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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-10196
INDEPENDENT BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-1717279
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
547 Chestnut Street
Abilene, Texas 79602
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (915) 677-5550
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, par value $0.25 per share
Securities Registered Pursuant to Section 12(g) of the Act:
None
______________________________
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the Registrant, based on the market value of such
stock on March 17, 1997, was $18,982,000. For purposes of this
computation, all executive officers, directors and 5% beneficial
owners of the Registrant are deemed to be affiliates. Such
determination should not be deemed an admission that such executive
officers, directors and beneficial owners are, in fact, affiliates
of the Registrant. At March 17, 1997, 1,420,894 shares of the
Registrant's common stock, $0.25 par value per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
into the indicated part or parts of this report:
(1) Annual Report to Shareholders for the fiscal year ended
December 31, 1996, furnished to the Commission pursuant to
Rule 14a-3(b) - Part II and Part IV.
(2) Definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A in connection with the Annual
Meeting of Shareholders to be held April 29, 1997 - Part III.
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PART I
OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND
ITEMS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS OF INDEPENDENT BANKSHARES, INC. AND ITS SUBSIDIARIES MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. CERTAIN FACTORS THAT COULD CONTRIBUTE TO SUCH
DIFFERENCES ARE DISCUSSED WITH THE FORWARD-LOOKING STATEMENTS
THROUGHOUT THIS REPORT AND ARE SUMMARIZED IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE."
ITEM 1. BUSINESS
General
- -------
Independent Bankshares, Inc., a Texas corporation (the
"Company"), is a bank holding company headquartered in Abilene,
Texas. The Company indirectly owns through a Delaware subsidiary,
Independent Financial Corp. ("Independent Financial"), 100% of the
stock of First State Bank, National Association, Abilene, Texas
(the "Bank"). The Bank currently operates full-service banking
locations in the West Texas cities of Abilene (2 locations),
Lubbock (acquired in January 1997), Odessa (2 locations), San
Angelo, Stamford and Winters.
In connection with its recent acquisition of Crown Park
Bancshares, Inc. ("Crown Park") and its subsidiary Western National
Bank ("Western National"), the Company merged, on December 30,
1996, its former subsidiary bank, First State Bank, National
Association, Odessa, Texas ("First State, N.A., Odessa"), with and
into the Bank in order to recognize certain cost savings and to
utilize the banks' capital more effectively than on a stand alone
basis.
The Company's primary activities are to assist the Bank in the
management and coordination of its financial resources and to
provide capital, business development, long range planning and
public relations for the Bank. The Bank operates under the
day-to-day management of its own officers and board of directors
and formulates its own policies with respect to banking matters.
At December 31, 1996, the Company had, on a consolidated
basis, total assets of $205,968,000, total deposits of
$189,575,000, total loans, net of unearned income, of $92,017,000
and total stockholders' equity of $14,937,000. The Company's net
income has grown from $224,000 in 1991 to $1,422,000 in 1996.
Additionally, since 1991, the Company's total loans have grown at
a 12% average annual rate, resulting from a combination of internal
growth and the Company's acquisition of community banks.
The Company's complete mailing address and telephone number is
547 Chestnut Street, Abilene, Texas 79602, (915) 677-5550.
The Bank
- --------
The Company conducts substantially all of its business through
the Bank and its various branches in West Texas. Each of the
Bank's branches is an established franchise with a significant
presence in its respective service area. The main branch in Abilene
was the third largest of four commercial banks headquartered in
Abilene, Texas, in terms of total deposits at June 30, 1996, the
latest date for which information is available, and was the fifth
largest of ten banks in Abilene in terms of total branch deposits
at the same time. The branches in Stamford and Winters were the
largest bank branches in those cities in terms of total deposits at
June 30, 1996. The Odessa branch was the sixth largest of eight
banks in Odessa in terms of total branch deposits at June 30, 1996.
The branch in San Angelo was the eighth largest of ten banks in
terms of total branch deposits in that city at June 30, 1996. The
branch in Lubbock, acquired in January 1997, was the ninth largest
of twelve banks in terms of total branch deposits in that city at
June 30, 1996. The Bank operates through its branches as a
community bank that focuses on long-term relationships with
customers and provides individualized, quality service. Reflecting
its community banking heritage, the Bank has a stable deposit base
from customers located within its West Texas market area. Its
recent financial performance is characterized by consistent core
earnings, an increasingly diversified loan portfolio and strong
asset quality. The deposits of the Bank are insured by the Federal
Deposit Insurance Corporation (the "FDIC") to the maximum extent
provided by law.
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At December 31, 1996, the Bank had total assets of
$204,625,000, total deposits of $189,904,000, total loans, net of
unearned income of $92,017,000, and total stockholders' equity of
$13,487,000.
The principal services provided by the Bank are as follows:
Commercial Services. The Bank provides a full range of
banking services for its commercial customers. Commercial lending
activities include short-term and medium-term loans, revolving
credit arrangements, inventory and accounts receivable financing,
equipment financing and interim and permanent real estate lending.
Other services include cash management programs and federal tax
depository and night depository services.
Consumer Services. The Bank also provides a wide range of
consumer banking services, including checking, savings and money
market accounts, savings programs and installment and personal
loans. The Bank makes automobile and other installment loans
directly to customers, as well as indirectly through automobile
dealers. The Bank makes home improvement and real estate loans and
provide safe deposit services. As a result of sharing arrangements
with the Pulse automated teller machine system network, the Bank
provides 24-hour routine banking services through automated teller
machines ("ATMs"). The Pulse network provides ATM accessibility
throughout the United States.
Trust Services. The Bank provides trust and agency services
to individuals, partnerships and corporations from its offices in
Abilene, Lubbock and Odessa. The trust division also provides
investment management, administration and advisory services for
agency and trust accounts, and acts as trustee for pension and
profit sharing plans.
Acquisition of Subsidiary Banks
- -------------------------------
Crown Park and Western National. On January 28, 1997, the
Company consummated the acquisition of Crown Park and its wholly
owned subsidiary bank, Western National, for an aggregate cash
purchase price of $7,510,000. The purchase price was initially
$7,425,000, but was adjusted to increase by the amount of interest
earned on the purchase price from December 1, 1996, through January
27, 1997, at a rate equal to the 26-week United States Treasury
Bill rate plus 2% (i.e., $85,000). The aggregate purchase price
included $143,000 that was paid to Crown Park's financial advisor.
On the closing date, Crown Park was merged with and into a wholly
owned subsidiary of the Company and Western National was merged
with and into the Bank. To obtain funding for the acquisition,
simultaneously with the closing, the Company consummated an
underwritten public offering of an aggregate of 316,250 shares of
its common stock at a price of $14.25 per share (the "Offering").
This included 41,250 shares covered by the Underwriter's over-
allotment option. The Company borrowed $800,000 from a financial
institution in Amarillo, Texas (the "Amarillo Bank") to finance the
remaining cost of acquiring Crown Park. The $800,000 of borrowings
was later reduced to $400,000 with the proceeds of the sale of the
over-allotment shares. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources." This acquisition will be
accounted for under the purchase method of accounting. A total of
$2,486,000 of goodwill was recorded in 1997 as a result of this
transaction.
Western National is a community bank that offers interest and
noninterest-bearing depository accounts, and makes consumer and
commercial loans. At the date of acquisition, on a consolidated
basis, Crown Park had total assets of $60,420,000, total loans, net
of unearned income, of $41,688,000, total deposits of $53,618,000
and stockholders' equity of $4,238,000.
The Company intends to increase the profitability of Western
National by expanding its loan portfolio and deposit base. The
Company believes enhanced marketing efforts, expanded loan and
deposit products and increased employee training and personal
attention to customers will promote this growth. The Company also
believes that savings can be realized in the area of noninterest
expenses through consolidation of operations. In addition to the
immediate increase in asset size and the potential for improved
future profitability, the Crown Park acquisition will allow the
Company to expand its market area into what the Company believes
are desirable banking locations. This expansion will increase the
geographic diversity of the Company's loan portfolio, which is
expected to decrease the Company's overall lending risks.
-3-
San Angelo Branch. On May 27, 1996, First State, N.A.,
Abilene assumed the deposits and certain other liabilities and
purchased the loans and certain other assets of the San Angelo,
Texas branch of Coastal Banc ssb ("Coastal Banc - San Angelo") in
a cash transaction. On the date of the acquisition, Coastal Banc -
San Angelo had approximately $14,895,000 in total deposits and
$155,000 in total loans. The acquisition was accounted for under
the purchase method of accounting, and the assets and liabilities
of this branch were recorded at their estimated fair value. A
total of $743,000 of goodwill was recorded as a result of the
acquisition. Coastal Banc - San Angelo became a branch of the
Bank.
Peoples National. The Bank completed the acquisition of
Peoples National Bank, Winters, Texas ("Peoples National")
effective January 1, 1996, and Peoples National became part of the
Winters branch of the Bank. At December 31, 1995, Peoples National
had total assets of $5,505,000, total loans, net of unearned
income, of $2,767,000, total deposits of $4,958,000 and
stockholders' equity of $525,000. These amounts are not included
in the Consolidated Balance Sheet for the Company at December 31,
1995. The acquisition was accounted for under the purchase method
of accounting, and the assets and liabilities of Peoples National
were recorded at their estimated fair value. A total of $260,000
of goodwill was recorded as a result of this acquisition.
Other Subsidiaries
At the present time, the Company does not have any
subsidiaries other than Independent Financial and the Bank.
Business Strategy
The Company's strategic plan contemplates an increase in
profitability and shareholder value through the building of a
valuable West Texas banking franchise consisting of low cost core
deposits as a funding base to support local consumer and commercial
lending programs. The Company's acquisition activities have been
designed to augment this franchise by increasing market share and
expanding into contiguous markets demographically similar to its
current service areas. Following the recent acquisition of Crown
Park and its subsidiary Western National, the Company has locations
in four of the fastest growing consumer markets in West Texas.
Management believes that it can increase the profitability of the
Company through increased operating efficiencies, an increase in
the loan to deposit ratio and cross-selling a more expansive
product line to newly acquired customers.
The Company's operating strategy is to provide customers with
the business sophistication and breadth of products of a regional
financial services company, while retaining the special attention
to personal service and the local appeal of a community bank.
Decentralized decision making authority vested in the presidents
and senior officers of the Abilene, Lubbock and Odessa branches
allows for rapid response time and flexibility in dealing with
customer requests and credit needs. The participation of the
Company's directors, officers and employees in area civic and
service organizations demonstrates the Company's continuing
commitment to the communities it serves. Management believes that
these qualities distinguish the Company from its competitors and
will allow the Company to compete successfully in its market
against larger regional and out-of-state institutions.
Supervision and Regulation
References in this report to applicable statutes, regulations
and policies are brief summaries thereof, do not purport to be
complete, and are qualified in their entirety by reference to such
statutes, regulations and policies.
REGULATION AND SUPERVISION
THE COMPANY
General
-------
The Company is a bank holding company registered with, and
subject to regulation by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). Federal law subjects
bank holding companies to particular restrictions on the types of
-4-
activities in which they may engage and to a range of supervisory
requirements and activities, including regulatory enforcement
actions for violations of laws and policies.
Scope of Permissible Activities
-------------------------------
The BHCA prohibits a bank holding company, with certain
limited exceptions, from acquiring direct or indirect ownership or
control of any voting shares of any company that is not a bank or
from engaging in any activities other than those of banking. One
principal exception to these prohibitions allows the acquisition of
interests in companies whose activities are found by the Federal
Reserve Board, by order or regulation, to be so closely related to
banking as to be a proper incident thereto. Some of the activities
that have been determined by regulation to be closely related to
banking are making or servicing loans, performing certain data
processing services, acting as an investment or financial advisor
to certain investment trusts and investment companies and providing
certain securities brokerage services. In approving acquisitions by
the Company of entities engaged in banking-related activities, the
Federal Reserve Board would consider a number of factors, including
the expected benefits to the public, such as greater convenience
and increased competition or gains in efficiency, which would be
weighed against the risk of potential negative effects, such as
undue concentration of resources, decreased or unfair competition,
conflicts of interest or unsound banking practices. The Federal
Reserve Board may also differentiate between activities commenced
DE NOVO and activities commenced through the acquisition of a going
concern. The Company has no current plans to form or acquire any
non-banking subsidiaries.
The Federal Reserve Board has approved applications by bank
holding companies to engage, through nonbank subsidiaries, in
certain securities-related activities (underwriting of municipal
revenue bonds, commercial paper, consumer-receivable-related
securities and certain mortgage-backed securities), provided that
the subsidiaries would not be "principally engaged" in such
activities for purposes of Section 20 of the Glass-Steagall Act. In
very limited situations, holding companies may be able to use such
subsidiaries to underwrite and deal in corporate debt and equity
securities. Bills from time to time have been introduced in both
the U.S. Senate and House of Representatives that would, if
enacted, remove many of the restraints imposed by the
Glass-Steagall Act, although no comprehensive bill has been enacted
to date.
On March 26, 1996 the U.S. Supreme Court ruled that Section 92
of the National Bank Act preempts state insurance laws which
prevent banks from exercising insurance powers granted under those
laws. Section 92 grants national banks located and doing business
in a place with a population not exceeding 5,000 inhabitants the
authority to act as insurance agent for any insurance company
authorized to do business in a state where the bank is located. In
response to this decision, on June 20, 1996, the Texas Department
of Insurance ("TDI") issued its "Interim Procedures for Banks
Selling Insurance" which contain licensing and consumer protection
guidance that apply to banks and savings associations located in
Texas. The TDI has stressed that these are only interim guidelines
intended to be in effect until the Texas Legislature or Congress
resolves some remaining issues which serve as impediments to the
ability of the banks to take full advantage of this activity. In
addition, the Comptroller has issued an advisory letter which
provides guidance to national banks regarding insurance and annuity
sales activities. The Comptroller has subsequently approved
applications by banks to engage in such general insurance agency
activities through operating subsidiaries.
Bank holding companies are not permitted to engage in unsafe
or unsound banking practices. For example, the Federal Reserve
Board's Regulation Y requires a holding company to give the Federal
Reserve Board prior notice of any redemption or repurchase of its
own equity securities, if the consideration to be paid, together
with the consideration paid for any repurchases or redemptions in
the preceding twelve-month period, is equal to 10% or more of the
company's consolidated net worth. The Federal Reserve Board may
oppose the transaction if it would constitute an unsafe or unsound
practice or would violate any law or regulation. Additionally, a
holding company may not impair the financial soundness of a
subsidiary bank by causing it to make funds available to nonbanking
subsidiaries or their customers when such a transaction would not
be prudent. The Federal Reserve Board may exercise several
administrative remedies including cease-and-desist powers over
parent holding companies and nonbanking subsidiaries when the
actions of such companies would constitute a serious threat to the
safety, soundness or stability of a subsidiary bank.
The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA") expanded the Federal Reserve Board's
authority to prohibit activities of bank holding companies and
their nonbanking subsidiaries that
-5-
represent unsafe and unsound banking practices or that constitute
violations of laws or regulations. FIRREA authorizes the
appropriate banking agency to issue cease and desist orders that
may, among other things, require affirmative action to correct any
harm resulting from a violation or practice, including restitution,
reimbursement, indemnification or guarantee against loss. A
financial institution may also be ordered to restrict its growth,
dispose of certain assets or take other appropriate action as
determined by the ordering agency.
FIRREA increased the amount of civil money penalties that the
Federal Reserve Board may assess for certain activities conducted
on a knowing and reckless basis, if those activities cause a
substantial loss to a depository institution. The penalties may
reach as much as $1,000,000 per day. FIRREA also expanded the scope
of individuals and entities or "institution-affiliated parties"
against which such penalties may be assessed. In addition, FIRREA
contains a "cross-guarantee" provision that makes commonly
controlled insured depository institutions liable to the FDIC for
any losses incurred, or reasonably anticipated to be incurred, in
connection with the failure of an affiliated insured depository
institution. The FDIC must present its claim within two years of
incurring such loss and may require either immediate or installment
payments.
Bank holding companies and their affiliates are prohibited
from tying the provision of certain services, such as extensions of
credit, to certain other services offered by a holding company or
its affiliates.
The Company is required to file quarterly and annual reports
with the Federal Reserve Bank of Dallas (the "Federal Reserve
Bank") and such additional information as the Federal Reserve Bank
may require pursuant to the BHCA. The Federal Reserve Bank may
examine a bank holding company or any of its subsidiaries and
charge the examined institution for the cost of such an
examination. The Company is also subject to reporting and
disclosure requirements under state and federal securities laws.
Capital Adequacy Requirements
-----------------------------
The Federal Reserve Board monitors the capital adequacy of
bank holding companies. The Federal Reserve Board has adopted a
system using a combination of risk-based guidelines and leverage
ratios to evaluate the capital adequacy of bank holding companies.
Under the risk-based capital guidelines, each category of assets is
assigned a different risk weight, based generally on the perceived
credit risk of the asset. These risk weights are multiplied by
corresponding asset balances to determine a "risk-weighted" asset
base. Certain off-balance sheet items, which previously were not
expressly considered in capital adequacy computations, are added to
the risk-weighted asset base by converting them to a balance sheet
equivalent and assigning to them the appropriate risk weight. In
addition, the guidelines define the capital components. Total
capital is defined as the sum of "Tier 1" and "Tier 2" capital
elements, with "Tier 2" being limited to 100% of "Tier 1." For bank
holding companies, "Tier 1" capital includes, with certain
restrictions, common stockholders' equity and qualifying perpetual
preferred stock and minority interests in consolidated
subsidiaries, reduced by goodwill and net deferred tax assets in
excess of regulatory capital limits. "Tier 2" capital includes,
with certain limitations, certain other preferred stock, as well as
qualifying debt instruments and all or part of the allowance for
possible loan losses.
The guidelines require a minimum ratio of qualifying total
capital to total risk-weighted assets of 8.0% (of which at least
4.0% is required to be in the form of "Tier 1" capital elements).
At December 31, 1996, the Company's ratios of "Tier 1" and total
capital to risk-weighted assets were 13.85% and 14.64%,
respectively. At such date, both ratios exceeded regulatory
minimums. The pro forma calculation of the Company's ratios of
"Tier 1" and total capital to risk-weighted assets would have been
10.99% and 12.15%, respectively, had the acquisition of Crown Park
occurred at December 31, 1996.
In addition to the risk-based capital guidelines, the Federal
Reserve Board and the FDIC have adopted the use of a leverage ratio
as an additional tool to evaluate the capital adequacy of bank
holding companies and banks. The leverage ratio is defined to be a
company's "Tier 1" capital divided by its adjusted quarterly
average total assets. The leverage ratio adopted by the federal
banking agencies requires a minimum 6.0% "Tier 1" capital to
adjusted quarterly average total assets ratio for a banking
organization to be considered well capitalized. The Company's and
the Bank's leverage ratios at December 31, 1996, were 6.86% and
6.19%, respectively, and each was considered to be well
capitalized. However, the pro forma calculation of the Company's
and the Bank's leverage ratios would have been 5.95% and 5.45%,
respectively, had the acquisition of Crown Park occurred at
December 31, 1996. As a result, the
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Company and the Bank would have been considered to be at least
adequately capitalized under the risk-based capital guidelines.
A bank holding company that fails to meet the applicable
capital standards will be at a disadvantage. For example, Federal
Reserve Board policy discourages the payment of dividends by a bank
holding company from borrowed funds as well as payments that would
adversely affect capital adequacy. Failure to meet the capital
guidelines may result in institution by the Federal Reserve Board
of appropriate supervisory or enforcement actions.
Imposition of Liability for Undercapitalized Subsidiaries
---------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") became effective at various times through
January 1994. FDICIA requires bank regulators to take "prompt
corrective action" to resolve problems associated with insured
depository institutions. In the event an institution becomes
"undercapitalized," it must submit a capital restoration plan. The
capital restoration plan will not be accepted by applicable
regulators unless each company "having control of" the
undercapitalized institution "guarantees" the subsidiary's
compliance with the capital restoration plan until it becomes
"adequately capitalized." The Company has control of the Bank for
purposes of this statute.
Under FDICIA, the aggregate liability of all companies
controlling a particular institution is generally limited to the
lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to bring the institution
into compliance with applicable capital standards. FDICIA grants
greater powers to regulatory authorities in situations where an
institution becomes "significantly" or "critically"
undercapitalized or fails to submit a capital restoration plan. For
example, a bank holding company controlling such an institution may
be required to obtain prior Federal Reserve Board approval of
proposed dividends or could be required to consent to a merger or
to divest the troubled institution or other affiliates.
Acquisitions by Bank Holding Companies
--------------------------------------
Subject to certain exceptions, the BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve
Board before it may acquire all or substantially all of the assets
of any bank, or ownership or control of any voting shares of any
bank, if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank. In
approving bank acquisitions by bank holding companies, the Federal
Reserve Board is required to consider the financial and managerial
resources and future prospects of the bank holding company and the
banks concerned, the convenience and needs of the communities to be
served, and various competitive factors. The Attorney General of
the United States may, within 30 days after approval of an
acquisition by the Federal Reserve Board, bring an action
challenging such acquisition under the federal antitrust laws, in
which case the effectiveness of such approval is stayed pending a
final ruling by the courts.
Currently, the Federal Reserve Board will only allow the
acquisition by a bank holding company of an interest in any bank
located in another state if the statutory laws of the state in
which the target bank is located expressly authorize such
acquisition. The Texas Banking Act permits, in certain
circumstances, out-of-state bank holding companies to acquire
certain existing banks and bank holding companies in Texas.
However, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Interstate Act"), permits bank holding
companies to acquire banks located in any state without regard to
whether the transaction is prohibited under any state law, except
that states may establish the minimum age of their local banks
subject to interstate acquisition by out-of-state bank holding
companies. The minimum age of local banks subject to interstate
acquisition is limited to a maximum of five years.
FDICIA eased restrictions on cross-industry mergers. Members
of the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF") are generally allowed to merge, assume each
other's deposits, and transfer assets in exchange for an assumption
of deposit liabilities. A formula applies to treat insurance
assessments relating to acquired deposits as if they were still
insured through the acquired institution's insurance fund. The
transaction must be approved by the appropriate federal banking
regulator. In considering such approval, the regulators take into
account applicable capital requirements, certain interstate banking
restrictions and other factors.
-7-
The Competitive Equality Banking Act of 1987 ("CEBA") amended
the Federal Deposit Insurance Act and certain other statutes to
provide federal regulatory agencies with expanded authority to deal
with troubled institutions. Among other things, CEBA expanded the
ability of out-of-state holding companies to acquire certain
financial institutions that are in danger of closing and permits
the FDIC, in certain circumstances, to establish a "bridge bank" to
assume the deposits or liabilities of one or more closed banks or
to perform certain other functions.
THE BANK
General
-------
The Bank is a national banking association organized under the
National Bank Act of 1864, as amended (the "National Bank Act"),
and is subject to regulatory supervision and examination by the
Office of the Comptroller of the Currency (the "Comptroller").
Pursuant to such regulation, the Bank is subject to special
restrictions, supervisory requirements and potential enforcement
actions.
Permissible Activities for National Banks
-----------------------------------------
The National Bank Act delineates the rights, privileges and
powers of national banks and defines the activities in which
national banks may engage. National banks are authorized to engage
in the following: make, arrange, purchase or sell loans or
extensions of credit secured by liens on interests in real estate;
purchase, hold and convey real estate under certain conditions;
offer certain trust services to the public; deal in investment
securities in certain circumstances; and, more broadly, engage in
the "business of banking" and activities that are "incidental" to
banking. Specifically, the following are a few of the activities
deemed incidental to the business of banking: the borrowing and
lending of money; receiving deposits, including deposits of public
funds; holding or selling stock or other property acquired in
connection with security on a loan; discounting and negotiating
evidences of debt; acting as guarantor, if the bank has a
"substantial interest in the performance of the transaction";
issuing letters of credit to or on behalf of its customers;
operating a safe deposit business; providing check guarantee plans;
issuing credit cards; operating a loan production office; selling
loans under repurchase agreements; selling money orders at offices
other than bank branches; providing consulting services to banks;
and verifying and collecting checks.
In general, statutory restrictions on the activities of banks
are aimed at protecting the safety and soundness of such depository
institutions. Many of the statutory restrictions limit the
participation of national banks in the securities and insurance
product markets. These restrictions do not now affect the Bank,
because the Bank is not presently involved in the types of
transactions covered by the restrictions.
Branching
---------
National banks may establish a branch anywhere in Texas
provided that the branch is approved in advance by the Comptroller,
which considers a number of factors, including financial history,
capital adequacy, earnings prospects, character of management,
needs of the community and consistency with corporate powers. The
Interstate Banking Act, which expands the authority of bank holding
companies and banks to engage in interstate bank acquisitions and
interstate banking, allows each state the option of "opting out" of
the interstate branching (but not banking) provisions. The Texas
Legislature opted out of the interstate branching provisions during
its 1995 Session. Interstate banking was effective on September 29,
1995, and interstate branching would have become effective in Texas
in June of 1997, if Texas had not elected to "opt out." The Texas
Legislature "opt-out" legislation prohibiting interstate branching
is effective until September of 1999.
Restrictions on Transactions with Affiliates
--------------------------------------------
Certain provisions of FDICIA applicable to the Bank enhance
safeguards against insider abuse by recodifying current law
restricting transactions among related parties. One set of
restrictions is found in Section 23A of the Federal Reserve Act,
which affects loans to and investments in "affiliates" of the Bank.
The term "affiliates" include the Company and any of its
subsidiaries. Section 23A imposes limits on the amount of such
transactions and also requires certain levels of collateral for
such loans. In addition, Section 23A limits the amount of advances
to third parties that are collateralized by the securities or
obligations of the Company or its subsidiaries.
-8-
Another set of restrictions is found in Section 23B of the
Federal Reserve Act. Among other things, Section 23B requires that
certain transactions between the Bank and its affiliates must be on
terms substantially the same, or at least as favorable to the Bank,
as those prevailing at the time for comparable transactions with or
involving other nonaffiliated companies. In the absence of such
comparable transactions, any transaction between the Bank and its
affiliates must be on terms and under circumstances, including
credit underwriting standards and procedures, that in good faith
would be offered to or would apply to nonaffiliated companies. The
Bank is also subject to certain prohibitions against advertising
that suggests that the Bank is responsible for the obligations of
its affiliates.
The restrictions on loans to insiders contained in the Federal
Reserve Act and Regulation O of the Federal Reserve Board now apply
to all insured institutions and their subsidiaries and holding
companies. The aggregate amount of an institution's loans to
insiders is limited to the amount of its unimpaired capital and
surplus, unless the FDIC determines that a lesser amount is
appropriate. The Bank may pay, on behalf of any executive officer
or director, an amount exceeding funds on deposit in that
individual's personal account only if there is a written,
preauthorized, interest-bearing extension of credit specifying a
method of repayment and a written preauthorized transfer of funds
from another account of the executive officer or director at the
Bank. Insiders are subject to enforcement actions for knowingly
accepting loans in violation of applicable restrictions.
Interest Rate Limits and Lending Regulations
--------------------------------------------
The Bank is subject to various state and federal statutes
relating to the extension of credit and the making of loans. The
maximum legal rate of interest that the Bank may charge on a loan
depends on a variety of factors such as the type of borrower,
purpose of the loan, amount of the loan and date the loan is made.
Texas statutes establish maximum legal rates of interest for
various lending situations.
Loans made by banks located in Texas are subject to numerous
other federal and state laws and regulations, including
truth-in-lending statutes, the Texas Consumer Credit Code, the
Equal Credit Opportunity Act, the Real Estate Settlement Procedures
Act and the Home Mortgage Disclosure Act. These laws provide
remedies to the borrower and penalties to the lender for failure of
the lender to comply with such laws. The scope and requirements of
these laws and regulations have expanded in recent years, and
claims by borrowers under these laws and regulations may increase.
Restrictions on Subsidiary Bank Dividends
-----------------------------------------
Dividends payable by the Bank to Independent Financial are
restricted under the National Bank Act. The Bank's ability to pay
dividends is further restricted by the requirement that it maintain
adequate capital in accordance with capital adequacy guidelines
promulgated from time to time by the Comptroller. See "Dividend
Policy." Moreover, the prompt corrective provisions of FDICIA and
implementing regulations prohibit a bank from paying a dividend if,
following the payment, the bank would be in any of the three
capital categories for undercapitalized institutions. See "Capital
Adequacy Requirements" below.
Examinations
------------
The Comptroller periodically examines and evaluates national
banks. Based upon such evaluations, the Comptroller may revalue
certain assets of an institution and require that it establish
specific reserves to compensate for the difference between the
regulatory-determined value and the book value of such assets. The
Comptroller is authorized to assess the institution an annual fee
based upon deposits for, among other things, the costs of
conducting the examinations.
Capital Adequacy Requirements
-----------------------------
FDICIA, among other things, substantially revised existing
statutory capital standards, restricted certain powers of state
banks, gave regulators the authority to limit officer and director
compensation and required holding companies to guarantee the
capital compliance of their banks in certain instances. Among other
things, FDICIA requires the federal banking agencies to take
"prompt corrective action" with respect to banks that do not meet
minimum capital requirements. FDICIA established five capital
tiers: "well capitalized," "adequately capitalized,"
-9-
"undercapitalized," "significantly undercapitalized" and
"critically undercapitalized," as defined by regulations adopted by
the Federal Reserve Board, the FDIC and the other federal
depository institution regulatory agencies. A depository
institution is well capitalized if it significantly exceeds the
minimum level required by regulation for each relevant capital
measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure,
significantly undercapitalized if it is significantly below such
measure and critically undercapitalized if it fails to meet any
critical capital level set forth in the regulations. The critical
capital level must be a level of tangible equity capital equal to
the greater of 2% of total tangible assets or 65% of the minimum
leverage ratio to be prescribed by regulation. An institution may
be deemed to be in a capitalization category that is lower than is
indicated by its actual capital position if it receives an
unsatisfactory examination rating. At December 31, 1996, the Bank
was well capitalized.
Banks with capital ratios below the required minimum are
subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a
temporary suspension of insurance without a hearing in the event
the institution has no tangible capital.
Corrective Measures for Capital Deficiencies
--------------------------------------------
FDICIA requires the federal banking regulators to take "prompt
corrective action" with respect to capital-deficient institutions
with the overall goal to reduce losses to the depository insurance
fund. In addition to requiring the submission of a capital
restoration plan (as discussed above), FDICIA contains broad
restrictions on certain activities of undercapitalized institutions
involving asset growth, acquisitions, branch establishment and
expansion into new lines of business. With certain exceptions, an
insured depository institution is prohibited from making capital
distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be
undercapitalized after any such distribution or payment.
As an institution's capital decreases, the FDIC's powers and
scrutiny become greater. A significantly under-capitalized
institution is subject to mandated capital raising activities,
restrictions on interest rates paid and transactions with
affiliates, removal of management, and other restrictions. Under
proposed regulations, an institution will be considered critically
undercapitalized if its tangible equity to assets ratio falls below
2%. The FDIC has only very limited discretion in dealing with a
critically undercapitalized institution and is virtually required
to appoint a receiver or conservator.
Real Estate Lending Evaluations and Appraisal Requirements
----------------------------------------------------------
The FDIC is required by the Federal Deposit Insurance Act to
assess all banks in order to adequately fund the BIF so as to
resolve any insured institution that is declared insolvent by its
primary regulator. FDICIA required the federal banking regulators
to adopt uniform standards for evaluations by the regulators of
loans collateralized by real estate or made to finance improvements
to real estate. In formulating the standards, the banking agencies
were required to take into consideration the risk posed to the
insurance funds by real estate loans, the need for safe and sound
operation of insured depository institutions and the availability
of credit. FDICIA also prohibits the regulators from adversely
evaluating a real estate loan or investment solely on the grounds
that the investment involves commercial, residential or industrial
property, unless the safety and soundness of an institution may be
affected.
The federal agencies adopted a number of regulatory standards
with regard to real estate lending. These standards require banking
institutions to establish and maintain written internal real estate
lending policies. These policies must not only be consistent with
safe and sound banking practices, but must also be appropriate to
the size of the institution and the nature and scope of its
operations. The policies must establish loan portfolio
diversification standards, prudent underwriting standards,
including clear and measurable loan-to-value limits (although such
limits should not exceed specific supervisory limits), loan
administration procedures and comprehensive documentation, approval
and reporting requirements to ensure compliance with these
policies. Additionally, the institution's policies must be reviewed
and approved by that institution's Board of Directors on at least
an annual basis and such policies must be continually monitored by
the institutions to ensure compatibility with current market
conditions. In addition, banks are required to secure appraisals
for real estate-collateralized loans with a transaction value of
$250,000 or more.
-10-
Deposit Insurance Assessments
-----------------------------
The FDIC is required by the Federal Deposit Insurance Act to
assess all banks in order to adequately fund the BIF so as to
resolve any insured institution that is declared insolvent by its
primary regulator. FDICIA required the FDIC to establish a
risk-based deposit insurance premium schedule. The risk-based
assessment system is used to calculate a depository institution's
semi-annual deposit insurance assessment based upon the designated
reserve ratio for the deposit insurance fund and the probability
and extent to which the deposit insurance fund will incur a loss
with respect to this institution. In addition, the FDIC can impose
special assessments to cover the cost of borrowings from the U.S.
Treasury, the Federal Financing Bank and BIF member banks.
On September 15, 1992, the FDIC issued a rule revising its
assessment regulations from the existing flat-rate system for
deposit insurance assessments (or "premiums") to a new, risk-based
assessment system. This system became effective for the assessment
period beginning January 1, 1993. Under this system, each
depository institution will be placed in one of nine assessment
categories based on certain capital and supervisory measures.
Institutions assigned to higher-risk categories - that is,
institutions that pose a greater risk of loss to their respective
deposit insurance funds - pay assessments at higher rates than
would institutions that pose a lower risk. The Bank (including
First State, N.A., Odessa) was assessed a weighted average premium
of 0.006% of deposits for the year ended December 31, 1996.
On August 8, 1995, the FDIC amended its regulations to change
the range of deposit insurance assessments charged to members of
the BIF from the then-prevailing range of 0.23% to 0.31% of
deposits, to a range of 0.04% to 0.31% of deposits. On November 14,
1995, the FDIC further reduced the deposit insurance assessments
for BIF-member institutions, such that the range of BIF assessments
is currently between 0% and 0.27% of deposits. BIF-member
institutions which qualified for the 0% assessment category were,
until September 30, 1996, required to pay the $1,000 minimum
semi-annual assessment required by federal statute.
In connection with the new rate schedule, the FDIC established
a process for raising or lowering all rates for BIF-insured
institutions semi-annually if conditions warrant a change. Under
this new system, the FDIC will have the flexibility to adjust the
entire BIF assessment rate schedule twice a year without seeking
public comment first, but only within a range of five cents per
$100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the
current schedule can be made by the FDIC only after a full
rulemaking with opportunity for public comment.
On September 30, 1996, President Clinton signed into law an
act that contained a comprehensive approach to recapitalizing the
SAIF and to assure the payment of the Financing Corporation's
("FICO") bond obligations. Under this new act, banks insured under
the BIF are required to pay a portion of the interest due on bonds
that were issued by FICO in 1987 to help shore up the ailing
Federal Savings and Loan Insurance Corporation ("FSLIC"). The
amount of FICO debt service to be paid by all BIF-insured
institutions is currently estimated to be approximately
$320,343,000 per year, or 0.013% of deposits from 1997 until the
year 2000, when the obligation of BIF-insured institutions
increases to approximately $598,500,000 or 0.024% of deposits per
year through the year 2019.
Community Reinvestment Act
--------------------------
The Community Reinvestment Act of 1977 ("CRA") and the
regulations issued by the Comptroller to implement that law are
intended to encourage banks to help meet the credit needs of their
service area, including low and moderate income neighborhoods,
consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's
record in meeting the needs of its service area when considering
applications to establish branches, merger applications and
applications to acquire the assets and assume the liabilities of
another bank. FIRREA requires federal banking agencies to make
public a rating of a bank's performance under the CRA. In the case
of a bank holding company, the CRA performance record of the banks
involved in the transaction are reviewed in connection with the
filing of an application to acquire ownership or control of shares
or assets of a bank or to merge with any other bank holding
company. An unsatisfactory record can substantially delay or block
the transaction. The bank regulatory agencies in 1995 adopted final
regulations implementing the CRA. These regulations affect
extensive changes to the existing procedures for determining
compliance with the CRA and the full effect of these new
regulations cannot be determined at this time.
-11-
Changing Regulatory Structure
-----------------------------
Other legislative and regulatory proposals regarding changes
in banking, and regulations of banks, thrifts and other financial
institutions, are being considered by the executive branch of the
federal government, Congress and various state governments,
including Texas. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial
services industry. The Company cannot predict accurately whether
any of these proposals will be adopted or, if adopted, how these
proposals will affect the Company or the Bank.
Expanding Enforcement Authority
-------------------------------
One of the major additional burdens imposed on the banking
industry by FDICIA is the increased ability of banking regulators
to monitor the activities of banks and their holding companies. In
addition, the Federal Reserve Board and FDIC are possessed of
extensive authority to police unsafe or unsound practices and
violations of applicable laws and regulations by depository
institutions and other holding companies. For example, the FDIC may
terminate the deposit insurance of any institution that it
determines has engaged in an unsafe or unsound practice. The
regulatory agencies can also assess civil money penalties, issue
cease and desist or removal orders, seek injunctions and publicly
disclose such actions. FDICIA, FIRREA and other laws have expanded
the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.
Effect on Economic Environment
------------------------------
The policies of regulatory authorities, including the monetary
policy of the Federal Reserve Board, have a significant effect on
the operating results of bank holding companies and their
subsidiaries. Among the means available to the Federal Reserve
Board to affect the money supply are open market operations in U.S.
Government securities, control of borrowings at the "discount
window," changes in the discount rate on member bank borrowings,
changes in reserve requirements against member bank deposits and
against certain borrowings by banks and their affiliates and the
placing of limits on interest rates that member banks may pay on
time and savings deposits. These means are used in varying
combinations to influence overall growth and distribution of bank
loans, investments and deposits, and their use may affect interest
rates charged on loans or paid for deposits. Federal Reserve Board
monetary policies have materially affected the operating results of
commercial banks in the past and are expected to continue to do so
in the future. The Company cannot predict the nature of future
monetary policies and the effect of such policies on the business
and earnings of the Company and the Bank.
COMPETITION
The activities in which the Company and the Bank engage are
highly competitive. Each activity engaged in and the geographic
market served involves competition with other banks and savings and
loan associations as well as with nonbanking financial institutions
and nonfinancial enterprises. In Texas, savings and loan
associations and banks are allowed to establish statewide branch
offices. The Bank actively competes with other banks in its effort
to obtain deposits and make loans, in the scope and type of
services offered, in interest rates paid on time deposits and
charged on loans and in other aspects of banking. In addition to
competing with other commercial banks within and without its
primary service areas, the Bank competes with other financial
institutions engaged in the business of making loans or accepting
deposits, such as savings and loan associations, credit unions,
insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, factors, certain
governmental agencies, credit card organizations and other
enterprises. Additional competition for deposits comes from
government and private issues of debt obligations and other
investment alternatives for depositors such as money market funds.
The Bank also competes with suppliers of equipment in providing
equipment financing.
EMPLOYEES
At February 28, 1997, the Company and the Bank had 128
full-time equivalent employees. Employees are provided with
employee benefits, such as an employee stock ownership/401(k) plan
and life, health and long-term disability insurance plans. The
Company considers the relationship of the Bank with its employees
to be excellent.
-12-
ITEM 2. PROPERTIES
At February 28, 1997, the Company occupied approximately 600
square feet of space for its corporate offices at 547 Chestnut
Street, Abilene, Texas. The Central Branch of the Bank occupies
approximately 8,000 square feet at this same facility. The
following table sets forth, at February 28, 1997, certain
information with respect to the banking premises owned or leased by
the Company and the Bank. The Company considers such premises
adequate for its needs and the needs of the Bank.
Approximate
Location Square Footage Ownership and Occupancy
- ---------------- -------------- ------------------------------
Abilene, Texas 8,600 Owned by the Bank and occupied
by the Central Branch of the
Bank and the Company
Abilene, Texas 3,500 Owned by the Bank and occupied
by the Wylie Branch
Lubbock, Texas 24,300(1) Owned by the Bank; occupied and
leased by the Lubbock Branch
Odessa, Texas 62,400(2) Owned by the Bank; occupied and
leased by the Odessa Branch
Odessa, Texas 2,400 Leased by the Bank and occupied
by the Winwood Branch
San Angelo, Texas 6,800(3) Owned by the Bank; occupied and
leased by the San Angelo Branch
Stamford, Texas 14,000 Owned by the Bank and occupied
by the Stamford Branch
Winters, Texas 9,500 Owned by the Bank and occupied
by the Winters Branch
_________________________
(1) The Lubbock Branch occupies approximately 14,600 square feet,
leases 6,700 square feet and is attempting to lease the
remaining 3,000 square feet.
(2) The Odessa Branch occupies approximately 20,400 square feet,
leases 25,100 square feet and is attempting to lease the
remaining 16,900 square feet.
(3) The San Angelo Branch occupied approximately 3,400 square
feet, leases 2,400 square feet and is attempting to lease the
remaining 1,000 square feet.
The Bank owns or leases certain additional tracts of land for
parking, drive-in facilities and for future expansion or
construction of new premises. Aggregate annual rentals of the
Company and the Bank for all leased premises during the year ended
December 31, 1996, were $40,000. This amount represents rentals
paid for the lease of land by the Wylie Branch and of banking
premises by the Winwood Branch of the Bank.
ITEM 3. LEGAL PROCEEDINGS
In CONNIE POLLARD V. FIRST STATE BANK, N.A., ODESSA, TEXAS
(Cause No. A-100,846) brought in the 70th District Court of Ector
County, Texas, the plaintiff, the former Senior Vice President,
Manager of Trust Operations of First State, N.A., Odessa, alleges,
among other things, that she was discriminated against on the basis
of her sex, she was repeatedly passed over for promotion to the
Trust Department Manager, she was paid less than male employees and
that she was constructively discharged. The plaintiff alleges
damages for past and future wages, emotional distress and
constructive discharge, actual damages, exemplary damages,
attorneys' fees, reinstatement and promotion and pre-judgment and
post-judgment interest. The Company believes the plaintiff's claims
to be without merit and intends to vigorously defend this action.
Discovery is ongoing, and the case is currently scheduled for trial
in mid-1997.
-13-
The Company is involved in various other litigation
proceedings incidental to the ordinary course of business. In the
opinion of management, however, the ultimate liability, if any,
resulting from such other litigation would not be material in
relation to the Company's financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year, no matter was
submitted by the Company to a vote of its shareholders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
Since September 12, 1995, the Company's Common Stock has
traded on the American Stock Exchange (the "AMEX") under the symbol
"IBK." Prior to September 12, 1995, the Common Stock was quoted on
Nasdaq's Small-Cap Market system under the symbol "IBKS."
The following table sets forth, for the periods indicated, the
high and low sales prices for the Common Stock as reported by the
AMEX and by Nasdaq Small-Cap Market, as the case may be, and the
amount of dividends per share, adjusted for the 33-1/3% stock
dividend paid to stockholders in May 1995.
Cash
Dividends
High Low Per Share
------ ----- ----------
1995
--------------
First Quarter $ 6 $ 5-1/4 $ 0.0225
Second Quarter 7-1/2 5-1/4 0.03
Third Quarter 11-1/4 7-1/4 0.03
Fourth Quarter 10-7/8 10-1/4 0.03
1996
--------------
First Quarter $ 10-1/2 $ 9-3/4 $ 0.03
Second Quarter 11 9 0.05
Third Quarter 12 10-7/8 0.05
Fourth Quarter 17-1/2 12-1/8 0.05
1997
--------------
First Quarter
(through March 17, 1997) $ 17 $ 14-3/8 $ 0.05
The Nasdaq Small-Cap Market quotations represent prices
between dealers, without retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
SHAREHOLDERS
At March 17, 1997, there were 1,558 stockholders who were
individual participants in security position listings.
-14-
DIVIDEND POLICY
The Company. In May 1994, the Company instituted the payment
of a $.03 per share quarterly cash dividend, which was raised to
$0.05 per share in May 1996. The Board of Directors presently
intends to continue the payment of a small cash dividend on the
Common Stock. The continued payment of dividends and the amount and
timing of any future dividend payments, however, will be determined
by the Board of Directors and will depend upon a number of factors,
including the extent of funds legally available therefor, dividend
requirements of the Company's Series C Cumulative Convertible
Preferred Stock ("Series C Preferred Stock"), and the earnings,
business prospects, acquisition opportunities, cash needs,
financial condition, regulatory and capital requirements of the
Company and the Bank and provisions of current and future loan or
financing agreements, including the Company's existing loan
agreement with the Amarillo Bank that restricts dividends if total
debt to the Amarillo Bank exceeds $1,200,000. At the date of the
filing of this report, the Company had outstanding borrowings of
$200,000 under the Amarillo Bank loan, which borrowings financed a
portion of the cost of acquiring Crown Park. Accordingly, no
dividend restriction is currently in effect.
The Company's ability to pay cash dividends is restricted by
the requirement that it and the Bank maintain certain levels of
capital in accordance with regulatory guidelines promulgated by, in
the case of the Company, the Federal Reserve Board and, in the case
of the Bank, the Comptroller. See "Item 1. Business - Regulation
and Supervision - the Company - Capital Adequacy Requirements."
Holders of the Series C Preferred Stock are entitled to
receive, if, as and when declared by the Company's Board of
Directors, out of funds legally available therefor, in preference
to the holders of Common Stock and any other stock ranking junior
to the Series C Preferred Stock in respect of dividends, quarterly
cumulative cash dividends at the annual rate of $4.20 per share.
The aggregate annual dividend payment on the 13,478 shares of the
Series C Preferred Stock outstanding at December 31, 1996, was
approximately $57,000. If earnings and cash flow from ordinary
operations of the Company are not sufficient to enable it to pay
the full amount of the dividend on the Series C Preferred Stock,
the Company may cumulate all or a portion of the annual dividend.
The Company can cause the mandatory conversion of the Series C
Preferred Stock into Common Stock beginning in December 1997. The
Series C Preferred Stock is the Company's only outstanding
preferred issue.
The Company may not, among other things, declare or pay any
cash dividend in respect of the Common Stock or any stock junior to
the Series C Preferred Stock with respect to dividends or
liquidation rights unless, on the date of payment, all accumulated
dividends in respect of the Series C Preferred Stock are paid or
set aside. Furthermore, the Company may not declare or pay any
dividends in respect of the Common Stock or purchase, redeem or
otherwise acquire shares of Common Stock if, on the record date for
such payment, or on the date of such purchase, redemption or
acquisition, such action would cause stockholders' equity
(including mandatorily redeemable preferred stock) of the Company,
as reported in the most recent quarterly or annual financial
statements filed by the Company with the Securities and Exchange
Commission, to be less than an amount equal to the sum of (i) 140%
of the number of then outstanding shares of Series C Preferred
Stock multiplied by its liquidation value and (ii) 140% of the
number of then outstanding shares of any stock ranking senior as to
dividends to the Series C Preferred Stock multiplied by the
liquidation value of such senior stock. Dividend payments on any
other stock junior to the Series C Preferred Stock with respect to
dividends or liquidation rights would be similarly limited.
The Federal Reserve Board has a policy prohibiting bank
holding companies from paying dividends on common stock except out
of current earnings. The Federal Reserve Board has asserted that
this policy, originally only applicable to common stock, also
limits dividends on preferred stocks. As expanded, the Federal
Reserve Board policy would limit dividends on the Series C
Preferred Stock to an amount equal to current earnings. To date,
the Company's earnings have been sufficient to cover dividends on
the Common Stock and the Series C Preferred Stock.
The Bank. The funds used by the Company to meet its
operational expenses and debt service obligations, to maintain the
necessary level of capital for itself and the Bank, and to pay cash
dividends on the Common Stock and the Series C Preferred Stock will
be derived primarily from dividends, management fees and tax
liabilities paid to the Company by Independent Financial and to
Independent Financial by the Bank. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity." The ability of the Bank to pay dividends
is
-15-
restricted by the requirement that the Bank maintain an adequate
level of capital in accordance with regulatory guidelines and by
statute.
The Federal Deposit Insurance Corporation ("FDIC") requires
insured banks, such as the Bank, to maintain certain minimum
capital ratios. The FDIC is permitted to require higher ratios if
it believes that the financial condition and operations of a
particular bank mandates such a higher ratio. The Comptroller has
substantially similar requirements. See "Item 1. Business -
Regulation and Supervision - The Bank - Capital Adequacy
Requirements" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company -
Capital Resources."
The National Bank Act of 1864, as amended (the "National Bank
Act"), provides that, prior to declaring a dividend, a bank must
transfer to its surplus account an amount equal to or greater than
10% of the net profits earned by the bank since its last dividend
was declared, unless such transfer would increase the surplus of
the bank to an amount greater than the bank's stated capital.
Moreover, the approval of the Comptroller is required for any
dividend to a bank holding company by a national bank if the total
of all dividends, including the proposed dividend, declared by the
bank in any calendar year exceeds the total of its net profits for
such year combined with its retained net profits for the preceding
two years, less any required transfers to surplus. In addition, the
prompt corrective provisions of FDICIA and implementing regulations
prohibit a bank from paying a dividend if, following the payment,
the bank would be in any of the three capital categories for
undercapitalized institutions. See "Item 1. Business - Regulation
and Supervision - The Bank - Capital Adequacy Requirements."
Dividends paid by the Bank (including First State, N.A.,
Odessa) to Independent Financial and by Independent Financial to
the Company each totaled $1,000,000 during 1996. At December 31,
1996, there were approximately $1,561,000 in dividends available
for payment to Independent Financial by the Bank without regulatory
approval.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated herein
by reference from page 28 of the Company's 1996 Annual Report to
Shareholders under the caption "Selected Consolidated Financial
Information."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein
by reference from pages 30 through 52, inclusive, of the Company's
1996 Annual Report to Shareholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein
by reference from pages 7 through 27, inclusive, of the Company's
1996 Annual Report to Shareholders under the captions "Report of
Coopers & Lybrand, L.L.P., Independent Auditors," "Consolidated
Balance Sheets," "Consolidated Income Statements," "Consolidated
Statements of Changes in Stockholders' Equity," "Consolidated
Statements of Cash Flows," "Notes to Consolidated Financial
Statements" and "Quarterly Data (Unaudited)."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
-16-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required for by this item is incorporated
herein by reference from pages 6 through 10, inclusive, of the
Company's definitive proxy statement to be filed pursuant to
Regulation 14A with the Securities and Exchange Commission relating
to its Annual Meeting of Shareholders to be held April 29, 1997
(the "Definitive Proxy Statement"), under the respective captions
"Item 1. Election of Directors" and "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein
by reference from pages 10 and 11 of the Company's Definitive Proxy
Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein
by reference from pages 3 through 6, inclusive, of the Company's
Definitive Proxy Statement under the caption "Voting Securities and
Principal Shareholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein
by reference from pages 11 and 12 of the Company's Definitive Proxy
Statement under the caption "Executive Compensation - Transactions
with Management."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents Filed as Part of Report.
1. Financial Statements
The following Consolidated Financial Statements of the
Company included in PART II of this report are incorporated by
reference from the Company's Annual Report to Shareholders for the
year ended December 31, 1996, furnished to the Securities and
Exchange Commission pursuant to Rule 14a-3(b):
Page
Reference to
Item Annual Report
------------------------------------------------------------ -------------
Report of Coopers & Lybrand, L.L.P., Independent Auditors 7
Consolidated Balance Sheets as of December 31, 1996 and 1995 8
Consolidated Income Statements for the three years in the
period ended December 31, 1996 9
Consolidated Statements of Changes in Stockholders' Equity
for the three years in the period ended December 31, 1996 10
Consolidated Statements of Cash Flows for the three years
in the period ended December 31, 1996 11
Notes to Consolidated Financial Statements 12-26
-17-
2. Financial Statement Schedules
All schedules for which provision is made in
the applicable accounting regulations of the Securities
and Exchange Commission have been omitted because such
schedules are not required under the related instructions
or are inapplicable or because the information required
is included in the Company's Consolidated Financial
Statements or notes thereto.
3. Exhibits
The exhibits listed below are filed as part of or
incorporated by reference in this report. Where such
filing is made by incorporation by reference to a
previously filed document, such document is identified in
parenthesis. See the Index of Exhibits included with the
exhibits filed as part of this report.
No. Description
--- -----------
3.1 Restated Articles of Incorporation of
Independent Bankshares, Inc. (Exhibit 3.1 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1994)
3.2 Restated Bylaws of Independent Bankshares,
Inc. (Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1994)
4.1 Specimen Stock Certificate for Common Stock of
the Company (Exhibit 4.1 to the Company's
Registration Statement on Form S-1, SEC File
No. 333-16419)
10.1 Form of Nonqualified Option Agreement (Exhibit
10.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1992)
10.2 Loan Agreement dated January 23, 1997, by and
among Independent Bankshares, Inc. and
Boatmen's First National Bank of Amarillo and
related Variable Rate Promissory Note dated
January 23, 1997, Security Agreement dated
January 23, 1997 and Third Party Pledge
Agreement dated January 23, 1997, executed by
Independent Financial Corp. (filed herewith)
10.3 Master Equipment Lease Agreement, dated
December 24, 1992, between Independent
Bankshares, Inc. and NCR Credit Corporation,
Amendment to Master Equipment Lease Agreement
dated concurrently therewith, and related form
of Schedule and Commencement Certificate
(Exhibit 10.7 to the Company's Annual Report
on Form 10-K for the year ended December 31,
1993)
10.4 Asset Purchase and Account Assumption
Agreement dated March 4, 1996, between the
Company and Coastal Banc ssb (Exhibit 10.4 to
the Company's Annual Report on Form 10-K for
the year ended December 31, 1995)
10.5 Agreement and Plan of Reorganization dated
July 11, 1996, between the Company and Crown
Park Bancshares, Inc. and Agreement and Plan
of Merger dated July 11, 1996 between Western
National Bank and First State, N.A. Abilene
(Exhibit 1.1 to the Company's Current Report
on Form 8-K dated July 11, 1996)
13.1 Annual Report to Shareholders for the year
ended December 31, 1996 (filed herewith)
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21.1 Subsidiaries of Independent Bankshares, Inc.
(Exhibit 21.1 to the Company's Registration
Statement on Form S-1, SEC File No. 333-16419)
23.1 Consent of Coopers & Lybrand, L.L.P. (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K.
Current Report on Form 8-K dated February 10, 1997,
relating to the Company's acquisition of Crown Park
Bancshares, Inc. and its subsidiary, Western National
Bank
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDEPENDENT BANKSHARES, INC.
By: /s/ Bryan W. Stephenson
Bryan W. Stephenson,
President and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
- --------- --------------------------- --------------
/s/ Bryan W. Stephenson President, Chief Executive March 28, 1997
- ---------------------------- Officer and Director
Bryan W. Stephenson
/s/ Randal N. Crosswhite Senior Vice President, Chief March 28, 1997
- ---------------------------- Financial Officer, Corporate
Randal N. Crosswhite Secretary and Director
/s/ Lee Caldwell
- ----------------------------- Director March 28, 1997
Lee Caldwell
/s/ Mrs. Wm. R. (Amber) Cree Director March 28, 1997
- ----------------------------
Mrs. Wm. R. (Amber) Cree
- ---------------------------- Director March __, 1997
Louis S. Gee
/s/ Marshal M. Kellar Director March 28, 1997
- ----------------------------
Marshal M. Kellar
-20-
/s/ Tommy McAlister Director March 28, 1997
- ----------------------------
Tommy McAlister
/s/ Scott L. Taliaferro Director March 28, 1997
- ----------------------------
Scott L. Taliaferro
/s/ James D. Webster, M.D. Director March 28, 1997
- ----------------------------
James D. Webster, M.D.
/s/ C. G. Whitten Director March 28, 1997
- ----------------------------
C.G. Whitten
/s/ John A. Wright Director March 28, 1997
- ----------------------------
John A. Wright
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INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
3.1 Restated Articles of Incorporation of Independent
Bankshares, Inc. (Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1994)
3.2 Restated Bylaws of Independent Bankshares, Inc.
(Exhibit 3.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1994)
4.1 Specimen Stock Certificate for Common Stock of the
Company (Exhibit 4.1 to the Company's Registration
Statement on Form S-1, SEC File No. 333-16419)
10.1 Form of Nonqualified Option Agreement (Exhibit 10.2
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1992)
10.2 Loan Agreement dated January 23, 1997, by and among
Independent Bankshares, Inc. and Boatmen's First
National Bank of Amarillo and related Variable Rate
Promissory Note dated January 23, 1997, Security
Agreement dated January 23, 1997 and Third Party
Pledge Agreement dated January 23, 1997, executed
by Independent Financial Corp. (filed herewith)
10.3 Master Equipment Lease Agreement, dated December
24, 1992, between Independent Bankshares, Inc. and
NCR Credit Corporation, Amendment to Master
Equipment Lease Agreement dated concurrently
therewith, and related form of Schedule and
Commencement Certificate (Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1993)
10.4 Asset Purchase and Account Assumption Agreement
dated March 4, 1996, between the Company and
Coastal Banc ssb (Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995)
10.5 Agreement and Plan of Reorganization dated July 11,
1996, between the Company and Crown Park
Bancshares, Inc. and Agreement and Plan of Merger
dated July 11, 1996 between Western National Bank
and First State, N.A. Abilene (Exhibit 1.1 to the
Company's Current Report on Form 8-K dated July 11,
1996)
13.1 Annual Report to Shareholders for the year ended
December 31, 1996 (filed herewith)
21.1 Subsidiaries of Independent Bankshares, Inc.
(Exhibit 21.1 to the Company's Registration
Statement on Form S-1, SEC File No. 333-16419)
23.1 Consent of Coopers & Lybrand, L.L.P. (filed
herewith)
27.1 Financial Data Schedule (filed herewith)
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