), the Borrower will furnish or cause to be furnished to the Bank a certificate in the form attached as Exhibit B hereto signed by a principal financial officer of the Borrower (i) stating that a review of the activities of the Borrower has been made under his supervision with a view to determining whether the Borrower has fulfilled all obligations under this Agreement, the Notes and the Security Instruments and that all representations made herein or therein continue to be true and correct (or specifying the nature of any change), or if the Borrower shall be in Default, specifying any Default and the nature and status thereof; (ii) to the extent requested from time to time by the Bank, specifically affirming compliance of the Borrower with any of its representations or obligations under such instruments; (iii) containing or accompanied by such financial or other details, information and material as the Bank may reasonably request to evidence such compliance. 5.3 TAXES AND OTHER LIENS. The Borrower will pay and discharge promptly all taxes, assessments and governmental charges or levies imposed upon the Borrower or upon the income or any property of the Borrower as well as all claims of any kind (including claims for labor, materials, supplies and rent) which, if unpaid, might become a Lien upon any or all of the property of the Borrower; provided, however, that the Borrower shall not be required to pay any such tax, assessment, charge, levy or claim if the amount, applicability or validity thereof shall currently be contested in good faith by appropriate proceedings diligently conducted by or on behalf of the Borrower, and if the Borrower shall have set up reserves therefore adequate under generally accepted accounting principles. PAGE 12 5.4 MAINTENANCE. The Borrower will (i) maintain its corporate existence and all of its rights and franchises, and (ii) observe and comply with all Governmental Requirements. 5.5 FURTHER ASSURANCES. The Borrower will cure promptly any defects in the creation and issuance of the Notes and the execution and delivery of the Security Instruments, including this Agreement. The Borrower at its expense will promptly execute and deliver to the Bank upon request all such other and further documents, agreements and instruments in compliance with or accomplishment of the covenants and agreements of the Borrower in this Agreement, or the Security Instruments or to correct any omissions in the Security Instruments, or more fully to state the obligations set out herein or in any of the Security Instruments. 5.6 PERFORMANCE OF OBLIGATIONS. The Borrower will pay the Notes according to the reading, tenor and effect thereof; and the Borrower will do and perform every act and discharge all of the obligations provided to be performed and discharged by the Borrower under the Security Instruments, including this Agreement, at the time or times and in the manner specified. 5.7 REIMBURSEMENT OF EXPENSES. The Borrower will pay all reasonable legal fees incurred by the Bank in connection with the preparation of this Agreement and any and all other Security Instruments contemplated hereby (including any amendments hereto and thereto or consents or waivers hereunder or thereunder). The Borrower will, upon request, promptly reimburse the Bank for all amounts expended, advanced or incurred by the Bank to satisfy any obligation of the Borrower under this Agreement or any other Security Instrument, or to collect the Notes, or to enforce the rights of the Bank under this Agreement or any other Security Instrument, which amounts will include all court costs, attorneys' fees (including, without limitation, for trial, appeal or other proceedings), fees of auditors and accountants and investigation expenses reasonably incurred by the Bank in connection with any such matter, together with interest at the post-maturity rate specified in section 2.3 above on each such amount from the date of written demand or request by the Bank for reimbursement until the date of reimbursement to the Bank. 5.8 INSURANCE. The Borrower will cause FSBA to maintain and continue to maintain, with financially sound and reputable insurers, insurance with respect to its properties and business against such liabilities, casualties, risks and contingencies and in such types and amounts as is customary in the case of Persons engaged in the same or similar businesses and similarly situated. The Borrower will furnish or cause to be furnished to the Bank prior to funding and from time to time a summary of the insurance coverage of FSBA in form and substance satisfactory to the Bank and if requested will furnish the Bank copies of the applicable policies. In the case of any fire, accident or other casualty PAGE 13 causing loss or damage to the properties of the Borrower, the proceeds of such policies shall be used at the option of the Borrower (i) to repair or replace the damaged property, or (ii) to prepay the Indebtedness. 5.9 RIGHT OF INSPECTION. The Borrower will permit any officer, employee or agent of the Bank to visit and inspect any of the properties of the Borrower and FSBA, examine the Borrower's and FSBA's books of record and accounts, take copies and extracts therefrom, and discuss the affairs, finances and accounts of the Borrower with the Borrower's officer, accountants and auditors, all at such reasonable times and as often as the Bank may reasonably desire. Further, Borrower shall allow Bank to conduct an annual, detailed review of FSBA's loan portfolio. If, after Bank's examination of FSBA's loan portfolio, Bank's calculation of Classified Assets exceeds FSBA's and BFNB's internal classification by more than 20 percent, and such classification would cause an Event of Default hereunder, then a third party acceptable to Borrower and Bank shall be appointed to appraise and classify FSBA's loan portfolio. 5.10 NOTICE OF CERTAIN EVENTS. The Borrower shall promptly notify the Bank if the Borrower learns of the occurrence of (i) any event which constitutes a Default, together with a detailed statement by a responsible officer of the Borrower of the steps being taken to cure the effect of such Default; or (ii) the receipt of any notice from, or the taking of any other action by, the holder of any promissory note, debenture or other evidence of indebtedness of the Borrower or of any security (as defined in the Securities Act of 1933, as amended) of the Borrower with respect to a claimed default, together with a detailed statement by a responsible officer of the Borrower or of any security (as defined in the Securities Act of 1933 as amended) of the Borrower with respect to a claimed default, together with a detailed statement by a responsible officer of the Borrower by specifying the notice given or other action taken by such holder and the nature of the claimed default and what action the Borrower is taking or proposes to take with respect thereto; (iii) any material legal, judicial or regulatory proceedings affecting the Borrower; (iv) any dispute between the Borrower and any governmental or regulatory body; (v) any event or condition having a Material Adverse Effect; (vi) any event which could cause Borrower's assets on a consolidated basis to decline by 10% or more; (vii) any litigation shall be commenced against Borrower which, together with court costs and attorneys's fees could result in a liability in excess of $50,000.00. PAGE 14 ARTICLE 6 NEGATIVE COVENANTS As a material inducement to Bank to enter into this Agreement, the Borrower agrees that it will at all times comply with the covenants contained in this Article 6, from the date hereof and for so long as any part of the Indebtedness is outstanding. 6.1 DEBT. Without the prior written consent of Bank, the Borrower will not incur, create, assume or suffer to exist any Debt, except: (a) the Note; (b) accounts payable (for the deferred purchase price of property or services) from time to time incurred in the ordinary course of business and which are not (i) in excess of ninety (90) days past the invoice or billing date or (ii) being disputed by the Borrower in good faith by appropriate proceedings, diligently conducted; and (c) leases associated with data processing, automated teller machines and/or subsidiary branch locations. 6.2 LIENS. The Borrower will not create, incur, assume or permit to exist any Lien upon any of its properties (now owned or hereafter acquired), except for the Bank Liens and Permitted Liens. 6.3 INVESTMENTS, LOANS AND ADVANCES. The Borrower will not make or permit to remain outstanding any loans or advances to or for investments in any Person, except that the foregoing restrictions shall not apply to: (a) investments in direct obligations of the United States of America or any agency thereof; (b) investments in certificates of deposit of the Bank of maturities less than one year, or issued by other commercial banks in the United States; and (c) investments in overnight federal funds transactions. 6.4 DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. So long as Borrower's debt to Bank exceeds $1,200,000, Borrower, without the written consent of Bank, will not declare or pay any dividend (other than dividends on preferred stock), purchase, redeem or otherwise acquire for value any of its stock now or hereafter outstanding, return any capital to its stockholders or make any distribution of its assets to its stockholders as such. Once Borrower's debt to Bank has been reduced to $1,200,000 or less, Borrower may pay common stock dividends so long as such dividends PAGE 15 would not cause Borrower's capital to be less than its allowable minimum capital as defined in Sections 6.12 and 6.13 of this Agreement. 6.5 NATURE OF BUSINESS. The Borrower will not permit any material change to be made in the character of its business as carried on at the date hereof. 6.6 ACQUISITIONS AND MERGERS. The Borrower will not merge or consolidate, with any Person, (other than subsidiaries), or acquire, other than in the normal course of business, directly or indirectly, all or any substantial portion of the property, assets or stock of, or interest in, any Person, except with the express written consent of the Bank. 6.7 SALE OF ASSETS. The Borrower will not, directly or indirectly, sell, lease or otherwise dispose of any of its assets except as permitted under Section 6.3 of this Agreement. 6.8 PROCEEDS OF NOTES. The Borrower will not permit the proceeds of the Note to be used for any purposes other than those permitted by Section 4.12 hereof. 6.9 PURCHASE OF ASSETS. The Borrower shall not make any expenditure in any fiscal year of the Borrower for capital or fixed assets aggregating $200,000.00 or more, without the prior written consent of Bank. The FSBA Branch expansion and the data processing system are exempt from this paragraph. 6.10 JUDICIAL ACTIONS. Borrower shall not fail to have discharged within a period of thirty (30) days after the commencement thereof, any attachment, sequestration or similar proceeding against any of its assets. 6.11 MINIMUM CAPITAL. Borrower shall not have capital of less than $12,500,000 at any time. FSBA shall not have capital less than $11,500,000 at any time. For purposes of this covenant, "Capital" shall mean assets less liabilities calculated in accordance with standard regulatory accounting practices. 6.12 MINIMUM CAPITAL TO ASSETS RATIO. Borrower, on a consolidated basis, shall not allow the ratio of (i) its capital, to (ii) its total assets to be less than 6.5%. FSBA shall not allow the ratio of (i) its capital, to (ii) its total assets to be less than 6.5%. These ratio requirements will be increased to 7.0% subsequent to March 31, 1999. For purposes of this covenant, "Capital" shall mean assets less liabilities calculated in accordance with standard regulatory accounting practices.. 6.13 MAXIMUM CLASSIFIED ASSETS. FSBA shall not have Classified Assets in excess of 70% of its capital. For purposes of this covenant, "Capital" shall mean total assets less total liabilities. PAGE 16 6.14 MINIMUM INCOME. FSBA shall not show net after-tax income of less than $70,000 quarterly beginning June 30, 1997. 6.15 NON-PERFORMING LOANS RATIO. FSBA shall not show non- performing loans to total loans greater than 1.50%. Non-performing loans shall be defined as loans past due over 90 days and still accruing plus non-accrual loans plus restructured loans. 6.16 NON-PERFORMING ASSETS RATIO. FSBA shall not show non- performing assets to total loans plus other real estate owned greater than 2.00%. Non-performing assets shall be defined as non- performing loans plus other real estate owned. ARTICLE 7 EVENTS OF DEFAULT 7.1 EVENTS. Any of the following events shall be considered an "Event of Default" as that term is used herein: (a) Payments - default is made in the payment when due of any installment of principal or interest on the Note or any fee provided for herein or other Indebtedness; or (b) Representations and Warranties - any representation or warranty by the Borrower herein or in any Security Instrument, or in any certificate, request or other document furnished pursuant to our under this Agreement proves to have been incorrect in any material respect as of the date when made or deemed made; or (c) Covenants - default is made in the due observance or performance by the Borrower of any of the covenants or agreements contained in Articles 5 and 6 and, in the case of default under Article 5 such default continues for thirty (30) days after the first knowledge thereof by an officer of the Borrower; or (d) Other Security Instrument and Covenant Obligations - default is made in the due observance or performance by the Borrower of any of the other covenants or agreements contained in any Security Instrument or other document (including but not limited to that certain agreement regarding escrow account of even date herewith between Borrower and Bank); or (e) Involuntary Bankruptcy or Other Proceedings - an involuntary case or other proceeding shall be commenced against the Borrower which seeks liquidation, reorganization or other relief with respect to it or its debt or other liabilities under any bankruptcy, insolvency or other similar PAGE 17 law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed or unstayed for a period of 60 days; or an order for relief against the Borrower shall be entered in any such case under the Federal Bankruptcy Code; or (f) Voluntary Petitions, etc. - the Borrower shall commence voluntary case of other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts or other liabilities under any bankruptcy, insolvency or other similar law now or thereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to, or shall admit in writing its inability to pay its debt generally as they become due, or shall take any corporate action to authorize or effect any of the foregoing; or (g) Discontinuance of Business - the Borrower discontinues its usual business; or (h) Undischarged Judgments - Borrower shall fail within 30 days to pay, bond or otherwise discharge any judgment or order for the payment of money that is not otherwise being satisfied in accordance with its terms and is not stayed on appeal or otherwise being appropriately contested in good faith; (i) Default on Other Agreements - the Borrower shall suffer any acceleration, notice of default, filing of suit or notice or breach by any creditor, lessee or party to any agreement to which Borrower is a party when the amount in controversy exceeds $100,000.00 and the failure of Borrower to have such acceleration, notice of default, filing of suit or notice of breach contested, rescinded, withdrawn, cancelled or released, as the case may be, within 15 days thereafter; (j) Material Adverse Effect - any event occurs which has a Material Adverse Effect or which, but for the passage of time, would have a Material Adverse Effect; (k) FSBA Shares and Independent Financial, Corp. Shares - issues of any additional shares of any class of stock which is not immediately pledged as collateral for the note; PAGE 18 (l) Dividends - FSBA shall declare any dividend on its outstanding stock, other than dividends which Borrower pays to Bank on the Loan, which would cause the bank's capital to be less than its allowable minimum capital as defined in paragraphs 6.11 and 6.12; No Default described in subparagraphs (b), (c), or (d) above shall be deemed an Event or Default until 30 days shall have lapsed after notice to Borrower by Bank of such Default. 7.2 REMEDIES. Upon the occurrence of any Event of Default described in section 7.1(e) or (f) hereof, the Commitments and any other lending obligations of the Bank hereunder shall immediately terminate, and the entire principal amount of all Indebtedness then outstanding together with interest then accrued thereon shall at Bank's option become immediately due and payable, all without written notice and without presentment, demand, notice of nonpayment, protest, notice of protest or dishonor, notice of intention to accelerate or of acceleration, bringing of suit, or any other notice of default of any kind, all of which are hereby expressly waived by the Borrower. Upon the occurrence and at any time during the continuance of any other Event of Default specified in section 7.1 hereof, the Bank may by written notice to the Borrower, declare the entire principal amount of all Indebtedness then outstanding together with interest then accrued thereon to be immediately due and payable without presentment, demand, notice of nonpayment, protest, notice of protest or dishonor, notice of intention to accelerate or of acceleration, bringing of suit, or other notice of default of any kind, all of which are hereby expressly waived by the Borrower. 7.3 RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default, or if the Borrower becomes insolvent, however evidenced, the Bank is hereby authorized at any time and from time to time, without notice to the Borrower (any such notice being expressly waived by the Borrower), to set-off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Borrower against any and all of the Indebtedness of the Borrower, irrespective of whether or not the Bank shall have made any demand under this Agreement or the Notes and although such obligations may be unmatured. The Bank agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Bank may have. 7.4 COLLATERAL. Borrower shall not be entitled to a release of any of the Collateral, notwithstanding that same may have been sold or a reduction of principal may have been made on any of the PAGE 19 Notes, and Bank shall thereafter be entitled to retain all proceeds of any kind from the sale of assets of Borrower. Further, upon the occurrence of any Event of Default, Bank may, in its discretion, but shall not be required to, exercise such rights as are provided it in any of the Security Instruments or at law or in equity. Nothing contained in this Article shall be construed to limit or amend in any way the Events of Default enumerated in any Security Instrument or any other document executed in connection with the transactions contemplated herein. 7.5 BANK NOT IN CONTROL. None of the covenants or other provisions contained in this Agreement or the Security Instruments shall, or shall be deemed to, give Bank the right to exercise control over the affairs or management of Borrower or any Guarantor, the rights of Bank being limited to the right to exercise the remedies provided in this Article. 7.6 DIMINUTION IN VALUE OF COLLATERAL. Bank shall have no liability or responsibility whatsoever for any diminution in or loss of value of any Collateral, except for that caused by Bank's willful misconduct or negligence. 7.7 DELEGATION OF DUTIES AND RIGHTS. Bank may perform any of its duties or exercise any of its rights under this Agreement or the Security Instruments by or through its officers, directors, employees, attorney, agents or other representatives. ARTICLE 8 CONDITIONS OF LENDING The obligations of the Bank to make the loan pursuant to this Agreement are subject to the conditions precedent stated in this Article 8. 8.1 LOAN. The obligation of the Bank to make the initial loan under this Agreement is subject to the following conditions precedent wherein each document to be delivered to the Bank shall be in form and substance satisfactory to it: (a) Note - the Borrower shall have duly and validly issued, executed and delivered the Note to the Bank. (b) Secretary's Certificates - (i) the Bank shall have received certificates of the Secretary or Assistant Secretary of the Borrower setting forth (A) resolutions of its board of directors in form and substance satisfactory to the Bank with respect to the authorization of the Notes, this PAGE 20 Agreement and any Security Instruments provided herein to which each is a party and the officers of the Borrower are authorized to sign such instruments and (B) specimen signatures of the officers of the Borrower authorized to sign such instruments; and (ii) the Bank shall have received a copy, certified as true by the Secretary or Assistant Secretary of the Borrower of the articles or certificate of incorporation and the bylaws of the Borrower. (c) Security Instruments - the Bank shall have received the security agreements creating, granting, renewing and extending the first and prior Bank liens pursuant to Section 3, each duly and validly executed and delivered by the Borrower. (d) No Default - the fact that immediately after such loan, no Default shall have occurred and be continuing. (e) Representations and Warranties - the fact that the representations and warranties of the Borrower contained in this Agreement or any Security Instrument (other than those representations and warranties which are by their terms limited to the date of the agreement in which they are initially made) are true and correct in all respects on and as of the date of such loan. (f) No Material Adverse Change - there shall have occurred, in the sole opinion of the Bank, no change in the condition, financial or otherwise, of the Borrower or with respect to the Borrower's properties from the facts represented in any Security Instrument, including this Agreement, which would have a Material Adverse Effect. (g) Other - the Bank shall have received such other documents as it may reasonably have requested at any time at or prior to the closing of the loan. ARTICLE 9 MISCELLANEOUS 9.1 NOTICES. Any notice required or permitted to be given under or in connection with this Agreement, the other Security Instruments (except as may otherwise be expressly required therein) or the Notes shall be in writing and shall be mailed by first class or express mail, postage prepaid, or sent by telex, telegram, telecopy or other similar form of rapid transmission confirmed by mailing (by first class or express mail, postage prepaid) written confirmation at substantially the same time as such rapid PAGE 21 transmission, or personally delivered to an officer of the receiving party. All such communications shall be mailed, sent or delivered: (a) if to the Borrower, to its address as shown at the beginning of this Agreement, or to such other address or to such individual's or department's attention as it may have furnished the Bank in writing; or (b) if to the Bank, to its mailing address shown at the beginning of this Agreement, or to such other address or to such individual's or department's attention as it may have furnished the Bank in writing; or Any communication so addressed and mailed shall be deemed to be given when so mailed; and any notice so sent by rapid transmission shall be deemed to be given when receipt of such transmission is acknowledged, and an any communication so delivered in person shall be deemed to be given when receipted for by, or actually received by, an authorized officer of the Borrower or the Bank, as the case may be. 9.2 AMENDMENTS AND WAIVER. Any provision of this Agreement, the other Security Instruments or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Bank. 9.3 INVALIDITY. In the event that any one or more of the provisions contained in the Notes, this Agreement or in any other Security Instrument shall, for any reason, be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of the Notes, this Agreement or any other Security Instrument. 9.4 SURVIVAL OF AGREEMENTS. All representations and warranties of the Borrower herein or in the other Security Instruments, and all covenants and agreements herein not fully performed before the effective date or dates of this Agreement and of the other Security Instruments, shall survive such date or dates. 9.5 SUCCESSORS AND ASSIGNS. All covenants and agreements by or on behalf of the Borrower in the Notes, this agreement and any other Security Instrument shall bind its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns. The Borrower shall not, however, have the right to assign its rights under this Agreement or any interest herein, without the prior written consent of the Bank. In the event that the Bank sells participations to other lenders in the Notes or other Indebtedness of the Borrower incurred or to be incurred pursuant to this Agreement, each of such other lenders shall have the same rights in and to the Collateral as may be available to the Bank. PAGE 22 9.6 RENEWAL, EXTENSION OR REARRANGEMENT. All provisions of this Agreement and of any other Security Instruments relating to the Notes or other Indebtedness shall apply with equal force and effect to each and all promissory notes hereinafter executed which in whole or in part represent a renewal, extension for any period, increase or rearrangement of any part of the Indebtedness originally represented by the Notes or of any part of such other Indebtedness. 9.7 WAIVERS. No course of dealing on the part of the Bank, its officers, employees, consultants or agents, acceptance of partial payments, nor any failure or delay by the Bank with respect to exercising any right, power or privilege of the Bank under the Notes, this Agreement or any other Security Instrument shall operate as a waiver thereof, except as otherwise provided in Section 9.2. 9.8 CUMULATIVE RIGHTS. Rights and remedies of the Bank under the Notes, this Agreement and each other Security Instrument shall be cumulative, and the exercise or partial exercise of any such right or remedy shall not preclude the exercise of any other right or remedy. 9.9 TIME. Time is of the essence of this Agreement, the Notes and the Security Instruments. 9.10 SINGULAR AND PLURAL. Words used herein the singular, where the context so permits, shall be deemed to include the plural and vice versa. The definitions of words in the singular herein shall apply to such words when used in the plural where the context so permits and vice versa. 9.11 CONSTRUCTION. This Agreement is, and the Notes will be, a contract made under and shall be construed in accordance with and governed by the laws of the United States of America and the State of Texas, as such laws are now in effect and, with respect to usury laws, if any, applicable to the Bank and to the extent allowed thereby, as such laws may hereafter be in effect which allow a higher maximum nonusurious interest rate than such laws now allow. 9.12 INTEREST. It is the intention of the parties hereto to conform strictly to usury laws applicable to the Bank. Accordingly, if the transactions contemplated hereby would be usurious under applicable law (including the laws of the United States of America and the State of Texas) then, in that event, notwithstanding anything to the contrary in the Notes, this Agreement or in any other Security Instrument or agreement entered into in connection with or as security for the Note, it is agreed as follows: (i) the aggregate of all consideration which constitutes interest under law applicable to the Bank that is contacted for, taken, reserved, charged or received under the Notes, this Agreement or under any of the other aforesaid Security PAGE 23 Instruments or agreements or otherwise in connection with the Notes shall under no circumstances exceed the maximum amount allowed by such applicable law, and any excess shall be credited by the Bank on the principal amount of the Indebtedness (or, if the principal amount of the Indebtedness shall have been paid in full, refunded by the Bank to the Borrower); and (ii) in the event that the maturity of the Notes is accelerated by reason of an election of the Bank resulting from any Event of Default under this Agreement or otherwise, or in the event of any required or permitted prepayment, then such consideration that constitutes interest under law applicable to the Bank may never include more than the maximum amount allowed by such applicable law, and excess interest, if any, provided for in this Agreement or otherwise shall be cancelled automatically as of the date of such acceleration of prepayment and, if theretofore paid, shall be credited by the Bank on the principal amount of the Indebtedness (or, if the principal amount of the Indebtedness shall have been paid in full, refunded by the Bank to the Borrower). 9.13 REFERENCES. The words "herein," "hereof," "hereunder" and other words of similar import when used in this Agreement refer to this Agreement as a whole, and not to any particular article, section or subsection. 9.14 TAXES, ETC. Any taxes (excluding income taxes) payable or ruled payable by federal or state authority in respect of the Note, this Agreement or the other Security Instruments shall be paid by the Borrower, together with interest and penalties, if any. 9.15 GOVERNMENTAL REGULATION. Anything contained in this Agreement to the contrary notwithstanding, if entering into a partnership, merger or other business relationship, or any other circumstance (not caused by the Bank) or act of the Borrower occurring after the date of this Agreement would cause any amount to be loaned under this Agreement by the Bank to be in violation of any limitation or prohibition provided by an applicable statute or other regulation, then the Bank shall not be obligated to extend credit to the Borrower in an amount in violation of any such limitation or prohibition. 9.16 TITLES OF ARTICLES, SECTIONS AND SUBSECTIONS. All titles or headings to articles, sections, subsections or other divisions of this Agreement or the exhibits hereto are only for the convenience of the parties and shall not be construed to have any effect or meaning with respect to the other content of such articles, sections, subsections or other divisions, such other content being controlling as to the agreement between the parties hereto. PAGE 24 9.17 COUNTERPARTS. This Agreement may be executed in two or more counterparts, and it shall not be necessary that the signatures of all parties hereto be contained on any one counterpart hereof; each counterpart shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.18 ENTIRETY. THIS AGREEMENT, THE TERM NOTES AND THE SECURITY INSTRUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties hereto have caused this instrument to be duly executed as of the date first above written. BORROWER: BANK: Independent Bankshares, Inc. Boatmen's First National Bank of Amarillo By /s/ Bryan Stephenson By /s/ Louis E. Cardwell ---------------------------- ---------------------------- Bryan Stephenson Louis E. Cardwell President Assistant Vice President EXHIBIT A BORROWER'S NAME AND ADDRESS: "I" includes each borrower above, joint and severally. INDEPENDENT BANKSHARES, INC. P O BOX 3296 ABILENE, TX 79604 LENDER'S NAME AND ADDRESS: "You" means the lender, its successors and assigns. BOATMEN'S FIRST NATIONAL BANK OF AMARILLO 8TH & TAYLOR - PO BOX 1331 AMARILLO, TX 79180 ACCOUNT #: 406386 LEC Loan Number: 50405 GAO Date: January 23, 1997 Maturity Date April 23, 1997 Loan Amount $1,200,000.00 Renewal of ______________ For value received, I promise to pay to you, or your order, at your address listed above the PRINCIPAL sum of ONE MILLION TWO HUNDRED THOUSAND AND NO/100 Dollars ($1,200,000) [ ] SINGLE ADVANCE: I will receive all of the principal sum on __________. No additional advances are contemplated under this note. [XX] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of principal I can borrow under this note. On JANUARY 23, 1997 I will receive the amount of $_______________ and future principal advances are contemplated. CONDITIONS: The conditions for future advances are ___________________. [ ] OPEN END CREDIT: You and I agree that I may borrow up to the maximum amount of principal more than one time. This feature is subject to all other conditions and expires on __________________. [XX] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum only one time (and subject to all other conditions). INTEREST: I agree to pay interest on the outstanding principal balance from JANUARY 23, 1997 at the rate of 8.750% per year until FIRST CHANGE DATE. [XX] VARIABLE RATE: This rate may then change as stated below. [XX] INDEX RATE: The future rate will be 0.500% OVER the following index rate: BOATMEN'S FIRST NATIONAL BANK OF AMARILLO'S BASE RATE AS ANNOUNCED PUBLICLY FROM TIME TO TIME BY BOATMEN'S FIRST NATIONAL BANK OF AMARILLO [XX] CEILING RATE: The interest rate ceiling for this note is the STD QUARTERLY ceiling rate announced by the Credit Commissioner from time to time. [XX] FREQUENCY AND TIMING: The rate on this note may change as often as DAILY. A change in the interest rate will take effect ON THE SAME DAY. [ ] LIMITATIONS: During the term of this loan, the applicable annual interest rate will not be more than _____% or less than _____%. The rate may not change more than _____% each _______________. EFFECT OF VARIABLE RATE: A change in the interest rate will have the following effect on the payments: [ ] The amount of each scheduled payment will change. [ ] The amount of the final payment will change. [XX] THE AMOUNT DUE AT MATURITY WILL CHANGE. ---------------------------------------- ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis. POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note owing after maturity, and until paid in full, as stated below: [ ] on the same fixed or variable rate basis in effect before maturity (as indicated above). [XX] at a rate equal to HIGHEST RATE PERMITTED BY LAW, [ ] LATE CHARGE: If a payment is made more than _____ days after it is due, I agree to pay a late charge of _______________________. [ ] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following charges which __ are __ are not included in the principal amount above: ______________________________________________. PAYMENTS: I agree to pay this note as follows: [XX] INTEREST: I agree to pay accrued interest ON DEMAND, BUT IF NO DEMAND IS MADE AT MATURITY. [XX] PRINCIPAL: I agree to pay the principal ON DEMAND, BUT IF NO DEMAND IS MADE THEN ON APRIL 23, 1997. [ ] INSTALLMENTS: I agree to pay this note in _____ payments. The first payment will be in the amount of $____________ and will be due _________. A payment of $___________ will be due ____________ thereafter. The final payment of the entire unpaid balance of principal and interest will be due ______________________. ADDITIONAL TERMS: "I AGREE THAT IF THE "INDEX RATE" CEASES TO EXIST, YOU MAY SUBSTITUTE A NEW "INDEX RATE" THAT IS REASONABLY SIMILAR TO THE PRIOR "INDEX RATE." [XX] SECURITY: This note is separately secured by (describe separate document by type and date): STOCK MORE FULLY DESCRIBED IN SECURITY AGREEMENTS DATED 01-23-97. (This section is for your internal use. Failure to list a separate security document does not mean the agreement will not secure this note). THIS WRITTEN LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN PARTIES. PURPOSE: The purpose of this loan is BUSINESS; PURCHASE STOCK. SIGNATURES: I AGREE TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2). I have received a copy of today's date. INDEPENDENT BANKSHARES, INC. BY: /S/ Bryan Stephenson --------------------- Bryan Stephenson, President Signature of Lender /S/ LOUIS CARDWELL - ------------------------ Louis Cardwell Assistant Vice President (Page 1 of 2) DEFINITIONS: As used on page 1, "XX" means the terms that apply to this loan. "I," "me" or "my" means each Borrower who signs this note and each other person or legal entity (including guarantors, endorsers, and sureties) who agrees to pay this note (together referred to as "us"). "You" or "your" means the Lender and its successors and assigns. APPLICABLE LAW: The law of the state of Texas will govern this note. Any term of this note which is contrary to applicable law will not be effective, unless the law permits you and me to agree to such a variation. If any provision of this agreement cannot be enforced according to its terms, this fact will not affect the enforceability of the remainder of this agreement. No modification of this agreement may be made without your express written consent. Time is of the essence in this agreement. PAYMENTS: Each payment I make on this note will first reduce the amount I owe you for charges which are neither interest nor principal. The remainder of each payment will then reduce accrued unpaid interest, and then unpaid principal. If you and I agree to a different application of payments, we will describe our agreement on this note. I may prepay a part of, or the entire balance of this loan without penalty, unless we specify to the contrary on this note. Any partial prepayment will not excuse or reduce any later scheduled payment until this note is paid in full (unless, when I make the prepayment, you and I agree in writing to the contrary). INTEREST: Interest accrues on the principal remaining unpaid from time to time, until paid in full. If I receive the principal in more than one advance, each advance will start to earn interest only when I receive the advance. The interest rate in effect on this note at any given time will apply to the entire principal advanced at that time. Notwithstanding anything to the contrary, I do not agree to pay and you do not intend to charge any rate of interest that is higher than the maximum rate of interest you could charge under applicable law for the extension of credit that is agreed to here (either before or after maturity). If any notice of interest accrual is sent and is in error, we mutually agree to correct it and if you actually collect more interest than allowed by law and this agreement, you agree to refund it to me. INDEX RATE: The index will serve only as a device for setting the rate on this note. You do not guarantee by selecting this index, or the margin, that the rate on this note will be the same rate you charge on any other loans or class of loans to me or other borrowers. ACCRUAL METHOD: The amount of interest that I will pay on this loan will be calculated using the interest rate and accrual method stated on page 1 of this note. For the purpose of interest calculation, the accrual method will determine the number of days in a "year." If no accrual method is stated, then you may use any reasonable accrual method for calculating interest. POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate" (shown on page 1) applies, the term "maturity" means the date of the last scheduled payment indicated on page 1 of this note or the date you accelerate payment on the note, whichever is earlier. SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that you will make only one advance of principal. However, you may add other amounts to the principal if you make any payments described in the "PAYMENTS BY LENDER" paragraph below. MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect that you will make more than one advance of principal. If this is closed end credit, repaying a part of the principal will not entitle me to additional credit. PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am obligated to pay (such as property insurance premiums), then you may treat those payments made by you as advances and add them to the unpaid principal under this note, or you may demand immediate payment of the charges. SET-OFF: I agree that you may set off any amount due and payable under this note against any right I have to receive money from you. "Right to receive money from you" means: (1) any deposit account balance I have with you; (2) any money owed to me on an item presented to you or in your possession for collection or exchange; and (3) any repurchase agreement or other nondeposit obligation. "Any amount due and payable under this note" means the total amount of which you are entitled to demand payment under the terms this note at the time you set off. This total includes any balance the due date for which you properly accelerate under this note. If my right to receive money from you is also owned by someone who has not agreed to pay this note, your right of set-off will apply to my interest in the obligation and to any other amounts I could withdraw on my sole request or endorsement. Your right of set-off does not apply to an account or other obligation where my rights are only as a representative. It also does not apply to any Individual Retirement Account or other tax-deferred retirement account. You will not be liable for the dishonor of any when the dishonor occurs because you set off this debt against any of my accounts. I agree to hold you harmless from any such claims arising as a result of your exercise of your right of set-off. REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a residence that is personal property, the existence of a default and your remedies for such a default will be determined by applicable law, by the terms of any separate instrument creating the security interest and, to the extent not prohibited by law and not contrary to the terms of the separate security instrument, by the "Default" and "Remedies" paragraphs herein. DEFAULT: I will be in default on this loan and any agreement securing this loan if any one or more of the following occurs: (1) I fail to perform any obligation which I have undertaken in this note or any agreement securing this note; (2) you, in good faith, believe that the prospect of payment or the prospect of my performance of any other of my obligations under this note or any agreement securing this note is impaired. If any of us are in default on this note or any security agreement, you may exercise your remedies against any or all of us. REMEDIES: If I am in default on this note you have, but are not limited to the following remedies: (1) You may demand immediate payment of my debt under this note (principal, accrued unpaid interest and other accrued charges). (2) You may set off this debt against any right I have to the payment of money from you, subject to the terms of the "Set- Off" paragraph herein. (3) You may demand security, additional security, or additional parties to be obligated to pay this note as a condition for not using any other remedy. (4) You may refuse to make advances to me or allow purchases on credit by me. (5) You may use any remedy you have under state or federal law. By selecting any one or more of these remedies you do not give up your right to later use any other remedy. By waiving your right to declare an event to be a default, you do not waive your right to later consider the event as a default if it continues or happens again. COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection, replevin or any other or similar type of cost if I am in default. In addition, if you hire an attorney to collect this note, I also agree to pay any fee you incur with such attorney plus court costs (except where prohibited by law). To the extent permitted by the United States Bankruptcy Code, I also agree to pay the reasonable attorney's fees and costs you incur to collect this debt as awarded by any court exercising jurisdiction under the Bankruptcy Code. WAIVER: I give up my rights to require you to do certain things. I will not require you to: (1) demand payment of amounts due (presentment); (2) obtain official certification of f nonpayment (protest); (3) give notice that amounts due have not been paid (notice of dishonor); (4) give notice of intent to accelerate; or (5) give notice of acceleration. I waive any defenses I have based on suretyship or impairment of collateral. OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone else has also agreed to pay it (by, for example, signing this form or separate guarantee or endorsement). You may sue me alone or anyone else who is obligated on this note, or any number of us together to collect this note. You may do so without any notice that it has not paid (notice of dishonor). You may without notice release any part this agreement without releasing any other party. If you give up any of your rights, with or without notice, it will not affect my duty to pay this note. Any extension of new credit to any of us, or renewal of this note by all or less than all of us will not release me from my duty to pay it. (Of course, you are entitled to only one payment in full.) I agree that you may at your option extend this note or the debt represented by this note, or any portion of the note or debt, from time to time without limit or notice and for any term without affecting my liability for payment of the note. I will not assign my obligation under this agreement without your prior written approval. CREDIT INFORMATION: I agree and authorize you to obtain credit information about me from time to time (for example, by requesting a credit report) and to report to others your credit experience with me (such as a credit reporting agency). I agree to provide you, upon request, any financial statement or information you may deem necessary. I warrant that the financial statements and information I provide to you are or will be accurate, correct and complete. NOTICE: Unless otherwise required by law, any notice to me shall be given by delivering it or by mailing it by first class mail addressed to me at my last known address. My current address is on page 1. I agree to inform you in writing of any change in my address. I will give any notice to you by mailing it first class to your address stated on page 1 of this agreement, or to any other address that you have designated.
BORROWER'S INTEREST DATE OF PRINCIPAL INITIALS PRINCIPAL PRINCIPAL INTEREST INTEREST PAID TRANSACTION ADVANCE (NOT REQUIRED) PAYMENTS BALANCE RATE PAYMENTS THROUGH: - ----------- --------- -------------- --------- --------- -------- -------- --------- / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / / / / $ $ $ % $ / /
(Page 2 of 2) SECURITY AGREEMENT (Collateral Pledge Agreement) DATE: JANUARY 23, 1997 DEBTOR: INDEPENDENT BANKSHARES, INC. BUSINESS OR RESIDENCE ADDRESS: PO BOX 3296 CITY, STATE & ZIP CODE: ABILENE, TX 79604 SECURED PARTY: BOATMEN'S FIRST NATIONAL BANK OF AMARILLO ADDRESS: 8TH & TAYLOR - PO BOX 1331 CITY, STATE & ZIP CODE: AMARILLO, TX 79180 1. SECURITY INTEREST AND COLLATERAL. To secure (check one): [XX] the payment and performance of each and every debt, liability and obligation of every type and description which Debtor may now or at any time hereafter owe to Secured Party (whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several; all such debts. Liabilities and obligations being herein collectively referred to as the "Obligations"). [ ] the debt, liability or obligation of the Debtor to secured party evidenced by the following:_______________________________ __________________________________, and any extensions, renewals or replacements thereof (herein referred to as the "Obligations"), Debtor hereby grants Secured Party a security interest (herein called the "Security Interest") in (check one): [ ] All property of any kind now or at any time hereafter owned by Debtor, or in which Debtor may now or hereafter have an interest, which may now be or may at any time hereafter come into the possession or control of Secured Party or into the possession or control of Secured Party's agents or correspondents, whether such possession or control is given for collateral purposes or for safekeeping, together with all rights in connection with such property (herein called the "Collateral"). [ ] the property owned by Debtor and held by Secured Party that is described as follows: INDEPENDENT FINANCIAL CORP. CAPITAL STOCK - - 1,000 SHARES together with all rights in connection with such property (herein called the "Collateral"). 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Debtor represents, warrants and covenants that: (a) Debtor will duly endorse, in blank, each and every instrument constituting Collateral by signing on said instrument or by signing a separate document of assignment or transfer, if required by Secured Party. (b) Debtor is the owner of the Collateral free and clear of all liens, encumbrances, security interests and restrictions, except the Security Interest and any restrictive legend appearing on any instrument constituting Collateral. (c) Debtor will keep the Collateral free and clear of all liens, encumbrances and security interests, except the Security Interest. (d) Debtor will pay, when due, all taxes and other governmental charges levied or assessed upon or against any Collateral. (e) At any time, upon request by Secured Party, Debtor will deliver to Secured Party all notices, financial statements, reports or other communications received by Debtor as an owner or holder of the Collateral. (f) Debtor will upon receipt deliver to Secured Party in pledge as additional Collateral all securities distributed on account of the Collateral such as stock dividends and securities resulting from stock splits, reorganizations and recapitalizations. THIS AGREEMENT CONTAINS ADDITIONAL PROVISIONS SET FORTH ON PAGE 2 HEREOF, ALL OF WHICH ARE MADE A PART HEREOF. Debtor's Name: INDEPENDENT BANKSHARES, INC. By: /S/ BRYAN STEPHENSON -------------------- Title: PRESIDENT By: _________________________________ Title:________________________________ (Page 1 of 2) ADDITIONAL PROVISIONS 3. RIGHTS OF SECURED PARTY. Debtor agrees that Secured Party may at any time, whether before or after the occurrence of an Event of Default and without notice or demand of any kind, (i) notify the obligor on or issuer of any Collateral to make payment to Secured Party of any amounts due or distributable thereon, (ii) in Debtor's name or Secured Party's name enforce collection of any Collateral by suit or otherwise, or surrender, release or exchange all or any part of it, or compromise, extend or renew for any period any obligation evidenced by the Collateral, (iii) receive all proceeds of the Collateral, and (iv) hold any increase or profits received from the Collateral as additional security for the Obligations, except that any money received from the Collateral shall, at Secured Party's option be applied in reduction of the Obligations, in such order of application as Secured Party may determine, or be remitted to Debtor. 4. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"); (i) Debtor shall fail to pay any or all of the Obligations when due or (if payable on demand) on demand, or shall fail to observe or perform any covenant or agreement herein binding on it; (ii) any representation or warranty by Debtor set forth in this Agreement or made to Secured Party in any financial statements or reports submitted to Secured Party by or on behalf of Debtor shall prove materially false or misleading; (iii) a garnishment summons or a writ of attachment shall be issued against or served upon the Secured Party for the attachment of any property of the Debtor or any indebtedness owing to Debtor; (iv) Debtor or any guarantor of any Obligation shall (A) be or become insolvent (however defined); (B) voluntarily file, or have filed against it involuntarily, a petition under this United States Bankruptcy Code; or (C) if a corporation, partnership or organization, be dissolved or liquidated or, if a partnership, suffer the death of a partner or, if an individual, die; or (D) go out of business; (v) Secured Party shall in good faith believe that the value then reliable by collection or disposition of the Collateral, after deduction of expenses of collection and disposition, is less than the aggregate unpaid balance of all Obligations then outstanding; (vi) Secured Party shall in good faith believe that the prospect of due and punctual payment of any or all of the Obligations is impaired. 5. REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of an Event of Default and at any time thereafter, Secured Party may exercise any one or more of the following rights or remedies: (i) declare all unmatured Obligations to be immediately due and payable, and the same shall thereupon be immediately due and payable, without presentment or other notice or demand; (ii) exercise all voting and other rights as a holder of the Collateral; (iii) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including the right to offer and sell the Collateral privately to purchasers who will agree to take the Collateral for investment and not with a view to distribution and who will agree to the imposition of restrictive legends on the certificates representing the Collateral, and the right to arrange for a sale which would otherwise qualify as exempt from registration under the Securities Act of 1933; and if notice to Debtor of any intended disposition of the Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least 10 calendar days prior to the date of intended disposition or other action; (iv) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Debtor or against any other person or property. Upon the occurrence of the Event of Default described in Section 4 (iv) (B), all Obligations shall be immediately due and payable without demand or notice thereof. 6. MISCELLANEOUS. Any disposition of the Collateral in the manner provided in Section 5 shall be deemed commercially reasonable. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party. A waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any of Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Debtor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Debtor at its address set forth above or at the most recent address shown on Secured Party's records. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if Secured Party exercises reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Debtor may have against prior parties, to exercise at all or in any particular manner any voting rights which may be available with respect to any Collateral, to realize on the Collateral at all or in any particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. Debtor will reimburse Secured Party for all expenses (including reasonable attorney's fees and legal expenses) incurred by Secured Party in the protection, defense or enforcement of the Security Interest, including expenses incurred in any litigation or bankruptcy or insolvency proceedings. This Agreement shall be binding upon and inure to the benefit of Debtor and Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when signed by Debtor and delivered to Secured Party, and Debtor waives notice of Secured Party's acceptance hereof. This Agreement shall be governed by laws of the state in which it is executed and, unless the context otherwise requires, all terms used herein which are defined in Articles 1 and 9 of the Uniform Commercial Code, as in effect in said state, shall have the meanings therein stated. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. If this Agreement is signed by more than one person as Debtor, the term "Debtor" shall refer to each of them separately and to both or all of them jointly, all such persons shall be bound both severally and jointly with the other(s); and the Obligations shall include all debts, liabilities and obligations owed to Secured Party by a Debtor solely or by both or several or all Debtors jointly or jointly and severally, and all property described in Section 1 shall be included as part of the Collateral, whether it is owned jointly by both or all Debtors or is owned in whole or in part by one (or more) of them. (Page 2 of 2) Third Party Pledge Agreement DATE: JANUARY 23, 1997 PLEDGOR: INDEPENDENT FINANCIAL CORP. BUSINESS OR RESIDENT ADDRESS: 15 E. NORTH STREET - PO BOX 899 CITY, STATE & ZIP CODE: DOVER, DE 19901 SECURED PARTY: BOATMEN'S FIRST NATIONAL BANK OF AMARILLO ADDRESS: 8TH & TAYLOR - PO BOX 1331 CITY, STATE ZIP CODE: AMARILLO, TX 79180 1. SECURITY INTEREST AND COLLATERAL. To secure (check one): [XX] the payment and performance of each and every debt, liability and obligation of every type and description which INDEPENDENT BANKSHARES, INC. ("Debtor") may now or at any time hereafter owe to Secured Party (whether such debt, liability or obligation now exists or is hereafter created or incurred, and whether it is or may be direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or joint, several or joint and several; all such debts, liabilities and obligations being herein collectively referred to as the "Obligations."), [ ] the debt, liability or obligation of ("Debtor") to Secured Party evidenced by or arising under the following:_______________ ______________________, and any extensions, renewals or replacements thereof (herein referred to as the "Obligations"), Pledgor hereby grants Secured Party a security interest (herein called the "Security Interest") in (check one): [ ] all property of any kind now or at any time hereafter owned by Pledgor, or in which Pledgor may now or hereafter have an interest, which may now be or may at any time hereafter come into the possession or control of Secured Party or into the possession or control of Secured Party's agents or correspondents, whether such possession or control is given for collateral purposes or for safekeeping, together with all proceeds of and other rights in connection with such property (herein called the "Collateral") [XX] the property owned by Pledgor and held by Secured Party that is described as follows: FIRST STATE BANK, N.A., CAPITAL STOCK - 250,000 SHARES, together with all rights in connection with that property (herein called the "Collateral"). 2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Pledgor represents, warrants and covenants that: (a) Pledgor will duly endorse, in blank, each and every instrument constituting Collateral by signing on said instrument or by signing a separate document of assignment or transfer, if required by Secured Party. (b) Pledgor is the owner of the Collateral free and clear of all liens, encumbrances, security interests and restrictions, except the Security Interest and any restrictive legend appearing on any instrument constituting Collateral. (c) Pledgor will keep the Collateral free and clear of all liens, encumbrances and security interests, except the Security Interest. (d) Pledgor will pay, when due, all taxes and other governmental charges levied or assessed upon or against any Collateral. (e) At any time, upon request by Secured Party, Pledgor will deliver to Party all notices, financial statements, reports or other communications received by Pledgor as an owner or holder of the Collateral; (f) Pledgor will upon receipt deliver to Secured Party in Pledge as :additional collateral all securities distributed on account of the Collateral such as stock dividends and securities resulting from stock splits, reorganizations and recapitalizations. 3. RIGHTS OF SECURED PARTY. Pledgor agrees that Secured Party may at any time, whether before or after the occurrence of an Event of Default and without notice or demand of any kind, (i) notify the obligor on or issuer of any Collateral to make payment to Secured Party of any amounts due or distributable thereon, (ii) Pledgor's name or Secured Party's name enforce collection of any Collateral by suit or otherwise, or surrender, release or exchange all or any part of it, or compromise, extend or renew for any period any obligation evidenced by the Collateral, (iii) receive all proceeds of the Collateral, and (iv) hold any increase or profits received from the Collateral as additional security for the Obligations, except that any money received from the Collateral shall, at Secured Party's option, be applied in reduction of the Obligations, in such order of application as Secured Party may determine, or be remitted to Debtor. THIS AGREEMENT CONTAINS ADDITIONAL PROVISIONS SET FORTH ON PAGE 2 HEREOF, ALL OF WHICH ARE MADE A PART HEREOF. PLEDGOR'S NAME: INDEPENDENT FINANCIAL CORP. BY: /S/ MICHAEL D. JARRETT ---------------------- TITLE: VICE PRESIDENT BY:__________________________ TITLE:_______________________ (Page 1 of 2) ADDITIONAL PROVISIONS 4. EVENTS OF DEFAULT. Each of the following occurrences shall constitute an event of default under this Agreement (herein called "Event of Default"): (i) Debtor shall fail to pay any or all of the Obligations when due or (if payable on demand) on demand; (ii) Pledgor shall fail to observe or perform any covenant or agreement herein binding on Pledgor; (iii) any representation or warranty by Pledgor set forth in this Agreement or made to Secured Party in any financial statement or report submitted to Secured Party by or on behalf of debtor shall prove materially false or misleading; (iv) Debtor shall voluntarily file or have involuntarily filed against it a petition under the United States Bankruptcy Code. 5. REMEDIES UPON EVENT OF DEFAULT. upon the occurrence of an Event of Default and at any time thereafter, Secured Party may exercise any one or more of the following rights or remedies: (i) declare all unmatured Obligations to be immediately due and payable and the same shall thereupon be immediately due and payable, without presentment or other notice or demand; (ii) exercise all voting and other rights as a holder of the Collateral; (iii) exercise and enforce any or all rights and remedies available upon default to a secured party under the Uniform Commercial Code, including the right to offer or sell the Collateral privately to purchasers who will agree to take the Collateral for investment and not with a view to distribution and who will agree to the imposition of restrictive legends on the certificates representing the Collateral, and the right to arrange for a sale which would otherwise qualify as exempt from registration under the Securities Act of 1933; and if notice to Pledgor of any intended disposition of the Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given at least 10 calendar days prior to the date of intended disposition or other action; (iv) exercise or enforce any or all other rights or remedies available to Secured Party by law or agreement against the Collateral, against Pledgor or against any other person or property. Upon the occurrence of the Event of Default described in Section 4 (iv); all Obligations shall be immediately due and payable without demand or notice thereof. 6. WAIVERS BY PLEDGOR. Pledgor waives notice of Secured Party's acceptance hereof and notice of the creation existence and payment or nonpayment of the Obligations. None of the following acts or things (which Secured Party is authorized to do or not to do with or without notice to Pledgor) shall in any way affect or impair the Security Interest or Pledgor's liabilities and obligations hereunder; (a) any extension or renewal (whether or not for longer than the original period) of any or all of the Obligations; (b) any change in the terms of payment or other terms of any or all of the Obligations or any Collateral therefor, or any substitution or exchange of any evidence of any or all of the Obligations or collateral therefor or any release of any collateral for any or all of the Obligations; (c) any waiver or forbearance granted to Debtor or any other person liable with respect to any or all of the Obligations or any release of, compromise with, or failure to assert rights against Debtor or any such other person; (d) the procurement or failure to procure any other collateral for or guarantors or sureties of any or all of the Obligations; (e) the transfer to any person, at any time, of any interest in any of the Obligations or any collateral therefor; (f) any arrangement, composition, extension, moratoria or other relief granted to Debtor pursuant to any statute now in force or hereafter enacted; (g) any interruption in business relations between Secured Party and Debtor; (h) the failure or neglect to protect or preserve any Obligation or any collateral therefor, or to exercise any right which may be available to Secured Party by law or agreement prior to or after an Event of Default or a default under any other agreement or any delay in doing any of the foregoing; (i) the failure or neglect to ascertain or assure that the proceeds of any loan to Debtor are used in any particular manner; and (k) the application or failure to apply in any particular manner any payments or credits upon the Obligations. 7. OTHER COLLATERAL. Whether or not Pledgor requests or demands that Secured Party do so, Secured Party shall not be required before exercising and enforcing its rights under this Agreement first to resort for payment of the Obligations to Debtor or to any guarantor or surety or other person obligated with respect to any Obligation, or to their properties or estates or to any security interest or other collateral securing payment of any or all Obligations, or to any other interest, properties, liens, rights or remedies whatsoever. Pledgor agrees to defer exercising, hereby waives, any and all rights which Pledgor might otherwise have to obtain reimbursement or payment from Debtor or other persons obligated with respect to any or all of the Obligations or out of the property of Debtor or of such other per person (whether such rights to obtain reimbursement or payment are rights of recourse, rights of subrogation, rights of contribution or otherwise until all the Obligations shall have been fully paid to Secured Party. 8. MISCELLANEOUS. Any disposition of the Collateral in Section 5 shall be deemed commercially reasonable. This Agreement can be waived, modified, amended, terminated, discharged, and the Security Interest can be released, only explicitly in a writing signed by Secured Party waiver signed by Secured Party shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any Secured Party's rights or remedies. All rights and remedies of Secured Party shall be cumulative and may be exercised singularly or concurrently, at Secured Party's option, and the exercise or enforcement of any one such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. All notices to be given to Pledgor shall be deemed sufficiently given if delivered or mailed by registered or certified mail, postage prepaid, to Pledgor at its address set forth above or at the most recent address shown on Secured Party's records. Secured Party's duty of care with respect to Collateral in its possession (as imposed by law shall be deemed fulfilled if Secured Party exercises reasonable care in physically safekeeping such Collateral or, in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and Secured Party need not otherwise preserve, protect, insure or care for any Collateral. Secured Party shall not be obligated to preserve any rights Pledgor may have against prior parties, to exercise at all or in any particular manner any voting rights which may be available with respect to any Collateral, to realize on the Collateral at all or in a particular manner or order, or to apply any cash proceeds of Collateral in any particular order of application. Pledgor will reimburse Secured Party for all expenses (including reasonable attorneys' fees and legal expenses) incurred by Secured Party in the protection, defense or enforcement of the Security Interest, including expenses incurred in any litigation or bankruptcy or insolvency, proceedings, This Agreement shall be binding upon and inure to the benefit of Pledgor and Secured Party and their respective heirs, representatives, successors and assigns and shall take effect when signed by Pledgor and delivered to Secured Party. Except to the extent otherwise required by law, this Agreement shall be governed by the laws of the state in which it is executed and, unless the context otherwise requires, all terms used herein which are defined in Articles 1 and 9 of the Uniform Commercial Code, as in effect in said state, shall have the meanings therein stated. If any provision or application of this Agreement is held unlawful or unenforceable in any respect, such illegality or unenforceability shall not affect other provisions or applications which can be given effect, and this Agreement shall be construed as if the unlawful or unenforceable provision or application had never been contained herein or prescribed hereby. All representations and warranties contained in this Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. If this Agreement is signed by more than one person as Pledgor, the term "Pledgor" shall refer to each of them separately and to both or all of them jointly; all such persons shall be bound both severally and jointly with the other(s); and all property described in Section 1 shall be included as part of the Collateral, whether it is owned jointly by both or all Pledgors or is owned in whole or in part by one (or more) of them. (Page 2 of 2) EX-13.1 3 ANNUAL REPORT 1996 [Logo] Independent Bankshares, Inc. Banking Locations in West Texas * Abilene (2 Locations) * Lubbock * Odessa (2 Locations) * San Angelo * Stamford * Winters [GRAPHIC OF TEXAS MAP SHOWING LOCATIONS OF BANKS] [LOGO] INDEPENDENT BANKSHARES, INC. Financial Highlights For The Year 1996 1995 1994 ================================================================= Net Income $1,422,000 $1,132,000 $450,000 Primary Earnings Per Common Share 1.25 1.02 0.36 Fully Diluted Earnings Per Common Share 1.05 0.84 0.33 At Year End 1996 1995 1994 ================================================================= Assets $205,968,000 $180,344,000 $159,860,000 Loans 92,017,000 81,927,000 81,306,000 Deposits 189,575,000 164,704,000 146,184,000 Notes Payable 240,000 849,000 930,000 Stockholders' Equity 14,937,000 13,818,000 11,073,000 Daily Averages 1996 1995 1994 ================================================================= Assets $196,155,000 $169,532,000 $159,982,000 Loans 85,880,000 82,302,000 74,727,000 Deposits 180,005,000 154,547,000 146,608,000 Notes Payable 568,000 1,069,000 1,061,000 Stockholders' Equity 14,375,000 12,594,000 11,302,000 Stock Transfer Agent: First State Bank, N.A. 547 Chestnut Street Abilene, Texas 79602 Stock Exchange Listing: American Stock Exchange (AMEX) AMEX Trading Symbol: IBK AMEX Listing: Indep Bksh PRESIDENT'S LETTER We are pleased to report that the Company's net income for the year ended December 31, 1996, totaled $1,422,000, representing a $290,000, or 25.6 percent, increase over the year ended December 31, 1995. Total deposits increased $24,871,000, or 15.1 percent, during 1996. The deposit increase was enhanced by the purchases of Peoples National Bank, Winters, Texas, and a branch of a savings bank in San Angelo, Texas. The Company's decision to pursue these purchases was based on economies of scale resulting from consolidation, in the case of Winters, and the desire to enter a new market, in the case of San Angelo. Both acquisitions were accomplished with existing capital and with a minimal increase in expenses to the Company. In fact, total noninterest expenses in 1996 increased only $48,000, or 0.8 percent, over 1995. The Company's strategy has been, and continues to be, the creation of shareholder value through the continued expansion of its West Texas banking franchise. With the January 1997 purchase of Crown Park Bancshares, Inc. and its subsidiary, Western National Bank, Lubbock, Texas, the Company is strategically positioned in Abilene, Lubbock, Odessa and San Angelo, four of the more densely populated markets in West Texas. We believe that by locating branches in these cities, we can effectively market our brand of customized services and increase profitability in the process. [PHOTOGRAPH OF BRYAN STEPHENSON PRESIDENT AND CHIEF EXECUTIVE OFFICER] Crown Park Bancshares, with total deposits of $53,618,000 on the date of acquisition, increased the Company's total deposits by 28.3 percent over total deposits at December 31, 1996. Additionally, and of greater importance to the Company, the Crown Park Bancshares acquisition brings an additional $41,688,000 in total loans to the Company. These additional loans increased the Company's total loan portfolio by 45.3 percent over total loans at December 31, 1996, and add a new dimension to the Company's asset/liability structure. In prior years, excess funds were invested in federal funds sold and short-term investment securities. The addition of Crown Park Bancshares, with its higher loan to deposit ratio and its proximity to a growing market, gives the Company an opportunity to substitute higher yielding loans for these lower-yielding investments. A higher loan to deposit ratio should translate into increased net interest income and a corresponding increase in net income. Because of the deposits acquired during 1996, the Company concentrated its efforts in finding new lending opportunities. This effort was -2- directed at small business owners that prefer to borrow money from a local financial institution that can respond to their loan requests in a timely manner. Implementing this approach, the Company successfully increased its loan portfolio $10,090,000, or 12.3 percent, during 1996. [PHOTOGRAPH OF SCOTT TALIAFERRO CHAIRMAN OF THE BOARD] The Company's success in expanding its franchise during 1996 and in the January 1997 acquisition of Crown Park Bancshares created the need to increase the Company's stockholders' equity through an underwritten common stock offering. The offering was completed in conjunction with the Crown Park Bancshares purchase and was well received. The Company, through its underwriters, sold an aggregate of 316,250 shares of its common stock and raised approximately $4.2 million of stockholders' equity. The offering increased the number of common shares outstanding by 28.6 percent and increased the number of shareholders by approximately 12 percent. We want to welcome our new shareholders to the family. [PHOTOGRAPH OF RANDAL CROSSWHITE SENIOR VICE PRESIDENT & CHIEF FINANCIAL OFFICER] As a result of the Company's 1996 performance, our common stock price at December 31, 1996, increased 47.7 percent from the price at December 31, 1995. Our challenge is to build on this success and continue our tradition of growth through customer service in West Texas. We look forward to these challenges and to the opportunity to enhance your investment as shareholders. Thank you for your continued support. Sincerely, /s/ Bryan Stephenson -3- Graphic Analysis & Discussion The Company's January 1997 underwritten common stock offering provided an opportunity to present the Company's recent operating history to a large number of potential investors. In preparation for these presentations, it was necessary to reflect back over several years and discuss the Company's recent financial performance. The following graphic presentation gives a pictorial history of the last five years. [GRAPH - TOTAL ASSETS - IN MILLIONS] 1992 $161 1993 161 1994 160 1995 180 1996 206 [GRAPH - NONPERFORMING ASSETS/TOTAL ASSETS] 1992 1.20% 1993 1.83 1994 0.49 1995 0.35 1996 0.28 [GRAPH - LOAN DIVERSIFICATION AT DECEMBER 31, 1996] Consumer 45.3% Real estate 28.5 Commercial 23.3 Other 2.9 [GRAPH - NET INCOME (BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE) - IN THOUSANDS] 1992 $ 839 1993 1,029 1994 450 1995 1,132 1996 1,422 [GRAPH - NET INCOME PER PRIMARY SHARE(BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE) - IN THOUSANDS] 1992 $0.72 1993 0.92 1994 0.36 1995 1.02 1996 1.25 [GRAPH - COMMON STOCK PRICE (PRICE QUOTE ON DECEMBER 31 OF EACH YEAR ADJUSTED, AS APPLICABLE, FOR THE 5% STOCK DIVIDEND PAID IN MAY 1993 AND THE 33-1/3% STOCK DIVIDEND PAID IN MAY 1995)] 1992 $ 4.29 1993 6.94 1994 6.09 1995 10.75 1996 15.88 For the years 1992, 1993 and 1994, the Company concentrated its efforts on resolving problems originating from the economic difficulties of the late 1980's. By 1995, the Company was beginning to expand its customer base through advertising and an expanded officer calling program. During 1996, internal growth was continuing while, at the same time, the Company completed its purchase of Peoples National Bank, Winters, Texas, and a branch of a savings bank in San Angelo, Texas. The reduction in the Company's ratio of nonperforming assets to total assets beginning in 1994, and continuing through 1996, evidenced the Company's conservative loan underwriting standards and the benefits of loan diversification. With assets increasing and nonperforming assets decreasing, the Company's net income was able to increase in four of the last five years. The one exception occurred in 1994, when the Company's net income was negatively impacted by litigation expense. The Company's common stock price has responded to improvements in net income. -4- Independent Bankshares, Inc. Board of Directors - ------------------ Lee Caldwell Attorney Mrs. William R. (Amber) Cree Entrepreneur Randal N. Crosswhite Senior Vice President & Chief Financial Officer Independent Bankshares, Inc. Louis S. Gee Chairman of the Board & Chief Executive Officer Tippett & Gee, Inc. Consulting Engineers Marshal M. Kellar Chairman of the Board West Texas Wholesale Supply Co. Tommy McAlister President McAlister, Inc. Bryan W. Stephenson President & Chief Executive Officer Independent Bankshares, Inc. Scott L. Taliaferro Chairman of the Board Independent Bankshares, Inc. President Scott Oils, Inc. James D. Webster, M.D. Physician C.G. Whitten Senior Vice President & General Counsel Pittencrieff Communications, Inc. John A. Wright Banking Consultant Advisory Directors - ------------------ Arlas Cavett Farming and Investments L.H. Mosley Mosley Investments, Inc. J.E. Smith Investments First State Bank, N.A. - --------------------- Board of Directors [Photograph of Jim Fitzhugh, Stanley Whisenhunt, Mike Trout, Mike Jarrett, Virgil Trower, Tim Gorman, Bryan Stephenson, Scott Taliaferro, Jr., Randal Crosswhite. Not pictured: Jack Bargainer, M.D.] -5- First State Bank, N.A., Officers - -------------------------------- Abilene Branches - ---------------- [Photograph of Kristy Kersh, Jane Bunyard, Kelly Dunlap, Angie Rodriguez, Jim Fitzhugh, Tommy Thompson, Nancy Chancey, Gary Yungblut, Ronnie Hobbs, Danielle Baker, Albert Jordan] Lubbock Branch - -------------- [Photograph of Kay Hudgens, Sheila Karr, Marilanda Cristan, Patsy Hamilton, Steve Jones, Jim Vines, Fred Bradley, Mike Phelps, Stacy Slater] Odessa Branches - --------------- [Photograph of Suzanne Smith, Ronny Haynes, Josie Molinar, Joel Velasquez, Jeannie Smith, Luther Suell, Carolyn Marshall, Fred Broussard, Mike Jarrett, Larry Kirk, Tom Snoddy, Herman Wells, Larry Melton] San Angelo/Winters Branches - --------------------------- [Photograph of Juanita Bredemeyer, Jeanne Hillard, Ruth Grenwelge, Jim Jordan, Tammy Kaczyk, Theresa Patterson, Jennifer Schulze, Drake McKinney] Stamford Branch - --------------- [Photograph of Lynda Folsom, Carolene Stovall, Jimmy Parker, Tammy McLemore, Randy Riley] -6- Report of Independent Accountants Board of Directors and Shareholders Independent Bankshares, Inc. Abilene, Texas We have audited the accompanying consolidated balance sheets of Independent Bankshares, Inc. as of December 31, 1996 and 1995, and the related consolidated income statements, statements of change in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Independent Bankshares, Inc., as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand, L.L.P. Fort Worth, Texas February 3, 1997 -7- INDEPENDENT BANKSHARES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995 ---- ---- ASSETS: Cash and Cash Equivalents: Cash and Due from Banks $ 11,458,000 $ 8,559,000 Federal Funds Sold 18,500,000 26,200,000 ------------- ------------- Total Cash and Cash Equivalents 29,958,000 34,759,000 ------------- ------------- Securities (Note 4): Available-for-sale 27,771,000 16,746,000 Held-to-maturity - Market Value of $47,291,000 for 1996 $39,384,000 for 1995 47,381,000 39,161,000 ------------- ------------- Total Securities 75,152,000 55,907,000 ------------- ------------- Loans (Note 5): Total Loans 94,264,000 85,281,000 Less: Unearned Income on Installment Loans 2,247,000 3,354,000 Allowance for Possible Loan Losses 793,000 759,000 ------------- ------------- Net Loans 91,224,000 81,168,000 ------------- ------------- Premises and Equipment (Note 6) 4,437,000 4,155,000 Accrued Interest Receivable 1,599,000 1,494,000 Goodwill (Note 3) 957,000 0 Real Estate and Other Repossessed Assets 389,000 337,000 Other Assets 2,252,000 2,524,000 ------------- ------------- Total Assets $ 205,968,000 $ 180,344,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits (Note 7): Noninterest-bearing Demand Deposits $ 32,240,000 $ 33,267,000 Interest-bearing Demand Deposits 58,676,000 52,430,000 Interest-bearing Time Deposits 98,659,000 79,007,000 ------------- ------------- Total Deposits 189,575,000 164,704,000 Notes Payable (Note 8) 240,000 849,000 Accrued Interest Payable 951,000 882,000 Other Liabilities 265,000 91,000 ------------- ------------- Total Liabilities 191,031,000 166,526,000 ------------- ------------- Commitments and Contingent Liabilities (Notes 14 and 16) STOCKHOLDERS' EQUITY (NOTES 10 AND 17): Preferred Stock - Par Value $10.00; 5,000,000 Shares Authorized: Series C Preferred Stock - Stated Value $42.00; 50,000 Shares Designated; 13,478 and 16,436 Shares Issued and Outstanding at December 31, 1996 and 1995, Respectively 135,000 164,000 Common Stock - Par Value $0.25; 30,000,000 Shares Authorized; 1,104,644 and 1,050,292 Shares Issued and Outstanding at December 31, 1996 and 1995, Respectively 276,000 263,000 Additional Paid-in Capital 9,891,000 9,875,000 Retained Earnings 4,610,000 3,448,000 Unrealized Gain on Available-for-sale Securities (Note 4) 25,000 68,000 ------------- ------------- Total Stockholders' Equity 14,937,000 13,818,000 ------------- ------------- Total Liabilities and Stockholders' Equity $ 205,968,000 $ 180,344,000 ============= =============
See accompanying notes. -8- INDEPENDENT BANKSHARES, INC. CONSOLIDATED INCOME STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
1996 1995 1994 ---- ---- ---- Interest Income: Interest and Fees on Loans (Note 5) $ 8,005,000 $ 7,726,000 $ 6,918,000 Interest on Securities 4,504,000 2,389,000 2,516,000 Interest on Federal Funds Sold 1,047,000 1,847,000 697,000 ------------- ------------- ------------- Total Interest Income 13,556,000 11,962,000 10,131,000 ------------- ------------- ------------- Interest Expense: Interest on Deposits 6,382,000 5,201,000 3,364,000 Interest on Notes Payable (Note 8) 59,000 108,000 88,000 ------------- ------------- ------------- Total Interest Expense 6,441,000 5,309,000 3,452,000 ------------- ------------- ------------- Net Interest Income 7,115,000 6,653,000 6,679,000 Provision for Loan Losses (Note 5) 201,000 206,000 147,000 ------------- ------------- ------------- Net Interest Income After Provision for Loan Losses 6,914,000 6,447,000 6,532,000 ------------- ------------- ------------- Noninterest Income: Service Charges 1,259,000 1,167,000 1,226,000 Trust Fees 189,000 201,000 169,000 Other Income 103,000 141,000 102,000 ------------- ------------- ------------- Total Noninterest Income 1,551,000 1,509,000 1,497,000 ------------- ------------- ------------- Noninterest Expenses: Salaries and Employee Benefits 3,082,000 2,849,000 2,838,000 Net Occupancy Expense 716,000 643,000 673,000 Equipment Expense 663,000 723,000 641,000 Professional Fees (Note 14) 304,000 454,000 1,342,000 Stationery, Printing and Supplies Expense 288,000 271,000 226,000 Net Revenues Applicable to Real Estate and Other Repossessed Assets (24,000) (7,000) (4,000) Other Expenses 1,261,000 1,309,000 1,636,000 ------------- ------------- ------------- Total Noninterest Expenses 6,290,000 6,242,000 7,352,000 ------------- ------------- ------------- Income Before Federal Income Taxes 2,175,000 1,714,000 677,000 Federal Income Taxes (Notes 2 and 9) 753,000 582,000 227,000 ------------- ------------- ------------- Net Income $ 1,422,000 $ 1,132,000 $ 450,000 ============= ============= ============= Preferred Stock Dividends (Note 10) $ 63,000 $ 70,000 $ 70,000 ============= ============= ============= Net Income Available to Common Stockholders (Note 11) $ 1,359,000 $ 1,062,000 $ 380,000 ============= ============= ============= Primary Net Income Per Common Share Available to Common Stockholders (Note 11) $ 1.25 $ 1.02 $ 0.36 ============= ============= ============= Fully Diluted Net Income Per Common Share Available to Common Stockholders (Note 11) $ 1.05 $ 0.84 $ 0.33 ============= ============= ==============
See accompanying notes. -9- INDEPENDENT BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
UNREALIZED GAIN (LOSS) ON SERIES C ADDITIONAL AVAILABLE- PREFERRED STOCK COMMON STOCK PAID-IN RETAINED FOR-SALE SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES ------ -------- -------- ------- ----------- ----------- ---------- Balances--January 1, 1994 16,668 $167,000 777,760 $195,000 $ 8,017,000 $ 2,260,000 $ 206,000 Net Income 450,000 Utilization of Net Operating Loss Carryforward (Note 2) 222,000 Cash Dividends (140,000) Exercise of Stock Options (Note 10) 321 2,000 Adjustment to Unrealized Gain (Loss) on Available- for-sale Securities, Net of Tax of $154,000 (Note 4) (306,000) ------ -------- --------- -------- ----------- ----------- ---------- Balances--December 31, 1994 16,668 167,000 778,081 195,000 8,241,000 2,570,000 (100,000) Net Income 1,132,000 Reduction of Deferred Tax Asset Valuation Allowance 1,600,000 Cash Dividends (187,000) 33-1/3% Stock Dividend (Note 10) 259,371 65,000 (67,000) Exercise of Stock Options (Note 10) 9,037 2,000 32,000 Conversion of Series C Preferred Stock (Note 10) (232) (3,000) 3,803 1,000 2,000 Adjustment to Unrealized Gain (Loss) on Available- for-sale Securities, Net of Tax of $86,000 (Note 4) 168,000 ------ -------- --------- -------- ----------- ----------- ---------- Balances--December 31, 1995 16,436 164,000 1,050,292 263,000 9,875,000 3,448,000 68,000 Net Income 1,422,000 Cash Dividends (260,000) Conversion of Series C Preferred Stock (Note 10) (2,958) (29,000) 54,352 13,000 16,000 Adjustment to Unrealized Gain (Loss) on Available- for-sale Securities, Net of Tax of $22,000 (Note 4) (43,000) ------ -------- --------- -------- ----------- ----------- ---------- Balances--December 31, 1996 13,478 $135,000 1,104,644 $276,000 $ 9,891,000 $ 4,610,000 $ 25,000 ====== ======== ========= ======== =========== =========== ==========
See accompanying notes. -10- INDEPENDENT BANKSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 -------------- -------------- ------------- Cash Flows from Operating Activities: Net Income $ 1,422,000 $ 1,132,000 $ 450,000 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Deferred Federal Income Tax Expense 677,000 547,000 222,000 Depreciation and Amortization 404,000 367,000 397,000 Provision for Loan Losses 201,000 206,000 147,000 Losses on Sales of Investment Securities 10,000 0 0 Gains on Sales of Premises and Equipment 0 (4,000) 0 Losses (Gains) on Sales of Real Estate and Other Repossessed Assets (50,000) (45,000) 52,000 Writedown of Real Estate and Other Repossessed Assets 21,000 32,000 27,000 Decrease (Increase) in Accrued Interest Receivable (17,000) (549,000) 376,000 Increase in Other Assets (382,000) (176,000) (41,000) Increase (Decrease) in Accrued Interest Payable (14,000) 474,000 115,000 Increase (Decrease) in Other Liabilities 166,000 (840,000) 670,000 ------------- ------------- ------------- Net Cash Provided by Operating Activities 2,438,000 1,144,000 2,415,000 ------------- ------------- ------------- Cash Flows from Investing Activities: Proceeds from Maturities of Available-for-sale Securities 9,437,000 21,828,000 34,436,000 Proceeds from Maturities of Held-to-maturity Securities 26,461,000 12,930,000 19,428,000 Proceeds from Sale of Available-for-sale Securities 30,000 0 8,000 Proceeds from Sale of Held-to-maturity Securities 2,000,000 0 0 Purchases of Available-for-sale Securities (19,382,000) (21,242,000) (12,873,000) Purchases of Held-to-maturity Securities (36,680,000) (35,864,000) (9,909,000) Net Increase in Loans (8,160,000) (1,603,000) (12,361,000) Proceeds from Sales of Premises and Equipment 94,000 4,000 0 Additions to Premises and Equipment (138,000) (177,000) (214,000) Proceeds from Sales of Real Estate and Other Repossessed Assets 754,000 1,025,000 569,000 Cash and Cash Equivalents Held by Peoples National Bank, Winters, Texas, on January 1, 1996 (Date of Acquisition), in Excess of Cash Paid for Purchase of Peoples National Bank 584,000 0 0 Cash and Cash Equivalents Held by Coastal Banc ssb, San Angelo, Texas, on May 27, 1996 (Date of Acquisition), in Excess of Cash Paid for Coastal Banc ssb, San Angelo 13,619,000 0 0 ------------- ------------- ------------- Net Cash Provided by (Used in) Investing Activities (11,381,000) (23,099,000) 19,084,000 ------------- ------------- ------------- Cash Flows from Financing Activities: Increase (Decrease) in Deposits 5,018,000 18,520,000 (1,601,000) Proceeds from Notes Payable 0 275,000 0 Repayment of Notes Payable (616,000) (690,000) (264,000) Net Proceeds from Issuance of Equity Securities 0 34,000 2,000 Payment of Cash Dividends (260,000) (187,000) (140,000) Cash Paid for Fractional Shares in Stock Dividend 0 (2,000) 0 ------------- ------------- -------------- Net Cash Provided by (Used In) Financing Activities 4,142,000 17,950,000 (2,003,000) ------------- ------------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents (4,801,000) (4,005,000) 19,496,000 Cash and Cash Equivalents at Beginning of Year 34,759,000 38,764,000 19,268,000 ------------- ------------- ------------- Cash and Cash Equivalents at End of Year $ 29,958,000 $ 34,759,000 $ 38,764,000 ============= ============= =============
See accompanying notes. -11- INDEPENDENT BANKSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business - -------- Independent Bankshares, Inc., a Texas corporation (the "Company"), is a bank holding company headquartered in Abilene, Texas. The Company indirectly owns through a Delaware subsidiary, Independent Financial Corp. ("Independent Financial"), 100% of the stock of First State Bank, National Association, Abilene, Texas (the "Bank"). The Bank currently operates full-service banking locations in the West Texas cities of Abilene (2 locations), Lubbock (acquired in January 1997), Odessa (2 locations), San Angelo, Stamford and Winters. The Company's primary activities are to assist the Bank in the management and coordination of its financial resources and to provide capital, business development, long range planning and public relations for the Bank. The Bank operates under the day-to-day management of its own officers and board of directors and formulates its own policies with respect to banking matters. The principal services provided by the Bank are as follows: Commercial Services. The Bank provides a full range of banking services for its commercial customers. Commercial lending activities include short-term and medium-term loans, revolving credit arrangements, inventory and accounts receivable financing, equipment financing and interim and permanent real estate lending. Other services include cash management programs and federal tax depository and night depository services. Consumer Services. The Bank also provides a wide range of consumer banking services, including checking, savings and money market accounts, savings programs and installment and personal loans. The Bank makes automobile and other installment loans directly to customers, as well as indirectly through automobile dealers. The Bank makes home improvement and real estate loans and provides safe deposit services. As a result of sharing arrangements with the Pulse automated teller machine system network, the Bank provides 24-hour routine banking services through automated teller machines ("ATMs"). The Pulse network provides ATM accessibility throughout the United States. Trust Services. The Bank provides trust and agency services to individuals, partnerships and corporations from its offices in Abilene, Lubbock and Odessa. The trust division also provides investment management, administration and advisory services for agency and trust accounts, and acts as trustee for pension and profit sharing plans. Basis of Financial Statements - ----------------------------- The accounting and reporting policies of the Company conform with generally accepted accounting principles followed by the banking industry. Principles of Consolidation - --------------------------- The Consolidated Financial Statements include the accounts of the Company, Independent Financial and the Bank. All significant intercompany accounts and transactions have been eliminated upon consolidation. Effective November 1, 1994, two of the Company's then existing subsidiary banks, The Winters State Bank, Winters, Texas ("Winters State"), and The First National Bank in Stamford, Stamford, Texas ("First National"), were merged with and into the Bank. As a result of the merger, the offices of these two banks became branches of the Bank. Effective December 30, 1996, another then existing subsidiary bank, First State Bank, National Association, Odessa, Texas ("First State, N.A., Odessa"), was merged with and into the Bank. As a result of the merger, the offices of First State, N.A., Odessa became branches of the Bank. All references to First State, N.A., Odessa, Winters State and First National in the Company's Consolidated Financial Statements are to these banks prior to the respective mergers. -12- Effective January 28, 1997, the Company acquired Crown Park Bancshares, Inc. ("Crown Park") and its subsidiary bank, Western National Bank, Lubbock, Texas ("Western National") in a transaction accounted for as a purchase. As a result, the Company's Consolidated Financial Statements do not include any information for Crown Park or Western National at December 31, 1996. See "Note 20: Subsequent Event." Statements of Cash Flows - ------------------------ For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Securities - ---------- Management determines the appropriate classification of securities at the time of purchase. If the securities are purchased with the positive intent and the ability to hold the securities until maturity, they are classified as held-to-maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time are classified as available-for-sale and carried at fair value. Loans - ----- Loans are stated at the principal amount outstanding. Interest on the various types of commercial loans is accrued daily based on the principal balances outstanding. Income on installment loans is recognized using the interest method or other methods under which income approximates the interest method. The recognition of income on a loan is discontinued, and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Interest is subsequently recognized only as received until the loan is returned to accrual status. Allowance for Possible Loan Losses - ---------------------------------- The allowance for possible loan losses is maintained at a level that, in management's opinion, is adequate to absorb possible losses in the loan portfolio and unfunded loan commitments. The allowance is based on a number of factors, including risk ratings of individual credits, current business and economic conditions, the size and diversity of the portfolio, collateral values and past loan loss experience. In June 1993, the FASB issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). FAS 114 requires that impaired loans (including certain nonaccrual loans and troubled debt restructurings) be measured at the present value of expected cash flows discounted at the loan's effective interest rate, or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company adopted FAS 114 on January 1, 1995. At December 31, 1996, the Company had no impaired loans. At December 31, 1995, the Company had a total of $100,000 of impaired loans. There was a related allowance for possible loan losses of $25,000 at December 31, 1995, recorded for such loans. Impaired loans are normally placed on nonaccrual status and, as a result, interest income is recorded only as cash is received. The average balance of impaired loans during the years ended December 31, 1996 and 1995, was approximately $50,000 and $125,000, respectively. There was no interest income recognized on such loans during the years ended December 31, 1996 or 1995. Premises and Equipment - ---------------------- Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is computed primarily on the straight-line method over the estimated useful lives of five (5) to forty (40) years. Goodwill - -------- Goodwill resulting from acquisitions accounted for using the purchase method is being amortized on the straight-line method over a period of fifteen (15) years. Management assesses the recoverability of goodwill by -13- comparing the goodwill to the undiscounted cash flows expected to be generated by the acquired banks during the anticipated period of benefit. Federal Income Taxes - -------------------- The Company uses the liability method of accounting for income taxes as required by Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Real Estate and Other Repossessed Assets - ---------------------------------------- Real estate and other repossessed assets consist principally of real estate properties and automobiles acquired by the Company through foreclosure. Such assets are carried at the lower of cost (generally the outstanding loan balance) or estimated fair value, net of estimated costs of disposal, if any. If the estimated fair value of the collateral securing the loan is less than the amount outstanding on the loan at the time the assets are acquired, the difference is charged against the allowance for possible loan losses. Subsequent declines in estimated fair value, if any, are charged to noninterest expense. Fair Value of Financial Instruments - ----------------------------------- FASB Statement No. 107, "Disclosures About Fair Value of Financial Instruments" ("FAS 107"), requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. FAS 107 excludes all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Stock-based Compensation - ------------------------ In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). This Statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("Opinion 25"). Entities electing to continue to use the method of accounting specified in Opinion 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value method of accounting defined in FAS 123 had been applied. The Company adopted FAS 123 on January 1, 1996. Due to the fact that no stock options were granted during 1995 or 1996, no pro forma disclosures are required. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications - ----------------- Certain 1995 and 1994 amounts have been reclassified to conform with the consolidated financial presentation adopted in 1996 and 1995, respectively. -14- NOTE 2: QUASI-REORGANIZATION In connection with the restructuring of its indebtedness to a financial institution in Dallas, Texas (the "Dallas Bank"), the Company effected a quasi-reorganization as of December 31, 1989. A quasi-reorganization is an elective accounting procedure under Generally Accepted Accounting Principles ("GAAP") in which assets and liabilities of the Company were restated to fair value and the Company's accumulated deficit was reduced to zero. Under GAAP, utilization of any of the Company's net operating loss carryforwards subsequent to the quasi-reorganization date will not be credited to future income. For periods prior to January 1, 1995, the tax effect of the utilization of the Company's net operating loss carryforwards was credited directly to additional paid-in capital. For periods subsequent to December 31, 1994, the effect of such utilization has been and will be credited against the Company's gross deferred tax asset. The tax effect of utilization of these net operating losses in 1996, 1995 and 1994 totaled $697,000, $547,000 and $222,000, respectively. NOTE 3: BANK ACQUISITIONS The Bank completed the acquisition of Peoples National Bank in Winters, Texas ("Peoples National") effective January 1, 1996. At December 31, 1995, Peoples National had total assets of $5,505,000, total loans, net of unearned income, of $2,767,000, total deposits of $4,958,000 and stockholders' equity of $525,000. The Bank paid $745,000 for the acquisition of Peoples National and, as a result of such acquisition, recorded $260,000 of goodwill. The Bank also completed the acquisition of the San Angelo branch of Coastal Banc ssb ("Coastal Banc - San Angelo") effective May 27, 1996. On that date, Coastal Banc - San Angelo had total deposits of $14,895,000 and total loans, net of unearned income, of $155,000. The Bank paid $760,000 as a premium on the deposits of Coastal Banc - San Angelo and, as a result of such payment, recorded $743,000 of goodwill. A total of $46,000 in goodwill amortization expense was recorded during 1996. NOTE 4: SECURITIES The amortized cost and estimated fair value of available-for- sale securities at December 31, 1996 and 1995, were as follows:
1996 --------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ U.S. Treasury securities $ 27,166,000 $ 76,000 $ (41,000) $ 27,201,000 Mortgage-backed securities 126,000 1,000 0 127,000 Other securities 443,000 0 0 443,000 ------------ ------------ ------------ ------------ Total available-for-sale securities $ 27,735,000 $ 77,000 $ (41,000) $ 27,771,000 ============ ============ ============ ============ 1995 --------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------ ------------ ------------ U.S. Treasury securities $ 16,042,000 $ 101,000 $ 0 $ 16,143,000 Mortgage-backed securities 158,000 2,000 0 160,000 Other securities 443,000 0 0 443,000 ------------ ------------ ------------ ------------ Total available-for-sale securities $ 16,643,000 $ 103,000 $ 0 $ 16,746,000 ============ ============ ============ ============
-15- The amortized cost and estimated fair value of held-to- maturity securities at December 31, 1996 and 1995, were as follows:
1996 ---------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- ------------- U.S. Treasury securities $ 7,942,000 $ 25,000 $ 0 $ 7,967,000 Obligations of U.S. Government agencies and corporations 29,928,000 129,000 (140,000) 29,917,000 Mortgage-backed securities 9,311,000 1,000 (111,000) 9,201,000 Obligations of states and political subdivisions 200,000 6,000 0 206,000 ------------- ------------- ------------- ------------- Total held-to-maturity securities $ 47,381,000 $ 161,000 $ (251,000) $ 47,291,000 ============= ============= ============= ============= 1995 ---------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------- ------------- ------------- ------------- U.S. Treasury securities $ 16,152,000 $ 98,000 $ (5,000) $ 16,245,000 Obligations of U.S. Government agencies and corporations 23,009,000 130,000 0 23,139,000 ------------- ------------- ------------- ------------- Total held-to-maturity securities $ 39,161,000 $ 228,000 $ (5,000) $ 39,384,000 ============= ============= ============= =============
The amortized cost and estimated fair value of securities at December 31, 1996, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated Available-for-sale Securities Cost Fair Value ----------------------------- ------------ ------------ Due in one year or less $ 16,946,000 $ 17,005,000 Due after one year through five years 10,225,000 10,201,000 Due after ten years 438,000 438,000 ------------ ------------ 27,609,000 27,644,000 Mortgage-backed securities 126,000 127,000 ------------ ------------ Total available-for-sale securities $ 27,735,000 $ 27,771,000 ============ ============
Amortized Estimated Held-to-maturity Securities Cost Fair Value --------------------------- ------------ ------------ Due in one year or less $ 4,942,000 $ 5,004,000 Due after one year through five years 29,880,000 29,877,000 Due after five years through ten years 3,248,000 3,209,000 ------------ ------------ 38,070,000 38,090,000 Mortgage-backed securities 9,311,000 9,201,000 ------------ ------------ Total held-to-maturity securities $ 47,381,000 $ 47,291,000 ============ ============
At December 31, 1996, securities with an amortized cost and estimated fair value of $10,847,000 and $10,820,000, respectively, were pledged as collateral for public and trust fund deposits and for other purposes required or permitted by law. At December 31, 1995, the amortized cost and estimated fair value of pledged securities were $6,423,000 and $6,482,000, respectively. During 1996, the Company sold available-for-sale securities with a book value of $42,000 and recorded a $12,000 loss on such sale. In addition, the Company sold held-to-maturity securities with a book value of $1,998,000 approximately thirty (30) days prior to their scheduled maturity and recorded a $2,000 gain on such sale. -16- During 1995, a transfer was made from held-to-maturity securities to available-for-sale securities in accordance with the Financial Accounting Standards Board's "Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The amortized cost of the securities transferred totaled $158,000 and the unrealized gain of $2,000 was included as a separate component of stockholders' equity. NOTE 5: LOANS The composition of loans at December 31, 1996 and 1995, was as follows:
1996 1995 ------------ ------------ Loans to individuals $ 43,927,000 $ 39,868,000 Real estate loans 26,233,000 23,265,000 Commercial and industrial loans 21,478,000 19,510,000 Other loans 2,626,000 2,638,000 ------------ ------------ Total loans 94,264,000 85,281,000 Less unearned income 2,247,000 3,354,000 ------------ ------------ Total loans, net of unearned income $ 92,017,000 $ 81,927,000 ============ ============
An analysis of nonperforming assets at December 31, 1996 and 1995, is as follows:
1996 1995 ------------ ------------ Nonaccrual loans $ 82,000 $ 204,000 Accruing loans past due over ninety days 41,000 23,000 Restructured loans 73,000 65,000 Real estate and other repossessed assets 389,000 337,000 ------------ ------------ Total nonperforming assets $ 585,000 $ 629,000 ============ ============
The amount of interest income that would have been recorded on nonaccrual loans for the years ended December 31, 1996, 1995 and 1994, based on the loans' original terms was $17,000, $14,000 and $26,000, respectively. No interest was collected on such loans and recorded as income during 1996 or 1995. A total of $38,000 in interest on nonaccrual loans was actually collected and recorded as income during the year ended December 31, 1994. A summary of the transactions in the allowance for possible loan losses for the years ended December 31, 1996, 1995 and 1994, is as follows:
1996 1995 1994 ----------- ----------- ----------- Balance at beginning of year $ 759,000 $ 817,000 $ 896,000 Provision for loan losses 201,000 206,000 147,000 Loans charged off (389,000) (376,000) (378,000) Recoveries of loans charged off 73,000 112,000 152,000 Bank acquisitions 149,000 0 0 ----------- ----------- ----------- Balance at end of year $ 793,000 $ 759,000 $ 817,000 =========== =========== ===========
NOTE 6: PREMISES AND EQUIPMENT The following is a summary of premises and equipment at December 31, 1996 and 1995: 1996 1995 ----------- ----------- Land $ 928,000 $ 707,000 Buildings and improvements 4,312,000 4,100,000 Furniture and equipment 1,499,000 1,285,000 ----------- ----------- 6,739,000 6,092,000 Less accumulated depreciation 2,302,000 1,937,000 ----------- ----------- Net premises and equipment $ 4,437,000 $ 4,155,000 =========== =========== -17- NOTE 7: DEPOSITS At December 31, 1996 and 1995, interest-bearing time deposits of $100,000 or more were $29,627,000 and $23,808,000, respectively. At December 31, 1996, the scheduled maturities of interest- bearing time deposits was as follows: Interest-bearing Time Deposits ---------------- 1997 $ 88,778,000 1998 6,439,000 1999 1,722,000 2000 989,000 2001 731,000 ---------------- Total interest-bearing time deposits $ 98,659,000 ================ NOTE 8: NOTES PAYABLE The Company had a note payable to a financial institution in Amarillo, Texas (the "Amarillo Bank"). This note (the "Term Note") had a maturity of April 15, 1996. On April 15, 1996, the Company paid the Amarillo Bank $100,000 to reduce the outstanding principal balance to $371,000 and the maturity was extended to April 15, 1999. Equal principal payments of $31,000, plus accrued interest, were due quarterly on January 15, April 15, July 15 and October 15. The Term Note bore interest at the Amarillo Bank's floating base rate plus 1% and was collateralized by 100% of the stock of the Bank, and First State, N.A., Odessa. On October 15, 1996, the Company paid off the remaining principal balance of the Term Note. In addition, at December 31, 1996, the Company had notes payable to one current and two former directors of the Company aggregating $228,000. The notes had an original face amount of $350,000 but were discounted upon issuance because they bear interest at a below-market interest rate (6%). The notes are payable in three equal annual installments, plus accrued interest. The first installment of $117,000 was made on March 1, 1996. The notes represent a portion of the final settlement of certain litigation. See "Note 14: Commitments and Contingent Liabilities." At December 31, 1996, the Bank had a $12,000 note payable to an individual which matures in March 1999. Principal, plus interest at 7.5%, is payable monthly. The note is collateralized by a two-story commercial building in Abilene, Texas. NOTE 9: FEDERAL INCOME TAXES Significant components of the Company's deferred tax assets and liabilities at December 31, 1996 and 1995, were as follows:
1996 1995 ------------ ------------ Deferred tax assets: Net operating loss carryforwards $ 1,112,000 $ 1,655,000 Allowance for possible loan losses 278,000 225,000 Tax credit carryforwards 549,000 142,000 Director indemnification 79,000 119,000 Real estate and other repossessed assets 69,000 82,000 Other, net 3,000 8,000 ------------ ------------ Total gross deferred tax assets 2,090,000 2,231,000 Less valuation allowance for deferred tax assets (389,000) (227,000) ------------ ------------ Net deferred tax assets 1,701,000 2,004,000 ------------ ------------ Deferred tax liabilities: Unrealized gain on available-for-sale securities (14,000) (37,000) Depreciation and amortization (23,000) (30,000) ------------ ------------ Total gross deferred tax liabilities (37,000) (67,000) ------------ ------------ Net deferred tax asset $ 1,664,000 $ 1,937,000 ============ ============
-18- As a result of the utilization of a portion of its net operating loss carryforwards, the Company reduced its gross deferred tax asset and the related valuation allowance by $222,000 during the year ended December 31, 1994. The Company also reduced the valuation allowance during 1995 by $1,600,000 and transferred such amount to additional paid-in capital due to the Company's belief, based on the Company's recent earnings history, that it is more likely than not that sufficient pre-tax income will be generated in the foreseeable future to realize its net deferred tax asset. Additionally, the Company reduced its gross deferred tax asset and related valuation allowance by $708,000 as a result of the write-off of a portion of the deferred tax asset related to the Winters State net operating loss carryforwards which will not be utilized. As a result of the acquisition of Peoples National in 1996, the Company increased its gross deferred tax asset and the related valuation allowance by $162,000. The Company may reduce or increase its valuation allowance depending on changes in the expectation of future earnings and other circumstances. At December 31, 1996, the Company had available net operating loss carryforwards and tax credit carryforwards to reduce future federal income taxes. These carryforwards expire approximately as follows: Net Operating Losses Tax Credits ----------- ----------- 1997-2001 $ 0 $ 33,000 2002-2006 238,000 0 2007-2011 3,031,000 516,000 ----------- ----------- Total carryforwards $ 3,269,000 $ 549,000 =========== =========== Included in the $3,269,000 of net operating loss carryforwards is approximately $407,000 acquired as part of the Winters State acquisition and $409,000 acquired as part of the Peoples National acquisition. For federal income tax purposes, due to certain change of ownership requirements of the Internal Revenue Code, utilization of the Winters State and Peoples National net operating loss carryforwards are limited to approximately $37,000 per year and $42,000 per year, respectively. If the full amount of these limitations is not used in any year, the amount not used increases the allowable limit in the subsequent year. These net operating loss carryforwards, if not used, expire between 2003 and 2010. The comprehensive provisions for federal income taxes for the years ended December 31, 1996, 1995 and 1994, consist of the following:
1996 1995 1994 ----------- ----------- ----------- Current tax provision $ 76,000 $ 35,000 $ 5,000 Deferred tax provision 677,000 547,000 222,000 ----------- ----------- ----------- Provision for tax expense charged to results of operations 753,000 582,000 227,000 Tax (benefit) on adjustment to unrealized gain/loss on available-for-sale securities (23,000) 86,000 (154,000) ----------- ----------- ----------- Comprehensive provision for federal income taxes $ 730,000 $ 668,000 $ 73,000 =========== =========== ===========
NOTE 10: STOCKHOLDERS' EQUITY In December 1992, the Company's board of directors approved the granting of nonqualified stock options for certain officers of the Company under which an original aggregate of 14,000 shares of Common Stock, adjusted for the 5% stock dividend paid to stockholders in May 1993 and the 33-1/3% stock dividend paid to stockholders in May 1995, could be issued. These options were exercisable at any time during the period January 1, 1993, to December 31, 1995, at a price of $3.75 per share, adjusted for the 5% stock dividend paid to stockholders in May 1993 and the 33-1/3% stock dividend paid to stockholders in May 1995. During the years ended December 31, 1994 and 1995, after adjustments for the two stock dividends noted above, options for 428 and 9,037 shares, respectively, were exercised and options for 1,261 and 1,032 shares, respectively, expired. In December 1993, the Company's board of directors approved the granting of nonqualified stock options to certain executive officers of the Company under which an original aggregate of 14,667 shares of Common Stock, adjusted for the 33-1/3% stock dividend paid to stockholders in May 1995, may be issued. Options are exercisable at any time during the period January 1, 1994, to December 31, 1997, at a price of $6.75 per share, adjusted for the 33-1/3% -19- stock dividend paid to stockholders in May 1995. No options were exercised or expired during the years ended December 31, 1994, 1995 and 1996. The Company's Series C Preferred Stock is cumulative, pays quarterly dividends at the annual rate of $4.20 per share, is senior to the Common Stock with respect to dividends and liquidation rights, is convertible into Common Stock at a price of $2.29 per share, adjusted for the 5% stock dividend paid to stockholders in May 1993 and the 33-1/3% stock dividend paid to stockholders in May 1995, and has certain voting rights if dividends are in arrears for three quarters. A total of 232 and 2,958 shares of the Series C Preferred Stock were converted into a total of 4,263 shares of Common Stock, adjusted for the 33-1/3% stock dividend paid to stockholders in May 1995, and 54,352 shares of Common Stock, during 1995 and 1996, respectively. The Series C Preferred Stock is redeemable in cash and/or Common Stock at the Company's option beginning December 12, 1997, at $42.00 per share. An additional 259,371 shares of Common Stock were issued as a result of the 33-1/3% stock dividend paid to stockholders in May 1995. The stock dividend was accounted for by a $65,000 transfer from retained earnings to common stock, representing the above number of shares at a par value of $0.25 per share. The following is a summary at December 31, 1996, of the number of shares of Common Stock reserved for issuance upon exercise of options or conversion of preferred stock and the related exercise or conversion price per share, adjusted for the 5% stock dividend paid to stockholders in May 1993 and the 33-1/3% stock dividend paid to stockholders in May 1995: Exercise or Shares Conversion Reserved for Price Issuance Per Share ------------ -------------- Unexercised stock options granted to certain executive officers of the Company 14,667 $ 6.75 Series C Preferred Stock 247,658 2.29 ------------ -------------- Total shares reserved for issuance and related exercise or conversion price per share 262,325 $ 2.29 - $6.75 ============ ============== NOTE 11: EARNINGS PER SHARE Primary earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of shares and share equivalents outstanding during the period. Because the Company's outstanding preferred stock is cumulative, the dividends allocable to such preferred stock reduces income available to common stockholders in the earnings per share calculations. The Series C Preferred Stock issued in December 1990 was determined not to be a common stock equivalent and, therefore, is not used to calculate primary earnings per common share. In computing fully diluted earnings per common share for the years ended December 31, 1996, 1995 and 1994, the conversion of the preferred stock was assumed, as the effect is dilutive. The following table presents information necessary to calculate earnings per share for the years ended December 31, 1996, 1995 and 1994 (adjusted for the 33-1/3% stock dividend paid to stockholders in May 1995):
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------- --------- --------- Primary Earnings Per Common Share (In thousands) - --------------------------------- Shares Outstanding: Weighted average shares outstanding 1,084 1,039 1,037 Share equivalents 6 8 5 --------- --------- --------- Adjusted shares outstanding 1,090 1,047 1,042 ========= ========= ========= Net Income: Net income $ 1,422 $ 1,132 $ 450 Preferred stock dividends (63) (70) (70) --------- --------- --------- Net income available to common stockholders $ 1,359 $ 1,062 $ 380 ========= ========= =========
-20-
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------- --------- --------- (In thousands) Fully Diluted Earnings Per Common Share Shares Outstanding: Weighted average shares outstanding 1,084 1,039 1,037 Share equivalents 6 8 5 Conversion of Series C Preferred Stock 268 305 306 --------- --------- --------- Adjusted shares outstanding 1,358 1,352 1,348 ========= ========= ========= Net Income $ 1,422 $ 1,132 $ 450 ========= ========= =========
NOTE 12: BENEFIT PLANS The Company has an employee stock ownership/401(k) plan (the "Plan") that covers most of its officers and employees. The Plan stipulates, among other things, that vesting in employer contributions begins after one year of service, each participant will become fully vested in employer contributions after seven years of service and the determination of the level of vesting began with the original date of current employment of each participant. Contributions made to the employee stock ownership portion of the Plan by the Company were $77,000, $72,000 and $62,000 for the years ended December 31, 1996, 1995 and 1994, respectively. These contributions were used to make distributions to employees who left the Company's employment in the respective years and to purchase Common Stock of the Company. No contributions have been made by the Company to match contributions made by plan participants to the 401(k) portion of the Plan. The amount of all such contributions is at the discretion of the Company's board of directors. Employee contributions are invested in various equity, debt and money market investments, including Common Stock of the Company. At December 31, 1996, 112,672 shares of Common Stock of the Company were held by the Plan. NOTE 13: RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has loans, deposits and other transactions with its senior officers and directors and businesses with which such persons are associated. It is the Company's policy that all such transactions are entered into on substantially the same terms as those prevailing at the time for comparable transactions with unrelated third parties. The balances of loans to all such persons were $2,990,000, $1,053,000 and $1,587,000 at December 31, 1996, 1995 and 1994, respectively. Additions and reductions on such loans were $2,293,000 and $356,000, respectively, for the year ended December 31, 1996. The Company and its subsidiaries paid $28,000, $19,000 and $55,000 in fees to a director-related company for services rendered on various legal matters during 1996, 1995 and 1994, respectively. During the year ended December 31, 1995, the Company reimbursed $800,000 ($450,000 in cash and $350,000 in notes payable) to three former directors (one of whom is also a current director of the Company) of a bank which was a repossessed asset of a former subsidiary bank for payment of reasonable legal fees and expenses in connection with their defense of an action brought by the Federal Deposit Insurance Corporation (the "FDIC"). See "Note 14: Commitments and Contingent Liabilities." NOTE 14: COMMITMENTS AND CONTINGENT LIABILITIES In 1985, a former subsidiary bank of the Company foreclosed on the stock of Texas Bank & Trust Company, Sweetwater, Texas ("TB&T- Sweetwater"), which became a repossessed asset of the former subsidiary. TB&T-Sweetwater subsequently failed, resulting in a legal action being brought in federal court against the thirteen TB&T-Sweetwater directors by the FDIC. In September 1993, nine former outside directors of TB&T-Sweetwater (the "Outside Directors") settled with the FDIC for an aggregate of $60,000. All former directors of TB&T-Sweetwater requested that the Company reimburse them for their expenses and settlement costs incurred by them in their defense of the FDIC litigation. This request was based on their interpretation of certain indemnification provisions contained in the Company's Articles of Incorporation. In January 1994, the Company filed a declaratory judgment action in state district court to petition the court to rule on certain matters that would have precluded indemnification. Certain of the directors filed counterclaims against the Company asserting their right to be indemnified. A hearing occurred in July 1994, and the court issued an order in September 1994, denying the Company's petition and upholding the directors' counterclaims. -21- In December 1994, a settlement was entered into between the FDIC, one Outside Director and the three management directors of TB&T-Sweetwater, who were also management directors of the Company (the "Inside Directors"), with the Inside Directors paying the FDIC a total of $450,000. As a result of the two settlements and indemnification requests, the Outside Directors claimed indemnification in the amount of approximately $467,000 and the Inside Directors claimed indemnification in the amount of approximately $900,000. In 1994, the Company accrued $900,000 for the potential reimbursement of the $1,367,000 in claims. On March 7, 1995, the Company agreed to settle the indemnification requests of the Inside Directors for $450,000 in cash and by delivery of three promissory notes in the aggregate principal amount of $350,000. These notes are payable in three equal annual installments beginning March 1, 1996, and bear interest at 6% per annum. As a result of the below-market interest rate, the notes were originally discounted to an aggregate of $323,000. In April and May 1995, the Company consummated this settlement with the Inside Directors by paying them an aggregate of $450,000 and delivering such promissory notes to them. In May and June 1995, the Company settled with the Outside Directors by paying them a aggregate of $252,000 in cash. The Company is involved in various other litigation proceedings incidental to the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from such other litigation would not be material in relation to the Company's financial condition. The Bank leases certain of its premises and equipment under noncancellable operating leases. Rental expense under such operating leases was approximately $336,000, $290,000 and $235,000 in 1996, 1995 and 1994, respectively. The minimum payments due under these leases at December 31, 1996, are as follows: 1997 $ 232,000 1998 87,000 1999 39,000 2000 39,000 2001 37,000 2002-2003 24,000 --------- Total $ 458,000 ========= NOTE 15: FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of financial assets and financial liabilities at December 31, 1996 and 1995, were as follows:
1996 1995 --------------------------- --------------------------- Carrying Carrying Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ Financial Assets ---------------- Cash and due from banks $ 11,458,000 $ 11,458,000 $ 8,559,000 $ 8,559,000 Federal funds sold 18,500,000 18,500,000 26,200,000 26,200,000 Available-for-sale securities 27,771,000 27,771,000 16,746,000 16,746,000 Held-to-maturity securities 47,381,000 47,291,000 39,161,000 39,384,000 Loans, net of unearned income 92,017,000 93,814,000 81,927,000 83,857,000 Accrued interest receivable 1,599,000 1,599,000 1,494,000 1,494,000 Financial Liabilities --------------------- Noninterest-bearing demand deposits $ 32,240,000 $ 32,240,000 $ 33,267,000 $ 33,267,000 Interest-bearing demand deposits 58,676,000 58,676,000 52,430,000 52,430,000 Interest-bearing time deposits 98,659,000 98,923,000 79,007,000 79,475,000 Notes payable 240,000 240,000 849,000 849,000 Accrued interest payable 951,000 951,000 882,000 882,000
Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. -22- For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values of other loans are estimated using discounted cash flow analyses, which utilize interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The fair values of noninterest and interest-bearing demand deposits are, by definition, equal to the amount payable on demand, i.e., their carrying amount. The fair values of interest-bearing time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar maturities. The carrying amounts for cash and due from banks, federal funds sold, accrued interest receivable, notes payable and accrued interest payable approximate the fair values of such assets and liabilities. Fair values for the Company's off-balance-sheet instruments, which consist of lending commitments and standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Management believes that the fair value of these off-balance-sheet instruments is not materially different from the commitment amount. NOTE 16: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is a party to financial instruments with off- balance-sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying financial statements. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, standby letters of credit and financial guarantees is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on- balance-sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. The Company had outstanding loan commitments of approximately $5,174,000, and $6,162,000 and outstanding standby letters of credit and financial guarantees of approximately $175,000 and $178,000 at December 31, 1996 and 1995, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in making loans to customers. The Company does not expect any material losses as a result of loan commitments, standby letters of credit and financial guarantees that were outstanding at December 31, 1996. In the normal course of business, the Company maintains deposits with other financial institutions in amounts which exceed FDIC insurance coverage limits. NOTE 17: REGULATORY MATTERS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could cause the initiation of certain mandatory, and possibly additional discretionary, actions by the regulatory authorities that, if undertaken, could have a direct material effect on the Company's and the Bank's respective financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's respective assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's respective -23- capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital and total capital (Tier 1 and Tier 2) to risk-weighted assets and of Tier 1 capital to adjusted quarterly average assets. At December 31, 1996, the Company and the Bank met all capital adequacy requirements to which they were subject. At December 31, 1996, the most recent notifications from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and Tier 1 capital to adjusted quarterly average assets ratios as set forth in the tables. The pro forma calculation of the Company's and the Bank's Tier 1 capital to adjusted quarterly average assets would have been 5.95% and 5.45%, respectively, had the acquisition of Crown Park occured at December 31, 1996. There are no other conditions or events since the most recent notification that management believes have changed either the Company's or the Bank's category. The minimum capital amounts and ratios for well capitalized bank holding companies and the Company's actual capital amounts and ratios at December 31, 1996, are as follows:
Minimums for Well Capitalized Holding Companies Actual ----------------- ----------------- Amount Ratio Amount Ratio -------- ------- -------- ------- (Dollars in thousands) Tier 1 capital to risk-weighted assets $ 8,062 8.00% $ 13,955 13.85% Total capital to risk-weighted assets 10,077 10.00 14,748 14.64 Tier 1 capital to adjusted quarterly average assets 12,214 6.00 13,955 6.86
The minimum capital amounts and ratios for well capitalized banks and the Bank's actual capital amounts and ratios at December 31, 1996, are as follows:
Minimums for Well Capitalized Banks Actual ----------------- ----------------- Amount Ratio Amount Ratio -------- ------- -------- ------- (Dollars in thousands) Tier 1 capital to risk-weighted assets $ 7,961 8.00% $ 12,506 12.57% Total capital to risk-weighted assets 9,952 10.00 13,300 13.36 Tier 1 capital to adjusted quarterly average assets 12,127 6.00 12,506 6.19
At December 31, 1996, retained earnings of the Bank included approximately $1,561,000 that was available for payment of dividends to the Company without prior approval of regulatory authorities. -24- NOTE 18: PARENT COMPANY FINANCIAL INFORMATION Condensed financial statements of the Company, parent only, are presented below: INDEPENDENT BANKSHARES, INC. CONDENSED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
1996 1995 ------------ ------------ Assets: Cash $ 148,000 $ 191,000 Investment in subsidiaries 13,576,000 12,908,000 Premises and equipment 3,000 4,000 Other assets 1,452,000 1,577,000 ------------ ------------ Total assets $ 15,179,000 $ 14,680,000 ============ ============ Liabilities: Notes payable $ 228,000 $ 832,000 Accrued interest payable and other liabilities 14,000 30,000 ------------ ------------ Total liabilities 242,000 862,000 Stockholders' equity 14,937,000 13,818,000 ------------ ------------ Total liabilities and stockholders' equity $ 15,179,000 $ 14,680,000 ============ ============
INDEPENDENT BANKSHARES, INC. CONDENSED INCOME STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Income: Dividends from subsidiaries (see Note 18) $ 1,000,000 $ 905,000 $ 450,000 Management fees from subsidiaries 161,000 177,000 158,000 Interest from subsidiaries 3,000 2,000 2,000 ------------ ------------ ------------ Total income 1,164,000 1,084,000 610,000 ------------ ------------ ------------ Expenses: Interest 58,000 107,000 86,000 Other expenses 557,000 756,000 1,381,000 ------------ ------------ ------------ Total expenses 615,000 863,000 1,467,000 ----------- ------------ ------------ Income (loss) before federal income taxes and equity in undistributed earnings of subsidiaries 549,000 221,000 (857,000) Federal income tax benefit (162,000) (236,000) (490,000) ------------ ------------ ------------ Income (loss) before equity in undistributed earnings of subsidiaries 711,000 457,000 (367,000) Equity in undistributed earnings of subsidiaries 711,000 675,000 817,000 ------------ ------------ ------------ Net income $ 1,422,000 $ 1,132,000 $ 450,000 ============ ============ ============
-25- INDEPENDENT BANKSHARES, INC. CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 1,422,000 $ 1,132,000 $ 450,000 Adjustments to reconcile net income to net cash provided by operating activities: Deferred federal income tax expense 677,000 547,000 222,000 Depreciation and amortization 1,000 2,000 1,000 Equity in undistributed earnings of subsidiaries (711,000) (675,000) (817,000) Decrease (increase) in other assets (540,000) (97,000) 4,000 Increase (decrease) in accrued interest payable and other liabilities (16,000) (390,000) 681,000 ------------ ------------ ------------ Net cash provided by operating activities 833,000 519,000 541,000 ------------ ------------ ------------ Cash flows from financing activities: Proceeds from notes payable 0 275,000 0 Repayment of notes payable (616,000) (687,000) (261,000) Net proceeds from issuance of equity securities 0 34,000 2,000 Cash paid for fractional shares in stock dividend 0 (4,000) 0 Payment of cash dividends (260,000) (187,000) (140,000) ------------ ------------ ------------ Net cash used in financing activities (876,000) (569,000) (399,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (43,000) (50,000) 142,000 Cash and cash equivalents at beginning of year 191,000 241,000 99,000 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 148,000 $ 191,000 $ 241,000 ============ ============ ============
NOTE 19: SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information for the years ended December 31, 1996, 1995 and 1994, is as follows:
1996 1995 1994 ------------ ------------ ------------ Cash paid during the year for: Interest $ 6,372,000 $ 4,835,000 $ 3,337,000 Federal income taxes 438,000 15,000 17,000 Noncash investing activities: Additions to real estate and other repossessed assets during the year through foreclosures 1,015,000 1,039,000 424,000 Sales of real estate and other repossessed assets financed with loans 240,000 196,000 335,000 Transfer of real estate and other repossessed assets to loans 0 125,000 0 Increase (decrease) in unrealized gain/loss on available-for-sale securities, net of tax (43,000) 168,000 (306,000) Other liabilities replaced with notes payable 0 334,000 0
NOTE 20: SUBSEQUENT EVENT The Bank completed the acquisition of Crown Park and its subsidiary, Western National, on January 28, 1997, for an aggregate cash purchase price of $7,510,000. At the date of acquisition, Crown Park had consolidated total assets of $60,420,000, total loans, net of unearned income of $41,688,000, total deposits of $53,618,000 and stockholders' equity of $4,238,000. Western National was merged with and into, and became a branch of, the Bank. To obtain funding for the acquisition, the Company sold an aggregate of 316,250 shares of its common stock in an underwritten offering at a price of $14.25 per share. This included 41,250 shares covered by the underwriter's over-allotment option. The Company borrowed $800,000 from the Amarillo Bank to finance the remaining cost of acquiring Crown Park. The $800,000 of borrowings was later reduced to $400,000 with the proceeds of the sale of the over-allotment shares. This acquisition will be accounted for under the purchase method of accounting. A total of $2,486,000 in goodwill was recorded as a result of the acquisition. -26- QUARTERLY DATA (UNAUDITED) The following table presents the unaudited results of operations for the past two years by quarter. See "Note 11: Earnings Per Share" in the Company's Consolidated Financial Statements.
1996 ------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- -------- (In thousands, except per share amounts) Interest income $ 3,223 $ 3,284 $ 3,502 $ 3,547 $ 13,556 Interest expense 1,485 1,544 1,693 1,719 6,441 Net interest income 1,738 1,740 1,809 1,828 7,115 Provision for loan losses 50 71 40 40 201 Income before federal income taxes 547 479 558 591 2,175 Net income 361 299 355 407 1,422 Primary earnings per common share available to common stockholders: Income before federal income taxes $ 0.50 $ 0.43 $ 0.49 $ 0.52 $ 1.94 Net income 0.33 0.27 0.32 0.33 1.25 Fully diluted earnings per common share available to common stockholders: Income before federal income taxes $ 0.40 $ 0.35 $ 0.41 $ 0.44 $ 1.60 Net income 0.27 0.23 0.27 0.28 1.05 1995 ------------------------------------------------ First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- -------- (In thousands, except per share amounts) Interest income $ 2,811 $ 2,971 $ 3,049 $ 3,131 $ 11,962 Interest expense 1,128 1,331 1,401 1,449 5,309 Net interest income 1,683 1,640 1,648 1,682 6,653 Provision for loan losses 42 30 69 65 206 Income before federal income taxes 502 277 479 456 1,714 Net income 332 182 317 301 1,132 Primary earnings per common share available to common stockholders: Income before federal income taxes $ 0.46 $ 0.25 $ 0.44 $ 0.42 $ 1.57 Net income 0.30 0.16 0.29 0.27 1.02 Fully diluted earnings per common share available to common stockholders: Income before federal income taxes $ 0.37 $ 0.20 $ 0.36 $ 0.34 $ 1.27 Net income 0.25 0.14 0.23 0.22 0.84
The above unaudited financial information reflects all adjustments that are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim periods presented. -27- SELECTED CONSOLIDATED FINANCIAL INFORMATION The following table presents selected consolidated financial information for the last five years. Such financial information has been restated to reflect the 5% stock dividend paid to stockholders in May 1993 and the 33-1/3% stock dividend paid to stockholders in May 1995. See "Note 1: Summary of Significant Accounting Policies-Principles of Consolidation," "Note 2: Quasi- reorganization," "Note 3: Bank Acquisitions," "Note 8: Notes Payable" and "Note 11: Earnings Per Share" in the Company's Consolidated Financial Statements for other significant changes in financial statement items.
1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- (In thousands, except per share amounts) Balance sheet information: Assets $ 205,698 $ 180,344 $ 159,860 $ 160,712 $ 160,554 Loans, net of unearned income 92,017 81,927 81,306 69,647 52,967 Deposits 189,575 164,704 146,184 147,785 134,679 Notes payable 240 849 930 1,194 2,290 Stockholders' equity 14,937 13,818 11,073 10,845 8,238 Income statement information: Total interest income $ 13,556 $ 11,962 $ 10,131 $ 9,221 $ 9,715 Net interest income 7,115 6,653 6,679 6,045 5,639 Income before extraordinary item and cumulative effect of accounting change 1,422 1,132 450 1,029 839 Extraordinary item 0 0 0 0 192(1) Cumulative effect of accounting change 0 0 0 200(2) 0 Net income 1,422 1,132 450 1,229 1,031 Primary earnings per common share available to common stockholders: Income before extraordinary item and cumulative effective of accounting change $ 1.25 $ 1.02 $ 0.36 $ 0.92 $ 0.72 Extraordinary item 0.00 0.00 0.00 0.00 0.19(1) Cumulative effect of accounting change 0.00 0.00 0.00 0.19(2) 0.00 --------- --------- --------- --------- --------- Net income $ 1.25 $ 1.02 $ 0.36 $ 1.11 $ 0.91 ========= ========= ========= ========= ========= Fully diluted earnings per common share available to common stockholders: Income before extraordinary item and cumulative effect of accounting change $ 1.05 $ 0.84 $ 0.33 $ 0.76 $ 0.60 Extraordinary item 0.00 0.00 0.00 0.00 0.14(1) Cumulative effect of accounting change 0.00 0.00 0.00 0.15(2) 0.00 --------- --------- --------- --------- --------- Net income $ 1.05 $ 0.84 $ 0.33 $ 0.91 $ 0.74 ========= ========= ========= ========= ========= Cash dividends per common share $ 0.18 $ 0.11 $ 0.07 $ 0.00 $ 0.00 ========= ========= ========= ========= ========= ______________________ (1) Gain on extinguishment of debt. (2) Cumulative effect of a change in accounting for income taxes.
-28- MARKET INFORMATION Since September 12, 1995, the Company's Common Stock has traded on the American Stock Exchange (the "AMEX") under the symbol "IBK." Prior to September 12, 1995, the Common Stock traded on the Nasdaq Small-Cap Market. The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock as quoted on the AMEX and Nasdaq Small-Cap Market and the amount of cash dividends paid per share, adjusted for the 33-1/3% stock dividend paid to stockholders in May 1995.
Cash Dividends High Low Per Share --------- --------- --------- Calendar Year Ended December 31, 1995 First Quarter $ 6 $ 5-1/4 $ 0.0225 Second Quarter 7-1/2 5-1/4 0.03 Third Quarter 11-1/4 7-1/4 0.03 Fourth Quarter 10-7/8 10-1/4 0.03 Calendar Year Ended December 31, 1996 First Quarter $ 10-1/2 $ 9-3/4 $ 0.03 Second Quarter 11 9 0.05 Third Quarter 12-1/8 10-7/8 0.05 Fourth Quarter 17-1/2 12-1/8 0.05 Calendar Year Ending December 31, 1997 First Quarter (through March 14) $ 17 $ 14-3/8 $ 0.05(1) ______________ (1) This cash dividend was paid February 28, 1997, to shareholders of record on February 14, 1997.
The Nasdaq Small-Cap Market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. At February 28, 1997, there were 1,558 stockholders who were individual participants in security position listings. -29- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE COMPANY Independent Bankshares, Inc. (the "Company") is a bank holding company headquartered in Abilene, Texas. The Company indirectly owns through a Delaware subsidiary, Independent Financial Corp. ("Independent Financial"), 100% of First State Bank, National Association, Abilene, Texas (the "Bank"). The Bank currently operates full-service banking locations in the West Texas cities of Abilene (2 locations), Lubbock (acquired in January 1997), Odessa (2 locations), San Angelo, Stamford and Winters. GENERAL The following discussion and analysis presents the more significant factors affecting the Company's financial condition at December 31, 1996 and 1995, and results of operations for each of the three years in the period ended December 31, 1996, after accounting for the acquisition of the subsidiary banks noted below and after giving effect to the quasi-reorganization of the Company effective December 31, 1989. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements, notes thereto and other financial information appearing elsewhere in this annual report. BANK ACQUISITIONS Crown Park and Western National. On January 28, 1997, the Company consummated the acquisition of Crown Park Bancshares, Inc. ("Crown Park") and its wholly owned subsidiary bank, Western National Bank ("Western National"), for an aggregate cash consideration of $7,510,000. On the closing date, Crown Park was merged with and into a wholly owned subsidiary of the Company and Western National was merged with and into the Bank. To obtain funding for the acquisition, the Company sold an aggregate of 316,250 shares of its common stock in an underwritten offering at a price of $14.25 per share (the "Offering"). This included 41,250 shares covered by the underwriter's over-allotment option. The Company borrowed $800,000 from a financial institution in Amarillo, Texas (the "Amarillo Bank") to finance the remaining cost of acquiring Crown Park. The $800,000 of borrowings was later reduced to $400,000 with the proceeds of the sale of the over-allotment shares. See "- Liquidity" and "- Capital Resources" below. This acquisition will be accounted for under the purchase method of accounting. A total of $2,486,000 of goodwill was recorded in 1997 as a result of this transaction. Western National is a community bank that offers interest and noninterest-bearing depository accounts, and makes consumer and commercial loans. At the date of acquisition, on a consolidated basis, Crown Park had total assets of $60,420,000, total loans, net of unearned income, of $41,688,000, total deposits of $53,618,000 and stockholders' equity of $4,238,000. San Angelo Branch. On May 27, 1996, the Bank assumed the deposits and certain other liabilities and purchased the loans and certain other assets of the San Angelo, Texas branch of Coastal Banc ssb ("Coastal Banc - San Angelo") in a cash transaction, and Coastal Banc - San Angelo became a branch of the Bank. On the date of the acquisition, Coastal Banc - San Angelo had approximately $14,895,000 in total deposits and $155,000 in total loans. The acquisition was accounted for under the purchase method of accounting, and the results of operations of Coastal Banc - San Angelo are included in the Company's results of operations from the date of purchase. The assets and liabilities of this branch were recorded at their estimated fair value. A total of $743,000 of goodwill was recorded as a result of the acquisition. Peoples National. The Bank completed the acquisition of Peoples National Bank, Winters, Texas ("Peoples National") effective January 1, 1996, and Peoples National became part of the Winters branch of the Bank. At December 31, 1995, Peoples National had total assets of $5,505,000, total loans, net of unearned income, of $2,767,000, total deposits of $4,958,000 and stockholders' equity of $525,000. The acquisition was accounted for under the purchase method of accounting, and the results of operations of Peoples National are included in the -30- Company's results of operations from the date of purchase. The assets and liabilities of Peoples National were recorded at their estimated fair value. A total of $260,000 of goodwill was recorded as a result of this acquisition. RESULTS OF OPERATIONS General - ------- Net income for the year ended December 31, 1996, amounted to $1,422,000 ($1.25 primary earnings per common share) compared to net income of $1,132,000 ($1.02 primary earnings per common share) for the year ended December 31, 1995, and net income of $450,000 ($0.36 primary earnings per common share) for the year ended December 31, 1994. The results of operations for 1995 included legal and settlement expenses of $205,000 ($135,000, net of tax), or $0.13 primary earnings per common share, incurred as a result of the final settlement of certain litigation. The results of operations for 1994 were negatively impacted by the accrual of $900,000 ($594,000, net of tax), or $0.57 primary earnings per common share, for the reimbursement of certain legal fees, expenses and settlement costs in connection with the same litigation. See "Note 15: Commitments and Contingent Liabilities" to the Company's Consolidated Financial Statements. Two industry measures of the performance by a banking institution are its return on average assets and return on average stockholders' equity. Return on average assets ("ROA") measures net income in relation to average total assets and indicates a company's ability to employ its resources profitably. During 1996, the Company's ROA was 0.72%, compared to 0.67% for 1995 and 0.28% for 1994. Excluding the unusual and extraordinary items noted above, the Company's ROA for 1995 and 1994 would have been 0.75% and 0.65%, respectively. Return on average stockholders' equity ("ROE") is determined by dividing net income by average stockholders' equity and indicates how effectively a company can generate net income on the capital invested by its stockholders. During 1996, the Company's ROE was 9.89%, compared to 8.99% for 1995 and 3.98% for 1994. Excluding the unusual and extraordinary items noted above, the Company's ROE for 1995 and 1994 would have been 10.06% and 9.24%, respectively. Net Interest Income - ------------------- Net interest income represents the amount by which interest income on interest-earning assets, including loans and securities, exceeds interest paid on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is the principal source of the Company's earnings. Interest rate fluctuations, as well as changes in the amount and type of interest-earning assets and interest-bearing liabilities, combine to affect net interest income. Net interest income amounted to $7,115,000 for 1996, an increase of $462,000 or 6.9% from 1995. Net interest income for 1995 was $6,653,000, a decrease of $26,000, or 0.4%, from net interest income of $6,679,000 for 1994. The increase in 1996 was due to the Company's growth. The small decrease in 1995 was due to an increase in average net earning assets (average interest-earning assets minus average interest-bearing liabilities), which was offset by a decrease in the Company's net interest margin. The net interest margin on a fully taxable-equivalent basis was 3.95% for 1996, compared to 4.29% for 1995 and 4.62% for 1994. The decrease in 1996 was due primarily to the fact that in the acquisitions of Peoples National and Coastal Banc - San Angelo, the Company acquired $19,853,000 in deposits and only $2,922,000 in loans. As a result, a significant amount of the increased funds has been invested in investment securities and federal funds sold, which yield a lower rate of interest than loans and, therefore, have a negative impact on the Company's net interest margin. The decrease in the net interest margin in 1995 was a result of a decrease of $7,423,000 in average noninterest-bearing and interest-bearing demand deposits and an increase of $15,362,000 in average interest- bearing time deposits, combined with a rising interest rate environment on such time deposits during most of 1995. At December 31, 1996, approximately $24,938,000, or 27.0%, of the Company's total loans, net of unearned income, were loans with floating interest rates. This amount represented 49.5% of loans, excluding loans to individuals, which are exclusively fixed rate in nature. The overall average rate paid for total deposits increased slightly in 1996. The average rate paid by the Company for certificates of deposit and other time deposits of $100,000 or more decreased -31- to 5.39% during 1996 from 5.61% in 1995; however, the average rate paid for certificates of deposit less than $100,000 increased slightly from 5.41% in 1995 to 5.42% in 1996. Rates on other types of deposits, such as savings accounts, money market accounts and NOW accounts, increased slightly from an average of 2.35% in 1995 to an average of 2.41% in 1996. Given the fact that the Company's interest-bearing liabilities are subject to repricing faster than its interest-earning assets in the very short term, a falling interest rate environment normally produces a higher net interest margin than a rising interest rate environment. As noted under "Analysis of Financial Condition - Interest Rate Sensitivity" below, because the Company's interest-bearing demand, savings and money market deposits are somewhat less rate-sensitive (as indicated above), the Company's net interest margin does not necessarily increase in a falling interest rate environment. The following table presents the average balance sheets of the Company for each of the last three fiscal years and indicates the interest earned or paid on each major category of interest-earning assets and interest-bearing liabilities on a fully taxable- equivalent basis, and the average rates earned or paid on each major category. This analysis details the contribution of interest-earning assets and the overall impact of the cost of funds on net interest income. -32-
Year Ended December 31, --------------------------------------------------------- 1996 1995 --------------------------- --------------------------- Interest Interest Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate --------- --------- ------- --------- --------- ------- (Dollars in thousands) ASSETS (1) Interest-earning assets: Loans, net of unearned income (2) $ 85,880 $ 8,005 9.32% $ 82,302 $ 7,726 9.39% Securities (3) 74,920 4,507 6.02 41,846 2,391 5.71 Federal funds sold 19,406 1,047 5.40 31,076 1,847 5.94 --------- --------- ----- --------- --------- ----- Total interest-earning assets 180,206 13,559 7.52 155,224 11,964 7.71 --------- --------- ----- --------- --------- ----- Noninterest-earning assets: Cash and due from banks 7,151 7,066 Premises and equipment, net 4,427 4,211 Accrued interest receivable and other assets 5,196 3,817 Allowance for possible loan losses (825) (786) --------- --------- Total noninterest-earning assets 15,949 14,308 --------- --------- Total assets $ 196,155 $ 169,532 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (1) Interest-bearing liabilities: Demand, savings and money market deposits $ 57,847 $ 1,397 2.41% $ 53,391 $ 1,257 2.35% Time deposits 92,065 4,985 5.41 72,137 3,944 5.47 --------- --------- ----- --------- --------- ----- Total interest-bearing deposits 149,912 6,382 4.26 125,528 5,201 4.14 Notes payable 568 59 10.39 1,069 108 10.10 --------- --------- ----- --------- --------- ----- Total interest-bearing liabilities 150,480 6,441 4.28 126,597 5,309 4.19 --------- --------- ----- --------- --------- ----- Noninterest-bearing liabilities: Demand deposits 30,093 29,019 Accrued interest payable and other liabilities 1,207 1,322 --------- --------- Total noninterest-bearing liabilities 31,300 30,341 --------- --------- Total liabilities 181,780 156,938 --------- --------- Stockholders' equity 14,375 12,594 --------- --------- Total liabilities and stockholders' equity $ 196,155 $ 169,532 ========= ========= Net interest income $ 7,118 $ 6,655 ========= ========= Interest rate spread (4) 3.24% 3.52% ===== ===== Net interest margin (5) 3.95% 4.29% ===== ===== Year Ended December 31, --------------------------- 1994 --------------------------- Interest Average Income/ Yield/ Balance Expense Rate --------- --------- ------- (Dollars in thousands) ASSETS (1) Interest-earning assets: Loans, net of unearned income (2) $ 74,727 $ 6,918 9.26% Securities (3) 53,986 2,521 4.67 Federal funds sold 15,939 697 4.37 --------- --------- ----- Total interest-earning assets 144,652 10,136 7.01 --------- --------- ----- Noninterest-earning assets: Cash and due from banks 8,060 Premises and equipment, net 4,458 Accrued interest receivable and other assets 3,617 Allowance for possible loan losses (805) --------- Total noninterest-earning assets 15,330 --------- Total assets $ 159,982 ========= LIABILITIES AND STOCKHOLDERS' EQUITY (1) Interest-bearing liabilities: Demand, savings and money market deposits $ 59,689 $ 1,288 2.16% Time deposits 56,775 2,076 3.66 --------- --------- ----- Total interest-bearing deposits 116,464 3,364 2.89 Notes payable 1,061 88 8.29 --------- --------- ----- Total interest-bearing liabilities 117,525 3,452 2.94 --------- --------- ----- Noninterest-bearing liabilities: Demand deposits 30,144 Accrued interest payable and other liabilities 1,011 --------- Total noninterest-bearing liabilities 31,155 --------- Total liabilities 148,680 --------- Stockholders' equity 11,302 --------- Total liabilities and stockholders' equity $ 159,982 ========= Net interest income $ 6,684 ========= Interest rate spread (4) 4.07% ===== Net interest margin (5) 4.62% ===== ______________________________ (1) The Average Balance and Interest Income/Expense columns include the balance sheet and income statement accounts of Peoples National and Coastal Banc - San Angelo, from January 1, 1996, and May 27, 1996 (the respective dates of acquisition of such banks), through December 31, 1996. (2) Nonaccrual loans are included in the Average Balance columns and income recognized on these loans, if any, is included in the Interest Income/Expense columns. Interest income on loans includes fees on loans, which are not material in amount. (3) Nontaxable interest income on securities was adjusted to a taxable yield assuming a tax rate of 34%. (4) The interest rate spread is the difference between the average yield on interest-earning assets and the average cost of interest- bearing liabilities. (5) The net interest margin is equal to net interest income, on a fully taxable-equivalent basis, divided by average interest-earning assets.
The following table presents the changes in the components of net interest income and identifies the part of each change due to differences in the average volume of interest-earning assets and interest-bearing liabilities and the part of each change due to the average rate on those assets and liabilities. The changes in interest due to both volume and rate in the table have been allocated to volume or rate change in proportion to the absolute amounts of the change in each. -33-
1996(1) vs 1995 1995 vs 1994 ------------------------- -------------------------- Increase (Decrease) Due To Increase (Decrease) Due To Changes In: Changes In: ------------------------- -------------------------- Volume Rate Total Volume Rate Total ------- ------- ------- ------- ------- ------- (In thousands) Interest-earning assets: Loans, net of unearned income $ 336 $ (57) $ 279 $ 710 $ 98 $ 808 Securities (2) 1,980 136 2,116 (629) 499 (130) Federal funds sold (644) (156) (800) 834 316 1,150 ------- ------- ------- ------- ------- ------- Total interest income 1,672 (77) 1,595 915 913 1,828 ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: Deposits: Demand, savings and money market deposits 107 33 140 (140) 109 (31) Time deposits 1,084 (43) 1,041 660 1,208 1,868 ------- ------- ------- ------ ------- ------- Total deposits 1,191 (10) 1,181 520 1,317 1,837 Notes payable (52) 3 (49) 1 19 20 ------- ------- ------- ------ ------- ------- Total interest expense 1,139 (7) 1,132 521 1,336 1,857 ------- -------- ------- ------ ------- ------- Increase (decrease) in net interest income $ 533 $ (70) $ 463 $ 394 $ (423) $ (29) ======= ======= ======= ====== ======= ======= ______________________________ (1) Income statement items include the income statement accounts of Peoples National and Coastal Banc - San Angelo beginning January 1, 1996, and May 27, 1996 (the respective dates of acquisition of such banks), through December 31, 1996. (2) Information with respect to interest income on tax-exempt securities is provided on a fully taxable-equivalent basis assuming a tax rate of 34%.
Provision for Loan Losses - ------------------------- The amount of the provision for loan losses is based on periodic (not less than quarterly) evaluations of the loan portfolio, especially nonperforming and other potential problem loans. During these evaluations, consideration is given to such factors as: management's evaluation of specific loans; the level and composition of nonperforming loans; historical loss experience; results of examinations by regulatory agencies; an internal asset review process conducted by the Company that is independent of the management of the Bank; expectations of future economic conditions and their impact on particular industries and individual borrowers; the market value of collateral; the strength of available guarantees; concentrations of credits; and other judgmental factors. The provision for loan losses for the year ended December 31, 1996, was $201,000, compared to $206,000 for the previous year. The provision in 1996 represented a decrease of $5,000, or 2.4%, from the 1995 provision. The provision for loan losses for the year ended December 31, 1995, represented an increase of $59,000, or 40.1%, over the $147,000 provision for the year ended December 31, 1994. The increase in the provision for loan losses during 1995 was a result of an increase in loan volume as well as increased repossessions and associated charge-offs relating to the Company's indirect installment lending program. The relatively lower provisions over the past several years reflect the general stabilization of the economic conditions in the Company's primary service area. In addition, the overall quality of the Company's loan portfolio has improved during that same period of time, necessitating generally lower provisions. Noninterest Income - ------------------ Noninterest income increased $42,000, or 2.8%, from $1,509,000 in 1995 to $1,551,000 in 1996. The amount for 1995 increased $12,000, or 0.8%, from $1,497,000 in 1994. Service charges on deposit accounts and charges for other types of services are the major source of noninterest income to the Company. This source of income increased $92,000, or 7.9%, from $1,167,000 for 1995 to $1,259,000 for 1996. The 1996 increase was a result of the overall growth in deposits during the last year, primarily as result of -34- acquisitions, and an increase in charges for checks drawn on insufficient funds. Service charge income decreased $59,000, or 4.8%, from $1,226,000 in 1994 to $1,167,000 in 1995, primarily due to a reclassification of income received in relation to printed checks from service charges to other income. Trust fees from trust operations decreased $12,000, or 6.0%, from $201,000 in 1995 to $189,000 in 1996 as a result of a one-time $24,000 fee received for services performed as executor of an estate during 1995, which was partially offset in the 1996 period by increased fees collected due to an increased amount of assets under management. Trust fees increased $32,000, or 18.9%, from $169,000 during 1994 to $201,000 during 1995. The increase is due to the same reasons noted above. Securities with a carrying value of $2,028,000 and $8,000 were sold during 1996 and 1994, respectively. Net losses of $10,000 were recorded on the securities sold during 1996. No gain or loss was recorded as a result of the sales during 1994. There were no sales of securities during 1995. The securities portfolio had an average life of approximately 1.48 years at December 31, 1996, compared to approximately 1.46 years at December 31, 1995. Other income is the sum of several small components of other operating income including check printing income, insurance premiums earned on automobiles financed through the Company's indirect installment loan program and other sources of miscellaneous income. Other income decreased $38,000, or 27.0%, from $141,000 in 1995 to $103,000 for 1996, due to $25,000 in sales tax refunds that were received in 1995 and a net loss of $10,000 on sales of securities in 1996. Other income increased $39,000, or 38.2%, from $102,000 in 1994 to $141,000 in 1995, as a result of the reclassification of income relating to printed checks noted above. This increase was offset somewhat by a reduction in insurance premium income from the sale of single interest insurance on automobiles collateralizing installment loans. Noninterest Expenses - -------------------- Noninterest expenses increased $48,000, or 0.8%, from $6,242,000 in 1995 to $6,290,000 in 1996, primarily due to increases in salaries and benefits and net occupancy expense, which were partially offset by decreases in various other categories of noninterest expense. Noninterest expenses decreased $1,110,000, or 15.1%, from $7,352,000 in 1994 to $6,242,000 in 1995. The decrease from 1994 to 1995 was primarily due to the accrual during 1994 of $900,000 for the reimbursement of certain legal fees, expenses and settlement costs in connection with certain litigation. See "Note 15: Commitments and Contingent Liabilities" to the Company's Consolidated Financial Statements. Salaries and benefits rose $233,000, or 8.2%, from $2,849,000 in 1995 to $3,082,000 in 1996. The increase was primarily a result of the acquisitions of Peoples National effective January 1, 1996, and Coastal Banc - San Angelo effective May 27, 1996, and overall salary increases effective January 1, 1996. Salaries and employee benefits increased $11,000, or 0.4%, from $2,838,000 in 1994 to $2,849,000 in 1995. Despite overall salary increases effective January 1, 1995, salaries and benefits were stable due to the economies of scale achieved as a result of the branching of The First National Bank in Stamford, Stamford, Texas ("First National"), and Winters State Bank, Winters, Texas ("Winters State"), with and into the Bank during the fourth quarter of 1994. Net occupancy expense increased $73,000, or 11.4%, from $643,000 in 1995 to $716,000 in 1996. The increase is due primarily to a reduction in rental income received in 1996 as a result of the loss of two tenants in a Bank-owned building and the additional occupancy expense of the San Angelo branch acquired in May 1996. Net occupancy expense decreased $30,000, or 4.5%, from $673,000 in 1994 to $643,000 in 1995, primarily due to lower amounts of depreciation expense as a result of certain fixed assets whose estimated useful lives had expired during 1995. Equipment expense decreased $60,000, or 8.3%, from $723,000 in 1995 to $663,000 for 1996. This decrease is the result of a significant amount of furniture, fixtures and equipment that became fully depreciated during the latter part of 1995 and the first quarter of 1996, thereby decreasing depreciation expense associated with such assets. Equipment expense increased from $641,000 in 1994 to $723,000 in 1995, an increase of $82,000, or 12.8%. Equipment leased to enable the Bank to do its own data processing internally was the primary cause of the increase. First National was converted to the new data processing system during the fourth quarter of 1993 and the Bank was -35- converted during the first quarter of 1994. The Company's third- party data processing contracts expired during the first five months of 1994. In addition, Winters State performed its own data processing prior to conversion to the new system in February 1995. Professional fees, which include legal and accounting fees, decreased $150,000, or 33.0%, from $454,000 during 1995 to $304,000 for 1996. The decrease during 1996 was due to the payment of $205,000 in 1995 for legal fees and settlement expenses on the final settlement of certain litigation. Professional fees decreased $888,000, or 66.2%, from $1,342,000 in 1994 to $454,000 in 1995, as a result of the $900,000 accrual in 1994 noted above. Stationery, printing and supplies expense increased $17,000, or 6.3%, from $271,000 for 1995 to $288,000 for 1996, primarily due to the acquisitions of Peoples National and Coastal Banc - San Angelo effective January 1, 1996, and May 27, 1996, respectively. Stationery, printing and supplies expense increased $45,000, or 19.9%, from $226,000 in 1994 to $271,000 in 1995 due primarily to an increase in paper costs. Net revenues applicable to real estate and other repossessed assets consists of expenses associated with holding and maintaining various repossessed assets, the net gain or loss on the sales of such assets, the write-down of the carrying value of the assets and any rental income on such assets that is credited as a reduction in such expenses. The Company recorded net revenues of $24,000 in 1996 compared to net revenues of $7,000 in 1995 as a result of gains on sales of, and rental income received on, such assets. These net revenues also increased $3,000, from $4,000 in net revenues in 1994 to $7,000 net revenues in 1995, as a result of gains on sales of, and rental income received on, such assets. The amount of the Company's real estate and other repossessed assets has continued to decline over the past few years, notwithstanding the bank acquisitions made in 1996, which resulted in a small increase in 1996. Other noninterest expense includes, among many other items, postage, advertising, insurance, directors' fees, dues and subscriptions, regulatory examinations, franchise taxes, travel and entertainment, due from bank account charges and Federal Deposit Insurance Corporation ("FDIC") insurance. These expenses decreased $48,000, or 3.7%, from $1,309,000 for 1995 to $1,261,000 for 1996. FDIC insurance premiums decreased $154,000 during the past year as a result of a reduction by the FDIC of deposit insurance rates for banks. This decrease was partially offset by an increase in other expenses as a result of the acquisitions of Peoples National and Coastal Banc - San Angelo. Other noninterest expenses decreased $327,000, or 20.0%, from $1,636,000 in 1994 to $1,309,000 in 1995. The decrease was primarily due to a decrease in FDIC insurance rates during 1995 and to savings achieved as a result of the merger of Winters State and First National into the Bank in November 1994. Federal Income Taxes - -------------------- The Company effected a quasi-reorganization as of December 31, 1989. A quasi-reorganization is an elective accounting procedure under Generally Accepted Accounting Principles ("GAAP") in which assets and liabilities of the Company were restated to fair value and the Company's accumulated deficit was reduced to zero. As a result of this transaction, the Company's net operating loss carryforwards existing at December 31, 1989, and utilized subsequent to the quasi-reorganization date will not be credited to future income. For periods prior to January 1, 1995, the tax effect of the utilization of the Company's net operating loss carryforwards was credited directly to additional paid-in capital. For periods subsequent to December 31, 1994, the tax effect of such utilization has been and will be credited against the Company's gross deferred tax asset. The Company accrued $753,000, $582,000 and $227,000 in federal income taxes in 1996, 1995 and 1994, respectively. Of the $227,000 accrued in 1994, $222,000 was transferred from federal income taxes payable to additional paid-in capital. Impact of Inflation - ------------------- The effects of inflation on the local economy and on the Company's operating results have been relatively modest for the past several years. Because substantially all of the Company's assets and liabilities are monetary in nature, such as cash, securities, loans and deposits, their values are less sensitive to the effects of inflation than to changing interest rates, which do not necessarily change in accordance with inflation rates. The Company attempts to control the impact of interest rate fluctuations by managing the relationship between its interest rate sensitive assets and liabilities. See "Analysis of Financial Condition - Interest Rate Sensitivity" below. -36- The Company's objective is to maintain a ratio of interest- sensitive assets to interest-sensitive liabilities that is as balanced as possible. The following tables show that ratio to be 52.0% at the 90-day interval, 51.6% at the 180-day interval and 50.9% at the 365-day interval at December 31, 1996. Currently, the Company is in a liability-sensitive position at the three intervals. During a falling interest rate environment, this position normally produces a higher net interest margin than in a rising interest rate environment; however, because the Company had $58,676,000 of interest-bearing demand, savings and money market deposits at December 31, 1996, that are somewhat less rate- sensitive, the Company's net interest margin does not necessarily increase in a falling interest rate environment. The interest sensitivity position is presented as of a point in time and can be modified to some extent by management as changing conditions dictate. The following table shows the interest rate sensitivity position of the Company at December 31, 1996:
Volumes Cumulative Volumes Subject to Subject to Repricing Within Repricing ----------------------------- After 90 Days 180 Days 365 Days 1 Year Total --------- --------- --------- ---------- ------- (Dollars in thousands) Interest-earning assets: Federal funds sold $ 18,500 $ 18,500 $ 18,500 $ 0 $ 18,500 Securities 3,106 9,371 22,091 53,061 75,152 Loans, net of unearned income 28,209 30,315 34,592 57,425 92,017 --------- --------- --------- --------- --------- Total interest-earning assets 49,815 58,186 75,183 110,486 185,669 --------- --------- --------- --------- --------- Interest-bearing liabilities: Demand, savings and money market deposits 58,676 58,676 58,676 0 58,676 Time deposits 36,945 54,059 88,806 9,853 98,659 Notes payable 118 119 121 119 240 --------- --------- --------- --------- --------- Total interest-bearing liabilities 95,739 112,854 147,603 9,972 157,575 --------- --------- --------- --------- --------- Rate-sensitivity gap(1) $ (45,924)$ (54,668)$ (72,420) $ 100,514 $ 28,094 ========= ========= ========= ========= ========= Rate-sensitivity ratio (2) 52.0% 51.6% 50.9% ====== ====== ====== _______________________________ (1) Rate-sensitive interest-earning assets less rate-sensitive interest-bearing liabilities. (2) Rate-sensitive interest-earning assets divided by rate- sensitive interest-bearing liabilities.
ANALYSIS OF FINANCIAL CONDITION Assets - ------ Total assets increased $20,484,000, or 12.8%, from $159,860,000 at December 31, 1994, to $180,344,000 at December 31, 1995, and $25,624,000, or 14.2%, from year-end 1995 to $205,968,000 at December 31, 1996, primarily due to the growth in deposits at the Bank in 1995 and 1996 and the bank acquisitions made in 1996. Cash and Cash Equivalents - ------------------------- At December 31, 1996, cash and cash equivalents were $29,958,000, a decrease of $4,801,000, or 13.8%, from the December 31, 1995, balance of $34,759,000. At December 31, 1996, the Company had $18,500,000 in federal funds sold, down from $26,200,000 at December 31, 1995, due to an increased amount of funds being invested in investment securities. Cash and cash equivalents averaged $26,557,000, $38,142,000 and $23,999,000 for the years ended December 31, 1996, 1995 and 1994, respectively. -37- Securities - ---------- Securities increased $19,245,000, or 34.4%, from $55,907,000 at December 31, 1995, to $75,152,000 at December 31, 1996. The increase in 1996 was due primarily to the reduction in federal funds sold noted above and the investment in securities of the net proceeds received from the assumption of the deposits in the Coastal Banc - San Angelo acquisition. The board of directors of the Bank reviews all securities transactions monthly and the securities portfolio periodically. The Company's current investment policy provides for the purchase of U.S. Treasury securities and federal agency securities having maturities of five years or less and for the purchase of state, county and municipal agencies' securities with maximum maturities of 10 years. The Company's policy is to maintain a securities portfolio with a mixture of securities classified as held-to- maturity and available-for-sale with staggered maturities to meet its overall liquidity needs. Municipal securities must be rated A or better. Certain school district issues, however, are acceptable with a Baa rating. Securities totaling $27,771,000 are classified as available-for-sale and are carried at fair value at December 31, 1996. Securities totaling $47,381,000 are classified as held-to- maturity and are carried at amortized cost. The securities portfolio had an average life of approximately 1.48 years at December 31, 1996, compared to approximately 1.46 years at December 31, 1995. During the first quarter of 1996, the Company sold investments in certain mutual funds obtained in the acquisition of Peoples National with a book value of $30,000 because they did not meet the Company's investment criteria. A loss of $12,000 was recorded on the sale of such investments. During the second quarter of 1996, the Company sold investments classified as held-to-maturity with a book value of $1,998,000 approximately 30 days prior to their scheduled maturity and recorded a $2,000 gain on such sale. During the fourth quarter of 1995, the Company transferred $160,000 of mortgage-backed securities from held-to- maturity securities to available-for-sale securities. The decision to sell securities classified as available-for-sale is based upon management's assessment of changes in economic or financial market conditions. Certain of the Company's securities are pledged to secure public and trust fund deposits and for other purposes required or permitted by law. At December 31, 1996, the book value of U.S. Government and other securities so pledged amounted to $10,847,000, or 14.4% of the total securities portfolio. The following table summarizes the amounts and the distribution of the Company's investment securities held at the dates indicated:
December 31, ------------------------------------------------------- 1996 1995 1994 ------------- -------------- --------------- Amount % Amount % Amount % -------- --- --------- ---- -------- ----- (In thousands) Carrying value: U.S. Treasury securities $ 35,143 46.8% $ 32,295 57.8% $ 31,441 94.4% Obligations of other U.S. Government agencies and corporations 39,239 52.2 23,009 41.2 1,154 3.5 Mortgage-backed securities 127 0.2 160 0.2 177 0.5 Obligations of states and political subdivisions 200 0.2 0 -- 90 0.3 Other securities 443 0.6 443 0.8 443 1.3 --------- ----- --------- ----- --------- ----- Total securities $ 75,152 100.0% $ 55,907 100.0% $ 33,305 100.0% ========= ===== ========= ===== ========= ===== Total fair value $ 75,062 $ 56,130 $ 32,991 ========= ========= =========
The fair value of held-to-maturity securities is usually different from the reported carrying value of such securities due to interest rate fluctuations that cause market valuations to change. The following table provides the maturity distribution and weighted average interest rates of the Company's total securities portfolio at December 31, 1996. The yield has been computed by relating the forward income stream on the securities, plus or minus the anticipated amortization of premium or accretion of discount, to the book value of the -38- 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%.
Estimated Weighted Principal Carrying Fair Average Type and Maturity Grouping at December 31, 1996 Amount Value Value Yield - ----------------------------------------------- --------- --------- --------- ------- (Dollars in thousands) U.S. Treasury securities: Within one year $ 19,950 $ 19,943 $ 19,995 5.91% After one but within five years 15,250 15,200 15,173 5.74 --------- --------- --------- ------ Total U.S. Treasury securities 35,200 35,143 35,168 5.83 --------- --------- --------- ------ Obligations of other U.S. Government agencies and corporations: Within one year 2,000 1,999 2,004 6.02 After one but within five years 25,000 24,881 24,910 6.42 After five but within ten years 3,000 3,048 3,003 5.74 --------- --------- --------- ------ Total obligations of other U.S. government agencies and corporations 30,000 29,928 29,917 6.32 --------- --------- --------- ------ Mortgage-backed securities 9,209 9,438 9,328 6.29 --------- --------- --------- ------ Obligations of states and political subdivisions: Within one year 0 0 0 -- After one but within five years 0 0 0 -- After five but within ten years 200 200 206 8.07 --------- --------- --------- ------ Total obligations of states and political subdivisions 200 200 206 8.07 --------- --------- --------- ------ Other securities: Within one year 5 5 5 5.49 After one but within five years 0 0 0 -- After five but within ten years 0 0 0 -- After ten years 438 438 438 3.59 --------- --------- --------- ------ Total other securities 443 443 443 3.61 --------- --------- --------- ------ Total securities $ 75,052 $ 75,152 $ 75,062 6.08% ========= ========= ========= ======
Loan Portfolio - -------------- Total loans, net of unearned income, increased $10,090,000, or 12.3%, from $81,927,000 at December 31, 1995, to $92,017,000 at December 31, 1996. The increase during 1996 was partially due to the purchase of Peoples National effective January 1, 1996, but primarily due to increased loan activity due to improved economic conditions in the Bank's market areas, primarily Abilene and Odessa. The Bank primarily makes installment loans to individuals and commercial loans to small to medium-sized businesses and professionals. The Bank offers a variety of commercial lending products including revolving lines of credit, letters of credit, working capital loans and loans to finance accounts receivable, inventory and equipment. Typically, the Bank's commercial loans have floating rates of interest, are for varying terms (generally not exceeding five years), are personally guaranteed by the borrower and are collateralized by accounts receivable, inventory or other business assets. Due to diminished loan demand in most areas, during the second quarter of 1992, the Bank's Odessa branch instituted an installment loan program whereby it began to purchase automobile loans from automobile dealerships in -39- the Abilene and Odessa/Midland, Texas areas. Under this program, an automobile dealership will agree to make a loan to a prospective customer to finance the purchase of a new or used automobile. The different financial institutions that have a pre-established relationship with the particular dealership review the transaction, including the credit history of the prospective borrower, and decide if they would agree to purchase the loan from the dealership and, if so, at what rate of interest. The dealership selects the financial institution to which it decides to sell the loan. The financial institution purchasing the loan has a direct loan to the borrower collateralized by the automobile, and the dealership realizes a profit based on the difference between the interest rate quoted to the buyer by the dealership and the interest rate at which the loan is purchased by the financial institution. During the second quarter of 1993, the Bank's Abilene branch began a similar indirect installment loan program. During the third quarter of 1996, the Company instituted this program in the San Angelo, Texas market. At December 31, 1996 and 1995, the Company had approximately $33,188,000 and $30,206,000 net of unearned income, respectively, of this type of loan outstanding. The following table presents the Company's loan balances at the dates indicated separated by loan type:
December 31, ------------------------------------------------- 1996 1995 1994 1993 1992(1) --------- --------- --------- --------- --------- (In thousands) Loans to individuals $ 43,927 $ 39,868 $ 43,113 $ 28,538 $ 17,718 Real estate loans 26,233 23,265 22,760 22,658 16,535 Commercial and industrial loans 21,478 19,510 16,702 16,723 16,221 Other loans 2,626 2,638 2,943 4,322 3,767 --------- --------- --------- --------- --------- Total loans 94,264 85,281 85,518 72,241 54,241 Less unearned income 2,247 3,354 4,212 2,594 1,274 --------- --------- --------- --------- --------- Loans, net of unearned income $ 92,017 $ 81,927 $ 81,306 $ 69,647 $ 52,967 ========= ========= ========= ========= ========= ______________________________ (1) Balances at December 31, 1992, do not include the loans of Olton State sold as of January 1, 1993.
Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. The Company had no concentrations of loans at December 31, 1996, except for those described above. The Bank had no loans outstanding to foreign countries or borrowers headquartered in foreign countries at December 31, 1996. Management of the Bank may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company's best interest. The Company requires payment of accrued interest in such instances and may adjust the rate of interest, require a principal reduction or modify other terms of the loan at the time of renewal. The following table presents the distribution of the maturity of the Company's loans and the interest rate sensitivity of those loans, excluding loans to individuals, at December 31, 1996. The table also presents the portion of loans that have fixed interest rates or interest rates that fluctuate over the life of the loans in accordance with changes in the interest rate environment as represented by the prime rate. -40-
One to Over Total One Year Five Five Carrying and Less Years Years Value --------- --------- --------- --------- (In thousands) Real estate loans $ 7,078 $ 14,000 $ 5,155 $ 26,233 Commercial and industrial loans 11,259 6,073 4,146 21,478 Other loans 1,342 776 508 2,626 --------- --------- --------- --------- Total loans $ 19,679 $ 20,849 $ 9,809 $ 50,337 ========= ========= ========= ========= With fixed interest rates $ 8,989 $ 12,217 $ 4,193 $ 25,399 With variable interest rates 10,690 8,632 5,616 24,938 --------- --------- --------- --------- Total loans $ 19,679 $ 20,849 $ 9,809 $ 50,337 ========= ========= ========= =========
Nonperforming Assets - -------------------- Nonperforming loans consist of nonaccrual, past due and restructured loans. A past due loan is an accruing loan that is contractually past due 90 days or more as to principal or interest payments. Loans on which management does not expect to collect interest in the normal course of business are placed on nonaccrual or are restructured. When a loan is placed on nonaccrual, any interest previously accrued but not yet collected is reversed against current income unless, in the opinion of management, the outstanding interest remains collectible. Thereafter, interest is included in income only to the extent of cash received. A loan is restored to accrual status when all interest and principal payments are current and the borrower has demonstrated to management the ability to make payments of principal and interest as scheduled. A "troubled debt restructuring" is a restructured loan upon which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is accrued based upon the new loan terms. Nonperforming loans are fully or substantially collateralized by assets, with any excess of loan balances over collateral values allocated in the allowance. Assets acquired through foreclosure are carried at the lower of cost or estimated fair value, net of estimated costs of disposal, if any. See "Real Estate and Other Repossessed Assets" below. The following table lists nonaccrual, past due and restructured loans and real estate and other repossessed assets at year-end for each of the past five years.
December 31, ----------------------------------------------- 1996 1995 1994 1993 1992(1) ------- ------- ------- ------- ------- (In thousands) Nonaccrual loans $ 82 $ 204 $ 48 $ 1,646 $ 773 Accruing loans contractually past due over 90 days 41 23 26 293 17 Restructured loans 73 65 80 195 295 Real estate and other repossessed assets 389 337 631 803 849 ------- ------- ------- ------- ------- Total nonperforming assets $ 585 $ 629 $ 785 $ 2,937 $ 1,934 ======= ======= ======= ======= ======= _______________________________ (1) Balances at December 31, 1992, do not include the assets of Olton State that were sold on January 1, 1993.
The gross interest income that would have been recorded in 1996 on the Company's nonaccrual loans if such loans had been current, in accordance with the original terms thereof and had been outstanding throughout the period or, if shorter, since origination, was approximately $17,000. No interest was actually recorded (received) on loans that were on nonaccrual during 1996. -41- A potential problem loan is defined as a loan where information about possible credit problems of the borrower is known, causing management to have serious doubts as to the ability of the borrower to comply with the present loan repayment terms and which may result in the inclusion of such loan in one of the nonperforming asset categories. The Company does not believe it has any potential problem loans other than these reported in the above table. The Company follows a loan review program to evaluate the credit risk in its loan portfolio. Through the loan review process, the Banks maintain an internally classified loan list that, along with the list of nonperforming loans discussed below, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance. Loans classified as "substandard" are those loans with clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the loan. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans, but also have an increased risk that a loss may occur or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as "loss" are those loans that are in the process of being charged off. At December 31, 1996, substandard loans totaled $1,287,000, of which $130,000 were loans designated as nonaccrual, 90 days past due or restructured, and there were $13,000 in doubtful loans, all of which were designated as 90 days past due. There were no loss loans. In addition to the internally classified loans, each Bank also has a "watch list" of loans that further assists each Bank in monitoring its loan portfolio. A loan is included on the watch list if it demonstrates one or more deficiencies requiring attention in the near term or if the loan's ratios have weakened to a point where more frequent monitoring is warranted. These loans do not have all the characteristics of a classified loan (substandard, doubtful or loss), but do have weakened elements as compared with those of a satisfactory credit. The Banks review these loans to assist in assessing the adequacy of the allowance. Substantially all of the loans on the watch list as of December 31, 1996, are current and paying in accordance with loan terms. At December 31, 1996, watch list loans totaled $1,104,000 (including $683,000 of loans guaranteed by U.S. governmental agencies). At such date, none of the watch list loans were designated as nonaccrual, 90 days past due or restructured loans. At such date, $55,000 of loans not classified and not on the watch list were designated as restructured loans. Real Estate and Other Repossessed Assets - ---------------------------------------- Real estate and other repossessed assets consist of real property and other assets unrelated to banking premises or facilities. Income derived from real estate and other repossessed assets, if any, is generally less than that which would have been earned as interest at the original contract rates on the related loans. At December 31, 1996, 1995 and 1994, real estate and other repossessed assets had an aggregate book value of $389,000, $337,000 and $631,000, respectively. Real estate and other repossessed assets increased $52,000, or 15.4%, during 1996 primarily as a result of the repossession of two properties by the Bank's Odessa branch, which were partially offset by the sales of several parcels of real estate during that time period. Of the December 31, 1996, balance, $204,000 represented nineteen repossessed automobiles, $103,000 represented four commercial properties and $82,000 represented three residential properties. The December 31, 1995, balance of $337,000 represented a decrease of $294,000, or 46.6%, from the December 31, 1994, balance of $631,000 as a result of sales of certain of these assets. Allowance for Possible Loan Losses - ---------------------------------- Implicit in the Company's lending activities is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made and the creditworthiness of the borrower over the term of the loan. To reflect the currently perceived risk of loss associated with the Company's loan portfolio, additions are made to the Company's allowance for possible loan losses (the "allowance"). The allowance is created by direct charges against income (the "provision" for loan losses), and the allowance is available to absorb possible loan losses. See "Results of Operations - Provision for Loan Losses" above. -42- The amount of the allowance equals the cumulative total of the provisions made from time to time, reduced by loan charge-offs and increased by recoveries of loans previously charged off. The Company's allowance was $793,000, or 0.86% of loans, net of unearned income, at December 31, 1996, compared to $759,000, or 0.93% of loans, net of unearned income, at December 31, 1995, and $817,000, or 1.00% of loans, net of unearned income, at December 31, 1994. The reduction in the ratio of the allowance to total loans, net of unearned income, is primarily due to the improvement in the overall credit quality of the Company's loan portfolio. Credit and loan decisions are made by management and the board of directors of the Bank in conformity with loan policies established by the board of directors of the Company. The Company's practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower's failure to meet repayment terms, the borrower's deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan's classification as a loss by regulatory examiners or for other reasons. The Company charged off $389,000 in loans during 1996. Charge-offs for 1996 were concentrated in the following categories: loans to individuals - $231,000, or 59.4%, real estate - $100,000, or 25.7%, and commercial and industrial - $58,000, or 14.9%. Charge-offs on five loans totaled $166,000, or 42.7%, of total charge-offs. The remainder of loan charge-offs were spread among numerous loans, and no other charge-off to any one single borrower during 1996 exceeded $10,000. Recoveries during 1996 were $73,000 and were concentrated in the following categories: loans to individuals - $28,000, or 38.4%, commercial and industrial - $25,000, or 34.2%, and real estate - $20,000, or 27.4%. Recoveries of $19,000 on three commercial and industrial loans, and $18,000 on one real estate loan accounted for 50.7% of total recoveries during 1996. The following table presents the provisions, loans charged off and recoveries of loans previously charged off, the amount of the allowance, average loans outstanding and certain pertinent ratios for the last five years. -43-
1996(1) 1995 1994 1993(2) 1992(2) -------- -------- -------- -------- -------- (Dollars in thousands) Analysis of allowance for possible loan losses: Balance at January 1 $ 759 $ 817 $ 896 $ 617 $ 669 Provision for loan losses 201 206 147 154 185 Acquisition of subsidiary 149 0 0 233 0 -------- -------- -------- -------- -------- 1,109 1,023 1,043 1,004 854 -------- -------- -------- -------- -------- Loans charged off: Loans to individuals 231 297 150 88 40 Real estate loans 100 72 119 68 179 Commercial and industrial loans 58 7 32 69 114 Other loans 0 0 77 16 311 -------- -------- -------- -------- -------- Total charge-offs 389 376 378 241 644 -------- -------- -------- -------- -------- Recoveries of loans previously charged off: Loans to individuals 28 43 45 28 11 Real estate loans 20 2 0 4 56 Commercial and industrial loans 25 52 48 84 59 Other loans 0 15 59 17 281 -------- -------- -------- -------- -------- Total recoveries 73 112 152 133 407 -------- -------- -------- -------- -------- Net loans charged off 316 264 226 108 237 -------- -------- -------- -------- -------- Balance at December 31 $ 793 $ 759 $ 817 $ 896 $ 617 ======== ======== ======== ======== ======== Average loans outstanding, net of unearned income $ 85,880 $ 82,302 $ 74,727 $ 59,767 $ 50,507 ======== ======== ======== ======== ======== Ratio of net loan charge-offs to average loans, net of unearned income 0.37% 0.32% 0.30% 0.18% 0.47% ==== ==== ==== ==== ==== Ratio of allowance for possible loan losses to total loans, net of unearned income, at December 31 0.86% 0.93% 1.00% 1.29% 1.16% ==== ==== ==== ==== ==== ______________________________ (1) Average loans, net of unearned income, for 1996 include the average loans, net of unearned income, of Peoples National from January 1, 1996, through December 31, 1996 and of Coastal Banc - San Angelo from May 27, 1996, through December 31, 1996. (2) Average loans, net of unearned income, for 1993 and 1992 include the average loans, net of unearned income, of Winters State from August 31, 1993, through December 31, 1993, and of Olton State from January 1, 1992, through June 30, 1992.
Foreclosures on defaulted loans resulted in the Company acquiring real estate and other repossessed assets; however, the amount of real estate and other repossessed assets being carried on the Company's books, has been decreasing. Accordingly, the Company incurs other expenses, specifically net costs applicable to real estate and other repossessed assets, in maintaining, insuring and selling such assets. The Bank attempts to convert nonperforming loans into interest-earning assets, although usually at a lower dollar amount than the face value of such loans, either through liquidation of the collateral securing the loan or through intensified collection efforts. As the economies of the Bank's market areas over the past several years has recovered and stabilized, there has been a steady reduction in total loan losses and in the amount of the provision necessary to maintain an adequate balance in the allowance. This reflects not only the loan loss trend, but management's assessment of the continued reduction of credit risks associated with the loan portfolio. The amount of the allowance is established by management based upon estimated risks inherent in the existing loan portfolio. Management reviews the loan portfolio on a continuing basis to evaluate potential problems. This review encompasses management's estimate of current economic conditions and the potential impact on various industries, prior loan loss experience and financial conditions of individual borrowers. Loans that have been -44- specifically identified as problem or nonperforming loans are reviewed on at least a quarterly basis, and management critically evaluates the prospect of ultimate losses arising from such loans, based on the borrower's financial condition and the value of available collateral. When a risk can be specifically quantified for a loan, that amount is specifically allocated in the allowance. In addition, the Company allocates the allowance based upon the historical loan loss experience of the different types of loans. Despite such allocation, both the allocated and unallocated portions of the allowance are available for charge-offs of all loans. On January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"). In accordance with FAS 114, any change in the present value of such loans is recognized as an adjustment to the Company's allowance. The following table shows the allocations in the allowance and the respective percentages of each loan category to total loans at year-end for each of the past five years.
December 31, ------------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- ----------------------- Percent of Percent of Percent of Amount of Loans by Amount of Loans by Amount of Loans by Allowance Category to Allowance Category to Allowance Category to Allocated Loans, Net Allocated Loans, Net Allocated Loans, Net to of Unearned to of Unearned to of Unearned Category Income Category Income Category Income -------- ----------- --------- ----------- -------- ----------- (Dollars in thousands) Loans to individuals $ 323 45.3% $ 136 44.6% $ 207 47.8% Real estate loans 128 28.5 197 28.4 165 28.0 Commercial and industrial loans 97 23.3 96 23.8 122 20.5 Other loans 43 2.9 59 3.2 68 3.7 ------- ------ ------- ------ ------- ------- Total allocated 591 100.0% 488 100.0% 562 100.0% ====== ====== ======= Unallocated 202 271 255 ------- ------- ------- Total allowance for possible loan losses $ 793 $ 759 $ 817 ======= ======= ======= December 31, ---------------------------------------------- 1993 1992(1) --------------------- --------------------- Percent of Percent of Amount of Loans by Amount of Loans by Allowance Category to Allowance Category to Allocated Loans, Net Allocated Loans, Net to of Unearned to of Unearned Category Income Category Income --------- ----------- -------- ----------- (Dollars in thousands) Loans to individuals $ 178 37.3% $ 101 31.0% Real estate loans 272 32.5 142 31.2 Commercial and industrial loans 212 24.0 142 30.7 Other loans 108 6.2 53 7.1 ------- ------ ------- ------ Total allocated 770 100.0% 438 100.0% ====== ====== Unallocated 126 179 ------- ------- Total allowance for possible loan losses $ 896 $ 617 ======= ======= ______________________________ (1) The categories of loans at December 31, 1992, do not include the loans of Olton State transferred on January 1, 1993.
Premises and Equipment - ---------------------- Premises and equipment increased $282,000, or 6.8%, from $4,155,000 at December 31, 1995, to $4,437,000 at December 31, 1996. The increase was due to $116,000 in additions made during 1996 and $618,000 of premises and equipment acquired as of a result of the acquisitions of Peoples National and Coastal Banc - San Angelo, which were partially offset by depreciation expense of $358,000 recorded for 1996. -45- Accrued Interest Receivable - --------------------------- Accrued interest receivable consists of interest that has accrued on securities and loans, but is not yet payable under the terms of the related agreements. The balance of accrued interest receivable increased $105,000, or 7.0%, from $1,494,000 at December 31, 1995, to $1,599,000 at December 31, 1996. The increase during 1996 was a result of an increase in investment securities, on which interest is collected semi-annually, and a decrease in federal funds sold, on which interest is collected daily. Of the total balance at December 31, 1996, $943,000, or 59.0%, was interest accrued on securities and $656,000 or 41.0%, was interest accrued on loans. Goodwill - -------- Goodwill increased to $957,000 at December 31, 1996, as a result of the recording of $260,000 in goodwill from the Peoples National acquisition and $743,000 in goodwill from the Coastal Banc - - San Angelo acquisition. A total of $46,000 in goodwill amortization expense was recorded during 1996. Other Assets - ------------ The most significant component of other assets at December 31, 1996 and 1995, is a net deferred tax asset of $1,664,000 and $1,937,000, respectively. The balance of other assets decreased $272,000, or 10.8%, to $2,252,000 at December 31, 1996, from $2,524,000 at December 31, 1995, primarily as a result of a $273,000 decrease in the net deferred tax asset primarily due to the utilization of a portion of the Company's net operating loss carryforwards. Deposits - -------- The Bank's lending and investing activities are funded almost entirely by core deposits, approximately 48.0% of which are demand, savings and money market deposits at December 31, 1996. Total deposits increased $24,871,000, or 15.1%, from $164,704,000 at December 31, 1995, to $189,575,000 at December 31, 1996. The increase is due primarily to an increase in interest-bearing time deposits at the Bank, primarily as a result of the acquisitions of Peoples National and Coastal Banc - San Angelo. The Bank does not have any brokered deposits. The following table presents the average amounts of and the average rate paid on deposits of the Company for each of the last three years:
Year Ended December 31, 1996(1) 1995 1994 Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate ------ ------- ------- ------- ------- ------- (Dollars in thousands) Noninterest-bearing demand deposits $ 30,093 --% $ 29,019 --% $ 30,144 --% Interest-bearing demand, savings and money market deposits 57,847 2.41 53,391 2.35 59,689 2.16 Time deposits of less than $100,000 64,112 5.42 52,452 5.41 43,158 3.62 Time deposits of $100,000 or more 27,953 5.39 19,685 5.61 13,617 3.78 -------- ------ -------- ----- -------- ------ Total deposits $180,005 3.55% $154,547 3.36% $146,608 2.29% ======== ====== ======== ====== ======== ====== ______________________ (1) The average amounts and average rates paid on deposits for the year ended December 31, 1996, include the averages of Peoples National and Coastal Banc - San Angelo from January 1, 1996, and May 27, 1996 (the respective dates of acquisition of such banks), through December 31, 1996.
-46- The maturity distribution of time deposits of $100,000 or more at December 31, 1996, is presented below: December 31, 1996 ----------------- (In thousands) 3 months or less $ 12,736 Over 3 through 6 months 6,714 Over 6 through 12 months 8,377 Over 12 months 1,800 --------------- Total time deposits of $100,000 or more $ 29,627 =============== The Banks experience relatively limited reliance on time deposits of $100,000 or more. Time deposits of $100,000 or more are a more volatile and costly source of funds than other deposits and are most likely to affect the Company's future earnings because of interest rate sensitivity. At December 31, 1996, deposits of $100,000 or more represented 14.4% of the Company's total assets, compared to 13.2% of the Company's total assets at December 31, 1995. Notes Payable - ------------- The Company's notes payable decreased $609,000, or 71.7%, from $849,000 at December 31, 1995, to $240,000 at December 31, 1996. The decrease was a result of the payoff of the Term Note (as defined below) during 1996 and the regular annual payment on debt incurred as a result of the final settlement of certain litigation. See "Note 14: Commitments and Contingent Liabilities" to the Company's Consolidated Financial Statements. Accrued Interest Payable - ------------------------ Accrued interest payable consists of interest that has accrued on deposits and notes payable, but is not yet payable under the terms of the related agreements. The balance of accrued interest payable increased $69,000, or 7.8%, from $882,000 at December 31, 1995, to $951,000 at December 31, 1996. The increase was a result of an increase in the amount of outstanding certificates of deposit. Other Liabilities - ----------------- The most significant components of other liabilities are amounts accrued for various types of expenses. The balance of other liabilities increased $174,000, or 191.2%, from $91,000 at December 31, 1995, to $265,000 at December 31, 1996, primarily because of an increase in the federal income tax liability of the Company due to the fact that, for alternative minimum tax purposes, all of the Company's net operating loss carryforwards had been utilized at December 31, 1995. As a result, the Company began paying federal income taxes at the effective rate of approximately 20% beginning January 1, 1996, as opposed to an effective rate of approximately 2%, which the Company had been paying since 1989. The Company still has net operating loss carryforwards available for regular federal income tax purposes. -47- Selected Financial Ratios - ------------------------- The following table presents selected financial ratios for each of the last three fiscal years:
Year Ended December 31, --------------------------- 1996(1) 1995 1994 ------- ------- ------- Net income to: Average assets 0.72% 0.67% 0.28% Average interest-earning assets 0.79 0.73 0.31 Average stockholders' equity 9.89 8.99 3.98 Dividend payout (2) to: Net income 13.85 10.34 15.56 Average stockholders' equity 1.37 0.93 0.62 Average stockholders' equity to: Average total assets 7.33 7.43 7.06 Average loans (3) 16.74 15.30 15.12 Average total deposits 7.99 8.15 7.71 Average interest-earning assets to: Average total assets 91.87 91.56 90.42 Average total deposits 100.11 100.44 98.67 Average total liabilities 99.13 98.91 97.29 Ratio to total average deposits of: Average loans (3) 47.71 53.25 50.97 Average noninterest-bearing deposits 16.72 18.78 20.56 Average interest-bearing deposits 83.28 81.22 79.44 Total interest expense to total interest income 47.51 44.38 34.07 Efficiency ratio (4) 72.78 76.56 89.97 _________________________ (1) Average balance sheet and income statement items for 1996 include the averages for Peoples National and Coastal Banc - San Angelo from January 1, 1996, and May 27, 1996 (the respective dates of acquisition of such banks), through December 31, 1996. (2) Dividends for Common Stock only. (3) Before allowance for possible loan losses. (4) Calculated as noninterest expense less amortization of intangibles and expenses related to other real estate owned divided by the sum of net interest income before provision for loan losses and total noninterest income excluding securities gains and losses.
LIQUIDITY The Company depends on the Bank for liquidity in the form of cash flow, primarily to meet debt service and dividend requirements and to cover other operating expenses. This cash flow comes from three sources: (1) dividends resulting from earnings of the Bank, (2) current tax liabilities generated by the Bank and (3) management and service fees for services performed for the Bank. The payment of dividends from the Bank is subject to applicable law and the scrutiny of regulatory authorities. Dividends paid by the Bank (including First State, N.A., Odessa) to Independent Financial in 1996 aggregated $1,000,000; in turn, Independent Financial paid dividends to the Company totaling $1,000,000 during 1996. Dividends paid by the Bank (including First State, N.A., Odessa) to Independent Financial and by Independent Financial to the Company totaled $700,000 and $905,000, respectively, during 1995. At December 31, 1996, there were approximately $1,561,000 in dividends available for payment to Independent Financial by the Bank without prior regulatory approval. The payment of current tax liabilities generated by the Bank and management and service fees constituted approximately 43.1% and 7.9%, respectively, of the Company's cash flow during 1996. Pursuant to a tax-sharing agreement, the Bank pays to the Company an amount equal to its individual tax liability on the accrual method of federal income tax reporting. The accrual method generates more timely payments of current tax liabilities by the Bank -48- to the Company, increasing the regularity of cash flow and shifting the time value of such funds to the Company. In the event that the Bank incurs losses, the Company may be required to refund tax liabilities previously collected. Current tax liabilities totaling $885,000 were paid by the Bank (including First State, N.A., Odessa) to the Company during 1996, compared to a total of $930,000 in 1995. Of the amount paid in 1995, $81,000 represented the final settlement of tax liabilities between the Company and the Bank for the year ended December 31, 1993. From January 1, 1989 through December 31, 1995, the Company collected federal income taxes from the Bank based on an effective tax rate of approximately 34% and paid taxes to the federal government at the rate of approximately 2% as a result of the utilization of the Company's net operating loss carryforwards for both regular tax and alternative minimum tax purposes. At December 31, 1995, the Company's net operating loss carryforwards for alternative tax purposes had been fully utilized. As a result, the Company began paying federal income taxes at the effective tax rate of approximately 20% during the first quarter of 1996. The Company still has net operating carryforwards available for regular federal income tax purposes. The Bank pays management fees to the Company for services performed. These services include, but are not limited to, financial and accounting consultation, attendance at the Bank's board meetings, audit and loan review services and related expenses. The Bank paid a total of $162,000 in management fees to the Company in 1996, compared to $175,000 in 1995. The Company's fees must be reasonable in relation to the management services rendered, and the Bank is prohibited from paying management fees to the Company if the Bank would be undercapitalized after any such distribution or payment. At December 31, 1995, the Company had a note payable to the Amarillo Bank. This note (the "Term Note") had a maturity of April 15, 1996. On April 15, 1996, the Company paid the Amarillo Bank $100,000 to reduce the outstanding principal balance to $371,000 and the maturity date was extended to April 15, 1999. Equal principal payments of $31,000, plus accrued interest, were due quarterly on January 15, April 15, July 15 and October 15. The Term Note bore interest at the Amarillo Bank's floating base rate plus 1% and was collateralized by 100% of the stock of the Bank (including at that time First State, N.A., Odessa). The loan agreement between the Company and the Amarillo Bank contained certain covenants that, among other things, restricted the ability of the Company to incur additional debt, to create liens on its property, to merge or to consolidate with any other person or entity, to make certain investments, to purchase or sell assets or to pay cash dividends on the common stock without the approval of the Amarillo Bank if the indebtedness due to the Amarillo Bank was $1,000,000 or greater. The loan agreement also required the Company and the Bank to meet certain financial ratios, all of which had been satisfied. The remaining principal balance of the Term Note was paid on October 15, 1996. In addition, at December 31, 1996, the Company had notes payable to one current and two former directors of the Company aggregating $228,000. The notes had an original face amount of $350,000, but were discounted upon issuance because they bear interest at a below-market interest rate (6%). The notes are payable in three equal annual installments plus interest. The first annual principal installment of $117,000 was made on March 1, 1996. The notes represent a portion of the final settlement of certain litigation. See "Note 14: Commitments and Contingent Liabilities" to the Company's Consolidated Financial Statements. At December 31, 1996, the Bank had a $12,000 note payable to an individual which matures in March 1999. Principal and interest at 7.5% are payable monthly. The note is collateralized by a two- story commercial building in Abilene, Texas. On January 28, 1997, the Company borrowed $800,000 from the Amarillo Bank to finance a portion of the cost of acquiring Crown Park. The terms of the loan provide that this loan accrues interest at a floating per annum rate equal to the Amarillo Bank's base rate plus one-half percent, principal and interest is payable on demand, but if no demand is made, at maturity and the loan matures on April 23, 1997. The loan is secured by a pledge of all of the stock of Independent Financial and the Bank and has certain other loan provisions, including limitations on additional debt, purchases and sales of assets, and acquisitions and mergers, dividend restrictions if total debt to the Amarillo Bank exceeds $1,200,000 and certain financial covenants (minimum capital of $12,500,000 for the Company and $11,500,000 for the Bank; minimum capital to assets ratios for the Company and the Bank of 6.5% for the first two years and 7.0% thereafter; nonperforming loans to total loans and nonperforming assets to total loans ratios for the -49- Bank of 1.5% and 2.0%, respectively; and minimum net income after tax for the Bank of $70,000 quarterly). At the date of this report, the Company was in compliance with all terms of the loan agreement. The loan agreement provides that at maturity, the Amarillo Bank will renew the note into a term note in an amount not to exceed the outstanding balance. The term note would be payable over seven years in annual principal installments with interest payable quarterly. On February 14, 1997, the Company used $400,000 of the net proceeds from the sale of shares of Common Stock to the underwriter of the Company's recent Common Stock offering pursuant to the underwriters' over-allotment option to reduce the principal amount of the the Amarillo Bank loan from $800,000 to $400,000. CAPITAL RESOURCES At December 31, 1996, stockholders' equity totaled $14,937,000, or 7.3% of total assets, compared to $13,818,000, or 7.7% of total assets, at December 31, 1995. Bank regulatory authorities in the United States have issued risk-based capital standards by which all bank holding companies and banks are evaluated in terms of capital adequacy. These guidelines relate a banking company's capital to the risk profile of its assets. The risk-based capital standards require all banks to have Tier 1 capital of at least 4%, and total capital (Tier 1 and Tier 2) of at least 8%, of risk-weighted assets. Tier 1 capital includes common stockholders' equity, qualifying perpetual preferred stock and minority interests in unconsolidated subsidiaries, reduced by goodwill and net deferred tax assets in excess of regulatory capital limits. Tier 2 capital may be comprised of certain other preferred stock, qualifying debt instruments and all or part of the allowance for possible loan losses. Banking regulators have also issued leverage ratio requirements. The leverage ratio requirement is measured as the ratio of Tier 1 capital to adjusted quarterly average assets. The following table provides a calculation of the Company's risk-based capital and leverage ratios and a comparison of the Company's and the Bank's risk-based capital ratios and leverage ratios to the minimum regulatory requirements at December 31, 1996 and on a pro forma basis at December 31, 1996, to reflect the Offering and the acquisition of Crown Park:
Pro Forma at The Company December 31, 1996 December 31, 1996 ----------- ----------------- ----------------- (Dollars in thousands) Tier 1 capital: Common stockholders' equity, excluding unrealized gain on available-for-sale securities $ 14,346 $ 18,496 Preferred stockholders' equity (1) 566 566 Goodwill (957) (3,443) --------- --------- Total Tier 1 capital 13,955 15,619 --------- --------- Tier 2 capital: Allowance for possible loan losses (2) 793 1,148 Subordinated debt 0 500 --------- --------- Total Tier 2 capital 793 1,648 --------- --------- Total capital $ 14,748 $ 17,267 ========= ========= Risk-weighted assets $ 100,773 $ 142,070 ========= ========= Adjusted quarterly average assets $ 203,559 $ 262,437 ========= =========
-50-
Minimum Actual Regulatory Ratios for Pro Forma at The Company Requirement(3) December 31, 1996 December 31, 1996 - ----------- -------------- ----------------- ----------------- Tier 1 capital to risk-weighted assets ratio 8.00% 13.85% 10.99% Total capital to risk-weighted assets ratio 10.00 14.64 12.15 Leverage ratio 6.00 6.86 5.95 The Bank - -------- Tier 1 capital to risk-weighted assets ratio 8.00% 12.57% 9.93% Total capital to risk-weighted assets ratio 10.00 13.36 11.08 Leverage ratio 6.00 6.19 5.45 _______________________________ (1) Limited to 25% of total Tier 1 capital, with any remainder qualifying as Tier 2 capital. (2) Limited to 1.25% of risk-weighted assets. (3) For well capitalized banking organizations.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities, as well as reflect the actual performance and expected risk of loss on multi- family mortgages. The law also requires each federal banking agency to specify the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under the FDIC's regulations, the Company and the Bank were both "well capitalized" at December 31, 1996. The Company's ability to generate capital internally through retention of earnings and access to capital markets is essential for satisfying the capital guidelines for bank holding companies as prescribed by the Federal Reserve Board. The payment of dividends on the Common Stock and the Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") is determined by the Company's board of directors in light of circumstances and conditions then existing, including the earnings of the Company and the Bank, funding requirements and financial condition, applicable loan covenants and applicable laws and regulations. The Company's ability to pay cash dividends is restricted by the requirement that it maintain a certain level of capital as discussed above in accordance with regulatory guidelines and by the terms of its loan agreement with the Amarillo Bank. Holders of the Series C Preferred Stock are entitled to receive, if, as and when declared by the Company's board of directors, out of funds legally available therefor, quarterly cumulative cash dividends at the annual rate of 10%. The Federal Reserve Board has promulgated a policy prohibiting bank holding companies from paying dividends on common stock unless such bank holding company can pay such dividends from current earnings. The Federal Reserve Board has asserted that this policy is also applicable to payment of dividends on preferred stock. Such an interpretation may limit the ability of the Company to pay dividends on the Series C Preferred Stock. The Company began paying quarterly cash dividends of $0.03 per share on its Common Stock during the second quarter of 1994. The Company also paid a 33-1/3% stock dividend on May 31, 1995. The Company's Board of Directors increased the Company's quarterly Common Stock cash dividend to $0.05 per share effective for the cash dividend payable on May 31, 1996. In connection with the Company's acquisition of Crown Park and its subsidiary, Western National, sold an aggregate of 316,250 shares of the Common Stock in an underwritten offering at a price of $14.25 per share. This amount included 41,250 shares covered by the underwriters' over-allotment option. The Company received net proceeds of approximately $4,150,000 from its offering, after expenses of approximately $200,000. -51- ACCOUNTING MATTERS In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement requires that after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In February 1997, the FASB issued Statement of Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128 simplifies the standards for computing earnings per share ("EPS") previously found in APB Opinion No. 15, "Earnings per Share" ("Opinion 15"), and make them comparable to international EPS standards. FAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. FAS 128 also requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. FAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. FAS 128 requires restatement of all prior-period EPS data presented. Management does not believe that the adoption of these pronouncements will have a material impact on the financial statements of the Company. -52- [LOGO - INDEPENDENT BANKSHARES, INC.] [LOGO] Independent Bankshares, Inc. P.O. Box 3296 / Abilene, Texas 79604 / 915-677-5550 EX-23.1 4 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the two separate registration statements of Independent Bankshares, Inc. on Form S-8 (File Nos. 33-83112 adn 333-07567) of our report dated February 3, 1997, on our audits of the consolidated financial statements of Independent Bankshares, Inc. as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Fort Worth, Texas March 27, 1997 EX-27.1 5
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED FINANCIAL STATEMENTS FOR INDEPENDENT BANKSHARES, INC. AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 11,458,000 0 18,500,000 0 27,771,000 75,152,000 75,062,000 92,017,000 793,000 205,968,000 189,575,000 120,000 1,216,000 120,000 0 135,000 276,000 14,526,000 205,968,000 8,005,000 4,504,000 1,047,000 13,556,000 6,382,000 6,441,000 7,115,000 201,000 0 6,290,000 2,175,000 2,175,000 0 0 1,422,000 1.25 1.05 3.95 82,000 41,000 73,000 0 759,000 389,000 73,000 793,000 793,000 0 202,000 Includes investments held for sale. Net of unearned income on installment loans of $2,247,000. Includes unallocated portion of the allowance.
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