10-Q 1 indepen10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: March 31, 2001 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: 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 the number of shares outstanding of each of the issuer's classes of common stock at March 31, 2001. Class: Common Stock, par value $0.25 per share Outstanding at March 31, 2001: 2,273,647 shares PART I FINANCIAL INFORMATION Item 1. Financial Statements. 2 INDEPENDENT BANKSHARES, INC. A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 (Unaudited)

See Accompanying Notes to Consolidated Financial Statements. 3

See Accompanying Notes to Consolidated Financial Statements. 4

See Accompanying Notes to Consolidated Financial Statements. 5 INDEPENDENT BANKSHARES, INC. A WHOLLY OWNED SUBSIDIARY OF STATE NATIONAL BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies For information with regard to significant accounting policies, reference is made to Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2000, which was filed with the Securities and Exchange Commission pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934, as amended. The accompanying financial statements reflect all adjustments necessary to present a fair statement of the results for the interim periods presented, and all adjustments are of a normal recurring nature. (2) Bank Mergers On November 9, 2000, State National Bancshares, Inc., Lubbock, Texas ("State National") contributed to the Company its ownership of United Bank & Trust, Abilene, Texas ("UB&T"). UB&T was merged (the "UB&T Merger") with and into First State Bank, National Association, Abilene, Texas ("First State"), a subsidiary of the Company at the time. At the time of the UB&T Merger, the name of the resulting bank was changed to State National Bank of West Texas, Abilene, Texas (the "Abilene Bank"). There was no consideration paid as, prior to the transaction, First State and UB&T were both direct or indirect subsidiaries of State National. The transaction was accounted for similar to a pooling of interests. As a result of the transaction, the balance sheet and results of operations of UB&T have been included in the Company's consolidated financial statements since August 11, 2000, the date of the acquisition of the Company by State National (the "Acquisition"). At August 11, 2000, UB&T had total assets of $112,806,000, total deposits of $93,946,000, total loans of $70,230,000 and total stockholder's equity of $16,729,000. On March 9, 2001, the Abilene Bank, an indirect wholly owned subsidiary of the Company, was merged (the "Lubbock Merger") with and into State National Bank of West Texas, Lubbock, Texas (the "Lubbock Bank"), an indirect wholly owned subsidiary of State National, the Company's parent. The Lubbock Bank continued as the surviving entity in the merger (the "Bank"). Immediately after the Lubbock Merger, State National caused to be contributed to the Company and the Company, in turn, contributed to Independent Financial Corp., a Delaware subsidiary of the Company, all of the capital stock of the Bank. The result of the transaction was that the Abilene Bank was merged into the Lubbock Bank, and the resulting Bank became an indirect wholly owned subsidiary of the Company. There was no merger consideration paid as, prior to the transaction, the Abilene Bank and the Lubbock Bank were both direct or indirect subsidiaries of State National. The transaction was accounted for similar to a pooling of interests. As a result of the transaction, the consolidated balance sheet for the Company at December 31, 2000, has been restated to reflect the Lubbock Merger. The results of operations of UB&T and the Lubbock Bank are included in the results of operations of the Company from August 11, 2000, the date of the Acquisition. At December 31, 2000, the Lubbock Bank had total assets of $216,721,000, total deposits of $196,689,000, total loans of $124,118,000 and stockholder's equity of $18,664,000. Collectively, the UB&T Merger and the Lubbock Merger are referred to as the Bank Mergers. 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. 6 (3) Accumulated Other Comprehensive Income An analysis of accumulated other comprehensive income for the quarter ended March 31, 2001, is as follows: Unrealized Gain (Loss) on Available-for- sale Securities --------------- (In thousands) Balance, at January 1 $1,618 Current period change 1,104 --------------- Balance, at March 31 $2,722 =============== 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q contains certain forward- looking statements and information relating to Independent Bankshares, Inc. (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. The Company ----------- 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"). The Company was acquired by State National at the close of business August 11, 2000, in an all cash transaction (the "Acquisition"). At March 31, 2001, 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, Lubbock, Texas (the "Bank"). At March 31, 2001, the Bank operated full-service banking locations in the Texas cities of Abilene (five locations), Azle (two locations), Bangs, Big Spring, Lubbock (3 locations), Midland, Odessa (four locations), Plainview, San Angelo, Stamford, Trent and Winters. Results of Operations --------------------- General The following discussion and analysis presents the more significant factors affecting the Company's financial condition at March 31, 2001, and December 31, 2000, and results of operations for each of the quarters ended March 31, 2001 and 2000. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements, notes thereto and other financial information appearing elsewhere in this quarterly report. Net Income The net loss for the quarter ended March 31, 2001, amounted to $1,077,000, compared to net income of $493,000 for the quarter ended March 31, 2000. The loss was primarily due to a $1.6 million provision for loan losses that was made during the first quarter of 2001, the increase in the amortization of intangible assets ($854,000 increase) related to the Acquisition, and the fact that UB&T and the Lubbock Bank as discussed below were not included in the Company's Predecessor operations for the March 31, 2000, quarter. See "Provision for Loan Losses" below. 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 $5,851,000 for the first quarter of 2001, an increase of $2,228,000, or 61.5%, from the first quarter of 2000. Net interest income for the first quarter of 2000 was $3,623,000. The increase in 2001 was due to the merger of United Bank & Trust, Abilene, Texas ("UB&T"), a wholly owned subsidiary of State National with and into First State Bank, National Association, a wholly owned subsidiary of the Company (the "Abilene Bank"), and the merger of the Abilene Bank with and into State National Bank of West Texas, Lubbock, 8 Texas (the "Lubbock Bank") (collectively, the "Bank Mergers"). The net interest margin on a fully taxable-equivalent basis, decreased from 4.67% for the first quarter of 2000, to 3.98% for the first quarter of 2001. The decrease in the net interest margin from the first quarter of 2000 to the first quarter of 2001 is due primarily to reductions in the prime interest rate from 9.5% at December 31, 2000, to 8% as of March 31, 2001. At March 31, 2001, approximately $150,651,000, or 43.9%, of the Company's total loans, net of unearned income, were loans with floating interest rates. Approximately 51.3% of loans, excluding loans to individuals, which are almost exclusively fixed rate in nature, were loans with floating interest rates. Average overall rates paid for various types of certificates of deposit increased from March 31, 2000, to March 31, 2001. For example, the average rate paid for certificates of deposit less than $100,000 increased from 5.05% for the first quarter of 2000 to 5.95% for the first quarter of 2001, while the average rate paid by the Company for certificates of deposit of $100,000 or more also increased from 5.27% during the first quarter of 2000 to 6.19% during the first quarter of 2001. Rates on other types of deposits, such as interest-bearing demand, savings and money market deposits, increased from an average of 2.04% during the first quarter of 2000 to an average of 2.71% during the first quarter of 2001. These changes caused the Company's overall cost of interest-bearing deposits to increase from 3.90% for the first three months of 2000 to 4.80% for the first three months of 2001. The following table presents the average balance sheets of the Company for the quarters ended March 31, 2001 and 2000, and indicates the interest earned or paid on the major categories 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 impact of the cost of funds on overall net interest income. 9

__________________ (1) The Average Balance and Interest Income/Expense columns include the balance sheet and income statement accounts of the Lubbock Bank beginning on January 1, 2001. (2) Nonaccrual loans are included in the Average Balance columns, and income recognized on these loans, if any, is included in the Interest Income/Expense columns. Interest income on loans includes fees on loans, which are not material in amount. (3) Nontaxable interest income on securities was adjusted to a taxable yield assuming a tax rate of 34%. (4) The interest rate spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) The net interest margin is equal to net interest income, on a fully taxable-equivalent basis, divided by average interest-earning assets. 10 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 rate and volume in the table have been allocated to volume or rate change in proportion to the absolute amounts of the change in each.

__________________ (1) Nonaccrual loans have been included in average assets for the purposes of the computations, thereby reducing yields. (2) Information with respect to 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; expectations of future economic conditions and their impact on particular industries and individual borrowers; the market value of collateral; the strength of available guarantees; concentrations of credits; and other judgmental factors. The provision for loan losses for the quarter ended March 31, 2001 was $1,635,000, compared to $110,000 for the quarter ended March 31, 2000. The reason for the substantially larger provision was the recently discovered deterioration of the Bank's collateral position on two particular large borrowing relationships. Noninterest Income Total noninterest income increased $458,000, or 56.4%, from $812,000 during the first quarter of 2000 to $1,270,000 during the first quarter of 2001. Service charges on deposit accounts and on other types of services are the major source of noninterest income to the Company. This source of income increased from $679,000 during the first three months of 2000 to $874,000 during the first three months of 2001, a $195,000, or 28.7%, increase. The increase was due to the Bank Mergers. 11 Trust fees from the operation of the trust department of the Bank increased $81,000, or 120.9%, from $67,000 during the first three months of 2000 to $148,000 during the same period in 2001, as a result of the purchase of the management of approximately $33,000,000 in trust assets from another trust company during the fourth quarter of 2000. Other income is the sum of several components of noninterest income including other customer service fees, brokerage service fees, credit and debit card income, safe deposit box rental income and other sources of miscellaneous income. Other income increased $182,000, or 275.8%, from $66,000 during the first quarter of 2000 to $248,000 during the first quarter of 2001, due to the Bank Mergers and the receipt of a $48,000 franchise tax refund during the first quarter of 2001. Noninterest Expenses Total noninterest expenses increased $3,366,000, or 94.0%, from $3,579,000 during the first quarter of 2000 to $6,945,000 during the first quarter of 2001. Salaries and employee benefits increased $1,364,000, or 90.9%, from $1,501,000 for the first quarter of 2000 to $2,865,000 for the corresponding period of 2001. The increase was a result of the Bank Mergers. Amortization of intangible assets increased $854,000, or 508.3%, from $168,000 for the first quarter of 2000 to $1,022,000 for the first quarter of 2001. The increase is due to the Acquisition and the Bank Mergers. Unamortized intangible assets increased from $9,746,000 immediately prior to the Acquisition to $48,156,000 at March 31, 2001. Net occupancy expense was $465,000 for the first three months of 2001, an increase of $181,000, or 63.7%, from the $284,000 in expense recorded during the first three months of 2000. The increase was primarily a result of the Bank Mergers. Equipment expense increased from $287,000 for the first quarter of 2000 to $459,000 for the corresponding period in 2001, representing an increase of $172,000, or 59.9%. The increase was due to the Bank Mergers. Professional fees, which include legal, accounting and other professional fees, increased $169,000, or 136.3%, from $124,000 during the first quarter of 2000 to $293,000 during the same period of 2001, due primarily to an increase in accounting fees associated with various regulatory filings that were required as a result of the Bank Mergers and the filing of the Company's final federal income tax return. Distributions on guaranteed preferred beneficial interests in the Company's subordinated debentures totaled $276,000 for the first quarter of 2000 and $280,000 for the first quarter of 2001, an increase of $4,000, or 1.4%. The increase was due to the accretion into expense of the purchase accounting discount recorded on the Company's Trust Preferred Securities in connection with the Acquisition. Communication expense increased $138,000, or 170.4%, from $81,000 for the first quarter of 2000 to $219,000 for the first quarter of 2001. The increase was due to a greater amount of voice and data communication capacity necessary for the increased number of Bank branch locations as a result of the Bank Mergers. Stationery, printing and supplies expense increased $48,000, or 34.5%, from $139,000 for the first three months of 2000 to $187,000 for the first three months of 2001. The increase is due to the Bank Mergers. Data processing expense increased $141,000, or 327.9%, from $43,000 for the first quarter of 2000 to $184,000 for the first quarter of 2001. The increase is due to several data processing conversions that were performed as a result of the Acquisition and the Bank Mergers and the fact that State National outsources the data processing function as opposed to the Company which had an in-house data processing system prior to the Acquisition. Advertising and business development expense increased $86,000, or 159.3%, from $54,000 during the first quarter of 2000 to $140,000 during the first quarter of 2001 due to the Bank Mergers and the more aggressive 12 advertising and public relations campaign employed by State National as compared to the Company prior to the Acquisition. Net costs applicable to other real estate and other repossessed assets consist of expenses associated with holding and maintaining repossessed assets, the net gain or loss on the sales of such assets, the write-down of the carrying value of the assets and any rental income that is credited as a reduction in expense. The Company recorded net revenues of $21,000 during the first quarter of 2001 and net costs of $6,000 during the first quarter of 2000. The net revenue recorded during the first quarter of 2001 was a result of a gain of approximately $30,000 on the sale of other real estate during that time period. Merger-related expense decreased from $209,000 during the first quarter of 2000 to $51,000 during the first quarter of 2001. The first quarter 2000 amount related to the Acquisition, while the first quarter 2001 amount related to the Lubbock Merger. Other noninterest expense includes, among many other items, postage, loan and collection expenses, armored car and courier services, travel, insurance, ATM transaction expenses, regulatory examinations, franchise taxes, dues and subscriptions, Federal Deposit Insurance Corporation ("FDIC") insurance expense and directors' fees. These expenses increased $394,000, or 96.8%, from $407,000 for the first quarter of 2000 to $801,000 for the first quarter of 2001 primarily as a result of the Bank Mergers. Federal Income Taxes The Company recorded a federal income tax benefit of $382,000 for the first quarter of 2001, compared to $253,000 in federal income tax expense in the first quarter of 2000. The benefit recorded during the first quarter of 2001 was due to the increased provision for loan losses, which was offset somewhat by the increased amortization of goodwill that is not deductible for tax purposes. 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 tries 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. Analysis of Financial Condition ------------------------------- Assets Total assets decreased $10,146,000, or 1.5%, from $697,196,000 at December 31, 2000, to $687,050,000 at March 31, 2001, due to decreases in noninterest-bearing demand deposits and interest-bearing demand deposits during the first three months of 2001. These decreases were somewhat offset by an increase in interest-bearing time deposits. Cash and Cash Equivalents The amount of cash and cash equivalents decreased $36,960,000, or 43.4%, from $85,185,000 at December 31, 2000, to $48,255,000 at March 31, 2001, due primarily to purchase of short- term investment securities during the first quarter of 2001. Securities Securities increased $45,013,000, or 25.4%, from $177,183,000 at December 31, 2000, to $222,196,000 at March 31, 2001. The increase in the first quarter of 2001 was due to the reason noted above. Effective January 1, 2001, the Bank adopted provisions of Financial Accounting Statement No. 133 permitting the reclassification of securities classified as held-to-maturity to the available-for-sale category. 13 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, federal agency securities and mortgage-backed securities having maturities of five years or less and for the purchase of state, county and municipal agencies' securities with maximum maturities of 10 years. The Company's policy is to maintain a securities portfolio with 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, totaling $222,196,000, are classified as available- for-sale and are carried at fair value at March 31, 2001. 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 March 31, 2001, the book value of U.S. Treasury and other U.S. Government agency securities so pledged amounted to $44,270,000, or 19.9% of the total securities portfolio. The following table summarizes the amounts and the distribution of the Company's securities held at the dates indicated.

The market value of securities classified as held-to- maturity is usually different from the reported carrying value of such securities due to interest rate fluctuations that cause market valuations to change. The following table provides the maturity distribution and weighted average interest rates of the Company's total securities portfolio at March 31, 2001. The yield has been computed by relating the forward income stream on the securities, plus or minus the anticipated amortization of premiums or accretion of discounts, to the carrying value of the securities. The book value of securities classified as held-to-maturity is their cost, adjusted for previous amortization or accretion. The restatement of the yields on tax-exempt securities to a fully taxable- equivalent basis has been computed assuming a tax rate of 34%. 14

Loan Portfolio Total loans, net of unearned income, decreased $23,734,000, or 6.5%, from $366,933,000 at December 31, 2000, to $343,199,000 at March 31, 2001. The decrease during the first quarter of 2001 was a result of a decrease in commercial and agriculture-related loans. The Bank primarily makes installment loans to individuals and commercial and real estate loans to small to medium-sized businesses and professionals. The Bank offers a variety of commercial lending products including revolving lines of credit, letters of credit, working capital loans and loans to finance accounts receivable, inventory and equipment. Typically, the Bank's commercial loans have floating rates of interest, are for varying terms (generally not exceeding five years), are personally guaranteed by the borrower and are collateralized by accounts receivable, inventory or other business assets. 15 The following table presents the Company's loan balances at the dates indicated separated by loan types. March 31, December 31, 2001 2000 ---------- ------------ (In thousands) Real estate loans $132,633 $127,510 Commercial loans 123,143 127,205 Loans to individuals 49,757 53,308 Other loans 37,757 59,036 -------- -------- Total loans 343,290 367,059 Less unearned income 91 126 -------- -------- Loans, net of unearned income $343,199 $366,933 ======== ======== 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 March 31, 2001, except for those described in the above table. The Bank had no loans outstanding to foreign countries or borrowers headquartered in foreign countries at March 31, 2001. 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 March 31, 2001. 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 money market environment as represented by the prime rate. One to Over Total One Year Five Five Carrying and Less Years Years Value -------- ------- ------- -------- (In thousands) Real estate loans $ 51,889 $68,324 $12,420 $132,633 Commercial loans 97,933 23,989 1,221 123,143 Other loans 35,231 2,449 77 37,757 -------- ------- ------- -------- Total loans $185,053 $94,762 $13,718 $293,533 ======== ======= ======= ======== With fixed interest rates $ 38,865 $91,153 $12,864 $142,882 With variable interest rates 146,188 3,609 854 150,651 -------- ------- ------- -------- Total loans $185,053 $94,762 $13,718 $293,533 ======== ======= ======= ======== 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. 16 The amount of the allowance equals the cumulative total of the loan loss 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 $9,256,000, or 2.70% of loans, net of unearned income, at March 31, 2001, compared to $8,379,000, or 2.28% of loans, net of unearned income, at December 31, 2000. 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 it 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 $829,000 in loans during the first quarter of 2001. Recoveries during the first quarter of 2001 were $71,000. The following table presents the provisions for loan losses, loans charged off and recoveries on loans previously charged off, the amount of the allowance, the average loans outstanding and certain pertinent ratios for the quarters ended March 31, 2001 and 2000. March 31, ---------------------- 2001 2000 --------- ---------- (Dollars in thousands) Analysis of allowance for possible loan losses: Balance, at January 1 $ 8,379 $ 1,833 Provision for loan losses 1,635 110 -------- --------- 10,014 1,943 -------- --------- Loans charged off: Real estate loans 0 0 Commercial loans 470 29 Loans to individuals 234 74 Other loans 125 6 -------- --------- Total charge-offs 829 109 -------- --------- Recoveries of loans previously charged off: Real estate loans 0 0 Commercial loans 31 5 Loans to individuals 40 26 Other loans 0 1 -------- --------- Total recoveries 71 32 -------- --------- Net loans charged off 758 77 -------- --------- Balance, at March 31 $ 9,256 $ 1,866 ======== ========= Average loans outstanding, net of unearned income $355,571 $ 186,162 ======== ========= Ratio of net loan charge-offs to average loans outstanding, net of unearned income (annualized) 0.85% 0.17% ======== ========= Ratio of allowance for possible loan losses to total loans, net of unearned income, at March 31 2.70% 1.00% ======== ========= The increase in the balance of the allowance from March 31, 2000, to March 31, 2001, are primarily due to the recording of an additional $3,028,000 in allowance through purchase accounting adjustments in connection with the Acquisition, the fact that UB&T had $1,562,000 in allowance at the date of the Acquisition, the fact that the Lubbock Bank had $1,481,000 in allowance at December 31, 2000, and the $1.6 million provision that was made during the first quarter of 2001. 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 Company attempts to convert 17 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. 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 March 31, 2001, and December 31, 2000.

Loan Review Process The Company follows a loan review program to evaluate the credit risk in its loan portfolio. Through the loan review process, the Bank maintains an internally classified loan list that, along with the list of nonperforming loans discussed below, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance. Loans classified as "substandard" are those loans with clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment sources, involvement in bankruptcy proceedings or poor financial condition, which may jeopardize recoverability of the loan. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans, but also have an increased risk that a loss may occur or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as "loss" are those loans that are usually in the process of being charged off. At March 31, 2001, substandard loans totaled $14,946,000, of which $4,666,000 were loans designated as nonaccrual or 90 days past due. Doubtful loans totaled $2,364,000 of which $2,157,000 were designated as nonaccrual or 90 days past due. There were no loans designated as loss at March 31, 2001. Substandard and doubtful loans at December 31, 2000, were $15,082,000 and $1,742,000, respectively. 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 18 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 in assessing the adequacy of the allowance. At March 31, 2001, watch list loans totaled $4,185,000. Substantially all of the loans on the watch list at March 31, 2001, were current and paying in accordance with loan terms. "Nonperforming Assets" below. 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 March 31, 2001, and December 31, 2000. March 31, December 31, 2001 2000 ---------- ----------- (In thousands) Nonaccrual loans $ 7,334 $3,337 Accruing loans contractually past due over 90 days 3,900 2,572 Restructured loans 64 119 Other real estate and other repossessed assets 841 576 ------- ------ Total nonperforming assets $12,139 $6,604 ======= ====== The gross interest income that would have been recorded during the first quarter of 2001 on the Company's nonaccrual loans if such loans had been current, in accordance with the original terms thereof and outstanding throughout the period or, if shorter, since origination, was approximately $108,000. No interest income was actually recorded (received) on loans that were on nonaccrual during the first quarter of 2001. 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 those reported in the above table or those included on the watch list as discussed above. 19 Intangible Assets Intangible assets decreased $1,020,000, or 2.1%, from $49,176,000 at December 31, 2000, to $48,156,000 at March 31, 2001. This decrease was due entirely to core deposit intangible and goodwill amortization expense recorded during the first quarter of 2001. Premises and Equipment Premises and equipment increased $171,000, or 1.1%, during the first quarter of 2001, from $15,855,000 at December 31, 2000, to $16,026,000 at March 31, 2001. The increase was due to the purchase of additional software and equipment. This increase was partially offset by depreciation expense of $359,000 which was recorded during the first quarter of 2001. 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 decreased $1,902,000, or 23.7%, from $8,014,000 at December 31, 2000, to $6,112,000 at March 31, 2001. The decrease was primarily a result of a decrease in loans, primarily agricultural, on which significant principal and interest payments are normally received after December 31. Of the total balance at March 31, 2001, $3,924,000, or 64.2%, was interest accrued on loans and $2,188,000, or 35.8%, was interest accrued on securities. The amounts of accrued interest receivable and percentages attributable to loans and securities at December 31, 2000, were $5,568,000, or 69.5%, and $2,446,000, or 30.5%, respectively. Other Real Estate and Other Repossessed Assets Other real estate and other repossessed assets consist of real property and other assets unrelated to banking premises or facilities. Income derived from other real estate and other repossessed assets, if any, is generally less than that which would have been earned as interest at the original contract rates on the related loans. At March 31, 2001, and December 31, 2000, other real estate and other repossessed assets had an aggregate book value of $841,000 and $576,000, respectively. Other real estate and other repossessed assets increased $265,000, or 46.0%, during the first three months of 2001, due to the repossession of one parcel of real estate. Of the March 31, 2001, balance, $714,000 represented six commercial and agricultural properties and $127,000 represented nineteen repossessed vehicles and other equipment. Other Assets The balance of other assets increased $8,868,000, or 334.3%, to $11,521,000 at March 31, 2001, from $2,653,000 at December 31, 2000, as a result of the purchase of bank owned life insurance on various officers of the Bank. Deposits The Bank's lending and investing activities are funded almost entirely by core deposits, 46.7% of which are demand, savings and money market deposits at March 31, 2001. Total deposits decreased $5,424,000, or 0.9%, from $592,971,000 at December 31, 2000, to $587,547,000 at March 31, 2001. The decrease was due to decreases in noninterest-bearing and interest- bearing demand deposits. These decreases were partially offset by an increase in time deposits. The Bank does not have any brokered deposits. 20 The following table presents the average amounts of, and the average rates paid on, deposits of the Company for the quarters ended March 31, 2001 and 2000.

The maturity distribution of time deposits of $100,000 or more at March 31, 2001, is presented below. At March 31, 2001 --------------------- (In thousands) 3 months or less $ 27,891 Over 3 through 6 months 33,091 Over 6 through 12 months 44,508 Over 12 months 14,807 ---------------- Total time deposits of $100,000 or more $ 120,297 ================ 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 March 31, 2001, and December 31, 2000, deposits of $100,000 or more represented approximately 17.5% and 15.5%, respectively, of the Company's total assets. 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 decreased $133,000, or 5.3%, from $2,491,000 at December 31, 2000, to $2,358,000 at March 31, 2001, due to a decrease in interest rates being paid on interest-bearing deposits during the first quarter of 2001. Other Liabilities The most significant components of other liabilities are amounts accrued for various types of expenses and current and deferred federal income taxes payable. The balance of other liabilities decreased $3,993,000, or 45.1%, from $8,846,000 at December 31, 2000, to $4,853,000 at March 31, 2001, primarily due to the reclassification of the Company's deferred tax asset against its deferred tax liability at March 31, 2001. Interest Rate Sensitivity 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 21 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 93.1% at the 90-day interval, 82.7% at the 180-day interval and 74.7% at the 365-day interval at March 31, 2001. Currently, the Company is in a liability-sensitive position at the three intervals. However, the Company had $181,793,000 of interest- bearing demand, savings and money market deposits at March 31, 2001, on which, from the Company's experience, interest rates change more slowly. 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 124.9% at March 31, 2001. The interest sensitivity position is presented as of a point in time and can be modified to some extent by management as changing conditions dictate. The following table shows the interest rate sensitivity position of the Company at March 31, 2001.

_________________ (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. 22 Selected Financial Ratios The following table presents selected financial ratios (annualized) for the quarters ended March 31, 2001 and 2000. Quarter Ended March 31, --------------- 2001 2000 ------- ------ Net income (loss) to: Average assets (0.62)% 0.55% Average interest-earning assets (0.73) 0.63 Average stockholder's equity (5.26) 7.69 Dividend payout (1) to: Net income N/A 27.59 Average stockholder's equity N/A 2.12 Average stockholder's equity to: Average total assets 11.74 7.13 Average loans (2) 23.03 13.78 Average total deposits 13.77 8.04 Average interest-earning assets to: Average total assets 84.95 87.64 Average total deposits 99.67 98.83 Average total liabilities 97.99 98.19 Ratio to total average deposits of: Average loans (2) 59.81 58.39 Average noninterest bearing deposits 16.02 18.68 Average interest-bearing deposits 83.98 81.32 Total interest expense to total interest income 50.58 41.09 Efficiency Ratio (3) 79.54 70.55 __________________ (1) Dividends on Common Stock only. (2) Before allowance for possible loan losses. (3) Calculated as a noninterest expense less distributions on guaranteed preferred beneficial interests in the Company's subordinated debentures, amortization of intangibles and expenses related to other real estate and other repossessed assets divided by the sum of net interest income before provision for loan losses and total noninterest income, excluding securities gains and losses. Liquidity The Bank Liquidity with respect to a financial institution is the ability to meet its short-term needs for cash without suffering an unfavorable impact on its on-going operations. The need for the Bank to maintain funds on hand arises principally from maturities of short-term borrowings, deposit withdrawals, customers' borrowing needs and the maintenance of reserve requirements. Liquidity with respect to a financial institution can be met from either assets or liabilities. On the asset side, the primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities and scheduled repayments and maturities of loans. The Bank maintains adequate levels of cash and near-cash investments to meet its day-to-day needs. Cash and due from banks averaged $35,888,000 during the first quarter of 2001 and $20,483,000 during the first quarter of 2000. These amounts comprised 5.1% and 5.7% of average total assets during the first three months of 2001 and 2000, respectively. The average level of securities, interest-earning time deposits in other banks and federal funds sold was $236,984,000 during the first quarter of 2001 and $128,950,000 during the first quarter of 2000. The increase in average balances from the first quarter of 2000 to the first quarter of 2001 was primarily due to the Bank Mergers. No securities were sold during the quarter ended March 31, 2001. A total of $2,000,000 of securities classified as available- for-sale were sold during the quarter ended March 31, 2000. At March 31, 2001, $78,659,000, or 44.7%, of the Company's securities portfolio, excluding mortgage-backed securities, matured within one year and $74,159,000, or 42.1%, excluding mortgage-backed securities, matured after one but within 23 five years. The Bank's commercial and real estate lending activities are concentrated in loans with maturities of less than five years 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 March 31, 2001, approximately $197,847,000, or 57.6%, of the Company's loans, net of unearned income, matured within one year and/or had adjustable interest rates. Approximately $189,516,000, or 64.6%, of the Company's loans (excluding loans to individuals) matured within one year and/or had adjustable interest rates. See "Analysis of Financial Condition-Loan Portfolio" above. On the liability side, the principal sources of liquidity are deposits, borrowed funds and the accessibility to money and capital markets. Customer deposits are by far the largest source of funds. During the first quarter of 2001, the Company's average deposits were $594,491,000 or 85.2% of average total assets, compared to $318,848,000, or 88.7% of average total assets, during the first quarter of 2000. 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 distribution requirements on Independent Capital Trust's Trust Preferred Securities and to cover other operating expenses. Prior to the Acquisition, 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 to the Company is subject to applicable law and the scrutiny of regulatory authorities. Dividends paid by the Bank to Independent Financial during the first quarter of 2001 and 2000 were $700,000 and $450,000, respectively; in turn, Independent Financial and Independent Capital paid dividends to the Company totaling $709,000 and $459,000 during the same time periods of 2001 and 2000, respectively. At March 31, 2001, there were no dividends available for payment to Independent Financial by the Bank without regulatory approval. There were no current tax liabilities generated by the Bank during the first quarter of 2001 due to the pre-tax loss incurred by the Bank. The payment of current tax liabilities generated by the Bank and management and service fees constituted 46.8% and 4.0%, respectively, of the Company's cash flow during the first quarter of 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 $446,000 were paid by the Bank to the Company during the first three months of 2000. 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 $38,000 in management fees to the Company in the first quarter of 2000. The Company's fees had to be reasonable in relation to the management services rendered, and the Bank was prohibited from paying management fees to the Company if the Bank would have been undercapitalized after any such distribution or payment. Capital Resources At March 31, 2001, stockholder's equity totaled $81,311,000, or 11.8% of total assets, compared to $81,984,000, or 11.8% of total assets, at December 31, 2000. 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 banking companies to have Tier 1 capital of at least 4% and total capital (Tier 1 and Tier 2 capital) of at least 8% of risk- weighted assets, and to be designated as well-capitalized, the banking company must have Tier 1 and total capital ratios of at least 24 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. For the Company, Tier 2 capital is comprised of the remainder of the guaranteed preferred beneficial interests in the Company's subordinated debentures not qualifying for Tier 1 capital and the qualifying amount of the allowance for possible loan losses. Banking regulators also have leverage ratio requirements. The leverage ratio requirement is measured as the ratio of Tier 1 capital to adjusted quarterly average assets. The leverage ratio standards require all banking companies to have a minimum leverage ratio of at least 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 March 31, 2001. The Company March 31, 2001 -------------- (In thousands) Tier 1 capital: Common stockholder's equity, excluding unrealized gain on available-for-sale securities $ 78,589 Qualifying guaranteed preferred beneficial interests in the Company's subordinated debentures (1) 10,907 Intangible assets, net of deferred tax liability associated with the core deposit intangible (43,206) Deferred tax asset disallowed for regulatory capital purposes (1,305) -------- Total Tier 1 capital 44,985 -------- Tier 2 capital: Allowance for possible loan losses (2) 4,802 -------- Total Tier 2 capital 4,802 -------- Total capital $ 49,787 ======== Net risk-weighted assets $379,739 ======== Adjusted quarterly average assets $652,621 ======== Actual Well Ratios at Regulatory Capitalized March 31, The Company Minimum Minimum 2001 ----------- ---------- ----------- ---------- Tier 1 capital to net risk- weighted assets ratio 4.00% 6.00% 11.85% Total capital to net risk- weighted assets ratio 8.00 10.00 13.11 Leverage ratio 4.00 5.00 6.89 The Bank -------- Tier 1 capital to net risk- weighted assets ratio 4.00% 6.00% 12.03% Total capital to net risk- weighted assets ratio 8.00 10.00 13.30 Leverage ratio 4.00 5.00 6.99 __________________ (1) Limited to 25% of total Tier 1 capital, with any remainder qualifying as Tier 2 capital. (2) Limited to 1.25% of risk-weighted assets. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non- traditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. This law also requires each federal banking 25 agency to specify the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under the FDIC's regulations, the Company and the Bank were both "well capitalized" at March 31, 2001. The Company's ability to generate capital internally through retention of earnings and access to capital markets is essential for satisfying the capital guidelines for bank holding companies as prescribed by the Federal Reserve Board. The payment of dividends on the Common Stock 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 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 on common stock unless such bank holding company can pay such dividends from current earnings. 26 PART II OTHER INFORMATION Item 1. Legal Proceedings. The Estate of Harry V. Howard, Deceased, has a lawsuit pending 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 2. Changes in Securities. None Item 3. Defaults upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. Effective May 15, 2001, Bryan W. Stephenson, the President, Chief Executive Officer and a Director of the Company, and Vice Chairman of the Board and a Director of the Bank, will no longer be a director, officer or employee of the Company or the Bank. Effective May 31, 2001, Randal N. Crosswhite, the Chief Financial Officer and a Director of the Company, and Director of the Bank, will no longer be a director, officer or employee of the Company or the Bank. 27 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits None (b) Reports on Form 8-K Current Report on Form 8-K/A dated January 29, 2001, amending the Current Report on Form 8-K dated November 28, 2000, reporting the merger of United Bank & Trust and First State Bank, N.A., 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. Current Report on Form 8-K/A dated May 11, 2001, amending the 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. 28 SIGNATURE Pursuant to the requirements 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. Date: May 15, 2001 Independent Bankshares, Inc. (Registrant) By: /s/Don E. Cosby ------------------------- Don E. Cosby Executive Vice President By: /s/Randal N. Crosswhite -------------------------- Randal N. Crosswhite Chief Financial Officer

INDEPENDENT BANKSHARES INC 10-Q