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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2000
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 (I.R.S. Employer
Jurisdiction of Identification
Incorporation or No.)
Organization)
547 Chestnut Street
Abilene, Texas 79602
(Address of Principal (Zip Code)
Executive Offices)
Registrant's Telephone Number, Including Area Code: (915) 677-5550
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- -------------------------------------- -----------------------
8.5% Cumulative Trust Preferred American Stock Exchange
Securities, Guaranteed by Independent
Bankshares, Inc., Stated Value $10.00
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $0.25 Par Value
(Title of Class)
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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. [ ]
On February 28, 2001, all of the shares of the Registrant's voting
stock was held indirectly by State National Bancshares, Inc. and thus no
shares were held by nonaffiliates of the Registrant. At February 28, 2001,
2,273,647 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: None
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TABLE OF CONTENTS
Page
PART I...................................................... 2
ITEM 1. BUSINESS....................................... 2
ITEM 2. PROPERTIES...................................... 13
ITEM 3. LEGAL PROCEEDINGS............................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.......................................... 14
PART II....................................................... 15
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS...................... 15
ITEM 6. SELECTED FINANCIAL DATA.......................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............. 17
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISKS..................................... 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...... 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............. 68
PART III...................................................... 69
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT ..................................... 69
ITEM 11. EXECUTIVE COMPENSATION.......................... 72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT ......................... 74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 74
PART IV...................................................... 76
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K........................ 76
SIGNATURES................................................... 78
PART I
Other than historical and factual statements, the matters
and items discussed in this Annual Report on Form 10-K are
forward-looking statements that involve risks and uncertainties.
Actual results of Independent Bankshares, Inc. and its
subsidiaries may differ materially from the results discussed in
the forward-looking statements. Certain factors that could
contribute to such differences are discussed with the forward-
looking statements throughout this report and are summarized in
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Forward-Looking Statements - Cautionary
Language."
ITEM 1. BUSINESS
General
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Independent Bankshares, Inc., a Texas corporation (the
"Company"), is a bank holding company headquartered in Abilene,
Texas. The Company is an indirect wholly owned subsidiary of
State National Bancshares, Inc., Lubbock, Texas ("State
National"). At December 31, 2000, the Company owned all of the
common securities of Independent Capital Trust ("Independent
Capital") and indirectly owned through a Delaware subsidiary,
Independent Financial Corp. ("Independent Financial"), 100% of
the stock of State National Bank of West Texas, Abilene, Texas
(the "Bank"). At December 31, 2000, the Bank operated full-
service banking locations in the Texas cities of Abilene (five
locations), Azle (two locations), Bangs, Lubbock, Odessa
(four locations), San Angelo, Stamford, Trent and Winters.
The Company's primary activities are to assist the Bank in
the management and coordination of its financial resources. 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, 2000, the Company had, on a consolidated
basis, total assets of $480,475,000, total deposits of
$396,282,000, total loans, net of unearned income, of
$242,815,000 and total stockholder's equity of $63,320,000.
The Company's complete mailing address and telephone number
is 547 Chestnut Street, Abilene, Texas 79602, (915) 677-5550.
Acquisition of the Company
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On August 11, 2000, State National acquired 100% of the
issued and outstanding common stock of the Company, pursuant to
the terms of an Agreement and Plan of Reorganization, dated as of
March 1, 2000 (the "Merger Agreement"), between the Company and
State National. Pursuant to the Merger Agreement, New FSB, Inc.,
a wholly owned subsidiary of State National, merged with and into
the Company (the "Acquisition"), with the Company surviving the
Acquisition as a wholly owned subsidiary of State National. As a
result of the Acquisition, each share of the Company's Common
Stock was exchanged into the right to receive $20.0165 in cash,
representing total aggregate merger consideration of
approximately $45,510,000. State National obtained the funds for
the purchase of the Company's Common Stock from (i) the sale of
shares of State National's common stock to certain qualified
investors and (ii) and from an advance on State National's line
of credit ("Loan") with the Amarillo National Bank, Amarillo,
Texas. The Loan bears interest at the rate equal to the 30 day
LIBOR rate plus 230 basis points. Principal payments of
$1,480,000 and $2,940,000, plus interest are due on February 28,
2002 and 2003, respectively. The remaining balance, plus
interest, is due on May 31, 2003. The Loan is secured by all of
the common stock of the indirect bank subsidiaries of State
National, including the Bank.
Reorganizations
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United Bank & Trust. On November 9, 2000, State National,
the owner of all the common stock of the Company, contributed to
the Company, and the Company, in turn, contributed to Independent
Financial, all of the
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capital stock of United Bank & Trust, of Abilene, Texas, a Texas
banking association ("UB&T"). After the contribution, UB&T was
then merged with and into First State Bank, National Association,
Abilene, Texas, the Company's subsidiary bank ("First State")
(the "Merger"). In addition, immediately after the merger, the
name of the combined bank was changed to State National Bank of
West Texas, Abilene, Texas. There was no merger consideration
paid because, prior to the transactions, the Company and UB&T
were both direct or indirect wholly owned subsidiaries of State
National.
UB&T was a community bank that offered interest and
noninterest bearing depository accounts, and made consumer and
commercial loans. At November 9, 2000, UB&T had total assets of
$112,076,000, total deposits of $92,920,000, total loans, net of
unearned income, of $64,567,000, and stockholder's equity of
$17,029,000. At November 9, 2000, First State had total assets
of $370,423,000, total deposits of $307,841,000, total loans, net
of unearned income, of $181,395,000, and stockholder's equity of
$57,405,000.
State National Bank of West Texas. On March 9, 2001, the
Bank was merged with and into State National Bank of West Texas,
a national banking association (the "Lubbock Bank") and wholly
owned subsidiary of State National Bancshares, Inc. of Delaware
("State National - Delaware"). The Lubbock Bank continued as the
surviving entity in the merger. Immediately after the merger,
State National - Delaware, a wholly owned subsidiary of State
National and the owner of all of the common stock the Company,
contributed to the Company and the Company, in turn, contributed
to Independent Financial, all of the capital stock of the Lubbock
Bank. The result of the transaction was that the Bank was merged
into the Lubbock Bank, which became an indirect wholly owned
subsidiary of the Company. There was no merger consideration
paid as, prior to the transactions, the Bank and the Lubbock Bank
were both direct or indirect subsidiaries of State National.
The Lubbock Bank is a community bank that offers interest
and noninterest-bearing depository accounts, and makes consumer
and commercial loans. At March 9, 2001, the Lubbock Bank had
total assets of $217,205,000, total deposits of $196,809,000,
total loans, net of unearned income, of $116,523,000 and
stockholder's equity of $19,086,000. At March 9, 2001, the Bank
had total assets of $479,870,000, total deposits of $398,345,000,
total loans, net of unearned income, of $231,458,000 and
stockholder's equity of $74,756,000.
The Bank
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General. The Company conducts substantially all of its
business through the Bank and its various branches in Texas.
Each of the Bank's branches is an established franchise with a
significant presence in its respective service area. The combined
branches in Abilene, Buffalo Gap and Trent had the second largest
total deposits of ten FDIC-insured financial institutions that
had branch(es) in Taylor County, at June 30, 2000, the latest
date for which information is available. The combined branches
in Azle had the twenty-sixth largest total deposits of fifty-
three financial institutions that had branch(es) in Tarrant
County at June 30, 2000. The branch in Lubbock had the thirteenth
largest total deposits of eighteen financial institutions that
had branch(es) in Lubbock County at June 30, 2000. The combined
branches in Odessa had the seventh largest total deposits of
eleven financial institutions that had branch(es) in Ector County
at June 30, 2000. The branch in San Angelo had the ninth largest
total deposits of fourteen financial institutions that had
branch(es) in Tom Green County at June 30, 2000. The branch in
Stamford had the third largest total deposits of five financial
institutions that had branch(es) in Jones County at June 30,
2000. The branch in Winters had the fifth largest total deposits
of seven financial institutions that had branch(es) in Runnels
County at June 30, 2000. The branch in Trent had the seventh
largest total deposits of eight financial institutions that had
branch(es) in Brown County at June 30, 2000. The Bank operates
through its branches as community banks that focus on long-term
relationships with customers and provide individualized, quality
service. Reflecting its community banking heritage, the Bank has
a stable deposit base from customers located within its Texas
market area. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation (the "FDIC") to the maximum extent
provided by law.
At December 31, 2000, the Bank had total assets of
$479,386,000, total deposits of $396,325,000, total loans, net of
unearned income, of $242,815,000, and total stockholder's equity
of $74,540,000.
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Services. The principal services provided by the Bank are as
follows:
Commercial Services. The Bank provides a full range of
banking services for its commercial customers. Commercial lending
activities include short-term and medium-term loans, revolving
credit arrangements, inventory and accounts receivable financing,
equipment financing and interim and permanent real estate
lending. Other services include cash management programs and
federal tax depository and night depository services.
Consumer Services. The Bank also provides a wide range of
consumer banking services, including checking, savings and money
market accounts, savings programs and installment and personal
loans. The Bank makes automobile and other installment loans
directly to customers, as well as indirectly through automobile
dealers. The Bank makes home improvement, home equity and real
estate loans and provides safe deposit services. As a result of
sharing arrangements with the Pulse automated teller machine
system network, the Bank provides 24-hour routine banking
services through automated teller machines ("ATMs"). The Pulse
network provides ATM accessibility throughout the United States.
The Bank also offers investment services and banking by phone,
personal computer or the Internet.
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.
Supermarket Branches. At December 31, 2000, the Bank had
three additional branch banking facilities, one in Abilene and
two in Odessa, located in large supermarkets. The Bank has
determined to close the two supermarket franchises in Odessa,
effective June 15, 2001.
Other Subsidiaries
- ------------------
At the present time, the Company does not have any
subsidiaries other than Independent Capital, Independent
Financial and the Bank.
Business Objectives and Strategy
- --------------------------------
The Company's principal business objectives are to increase
its profitability and shareholder value by building a valuable
Texas banking franchise using core deposits as a funding base to
support local commercial and consumer lending programs. The
Company employs several strategies, including the following, to
accomplish its objectives:
Sophistication and Breadth of Products; Personal Services.
The Company's goal is to provide customers with the business
sophistication and breadth of products of a regional financial
services company, while retaining the special attention to
personal service and the local appeal of a community bank. The
Company believes that, as a result of consolidation in the
financial industry within the Company's marketplace, there are
few financial institutions in its market area that have larger
lending limits than the Company that are willing to provide the
personal customer service that the Company is committed to
providing to its customers.
Decentralized Decision Making. The Company's decentralized
decision making authority, vested in the president and senior
officers of the Abilene, Azle, Lubbock and Odessa branches,
allows for rapid response time and flexibility in dealing with
customer requests and credit needs.
Efficient and Convenient Delivery Systems. The Company's
efforts to maintain and expand efficient and convenient delivery
systems for its products and services have included the
introduction of computer and telephone home banking and Internet
banking. The Company also maintains twenty-two ATMs throughout
its market area.
Acquisition Activity. The Company's strategy of
opportunistically acquiring banks in its West Texas market
resulted in its acquisition of four banks and one branch in the
six year period ended December 31, 1999.
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Since the acquisition of the Company by State National on August
11, 2000, the Company has grown by the reorganizations in which
it acquired UB&T and the Lubbock Bank. See "Reorganizations"
above. The Company currently has locations in or near five of the
major markets in West and North Central Texas.
Supervision and Regulation
- --------------------------
General
The Company and the Bank are extensively regulated under
federal and state law. These laws and regulations are intended
to protect consumers and depositors, not shareholders. To the
extent that the following information describes or summarizes
statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory or regulatory
provisions. Any change in applicable laws or regulations may have
a material effect on the business and prospects of the Company.
The operations of the Company may be affected by legislative
changes and by the policies of various regulatory authorities.
The Company is unable to predict the nature or the extent of the
effects on its business and earnings that fiscal or monetary
policies, economic controls or new federal or state legislation
may have in the future.
The Company is a registered bank holding company under the
Bank Holding Company Act of 1956 (as amended, the "BHCA") and, as
such, is subject to regulation, supervision and examination by
the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). The Company is required to file annual
reports with the Federal Reserve and to provide the Federal
Reserve such additional information as it may require.
The Bank, a national banking association organized under the
National Bank Act, is subject to the supervision and regulation
of the Office of the Comptroller of the Currency (the
"Comptroller"). Because the FDIC provides deposit insurance to
the Bank, the Bank is also subject to supervision and regulation
by the FDIC (even though the FDIC is not the primary federal
regulator of the Bank).
Significant Legislation
The enactment of the legislation described below has
significantly affected the banking industry generally and will
have an ongoing effect on the Company and the Bank in the future.
Financial Institutions Reform, Recovery and Enforcement Act
of 1989
The Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") reorganized and reformed the regulatory
structure applicable to financial institutions generally. FIRREA,
among other things, enhanced the supervisory and enforcement
powers of the federal bank regulatory agencies, required insured
financial institutions to guarantee repayment of losses incurred
by the FDIC in connection with the failure of an affiliated
financial institution, required financial institutions to provide
their primary federal regulator with notice (under certain
circumstances) of changes in senior management and broadened
authority for bank holding companies to acquire savings
institutions.
Under FIRREA, federal bank regulators were granted expanded
enforcement authority over "institution-affiliated parties"
(i.e., officers, directors, controlling shareholders, as well as
attorneys, appraisers or accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect
on an insured institution). Federal banking regulators have
greater flexibility to bring enforcement actions against insured
institutions and institution-affiliated parties, including cease
and desist orders, prohibition orders, civil money penalties,
termination of insurance and the imposition of operating
restrictions and capital plan requirements. These enforcement
actions, in general, may be initiated for violations of laws and
regulations and unsafe or unsound practices. Since the enactment
of FIRREA, the federal bank regulators have significantly
increased the use of written agreements to correct compliance
deficiencies with respect to applicable laws and regulations and
to ensure safe and sound practices. Violations of such written
agreements are grounds for initiation of cease-and-desist
proceedings. FIRREA granted the FDIC back-up enforcement
authority to recommend enforcement action to an
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appropriate federal banking agency and to bring such enforcement
action against a financial institution or an institution-
affiliated party if such federal banking agency fails to follow
the FDIC's recommendation.
FIRREA also established a cross-guarantee provision pursuant
to which the FDIC may recover from a depository institution
losses that the FDIC incurs in providing assistance to, or paying
off the insured depositors of, any of such depository
institution's affiliated insured banks or thrifts. The cross-
guarantee thus enables the FDIC to assess a holding company's
healthy Bank Insurance Fund ("BIF") members and Savings
Association Insurance Fund ("SAIF") members for the losses of any
of such holding company's failed BIF and SAIF members. Cross-
guarantee liabilities are generally superior in priority to
obligations of the depository institution to its shareholders due
solely to their status as shareholders and obligations to other
affiliates. Cross-guarantee liabilities are generally
subordinated, except with respect to affiliates, to deposit
liabilities, secured obligations or any other general or senior
liabilities, and any obligations subordinated to depositors or
other general creditors.
The Federal Deposit Insurance Corporation Improvement Act of
1991
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") was adopted to recapitalize the BIF and impose
certain supervisory and regulatory reforms on insured depository
institutions. FDICIA, in general, includes provisions, among
others, to:
* reform the deposit insurance system, including the
implementation of risk-based deposit insurance
premiums;
* establish a format for closer monitoring of financial
institutions to enable prompt corrective action by
banking regulators when a financial institution begins
to experience financial difficulty;
* establish five capital levels for financial
institutions ("well capitalized," "adequately
capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized")
that impose more scrutiny and restrictions on less
capitalized institutions;
* require banking regulators to set operational and
managerial standards for all insured depository
institutions and their holding companies, including
limits on excessive compensation to executive officers,
directors, employees and principal shareholders, and
establish standards for loans secured by real estate;
* adopt certain accounting reforms and require annual on-
site examinations of federally insured institutions,
including the ability to require independent audits of
banks and thrifts; and
* revise risk-based capital standards to ensure that they
take adequate account of interest-rate changes,
concentration of credit risk and the risks of
nontraditional activities, and reflect the actual
performance and expected risk of loss of multi-family
mortgages.
FDICIA also authorized the FDIC to make special assessments on
insured depository institutions, in amounts determined by the
FDIC to be necessary to give it sufficient assessment income to
repay amounts borrowed from the U.S. Treasury and other sources
or for any other purpose the FDIC deems necessary. FDICIA also
grants authority to the FDIC to establish semiannual assessment
rates on BIF and SAIF member banks so as to maintain these funds
at the designated reserve ratios.
FDICIA, as noted above, authorizes and (under certain
circumstances) requires the federal banking agencies to take
certain actions against institutions that fail to meet certain
capital-based requirements. The federal banking agencies are
required, under FDICIA, to establish five levels of insured
depository institutions based on leverage limit and risk-based
capital requirements established for institutions subject to
their jurisdiction plus, in their discretion, individual
additional capital requirements for such institutions. Under the
final rules that have been adopted by each of the federal banking
agencies, an institution is designated:
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* "well-capitalized" if the institution has a total risk-
based capital ratio of 10% or greater, a Tier 1 risk-
based capital ratio of 6% or greater, and a leverage
ratio of 5% or greater, and the institution is not
subject to an order, written agreement, capital
directive, or prompt corrective action directive to meet
and maintain a specific capital level for any capital
measure;
* "adequately capitalized" if the institution has a total
risk-based capital ratio of 8% or greater, a Tier 1 risk-
based capital ratio of 4% or greater, or a leverage ratio
of 4% or greater;
* "undercapitalized" if the institution has a total risk-
based capital ratio that is less than 8%, a Tier 1 risk-
based capital ratio that is less than 4%, or a leverage
ratio that is less than 4%;
* "significantly undercapitalized" if the institution has a
total risk-based capital ratio that is less than 6%, a
Tier 1 risk-based capital ratio that is less than 3%, or
a leverage ratio that is less than 3%; and
* "critically undercapitalized" if the institution has a
ratio of tangible equity to total assets that is equal to
or less than 2%.
"Undercapitalized," "significantly undercapitalized" and
"critically undercapitalized" institutions are required to submit
capital restoration plans to the appropriate federal banking
agency and are subject to certain operational restrictions.
Companies controlling an undercapitalized institution are also
required to guarantee the subsidiary institution's compliance
with the capital restoration plan subject to an aggregate
limitation of the lesser of 5% of the institution's assets at the
time it received notice that it was undercapitalized or the
amount of the capital deficiency when the institution first
failed to meet the plan.
Significantly or critically undercapitalized institutions
and undercapitalized institutions that do not submit or comply
with acceptable capital restoration plans are subject to
restrictions on the compensation of senior executive officers and
to additional regulatory sanctions and forced or mandated
actions. FDICIA generally equires the appointment of a
conservator or receiver within 90 days after an institution
becomes critically undercapitalized. The federal banking agencies
have adopted uniform procedures for the issuance of directives by
the appropriate federal banking agency. Under these procedures,
an institution will generally be provided advance notice when the
appropriate federal banking agency proposes to impose one or more
of the sanctions set forth above. These procedures provide an
opportunity for the institution to respond to the proposed agency
action or, where circumstances warrant immediate agency action,
an opportunity for administrative review of the agency's action.
As described under "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Capital Resources,"
both the Company and the Bank were "well capitalized" at December
31, 2000.
Pursuant to FDICIA, the Federal Reserve and the other
federal banking agencies adopted real estate lending guidelines
pursuant to which each insured depository institution is required
to adopt and maintain written real estate lending policies in
conformity with the prescribed guidelines. Under these
guidelines, each institution is expected to set loan-to-value
ratios not exceeding the supervisory limits set forth in the
guidelines. A loan-to-value ratio is generally defined as the
total loan amount divided by the appraised value of the property
at the time the loan is originated. The guidelines require that
the institution's real estate policy include proper loan
documentation and prudent underwriting standards. These rules
have had no material adverse impact on the Company and the Bank.
FDICIA also contained the Truth in Savings Act, which
requires clear and uniform disclosure of the rates of interest
payable on deposit accounts by depository institutions, and the
fees assessable against deposit accounts, so that consumers can
make a meaningful comparison between the competing claims of
financial institutions with regard to deposit accounts and
products.
Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994
Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Act") in
September 1994. Since September 1995, bank holding companies have
the right to expand, by acquiring
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existing banks, into all states, even those which had theretofore
restricted entry. The legislation also provided that, subject to
future action by individual states, a holding company has the
right, commencing in 1997, to convert the banks which it owns in
different states to branches of a single bank. A state was
permitted to "opt out" of provisions of the Interstate Act that
permitted conversion of separate banks to branches, but was not
permitted to "opt out" of the law allowing bank holding companies
from other states to enter the state. The federal legislation
also establishes limits on acquisitions by large banking
organizations, providing that no acquisition may be undertaken if
it would result in the organization having deposits exceeding
either 10% of all bank deposits in the United States or 30% of
the bank deposits in the state in which the acquisition would
occur.
Although Texas originally adopted legislation to "opt out"
of the interstate branching provisions, Texas' decision to opt
out of these provisions was rendered ineffective with the 1998
decision of the United States District Court for the Northern
District of Texas affirming the Comptroller's decision to permit
an interstate merger involving a Texas national bank. The Texas
Legislature responded in 1999 by passing The Interstate Banking
and Branching Bill, which became effective September 1, 1999.
This legislation provides a framework for interstate branching in
Texas, providing for de novo branching by banks headquartered in
states offering reciprocity to Texas institutions or institutions
authorized to branch in Texas. However, banks in other,
nonreciprocal states are prohibited from acquiring a Texas bank
in an interstate merger transaction if the Texas bank has not
been in existence and in continuous operation for at least five
years. The legislation also clarifies other provisions of Texas
law relating to interstate banks operating in Texas, and included
a "super parity" provision that provides a framework for a bank
chartered in Texas, upon application, to conduct any of the
activities allowed to any other state or federal financial
institution in the nation.
Pending Legislation
Proposals to change the laws and regulations governing the
banking and financial services industry are frequently introduced
in Congress, in the state legislatures and before the various
bank regulatory agencies. The likelihood and timing of any such
changes and the impact such changes might have on the Company and
the Bank cannot be determined at this time.
Bank and Bank Holding Company Regulation
Gramm-Leach-Bliley Act of 1999
Historically, the Company has been prohibited from acquiring
a direct or indirect interest in or control of more than 5% of
the voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling
banks or furnishing services to the Bank, except that the Federal
Reserve has permitted bank holding companies to engage in and own
shares of companies engaged in certain activities found by the
Federal Reserve to be so closely related to banking or managing
and controlling banks as to be a proper incident thereto. These
activities include, among others, operating a mortgage, finance,
credit card, or factoring company; performing certain data
processing operations; providing investment and financial advice;
acting as an insurance agent for certain types of credit-related
insurance; leasing personal property on a full pay out,
nonoperating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the
addition of activities, the Federal Reserve has considered
whether the acquisition or the additional activities can
reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in
efficiency, that outweigh such possible adverse effects as undue
concentration of resources, decreased or unfair competition, and
conflicts of interest or unsound banking practices. In
considering any application for approval of an acquisition or
merger, the Federal Reserve is also required to consider the
financial and managerial resources of the companies and the banks
concerned, as well as the applicant's record of compliance with
the Community Reinvestment Act, which generally requires a
financial institution to take affirmative action to ascertain and
meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The Gramm-Leach-Bliley Act ("Gramm-Leach"), enacted by
Congress in November 1999, now permits bank holding companies
with subsidiary banks meeting certain capital and management
requirements to elect to
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become "financial holding companies." Beginning in March 2000,
financial holding companies may engage in a full range of
financial activities, including not only banking, insurance and
securities activities, but also merchant banking and additional
activities determined to be "financial in nature." Gramm-Leach
also provides that the list of permissible activities will be
expanded as necessary for a financial holding company to keep
abreast of competitive and technological change.
Although it preserves the Federal Reserve as the umbrella
supervisor of financial holding companies, Gramm-Leach adopts an
administrative approach to regulation that defers to the approval
and supervisory requirements of the functional regulators of
insurers and insurance agents, broker-dealers, investment
companies and banks, as applicable. Thus, the various state and
federal regulators of a financial holding company's operating
subsidiaries would retain their jurisdiction and authority over
the operating entities. As the umbrella supervisor, however, the
Federal Reserve has the potential to affect the operations and
activities of financial holding companies' subsidiaries through
its power over the financial holding company parent. In addition,
Gramm-Leach contains numerous trigger points related to legal
noncompliance and other serious problems affecting bank
affiliates that could lead to direct Federal Reserve involvement
and to the possible exercise of remedial authority affecting both
financial holding companies and their affiliated operating
companies.
The Company has not, as of the date hereof, elected to
become a financial holding company.
The BHCA imposes certain limitations on extensions of credit
and other transactions by and between banks that are members of
the Federal Reserve and other banks and nonbank companies in the
same holding company. Under the BHCA and the Federal Reserve's
regulations, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of
property or furnishing of services.
The Company, as an affiliate of the Bank, is subject to
certain restrictions regarding transactions between a bank and
companies with which it is affiliated. These provisions limit
extensions of credit (including guarantees of loans) by the Bank
to affiliates, investments in the stock or other securities of
the Company by the Bank, and the nature and amount of collateral
that the Bank may accept from any affiliate to secure loans
extended to the affiliate.
Insurance of Accounts
The FDIC provides insurance, through the BIF, to deposit
accounts at the Bank to a maximum of $100,000 for each insured
depositor. Effective January 1, 1996, the FDIC implemented an
amendment to the BIF risk-based assessment schedule that
effectively eliminated deposit insurance assessments for most
commercial banks and other depository institutions with deposits
insured by the BIF only. At this time, the deposit insurance
assessment rate for institutions in the lowest risk-based premium
category is zero.
Regulations Governing Capital Adequacy
The federal bank regulatory agencies use capital adequacy
guidelines in their examination and regulation of bank holding
companies and banks. If the capital falls below the minimum
levels established by these guidelines, the bank holding company
or bank may be denied approval to acquire or establish additional
banks or nonbank businesses or to open facilities.
The Federal Reserve and the Comptroller have adopted risk-
based capital guidelines for banks and bank holding companies.
The risk-based capital guidelines are designed to make regulatory
capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, to account for
off-balance sheet exposure and to minimize disincentives for
holding liquid assets. Assets and off-balance sheet items are
assigned to broad risk categories, each with appropriate weights.
The resulting capital ratios represent capital as a percentage of
total risk-weighted assets and off-balance sheet items. The
Federal Reserve has noted that bank holding companies
contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain
ratios well in excess of the minimums. Under these guidelines,
all bank holding companies and federally
-9-
regulated banks must maintain a minimum risk-based total capital
ratio equal to 8%, of which at least one-half must be Tier 1
capital.
The Federal Reserve also has implemented a leverage ratio,
which is Tier 1 capital to total assets, to be used as a
supplement to the risk-based guidelines. The principal objective
of the leverage ratio is to place a constraint on the maximum
degree to which a bank holding company may leverage its equity
capital base. The Federal Reserve requires a minimum leverage
ratio of 3%. For all but the most highly-rated bank holding
companies and for bank holding companies seeking to expand,
however, the Federal Reserve expects that additional capital
sufficient to increase the ratio by at least 100 to 200 basis
points will be maintained.
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Capital Resources" for a
discussion of the capital adequacy of the Company and the Bank.
Management of the Company believes that the risk-weighting
of assets and the risk-based capital guidelines do not have a
material adverse impact on the Company's operations or on the
operations of the Bank. The requirement of deducting certain
intangibles in computing capital ratios contained in the
guidelines, however, could adversely affect the ability of the
Company to make acquisitions in the future in transactions that
would be accounted for using the purchase method of accounting.
Although these requirements would not reduce the ability of the
Company to make acquisitions using the pooling of interests
method of accounting, the Company has not historically made, and
has no present plans to make, acquisitions on this basis.
Change in Bank Control Act
The Change in Bank Control Act prohibits a person or group
of persons from acquiring "control" of a bank holding company,
unless the Federal Reserve has been notified and has not objected
to the transaction. Under a rebuttal presumption established by
the Federal Reserve, the acquisition of 10% or more of a class of
voting stock of a bank holding company with a class of securities
registered under Section 12 of the Exchange Act, such as the
Company, would, under the circumstance set forth in the
presumption, constitute acquisition of control of the bank
holding company. In addition, a company is required to obtain the
approval of the Federal Reserve under the Bank Holding Company
Act before acquiring 25% (5% in the case of an acquiror that is a
bank holding company) or more of any class of outstanding voting
stock of a bank holding company, or otherwise obtaining control
or a "controlling influence" over that bank holding company.
Community Reinvestment Act
The Community Reinvestment Act of 1977 requires that, in
connection with examinations of financial institutions within
their jurisdiction, the federal banking regulators must evaluate
the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound
operation of those banks. These factors are also considered in
evaluating mergers, acquisitions and applications to open a
branch or facility.
Regulations Governing Extensions of Credit
The Bank is subject to certain restrictions imposed by the
Federal Reserve Act on extensions of credit to the Company or the
Bank or investments in their securities and on the use of their
securities as collateral for loans to any borrowers. These
regulations and restrictions limit the ability of the Company to
borrow funds from the Bank for its cash needs, including funds
for acquisitions and for payment of dividends, interest and
operating expenses. Further, under the BHCA and certain
regulations of the Federal Reserve, a bank holding company and
its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services. For example, the Bank
may not generally require a customer to obtain other services
from the Bank or the Company, and may not require the customer to
promise not to obtain other services from a competitor as a
condition to an extension of credit to the customer.
-10-
The Bank is also subject to certain restrictions imposed by
the Federal Reserve Act on extensions of credit to executive
officers, directors, principal shareholders or any related
interest of such persons. Extensions of credit (i) must be made
on substantially the same terms, including interest rates and
collateral as, and following credit underwriting procedures that
are not less stringent than, those prevailing at the time for
comparable transactions with persons not covered above and who
are not employees, and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features. The Bank
is also subject to certain lending limits and restrictions on
overdrafts to such persons.
Reserve Requirements
The Federal Reserve requires all depository institutions to
maintain reserves against their transaction accounts and
nonpersonal time deposits. Reserves of 3% must be maintained
against net transaction accounts of $42.8 million or less
(subject to adjustment by the Federal Reserve) and an initial
reserve of $1,284,000 plus 10% of the amount over $42.8 million
(subject to adjustment by the Federal Reserve) must be maintained
against that portion of net transaction accounts in excess of
such amount. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to
satisfy liquidity requirements.
Institutions are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve regulations
require institutions to exhaust other reasonable alternative
sources of funds before borrowing from the Federal Reserve Bank.
Dividends
The Company's primary sources of funds have been the
dividends, current tax liabilities and management fees paid by
the Bank. The ability of the Bank to pay dividends and management
fees is limited by various state and federal laws, by the
regulations promulgated by its primary regulators and by the
principles of prudent bank management. Since the Acquisition, the
Bank has not paid management fees to the Company.
Technology Risk Management
Federal banking regulators have issued various policy
statements emphasizing the importance of technology risk
management and supervision in evaluating the safety and soundness
of depository institutions. Banks are contracting increasingly
with outside vendors to provide data processing and core banking
functions. The use of technology-related products, services,
delivery channels, and processes expose a bank to various risks,
particularly operational, privacy, security, strategic,
reputation and compliance risk. Banks are generally expected to
successfully manage technology-related risks with all other risks
to ensure that the bank's risk management is integrated and
comprehensive, primarily through identifying, measuring,
monitoring and controlling risks associated with the use of
technology.
Monetary Policy and Economic Control
The commercial banking business in which the Company engages
is affected not only by general economic conditions, but also by
the monetary policies of the Federal Reserve. Changes in the
discount rate on member bank borrowing, availability of borrowing
at the "discount window," open market operations, the imposition
of changes in reserve requirements against member banks deposits
and assets of foreign branches, and the imposition of and changes
in reserve requirements against certain borrowings by banks and
their affiliates are some of the instruments of monetary policy
available to the Federal Reserve. These monetary policies are
used in varying combinations to influence overall growth and
distributions of bank loans, investments and deposits, and such
use may affect interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve have had a
significant effect on the operating results of commercial banks
and are expected to do so in the future. The monetary policies of
the Federal Reserve are influenced by various factors, including
inflation, unemployment, short-term and long-term changes in the
international trade balance and in the fiscal policies of the
U.S. Government. Future monetary policies and the effect of such
policies on the future business and earnings of the Company and
the Bank cannot be predicted.
-11-
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, 2001, the Company and the Bank had 191 full-
time equivalent employees. Employees are provided with employee
benefits, such as a 401(k) profit sharing plan and life, health
and long-term disability insurance plans. The Company considers
the relationship of the Bank with its employees to be good.
-12-
ITEM 2. PROPERTIES
At February 28, 2001, the Company occupied approximately 600
square feet of space for its corporate offices at 547 Chestnut
Street, Abilene, Texas. The Chestnut Branch of the Bank occupies
approximately 8,000 square feet at this same facility. The
following table sets forth, at February 28, 2001, 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
Square
Location Footage Ownership and Occupancy
- -------------- ------------ ---------------------------------
Abilene, Texas 8,600 Owned by the Bank; occupied by
the Chestnut Branch and the
Company
Abilene, Texas 3,500 Owned by the Bank; occupied by
the Wylie Branch
Abilene, Texas 400 Leased by the Bank; occupied by
the Buffalo Gap Road Branch
Abilene, Texas 58,900(1) Owned by the Bank; occupied and
leased by the North 3rd Street
Branch
Abilene, Texas 1,200 Owned by the Bank; occupied by
the South 14th Street Branch
Azle, Texas 20,400(2) Owned by the Bank and two other
condominium owners; occupied and
leased by the Azle Main Branch
Azle, Texas 3,900 Owned by the Bank; occupied by
the Azle North Branch
Bangs, Texas 5,800(3) Owned by the Bank; occupied by
the Bangs Branch
Lubbock, Texas 23,200(4) Owned by the Bank; occupied and
leased by the 82nd Street Branch
Odessa, Texas 62,400(5) Owned by the Bank; occupied and
leased by the Odessa Main Branch
Odessa, Texas 2,400 Leased by the Bank; occupied by
the Winwood Branch
Odessa, Texas 400 Leased by the Bank; occupied by
the 42nd Street Branch
Odessa, Texas 400 Leased by the Bank; occupied by
the County Road West Branch
San Angelo, 6,800(6) Owned by the Bank; occupied and
Texas leased by the San Angelo Branch
Stamford, 14,000 Owned by the Bank; occupied by
Texas the Stamford Branch
Trent, Texas 4,900 Leased by the Bank; occupied by
the Trent Branch
Winters, Texas 9,500 Owned by the Bank; occupied by
the Winters Branch
_________________
(1) The North 3rd Street Branch occupies approximately 14,200
square feet, leases approximately 44,600 square feet and is
attempting to lease the remaining approximately 100 square
feet.
(2) The Bank owns condominium interests totaling approximately
17,100 square feet, of which it leases approximately 300
square feet. Two other condominium owners own units totaling
approximately 3,300 square feet.
(3) The Bangs Branch occupies approximately 3,600 square feet
and donates the usage of approximately 2,200 square feet to
a nonprofit agency.
(4) The 82nd Street Branch occupies approximately 13,300 square
feet, leases approximately 6,300 square feet and is
attempting to lease the remaining approximately 3,600 square
feet.
(5) The Odessa Main Branch occupies approximately 18,500 square
feet, leases approximately 26,100 square feet and is
attempting to lease the remaining approximately 17,800
square feet.
(6) The San Angelo Branch occupies approximately 3,400 square
feet, leases approximately 3,400 square feet.
-13-
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, 2000, were $152,000. This amount represents
rentals paid for the lease of land by the South 14th Street and
Wylie Branches and of banking premises by the Buffalo Gap Road,
Winwood, 42nd Street, County Road West and Trent Branches of the
Bank.
ITEM 3. LEGAL PROCEEDINGS
The Estate of Harry V. Howard, Deceased, filed a lawsuit
against the Bank (as successor to First State Bank of Odessa,
N.A.), (John and Billy Neal Storie v. First State Bank of
Odessa, N.A., Odessa, Texas, Cause No. 22080-B) in the 104th
District Court for Taylor County, Texas. The plaintiffs' lawsuit
relates to the Bank's management of the Harry V. Howard Trust.
The lawsuit alleges that the Bank, in its capacity as trustee of
this testamentary trust, failed to adequately oversee the trust
assets and allowed waste to occur to the trust principal.
Additionally, the lawsuit alleges that the Bank made
inappropriate distributions to the current beneficiary of the
trust. The lawsuit also alleges, among other things, other
general acts of mismanagement and breach of fiduciary duty. The
lawsuit seeks actual and exemplary damages in excess of
$10,000,000, as well as pre and post-judgment interest and
attorneys' fees. The Bank denies any allegations made in the
petition and intends to vigorously defend this suit.
The Bank has trust errors and omissions liability insurance
to cover certain risk associated with claims filed against the
Bank as trustee. The Bank has notified the insurance company of
the complaint filed against the Bank. The insurance company has
neither admitted nor denied coverage.
The trial is scheduled to begin in June, 2001.
Consequently, at this time it is not possible to predict whether
the Bank will incur any liability or to estimate the damages, or
the range of damages, if any, that the Bank might incur in
connection with such action. The Bank is also not able to
estimate the amount, if any, of reimbursements that it would
receive from insurance should damages with respect to the above
action be incurred.
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 position or results of operations.
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.
-14-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
- ------------------
Until August 11, 2000, the Company's Common Stock was traded
on the American Stock Exchange (the "AMEX") under the symbol
"IBK." Independent Capital's Trust Preferred Securities currently
trade on the AMEX under the symbol "IBK.Pr." The following table
sets forth, for the periods indicated, the high and low sales
prices for the Common Stock and Trust Preferred Securities as
quoted on the AMEX and the amount of cash dividends and
distributions paid per share.
Common Stock Trust Preferred Securities
---------------------------- -------------------------------
Cash
Dividends Distributions
High Low Per Share High Low Per Security
------- -------- -------- ------- ------ -------------
Year Ended December 31, 1999
- ----------------------------
First Quarter $12.125 $10.375 $0.05 $10.875 $9.375 $0.21
Second Quarter 11 10.1875 0.05 10.75 9.125 0.21
Third Quarter 12.375 10.375 0.05 10.125 9 0.21
Fourth Quarter 15.875 10.75 0.05 9.9375 6.75 0.22
Year Ended December 31, 2000
- ----------------------------
First Quarter $21.125 $11.75 $0.06 $ 8.75 $6.4375 $0.21
Second Quarter 19.50 17.25 0.06 8.75 7.625 0.21
Third Quarter (through August
11 for Common Stock) 20 18 -- 8.5625 8 0.21
Fourth Quarter N/A N/A N/A 8.25 6.625 0.22
Year Ended December 31, 2001
- ----------------------------
First Quarter (through
February 28) N/A N/A N/A $ 9.44 $8.375 $0.21
Shareholders
- ------------
At February 28, 2001, all of the Company's Common Stock was
owned indirectly by State National.
Dividend Policy
- ---------------
As the holder of all of the Common Stock, State National is
entitled to receive any cash dividends that may be declared by
the Company's Board of Directors. The declaration and payment of
future dividends to State National will be at the discretion of
the Company's Board of Directors and will depend upon a number of
factors, including the extent of funds legally available for the
payment of dividends, the Company's earnings and financial
condition, capital requirements of its subsidiaries, regulatory
requirements and considerations and such other factors as the
Company's Board of Directors may deem relevant.
As a holding company, the Company is ultimately dependent
upon its subsidiaries to provide funding for its operating
expenses, debt service and dividends. Various banking laws
applicable to the Company's subsidiaries limit the payment of
dividends, management fees and other distributions by such
subsidiaries to the Company and may therefore limit the ability
of the Company to make dividend payments.
-15-
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected consolidated financial
information for the last five years. Such financial information
has been restated to reflect the 5-for-4 stock split, effected in
the form of a 25% stock dividend, paid to stockholders in May
1997. See "Note 1: Summary of Significant Accounting Policies-
Principles of Consolidation," "Note 2: Acquisition of the
Company," "Note 3: Bank Merger," Note 12: Earnings Per Share" and
the Other Notes in the Company's Consolidated Financial
Statements for an explanation of changes in financial statement
items.
August January 1,
12, 2000, 2000,
through through
December August 11,
31, 2000 2000 1999 1998 1997 1996
--------- ----------- -------- --------- ------- ---------
(In thousands, except per share amounts)
Balance sheet
information:
Assets $480,475 $ -- $358,262 $370,178 $264,574 $205,698
Loans, net of unearned
income 242,815 -- 186,626 184,560 140,853 92,017
Deposits 396,282 -- 318,299 330,804 242,801 189,575
Note payable 0 -- 0 1 57 240
Stockholder's equity 63,320 -- 25,356 24,505 20,527 14,937
Income statement
information:
Total interest income $ 13,316 $ 15,273 $ 24,206 $ 20,434 $ 18,324 $ 13,556
Net interest income 7,304 8,918 14,308 11,158 9,665 7,115
Net income (loss) (581) (1,908) 2,452 2,188 2,110 1,422
Basic earnings (loss)
per common share
available to common N/A $ (0.84) $ 1.12 $ 1.07 $ 1.12 $ 1.00
stockholders
Diluted earnings (loss)
per share available to
common stockholders N/A $ (0.84) $ 1.08 $ 1.02 $ 1.03 $ 0.84
Cash dividends per
common share N/A $ 0.12 $ 0.20 $ 0.20 $ 0.19 $ 0.14
Weighted average common
shares outstanding:
Basic N/A 2,262 2,178 2,031 1,842 1,355
Diluted N/A 2,262 2,275 2,151 2,048 1,698
-16-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements-Cautionary Statements
This report contains certain forward-looking statements and
information relating to the Company and its subsidiaries that are
based on the beliefs of the Company's management as well as
assumptions made by and information currently available to the
Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and
words or phrases of similar import, as they relate to the Company
or its subsidiaries or Company management, are intended to
identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions related
to certain factors including, without limitation, competitive
factors, general economic conditions, customer relations, the
interest rate environment, governmental regulation and
supervision, nonperforming asset levels, loan concentrations,
changes in industry practices, one time events and other factors
described herein. Based upon changing conditions, should any one
or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated,
believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
General
The following discussion and analysis presents the more
significant factors affecting the Company's financial condition
at December 31, 2000 and 1999, and results of operations for each
of the three years in the period ended December 31, 2000, after
accounting for the Acquisition and the bank merger noted below.
This discussion and analysis should be read in conjunction with
the Company's consolidated financial statements, notes thereto
and other financial information appearing elsewhere in this
annual report. The results of operations for the Company for the
year ended December 31, 2000, include the results of operations
for UB&T beginning August 11, 2000, the date of the Acquisition.
UB&T was a previously owned subsidiary of State National which
was merged with and into the Bank in the Merger. The Merger was
accounted for similar to a pooling of interests. The name of the
resulting bank was changed to State National Bank of West Texas,
Abilene, Texas. The results of operations for the year ended
December 31, 1998, include the results of operations for Azle
State Bank, Azle, Texas ("Azle State") beginning September 22,
1998, the date of acquisition of Azle State.
On March 1, 2000, the Company entered into an Agreement and
Plan of Reorganization (the "Agreement") with State National for
the Acquisition. The Company and State National consummated the
Acquisition at the close of business August 11, 2000. Pursuant
to the terms of the Agreement, each share of common stock of the
Company was exchanged for $20.0165 in cash. Upon consummation of
the Acquisition, State National became the sole shareholder of
the Company, owning all 2,273,647 outstanding shares of the
Company's common stock. In connection with the Acquisition, State
National agreed to assume and guarantee the outstanding Trust
Preferred Securities issued by Independent Capital, a Delaware
business trust controlled by the Company.
State National accounted for its acquisition of the Company
as a purchase business combination, and purchase accounting
adjustments, including goodwill, have been pushed down and
reflected in the consolidated financial statements of the Company
subsequent to August 11, 2000. The consolidated financial
statements of the Company for the periods ended before August 12,
2000 (predecessor), were prepared using the Company's historical
basis of accounting. The comparability of operating results for
these periods and the periods encompassing push down accounting
are affected by the purchase accounting adjustments, including
the amortization of goodwill (straight-line method) and core
deposit intangibles (accelerated method) over a period of 20 and
10 years, respectively.
-17-
Results of Operations
General
The net loss for the period from January 1, 2000, through
August 11, 2000, the date of the Acquisition was $1,908,000
($0.84 diluted loss per share). The net loss for the period from
August 12, 2000, through December 31, 2000, was $581,000. Net
income for the year ended December 31, 1999, amounted to
$2,452,000 ($1.08 diluted earnings per common share) compared to
net income of $2,188,000 ($1.02 diluted earnings per common
share) for the year ended December 31, 1998. The net losses
recorded during 2000 were due primarily to expenses incurred in
connection with the Acquisition and increases in the provisions
for loan losses. Net income and earnings per share increased in
1999 primarily due to the acquisition of Azle State, an increase
in the Company's net interest margin and a reduction in the
amount of provision for loan losses recorded during 1999 compared
to 1998.
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 $16,222,000 for 2000, an
increase of $1,914,000, or 13.4%, from 1999. Net interest income
for 1999 was $14,308,000, an increase of $3,150,000, or 28.2%,
from 1998. The increase in 2000 was due to the Merger and the
increase in 1999 was primarily due to the acquisition of Azle
State in September 1998. The net interest margin on a fully
taxable-equivalent basis was 4.73% for 2000, compared to 4.57%
for 1999 and 4.30% for 1998. The primary reason for the increase
in the net interest margin during 2000 was the Merger. UB&T had a
historically higher loan to deposit ratio than the Company prior
to the Merger. The primary reasons for the increase in net
interest margin during 1999 were the acquisition of Azle State
and a shift within the Company's loan portfolio to more
commercial and real estate loans and away from lower-yield
indirect installment loans.
At December 31, 2000, approximately $88,370,000, or 36.4%,
of the Company's total loans, net of unearned income, were loans
with floating interest rates. Approximately 42.8% of loans,
excluding loans to individuals, were loans with floating interest
rates. The overall average rate paid for interest-bearing
deposits increased by 61 basis points in 2000. The average rate
paid by the Company for certificates of deposit and other time
deposits of $100,000 or more increased to 5.81% during 2000 from
4.95% in 1999. The average rate paid for certificates of deposit
less than $100,000 increased from 4.81% in 1999 to 5.58% in 2000.
Rates on other types of deposits, such as interest-bearing
demand, savings and money market deposits, increased from an
average of 2.10% in 1999 to an average of 2.40% in 2000. Given
the fact that the Company's interest-bearing liabilities are
subject to repricing faster than its interest-earning assets in
the very short term, an overall rising interest rate environment,
as was experienced during 2000, would normally produce a lower
net interest margin than a falling 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, the Company's net interest margin does not necessarily
decrease significantly in an overall rising 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.
-18-
Year Ended December 31,
------------------------------------------------------------------------------------
2000(1)(2) 1999(2) 1998(2)
------------------------- -------------------------- ----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ------ -------- -------- ------ -------- --------- -------
(Dollars in thousands)
ASSETS
Interest-earning assets:
Loans, net of unearned
income (3) $210,050 $20,311 9.67% $184,471 $17,027 9.23% $153,188 $14,150 9.24%
Securities (4) 111,147 6,812 6.13 106,782 6,074 5.69 73,363 4,498 6.13
Federal funds sold 26,156 1,684 6.44 26,826 1,332 4.97 34,472 1,859 5.39
-------- -------- ------ -------- ------- ------- -------- -------- ------
Total interest-earning
assets 347,353 28,807 8.29 318,079 24,433 7.68 261,023 20,507 7.86
-------- -------- ------ -------- ------- ------- -------- -------- ------
Noninterest-earning assets:
Cash and due from banks 22,610 19,539 15,149
Intangible assets 24,094 10,480 5,242
Premises and equipment,
net 10,820 10,034 8,233
Accrued interest receivable
and other assets 6,140 6,099 5,220
Allowance for possible loan
losses (3,758) (1,787) (1,288)
-------- -------- --------
Total noninterest-earning
assets 59,906 44,365 32,556
-------- -------- --------
Total assets $407,259 $362,444 $293,579
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Interest-bearing
liabilities:
Demand, savings and money
market deposits $114,153 $ 2,739 2.40% $106,485 $ 2,231 2.10% $ 86,428 $ 2,207 2.55%
Time deposits 170,181 9,628 5.66 157,994 7,667 4.85 132,654 7,061 5.32
-------- -------- ----- -------- ------- ------- -------- -------- ------
Total interest-bearing
deposits 284,334 12,367 4.35 264,479 9,898 3.74 219,082 9,268 4.23
Note payable 0 0 -- 0 0 -- 100 8 8.00
-------- -------- ------ -------- ------- ------- -------- -------- ------
Total interest-bearing
liabilities 284,334 12,367 4.35 264,479 9,898 3.74 219,182 9,276 4.23
-------- -------- ------ -------- ------- ------- -------- -------- ------
Noninterest-bearing
liabilities:
Demand deposits 65,719 58,041 46,877
Accrued interest payable and
other liabilities 4,879 2,070 1,809
-------- -------- --------
Total noninterest-bearing
liabilities 70,598 60,111 48,686
-------- -------- --------
Total liabilities 354,932 324,590 267,868
Guaranteed preferred
beneficial interests in the
Company's subordinated
debentures 12,188 13,000 3,597
Stockholder's equity 40,139 24,854 22,114
-------- -------- --------
Total liabilities and
stockholder's equity $407,259 $362,444 $293,579
======== ======== ========
Tax-equivalent net interest
income $16,440 $14,535 $11,231
======== ======= ========
Interest rate spread (5) 3.94% 3.94% 3.63%
====== ======= ======
Net interest margin (6) 4.73% 4.57% 4.30%
====== ======= ======
______________________________
(1) The Average Balance and Interest Income/Expense columns for
the year ended December 31, 2000, include information for
the predecessor Company pre-Acquisition (January 1, 2000,
through August 11, 2000) and post-Acquisition (August 12,
2000, through December 31, 2000).
(2) The Average Balance and Interest Income/Expense columns
include the balance sheet and income statement accounts of
UB&T and Azle State from August 12, 2000, and September 22,
1998, respectively, through December 31, 2000.
(3) 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.
(4) Nontaxable interest income on securities was adjusted to a
taxable yield assuming a tax rate of 34%.
(5) The interest rate spread is the difference between the
average yield on interest-earning assets and the average
cost of interest-bearing liabilities.
(6) The net interest margin is equal to net interest income, on
a fully taxable-equivalent basis, divided by average
interest-earning assets.
-19-
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.
2000 vs 1999(1)(2) 1999 vs 1998(2)
-------------------- ---------------------
Increase (Decrease) Increase (Decrease) Due
Due To To
Changes In: Changes In:
--------------------- --------------------
Volume Rate Total Volume Rate Total
------ ------ ------ ------ ------ ------
(In thousands)
Interest-earning
assets:
Loans, net of
unearned income $2,360 $ 924 $3,284 $2,894 $ (17) $2,877
Securities (3) 249 489 738 2,047 (471) 1,576
Federal funds
sold (33) 385 352 (414) (113) (527)
------ ------ ------ ------ ------- ------
Total interest
income 2,576 1,798 4,374 4,527 (601) 3,926
------ ------ ------ ------ ------- ------
Interest-bearing
liabilities:
Deposits:
Demand, savings and
money market
deposits 163 345 508 507 (483) 24
Time deposits 588 1,373 1,961 1,348 (742) 606
------ ------ ------ ------ ------- ------
Total deposits 751 1,718 2,469 1,855 (1,225) 630
Note payable 0 0 0 (8) 0 (8)
------ ------ ------ ------ ------- ------
Total interest
expense 751 1,718 2,469 1,847 (1,225) 622
------ ------ ------ ------ ------- ------
Increase in net
interest income $1,825 $ 80 $1,905 $2,680 $ 624 $3,304
====== ====== ====== ====== ======= ======
____________________________
(1) Income statement items for the year ended December 31, 2000,
include information for the predecessor Company pre-
Acquisition (January 1, 2000, through August 11, 2000) and
post-Acquisition (August 12, 2000, through December 31,
2000).
(2) Income statement items include the income statement accounts
of UB&T and Azle State beginning August 12, 2000, and
September 22, 1998, respectively, through December 31, 2000.
(3) Information with respect to interest income on tax-exempt
securities is provided on a fully taxable-equivalent basis
assuming a tax rate of 34%.
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 credit; and
other judgmental factors. The provision for loan losses for the
year ended December 31, 2000, was $2,238,000, compared to
$445,000 for the previous year. The provision in 2000 represented
a increase of $1,793,000, or 402.9%, from the 1999 provision. The
higher provision in 2000 is due to increased classified,
nonperforming and charged off loans during the second half of
2000. The provision in 1999 represented a decrease of $125,000,
or 21.9%, from the 1998 provision due to decreased charge-offs in
the indirect installment loan portfolio.
Noninterest Income
Noninterest income increased $124,000, or 3.8%, from
$3,267,000 in 1999 to $3,391,000 in 2000. The amount for 1999
increased $476,000, or 17.1%, from $2,791,000 in 1998.
-20-
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 $78,000, or 2.7%,
from $2,842,000 for 1999 to $2,920,000 for 2000. The increase was
attributable to the Merger. Service charge income increased
$615,000, or 27.6%, from $2,227,000 for 1998 to $2,842,000 for
1999. Approximately two-thirds of the increase was due to the
acquisition of Azle State.
Trust fees from trust operations increased $50,000, or
24.0%, from $208,000 in 1999 to $258,000 in 2000. Trust fees also
increased $9,000, or 4.5%, from $199,000 during 1998 to $208,000
during 1999. The increases in 2000 and 1999 are due to an overall
increase in the value of assets under management of the trust
department. In particular, during the fourth quarter of 2000, the
Bank purchased the management of approximately $33,000,000 in
trust assets from another trust company.
Other income is the sum of several components of noninterest
income including commissions earned on the sale of mutual funds
and annuities, debit card royalty income, insurance premiums
earned on automobiles financed through the Company's indirect
installment loan program and other sources of miscellaneous
income. Other income decreased $4,000, or 1.8%, from $217,000 in
1999 to $213,000 in 2000. Other income decreased $148,000, or
40.5%, from $365,000 in 1998 to $217,000 for 1999, primarily due
to a significant decrease in insurance premiums received during
1999 on automobiles financed through the Company's indirect
lending program which has been substantially curtailed.
Noninterest Expenses
Noninterest expenses increased $6,151,000, or 45.5%, from
$13,504,000 in 1999 to $19,655,000 in 2000, primarily as a result
of costs incurred in association with the Acquisition and due to
the Merger. Noninterest expenses increased $3,506,000, or 35.1%,
from $9,998,000 in 1998 to $13,504,000 in 1999. Approximately 85%
of the increase was due to the acquisition of Azle State and the
payment of the distributions on the Company's Trust Preferred
Securities that were sold in an underwritten public offering in
1998 ("1998 Offering").
Salaries and benefits rose $1,119,000, or 18.5%, from
$6,046,000 in 1999 to $7,165,000 in 2000, primarily due to the
Merger. Salaries and employee benefits increased $1,294,000, or
27.2%, from $4,752,000 in 1998 to $6,046,000 in 1999.
Approximately 80% of the increase was a result of the acquisition
of Azle State.
Merger-related expenses totaled $1,970,000 for the year
ended December 31, 2000. These expenses include approximately
$887,000 in accrued retention agreement payments contingently
payable to certain officers of the Company and the Bank,
approximately $605,000 in payments made to the Company's
investment advisor in connection with the Acquisition,
approximately $319,000 paid for legal services rendered to the
Company in connection with the Acquisition, approximately $65,000
for the purchase of tail insurance covering the Company's former
officers and directors subsequent to the Acquisition and other
miscellaneous expenses related to the Acquisition.
Amortization of intangible assets increased $1,333,000, or
198.1%, from $673,000 for 1999 to $2,006,000 for 2000 and
increased $334,000, or 98.5%, from $339,000 for 1998 to $673,000
for 1999. The 2000 increase is due to the amortization of the
additional core deposit intangible and goodwill recorded as a
result of the Acquisition. Core deposit intangibles totaling
$16,961,000 and goodwill totaling $32,692,000 for the merged
banks are being amortized on an accelerated basis over an
estimated useful life of ten (10) years, and on a straight-line
basis over an estimated useful life of twenty (20) years,
respectively. The 1999 increase was due to the amortization of
intangibles recorded as a result of the acquisition of Azle
State.
Net occupancy expense increased $239,000, or 16.7%, from
$1,433,000 in 1999 to $1,672,000 in 2000. The increase was due to
the Merger and increases in property taxes and utilities in 2000.
Net occupancy expense increased $334,000, or 30.4%, from
$1,099,000 in 1998 to $1,433,000 in 1999. Approximately 82% of
the increase was due to the acquisition of Azle State.
-21-
Distributions on guaranteed preferred beneficial interests
in the Company's Subordinated Debentures increased $7,000, or
0.6%, from $1,105,000 for 1999 to $1,112,000 for 2000 due to the
accretion into expense of the purchase accounting discount
recorded on the Trust Preferred Securities in connection with the
Acquisition. Independent Capital issued $13,000,000 par value of
Trust Preferred Securities in the 1998 Offering, on which
distributions are payable quarterly at the rate of 8.5%.
Equipment expense increased $169,000, or 15.3%, from
$1,103,000 in 1999, to $1,272,000 in 2000. The increase was due
to the Merger and the write-off of equipment and capitalized data
processing conversion costs which would not be utilized or have
any future value subsequent to the Acquisition. Equipment expense
increased $216,000, or 24.4%, from $887,000 in 1998 to $1,103,000
for 1999. Approximately 57% of this increase was the result of
the Azle State acquisition. In addition, the Bank entered into a
lease for new data processing related equipment for Azle State
when it became a branch of the Bank in March 1999. This higher
level of lease expense accounted for the remainder of the
increase.
Professional fees, which include legal, accounting and other
professional fees, increased $681,000, or 156.2%, from $436,000
during 1999 to $1,117,000 during 2000. The increase in 2000 is a
result of increased professional fees due to the Acquisition and
the Merger, as well as consulting and other professional fees
paid for services subsequent to the Acquisition. Professional
fees increased $131,000, or 43.0%, from $305,000 during 1998 to
$436,000 for 1999. Approximately 45% of the increase was due to
the Azle State acquisition. In addition, during 1999, the Company
was involved in more extended litigation which caused such
expenses to increase.
Stationery, printing and supplies expense decreased $27,000,
or 4.7%, from $574,000 for 1999 to $547,000 for 2000 due to the
higher expenses incurred with the conversion of Azle State to a
branch of the Bank during 1999. Stationery, printing and supplies
expense increased $132,000, or 29.9%, from $442,000 for 1998 to
$574,000 for 1999. Approximately 70% of the increase was due to
the acquisition of Azle State.
Net costs applicable to other real estate and other
repossessed assets consist 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 costs of $6,000 in 2000 compared to net costs of $91,000 in
1999, a decrease of $85,000, or 93.4%. The decrease in net costs
during 2000 was primarily due to a decrease in the number of
repossessed automobiles during 2000 as a result of a reduction in
the number of outstanding indirect installment loans secured by
automobiles. Net costs for the Company were $91,000 in 1999
compared to $106,000 in 1998 for the same reason noted above.
Other noninterest expense includes, among many other items,
postage, due from bank account charges, data processing,
advertising, travel and entertainment, armored car and courier
fees, insurance, franchise taxes, merger and acquisition expenses
and FDIC insurance. These expenses increased $745,000, or 36.5%,
from $2,043,000 during 1999 to $2,788,000 during 2000. The
majority of the increase is due to the Merger. In addition,
increased operating losses and write-off of capitalized merger
and acquisition costs related to prior transactions, primarily
the acquisition and branching of Azle State of approximately
$109,000, that were being amortized to expense contributed to the
increase. These expenses increased $279,000, or 15.8%, from
$1,764,000 for 1998 to $2,043,000 for 1999. Virtually all of the
increase was due to the Azle State acquisition.
Federal Income Taxes
The Company provided for $209,000, $1,174,000 and $1,193,000
in federal income taxes in 2000, 1999 and 1998, respectively. The
provision was made in 2000 despite the fact that the Company had
a pretax loss due to a substantial amount of nondeductible merger
related expenses that were incurred during the year ended
December 31, 2000. The effective tax rates for the Company were
32.4% and 35.3% for the years ended December 31, 1999 and 1998,
respectively.
-22-
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.
Quantitative and Qualitative Disclosures about Market Risk
The business of the Company and the composition of its
consolidated balance sheet consists of investments in interest-
earning assets (primarily loans and investment securities), which
are primarily funded by interest-bearing liabilities (deposits).
Such financial instruments have varying levels of sensitivity to
changes in market interest rates resulting in the market risk.
Interest Rate Risk Measurement
Interest rate risk arises when an interest-earning asset
matures or when its rate of interest changes in a time frame
different from that of the supporting interest-bearing liability.
The Company seeks to minimize the difference between the amount
of interest-earning assets and the amount of interest-bearing
liabilities that could change interest rates in the same time
frame in an attempt to reduce the risk of significant adverse
effects on the Company's net interest income caused by interest
rate changes. The Company does not attempt to match each
interest-earning asset with a specific interest-bearing
liability. Instead, as shown in the table below, it aggregates
all of its interest-earning assets and interest-bearing
liabilities to determine the difference between the two in
specific time frames. This difference is known as the rate-
sensitivity gap. A positive gap indicates that more interest-
earning assets than interest-bearing liabilities mature in a time
frame, and a negative gap indicates the opposite. Maintaining a
balanced position will reduce risk associated with interest rate
changes, but it will not guarantee a stable interest rate spread
because the various rates within a time frame may change by
differing amounts and occasionally change in different
directions. Management regularly monitors the interest
sensitivity position and considers this position in its decisions
in regard to interest rates and maturities for interest-earning
assets acquired and interest-bearing liabilities accepted.
In adjusting the Company's asset/liability position,
management attempts to manage the Company's interest rate risk
while enhancing net interest margins. The rates, terms and
interest rate indices of the Company's interest-earning assets
result primarily from the Company's strategy of investing in
loans and securities, which permit the Company to limit its
exposure to interest rate risk, together with credit risk, while
at the same time achieving a positive and relatively stable
interest rate spread from the difference between the income
earned on interest-earning assets and the cost of interest-
bearing liabilities.
The Company's ratios of interest-sensitive assets to interest-
sensitive liabilities, as shown in the following tables, are
67.9% at the 90-day interval, 63.1% at the 180-day interval and
59.4% at the 365-day interval at December 31, 2000. Currently,
the Company is in a liability-sensitive position at the three
intervals. However, the Company had $129,419,000 of interest-
bearing demand, savings and money market deposit at December 31,
2000, which from the Company's experience, change more slowly in
a rising interest rate environment than in a declining rate
environment. Therefore, excluding these types of deposits, the
Company's interest-sensitive assets to interest sensitive
liabilities ratio at the 365-day interval would have been 105.3%
at December 31, 2000. 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.
-23-
The following table shows the interest rate sensitivity
position of the Company at December 31, 2000:
Volumes
Subject
Cumulative Volumes 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 $ 26,450 $ 26,450 $ 26,450 $ 0 $ 26,450
Securities 6,986 11,862 22,819 94,388 117,207
Loans, net of unearned
income 98,824 109,037 127,175 115,640 242,815
-------- --------- --------- -------- --------
Total interest-earning
assets 132,260 147,349 176,444 210,028 386,472
-------- --------- --------- -------- --------
Interest-bearing
liabilities:
Demand, savings and money
market deposits 129,419 129,419 129,419 0 129,419
Time deposits 65,237 104,141 167,521 28,119 195,640
-------- --------- --------- -------- --------
Total interest-bearing
liabilities 194,656 233,560 296,940 28,119 325,059
-------- --------- --------- -------- --------
Rate-sensitivity gap (1) $(62,396) $ (86,211) $(120,496) $181,809 $ 61,413
======== ========= ========= ======== ========
Rate-sensitivity ratio (2) 67.9% 63.1% 59.4%
======= ========= ========
______________________________
(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.
Net Economic Value
The interest rate risk ("IRR") component is a dollar amount
that is deducted from total capital for the purpose of
calculating an institution's risk-based capital requirement and
is measured in terms of the sensitivity of its net economic value
("NEV") to changes in interest rates. An institution's NEV is
calculated as the net discounted cash flows from assets,
liabilities and off-balance sheet contracts. As an institution's
IRR component is measured as the change in the ratio of NEV to
the net present value of total assets as a result of a
hypothetical 200 basis point change in market interest rates. A
resulting decline in this ratio of more than 2% of the estimated
present value of an institution's total assets prior to the
hypothetical 200 basis point change will require the institution
to deduct from its regulatory capital 50% of that excess decline.
Based on quarterly calculations, the Bank experienced no such
decline.
Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a
short-term basis and over the life of the loan. Further, in the
event of a change in interest rates, prepayment and early
withdrawal levels could deviate significantly from those assumed
in calculating the table. Finally, the ability of many borrowers
to service their debt may decrease in the event of a significant
interest rate increase. The Company considers all of these
factors in monitoring its exposure to interest rate risk.
The repricing of certain categories of assets and
liabilities are subject to competitive and other pressures beyond
the Company's control. As a result, certain assets and
liabilities indicated as maturing or otherwise repricing within a
stated period may in fact mature or reprice at different times
and at different volumes.
-24-
The following table provides information about the Company's
financial instruments that are sensitive to changes in interest
rates. Except for the effects of prepayments and scheduled
principal amortization on mortgage related assets, the table
presents principal cash flows and related weighted average
interest rates by the contractual terms to maturity. Nonaccrual
loans are included in the loan totals. All securities are
classified as available-for-sale.
Year Ending December 31,
--------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
-------- ------- ------ ------ ------- ---------- --------- ----------
(Dollars in thousands)
Fixed Rate
Loans:
Maturities $ 40,966 $ 60,752 $13,569 $13,569 $13,569 $ 12,145 $154,570 $158,681
Average
interest rate 9.82% 9.59% 9.20% 9.20% 9.20% 9.39% 9.53%
Adjustable
Rate Loans:
Maturities 55,615 15,370 2,986 2,985 2,986 8,428 88,370 88,370
Average
interest rate 10.52% 10.19% 10.42% 10.42% 10.42% 10.42% 10.45%
Securities and
Other Interest-
earning
Assets:
Maturities 49,269 32,982 23,248 7,174 7,174 23,810 143,657 143,657
Average
interest rate 6.39% 6.94% 6.92% 6.88% 6.88% 6.88% 6.76%
Total interest-
earning
Assets:
Maturities $145,850 $109,104 $39,803 $23,728 $23,729 $ 44,383 $386,597 $390,708
Average
interest rate 8.93% 8.87% 7.96% 8.65% 8.65% 8.24% 8.71%
Savings
Deposits:
Maturities $ 0 $ 0 $ 0 $ 0 $ 0 $ 20,557 $ 20,557 $20,557
Average
interest rate --% --% --% --% --% 2.30% 2.30%
NOW Deposits:
Maturities 0 0 0 0 0 56,584 56,584 56,584
Average
interest rate --% --% --% --% --% 2.00% 2.00%
Money Market
Deposits:
Maturities 0 0 0 0 0 52,278 52,278 52,278
Average
interest rate --% --% --% --% --% 3.08% 3.08%
Certificates
of Deposit:
Maturities 167,521 19,660 5,143 1,671 1,645 0 195,640 195,825
Average
interest
rate 6.12% 6.40% 5.49% 6.54% 6.65% --% 6.14%
Total Interest-
bearing
Liabilities:
Maturities $167,521 $19,660 $ 5,143 $ 1,671 $ 1,645 $129,419 $325,059 $325,244
Average
interest
rate 6.12% 6.40% 5.49% 6.54% 6.65% 2.48% 4.68%
The Company assumes that 100% of savings, NOW and money
market deposits at December 31, 2000, are core deposits and are,
therefore, expected to roll off after five years. No roll-off is
applied to certificates of deposit. Fixed maturity deposits
reprice at maturity.
-25-
Analysis of Financial Condition
Assets
Total assets increased $122,213,000, or 34.1%, from
$358,262,000 at December 31, 1999, to $480,475,000 at December
31, 2000, due primarily to the Merger of UB&T, which had
$112,076,000 in total assets at November 9, 2000, the date of the
Merger. Total assets decreased $11,916,000, or 3.2%, from
$370,178,000 at year-end 1998 to $358,262,000 at December 31,
1999, due primarily to a decrease in interest-bearing demand and
time deposits at most of the Bank's larger branches.
Cash and Cash Equivalents
At December 31, 2000, the Company had $61,222,000 in cash
and cash equivalents, up $22,462,000, or 58.0%, from $38,760,000
at December 31, 1999, due primarily to the Merger. UB&T had
$12,696,000 in cash and cash equivalents as of the Merger date.
During 1999, cash and cash equivalents decreased $25,977,000, or
40.1%, from the December 31, 1998, balance of $64,737,000 due to
an increased amount of funds being invested temporarily in
federal funds sold at December 31, 1998. Cash and cash
equivalents averaged $48,766,000, $46,365,000 and $49,621,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.
Securities
Securities increased $8,304,000, or 7.6%, from $108,903,000
at December 31, 1999, to $117,207,000 at December 31, 2000. The
increase in 2000 was due to the Merger. An increase of
$20,518,000 in securities as a result of the Merger was offset
somewhat by maturities and sales during 2000 which were greater
than purchases during the same time period. As a result of the
Acquisition, a total of $39,692,000 in securities classified as
held-to-maturity were transferred to available-for-sale and were
sold. Purchases of available-for-sale securities were made to
replace such securities.
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, U.S. Government agency securities,
mortgage-backed securities and collateralized mortgage
obligations having maturities of seven years or less and for the
purchase of state, county and municipal agencies' securities with
maximum maturities of 15 years. The Company's policy is to
maintain a securities portfolio 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. All securities are classified as
available-for-sale and are carried at fair value at December 31,
2000. In addition, to the sales noted above, available-for-sale
securities aggregating $3,000,000 were sold immediately prior to
maturity during the first half of 2000. The securities portfolio
had an average remaining maturity of approximately 3.12 years at
December 31, 2000, compared to approximately 2.37 years at
December 31, 1999. 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, 2000, the carrying value of
U.S. Government and other securities so pledged amounted to
$59,576,000, or 50.8% of the total securities portfolio.
-26-
The following table summarizes the amounts and the
distribution of the Company's securities held at the
dates indicated:
December 31,
-----------------------------------------------------
2000 1999 1998
---------------- ------------------ ----------------
Amount % Amount % Amount %
--------- ----- --------- ------ ------- -------
(Dollars in thousands)
Carrying value:
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations $ 87,678 74.8% $ 90,998 83.6% $73,242 77.0%
Mortgage-backed securities and
collateralized mortgage obligations 18,619 15.9 7,783 7.1 12,121 12.7
Obligations of states and political
subdivisions 8,334 7.1 9,103 8.4 9,262 9.7
Other securities 2,576 2.2 1,019 0.9 583 0.6
-------- ------ -------- ------ ------- ------
Total securities $117,207 100.0% $108,903 100.0% $95,208 100.0%
======== ====== ======== ====== ======= ======
Total fair value $117,207 $107,608 $95,276
======== ======== =======
-27-
The following table provides the maturity distribution and
weighted average interest rates of the Company's total securities
portfolio at December 31, 2000. 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 historical cost of the securities, adjusted for
premium amortization and discount accretion. The carrying value
of available-for-sale securities is their estimated fair value.
The restatement of the yields on tax-exempt securities to a fully
taxable-equivalent basis has been computed assuming a tax rate of
34%.
Weighted
Type and Maturity Grouping at December Principal Carrying Estimated Average
31, 2000 Amount Value Fair Value Yield
- ---------------------------------------- ---------- -------- ----------- -----------
(Dollars in thousands)
U.S. Treasury securities and obligations
of U.S. Government agencies and
corporations:
Within one year $ 4,000 $ 4,004 $ 4,004 6.64%
After one but within five years 65,255 65,662 65,662 6.81
After five but within ten years 17,670 18,012 18,012 6.73
-------- -------- --------- --------
Total U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations 86,925 87,678 87,678 6.79
-------- -------- --------- --------
Mortgage-backed securities and
collateralized mortgage obligations 18,306 18,619 18,619 7.16
-------- -------- --------- --------
Obligations of states and political
subdivisions:
Within one year 1,311 1,211 1,211 7.01
After one but within five years 4,560 4,620 4,620 6.99
After five but within ten years 2,374 2,377 2,377 6.92
After ten years 133 126 126 8.02
-------- -------- --------- --------
Total obligations of states and political
subdivisions 8,378 8,334 8,334 6.99
-------- -------- --------- --------
Other securities:
Within one year 0 0 0 --
After one but within five years 0 0 0 --
After five but within ten years 0 0 0 --
After ten years 2,576 2,576 2,576 5.11
-------- -------- --------- --------
Total other securities 2,576 2,576 2,576 5.11
-------- -------- --------- --------
Total securities $116,185 $117,207 $117,207 6.83%
======== ======== ========= ========
Loan Portfolio
Total loans, net of unearned income, increased $56,189,000, or
30.1%, from $186,626,000 at December 31, 1999, to $242,815,000 at
December 31, 2000, due to the Merger. UB&T had $66,278,000 in
loans, net of unearned income at the Merger date. This increase was
offset somewhat by a decrease in the amount of the Company's
outstanding indirect installment loans.
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, loans to finance accounts receivable,
inventory and equipment and various types of agriculture loans.
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 real estate, accounts receivable, inventory or
other business assets.
-28-
Due to the diminished loan demand during the early 1990's, the
Bank instituted an installment loan program whereby it began to
purchase automobile loans from automobile dealerships in its market
areas. At December 31, 2000 and 1999, the Company had approximately
$6,205,000 and $14,004,000 net of unearned income, respectively, of
this type of loan outstanding. The decrease is due to management's
decision to shift the loan portfolio toward more commercial and
real estate loans and less toward indirect installment loans.
The following table presents the Company's loan balances at
the dates indicated separated by loan type:
December 31,
-----------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- -------- ------
(In thousands)
Real estate loans $103,711 $72,268 $71,901 $44,569 $26,233
Commercial loans 84,832 55,270 47,551 24,184 18,430
Loans to
individuals 36,535 46,748 57,564 67,453 46,975
Other loans 17,863 12,857 9,310 6,109 2,626
-------- ------- ------- -------- ------
Total loans 242,941 187,143 186,326 142,315 94,264
Less unearned
income 126 517 1,766 1,462 2,247
-------- ------- ------- -------- ------
Loans, net of
unearned
income $242,815 $186,626 $184,560 $140,853 $92,017
======== ======== ======== ========= ========
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, 2000, except for those described above. The
Bank had no loans outstanding to foreign countries or borrowers
headquartered in foreign countries at December 31, 2000.
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, 2000. 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.
One to Total
One Year Five Over Five Carrying
and Less Years Years Value
--------- -------- -------- ---------
(In thousands)
Real estate loans $20,366 $ 68,762 $14,583 $103,711
Commercial loans 50,422 29,610 4,800 84,832
Other loans 15,003 2,536 324 17,863
------- ------- ------- ---------
Total loans $85,791 $100,908 $19,707 $206,406
======= ======== ======= ========
With fixed interest
rates $30,176 $ 76,581 $11,279 $118,036
With variable
interest rates 55,615 24,327 8,428 88,370
------- -------- ------- --------
Total loans $85,791 $100,908 $19,707 $206,406
======= ======== ======= ========
-29-
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 "Other Real Estate and
Other Repossessed Assets" below.
The following table lists nonaccrual, past due and
restructured loans and other real estate and other repossessed
assets at year-end for each of the past five years.
December 31,
---------------------------------
2000 1999 1998 1997 1996
------ ---- ------ ----- -----
(In thousands)
Nonaccrual loans $3,087 $236 $ 238 $ 70 $82
Accruing loans contractually
past due over 90 days...... 1,009 203 198 121 41
Restructured loans 119 186 110 104 73
Other real estate and other
repossessed assets 557 272 630 739 389
------ ---- ------ ------ ---
Total nonperforming assets $4,772 $897 $1,176 $1,034 $585
====== ==== ====== ====== ====
The gross interest income that would have been recorded in
2000 on the Company's impaired 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 $100,000. A total of $16,000 in
interest on impaired loans was actually recorded (received) during
2000.
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 and the five borrowing relationships with whom successor
management has determined that the Company will no longer maintain
a relationship. See "Allowance for Possible Loan Losses" below.
The Company follows a loan review program to evaluate the
credit risk in its loan portfolio. Through the loan review process,
the Bank maintains an internally classified loan list that, along
with the list of nonperforming loans discussed below, helps
management assess the overall quality of the loan portfolio and the
adequacy of the allowance. Loans classified as "substandard" are
those loans with clear and defined weaknesses such as highly
leveraged positions, unfavorable financial ratios, uncertain
repayment sources or poor financial condition, which may jeopardize
recoverability of the loan. Loans classified as "doubtful" are
those loans that have characteristics similar to substandard loans,
but also have an increased risk that a loss may occur or at least a
portion of the loan may require a charge-off if
-30-
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, 2000, substandard loans totaled
$13,692,000, of which $1,798,000 were loans designated as
nonaccrual, 90 days past due or restructured, doubtful loans
totaled $1,742,000, of which $1,518,000 were loans designated as
nonaccrual or 90 days past due and there were no loans designated
as loss. Approximately $7.9 million of loans, all of which are
classified substandard or doubtful, represent loans to borrowers
with which successor management has determined that the Company
will no longer maintain a relationship for longer than one year
from the date of the Acquisition.
In addition to the internally classified loans, the Bank also
has a "watch list" of loans that further assists the Bank in
monitoring its loan portfolio. A loan is included on the watch list
if it demonstrates one or more deficiencies requiring attention in
the near term or if the loan's ratios have weakened to a point
where more frequent monitoring is warranted. These loans do not
have all the characteristics of a classified loan (substandard,
doubtful or loss), but do have weakened elements as compared with
those of a satisfactory credit. Management of the Bank reviews
these loans to assist in assessing the adequacy of the allowance.
Substantially all of the loans on the watch list at December 31,
2000, were current and paying in accordance with loan terms. At
December 31, 2000, watch list loans totaled $4,630,000. At such
date, $80,000 of loans on the watch list were designated as
nonaccrual or 90 days past due. In addition, at December 31, 2000,
$379,000 of unclassified loans were designated as nonaccrual, 90
days past due or restructured loans.
Other Real Estate and Other Repossessed Assets
Foreclosures on defaulted loans result in the Company
acquiring other real estate and other repossessed assets.
Accordingly, the Company incurs other expenses, specifically net
costs applicable to other real estate and other repossessed assets,
in maintaining, insuring and selling such assets. The Bank attempts
to convert nonperforming loans into interest-earning assets,
although usually at a lower dollar amount than the face value of
such loans, either through liquidation of the collateral securing
the loan or through intensified collection efforts.
Other real estate and other repossessed assets consist of real
property and other assets unrelated to banking premises or
facilities. Income derived from other real estate and other
repossessed assets, if any, is generally less than that which would
have been earned as interest at the original contract rates on the
related loans. At December 31, 2000 and 1999, other real estate and
other repossessed assets had an aggregate book value of $557,000
and $272,000, respectively. Other real estate and other repossessed
assets increased $285,000, or 104.8%, during 2000. The increase was
primarily due to the Merger. UB&T had a total of $235,000 in real
estate and other repossessed assets at the date of the Merger. The
December 31, 2000, balance of $557,000 included six commercial
properties ($434,000), two residential properties ($62,000) and ten
repossessed automobiles ($58,000). Of the December 31, 1999,
balance of $272,000, $178,000 represented three commercial properties,
$90,000 represented fourteen repossessed automobiles and
$4,000 represented one residential property.
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.
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 $6,898,000, or 2.84% of loans, net of
unearned income, at December 31, 2000, compared to $1,833,000, or
0.98% of loans, net of unearned income, at December 31, 1999, and
compared to $1,842,000, or 1.00% of loans, net of unearned income,
at December 31, 1998. The increase in the balance of the allowance
from December 31, 1999, to December 31,
-31-
2000, and the increase in the ratio of the allowance to total
loans, net of unearned income, during the past year, are primarily
due to the recording of an additional $3,028,000 in allowance
through purchase accounting adjustments in connection with the
Acquisition and the fact that UB&T had $1,562,000 in its allowance
at the date of the Acquisition.
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 $1,869,000 in loans during 2000. Charge-offs for 2000 were
concentrated in the following categories: commercial
loans-$1,484,000, or 79.4%, and loans to individuals-$355,000, or
19.0%. Charge-offs on commercial loans to three borrowing
relationships aggregated $1,154,000, or 61.7%, of total charge-
offs. Management learned that one of the three borrowers which
represented $664,000 of the total charge-offs had allegedly
committed fraud in obtaining loans from the Company and, as a
result, management has filed a criminal referral related to this
borrower. Recoveries during 2000 were $106,000 and were
concentrated in loans to individuals which accounted for $92,000,
or 86.8%, of total recoveries during 2000.
-32-
The following table presents the activity in the allowance for the
period from January 1, 2000, to August 11, 2000, the period from August
12, 2000, to December 31, 2000, and the years ended December 31, 1999,
1998, 1997 and 1996. Also presented are average loans outstanding and
certain pertinent ratios for the last five years.
August 12, January 1
2000, to 2000,
December to August Year Ended December 31,
31, 11, --------------------------------------
2000 (1) 2000 1999 1998(2) 1997(3) 1996(4)
-------- ------- --------- --------- ------- -------
(Dollars in thousands)
Analysis of allowance for possible
loan losses:
Balance, beginning of period $ 6,371 $1,833 $ 1,842 $ 1,173 $ 793 $ 759
Provision for loan losses 578 1,660 445 570 250 201
Purchase accounting adjustment 0 3,028 0 0 0 0
Bank acquisition/merger 1,562 0 0 726 395 149
-------- ------ -------- -------- -------- -------
8,511 6,521 2,287 2,469 1,438 1,109
-------- ------ -------- -------- -------- -------
Loans charged off:
Real estate loans 19 0 5 40 6 100
Commercial loans 1,433 50 106 18 107 58
Loans to individuals 181 174 586 671 457 231
Other loans 6 6 0 0 11 0
-------- ------ -------- -------- -------- -------
Total charge-offs 1,639 230 697 729 581 389
-------- ------ -------- -------- -------- -------
Recoveries of loans previously
charged off:
Real estate loans 0 1 104 16 35 20
Commercial loans 6 6 20 41 220 25
Loans to individuals 20 72 118 45 60 28
Other loans 0 1 1 0 1 0
-------- ------ -------- -------- -------- -------
Total recoveries 26 80 243 102 316 73
-------- ------ -------- -------- -------- -------
Net loans charged off 1,613 150 454 627 265 316
-------- ------ -------- -------- -------- -------
Balance, end of period $ 6,898 $6,371 $ 1,833 $ 1,842 $ 1,173 $ 793
======== ====== ======== ======== ======== =======
Average loans outstanding, net of
unearned income, for the year
ended December 31 $210,050 $184,471 $153,188 $132,891 $85,880
======== ======== ======== ======== =======
Ratio of net loan charge-offs to
average loans, net of unearned
income, for the year ended
December 31 0.84% 0.25% 0.41% 0.20% 0.37%
======== ======== ======== ======== =======
Ratio of allowance for possible loan
losses to total loans, net of
unearned income, at December 31 2.84% 0.98% 1.00% 0.83% 0.86%
======== ======== ======== ======== =======
______________________________
(1) Average loans, net of unearned income, for 2000 include the
average loans, net of unearned income, of UB&T from August 12, to
December 31, 2000.
(2) Average loans, net of unearned income, for 1998 include the
average loans, net of unearned income, of Azle State from
September 22 through December 31, 1998.
(3) Average loans, net of unearned income, for 1997 include the
average loans, net of unearned income, of Western National Bank,
Lubbock, Texas, from January 28 through December 31, 1997.
(4) Average loans, net of unearned income, for 1996 include the
average loans, net of unearned income, of Peoples National Bank,
Winters, Texas, from January 1 through December 31, 1996, and of
Coastal Banc-San Angelo from May 27 through December 31, 1996.
-33-
The increase in the allowance of $3,028,000 related to
purchase accounting adjustments is due primarily to five
borrowing relationships with whom predecessor management had
intended to continue to work and extend or renew the loans as
necessary. Predecessor management believed that the net carrying
amount, after considering specific reserves, was adequate to
reflect the estimated carrying amount of the loans. Successor
management has determined that the Company will no longer
maintain a relationship with these borrowers, has informed the
borrowers that the borrowers will have to pay off their
respective loans with the Company and, if necessary, liquidate
the collateral supporting the loans within no later than one year
of the Acquisition date. The Company also offered a reduction in
principal to one borrower to provide an incentive for the
borrower to move its loan relationship. As these loans are
collateral dependent, the estimated losses on these loans are
primarily due to estimated collateral liquidation value
shortfalls. Overall, successor management has determined that the
intended method of ultimate recovery on loans from these five
borrowing relationships is demonstrably different from the plans
that had served as the basis for predecessor management's
estimation of recovery on such loans. The provision for loan
losses for the period of August 12, 2000, to December 31, 2000,
includes the impact of successor management conforming certain
predecessor loan loss methodology to its loan loss calculation
methodology. Specifically, successor management has conformed
certain charge-off factors on pools of loans to its own
historical loan loss factors.
The amount of the allowance is established by management
based upon estimated risks inherent in the existing loan
portfolio. The allowance is comprised of three components:
specific reserves on specific problem loans, historical loss
percentages applied to pools of loans with similar
characteristics, and an unallocated portion. Management reviews
the loan portfolio on a continuing basis to evaluate potential
problem loans. This review encompasses management's estimate of
current economic conditions and the potential impact on various
industries, prior loan loss experience and the financial
conditions of individual borrowers. Loans that have been
specifically identified as problem or nonperforming loans are
reviewed on at least a quarterly basis, and management critically
evaluates the prospect of ultimate losses arising from such
loans, based on the borrower's financial condition and the value
of available collateral. When a risk can be specifically
quantified for a loan, that amount is specifically allocated in
the allowance. In addition, the Company allocates the allowance
based upon the historical loan loss experience of the different
types of loans. Despite such allocation, both the allocated and
unallocated portions of the allowance are available for charge-
offs for all loans.
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,
---------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Percent of Percent of Percent of
Loans by Loans by Loans by
Amount of Category to Amount of Category to Amount of Category to
Allowance Loans, Net Allowance Loans, Net Allowance Loans, Net
Allocated of Unearned Allocated of Unearned Allocated of Unearned
to Category Income to Category Income to Category Income
----------- ----------- ---------- ----------- ----------- ------------
(Dollars in thousands)
Real estate loans $ 685 42.7% $ 198 38.7% $ 106 39.0%
Commercial loans 3,426 34.9 254 29.6 164 25.8
Loans to individuals 1,019 15.0 672 24.8 577 30.2
Other loans 1,602 7.4 37 6.9 9 5.0
--------- -------- --------- --------- --------- ---------
Total allocated 6,732 100.0% 1,161 100.0% 856 100.0%
======== ========= =========
Unallocated 166 672 986
--------- --------- ---------
Total allowance for
possible loan
losses $6,898 $1,833 $1,842
========= ========= =========
-34-
December 31,
----------------------------------------------------
1997 1996
-------------------------- ------------------------
Percent of Percent of
Loans by Loans by
Amount of Category to Amount of Category to
Allowance Loans, Net of Allowance Loans, Net
Allocated to Unearned Allocated to of Unearned
Category Income Category Income
------------ ------------ ----------- ----------
(Dollars in thousands)
Real estate loans $ 52 31.6% $ 128 28.5%
Commercial loans 193 17.2 97 20.0
Loans to individuals 570 46.8 323 48.6
Other loans 28 4.4 43 2.9
------ ------- ------- ------
Total allocated 843 100.0% 591 100.0%
======= ======
Unallocated 330 202
------ -------
Total allowance for possible
loan losses $1,173 $ 793
====== =======
Intangible Assets
Intangible assets increased $36,637,000, or 360.7%, from
$10,158,000 at December 31, 1999, to $46,795,000 at December 31,
2000, due to the Acquisition and the Merger, which increased
total intangible assets by $30,100,000 and $8,460,000,
respectively.
Premises and Equipment
Premises and equipment increased $2,680,000, or 27.3%, from
$9,816,000 at December 31, 1999, to $12,496,000 at December 31,
2000. The increase was due to the Merger. The net book value of
UB&T's premises and equipment on the date of the Merger was
$3,510,000. This increase was partially offset by depreciation
expense of $844,000 that was recorded during 2000 and a net
decrease in premises and equipment of $492,000 as a result of
adjusting such assets to fair value at the date of the
Acquisition.
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 $1,077,000, or 30.4%, from $3,538,000 at
December 31, 1999, to $4,615,000 at December 31, 2000. The
increase during 2000 was a result of the Merger. UB&T had
$971,000 in accrued interest receivable at the date of the
Merger. Of the total balance at December 31, 2000, $3,051,000, or
66.1%, was interest accrued on loans and $1,564,000, or 33.9%,
was interest accrued on securities.
Other Assets
The balance of other assets decreased $356,000, or 17.6%, to
$1,666,000 at December 31, 2000, from $2,022,000 at December 31,
1999 due principally to a decrease in prepaid expenses during
2000.
Deposits
The Bank's lending and investing activities are funded
almost entirely by core deposits, 50.6% of which were noninterest-
bearing and interest-bearing demand deposits at December 31,
2000. Total deposits increased $77,983,000, or 24.5%, from
$318,299,000 at December 31, 1999, to $396,282,000 at December
31, 2000. The increase was due to the Merger. UB&T had
$92,920,000 in total deposits at the date of the Merger. This
increase was partially offset by a
-35-
decrease of approximately $8,000,000 in interest-bearing demand
deposits and a decrease of approximately $6,000,000 in interest-
bearing time deposits during 2000. 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,
------------------------------------------------------
2000(1) 1999 1998(2)
------------------ ----------------- ----------------
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
--------- ------- ------- --------- ------- --------
(Dollars in thousands)
Noninterest-bearing demand
deposits $ 65,719 --% $ 58,041 --% $ 46,887 --%
Interest-bearing demand, savings
and money market deposits 114,153 2.40 106,485 2.10 86,428 2.55
Time deposits of less than
$100,000 114,067 5.58 109,140 4.81 91,087 5.31
Time deposits of $100,000 or more 56,114 5.81 48,854 4.95 41,567 5.35
--------- ------- ------- ------- ------- -------
Total deposits $350,053 3.53% $332,520 3.07% $265,959 3.48%
========= ======= ======== ======= ======== =======
______________________
(1) The average amounts and average rates paid on deposits for
the year ended December 31, 2000, include the averages of UB&T
from August 12 through December 31, 2000.
(2) The average amounts and average rates paid on deposits for
the year ended December 31, 1998, include the averages of Azle
State from September 22 through December 31, 1998.
The maturity distribution of time deposits of $100,000 or
more at December 31, 2000, is presented below:
December 31, 2000
------------------
(In thousands)
3 months or less $20,435
Over 3 through 6 months 11,784
Over 6 through 12 months 25,141
Over 12 months 7,376
-------------
Total time deposits of
$100,000 or more $64,736
=============
The Bank experiences relatively limited reliance on time
deposits of $100,000 or more. Time deposits of $100,000 or more
are a more volatile and costly source of funds than other
deposits and are most likely to affect the Company's future
earnings because of interest rate sensitivity. At December 31,
2000, time deposits of $100,000 or more represented 16.3% of the
Company's total deposits, compared to 16.7% of the Company's
total deposits at December 31, 1999.
Accrued Interest Payable
Accrued interest payable consists of interest that has
accrued on deposits, but is not yet payable under the terms of
the related agreements. The balance of accrued interest payable
increased $641,000, or 59.7%, from $1,074,000 at December 31,
1999, to $1,715,000 at December 31, 2000. The increase was due to
the Merger, at which date UB&T had $438,000 in accrued interest
payable, and an overall increase in interest rates that were paid
on interest-bearing deposits during 2000.
-36-
Other Liabilities
The balance of other liabilities increased $7,721,000, or
1,448.6%, from $533,000 at December 31, 1999, to $8,254,000 at
December 31, 2000, due primarily to an increase in deferred taxes
payable of $4,283,000 that resulted from the recording of a
$12,598,000 core deposit intangible upon the consummation of the
Acquisition, $899,000 in accrued expenses related to the
Acquisition, primarily payments due under retention agreements
that had not been made at December 31, 2000, and increases in
various other accrued expenses.
Selected Financial Ratios
The following table presents selected financial ratios for
each of the last three fiscal years:
Year Ended December 31,
-------------------------
2000(1) 1999 1998(2)
-------- ------- -------
Net income (loss) to:
Average assets (0.61)% 0.68% 0.75%
Average interest-earning assets (0.72) 0.77 0.84
Average stockholder's equity (6.20) 9.87 9.89
Dividend payout (3) to:
Net income (loss) N/A 17.82 18.69
Average stockholder's equity 1.36 1.76 1.84
Average stockholder's equity to:
Average total assets 9.86 6.86 7.53
Average loans (4) 19.11 13.47 14.44
Average total deposits 11.47 7.71 8.31
Average interest-earning assets to:
Average total assets 85.29 87.76 88.91
Average total deposits 99.23 98.62 98.14
Average total liabilities 97.86 97.99 97.44
Ratio to total average deposits of:
Average loans (4) 60.01 57.20 57.60
Average noninterest bearing deposits 18.77 18.00 17.63
Average interest-bearing deposits 81.23 82.00 82.37
Total interest expense to total
interest income 43.26 40.89 45.39
Efficiency Ratio (5) 90.14 66.20 66.31
_________________________
(1) Average balance sheet and income statement items for 2000
include the averages for UB&T from August 12 through
December 31, 2000.
(2) Average balance sheet and income statement items for 1998
include the averages for Azle State from September 22
through December 31, 1998.
(3) Dividends for Common Stock only.
(4) Before allowance for possible loan losses.
(5) Calculated as noninterest expense less distributions on
guaranteed preferred beneficial interests in the Company's
subordinated debentures, amortization of intangibles, merger-
related expense and net costs (revenues) related to other
real estate and other repossessed assets divided by the sum
of net interest income before provision for loan losses and
total noninterest income, excluding securities gains and
losses.
Liquidity
The Bank
Liquidity with respect to a financial institution is the
ability to meet its short-term needs for cash without suffering
an unfavorable impact on its on-going operations. The need for
the Bank to maintain funds on hand arises principally from
maturities of short-term borrowings, deposit withdrawals,
customers' borrowing needs and the
-37-
maintenance of reserve requirements. Liquidity with respect to a
financial institution can be met from either assets or
liabilities. On the asset side, the primary sources of liquidity
are cash and due from banks, federal funds sold, maturities of
securities and scheduled repayments and maturities of loans. The
Bank maintains adequate levels of cash and near-cash investments
to meet their day-to-day needs. Cash and due from banks averaged
$22,610,000 and $19,539,000 during the years ended December 31,
2000 and 1999, respectively. These amounts comprised 5.6% and
5.4% of average total assets during the years ended December 31,
2000 and 1999, respectively. The average level of securities and
federal funds sold was $137,303,000 and $133,608,000 during the
years ended December 31, 2000 and 1999, respectively. The
increases from 1999 to 2000 were primarily due to the Merger.
A total of $42,692,000 of securities classified as available-
for-sale were sold during the year ended December 31, 2000. All
but $3,000,000 were sold in conjunction with a restructuring of
the Company's securities portfolio subsequent to the Acquisition.
In conjunction with the Acquisition, all of the Company's held-to-
maturity securities were reclassified to available-for-sale. The
Bank did not sell any securities during the year ended December
31, 1999. At December 31, 2000, $5,216,000, or 5.3%, of the
Company's securities portfolio, excluding mortgage-backed
securities and collateralized mortgage obligations, matured
within one year and $70,282,000, or 71.3%, excluding mortgage-
backed securities, and collateralized mortgage obligations
matured after one but within five years. The Bank's commercial
lending activities are concentrated in loans with maturities of
less than five years and with both fixed and adjustable interest
rates, while its installment lending activities are concentrated
in loans with maturities of three to five years and with
primarily fixed interest rates. At December 31, 2000,
approximately $127,175,000, or 52.4%, of the Company's loans, net
of unearned income, matured within one year and/or had adjustable
interest rates. Approximately $118,546,000, or 57.4 %, of the
Company's loans (excluding loans to individuals) matured within
one year and/or had adjustable interest rates. See "Analysis of
Financial Condition-Loan Portfolio" above.
On the liability side, the principal sources of liquidity
are deposits, borrowed funds and the accessibility to money and
capital markets. Customer deposits are by far the largest source
of funds. During the years ended December 31, 2000 and 1999, the
Company's average deposits were $350,053,000, or 86.0% of average
total assets, and $322,520,000, or 89.0% of average total assets,
respectively. The Company attracts its deposits primarily from
individuals and businesses located within the market areas served
by the Bank. See "Analysis of Financial Condition-Deposits"
above.
The Company
The Company depends on the Bank for liquidity in the form of
cash flow, primarily to meet debt service and dividend
requirements and to cover other operating expenses. During the
years ended December 31, 2000 and 1999, this cash flow came 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. Subsequent to the Acquisition, the Company ceased charging
management fees to the Bank.
The payment of dividends from the Bank is subject to
applicable law and the scrutiny of regulatory authorities.
Dividends paid by the Bank to Independent Financial in 2000
aggregated $2,900,000; in turn, Independent Financial and
Independent Capital paid dividends to the Company totaling
$2,935,000 during 2000. Dividends paid by the Bank to Independent
Financial during 1999 aggregated $1,675,000; in turn, Independent
Financial and Independent Capital paid dividends to the Company
totaling $1,709,000. At December 31, 2000, there were
approximately $1,478,000 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 24.6%
and 2.3%, respectively, of the Company's total cash flow during
2000. Pursuant to a tax-sharing agreement, the Bank pays to the
Company an amount equal to its individual tax liability on the
accrual method of federal income tax reporting. The accrual
method generates more timely payments of current tax liabilities
by the Bank to the Company, increasing the regularity of cash
flow and shifting the time value of such funds to the Company. In
the event that the Bank incurs losses, the Company may be
required to refund tax liabilities previously collected. Current
tax liabilities totaling $1,096,000 were paid by the Bank to the
Company during 2000, compared to a total of $1,912,000 in 1999.
-38-
Prior to the Acquisition, the Bank paid management fees to
the Company for services performed. These services included, but
were 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 $102,000
in management fees to the Company in 2000, compared to $143,000
in 1999. 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.
Capital Resources
At December 31, 2000, stockholders' equity totaled
$63,320,000, or 13.2% of total assets, compared to $25,356,000,
or 7.1% of total assets, at December 31, 1999. The reasons for
the increase are the Acquisition and the Merger.
Bank regulatory authorities in the United States have risk-
based capital standards by which all bank holding companies and
banks are evaluated in terms of capital adequacy. These
guidelines relate a banking company's capital to the risk profile
of its assets. The risk-based capital standards require all banks
to have Tier 1 capital of at least 4%, and total capital (Tier 1
and Tier 2 capital) of at least 8%, of net risk-weighted assets,
and to be designated as well-capitalized, the banking company
must have Tier 1 and total capital ratios of 6% and 10%,
respectively. For the Company, Tier 1 capital includes common
stockholders' equity and qualifying guaranteed preferred
beneficial interests in the Company's subordinated debentures,
reduced by intangible assets, net of the deferred tax liability
associated with the core deposit intangible, and any deferred tax
asset disallowed for regulatory capital purposes. Tier 2 capital
for the Company is comprised of the remainder of guaranteed
preferred beneficial interests in the Company's subordinated
debentures not qualifying as Tier 1 capital and the qualifying
amount of the allowance for possible loan losses.
-39-
Banking regulators also have leverage ratio requirements.
The leverage ratio requirement is measured as the ratio of Tier 1
capital to adjusted quarterly average assets. The leverage ratio
standards require all banking companies to have a minimum
leverage ratio of 4%, and to be designated as well-capitalized,
the banking company must have a leverage ratio of at least 5%.
The following table provides a calculation of the Company's risk-
based capital and leverage ratios and a comparison of the
Company's and the Bank's risk-based capital ratios and leverage
ratios to the minimum regulatory and well-capitalized minimum
requirements at December 31, 2000:
The Company December 31,
2000
--------------
(In thousands)
Tier 1 capital:
Common stockholders' equity, excluding unrealized
loss on available-for-sale securities $ 61,875
Qualifying guaranteed preferred beneficial interests
in the Company's Subordinated Debentures (1) 6,341
Intangible assets, net of deferred tax liability
associated with the core deposit intangible (41,652)
Deferred tax asset disallowed for regulatory
capital purposes (1,445)
---------
Total Tier 1 capital 25,119
---------
Tier 2 capital:
Guaranteed preferred beneficial interests in the
Company's Subordinated Debentures (1) 4,563
Allowance for possible loan losses (2) 3,325
---------
Total Tier 2 capital 7,888
---------
Total capital $ 33,007
=========
Net risk-weighted assets $262,421
==========
Adjusted quarterly average assets $436,283
==========
_______________________________
(1) Limited to 25% of total Tier 1 capital, with any remainder
qualifying as Tier 2 capital.
(2) Limited to 1.25% of gross risk-weighted assets.
The minimum regulatory capital ratios, minimum capital
ratios for well capitalized holding companies and the Company's
actual capital amounts and ratios at December 31, 2000 and 1999,
were as follows:
December 31, Minimum Well
-------------- Capital Capitalized
2000 1999 Ratios Ratios
------- ------ -------- -----------
(Dollars in thousands)
Tier 1 capital $ 25,119 $ 24,106
Total capital 33,007 30,374
Net risk-weighted assets 262,421 199,565
Adjusted quarterly average
assets 436,283 353,065
Capital ratios:
Tier 1 capital to net risk-
weighted assets 9.57% 12.08% 4.00% 6.00%
Total capital to net risk-
weighted assets 12.58 15.22 8.00 10.00
Tier 1 capital to adjusted
quarterly average assets 5.76 6.83 4.00 5.00
-40-
The minimum regulatory capital ratios, minimum capital
ratios for well capitalized banks and the Bank's actual capital
ratios at December 31, 2000, were as follows:
Regulatory Minimum Ratio Actual
Minimum for Well Ratios at
Ratio for Capitalized December 31,
Banks Banks 2000
------------ ------------ -----------
Tier 1 capital to net
risk-weighted assets 4.00% 6.00% 11.48%
Total capital to net
risk-weighted assets 8.00 10.00 12.75
Tier 1 capital to
adjusted quarterly
average assets 4.00 5.00 6.89
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 "well capitalized" at December 31,
2000.
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 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. The Federal Reserve Board
has promulgated a policy prohibiting bank holding companies from
paying dividends unless such bank holding company can pay such
dividends from current earnings.
At December 31, 2000, retained earnings of the Bank included
approximately $1,478,000 that was available for payment of
dividends to the Company without prior approval of regulatory
authorities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISKS
For quantitative and qualitative disclosures about market
risk affecting the Company, see "Management's Discussion and
Analysis of Financial Condition and Results of
Operations-Quantitative and Qualitative Disclosures about Market
Risk" in Item 7 above, which is incorporated herein by reference.
-41-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
Report of Independent Auditors................................ 43
Report of Independent Accountants............................. 44
Consolidated Balance Sheets as of December 31, 2000 and 1999.. 45
Consolidated Statements of Income (Loss) and Comprehensive
Income (Loss) for the Period from August 12, 2000, through
December 31, 2000, the Period from January 1, 2000,
through August 11, 2000, and the Years ended December 31,
1999 and 1998................................................ 46
Consolidated Statements of Changes in Stockholder's Equity
for the Period from August 12, 2000, through December 31,
2000, the Period from January 1, 2000, through August 11,
2000, and the Years ended December 31, 1999 and 1998 ........ 47
Consolidated Statements of Cash Flows for the Period from
August 12, 2000, through December 31, 2000, the Period
from January 1, 2000, through August 11, 2000, and the
Years ended December 31, 1999 and 1998....................... 48
Notes to Consolidated Financial Statements.................... 49
Quarterly Data (Unaudited).................................... 67
-42-
REPORT OF INDEPENDENT AUDITORS
The Stockholder and Board of Directors
Independent Bankshares, Inc.
We have audited the accompanying consolidated balance sheet of
Independent Bankshares, Inc., a wholly owned subsidiary of State
National Bancshares, Inc., as of December 31, 2000, and the
related consolidated statements of income (loss) and
comprehensive income (loss), changes in stockholder's equity, and
cash flows for the periods of August 12, 2000 through December
31, 2000 (subsequent to acquisition) and January 1, 2000 through
August 11, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2000 consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Independent Bankshares, Inc.
at December 31, 2000, and the consolidated results of its
operations and its cash flows for the periods of August 12, 2000
through December 31, 2000 (subsequent to acquisition) and January
1, 2000 through August 11, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 9, 2001
-43-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Independent Bankshares, Inc.:
In our opinion, the consolidated balance sheet as of December 31,
1999 and the related consolidated statements of income and
comprehensive income, of changes in shareholders' equity, and of
cash flows for each of the two years in the period ended December
31, 1999 present fairly, in all material respects, the financial
position, results of operations and cash flows of Independent
Bankshares, Inc. at December 31, 1999 and for each of the two
years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of
America. 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 of these statements in accordance with auditing
standards generally accepted in the United States of America,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. We have not
audited the consolidated financial statements of Independent
Bankshares, Inc. for any period subsequent to December 31, 1999.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
January 28, 2000
-44-
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
Predecessor
2000 1999
----------- -----------
Assets:
Cash and Cash Equivalents:
Cash and Due from Banks $ 34,772,000 $ 22,985,000
Federal Funds Sold 26,450,000 15,775,000
------------ ------------
Total Cash and Cash Equivalents 61,222,000 38,760,000
------------ ------------
Securities (Note 4):
Available-for-sale 117,207,000 48,387,000
Held-to-maturity 0 60,516,000
------------ ------------
Total Securities 117,207,000 108,903,000
------------ ------------
Loans (Note 5):
Total Loans 242,941,000 187,143,000
Less:
Unearned Income on Installment Loans 126,000 517,000
Allowance for Possible Loan Losses 6,898,000 1,833,000
------------ ------------
Net Loans 235,917,000 184,793,000
------------ ------------
Intangible Assets (Note 6) 46,795,000 10,158,000
Premises and Equipment (Note 7) 12,496,000 9,816,000
Accrued Interest Receivable 4,615,000 3,538,000
Other Real Estate and Other
Repossessed Assets 557,000 272,000
Other Assets 1,666,000 2,022,000
------------ ------------
Total Assets $480,475,000 $358,262,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 8):
Noninterest-bearing Demand Deposits $ 71,223,000 $ 57,441.000
Interest-bearing Demand Deposits 129,419,000 102,573,000
Interest-bearing Time Deposits 195,640,000 158,285,000
------------ ------------
Total Deposits 396,282,000 318,299,000
Accrued Interest Payable 1,715,000 1,074,000
Other Liabilities 8,254,000 533,000
------------ ------------
Total Liabilities 406,251,000 319,906,000
------------ ------------
Guaranteed Preferred Beneficial
Interests in the Company's
Subordinated Debentures (Note 10) 10,904,000 13,000,000
------------ ------------
Commitments and Contingent
Liabilities (Notes 15 and 17)
Stockholders' Equity (Notes 11 and 18):
Common Stock-Par Value $0.25;
30,000,000 Shares Authorized;
2,273,647 and 2,333,647 Shares Issued
at December 31, 2000 and 1999,
Respectively 568,000 583,000
Additional Paid-in Capital 62,588,000 15,955,000
Retained Earnings (Deficit) (1,281,000) 9,972,000
Unrealized Gain (Loss) on Available-
for-sale Securities (Note 4) 1,445,000 (343,000)
Treasury Stock, 60,000 Shares Held at
December 31, 1999, at Cost 0 (669,000)
Unearned Employee Stock Ownership Plan
Stock 0 (142,000)
------------ ------------
Total Stockholders' Equity 63,320,000 25,356,000
------------ ------------
Total Liabilities and
Stockholders' Equity $480,475,000 $358,262,000
============ ============
See accompanying notes.
-45-
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
FOR THE PERIOD FROM AUGUST 12, 2000, THROUGH DECEMBER 31, 2000, THE PERIOD
FROM JANUARY 1, 2000, THROUGH AUGUST 11, 2000, AND THE YEARS ENDED
DECEMBER 31, 1999 and 1998
Predecessor
-----------------------------------------
August 12, 2000, January 1, 2000, Year Ended December 31
Through Through -----------------------
December 31, 2000 August 11, 2000 1999 1998
---------------- -------------- ---------- -----------
Interest Income:
Interest and Fees on Loans (Note 5) $ 9,565,000 $10,746,000 $17,027,000 $14,150,000
Interest on Securities 2,889,000 3,705,000 5,847,000 4,425,000
Interest on Federal Funds Sold 862,000 822,000 1,332,000 1,859,000
------------- ------------ ----------- -----------
Total Interest Income 13,316,000 15,273,000 24,206,000 20,434,000
------------- ------------ ----------- -----------
Interest Expense:
Interest on Deposits 6,012,000 6,355,000 9,898,000 9,268,000
Interest on Note Payable 0 0 0 8,000
------------- ------------ ----------- -----------
Total Interest Expense 6,012,000 6,355,000 9,898,000 9,276,000
------------- ------------ ----------- -----------
Net Interest Income 7,304,000 8,918,000 14,308,000 11,158,000
Provision for Loan Losses (Note 5) 578,000 1,660,000 445,000 570,000
------------- ------------ ----------- -----------
Net Interest Income After Provision
for Loan Losses 6,726,000 7,258,000 13,863,000 10,588,000
------------- ------------ ----------- -----------
Noninterest Income:
Service Charges 1,299,000 1,621,000 2,842,000 2,227,000
Trust Fees 118,000 140,000 208,000 199,000
Other Income 71,000 142,000 217,000 365,000
------------- ------------ ----------- -----------
Total Noninterest Income 1,488,000 1,903,000 3,267,000 2,791,000
------------- ------------ ----------- -----------
Noninterest Expenses:
Salaries and Employee Benefits 3,296,000 3,869,000 6,046,000 4,752,000
Amortization of Intangible Assets 1,593,000 413,000 673,000 339,000
Merger-related Expense 0 1,970,000 0 0
Net Occupancy Expense 758,000 914,000 1,433,000 1,099,000
Equipment Expense 463,000 809,000 1,103,000 887,000
Professional Fees 701,000 416,000 436,000 305,000
Distributions on Guaranteed Preferred
Beneficial Interests in the
Company's Subordinated Debentures
(Note 10) 434,000 678,000 1,105,000 304,000
Stationery, Printing and Supplies
Expense 187,000 360,000 574,000 442,000
Net Costs (Revenues) Applicable to
Other Real Estate and Other
Repossessed Assets (23,000) 29,000 91,000 106,000
Other Expenses 1,276,000 1,512,000 2,043,000 1,764,000
------------ ------------ ----------- -----------
Total Noninterest Expenses 8,685,000 10,970,000 13,504,000 9,998,000
------------ ------------ ----------- -----------
Income (Loss) Before Federal Income
Taxes (471,000) (1,809,000) 3,626,000 3,381,000
Federal Income Tax Expense (Note 9) 110,000 99,000 1,174,000 1,193,000
------------ ------------ ----------- -----------
Net Income (Loss) (581,000) (1,908,000) 2,452,000 2,188,000
Other Comprehensive Income, Net of
Tax:
Unrealized Holding Gains (Losses) on
Available-for-sale Securities 1,445,000 150,000 (504,000) 130,000
Arising During the Period ------------ ------------ ----------- -----------
Comprehensive Income (Loss) $ 864,000 $ (1,758,000) $ 1,948,000 $ 2,318,000
============ ============ =========== ===========
Preferred Stock Dividends (Note 11) $ 0 $ 20,000 $ 22,000
============ =========== ===========
Net Income (Loss) Available to Common
Stockholders $ (1,908,000) $ 2,432,000 $ 2,166,000
============ =========== ===========
Basic Earnings (Loss) Per Common Share
Available to Common Stockholders
(Note 12) $ (0.84) $ 1.12 $ 1.07
============ =========== ===========
Diluted Earnings (Loss) Per Common
Share Available to Common
Stockholders (Note 12) $ (0.84) $ 1.08 $ 1.02
============ =========== ===========
See accompanying notes.
-46-
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM AUGUST 12, 2000, THROUGH DECEMBER 31, 2000, THE PERIOD FROM
JANUARY 1, 2000, THROUGH AUGUST 11, 2000, AND THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Series C Preferred
Stock Common Stock Additional
----------------- ---------------------- Paid-in
Shares Amount Shares Amount Capital
-------- -------- ----------- --------- --------------
Balances-
January 1, 1998
Net Income 5,590 $56,000 1,975,263 $494,000 $13,921,000
Adjustment to
Unrealized Gain
on Available-for-
sale Securities,
Net of Tax of
$67,000 (Note 4)
Cash Dividends
($0.20 Per Share)
Sale of Stock in
Secondary Offering
(Note 11) 230,000 57,000 2,010,000
Principal Payments
on Loan to ESOP for
Stock Purchase-Earned
Stock (Note 11)
Conversion of Series
C Preferred Stock
(Note 11) (524) (5,000) 12,033 3,000 2,000
------ ------- --------- -------- -----------
Balance-December 31, 1998 5,066 51,000 2,217,296 554,000 15,933,000
Net Income
Adjustment to
Unrealized Loss on
Available-for-sale
Securities, Net of
Tax of $260,000 (Note 4)
Cash Dividends
($0.20 Per Share)
Principal Payments
on Loan to ESOP for
Stock Purchase-Earned
Stock (Note 11)
Conversion of
Series C Preferred
Stock (Note 11) (5,066) (51,000) 116,351 29,000 22,000
Purchase of Treasury
Stock (Note 11)
------ -------- --------- -------- -----------
Balances-December 31,
1999 0 0 2,333,647 583,000 15,955,000
Net Loss, January 1
to August 11
Adjustment to
Unrealized Loss on
Available-for-sale
Securities, Net of
Tax of $77,000 (Note 4)
Cash Dividends
($0.12 Per Share)
Principal Payments on
Loan to ESOP for
Stock Purchase-Earned
Stock (Note 11)
------ -------- --------- -------- -----------
Balances-August 11, 2000
(Predecessor) 0 0 2,333,647 583,000 15,955,000
Purchase Accounting
Adjustments (Note 2) 30,258,000
Retirement of Treasury
Stock (60,000) (15,000) (654,000)
Net Loss, August 12 to
December 31
Adjustment to
Unrealized Gain on
Available-for-sale
Securities, Net of
Tax of $744,000
(Note 4)
Cash Dividends
Merger of United Bank
& Trust, Abilene with
and into First State
Bank, N.A. (Note 3) 17,029,000
------ -------- --------- -------- -----------
Balances-December 31,
2000 0 $ 0 2,273,647 $568,000 $62,588,000
====== ======== ========= ======== ===========
Unrealized Unearned
Gain(Loss) Employee Stock
Retained Available Treasury Stock Ownership Plan Stock
Earnings For-Sale -------------------- --------------------
(Deficit) Securities Shares Amount Shares Amount
------------ ----------- -------- ---------- --------- ----------
Balances-
January 1, 1998 $ 6,218,000 $ 31,000 0 $ 0 (16,961) $(193,000)
Net Income 2,188,000
Adjustment to
Unrealized Gain on
Available-for-sale
Securities, Net of
Tax of $67,000 (Note 4) 130,000
Cash Dividends
($0.20 Per Share) (431,000)
Sale of Stock in
Secondary Offering
(Note 11)
Principal Payments on
Loan to ESOP for Stock
Purchase-Earned Stock
(Note 11) 2,122 24,000
Conversion of Series
C Preferred Stock
(Note 11) ----------- ---------- ------- --------- ------- ---------
Balance-December 31, 1998 7,975,000 161,000 0 0 (14,839) (169,000)
Net Income 2,452,000
Adjustment to
Unrealized Loss on
Available-for-sale
Securities, Net of
Tax of $260,000 (Note 4) (504,000)
Cash Dividends
($0.20 Per Share) (455,000)
Principal Payments
on Loan to ESOP for
Stock Purchase-Earned
Stock (Note 11) 2,369 27,000
Conversion of
Series C Preferred
Stock (Note 11)
Purchase of Treasury
Stock (Note 11) (60,000) (669,000)
----------- ---------- ------- --------- ------- ---------
Balances-December 31,
1999 9,972,000 (343,000) (60,000) (669,000) (12,470) (142,000)
Net Loss, January 1 to
August 11 (1,908,000)
Adjustment to
Unrealized Loss on
Available-for-sale
Securities, Net of
Tax of $77,000 (Note 4) 150,000
Cash Dividend ($0.12 Per
Share) (273,000)
Principal Payments on
Loan to ESOP for Stock
Purchase-Earned
Stock (Note 11) 12,470 142,000
----------- ---------- ------- --------- ------- ---------
Balances-August 11, 2000
(Predecessor) 7,791,000 (193,000) (60,000) (669,000) 0 0
Purchase
Accounting Adjustments
(Note 2) (7,791,000) 193,000
Retirement of
Treasury Stock 60,000 669,000
Net Loss, August 12 to
December 31 (581,000)
Adjustment to
Unrealized Gain on
Available-for-sale
Securities, Net of
Tax of $744,000 (Note 4) 1,445,000
Cash Dividends (700,000)
Merger of United Bank &
Trust, Abilene with
and into First State
Bank, N.A.(Note 3)
----------- ---------- ------- --------- ------- ---------
Balances-December 31,
2000 $(1,281,000) $1,445,000 0 $ 0 0 $ 0
=========== ========== ======= ========= ======= =========
See accompanying notes.
-47-
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM AUGUST 12,
2000, THROUGH DECEMBER 31, 2000, THE PERIOD FROM JANUARY 1, 2000,
THROUGH AUGUST 11, 2000, AND THE
YEARS ENDED DECEMBER 31, 1999 AND 1998
Predecessor
August 12, --------------------------------------------
2000 January 1,
Through 2000, Through Year Ended December 31,
December 31, August 11, ---------------------------
2000 2000 1999 1998
------------ ------------- ------------- -------------
Cash Flows from Operating
Activities:
Net Income (Loss) $ (581,000) $ (1,908,000) $ 2,452,000 $ 2,188,000
Adjustments to Reconcile Net
Income (Loss) to Net Cash
Provided by Operating
Activities:
Deferred Federal Income Tax
Expense (Benefit) 108,000 (817,000) 260,000 488,000
Depreciation and Amortization
1,986,000 864,000 1,424,000 962,000
Provision for Loan Losses 578,000 1,660,000 445,000 570,000
Gains on Sales of Securities (36,000) 0 0 0
Gain on Sales of Premises and
Equipment (40,000) 0 (1,000) 0
Gains on Sales of Other Real
Estate and Other Repossessed
Assets 0 0 (1,000) (12,000)
Writedown of Other Real Estate
and Other Repossessed Assets 2,000 4,000 6,000 3,000
Decrease (Increase) in Accrued
Interest Receivable (138,000) 6,000 (284,000) (190,000)
Decrease (Increase) in Other
Assets 1,085,000 1,180,000 224,000 (698,000)
Increase (Decrease) in Accrued
Interest Payable 96,000 99,000 (89,000) (92,000)
Increase in Other
Liabilities 1,468,000 1,227,000 88,000 84,000
------------ ------------- ------------ ------------
Net Cash Provided by
Operating Activities 4,528,000 2,315,000 4,524,000 3,303,000
------------ -------------- ------------ ------------
Cash Flows from Investing
Activities:
Proceeds from Maturities of
Available-for-sale Securities 6,025,000 12,200,000 6,768,000 15,766,000
Proceeds from Maturities of
Held-to-maturity Securities 0 4,724,000 34,031,000 36,745,000
Proceeds from Sales of
Available-for-sale
Securities 39,692,000 3,000,000 0 0
Purchases of Available-for-
sale Securities (41,144,000) (4,891,000) (25,663,000) (19,489,000)
Purchases of Held-to-maturity
Securities 0 (5,836,000) (29,918,000) (22,627,000)
Net Decrease (Increase) in
Loans 6,316,000 3,167,000 (3,027,000) (254,000)
Proceeds from Sales of
Premises and Equipment 0 0 1,000 0
Additions to Premises and
Equipment (420,000) (82,000) (273,000) (651,000)
Proceeds from Sales of Other
Real Estate and Other
Repossessed Assets 104,000 356,000 1,210,000 1,551,000
Net Cash and Cash Equivalents
Received (Paid) in
Merger/Acquisition 9,344,000 0 0 (10,133,000)
------------ ------------ ------------- -------------
Net Cash Provided by
(Used in) Investing
Activities 19,917,000 12,638,000 (16,871,000) 908,000
------------ ------------- ------------- -------------
Cash Flows from Financing
Activities:
Net Increase (Decrease) in
Deposits (9,001,000) (6,962,000) (12,505,000) 7,048,000
Proceeds from Notes Payable 0 0 0 4,300,000
Repayment of Notes Payable 0 0 (1,000) (4,356,000)
Net Proceeds from Issuance of
Equity Securities 0 0 0 2,067,000
Net Proceeds from Issuance of
Guaranteed Preferred
Beneficial Interests in the
Company's Subordinated
Debentures 0 0 0 12,480,000
Payment of Cash Dividends (700,000) (273,000) (455,000) (431,000)
Purchase of Treasury Stock 0 0 (669,000) 0
------------ ------------ ------------- -------------
Net Cash Provided by
(Used in)
Financing Activities (9,701,000) (7,235,000) (13,630,000) 21,108,000
------------ ------------ ------------- -------------
Net Increase (Decrease) in
Cash and Cash Equivalents 14,744,000 7,718,000 (25,977,000) 25,319,000
Cash and Cash Equivalents at
Beginning of Period 46,478,000 38,760,000 64,737,000 39,418,000
------------ ------------ ------------- -------------
Cash and Cash Equivalents at
End of Period $61,222,000 $ 46,478,000 $ 38,760,000 $64,737,000
============ ============ ============= ============
See accompanying notes.
-48-
INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
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 is an indirect wholly owned subsidiary of
State National Bancshares, Inc., Lubbock, Texas ("State
National"). At December 31, 2000, the Company owned all of the
common securities of Independent Capital Trust ("Independent
Capital") and indirectly owned through a Delaware subsidiary,
Independent Financial Corp. ("Independent Financial"), 100% of
the stock of State National Bank of West Texas, Abilene, Texas
(the "Bank"). At December 31, 2000, the Bank operated full-
service banking locations in the Texas cities of Abilene (five
locations), Azle (two locations), Bangs, Lubbock, Odessa
(four locations), San Angelo, Stamford, Trent and Winters.
The Company's primary activities are to assist the Bank in
the management and coordination of its financial resources. The
Bank operates under the day-to-day management of its own officers
and board of directors and formulates its own policies with
respect to banking matters.
The principal services provided by the Bank are as follows:
Commercial Services. The Bank provides a full range of
banking services for its commercial customers. Commercial lending
activities include short-term and medium-term loans, revolving
credit arrangements, inventory and accounts receivable financing,
equipment financing and interim and permanent real estate
lending. Other services include cash management programs and
federal tax depository and night depository services.
Consumer Services. The Bank also provides a wide range of
consumer banking services, including checking, savings and money
market accounts, savings programs and installment and personal
loans. The Bank makes automobile and other installment loans
directly to customers, as well as indirectly through automobile
dealers. The Bank makes home improvement, home equity and real
estate loans and provides safe deposit services. As a result of
sharing arrangements with the Pulse automated teller machine
system network, the Bank provides 24-hour routine banking
services through automated teller machines ("ATMs"). The Pulse
network provides ATM accessibility throughout the United States.
The Bank also offers investment services and banking by phone or
personal computer.
Trust Services. The Bank provides trust and agency services
to individuals, partnerships and corporations from its offices in
Abilene, Lubbock and Odessa. The trust division also provides
investment management, administration and advisory services for
agency and trust accounts, and acts as trustee for pension and
profit sharing plans.
Investment Services. The Bank provides investment services,
including purchases and sales of various investments, and
management of such investments, for its customers.
Principles of Consolidation
The Consolidated Financial Statements include the accounts
of the Company, Independent Capital, Independent Financial and
the Bank. All significant intercompany accounts and transactions
have been eliminated upon consolidation.
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.
-49-
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 historical cost, adjusted for
amortization of premiums and accretion of fees and discounts
using a method that approximates the interest method. Securities
to be held for indefinite periods of time are classified as
available-for-sale and carried at fair value. Unrealized gains
and losses, net of taxes, related to securities available-for-
sale are recorded as a separate component of stockholder's
equity. The Company had no securities classified as held-to-
maturity or trading as of December 31, 2000, and no securities
classified as trading as of December 31, 1999. The cost of
securities sold is based on the specific identification method.
Loans
Loans are stated at the principal amount outstanding.
Interest on the various types of commercial, real estate and
other loans is accrued daily based on the principal balances
outstanding. Income on installment loans is recognized using this
method or other methods under which income approximates the
effective 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.
A loan is considered impaired when, based on current
information and events, it is probable that the Bank will be
unable to collect all amounts due (both principal and interest)
according to the terms of the loan agreement. Reserves on
impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or the fair value of the underlying collateral.
Allowance for Possible Loan Losses
The allowance for possible loan losses (the "allowance")
is increased by provision for loan losses and decreased by
charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on past loan loss experience,
known inherent risks in the portfolio, adverse situations that may
affect the borrowers' ability to repay, the estimated value of any
underlying collateral and current economic conditions. The allowance
is comprised of three elements which include: (1)
allowances established on specific loans, (2) allowances based on
loss experience and trends in pools or loans with similar
characteristics, and (3) unallocated allowances based on general
economic conditions and other internal and external risk factors
in the Company's individual markets. The total allowance
includes activity related to allowances calculated in
accordance with Statement of Financial Accounting Standards No.
114 "Accounting by Creditors for Impairment of a Loan" ("FAS
114") and activity related to other allowances
determined in accordance with Statement of Financial Accounting
Standards "Accounting for Contingencies" ("FAS 5").
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation for financial reporting purposes is
computed primarily on the straight-line method over the estimated
useful lives of five (5) to forty (40) years. When assets are
retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations
for the period.
Intangible Assets
A core deposit intangible resulting from the acquisition of
the Company is being amortized on an accelerated method over a
ten (10) year period. Goodwill resulting from the acquisition of
the Company is being amortized on the straight-line method over a
twenty (20) year period.
-50-
All intangible assets are evaluated periodically to
determine recoverability of their carrying value when economic
conditions indicate impairment may exist. These conditions would
include an ongoing negative performance history and a forecast of
anticipated performance that is significantly below management's
initial expectation for the acquired entity. Impairment would be
determined based upon the estimated discounted cash flows of the
entity acquired over the remaining amortization period, compared
to the remaining intangible balance. As of December 31, 2000,
management believes that no impairment of intangible assets had
occurred.
Federal Income Taxes
The Company uses the liability method of accounting for
deferred income taxes as required by the Financial Accounting
Standards Board (the "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.
Other Real Estate and Other Repossessed Assets
Other real estate and other repossessed assets consist
principally of real estate properties and automobiles acquired by
the Company through foreclosure. Such assets are carried at the
lower of cost (generally the outstanding loan balance) or
estimated fair value, net of estimated costs of disposal, if any.
If the estimated fair value of the collateral securing the loan
is less than the amount outstanding on the loan at the time the
assets are acquired, the difference is charged against the
allowance for possible loan losses. Subsequent declines in
estimated fair value, if any, are charged to noninterest expense.
Advertising Costs
Advertising costs are expensed as incurred. The total
amounts charged to advertising expense for the years ended
December 31, 2000, 1999 and 1998 were approximately $278,000,
$137,000 and $93,000, respectively.
Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133, as
amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. The
Company currently owns no derivative financial instruments
subject to FAS 133 and does not engage in hedging activities. As
a result, the Company has determined that adoption of FAS 133 on
January 1, 2001, will not have a material effect on the Company's
consolidated financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
NOTE 2: ACQUISITION OF THE COMPANY
On March 1, 2000, the Company entered into an Agreement and
Plan of Reorganization (the "Merger Agreement") with State
National for a cash acquisition of the Company by State National
(the "Acquisition"). The Company and State National consummated
the Acquisition at the close of business August 11, 2000.
Pursuant to the terms of the Merger Agreement, each share of
common stock of the Company was exchanged for $20.0165 in cash.
Upon conclusion of the Acquisition, State National became the
sole shareholder of the Company, owning all 2,273,647 outstanding
shares of the Company's common stock. In connection with the
Acquisition, State National agreed to assume and guarantee the
outstanding Trust Preferred Securities issued by Independent
Capital, a Delaware business trust controlled by the Company.
-51-
State National accounted for its acquisition of the Company
as a purchase business combination and purchase accounting
adjustments, including goodwill, have been pushed down and
reflected in the consolidated financial statements of the Company
subsequent to August 11, 2000. The consolidated financial
statements of the Company for the periods ended before August 12,
2000 (predecessor), were prepared using the Company's historical
basis of accounting. The comparability of operating results for
these periods and the periods encompassing push down accounting
is affected by the purchase accounting adjustments, including the
amortization of goodwill (straight-line method) and core deposit
intangibles (accelerated method) over a period of 20 and 10
years, respectively.
The purchase price, including costs incurred by State
National directly associated with the Acquisition, were
preliminarily allocated to net assets acquired. Final allocation
has been obtained and the purchase allocations finalized at
December 31, 2000. The following table summarizes the preliminary
changes made to the accounts of the Company as of August 11,
2000, as a result of applying push down accounting:
Balance at Push Down
Date of Accounting Adjusted
Acquisition Adjustments Balance
----------- ----------- ---------
(In thousands)
Investment securities $ 99,906 $ (1,494) $ 98,412
Loans, net of unearned
income 183,082 (1,169) 181,913
Allowance for possible
loan losses (3,343) (3,028) (6,371)
Goodwill and core
deposit intangibles 9,746 30,099 39,845
Premises and equipment 9,446 (492) 8,954
Other assets 1,659 (126) 1,533
Total assets 350,735 23,790 374,525
Other liabilities $ 1,760 $ 3,233 $ 4,993
Trust Preferred 13,000 (2,103) 10,897
Securities
Stockholder's equity 23,465 22,660 46,125
Total liabilities and
stockholder's equity 350,735 23,790 374,525
NOTE 3: BANK MERGER
During November 2000, State National contributed to the
Company its ownership of United Bank & Trust, Abilene, Texas
("UB&T"). UB&T was merged with and into First State Bank,
National Association, Abilene, Texas ("First State"), a
subsidiary of the Company at that time. At the time of the
merger, the name of the resulting bank was changed to State
National Bank of West Texas, Abilene, Texas.
At November 9, 2000, UB&T had total assets of $112,076,000,
loans, net of allowance for possible loan losses, of
$64,567,000, total deposits of $92,920,000 and total
stockholder's equity of $17,029,000. In addition, UB&T had
unamortized intangible assets at November 9, 2000, of
$8,460,000.
UB&T's net interest income for the period from August 12 to
November 9, 2000, was $1,087,000, and its net income for the
same period was $23,000. The operations of UB&T have been
included in those of the Company from August 12, 2000.
-52-
NOTE 4: SECURITIES
The amortized cost and estimated fair value of available-for-
sale securities at December 31, 2000 and 1999, were as follows:
2000
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
------------ ---------- ---------- -------------
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations $ 85,821,000 $1,901,000 $ (44,000) $ 87,678,000
Mortgage-backed securities and
collateralized mortgage
obligations 18,331,000 372,000 (84,000) 18,619,000
Obligations of states and
political subdivisions 8,290,000 55,000 (11,000) 8,334,000
Other securities 2,576,000 0 0 2,576,000
------------ ----------- ----------- ------------
Total available-for-sale
securities $115,018,000 $2,328,000 $ (139,000) $117,207,000
============ =========== =========== ============
1999
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
---------- ----------- ---------- -------------
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations $46,227,000 $ 5,000 $ 478,000 $45,754,000
Mortgage-backed securities and
collateralized mortgage
obligations 1,648,000 1,000 35,000 1,614,000
Other securities 1,019,000 0 0 1,019,000
----------- ---------- ---------- --------------
Total available-for-sale
securities $48,894,000 $ 6,000 $ 513,000 $48,387,000
=========== ========== =========== ===========
There were no held-to-maturity securities at December 31, 2000, as they
were reclassified to available-for-sale in conjunction with the Acquisition. The
amortized cost and estimated fair value of held-to-maturity securities at
December 31, 1999, were as follows:
1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
------------ ---------- ---------- -------------
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations $45,244,000 $ 0 $1,014,000 $44,230,000
Obligations of states and
political subdivisions 9,103,000 0 205,000 8,898,000
Mortgage-backed securities and
collateralized mortgage
obligations 6,169,000 0 76,000 6,093,000
----------- ----------- ---------- -----------
Total held-to-maturity
securities $60,516,000 $ 0 $1,295,000 $59,221,000
=========== =========== ========== ===========
-53-
The amortized cost and estimated fair value of securities at
December 31, 2000, 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.
Available-for-sale Amortized Estimated Fair
Securities Cost Value
- ----------------------- ------------ -------------
Due in one year or less $ 5,198,000 $ 5,216,000
Due after one year
through five years 69,098,000 70,282,000
Due after five years
through ten years 19,695,000 20,389,000
Due after ten years 2,696,000 2,701,000
------------ ------------
96,687,000 98,588,000
Mortgage-backed
securities and
collateralized mortgage
obligations 18,331,000 18,619,000
------------ ------------
Total available-for-sale
securities $115,018,000 $117,207,000
============ ============
At December 31, 2000, securities with an amortized cost and
estimated fair value of $58,591,000 and $59,576,000,
respectively, were pledged as collateral for public and trust
fund deposits and for other purposes required or permitted by
law. At December 31, 1999, the amortized cost and estimated fair
value of pledged securities were $21,802,000 and $21,647,000,
respectively.
Available-for-sale securities aggregating $3,000,000 were
sold immediately prior to maturity during the first six months of
2000. Available-for-sale securities aggregating $39,692,000 were
sold immediately after the Acquisition, and a similar amount of
available-for-sale securities were then purchased to reposition
the Company's securities portfolio. During 1999 and 1998, the
Company did not sell any securities prior to maturity.
NOTE 5: LOANS
The composition of loans at December 31, 2000 and 1999, was
as follows:
2000 1999
--------------- -------------
Real estate loans $103,711,000 $ 72,268,000
Commercial loans 84,832,000 55,270,000
Loans to individuals 36,535,000 46,748,000
Other loans 17,863,000 12,857,000
------------ ------------
Total loans 242,941,000 187,143,000
Less unearned income 126,000 517,000
------------ ------------
Total loans, net of
unearned income $242,815,000 $186,626,000
============ ============
Nonperforming assets at December 31, 2000 and 1999, were as
follows:
2000 1999
---------- ------------
Nonaccrual loans $3,087,000 $236,000
Accruing loans past due
over ninety days 1,009,000 203,000
Restructured loans 119,000 186,000
Other real estate and
other repossessed assets 557,000 272,000
---------- --------
Total nonperforming
assets $4,772,000 $897,000
========== ========
-54-
At December 31, 2000, and 1999, loans identified as being
impaired consisted of loans placed on nonaccrual status.
At December 31, 2000, and 1999, the recorded investment in
loans that are considered to be impaired under FAS 114 was
approximately $9,594,000 and $236,000, respectively. Included in
these amounts at December 31, 2000, and 1999, was approximately
$4,639,000 and $24,000, respectively, of impaired loans for which
the related specific reserve for loan losses was approximately
$3,021,000 and $21,000, respectively. Impaired loans of
$2,964,000 and $212,000 at December 31, 2000, and 1999,
respectively, did not have a specific reserve for loan losses.
The amount of interest income that would have been recorded
on impaired loans for the period from August 12, 2000 to December
31, 2000, the period from January 1, 2000, to August 11, 2000,
and for the years ended December 31, 1999 and 1998, based on the
loans' original terms was $88,000, $12,000, $23,000 and $12,000,
respectively. A total of $0, $16,000, $2,000 and $1,000 in
interest on impaired loans was actually collected and recorded as
income during the period from August 12, 2000, to December 31,
2000, the period from January 1, 2000, to August 11, 2000, and
for the years ended December 31, 1999 and 1998, respectively.
A summary of the activity in the allowance for possible loan
losses for the period from August 12, 2000, to December 31, 2000,
the period from January 1, 2000, to August 11, 2000, and for the
years ended December 31, 1999 and 1998, is as follows:
August 12, January 1, Years Ended December 31,
2000, to 2000 to -----------------------
December August 11,
31, 2000 2000 1999 1998
---------- ---------- ---------- ------------
Balance at beginning of period $ 6,371,000 $1,833,000 $1,842,000 $1,173,000
Provision for loan losses 578,000 1,660,000 445,000 570,000
Loans charged off (1,639,000) (230,000) (697,000) (729,000)
Recoveries of loans charged off 26,000 80,000 243,000 102,000
Purchase accounting adjustment 0 3,028,000 0 0
Bank acquisition/merger 1,562,000 0 0 726,000
----------- ---------- ---------- ----------
Balance at end of period $ 6,898,000 $6,371,000 $1,833,000 $1,842,000
=========== ========== ========== ==========
The increase in the allowance of $3,028,000 related to the
purchase accounting adjustments is due primarily to five
borrowing relationships with whom predecessor management had
intended to continue to work and extend or renew the loans as
necessary. Predecessor management believed that the net carrying
amount, after considering specific reserves, was adequate to
reflect the estimated carrying amount of the loans. Successor
management has determined that they will no longer maintain a
relationship with these borrowers, has informed the borrowers
that the borrowers will have to pay off their respective loans
with the Company and, if necessary, liquidate the collateral
supporting the loans within no later than one year of the
Acquisition date. The Company has also offered a reduction in
principal to one borrower to provide an incentive for the
borrower to move its loan relationship. As these loans are
collateral dependent, the estimated losses on these loans are
primarily due to estimated collateral liquidation value
shortfalls. Overall, successor management has determined that the
intended method of ultimate recovery on loans from these five
borrowing relationships is demonstrably different from the plans
that served as the basis for predecessor management estimation of
recovery on such loans. The portion of the allowance will only be
used for the specific relationships[?]. As these loans are
collected, any excess allowance, if any, will be adjusted against
goodwill.
-55-
NOTE 6: INTANGIBLE ASSETS
The following is a summary of intangible assets at December
31, 2000 and 1999:
2000 1999
----------- -------------
Goodwill $32,692,000 $ 8,539,000
Core deposit
intangible 16,961,000 2,895,000
----------- ------------
49,653,000 11,434,000
Less accumulated
amortization 2,858,000 1,276,000
----------- ------------
Net intangible
assets $46,795,000 $10,158,000
=========== ===========
NOTE 7: PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at
December 31, 2000 and 1999:
2000 1999
------------ ------------
Land $ 2,653,000 $ 1,684,000
Buildings and
improvements 12,278,000 9,242,000
Furniture and equipment 2,414,000 2,135,000
----------- ------------
17,345,000 13,061,000
Less accumulated
depreciation 4,849,000 3,245,000
----------- ------------
Net premises and
equipment $12,496,000 $ 9,816,000
=========== ============
NOTE 8: DEPOSITS
At December 31, 2000, the scheduled maturities of interest-
bearing time deposits was as follows:
Interest-bearing
Time Deposits
------------------
2001 $167,451,000
2002 19,662,000
2003 5,144,000
2004 915,000
2005 2,427,000
Thereafter 41,000
------------
Total interest-
bearing time deposits $195,640,000
============
At December 31, 2000 and 1999, interest-bearing time
deposits of $100,000 or more were $64,736,000 and $53,232,000,
respectively.
NOTE 9: FEDERAL INCOME TAXES
The Company's deferred tax benefit for 2000 was $709,000.
The Company's deferred tax provision for 1999 and 1998 totaled
$260,000 and $488,000, respectively.
-56-
Significant components of the Company's deferred tax assets
and liabilities at December 31, 2000 and 1999, were as follows:
2000 1999
------------ -----------
Deferred tax assets:
Allowance for possible loan
losses $ 2,293,000 $200,000
Net unrealized loss on
available-for-sale securities 744,000 177,000
Investment securities 351,000 0
Retirement plan 279,000 255,000
Net operating loss
carryforwards 143,000 197,000
Employee retention agreement 72,000 0
Other real estate and other
repossessed assets 17,000 15,000
Tax credit carryforward 0 48,000
Other 625,000 0
------------ --------
Total gross deferred tax
assets 4,524,000 892,000
Less valuation allowance for
deferred tax assets (40,000) (94,000)
------------ --------
Net deferred tax assets 4,484,000 798,000
------------ --------
Deferred tax liabilities:
Core deposit intangible (5,143,000) 0
Trust Preferred Securitie (712,000) 0
Depreciation and amortization (213,000) (269,000)
Other, net (125,000) (21,000)
------------ --------
Total gross deferred tax
liabilities (6,193,000) (290,000)
------------ --------
Net deferred tax asset
(liability) $(1,709,000) $508,000
============ ========
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. The Company records a valuation allowance on
deferred tax assets if it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The
valuation allowance was $40,000 and $94,000 at December 31, 2000
and 1999, respectively. Management believes that it is more
likely than not that the Company will generate sufficient future
taxable income to realize the net deferred tax asset less the
related valuation allowance.
At December 31, 2000, the Company had available net
operating loss carryforwards of approximately $422,000 acquired
as part of prior acquisitions. These net operating loss
carryforwards, if not used, expire between 2003 and 2010.
-57-
The comprehensive provisions for federal income taxes for
the periods from August 12, 2000, through December 31, 2000, from
January 1, 2000, through August 11, 2000, and for the years ended
December 31, 1999 and 1998, were as follows:
The comprehensive provisions for federal income taxes for the periods from
August 12, 2000, through December 31, 2000, from January 1, 2000, through August
11, 2000, and for the years ended December 31, 1999 and 1998, were as follows:
August 12, January 1,
2000 through 2000 through Year Ended December 31,
December 31, August 11, ------------------------
2000 2000 1999 1998
------------- ------------ ---------- -----------
Current tax provision $ 2,000 $ 916,000 $ 914,000 $ 705,000
Deferred tax provision
(benefit) 108,000 (817,000) 260,000 488,000
-------- --------- --------- -----------
Provision for tax expense
charged to results of
operations 110,000 99,000 1,174,000 1,193,000
Tax provision (benefit) on
adjustment to unrealized
gain/loss on available-
for-sale securities 744,000 77,000 (260,000) 67,000
-------- -------- ---------- ----------
Comprehensive provision
for federal income taxes $854,000 $176,000 $ 914,000 $1,260,000
======== ======== ========== ==========
The following is a reconciliation of the difference between income tax
expense as reported and the amount of expense (benefit) computed by applying the
statutory income tax rate to income (loss) before income taxes:
August 12, January 1, Year Ended December 31,
2000 through 2000 through ------------------------
December 31, August 11,
2000 2000 1999 1998
------------- ------------- --------- -----------
Income (loss) before
income taxes $(471,000) $(1,809,000) $3,626,000 $3,381,000
Statutory rate 34% 34% 34% 34%
--------- ----------- ---------- ----------
Income tax expense
(benefit) at statutory
rate (160,000) (615,000) 1,233,000 1,150,000
Amortization of goodwill 224,000 130,000 212,000 99,000
Tax-exempt income (40,000) (113,000) (187,000) (61,000)
Nondeductible acquisition
expenses 0 717,000 24,000 17,000
Other 86,000 (20,000) (108,000) (12,000)
---------- ----------- ---------- ----------
Income tax expense as
reported $ 110,000 $ 99,000 $1,174,000 $1,193,000
========= =========== ========== ==========
NOTE 10: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE
COMPANY'S SUBORDINATED DEBENTURES
Independent Capital sold 1,300,000 of Trust Preferred
Securities at $10.00 per preferred security in an underwritten
offering in 1998. The proceeds from the sale of the Trust
Preferred Securities were used by Independent Capital to purchase
an equivalent amount of Subordinated Debentures of the Company.
The Trust Preferred Securities carry a distribution rate of 8.5%,
have a stated maturity of September 22, 2028, and are guaranteed
by State National. The securities are redeemable at par after
September 22, 2003.
Distributions on the Trust Preferred Securities are payable
quarterly on March 31, June 30, September 30 and December 31.
Distributions paid to holders of the Trust Preferred Securities
during both the years ended December 31, 2000 and 1999, totaled
$1,105,000.
-58-
NOTE 11: STOCKHOLDER'S EQUITY
The Company's Series C Cumulative Convertible Preferred
Stock (the "Series C Preferred Stock") paid quarterly dividends
at the annual rate of $4.20 per share, was senior to the Common
Stock with respect to dividends and liquidation rights, was
convertible into Common Stock at a price of $1.83 per share,
adjusted for stock dividends, and had certain voting rights if
dividends were in arrears for three quarters. The Series C
Preferred Stock was redeemable in cash and/or Common Stock at the
Company's option at $42.00 per share. All of the remaining
outstanding shares of Series C Preferred Stock were converted to
Common Stock during 1999.
The Company's Employee Stock Ownership/401(k) Plan (the
"ESOP/401(k) Plan") purchased 18,750 shares of the Company's
Common Stock in an underwritten public offering conducted by the
Company (the "1997 Offering") for $214,000. The funds used for
the purchase were borrowed from the Company. The note evidencing
such borrowing was due in eighty-four equal monthly installments
of $4,000, including interest, and matured on February 27, 2004.
The note bore interest at the Company's floating base rate plus
1% and was collateralized by the stock purchased in the 1997
Offering.
As a result of the lending arrangement between the Company
and the ESOP/401(k) Plan, the shares were considered "unearned."
The shares were "earned" on a pro rata basis as principal
payments are made on the note used to purchase the shares. The
shares were included in the Company's earnings per share
calculations only as they were earned. The note was paid off
immediately prior to the Acquisition. All of the remaining
unearned shares became earned when the note to the Company was
paid off prior to the Acquisition.
During the first half of 1999, the Company authorized the
repurchase of up to 80,000 shares of the Company's Common Stock
in the open market. As of December 31, 1999, the Company had
repurchased a total of 60,000 shares of its Common Stock at an
average price of $11.15 per share. The repurchased shares were
being held as treasury shares prior to the Acquisition. As a
result of the Acquisition, the treasury shares were retired.
NOTE 12: EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net
income available to common stockholders by the weighted average
number of common shares and share equivalents outstanding during
the period. The remainder of the Series C Preferred Stock was
converted to Common Stock during the fourth quarter of 1999.
Because the Company's outstanding Series C Preferred Stock was
cumulative, the dividends allocable to such preferred stock
reduced income available to common stockholders in the basic
earnings per share calculations. In computing diluted earnings
per common share for the years ended December 31, 1999 and 1998,
the conversion of the Series C Preferred Stock was assumed, as
the effect was dilutive. The following table presents information
necessary to calculate earnings per share for the period from
January 1, 2000, to August 11, 2000, and for the years ended
December 31, 1999 and 1998:
Period from
January 1, Year Ended
2000, to December 31,
August 11, -------------------
2000 1999 1998
----------- ------ --------
Basic Earnings (Loss) Per (In thousands)
Common Share
- ------------
Net income (loss) $ (1,908) $2,452 $2,188
Preferred stock dividends 0 (20) (22)
-------- ------ ------
Net income (loss) available to
common stockholders $ (1,908) $2,432 $2,166
======== ====== ======
Weighted average shares
outstanding 2,262 2,178 2,031
======== ====== ======
-59-
Period
from
January 1, Year Ended
2000, to December 31,
August 11, ------------------
2000 1999 1998
---------- ------ ---------
Diluted Earnings (Loss) Per (In thousands)
Common Share
- ------------
Net income (loss) $(1,908) $2,452 $2,188
======== ====== ======
Weighted average shares
outstanding 2,262 2,178 2,031
Conversion of Series C
Preferred Stock 0 97 120
-------- ------ ------
Adjusted weighted average
shares outstanding 2,262 2,275 2,151
======== ====== ======
NOTE 13: BENEFIT PLANS
The Company's ESOP/401(k) Plan covered most of its officers
and employees. Contributions made to the ESOP/401(k) Plan by the
Company were $214,000, $141,000 and $106,000 for the period from
January 1 to August 11, 2000, and for the years ended December
31, 1999 and 1998, 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 were made by the Company to match
contributions made by plan participants in the 401(k) portion of
the ESOP/401(k) Plan during the years ended December 31, 1999 and
1998; however, the Company's board of directors voted to match
25% of up to a maximum of the first 4% of each employees' salary
which was deferred and contributed to the 401(k) portion of the
ESOP/401(k) Plan beginning January 1, 2000. The amount of all
such contributions was at the discretion of the Company's board
of directors. Contributions were invested in various equity, debt
and money market investments, including Common Stock of the
Company. The ESOP/401(k) Plan was terminated at the date of the
Acquisition and was liquidated subsequent to the Acquisition.
Subsequent to the Acquisition, most of the Company's
officers and employees became eligible to participate in State
National's 401(k) profit sharing plan. Beginning August 12, 2000,
the Company matched 100% of the first 3%, and 50% of the next 2%,
of each employee's salary which was deferred and contributed to
such plan. The Company contributed $59,000 to the plan for the
period from August 12 to December 31, 2000.
NOTE 14: RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company and the Bank
have loans, deposits and other transactions with their respective
directors and businesses with which such persons are associated.
It is the Company's policy that all such transactions are entered
into on substantially the same terms as those prevailing at the
time for comparable transactions with unrelated third parties.
The balances of loans to all such persons were $0, $4,113,000
and $3,880,000 at December 31, 2000, 1999 and 1998, respectively.
Additions and reductions on such loans were $4,354,000 and
$8,467,000, respectively, for the year ended December 31, 2000.
NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES
The Company is involved in various litigation proceedings
incidental to the ordinary course of business. In the opinion of
management, the ultimate liability, if any, resulting from such
other litigation would not be material in relation to the
Company's financial condition, results of operations and
liquidity.
The Bank leases certain of its premises and equipment under
noncancellable operating leases. Rental expense under such
operating leases was approximately $483,000, $436,000 and
$322,000 in 2000, 1999 and 1998, respectively.
-60-
The minimum payments due under these leases at December 31,
2000, are as follows:
2001 $ 510,000
2002 474,000
2003 201,000
2004 11,000
----------
Total $1,196,000
==========
NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of financial assets and
financial liabilities at December 31, 2000 and 1999, were as
follows:
2000 1999
--------------------------- -----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------- -------------- ------------
Financial Assets
- ----------------
Cash and due from banks $ 34,772,000 $ 34,772,000 $ 22,985,000 $ 22,985,000
Federal funds sold 26,450,000 26,450,000 15,775,000 15,775,000
Available-for-sale securities 117,207,000 117,207,000 48,387,000 48,387,000
Held-to-maturity securities 0 0 60,516,000 59,221,000
Loans, net of unearned income 242,815,000 247,051,000 186,626,000 187,666,000
Accrued interest receivable 4,615,000 4,615,000 3,538,000 3,538,000
Financial Liabilities
- ---------------------
Noninterest-bearing demand
deposits $ 71,223,000 $ 71,223,000 $ 57,441,000 $ 57,441,000
Interest-bearing demand
deposits 129,419,000 129,419,000 102,573,000 102,573,000
Interest-bearing time
deposits 195,640,000 195,825,000 158,285,000 158,393,000
Accrued interest payable 1,715,000 1,715,000 1,074,000 1,074,000
Guaranteed preferred beneficial
interests in the Company's
subordinated debentures 10,904,000 10,569,000 13,000,000 8,938,000
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.
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.
Fair value for the guaranteed preferred beneficial interests
in the Company's subordinated debentures is based on the closing
price for the Trust Preferred Securities as quoted on the
American Stock Exchange at December 31, 2000 and 1999.
The carrying amounts for cash and due from banks, federal
funds sold, accrued interest receivable 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 and commercial
letters of credit, are based on fees currently charged to enter
into similar agreements, taking
-61-
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
material.
NOTE 17: 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 and standby and
commercial letters of credit. 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 or standby or commercial letters of
credit 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 $29,133,000 and outstanding
financial and performance standby letters of credit of
approximately $934,000 at December 31, 2000.
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.
Financial and performance standby letters of credit 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.
In the normal course of business, the Company maintains
deposits with other financial institutions in amounts that exceed
FDIC insurance coverage limits.
NOTE 18: 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
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 net risk-
weighted assets and of Tier 1 capital to adjusted quarterly
average assets. At December 31, 2000, the Company and the Bank
met all capital adequacy requirements to which they were subject.
-62-
At December 31, 2000, the most recent notifications from the
Federal Deposit Insurance Corporation (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
net risk-weighted assets, total capital to net risk-weighted
assets and Tier 1 capital to adjusted quarterly average assets
ratios as set forth in the tables. No other conditions or events
have occurred since the most recent notification that management
believes have changed either the Company's or the Bank's
category.
The minimum regulatory capital ratios, minimum capital
ratios for well capitalized bank holding companies and the
Company's actual capital amounts and ratios at December 31, 2000
and 1999, were as follows:
December 31, Minimum Well
--------------- Capital Capitalized
2000 1999 Ratios Ratios
------- ------ ------- -------
(Dollars in thousands)
Tier 1 capital $ 25,119 $ 24,106
Total capital 33,007 30,374
Net risk-weighted assets 262,421 199,565
Adjusted quarterly average
assets 436,283 353,065
Capital ratios:
Tier 1 capital to net risk-
weighted assets 9.57% 12.08% 4.00% 6.00%
Total capital to net risk-
weighted assets 12.58 15.22 8.00 10.00
Tier 1 capital to adjusted
quarterly average assets 5.76 6.83 4.00 5.00
The minimum capital ratios for well capitalized banks and
the Bank's actual capital ratios at December 31, 2000, were as
follows:
Minimum Ratios Actual
for Well Ratios at
Capitalized December 31,
Banks 2000
-------------- -----------
Tier 1 capital to net risk-
weighted assets 6.00% 11.48%
Total capital to net risk-
weighted assets 10.00 12.75
Tier 1 capital to adjusted
quarterly average assets 5.00 6.89
At December 31, 2000, retained earnings of the Bank included
approximately $1,478,000 that was available for payment of
dividends to the Company without prior approval of regulatory
authorities.
-63-
NOTE 19: PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of the Company, parent only,
are presented below:
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
----------- ------------
Assets:
Cash $ 39,000 $ 372,000
Investment in subsidiaries 74,945,000 37,389,000
Other assets 1,089,000 1,076,000
----------- ------------
Total assets $76,073,000 $38,837,000
=========== ===========
Liabilities:
Accrued interest payable and $ 1,447,000 $ 79,000
other liabilities ----------- ------------
Total liabilities 1,447,000 79,000
Subordinated debentures 11,306,000 13,402,000
Stockholder's equity 63,320,000 25,356,000
----------- ------------
Total liabilities and $76,073,000 $38,837,000
stockholder's equity =========== ===========
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONDENSED INCOME STATEMENTS
FOR THE PERIOD FROM AUGUST 12, 2000, THROUGH DECEMBER 31, 2000,
THE PERIOD FROM JANUARY 1, 2000, THROUGH AUGUST 11, 2000, AND THE
YEARS ENDED DECEMBER 31, 1999 AND 1998
August 12, 2000, January 1,
through 2000, through Year Ended December 31,
December 31, August 11, -----------------------
2000 2000 1999 1998
---------------- ------------ ---------- ----------
Income:
Dividends from subsidiaries (see
Note 18) $ 17,000 $ 2,917,000 $1,709,000 $5,259,000
Management fees from subsidiaries 0 90,000 144,000 145,000
Interest on loan to the ESOP/401(k)
Plan 0 8,000 20,000 23,000
Interest from subsidiaries 0 3,000 8,000 6,000
Other income 0 2,000 0 11,000
---------- ----------- ----------- -----------
Total income 17,000 3,020,000 1,881,000 5,444,000
---------- ----------- ----------- -----------
Expenses:
Interest 447,000 699,000 1,139,000 321,000
Other expenses 160,000 2,433,000 629,000 680,000
---------- ----------- ----------- -----------
Total expenses 607,000 3,132,000 1,768,000 1,001,000
---------- ----------- ----------- -----------
Income (loss) before federal income
taxes and equity in undistributed
earnings of subsidiaries
(590,000) (112,000) 113,000 4,443,000
Federal income tax benefit (205,000) (347,000) (762,000) (93,000)
---------- ------------ ----------- -----------
Income (loss) before equity in
undistributed earnings of
subsidiaries (385,000) 235,000 875,000 4,536,000
Equity in undistributed earnings
(loss) of subsidiaries (196,000) (2,143,000) 1,577,000 (2,348,000)
---------- ----------- ---------- -----------
Net income (loss) $ (581,000) $(1,908,000) $2,452,000 $2,188,000
========== =========== ========== ==========
-64-
INDEPENDENT BANKSHARES, INC.
A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 12, 2000, THROUGH DECEMBER 31, 2000,
THE PERIOD FROM JANUARY 1, 2000, THROUGH AUGUST 11, 2000, AND THE
YEARS ENDED DECEMBER 31, 1999 AND 1998
August 12, 2000, January 1, Year Ended December 31,
through 2000, through ------------------------
December 31, August 11,
2000 2000 1999 1998
--------------- -------------- ---------- ------------
Cash flows from operating
activities:
Net income (loss) $ (581,000) $(1,908,000) $ 2,452,000 $ 2,188,000
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Deferred federal income tax expense
0 0 260,000 488,000
Depreciation and amortization 0 0 0 2,000
Equity in undistributed earnings of
subsidiaries 196,000 2,143,000 (1,577,000) 2,348,000
Decrease (increase) in other assets
(188,000) 175,000 (303,000) (398,000)
Increase (decrease) in accrued
interest payable and other
liabilities (306,000) 1,109,000 49,000 76,000
------------ ----------- ----------- ----------
Net cash provided by (used in)
operating activities (879,000) 1,519,000 881,000 4,704,000
------------ ----------- ----------- ----------
Cash flows from investing
activities:
Loans made to employee stock
ownership plan 0 0 0 (95,000)
Proceeds from repayments of loans
made to employee stock ownership
plan 0 0 65,000 54,000
Purchase of subsidiary bank 0 0 0 (19,025,000)
Capital contributions made to
subsidiaries 0 0 0 (402,000)
------------ ---------- ---------- -----------
Net cash provided by (used in )
investing activities 0 0 65,000 (19,468,000)
------------ ---------- ---------- -----------
Cash flows from financing
activities:
Proceeds from notes payable 0 0 0 4,300,000
Repayment of notes payable 0 0 0 (4,350,000)
Proceeds from issuance of
subordinated debentures 0 0 0 13,402,000
Net proceeds from issuance of equity
securities 0 0 0 2,067,000
Payment of cash dividends (700,000) (273,000) (455,000) (431,000)
Purchase of treasury stock 0 0 (669,000) 0
------------ ---------- ---------- ------------
Net cash provided by (used in) (700,000) (273,000) (1,124,000) 14,988,000
financing activities ------------ ---------- ---------- ------------
Net increase (decrease) in cash and
cash equivalents (1,579,000) 1,246,000 (178,000) 224,000
Cash and cash equivalents at
beginning of period 1,618,000 372,000 550,000 326,000
------------ ----------- ---------- ------------
Cash and cash equivalents at end of
period $ 39,000 $ 1,618,000 $ 372,000 $ 550,000
============ =========== ========== ============
-65-
NOTE 20: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the period from
August 12, 2000, through December 31, 2000, the period from
January 1, 2000, through August 11, 2000, and the years ended
December 31, 1999 and 1998, is as follows:
August 12, January 1,
2000, 2000,
through through Year Ended December 31,
December 31, August 11, --------------------------
2000 2000 1999 1998
------------ ----------- ----------- ------------
Cash paid during the period for:
Interest $5,916,000 $6,256,000 $9,987,000 $ 9,368,000
Federal income taxes 1,629,000 800,000 1,000,000 630,000
Noncash investing activities:
Additions to other real estate and
other repossessed assets during
the period through foreclosures $ 385,000 $ 317,000 $ 857,000 $ 1,433,000
Sales of other real estate and
other repossessed assets financed
with loans 0 0 0 167,000
Increase (decrease) in unrealized
gain (loss) on available-for-sale
securities, net of tax $1,445,000 $ 150,000 $ (504,000) $ 130,000
Details of acquisition/merger:
Cash paid in acquisition $ 0 $ 0 $ 0 $(19,025,000)
Cash and cash equivalents held by
companies acquired at dates of
acquisition/merger 9,344,000 0 0 8,892,000
---------- ---------- ---------- ------------
Net cash received (paid) in
merger/acquisition $9,344,000 $ 0 $ 0 $(10,133,000)
========== ========== ========== ============
NOTE 21: SUBSEQUENT EVENT (UNAUDITED)
On March 9, 2001, the Bank was merged with and into State
National Bank of West Texas, a national banking association (the
"Lubbock Bank") and an indirect wholly owned subsidiary of State
National. The Lubbock Bank continued as the surviving entity in
the merger. Immediately after the merger, State National, the
indirect owner of all of the common stock of the Company, caused
to be contributed to the Company and the Company, in turn,
contributed to Independent Financial, all of the capital stock of
the Lubbock Bank. The result of the transaction was that the
Bank was merged into the Lubbock Bank, which became an indirect
wholly owned subsidiary of the Company. There was no merger
consideration paid as, prior to the transactions, the Bank and
the Lubbock Bank were both direct or indirect subsidiaries of
State National.
The Lubbock Bank is a community bank that offers interest
and non-interest-bearing depository accounts, and makes consumer
and commercial loans. At March 9, 2001, the Lubbock Bank had
total assets of $217,205,000, total deposits of $196,809,000,
total loans, net of unearned income, of $116,523,000 and
stockholder's equity of $19,086,000. At March 9, 2001, the Bank
had total assets of $479,870,000, total deposits of $398,345,000,
total loans, net of unearned income, of $231,458,000 and
stockholder's equity of $74,756,000.
-66-
QUARTERLY DATA (UNAUDITED)
The following table presents the unaudited results of
operations for the past two years by quarter. See "Note 12:
Earnings Per Share" in the Company's Consolidated Financial
Statements.
2000
July 1 August 12
First Second through through Fourth
Quarter Quarter August 11 September 30 Quarter
------- ------ ---------- ----------- --------
(In thousands, except per share amounts)
Interest income $6,150 $6,241 $ 2,882 $ 3,493 $9,823
Interest expense 2,527 2,608 1,220 1,502 4,510
Net interest income 3,623 3,633 1,662 1,991 5,313
Provision for loan losses 110 400 1,150 408 170
Income (loss) before federal income
taxes 746 479 (3,034) (75) (396)
Net income (loss) 493 310 (2,711) (2) (579)
Basic earnings (loss) per common
share available to common
stockholders $ 0.22 $ 0.14 $ (1.20) N/A N/A
Diluted earnings (loss) per common
share available to common
stockholders 0.22 0.14 (1.20) N/A N/A
1999
-------------------------------------------------
First Third Fourth
Quarter Second Quarter Quarter Quarter
----------- -------------- --------- --------
(In thousands, except per share amounts)
Interest income $ 6,056 $ 5,986 $ 6,042 $ 6,122
Interest expense 2,543 2,434 2,412 2,509
Net interest income 3,513 3,552 3,630 3,613
Provision for loan losses 105 65 150 125
Income before federal income taxes 925 964 907 830
Net income 629 628 631 564
Basic earnings per common share
available to common stockholders $ 0.28 $ 0.29 $ 0.29 $ 0.26
Diluted earnings per common share
available to common stockholders 0.27 0.28 0.28 0.25
_________________
(1) Earnings per share and dividends per share were calculated
for the period from January 1 through August 11, 2000, the
date of the Acquisition.
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.
-67-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective September 27, 2000, the Company dismissed
PricewaterhouseCoopers LLP ("PWC") as its independent accountant
and engaged the firm of Ernst & Young LLP ("EY") as the Company's
independent accountant to audit the Company's financial
statements for the year ending December 31, 2000. The Company's
Board of Directors recommended and approved the change in the
Company's certifying accountants. PWC audited the Company's
financial statements for its two most recent fiscal years ended
December 31, 1998 and 1999.
The change in certifying accountants was made by the Company
following the acquisition of control of the Company by State
National, effective August 11, 2000.
PWC's reports with respect to the Company's financial
statements for the years ended December 31, 1999 and 1998, did
not contain an adverse opinion or a disclaimer of opinion, and
were not qualified or modified as to uncertainty, audit scope or
accounting principles. During the years ended December 31, 1999
and 1998, and from January 1, 2000, through September 27, 2000,
there were no disagreements with PWC on any matters of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure which, if not resolved to the
satisfaction of PWC, would have caused it to make reference to
the subject matter of the disagreement in any of its reports on
the Company's financial statements, except as described in the
following paragraph.
As previously reported on the Company's Current Report on
Form 8-K dated October 4, 2000, in connection with the
preparation and original filing of the Company's Form 10-Q for
the quarter ended March 31, 2000 ("First Quarter Form 10-Q"), the
Company capitalized costs related to its then pending merger with
State National. PWC maintained that such costs should be expensed
and discussed this disagreement with the audit committee of the
Company's board of directors prior to the filing of the First
Quarter Form 10-Q. In August 2000, the Company prepared and filed
an amendment to the First Quarter Form 10-Q to restate its
financial statements for the first quarter. In the restatement,
costs related to the pending merger of the Company with State
National that had been capitalized through March 31, 2000
($209,000), were expensed. In preparing and filing its Form 10-Q
for the quarter ended June 30, 2000, the Company appropriately
expensed the merger costs incurred in the second quarter. The
Company has authorized PWC to respond fully to the inquiries of
EY concerning the subject matter of the disagreement.
-68-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Nominees
The Bylaws of the Company provide that the Board of
Directors consists of not fewer than seven nor more than 30
members (exclusive of advisory directors) and that the number of
directors, within such limits, is to be determined by resolution
of the Board of Directors at any meeting. The Board of Directors
has set the Board at nine members (exclusive of advisory
directors). Directors serve for one year terms.
The tables below set forth for each director:
* the name,
* age and the principal occupation of each director;
* the directorships of public companies, if any, held by each
director; and
* the year he first became a director of the Company.
Year
First
Became a
Director
of the Principal Occupation
Name and Age Company During the Last Five Years
- ------------------------- -------- --------------------------
Randal N. Crosswhite (47) 1995 Senior Vice President,
Chief Financial Officer
and Director of the
Company; Director of the
Bank
Bryan W. Stephenson (51) 1989 President, Chief Executive
Officer and Director of
the Company; Chairman of
the Board of the Bank
Tom C. Nichols (53) 2000 Chairman of the Board and
Chief Executive Officer of
State National and the
Lubbock Bank
Don E. Cosby (46) 2000 Executive Vice President,
Chief Financial Officer
and Director of State
National and the Lubbock
Bank
Rick J. Calhoon (47) 2000 Partner, Pruet Companies
(oil and gas)
James A. Cardwell (69) 2000 Chairman and Chief
Executive Officer, Petro
Stopping Centers, L.P.
(truck stops)
Gary J. Fletcher (54) 2000 Rancher, Salt Fork Ranch
David D. Kirk (54) 2000 Executive Vice President,
Chief Credit Officer and
Director of State National
and the Lubbock Bank
Ronald Simpson (54) 2000 President and Director of
UB&T
-69-
Resignation and Appointment of Directors and Officers
Effective August 16, 2000, Mr. John L. Beckham, Mr. Lee
Caldwell, Mrs. Wm. R. (Amber) Cree, Ms. Nancy E. Jones, Mr.
Marshal M. Kellar, Mr. Tommy McAlister, Mr. Scott L. Taliaferro,
James D. Webster, M.D. and Mr. C.G. Whitten resigned from the
Company's Board of Directors, Bryan W. Stephenson and Randal N.
Crosswhite continued as Company directors and officers and Carl
E. Campbell, Tom C. Darden, James G. Fitzhugh and Michael D.
Jarrett continued as officers of the Company (collectively all of
the foregoing, the "Pre-Change of Control Directors and
Officers"), and Tom C. Nichols, Don E. Cosby, Ronald Simpson,
David Kirk, Rick J. Calhoon, James A. Cardwell and Gary J.
Fletcher were appointed as new directors of the Company's Board
of Directors and Tom C. Nichols and Don E. Cosby were elected as
officers of the Company (collectively all of the foregoing, the
"New Post-Change of Control Directors and Officers").
Meetings and Committees of the Board of Directors
The Board of Directors conducts its business through
meetings of the Board of Directors and through its committees.
In accordance with the Bylaws of the Company, the Board of
Directors had established an Executive Committee, an Audit
Committee and a Compensation Committee that performs the function
of the Employee Stock Ownership 401(k) Plan Committee, among
other things. After the Acquisition, only the Audit Committee of
the Board of Directors continued. During the period from January
1, 2000, to August 16, 2000, the Board of Directors held eight
regular meetings and three special meetings; the Executive
Committee held four meetings; the Audit Committee held one
meeting and the Compensation Committee did not meet. Each
director attended at least 75% of the total number of meetings of
the Board of Directors and the committees on which he or she
served except former directors Lee Caldwell and Nancy E. Jones
who each attended seven of the regular and special meetings of
the Board of Directors.
Executive Committee. The Executive Committee exercised all
the powers of the Board of Directors in the management of the
business and affairs of the Company, except for matters related
to the composition of the Board of Directors, changes in the
Bylaws and certain other significant corporate matters. Bryan W.
Stephenson and former directors John L. Beckham, Scott L.
Taliaferro and C.G. Whitten were the members of the Executive
Committee during the period from January 1, 2000, through August
16, 2000.
Audit Committee. The Audit Committee recommends to the
Board of Directors the appointment and discharge of the Company's
independent auditors; reviews the completed audit with the
independent auditors regarding the conduct of the audit,
accounting adjustments, recommendations for improving internal
controls and any other significant findings during the audit;
meets periodically with management; monitors accounting and
financial controls; and initiates and supervises special
investigations. Former directors Lee Caldwell, Mrs. Wm. R.
(Amber) Cree and Tommy McAlister were the members of the Audit
Committee during the period from January 1, 2000, through
August 16, 2000. Rick J. Calhoon, James A. Cardwell and Gary J.
Fletcher were members of the Audit Committee during the period
from September 15, 2000 to December 31, 2000.
Compensation Committee. The Compensation Committee
administered management incentive compensation plans, established
the compensation of executive officers, determined major
compensation policies, and administered the Stock Ownership Plan.
Former directors Nancy E. Jones, Scott L. Taliaferro and James D.
Webster were the members of the Compensation Committee during the
period from January 1, 2000, to August 16, 2000.
-70-
The table below sets forth at the date of this report the
name, age, current positions with the Company, principal
occupation during the last five years of each principal executive
officer of the Company and the year he first became an executive
officer of the Company:
Executive
Officer
Current Position of the Principal
with the Company Company Occupation During
Name and Age or the Bank Since Last Five Years
- --------------- --------------- --------- -----------------
Tom C. Nichols Chairman of the 2000 Chairman of the
(53) Board of the Board and Chief
Company and Executive Officer
Chairman of the of State National
Board and Chief and the Lubbock
Executive Bank
Officer of the
Bank
Bryan W. President, Chief 1985 President, Chief
Stephenson (51) Executive Executive Officer
Officer and and Director of
Director of the the Company; Chief
Company and Vice Executive Officer
Chairman of the and Director of
Board and the Bank
Director of the
Bank
Don E. Cosby Executive Vice 2000 Executive Vice
(46) President and President, Chief
Director of the Financial Officer
Company and and Director of
Director of the State National and
Bank the Lubbock Bank
Randal N. Chief Financial 1985 Senior Vice
Crosswhite (47) Officer and President, Chief
Director of the Financial Officer
Company and and Director of
Executive Vice the Company;
President, Chief Director of the
Financial Bank
Officer and
Director of the
Bank
Ronald Simpson Director of the 2000 President and
(54) Company; Director of UB&T
President and
Director of the
Bank
Term of Office
Executive officers of the Company are elected by the Board
of Directors at its annual meeting and hold office until the next
annual meeting of the Board of Directors or until their
respective successors are duly elected and have qualified. The
officers of the Bank are elected by the board of directors of the
Bank at its annual meeting and hold office until the next annual
meeting of such board of directors or until their respective
successors are duly elected and have qualified.
Compliance with Section 16(a) of the Securities Exchange Act of
1934
Officers, directors and beneficial owners of more than ten
percent of the Common Stock must file initial reports of
ownership and reports of changes in ownership with the Securities
and Exchange Commission and American Stock Exchange pursuant to
Section 16(a).
In August 2000, State National acquired 100% of the common
stock of the Company in a cash merger and all of the Pre-Change
of Control Directors and Officers did not timely report the sale
of their respective holdings of Company common stock on Form 4 in
September 2000. The Pre-Change of Control Directors and Officers
-71-
reported the sale of their respective holdings in the cash merger
on Form 5 in February 2001. None of such Pre-Change of Control
Directors or Officers had any transaction in the Company's
securities in the six month period prior to the date of the cash
merger.
In addition, the new Post-Change of Control Directors and
Officers did not timely report their holdings of the Company
securities upon their appointment to positions with the Company
on Form 3 in October 2000. The new Post-Change of Control
Directors and Officers reported such holdings in February 2001 on
Form 5. Because the Company is wholly owned by State National,
none of these individuals beneficially has owned any securities
of the Company at any time since their respective appointments.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding
compensation paid during each of the Company's last three fiscal
years to the Company's Chief Executive Officer and other
executive officers of the Company (including those who are
employed by the Company's direct and indirect subsidiaries) whose
cash compensation exceeded $100,000 during the fiscal year ended
December 31, 2000 (the "named executive officers").
Long-Term
Compensation
Awards
-----------
Annual Compensation Other Annual Securities
Name and Principal Fiscal --------------------- Compensation Underlying
Position Year Salary Bonus ($) ($)(1) Options
------------------------ --------- --------- ---------- ----------- ------------
Bryan W. Stephenson 2000 $165,000 $31,700 $3,200 $0
President,
Chief Executive 1999 156,000 20,000 4,100 0
Officer and Director of 1998 150,000 20,000 4,400 0
the Company
Carl E. Campbell (2) (3) 2000 $124,000 $ 0 $ 400 $0
Azle Branch President and 1999 121,000 0 0 0
Director of the Bank 1998 33,300 0 0 0
Michael D. Jarrett (3) 2000 $111,000 $11,900 $3,200 $0
Odessa Branch President 1999 105,500 7,500 4,100 0
and Director of the Bank 1998 101,500 7,500 3,600 0
Randal N. Crosswhite 2000 $107,000 $ 7,900 $3,200 $0
Senior Vice President, 1999 100,000 5,000 4,100 0
Chief Financial Officer 1998 96,000 5,000 4,200 0
and Director of the
Company
______________
(1) Constitutes directors fees paid by the Bank and its
predecessors.
(2) Mr. Campbell was president of Azle State Bank, Azle, Texas,
prior to September 22, 1998, the date of acquisition of such
bank.
(3) Prior to the Acquisition, Messrs. Campbell and Jarrett were
deemed executive officers of the Company by virtue of their
positions with the Bank.
Stock Option Grants/Exercises in Fiscal 2000
No stock options were granted to, or exercised by, the Chief
Executive Officer or the named executive officers during fiscal
2000. The Company has never granted stock appreciation rights.
-72-
Employee Retention Agreements
In September 1999, the Company entered into employee
retention agreements with its key employees and selected
executive officers (individually, the "Key Employee," or
collectively, the "Key Employees") to provide additional
incentives to such Key Employees to continue their employment
with the Company in the event that the Company experienced a
change of control, i.e., merger, consolidation, or sale of the
assets or stock of the Company. Each employee retention
agreement provides that the Key Employee would receive a cash
lump sum payment equal to one or two times the Key Employee's
annual compensation, including bonus compensation. This amount is
payable after one year from the change in control unless such Key
Employee is terminated sooner for cause or resigns or severs his
employment with the Company for any reason other than
constructive termination. In the event the Key Employee is
terminated without cause or the Key Employee is constructively
terminated because the Key Employee's compensation is diminished,
his job title is changed to a position of lesser importance, or
his responsibilities are materially reduced, the retention
benefit must be paid by the Company within thirty (30) days of
such termination. In the event of the Key Employee's death or
disability, the pro rated portion of the retention benefit must
be paid by the Company within thirty (30) days of such death or
disability.
The August 2000 acquisition of the Company by State National
triggered the provisions of certain of these retention
agreements. Pursuant to the terms of the Key Employee retention
agreements, the following named executive officers are entitled
to payment of the specific retention benefit:
Aggregate Received to
Payment Date
----------- -----------
Bryan W. Stephenson $352,000 $176,000
Randal N. Crosswhite 210,000 105,000
Michael D. Jarrett 113,000 113,000
James G. Fitzhugh 92,000 92,000
To date, Bryan W. Stephenson and Randal N. Crosswhite, who
are still executive officers and directors of the Company, have
received one-half of their retention benefits under their
respective retention agreements. The remaining one-half owed to
Messrs. Stephenson and Crosswhite will be paid on or before
August 11, 2001.
Director Compensation
During the period from January 1, 2000, through August 16,
2000, each non-employee director and advisory director was paid
$250 for each regular directors' meeting of the Company attended
and $100 for each meeting of the Executive Committee and Audit
Committee attended. No director fees have been paid subsequent
to the Acquisition.
-73-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Management
All of the common stock of the Company is owned by State
National. Accordingly, none of the directors or executive
officers of the Company has owned any shares of Common Stock
since the Company's acquisition of State National was completed
on August 11, 2000. In addition, none of the directors or
executive officers of the Company own any derivative securities
with respect to the Company's common stock.
Security Ownership of Certain Beneficial Owners
The following entity is known by the Company to own
beneficially more than five percent of the Company's Common Stock
on February 28, 2001.
Percent
Number of of Class
Name and Address Shares(1) (2)
------------------------------ --------- --------
State National Bancshares of 2,273,647 100%
Delaware, Inc., a wholly owned
subsidiary of State National
Bancshares, Inc.
1617 Broadway
Lubbock, Texas 79401
_____________
(1) Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 under the
Securities Exchange Act of 1934, as amended.
(2) The percentage of Common Stock indicated is based on
2,273,647 shares of Common Stock outstanding on February 28,
2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management
Loan Transactions. The Bank had, during the period from
January 1, 2000, to February 28, 2001, and expects to have in the
future, loan transactions with directors of the Company and the
Bank and their respective associates, which includes any
immediate family member or any corporation or firm of which such
person is an executive officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of
equity securities or any trusts of which such person serves as
trustee or in which he or she has a substantial beneficial
interest. These loan transactions have been made in the ordinary
course of the Bank's business and have been and will continue to
be on substantially the same terms, including interest rates,
collateral and repayment, as those prevailing at the time for
comparable transactions with unaffiliated persons and did not
involve more than the normal risk of collectibility or present
other unfavorable features. All loans made to directors and
nominees for director of the Company and their respective
associates are believed to be in compliance with the Financial
Institutions Regulatory and Interest Rate Control Act of 1978.
UB&T. On November 9, 2000, State National, the owner of all
the common stock of the Company, contributed to the Company, and
the Company, in turn, contributed to Independent Financial, all
of the capital stock of UB&T. After the contribution, UB&T was
then merged with and into First State. In addition, immediately
after the merger, the name of the combined bank was changed to
State National Bank of West Texas, Abilene, Texas. There was no
merger consideration paid because, prior to the transactions, the
Company and UB&T were both direct or indirect subsidiaries of
State National. See "Item 1. Business-Reorganizations."
-74-
At the time of this Merger, there were parent-subsidiary
relationships among State National, the Company, Independent
Financial, the Bank and UB&T. Further, there were common
directors and officers among the above named entities. The
common directors and officers were Rick Calhoon (Director of
State National and the Company), Don Cosby (Director of State
National, the Company, Independent Financial, the Bank and UB&T),
Jack Cardwell (Director of State National and the Company),
Randal Crosswhite (Director of the Company and the Bank and Chief
Financial Officer of the Company), Gary Fletcher (Director of
State National and the Company), David Kirk (Director of State
National, the Company, the Bank and UB&T), Tom Nichols (Chairman
of the Board and Chief Executive Officer of State National, the
Company, the Bank and UB&T), Ronald Simpson (Director and
President of UB&T and Director of the Company) and Bryan
Stephenson (Director of the Company and the Bank and President of
the Company).
Lubbock Bank. On March 9, 2001, the Bank was merged with and
into the Lubbock Bank. The Lubbock Bank continued as the
surviving entity in the merger. Immediately after the merger,
State National - Delaware and the owner of all of the common
stock of the Company contributed to the Company and the Company,
in turn, contributed to Independent Financial, all of the capital
stock of the Lubbock Bank. The result of the transaction was
that the Bank was merged into the Lubbock Bank, which became an
indirect wholly owned subsidiary of the Company. There was no
merger consideration paid as, prior to the transactions, the Bank
and the Lubbock Bank were both direct or indirect subsidiaries of
State National. See "Item 1. Business-Reorganizations."
At the time of this merger, there were parent-subsidiary
relationships among State National, State National - Delaware,
the Company, Independent Financial, the Bank and the Lubbock
Bank. Further, there were common directors and officers among
the above-named entities. The common directors and officers were
Rick Calhoon (Director of State National and the Company), Jack
Cardwell (Director of State National and the Company), Don Cosby
(Director of State National, State National - Delaware, the
Company, Independent Financial, the Bank and the Lubbock Bank;
Executive Vice President and Chief Financial Officer of State
National; President of State National - Delaware; Executive Vice
President of the Company; and President of Independent
Financial), Randal Crosswhite (Director of the Company and the
Bank, Chief Financial Officer and Secretary of the Company; and
Executive Vice President and Chief Financial Officer of the
Bank), Gary Fletcher (Director of State National, the Company and
the Lubbock Bank), David Kirk (Director of State National, the
Company, the Bank and the Lubbock Bank), Tom Nichols (Chairman of
the Board and Chief Executive Officer of State National, the Bank
and the Lubbock Bank and Chairman of the Board of the Company),
Ronald Simpson (Director of the Company and Director and
President of the Bank) and Bryan Stephenson (Director and
President and Chief Executive Officer of the Company and Director
and Vice Chairman the Bank).
-75-
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 are included in PART II of this report:
Page
Reference
to Annual
Report on
Item Form 10-K
------------------------------------------- -----------
Report of Ernst & Young, LLP, Independent
Auditors 43
Report of PricewaterhouseCoopers LLP,
Independent Accountants 44
Consolidated Balance Sheets as of December
31, 2000 and 1999 45
Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss) for the period
from August 12, 2000, through December 31,
2000, the period from January 1, 2000,
through August 11, 2000, and the years
ended December 31, 1999 and 1998 46
Consolidated Statements of Changes in
Stockholder's Equity for the period from
August 12, 2000, through December 31, 2000,
the period from January 1, 2000, through
August 11, 2000, and the years ended
December 31, 1999 and 1998
47
Consolidated Statements of Cash Flows for
the period from August 12, 2000, through
December 31, 2000, the period from January
1, 2000, through August 11, 2000, and the
years ended December 31, 1999 and 1998 48
Notes to Consolidated Financial Statements 49
Quarterly Data (unaudited) 67
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.
-76-
No. Description
--- -----------
3.1 Restated Articles of Incorporation of Independent
Bankshares, Inc. (filed herewith).
3.2 Articles of Amendment to the Articles of
Incorporation of Independent Bankshares, Inc.
(filed herewith).
3.3 Restated Bylaws of Independent Bankshares, Inc.,
as amended (filed herewith).
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 Employee Retention Agreement. (Exhibit
10.1 to the Company's Quarterly Report on Form 10-
Q dated September 30, 1999).
10.2 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 10.4 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1999).
10.4 Agreement and Plan of Reorganization, dated as of
March 1, 2000, by and among State National
Bancshares, Inc. and Independent Bankshares, Inc.
(Exhibit 2.1 to the Company's Current Report on
Form 8-K dated March 8, 2000).
10.5 Agreement and Plan of Merger by and among United
Bank & Trust, Abilene, Texas and First State Bank,
N.A., Abilene, Texas, dated October 24, 2000
(Exhibit 2.1 to the Company's Current Report on
Form 8-K dated November 28, 2000).
10.6 Agreement and Plan of Merger by and between State
National Bank of West Texas and State National
Bank of West Texas, Abilene, Texas, dated February
21, 2001; but effective as of March 9, 2001
(Exhibit 2.1 to the Company's Current Report on
Form 8-K dated March 23, 2001).
21.1 Subsidiaries of Independent Bankshares, Inc.
(filed herewith).
(b) Current Reports on Form 8-K.
Current Report on Form 8-K dated October 4, 2000,
reporting the change in the Company's independent
accountants.
Current Report on Form 8-K dated November 28, 2000
reporting the merger of United Bank & Trust, and First
State Bank, N.A.
Current Report on Form 8-K/A dated January 29, 2001,
amending Current Report on Form 8-K dated November 28,
2000 to provide audited and pro forma Financial
Statements of United Bank & Trust, Abilene, Texas.
Current Report on Form 8-K dated March 23, 2001
reporting the merger by and between State National Bank
of West Texas, Abilene, Texas and State National Bank
of West Texas.
-77-
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, Chief Executive
Officer and Director
Date: April 2, 2001
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/ Tom C. Nichols Chairman of the April 2, 2001
----------------------- Board and
Tom C. Nichols Director
/s/ Bryan W Stephenson President, Chief April 2, 2001
----------------------- Executive
Bryan W. Stephenson Officer and
Director
/s/ Don E. Cosby Executive Vice April 2, 2001
------------------------ President and
Don E. Cosby Director
/s/ Randal N. Crosswhite Chief Financial April 2, 2001
------------------------ Officer and
Randal N. Crosswhite Director
/s/ Rick J. Calhoon Director April 2, 2001
- --------------------------
Rick J. Calhoon
/s/ James A. Cardwell Director April 2, 2001
- -------------------------
James A. Cardwell
/s/ Gary J. Fletcher Director April 2, 2001
- --------------------------
Gary J. Fletcher
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/s/ David D. Kirk Director April 2, 2001
- --------------------------
David D. Kirk
/s/ Ronald Simpson Director April 2, 2001
-----------------------
Ronald Simpson
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INDEX TO EXHIBITS
Exhibit
Number Description
- ---------- ----------------------------------------------------
3.1 Restated Articles of Incorporation of Independent
Bankshares, Inc. (filed herewith).
3.2 Articles of Amendment to the Articles of
Incorporation of Independent Bankshares, Inc. (filed
herewith).
3.3 Restated Bylaws of Independent Bankshares, Inc., as
amended (filed herewith).
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 Employee Retention Agreement (Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q dated
September 30, 1999).
10.2 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 10.4 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1999).
10.4 Agreement and Plan of Reorganization, dated as of
March 1, 2000, by and among State National
Bancshares, Inc. and Independent Bankshares, Inc.
(Exhibit 2.1 to the Company's Current Report on Form
8-K dated March 8, 2000)
10.5 Agreement and Plan of Merger by and among United
Bank & Trust, Abilene, Texas and First State Bank,
N.A., Abilene, Texas, dated October 24, 2000
(Exhibit 2.1 to the Company's Current Report on Form
8-K dated November 28, 2000).
10.6 Agreement and Plan of Merger by and between State
National Bank of West Texas and State National Bank
of West Texas, Abilene, Texas, dated February 21,
2001; but effective as of March 9, 2001 (Exhibit 2.1
to the Company's Current Report on Form 8-K dated
March 23, 2001).
21.1 Subsidiaries of Independent Bankshares, Inc. (filed
herewith).
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