SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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 0-7674
First Financial Bankshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Texas 75-0944023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 Pine Street
Abilene, Texas 79601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (915) 627-7155
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
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 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. [X]
As of March 1, 2000, the aggregate market value of voting stock held by
non-affiliates was $232,108,200.
As of March 1,2000,there were 9,974,306 shares of Common Stock outstanding.
Documents Incorporated by Reference
The Proxy Statement for the 2000 Annual Meeting is incorporated into Part
III of this Form 10-K by reference.
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TABLE OF CONTENTS
Page
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FORWARD-LOOKING STATEMENTS.....................................................1
PART I
ITEM 1. BUSINESS........................................................1
ITEM 2. PROPERTIES.....................................................10
ITEM 3. LEGAL PROCEEDINGS..............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................11
ITEM 6. SELECTED FINANCIAL DATA........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........23
ITEM 11. EXECUTIVE COMPENSATION......................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K....................................................23
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
and similar expressions, as they relate to us or our management, identify
forward-looking statements. These forward-looking statements are based on
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including but not limited to general economic conditions,
actions taken by the Federal Reserve Board, legislative and regulatory actions
and reforms, competition and other factors described in "PART II, Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements reflect the current views of our management with
respect to future events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of operations, growth
strategy and liquidity. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
General
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First Financial Bankshares, Inc., a Texas corporation, is a multi-bank
holding company registered under the Bank Holding Company Act of 1956, or BHCA.
As such, we are supervised by the Board of Governors of the Federal Reserve
System, or Federal Reserve Board. We were formed in 1956 under the original name
F & M Operating Company. By virtue of a series of reorganizations, mergers, and
acquisitions since 1956, we now own, through our wholly-owned Delaware
subsidiary, First Financial Bankshares of Delaware, Inc., nine banks organized
and located in Texas. These nine banks are First National Bank of Abilene,
Abilene, Texas; Hereford State Bank, Hereford, Texas; First National Bank,
Sweetwater, Texas; Eastland National Bank, Eastland, Texas; The First National
Bank in Cleburne, Cleburne, Texas; Stephenville Bank and Trust Co.,
Stephenville, Texas; San Angelo National Bank, San Angelo, Texas; Weatherford
National Bank, Weatherford, Texas; and Texas National Bank, Southlake, Texas.
Our service centers are located primarily in North Central and West Texas.
Considering the branches and locations of all our subsidiary banks, as of
December 31, 1999, we had 25 financial centers across Texas, with seven
locations in Abilene, two locations in Cleburne, two locations in Stephenville,
two locations in San Angelo, three locations in Weatherford, and one location
each in Hereford, Sweetwater, Eastland, Southlake, Aledo, Alvarado, Burleson,
Trophy Club, and Roby.
First Financial Bankshares, Inc.
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We provide management and technical resources and policy direction to our
subsidiary banks, which enables them to improve or expand their banking services
while continuing their local activity and identity. Each of our subsidiary banks
operates under the day-to-day management of its own board of directors and
officers, with substantial authority in making decisions concerning their own
investments, loan policies, interest rates, and service charges. We provide
resources and policy direction in, among other things, the following areas:
o asset and liability management;
o accounting, budgeting, planning and insurance;
o capitalization; and
o regulatory compliance.
In particular, we assist our subsidiary banks with, among other things,
decisions concerning major capital expenditures, employee fringe benefits,
including pension plans and group insurance, dividend policies, and appointment
of officers and directors and their compensation. We also perform, through
corporate staff groups or by outsourcing to third parties, internal audits and
loan reviews of our subsidiary banks. Through First National Bank of Abilene, we
provide advice and specialized services for our banks related to lending,
investing, purchasing, advertising, public relations, and computer services.
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Services Offered by Our Subsidiary Banks
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Each of our subsidiary banks is a separate entity that operates under the
day-to-day management of its own board of directors and officers. Each of our
subsidiary banks provides general commercial banking services, which include
accepting and holding checking, savings and time deposits, making loans,
automated teller machines, drive-in and night deposit services, safe deposit
facilities, transmitting funds, and performing other customary commercial
banking services. Our subsidiary banks also administer pension plans, profit
sharing plans and other employee benefit plans, act as stock transfer agents or
stock registrars for corporations, and provide paying agent services. First
National Bank of Abilene, First National Bank, Sweetwater, Stephenville Bank and
Trust Co. and San Angelo National Bank have active trust departments. The trust
departments offer a complete range of services to individuals, associations, and
corporations. These services include administering estates, testamentary trusts,
various types of living trusts, and agency accounts. In addition, First National
Bank of Abilene, First National Bank in Cleburne, and San Angelo National Bank
provide securities brokerage services through arrangements with various third
parties.
Competition
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Commercial banking in Texas is highly competitive, and because we hold less
than 1% of deposits, we represent only a minor segment of the industry. To
succeed in this industry, our management believes that our banks must have the
capability to compete in the areas of (1) interest rates paid or charged; (2)
scope of services offered; and (3) prices charged for such services. Our
subsidiary banks compete in their respective service areas against highly
competitive banks, savings and loan associations, small loan companies, credit
unions, and brokerage firms, all of which are engaged in providing financial
products and services and some of which are larger than our subsidiary banks in
terms of capital, resources and personnel.
Our business does not depend on any single customer or any few customers,
the loss of any one of which would have a materially adverse effect upon our
business. Our customers include our officers and directors, as well as other
entities with which we are affiliated. With our subsidiary banks we may make
loans to officers and directors, and entities with which we are affiliated, in
the ordinary course of business. We make these loans on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. Loans to directors, officers and
their affiliates are also subject to certain restrictions under federal and
state banking laws.
Employees
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With our subsidiary banks we employed approximately 720 full-time
equivalent employees at March 1, 2000. Our management believes that our employee
relations have been and will continue to be good.
Supervision and Regulation
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Both federal and state laws extensively regulate bank holding companies and
banks. These laws (and the regulations promulgated thereunder) are primarily
intended to protect depositors and the deposit insurance fund of the Federal
Deposit Insurance Corporation, or FDIC, although shareholders are also
benefited. The following information describes particular laws and regulatory
provisions relating to bank holding companies and banks. This discussion is
qualified in its entirety by reference to the particular laws and regulatory
provisions. A change in any of these laws or regulations may have a material
effect on our business and the business of our subsidiary banks.
Bank Holding Companies
Because we are a bank holding company, we are subject to regulation under
the BHCA and its examination and reporting requirements. The BHCA provides that
bank holding companies may not:
(1) engage in any activities other than banking, managing and controlling
banks, furnishing services to a bank that it owns and controls, or engaging in
certain activities closely related to banking. Examples of activities that the
Federal Reserve Board has determined to be closely related to banking, or to
managing or controlling banks, include:
o the making or acquiring of loans or other extensions of credit;
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o servicing of loans;
o performing certain trust functions;
o acting or serving as an investment or financial advisor;
o providing certain securities brokerage services as agent for
customers; and
o providing bookkeeping and data processing services for a bank
holding company and its subsidiaries; or
(2) (subject to certain limited exceptions) directly or indirectly acquire
the ownership or control of more than five percent of any class of voting shares
or assets of any company, including a bank, without the prior written approval
of the Federal Reserve Board.
The BHCA provides that the Federal Reserve Board cannot approve any
acquisition, merger or consolidation that may
o substantially lessen competition in the banking industry,
o create a monopoly in any section of the country, or
o be a restraint of trade.
However, the Federal Reserve Board may approve such a transaction if the
convenience and needs of the community clearly outweigh any anti-competitive
effects. Specifically, the Federal Reserve Board would consider, among other
factors, the expected benefits to the public (greater convenience, increased
competition, greater efficiency, etc.) against the risks of possible adverse
effects (undue concentration of resources, decreased or unfair competition,
conflicts of interest, unsound banking practices, etc.). Also, see
"--Supervision and Regulation--Capital" for discussion of capital requirements
of bank holding companies and "--Our Support of Our Subsidiary Banks" for
discussion of support requirements of bank holding companies.
Banks
Federal and state laws and regulations that govern banks have the effect
of, among other things, regulating the scope of business, investments, cash
reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking
associations under the National Bank Act are subject to regulation and
examination by the Office of the Comptroller of the Currency, or OCC. The OCC
supervises, regulates and regularly examines the First National Bank of Abilene,
First National Bank, Sweetwater, The First National Bank in Cleburne, Eastland
National Bank, San Angelo National Bank, Weatherford National Bank and Texas
National Bank. The OCC's supervision and regulation of banks is primarily
intended to protect the interests of depositors. The National Bank Act
o requires each national banking association to maintain reserves
against deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
State Banks. Banks that are organized as state banks under Texas law are
subject to regulation and examination by the Banking Commissioner of the State
of Texas. The Commissioner regulates and supervises, and the Texas Banking
Department regularly examines, Hereford State Bank and Stephenville Bank and
Trust Co. The Commissioner's supervision and regulation of banks is primarily
designed to protect the interests of depositors. Texas law
o requires each state bank to maintain reserves against deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
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See "--Supervision and Regulation--Payment of Dividends" for discussion of
restrictions on a bank's ability to pay dividends and "--Supervision and
Regulation--Capital" for a discussion of capital requirements of our subsidiary
banks.
Deposit Insurance
Each of our subsidiary banks is a member of the FDIC. The FDIC provides
deposit insurance protection that covers all deposit accounts in FDIC-insured
depository institutions and that generally does not exceed $100,000 per
depositor. Our subsidiary banks must pay assessments to the FDIC under a
risk-based assessment system for federal deposit insurance protection.
FDIC-insured depository institutions that are members of the Bank Insurance Fund
pay insurance premiums at rates based on their risk classification. Institutions
assigned to higher risk classifications (i.e., institutions that pose a greater
risk of loss to their respective deposit insurance funds) pay assessments at
higher rates than institutions that pose a lower risk. An institution's risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to bank regulators. In addition, the
FDIC can impose special assessments to cover the costs of borrowings from the
U.S. Treasury, the Federal Financing Bank and the Bank Insurance Fund member
banks. As of December 31, 1999, the assessment rate for each of our subsidiary
banks is at the lowest level risk-based premium available.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, or FIRREA, an FDIC-insured depository institution can be held liable for
any losses incurred by the FDIC in connection with (1) the "default" of one of
its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one
of its FDIC-insured subsidiaries "in danger of default." "Default" is defined
generally as the appointment of a conservator or receiver, and "in danger of
default" is defined generally as the existence of certain conditions indicating
that a default is likely to occur in the absence of regulatory assistance.
The Federal Deposit Insurance Act, or FDIA requires that the FDIC review
(1) any merger or consolidation by or with an insured bank, or (2) any
establishment of branches by an insured bank. The FDIC is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also
required before an insured bank retires any part of its common or preferred
stock, or any capital notes or debentures. Insured banks that are also members
of the Federal Reserve System, however, are regulated with respect to the
foregoing matters by the Federal Reserve System.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other
subsidiaries. We receive most of our revenue from dividends paid to us by our
Delaware holding company subsidiary. Similarly, the Delaware holding company
subsidiary receives dividends from our bank subsidiaries. Described below are
some of the laws and regulations that apply when either we or our subsidiary
banks pay dividends.
Each state bank that is a member of the Federal Reserve System and each
national banking association is required by federal law to obtain the prior
approval of the Federal Reserve Board and the OCC, respectively, to declare and
pay dividends if the total of all dividends declared in any calendar year would
exceed the total of (1) such bank's net profits (as defined and interpreted by
regulation) for that year plus (2) its retained net profits (as defined and
interpreted by regulation) for the preceding two calendar years, less any
required transfers to surplus. In addition, these banks may only pay dividends
to the extent that retained net profits (including the portion transferred to
surplus) exceed bad debts (as defined by regulation).
Our subsidiary banks paid aggregate dividends of approximately $20.6
million in 1999 and approximately $15.5 million in 1998. Under the dividend
restrictions discussed above, as of December 31, 1999, our subsidiary banks,
without obtaining governmental approvals, could have declared in the aggregate
additional dividends of approximately $18.6 million from retained net profits.
To pay dividends, we and our subsidiary banks must maintain adequate
capital above regulatory guidelines. In addition, if the applicable regulatory
authority believes that a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), the authority
may require, after notice and hearing, that such bank cease and desist from the
unsafe practice. The Federal Reserve Board and the OCC have each indicated that
paying dividends that deplete a bank's capital base to an inadequate level would
be an unsafe and unsound banking practice. The Federal Reserve Board, the OCC
and the FDIC have issued policy statements that recommend that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.
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Affiliate Transactions
The Federal Reserve Act and the FDIA restrict the extent to which we can
borrow or otherwise obtain credit from, or engage in certain other transactions
with, our depository subsidiaries. These laws regulate "covered transactions"
between insured depository institutions and their subsidiaries, on the one hand,
and their nondepository affiliates, on the other hand. "Covered transactions"
include a loan or extension of credit to a nondepository affiliate, a purchase
of securities issued by such an affiliate, a purchase of assets from such an
affiliate (unless otherwise exempted by the Federal Reserve Board), an
acceptance of securities issued by such an affiliate as collateral for a loan,
and an issuance of a guarantee, acceptance, or letter of credit for the benefit
of such an affiliate. The "covered transactions" that an insured depository
institution and its subsidiaries are permitted to engage in with their
nondepository affiliates are limited to the following amounts: (1) in the case
of any one such affiliate, the aggregate amount of "covered transactions" cannot
exceed ten percent of the capital stock and the surplus of the insured
depository institution; and (2) in the case of all affiliates, the aggregate
amount of "covered transactions" cannot exceed twenty percent of the capital
stock and surplus of the insured depository institution. In addition, extensions
of credit that constitute "covered transactions" must be collateralized in
prescribed amounts. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Capital
Bank Holding Companies. The Federal Reserve Board has adopted risk-based
capital guidelines for bank holding companies. The ratio of total capital to
risk weighted assets (including certain off-balance-sheet activities, such as
standby letters of credit) must be a minimum of eight percent. At least half of
the total capital is to be composed of common shareholders' equity, minority
interests in the equity accounts of consolidated subsidiaries and a limited
amount of perpetual preferred stock, less goodwill, which is collectively
referred to as Tier 1 Capital. The remainder of total capital may consist of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. Bank holding companies that meet
certain specified criteria, including having the highest regulatory rating, must
maintain a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average
assets for the current quarter, less goodwill) of three percent. Bank holding
companies that do not have the highest regulatory rating will generally be
required to maintain a higher Tier 1 Capital leverage ratio of three percent
plus an additional cushion of 100 to 200 basis points. The Federal Reserve Board
has not advised us of any specific minimum leverage ratio applicable to it. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions.
Such strong capital positions must be kept substantially above the minimum
supervisory levels without significant reliance on intangible assets (e.g.,
goodwill, core deposit intangibles and purchased mortgage servicing rights). As
of December 31, 1999, the capital ratios were as follows: (1) Tier 1 Capital to
Risk-Weighted Assets Ratio, 17.19%; (2) Total Capital to Risk-Weighted Assets
Ratio, 18.13%; and (3) Tier 1 Capital Leverage Ratio, 9.62%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991,
or FDICIA established five capital tiers with respect to depository
institutions: "well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution's capital tier will depend upon where its capital levels
are in relation to various relevant capital measures, including (1) risk-based
capital measures, (2) a leverage ratio capital measure and (3) certain other
factors. Regulations establishing the specific capital tiers provide that a
"well-capitalized" institution will have a total risk-based capital ratio of ten
percent or greater, a Tier 1 risk-based capital ratio of six percent or greater,
and a Tier 1 leverage ratio of five percent or greater, and not be subject to
any written regulatory enforcement agreement, order, capital directive or prompt
corrective action derivative. For an institution to be "adequately capitalized,"
it will have a total risk-based capital ratio of eight percent or greater, a
Tier 1 risk-based capital ratio of four percent or greater, and a Tier 1
leverage ratio of four percent or greater (in some cases three percent). For an
institution to be "undercapitalized," it will have a total risk-based capital
ratio that is less than eight percent, a Tier 1 risk-based capital ratio less
than four percent or a Tier 1 leverage ratio less than four percent (or a
leverage ratio less than three percent if the institution is rated composite 1
in its most recent report of examination, subject to appropriate federal banking
agency guidelines). For an institution to be "significantly undercapitalized,"
it will have a total risk-based capital ratio less than six percent, a Tier 1
risk-based capital ratio less than three percent, or a Tier 1 leverage ratio
less than three percent. For an institution to be "critically undercapitalized,"
it will have a ratio of tangible equity to total assets equal to or less than
two percent. FDICIA requires federal banking agencies to take "prompt corrective
action" against depository institutions that do not meet minimum capital
requirements. Under current regulations, we were "well capitalized" as of
December 31, 1999.
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FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
"undercapitalized." An "undercapitalized" institution must develop a capital
restoration plan and its parent holding company must guarantee that
institution's compliance with such plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of five percent of the
institution's assets at the time it became "undercapitalized" or the amount
needed to bring the institution into compliance with all capital standards.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors. If
a depository institution fails to submit an acceptable capital restoration plan,
it shall be treated as if it is significantly undercapitalized. "Significantly
undercapitalized" depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become "adequately capitalized," requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. "Critically
undercapitalized" institutions are subject to the appointment of a receiver or
conservator. Finally, FDICIA requires the various regulatory agencies to set
forth certain standards that do not relate to capital. Such standards relate to
the safety and soundness of operations and management and to asset quality and
executive compensation, and permit regulatory action against a financial
institution that does not meet such standards.
If an insured bank fails to meet its capital guidelines, it may be subject
to a variety of other enforcement remedies, including a prohibition on the
taking of brokered deposits and the termination of deposit insurance by the
FDIC. Bank regulators continue to indicate their desire to raise capital
requirements beyond their current levels.
In addition to FDICIA capital standards, Texas-chartered banks must also
comply with the capital requirements imposed by the Texas Banking Department.
Neither the Texas Finance Code nor its regulations specify any minimum
capital-to-assets ratio that must be maintained by a Texas-chartered bank.
Instead, the Texas Banking Department determines the appropriate ratio on a bank
by bank basis, considering factors such as the nature of a bank's business, its
total revenue, and the bank's total assets. As of December 31, 1999, all of our
Texas-chartered banks exceeded the minimum ratios applied to them.
Our Support of Our Subsidiary Banks
Under Federal Reserve Board policy, we are expected to commit resources to
support each of our subsidiary banks. This support may be required at times
when, absent such Federal Reserve Board policy, we would not otherwise be
required to provide it. In addition, any loans we make to our subsidiary banks
would be subordinate in right of payment to deposits and to other indebtedness
of our banks. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and be subject to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require the bank's
shareholders to pay the deficiency on a pro-rata basis. If any shareholder
refuses to pay the pro-rata assessment after three months notice, then the
bank's board of directors must sell an appropriate amount of the shareholder's
stock at a public auction to make up the deficiency. To the extent necessary, if
a deficiency in capital still exist and the bank refuses to go into liquidation,
then a receiver may be appointed to wind up the bank's affairs.
Interstate Banking and Branching Act
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, or Riegle-Neal Act, a bank holding company is able to acquire banks in
states other than its home state. Prior to September 29, 1995, federal law
provided that the Federal Reserve Board could only approve interstate
acquisitions by bank holding companies that were specifically authorized by the
laws of the state in which the bank whose shares were to be acquired was
located.
The Riegle-Neal Act also authorized banks to merge across state lines,
thereby creating interstate branches, beginning June 1, 1997. Under this act,
each state had the opportunity to "opt out" of this provision, thereby
prohibiting interstate branching in such states, or to "opt in" at an earlier
time, thereby allowing interstate branching within that state prior to June 1,
1997. Furthermore, pursuant to this act, a bank is now able to open new branches
in a state in which it does not already have banking operations, if the laws of
such state permit it to do so. Although Texas had adopted legislation to "opt
out" of the interstate branching provisions, recent judicial decisions and Texas
legislation have superseded this "opt-out" legislation. Accordingly, both the
OCC and the Texas Banking Department are presently accepting applications for
interstate merger and branching transactions.
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Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA subjects a bank to
regulatory assessment to determine if the institution meets the credit needs of
its entire community, including low- and moderate-income neighborhoods served by
the bank, and to take that determination into account in its evaluation of any
application made by such bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition of shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. Our subsidiary banks have taken significant actions to comply
with the CRA, and each has received at least a "satisfactory" commendation in
its most recent review by federal regulators with respect to its compliance with
the CRA. Both the United States Congress and the banking regulatory authorities
have proposed substantial changes to the CRA and fair lending laws, rules and
regulations, and there can be no certainty as to the effect, if any, that any
such changes would have on our subsidiary banks.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, which mostly takes effect on March 12, 2000,
dismantles many Depression-era restrictions against affiliation between banking,
securities and insurance firms. The act eliminates many of these barriers by
providing for a new "financial holding company" that can engage through a bank
subsidiary or other non-bank affiliates in a virtually unlimited range of
financial activities, so long as certain prudential safeguards are observed.
Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, securities firms
and insurance companies will find it easier to acquire or affiliate with each
other and cross-sell financial products.
Our management believes that the Gramm-Leach-Bliley Act will increase
competition in the market for financial services and products. Insurance
companies and securities firms, which before the passage of the act were limited
in their ability to acquire deposit-taking institutions, will find it easier to
acquire or charter banks. Conversely, banks, which before the passage of the act
were limited in their ability to underwrite securities and insurance products,
will find it easier to engage in those activities. The act also requires
additional safeguards for maintaining confidentiality of consumer financial
information. We will continue to analyze the effect of the act on our operations
and our competition after it takes effect.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, that affect the national supply of credit.
The Federal Reserve Board regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial
institution deposits, and restricting certain borrowings by financial
institutions and their subsidiaries. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banks in
the past and are expected to continue to do so in the future.
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on us and our
subsidiary banks cannot be determined at this time.
7
<PAGE>
Statistical Disclosure
- ----------------------
The following tables provide information required by the Exchange Act
Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" that has
not been included in "PART II, Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Composition of Loans (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.. $ 297,966 $ 278,647 $ 286,630 $ 240,271 $ 219,792
Real estate - construction.............. 43,039 36,721 34,100 22,887 20,206
Real estate - mortgage.................. 208,895 198,447 177,658 152,350 131,801
Consumer................................ 247,375 265,729 245,068 189,307 164,231
----------- ----------- ----------- ----------- -----------
$ 797,275 $ 779,544 $ 743,456 $ 604,815 $ 536,030
=========== =========== =========== =========== ===========
</TABLE>
Loan Concentrations
Other than the classifications shown above, we had no loans outstanding at
December 31, 1999 that represented more than 10% of total loans.
Maturity Distribution and Interest Sensitivity of Loans at December 31,
1999 (in thousands):
The following tables summarize maturity and yield information for the
commercial, financial, and agricultural and real estate construction portion of
the loan portfolio as of December 31, 1999:
<TABLE>
<CAPTION>
After One
Year
One Year Through After Five
or less Five years Years Total
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Commercial, financial, and agricultural... $ 174,545 $ 85,571 $ 37,850 $ 297,966
Real estate-- construction................ 34,407 8,632 -- 43,039
----------- ------------ ----------- -----------
$ 208,952 $ 94,203 $ 37,850 $ 341,005
=========== ============ =========== ===========
</TABLE>
Maturities
After One Year
-----------
Loans with fixed interest rates.......................... $ 71,202
Loans with floating or adjustable interest rates......... 60,851
-----------
$ 132,053
===========
Potential Problem Loans
Certain loans classified for regulatory purposes as doubtful, substandard,
or special mention are included in the nonperforming loan table. Also included
in the classified loans are certain other loans that are deemed to be potential
problems. Potential problem loans are those loans that are currently performing
but where known information about trends or uncertainties or possible credit
problems of the borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with present repayment terms, possibly
resulting in the transfer of such loans to nonperforming status. These potential
problem loans totaled $390 thousand as of December 31, 1999.
8
<PAGE>
Composition of Investment Securities (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
---------------------- --------------------- ----------------------
Amortized Est. Fair Amortized Est. Fair Amortized Est. Fair
Cost Value Cost Value Cost Value
--------- ----------- -------- ----------- -------- -----------
Held-to-maturity at amortized cost
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 283,736 $ 277,681 $293,400 $ 297,080 $330,674 $ 332,389
Obligations of states and political subdivisions 86,908 85,779 66,764 67,731 34,456 34,796
Mortgage-backed securities 46,083 45,393 44,634 44,894 59,809 59,995
Other securities 5,636 5,554 9,505 9,547 10,958 11,189
--------- ----------- -------- ----------- -------- -----------
Total $ 422,363 $ 414,407 $414,303 $ 419,252 $435,897 $ 438,369
========= =========== ======== =========== ======== ===========
Available-for-sale
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 105,290 $ 102,792 $104,256 $ 105,368 $141,531 $ 141,784
Obligations of states and political subdivisions 50,408 48,200 33,255 33,863 8,168 8,408
Mortgage-backed securities 41,940 41,158 42,579 42,795 27,036 27,164
Other securities 42,513 41,705 29,143 29,562 2,767 2,766
--------- ----------- -------- ----------- -------- -----------
Total $ 240,151 $ 233,855 $209,233 $ 211,588 $179,502 $ 180,122
========= =========== ======== =========== ======== ===========
</TABLE>
Analysis of the Allowance for Loan Losses (in thousands, except percentages):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1,........................ $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
Allowance established from
purchase acquisition...................... -- -- 1,444 800 83
---------- ---------- ---------- ---------- ---------
8,988 10,632 11,241 10,450 9,852
Charge-offs:
Commercial, financial and agricultural.... 1,038 1,267 836 1,214 442
Consumer.................................. 2,747 2,786 2,127 1,476 730
All other................................. 36 106 164 74 20
---------- ---------- ---------- ---------- ---------
Total loans charged off...................... 3,821 4,159 3,127 2,764 1,192
Recoveries:
Commercial, financial and agricultural.... 632 532 726 389 393
Consumer.................................. 936 811 643 380 325
All other................................. 172 32 35 142 103
---------- ---------- ---------- ---------- ---------
Total recoveries............................. 1,740 1,375 1,404 911 821
---------- ---------- ---------- ---------- ---------
Net charge-offs.............................. 2,081 2,784 1,723 1,853 371
Provision for loan losses.................... 2,031 1,140 1,114 1,200 169
---------- ---------- ---------- ---------- ---------
Balance at December 31,...................... $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
========== ========== ========== ========== =========
Loans at year-end............................ $ 797,275 $ 779,544 $ 743,456 $ 604,815 $ 536,030
Average loans................................ 779,283 770,183 657,325 575,658 493,831
Net charge-offs/average loans................ 0.27% 0.36% 0.26% 0.32% 0.08%
Average for loan losses/year-end loans....... 1.12 1.15 1.43 1.62 1.80
Allowance for loan losses/nonperforming
loans..................................... 615.56 322.84 255.58 288.57 451.36
</TABLE>
9
<PAGE>
Allocation of Allowance for Loan Losses (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural..... $ 3,340 $ 3,212 $ 4,099 $ 3,892 $ 3,957
Real estate - construction................. 483 423 488 370 364
Real estate - mortgage..................... 2,342 2,288 2,541 2,468 2,373
Consumer................................... 2,773 3,064 3,504 3,067 2,956
--------- --------- --------- --------- --------
Total................................. $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
========= ========= ========= ========= ========
</TABLE>
Percent of Total Loans:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural.... 37.37% 35.74% 38.55% 39.73% 41.00%
Real estate - construction................ 5.40 4.71 4.59 3.78 3.77
Real estate - mortgage.................... 26.20 25.46 23.90 25.19 24.59
Consumer.................................. 31.03 34.09 32.96 31.30 30.64
</TABLE>
Available Information
- ---------------------
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the Securities and Exchange Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public
at the Securities and Exchange Commission's web site at http://www.sec.gov. No
information from this web page is incorporated by reference herein.
ITEM 2. PROPERTIES
Our principal office is located in the First National Bank Building at 400
Pine Street in downtown Abilene, Texas. We lease approximately 2,300 square feet
from First National Bank of Abilene, which owns the building, pursuant to a
lease agreement that expires December 31, 2004. Our subsidiary banks
collectively own 25 banking facilities, some of which are detached drive-ins,
and lease four banking facilities. During 1999, we:
o made permanent improvements to an existing banking facility,
o constructed a new banking facility to replace a smaller,
leased one,
o sold an existing banking facility that was located near a facility
acquired by us in 1998,
o sold a banking facility acquired in 1998 that was located near an
existing banking facility, and
o leased a new banking facility as a grocery store branch.
These facility projects were funded with cash from operations and will not
be material to our future consolidated results of operations. Our management
considers all of our existing locations to be quality facilities and well-suited
for conducting the business of banking. We believe that our existing facilities
are adequate to meet our and our subsidiary banks' requirements for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
With our subsidiary banks we are parties to a number of lawsuits arising in
the ordinary course of its banking business. However, there are no material
pending legal proceedings to which we, our subsidiary banks or our other direct
and indirect subsidiaries, or any of their properties, are subject. Other than
regular, routine examinations by state and federal banking authorities, there
are no proceedings pending or known to be contemplated by any governmental
authorities.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock, par value $10.00 per share, is traded on the The Nasdaq
Stock Market under the trading symbol FFIN. See "Item 8--Financial Statements
and Supplementary Data--Quarterly Financial Data" for the high, low and closing
sales prices as reported by the Nasdaq National Market for our common stock for
the periods indicated. As of March 17, 2000, we had 1,706 shareholders of
record.
See "Item 8--Financial Statements and Supplementary Data--Quarterly
Financial Data" for the frequency and amount of cash dividends paid by us. Also,
see "PART I--Item 1--Business--Regulation and Supervision" for restrictions on
our present or future ability to pay dividends.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1999, 1998,
1997, 1996 and 1995, and for the five years ended December 31, 1999, have been
derived from the audited consolidated financial statements. The selected
financial data should be read in conjunction with "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements. The results of operations presented below
are not necessarily indicative of the results of operations that may be achieved
in the future. The amounts related to shares of our common stock have been
adjusted to give effect to all stock dividends and stock splits.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ----------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Summary Income Statement Information:
Interest income $ 110,013 $ 111,868 $ 101,474 $ 89,164 $ 79,165
Interest expense 43,338 46,292 41,735 35,699 31,252
----------- ---------- ---------- ----------- -----------
Net interest income 66,675 65,576 59,739 53,465 47,913
Provision for loan losses 2,031 1,140 1,114 1,200 168
Noninterest income 24,484 22,351 19,486 16,491 15,686
Noninterest expense 51,934 52,422 46,522 39,829 36,460
----------- ---------- ---------- ----------- -----------
Earnings before income taxes 37,194 34,365 31,589 28,927 26,971
Provision for income taxes 11,504 11,111 10,563 9,884 9,106
----------- ---------- ---------- ----------- -----------
Net earnings (1) $ 25,690 $ 23,254 $ 21,026 $ 19,043 $ 17,865
=========== ========== ========== =========== ===========
Per Share Data:
Net earnings per share $ 2.58 $ 2.34 $ 2.12 $ 1.98 $ 1.87
Net earnings per share,assuming dilution 2.57 2.33 2.11 1.97 1.84
Cash dividends declared 1.125 1.00 0.88 0.79 0.71
Book value at period-end 17.91 17.03 15.56 14.20 13.06
Earnings performance ratios:
Return on average assets 1.53% 1.44% 1.46% 1.51% 1.46%
Return on average equity 14.84 14.51 14.37 14.72 13.91
Summary Balance Sheet Data (Period-end):
Investment securities $ 656,218 $ 625,891 $ 616,018 $ 541,451 $ 508,769
Loans 797,275 779,544 743,456 604,815 536,030
Total assets 1,723,369 1,686,647 1,657,044 1,332,645 1,190,769
Deposits 1,524,704 1,504,856 1,488,709 1,185,440 1,055,961
Total liabilities 1,544,706 1,517,198 1,502,583 1,196,236 1,066,392
Total shareholders' equity 178,663 169,449 154,461 136,409 124,377
Asset quality ratios:
Allowance for loan losses/period-end loans 1.12% 1.15% 1.43% 1.62% 1.80%
Nonperforming assets/period-end
loans plus foreclosed assets 0.26 0.41 0.68 0.69 0.53
Net charge offs/average loans 0.27 0.36 0.26 0.32 0.08
Capital ratios:
Leverage ratio (2) 9.62% 9.02% 8.28% 10.27% 10.65%
Tier 1 risk-based capital (3) 17.19 16.03 14.76 18.73 19.20
Total risk-based capital (4) 18.13 17.01 15.95 19.95 20.42
Dividend payout ratio 43.64 41.66 41.24 40.32 35.63
- --------------------------------
(1) Net earnings for the year ended December 31, 1995, includes $1.3 million, or
$0.14 per share, in nonrecurring gains from sale of assets.
(2) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
by fourth quarter average assets less intangible assets.
(3) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
risk-adjusted assets.
(4) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
plus allowance for loan losses to the extent allowed under regulatory
guidelines by risk-adjusted assets.
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of the major elements of our
consolidated balance sheets as of December 31, 1999 and 1998, and statements of
earnings for the years 1997 through 1999 should be reviewed in conjunction with
our consolidated financial statements, accompanying notes, and selected
financial data presented elsewhere in this Form 10-K. All amounts and prices
related to our common stock have been adjusted to give effect to all stock
splits and stock dividends.
Results of Operations
Performance Summary. Net earnings for 1999 were $25.7 million, an increase
of $2.4 million, or 10.3%, over net earnings for 1998 of $23.3 million. Net
earnings for 1997 were $21.0 million. The increase in net earnings for 1999 was
primarily attributable to an increase in net interest income resulting primarily
from the growth in average earning assets and an increase in noninterest income
resulting primarily from an increase in service fees on deposit accounts. The
increase in net earnings for 1998 was primarily attributable to an increase in
net interest income resulting primarily from the growth in average earning
assets and an increase in noninterest income resulting primarily from increases
in service fees on deposit accounts and trust fees.
On a per share basis, net earnings were $2.58 for 1999 as compared to $2.34
for 1998 and $2.12 for 1997. When calculated on a cash basis which excludes the
after tax effect of goodwill amortization, our earnings per share amounted to
$2.70 for 1999, $2.46 for 1998, and $2.19 for 1997. Return on average assets was
1.53% for 1999 as compared to 1.44% for 1998 and 1.46% for 1997. Return on
average equity was 14.84% for 1999 as compared to 14.51% for 1998 and 14.37% for
1997.
Net Interest Income. Net interest income is the difference between interest
income on earning assets and the interest expense on liabilities incurred to
fund those assets. Our earning assets consist primarily of loans and securities.
Our liabilities to fund those assets consist primarily of interest-bearing
deposits. Net interest income was $69.0 million in 1999 as compared to $67.0
million in 1998 and $60.5 million in 1997. These increases were primarily due to
growth in the volume of earning assets. Average earning assets were $1.519
billion in 1999, as compared to $1.470 billion in 1998, which was $162.0
million, or 12.4%, higher than 1997. The 1999 increase is attributable to higher
average investment securities, primarily tax-exempt securities which increased
$49.0 million. The 1998 increase is due primarily to an acquisition which
accounted for approximately $112.0 million of such increase. Table 1 allocates
the increases in tax-equivalent net interest income for 1999 and 1998 between
the amount of increase attributable to volume and rate.
Table 1 -- Changes in Interest Income and Interest Expense (in thousands):
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
----------------------------------- -----------------------------------
Change Attributable to Total Change Attributable to Total
---------------------- ----------------------
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Short-term investments............... $ 274 $ (341) $ (67) $ 822 $ (98) $ 724
Taxable investment securities........ (429) (932) (1,361) 238 (203) 35
Tax-exempt investment securities (1). 2,773 (157) 2,616 1,962 56 2,018
Loans (1)............................ 838 (2,992) (2,154) 10,756 (2,438) 8,318
--------- --------- --------- --------- --------- --------
Interest income................... 3,456 (4,422) (966) 13,778 (2,683) 11,095
--------- --------- --------- --------- --------- --------
Interest-bearing deposits............ 1,338 (4,352) (3,014) 4,967 (447) 4,520
Short-term borrowings................ 154 (95) 59 41 (1) 40
Long-term debt....................... - - - (3) -- (3)
--------- --------- --------- --------- --------- --------
Interest expense.................. 1,492 (4,447) (2,955) 5,005 (448) 4,557
--------- --------- --------- --------- --------- --------
Net interest income............... $ 1,964 $ 25 $ 1,989 $ 8,773 $ (2,235) $ 6,538
========= ========= ========= ========= ========= ========
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
</TABLE>
The net interest margin, which measures tax-equivalent net interest income
as a percentage of average earning assets, amounted to 4.54% in 1999 which was
down slightly from 4.56% reported in 1998. In 1997, the net interest margin
amounted to 4.62%. Our rates on earning assets and interest-bearing liabilities
are influenced by national market trends and competitive pressures in local
markets. As market rates moved up during 1999, our spread between rates earned
on earning assets and the rates paid on interest-bearing liabilities improved
which allowed the net interest margin to recover some of the decline experienced
during 1998. In 1998, when national market interest rates declined, our yield on
earning assets decreased more than the rate on interest-bearing liabilities,
which resulted in a lower net interest margin as compared to 1997.
13
<PAGE>
Table 2 -- Average Balances and Average Yields and Rates (in thousands,
except percentages):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ---- ---------- ------- ---- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Short-term investments $ 90,383 $ 4,476 4.95% $ 85,247 $ 4,543 5.33% $ 70,136 $ 3,819 5.45%
Taxable investment
securities 540,402 32,022 5.93 547,438 33,383 6.10 543,561 33,348 6.14
Tax-exempt
investment securities(1) 109,079 7,042 6.46 67,068 4,426 6.60 36,954 2,408 6.52
Loans (1)(2) 779,283 68,809 8.83 770,183 70,963 9.21 657,325 62,645 9.53
---------- -------- ---------- ------- ---------- --------
Total earning assets 1,519,147 112,349 7.40 1,469,936 113,315 7.71 1,307,976 102,220 7.82
Cash and due from banks 80,689 72,608 69,185
Bank premises and
equipment 41,285 43,524 41,264
Other assets 27,478 21,720 21,564
Goodwill, net 21,056 22,466 10,315
Allowance for loan losses (9,016) (9,912) (10,211)
---------- ---------- ----------
Total assets $1,680,639 $1,620,342 $1,440,093
========== ========== ==========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits $1,171,892 $ 43,120 3.68% $1,138,858 $46,134 4.05% $1,017,412 $ 41,614 4.09%
Short-term borrowings 4,607 217 4.71 2,338 158 6.76 1,742 118 6.77
Long-term debt -- -- -- -- 33 3 8.58
---------- -------- ---------- ------- ---------- --------
Total interest-
bearing liabilities 1,176,499 43,337 3.68 1,141,196 46,292 4.06 1,019,187 41,735 4.09
-------- ------- --------
Noninterest-bearing
deposits 318,399 306,743 262,554
Other liabilities 12,599 12,108 12,028
---------- ---------- ----------
Total liabilities 1,507,497 1,460,047 1,293,769
Shareholders' equity 173,142 160,295 146,324
---------- ---------- ----------
Total liabilities and
Shareholders' equity $1,680,639 $1,620,342 $1,440,093
========== ========== ==========
Net interest income $ 69,012 $67,023 $ 60,485
======== ======= ========
Rate Analysis:
Interest income/earning assets 7.40% 7.71% 7.82%
Interest expense/earning assets 2.85 3.15 3.20
---- ---- ----
Net yield on earning assets 4.54% 4.56% 4.62%
==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
</TABLE>
Noninterest Income. Noninterest income for 1999 was $24.5 million, an
increase of $2.1 million, or 9.5%, as compared to 1998. This increase was
primarily a result of (i) an increase in trust fees of $349 thousand due
primarily to growth in trust assets; (ii) an increase in service fees on deposit
accounts of $1.5 million which reflects growth in the number of accounts and the
volume of transactions processed; and (iii) an increase in ATM fees of $207
thousand which resulted from an increase in the number of cardholders and the
volume of transactions processed.
Noninterest income for 1998 was $22.4 million, an increase of $2.9 million,
or 14.7%, as compared to 1997. This increase was primarily a result of (i) an
increase in trust fees of $761 thousand due primarily to an acquisition which
earned $600 thousand in gross fees during 1998; (ii) an increase in service fees
on deposit accounts of $1.2 million, which reflects growth in the number of
accounts and the volume of transactions processed; and (iii) an increase in real
estate mortgage fees of $555 thousand, or 69.1%, which resulted from a
significant increase in the volume of loan originations and loan refinancings
processed and placed in the secondary market. Table 3 provides comparisons for
other categories of noninterest income.
14
<PAGE>
Table 3 -- Noninterest Income (in thousands):
<TABLE>
<CAPTION>
Increase Increase
1999 (Decrease) 1998 (Decrease) 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Trust fees.............................. $ 5,098 $ 349 $ 4,749 $ 761 $ 3,988
Service fees on deposit accounts........ 13,322 1,484 11,838 1,187 10,651
Real estate mortgage fees............... 1,291 (67) 1,358 555 803
Net securities gains (losses)........... -- (42) 42 42 --
Other:
ATM fees............................. 1,241 207 1,034 295 739
Mastercard fees...................... 809 (63) 872 3 869
Miscellaneous income................. 997 167 830 (45) 875
Safe deposit rental fees............. 392 1 391 40 351
Exchange fees........................ 256 (125) 381 29 352
Credit life fees..................... 284 34 250 (95) 345
(Loss) Gain on sale of repossessed
assets............................ (15) (250) 235 196 39
Brokerage commissions................ 254 41 213 (50) 263
Gain on sale of premises and
equipment.......................... 258 248 10 4 6
Interest on loan recoveries.......... 297 149 148 (57) 205
----------- ----------- ----------- ----------- -----------
Total other........................ 4,773 409 4,364 320 4,044
----------- ----------- ----------- ----------- -----------
Total Noninterest Income............. $ 24,484 $ 2,133 $ 22,351 $ 2,865 $ 19,486
=========== =========== =========== =========== ===========
</TABLE>
Noninterest Expense. Total noninterest expense for 1999 was $51.9 million,
a decrease of $489 thousand as compared to 1998. An important measure in
determining whether a banking company effectively managed noninterest expenses
is the efficiency ratio, which is calculated by dividing noninterest expense by
the sum of net interest income on a tax-equivalent basis and noninterest income.
Our efficiency ratios were 55.55% for 1999, 58.65% for 1998, and 58.17% for
1997.
Salaries and employee benefits totaled $26.9 million, an increase of only
$266 thousand as compared to 1998. Net occupancy and equipment expense in
aggregate for 1999 decreased by $339 thousand and resulted primarily from lower
depreciation and utilities expense. On a combined basis, accounting and legal
fees for 1999 decreased $174 thousand as compared to 1998 and resulted primarily
from a reduction in merger and acquisition expenses. Other miscellaneous expense
totaled $3.7 million for 1999, a decrease of $315 thousand as compared to 1998.
Approximately $160 thousand of the decrease resulted from lower expenses related
to preparation for Year 2000.
Salaries and employee benefits for 1998 totaled $26.7 million, an increase
of $2.9 million, or 12.2%, as compared to 1997. Approximately $1.3 million of
this increase related to an acquisition. Net occupancy and equipment expense in
the aggregate for 1998 increased by $800 thousand as compared to 1997.
Approximately $300 thousand of this increase for 1998 related to facilities and
equipment added through an acquisition. Goodwill amortization, a noncash
expense, was $1.6 million for 1998, an increase of $907 thousand as compared to
1997, and also resulted primarily from an acquisition. Audit and accounting fees
for 1998 increased by $277 thousand and resulted primarily from our outsourcing
of internal audit during 1998 which was offset by a greater amount through
decreases in other noninterest expenses, primarily salaries and travel.
15
<PAGE>
Table 4 -- Noninterest Expense (in thousands):
<TABLE>
<CAPTION>
Increase Increase
1999 (Decrease) 1998 (Decrease) 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Salaries................................ $ 20,885 $ 153 $ 20,732 $ 2,189 $ 18,543
Medical and other benefits.............. 2,388 34 2,354 348 2,006
Profit sharing.......................... 2,111 84 2,027 203 1,824
Payroll taxes........................... 1,561 (5) 1,566 167 1,399
----------- ----------- ----------- ----------- -----------
Total salaries and employee
benefits........................... 26,945 266 26,679 2,907 23,772
Net occupancy expense .................. 3,819 (366) 4,185 387 3,798
Equipment expense....................... 4,118 27 4,091 413 3,678
Goodwill amortization................... 1,641 (14) 1,655 907 748
Other:
Data processing and operation fees... 1,175 26 1,149 (164) 1,313
Postage.............................. 1,103 (38) 1,141 51 1,090
Printing, stationery and supplies.... 1,178 76 1,102 (63) 1,165
Advertising.......................... 1,041 (52) 1,093 (5) 1,098
Correspondent bank service charges... 1,243 151 1,092 104 988
ATM expense.......................... 960 137 823 110 713
Credit card fees..................... 744 (9) 753 15 738
Telephone............................ 670 (51) 721 78 643
Public relations and business
development........................ 602 6 596 57 539
Directors' fees...................... 461 (49) 510 (70) 580
Audit and accounting fees............ 622 (38) 660 277 383
Legal fees........................... 361 (136) 497 97 400
Other professional and service fees.. 426 (36) 462 99 363
Regulatory exam fees................. 385 (25) 410 47 363
Franchise tax........................ 357 (47) 404 40 364
Software amortization................ 386 (2) 388 141 247
Other miscellaneous.................. 3,696 (315) 4,011 472 3,539
----------- ----------- ----------- ----------- -----------
Total other........................ 15,410 (402) 15,812 1,286 14,526
----------- ----------- ----------- ----------- -----------
Total Noninterest Expense............... $ 51,933 $ (489) $ 52,422 $ 5,900 $ 46,522
=========== =========== =========== =========== ===========
</TABLE>
Income Taxes. Income tax expense was $11.5 million for 1999 as compared to
$11.1 million for 1998 and $10.6 million for 1997. Our effective tax rates on
pretax income were 30.9%, 32.3% and 33.4%, respectively, for the years 1999,
1998 and 1997. The decreases for 1999 and 1998 were due to higher levels of
nontaxable interest income resulting from increased volumes of tax-exempt
securities.
Balance Sheet Review
Loans. The loan portfolio is comprised of loans made to businesses,
individuals, and farm and ranch operations located in the primary trade areas
served by our subsidiary banks. Real estate loans represent loans primarily for
new home construction and owner-occupied real estate. The structure of loans in
the real estate mortgage classification generally provides repricing intervals
to minimize the interest rate risk inherent in fixed rate mortgage loans. As of
December 31, 1999, total loans were $797.3 million, an increase of $17.8 million
as compared to December 31, 1998. Commercial loans and real estate loans as of
December 31, 1999, increased $19.3 million and $16.7 million, respectively, as
compared to December 31, 1998. Consumer loans as of December 31, 1999, were
$247.3 million, a decrease of $18.3 million as compared to December 31, 1998.
The decrease in consumer loans for 1999 resulted primarily from a $15.5 million
reduction in the volume of indirect automobile loans. Loans averaged $779.3
million during 1999, an increase of $9.1 million over the prior year average.
16
<PAGE>
Table 5 -- Composition of Loans (in thousands, except percentages):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------- ---------------------
Amount % of Total Amount % of Total
---------- -------- ---------- -------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural........................ $ 297,966 37.37% $ 278,647 35.74%
Real estate - construction.................................... 43,039 5.40 36,721 4.71
Real estate - mortgage........................................ 208,895 26.20 198,447 25.46
Consumer...................................................... 247,375 31.03 265,729 34.09
---------- -------- ---------- -------
$ 797,275 100.00% $ 779,544 100.00%
========== ======== ========== =======
</TABLE>
Asset Quality. Loan portfolios of each of our subsidiary banks are subject
to periodic reviews by our centralized independent loan review group as well as
periodic examinations by State and Federal bank regulatory agencies. Loans are
placed on nonaccrual status when, in the judgment of management, the
collectibility of principal or interest under the original terms becomes
doubtful. Nonperforming assets, which consist of nonperforming loans and
foreclosed assets, were $2.1 million at December 31, 1999, as compared to $3.2
million at December 31, 1998. As a percent of loans and foreclosed assets,
nonperforming assets were 0.26% at December 31, 1999, as compared to 0.41% at
December 31, 1998. Management was not aware of any material classified credit
not properly disclosed as nonperforming at December 31, 1999.
Table 6 -- Nonperforming Assets (in thousands, except percentages):
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans........................ $ 1,389 $ 2,717 $ 3,668 $ 2,906 $ 1,589
Loans past due 90 days or more.......... 63 67 134 116 181
Restructured loans...................... -- -- 358 373 368
----------- ----------- ----------- ----------- -----------
Nonperforming loans................ 1,452 2,784 4,160 3,395 2,138
Foreclosed assets....................... 637 385 936 806 708
----------- ----------- ----------- ----------- -----------
Total nonperforming assets......... $ 2,089 $ 3,169 $ 5,096 $ 4,201 $ 2,846
=========== =========== =========== =========== ===========
As a % of loans and
foreclosed assets.................. 0.26% 0.41% 0.68% 0.69% 0.53%
</TABLE>
Provision and Allowance for Loan Losses. The allowance for loan losses is
the amount deemed by management as of a specific date to be adequate to provide
for possible losses on loans that may become uncollectible. Management
determines the allowance and the required provision expense by reviewing general
loss experiences and the performances of specific credits. The provision for
loan losses was $2.0 million for 1999 as compared to $1.1 million for 1998 and
1997. As a percent of average loans, net loan charge-offs were 0.27% during 1999
as compared to 0.36% during 1998. The lower net charge-off ratio for 1999
resulted primarily from a $428 thousand reduction in agricultural related net
loan losses. The allowance for loan losses as a percent of loans was 1.12% as of
December 31, 1999, as compared to 1.15% as of December 31, 1998. Management
anticipates that the ratio of allowance for loan losses to loans will remain
above 1% in future periods. A key indicator of the adequacy of the allowance for
loan losses is the ratio of the allowance to nonperforming loans, which consist
of nonaccrual loans, loans past due 90 days, and restructured loans. As of
December 31, 1999, the ratio was 615.56% as compared to 322.84% at December 31,
1998.
17
<PAGE>
Table 7 -- Loan Loss Experience and Allowance for Loan Losses (in
thousands, except percentages):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1,............................... $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
Allowance established from purchase acquisition..... -- -- 1,444 800 83
--------- --------- -------- -------- ---------
8,988 10,632 11,241 10,450 9,852
Loans charged off................................... 3,821 4,159 3,127 2,764 1,192
Loans recovered..................................... 1,740 1,375 1,404 911 821
--------- --------- -------- -------- ---------
Net charge-offs..................................... 2,081 2,784 1,723 1,853 371
Provision for loan losses........................... 2,031 1,140 1,114 1,200 169
--------- --------- -------- -------- ---------
Balance at December 31,............................. $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
========= ========= ======== ======== =========
Loans at year-end................................... $ 797,275 $ 779,544 $743,456 $604,815 $ 536,030
Average loans....................................... 779,283 770,183 657,325 575,658 493,831
Net charge offs/average loans....................... 0.27% 0.36% 0.26% 0.32% 0.08%
Allowance for loan losses/year-end loans............ 1.12 1.15 1.43 1.62 1.80
Allowance for loan losses/nonperforming assets...... 615.55 322.84 255.58 288.57 451.36
</TABLE>
Investment Securities. Investment securities totaled $656.2 million as of
December 31, 1999, as compared to $625.9 million at December 31, 1998. At
December 31, 1999, securities with an amortized cost of $422.4 million were
classified as securities held-to-maturity and securities with a market value of
$233.8 million were classified as securities available-for-sale. As compared to
December 31, 1998, the portfolio at December 31, 1999, reflected (i) a decrease
of $12.3 million in U.S. Treasury and U.S. Government corporations and agencies
securities; (ii) an increase of $34.5 million in tax-exempt obligations of
states and political subdivisions; and (iii) an $8.1 million increase in other
securities, primarily corporate bonds. The overall portfolio yield of 6.15% at
the end of 1999 was up slightly from prior year-end yield of 6.14%. We did not
hold any collateralized mortgage obligations that entail higher risks than
standard mortgage-backed securities. As of December 31, 1999, total investment
securities included structured notes with an amortized cost of $7.0 million and
an approximate market value of $6.9 million. See Note 2 to the Consolidated
Financial Statements for additional disclosures relating to the maturities and
fair values of the investment portfolio at December 31, 1999 and 1998.
Table 8 -- Maturities and Yields of Investment Securities Held December 31,
1999 (in thousands, except percentages):
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
----------------- ----------------- --------------- --------------- ----------------
Held-to-Maturity: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- -------- ---- --------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations $ 7,506 6.20% $ 5,567 5.51% $ -- --% $ -- --% $ 13,073 5.91%
Obligations of U.S.
Government corporations
and agencies.......... 54,884 5.98 204,077 5.70 11,702 6.59 -- -- 270,667 5.80
Obligations of states and
political subdivisions 8,708 6.25 57,067 6.39 15,365 7.09 5,768 7.81 86,908 6.60
Other securities......... 505 5.89 4,637 5.36 494 6.87 -- -- 5,632 5.54
Mortgage-backed securities 5,938 5.53 18,918 6.00 11,249 6.50 9,978 6.77 46,083 6.23
-------- ---- --------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 77,541 6.00% $ 290,266 5.85% $ 38,810 6.77% $ 15,746 7.15% $422,363 6.01%
======== ==== ========= ==== ======== ==== ======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
----------------- ----------------- --------------- --------------- ----------------
Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ -------- ---- --------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations $ 501 6.38% $ 4,294 6.05% $ -- --% $ -- --% $ 4,795 6.08%
Obligations of U.S.
Government corporations
and agencies.......... 10,259 5.84 55,027 6.14 32,711 6.46 -- -- 97,997 6.21
Obligations of states and
political subdivisions 202 6.31 7,533 6.44 3,083 7.09 37,382 7.58 48,200 7.37
Other securities......... 1,000 5.89 37,568 6.15 -- -- 3,137 6.00 41,705 6.13
Mortgage-backed securities 1,875 6.48 22,566 5.93 13,617 6.25 3,100 6.92 41,158 6.10
-------- ---- --------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 13,837 5.96% $ 126,988 6.12% $ 49,411 6.44% $ 43,619 7.42% $233,855 6.42%
======== ==== ========= ==== ======== ==== ======== ==== ======== ====
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Maturing
----------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
----------------- ----------------- --------------- --------------- ----------------
Total Investment
Securities: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- -------- ---- --------- ---- -------- ---- -------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury obligations $ 8,007 6.21% $ 9,861 5.75% $ -- --% $ -- --% $ 17,868 5.95%
Obligations of U.S.
Government corporations
and agencies.......... 65,147 5.96 259,104 5.79 44,413 6.49 -- -- 368,664 5.91
Obligations of states and
political subdivisions 8,910 6.25 64,600 6.40 18,448 7.09 43,150 7.61 135,108 6.87
Other securities......... 1,501 5.89 42,205 6.06 494 6.87 3,137 6.00 47,337 6.06
Mortgage-backed securities 7,813 5.76 41,484 5.96 24,866 6.37 13,078 6.81 87,241 6.18
-------- ---- --------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 91,378 5.99% $ 417,254 5.93% $ 88,221 6.58% $ 59,365 7.35% $656,218 6.15%
======== ==== ========= ==== ======== ==== ======== ==== ======== ====
</TABLE>
Deposits. Deposits held by subsidiary banks represent our primary source of
funding. Total deposits were $1.525 billion as of December 31, 1999, as compared
to $1.505 billion as of December 31, 1998. Total deposits averaged $1.490
billion during 1999 as compared to $1.456 billion for 1998 which was $165.6
million higher than the average for 1997. An acquisition accounted for
approximately $114.0 million of the 1998 increase. Table 9 provides a breakdown
of average deposits and rates paid over the past three years and the remaining
maturity of time deposits of $100 thousand or more.
Table 9 -- Composition of Average Deposits and Remaining Maturity of Time
Deposits of $100,000 or More (in thousands, except percentages):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits........ $ 318,399 -- $ 306,743 -- $ 262,554 --
Interest-bearing deposits
Interest-bearing checking........ 248,516 1.43% 240,159 2.01% 212,845 2.04%
Savings and money market accounts 379,075 3.42 351,319 3.23 306,503 3.65
Time deposits under $100,000..... 378,528 4.88 390,791 5.23 359,960 5.25
Time deposits of $100,000 or more 165,773 4.91 156,589 5.56 138,104 5.22
---------- ---- ---------- ---- ---------- ----
Total interest-bearing deposits.. 1,171,892 3.68% 1,138,858 4.05% 1,017,412 4.09%
---------- ---------- ----------
Total average deposits.............. $1,490,291 $1,445,601 $1,279,966
========== ========== ==========
</TABLE>
December 31, 1999
-----------------
Three months or less........................................ $ 64,966
Over three through six months............................... 36,413
Over six through twelve months.............................. 43,045
Over twelve months.......................................... 12,913
----------
Total time deposits of $100,000 or more................ $ 157,337
==========
Capital. Total shareholders' equity was $178.7 million, or 10.37% of total
assets, at December 31, 1999, as compared to $169.4 million, or 10.05% of total
assets, at December 31, 1998. During 1999, total shareholders' equity averaged
$173.1 million, or 10.30% of average assets, as compared to $160.3 million, or
9.89% of average assets, during 1998.
Banking regulators measure capital adequacy by means of the risk-based
capital ratio and leverage ratio. The risk-based capital rules provide for the
weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory
capital is then divided by risk-weighted assets to determine the risk-adjusted
capital ratios. The leverage ratio is computed by dividing shareholders' equity
less intangible assets by quarter-to-date average assets less intangible assets.
Regulatory minimums for risk-based and leverage ratios are 8.00% and 3.00%,
respectively. As of December 31, 1999, our total risk-based and leverage ratios
were 18.13% and 9.62%, respectively, as compared to total risk-based and
leverage ratios of 17.01% and 9.02% as of December 31, 1998. In 1999, we
experienced a higher rate of growth in tangible equity capital (11.3%) than
assets (2.2%), which resulted in higher capital ratios as of December 31, 1999,
as compared to December 31, 1998.
Interest Rate Risk. Interest rate risk results when the maturity or
repricing intervals of interest-earning assets and interest-bearing liabilities
are different. Our exposure to interest rate risk is managed primarily through
our strategy of selecting the types and terms of interest-earning assets and
interest-bearing liabilities that generate favorable earnings while limiting the
potential negative effects of changes in market interest rates. We use no
off-balance-sheet financial instruments to manage interest rate risk.
19
<PAGE>
Each of our subsidiary banks has an asset/liability committee that monitors
interest rate risk and compliance with investment policies. Each subsidiary bank
tracks interest rate risk by, among other things, interest-sensitivity gap and
simulation analysis. Table 10 sets forth the interest rate sensitivity of our
consolidated assets and liabilities as of December 31, 1999, and sets forth the
repricing dates of our consolidated interest-earning assets and interest-bearing
liabilities as of that date, as well as our projected consolidated interest rate
sensitivity gap percentages for the periods presented. The table is based upon
assumptions as to when assets and liabilities will reprice in a changing
interest rate environment. These assumptions are estimates made by management.
Assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate movements
on our consolidated net interest income.
Table 10 -- Interest Sensitivity Analysis (in thousands, except
percentages):
<TABLE>
<CAPTION>
December 31,
1999
Estimated
2000 2001 2002 2003 2004 Beyond Total Fair Value
---------- -------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans
Fixed rate loans $ 109,149 $ 53,045 $ 72,183 $ 81,256 $ 71,691 $ 51,608 $ 438,932 $ 436,632
Average interest rate 8.91% 9.61% 9.50% 8.66% 8.63 8.40% 8.94%
Adjustable rate loans 358,343 -- -- -- -- -- 358,343 358,343
Average interest rate 8.60 -- -- -- -- -- 8.60
Investment securities
Fixed rate securities 85,996 100,812 123,983 112,360 79,266 135,405 637,822 629,866
Average interest rate 6.01 5.90 5.89 5.79 6.20 7.00 6.17
Adjustable rate
securities 18,396 -- -- -- -- -- 18,396
18,396
Average interest rate 5.35 -- -- -- -- -- 5.35
Other earning assets
Adjustable rate other 68,745 -- -- -- -- -- 68,745 68,745
Average interest rate 5.07 -- -- -- -- -- 5.07
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
assets $ 640,629 $153,857 $196,166 $193,616 $150,957 $187,013 $1,522,238 $1,511,982
Average interest rate 7.28% 7.18% 7.22% 7.00% 7.36% 7.39% 7.25%
Deposits
Fixed rate deposits $ 439,579 $ 39,449 $ 13,541 $ 8,110 $ 4,083 $ 15 $ 504,777 $ 504,058
Average interest rate 4.95% 5.16% 5.45% 5.36% 5.37% 4.50% 4.99%
Adjustable rate deposits 679,414 -- -- -- -- -- 679,414 679,414
Average interest rate 2.89 -- -- -- -- -- 2.89
Other interest-bearing
liabilities
Adjustable rate other 9,748 -- -- -- -- -- 9,748 9,748
Average interest rate 4.39 -- -- -- -- -- 4.39
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
liabilities $1,128,741 $ 39,449 $ 13,541 $ 8,110 $ 4,083 $ 15 $1,193,939 $1,193,939
Average interest rate 3.70% 5.16% 5.45% 5.36% 5.37% 4.50% 3.79%
Interest sensitivity gap $ (488,112) $114,408 $182,625 $185,506 $146,874 $186,998 $ 328,299 $ 318,762
Cumulative interest
sensitivity
gap (488,112) (373,704) (191,079) (5,573) 141,301 328,299
Ratio of interest
sensitive assets
to interest sensitive
liabilities 56.76 -- -- -- -- --
Cumulative ratio of
interest sensitive
assets to interest
sensitive liabilities 56.76 68.01 83.83 99.53 111.84 127.50
Cumulative interest
sensitivity gap as a
percent of earning assets (32.06)% (24.55)% (12.55)% (0.37)% 9.28% 21.57%
</TABLE>
As of December 31, 1998, our 1999 interest-sensitivity gap was ($393.9)
million and its 1999 ratio of interest sensitive assets to interest sensitive
liabilities was 63.95%.
Management estimates that, as of December 31, 1999 and December 31, 1998,
an upward shift of interest rates by 200 basis points would result in an
increase of projected net interest income of 1.4% and 4.2%, respectively, and a
downward shift of interest rates by 200 basis points would result in a reduction
in projected net interest income of 4.0% and 6.1%, respectively. These are good
faith estimates and assume that the composition of our interest sensitive assets
and liabilities existing at each year-end will remain constant over the relevant
twelve month measurement period and that changes in market interest rates are
instantaneous and sustained across the yield curve regardless of duration of
pricing characteristics of specific assets or liabilities. Also, this analysis
does not contemplate any actions that we might undertake in response to changes
in market interest rates. In management's belief, these estimates are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. Management believes that
it is unlikely that such changes would occur in a short time period. As
interest-bearing assets and liabilities reprice at different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, our
future results would, in management's belief, be different from the foregoing
estimates, and such results could be material.
20
<PAGE>
Liquidity. Liquidity is our ability to meet cash demands as they arise.
Such needs can develop from loan demand, deposit withdrawals or acquisition
opportunities. Asset liquidity is provided by cash and assets, which are readily
marketable or which will mature in the near future. Liquid assets include cash,
Federal funds sold, and short-term investments in time deposits in banks.
Liquidity is also provided by access to funding sources, which include core
depositors and correspondent banks that maintain accounts with and sell Federal
funds to our subsidiary banks. Given the strong core deposit base and relatively
low loan deposit ratios maintained at the subsidiary banks, management considers
the current liquidity position to be adequate to meet short-term liquidity
needs.
Parent Company Funding. Our ability to fund various operating expenses,
dividends, and cash acquisitions is generally dependent soley on our own
earnings (without giving effect to our subsidiaries), cash reserves and funds
derived from our subsidiary banks. These funds historically have been produced
by intercompany dividends and management fees that are limited to reimbursement
of actual expenses. We anticipate that our recurring cash sources will continue
to include dividends and management fees from our subsidiary banks. At December
31, 1999, approximately $18.6 million was available for the payment of
intercompany dividends by the subsidiary banks without the prior approval of
regulatory agencies. Also at December 31, 1999, we had $25.0 million available
under a line of credit with an unaffiliated financial institution.
Dividends. Our long-term dividend policy is to pay cash dividends to our
shareholders of between 40% and 45% of its net earnings while maintaining
adequate capital to support growth. The dividend payout ratios have amounted to
43.6%, 41.7% and 41.2% of net earnings, respectively, in 1999, 1998 and 1997.
Given the current strong capital position and projected earnings and asset
growth rates, we do not anticipate any change in our current dividend policy.
Year 2000
We have not experienced any significant information technology, or IT,
system problems or disruptions in our normal business operations relating to the
Year 2000. The cost of testing, communication programs, and other related items
were in line with prior estimates and have been recorded as noninterest expense.
In 1999, we decided to install servers and an internal PC network at our lead
bank, which increased the cost for system upgrades related to Year 2000 to
approximately $1.5 million as compared to an original cost estimate of $1.0
million. The cost of system upgrades, which was funded with cash from
operations, has been capitalized and is being amortized over future periods.
Contingency plans developed in preparation for Year 2000 remain in place
should problems develop in the future. Our plans are not comprehensive and do
not address all Year 2000 contingencies, including contingencies for Year 2000
noncompliance by our embedded technology or the systems of governmental
agencies, significant customers or significant vendors. Also, there can be no
assurance that our contingency plans will prevent us from suffering a material
adverse effect on operations, financial condition or results of operations if
any embedded technology or any systems of a governmental agency, a significant
customer or significant vendor prove not to be Year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our management considers interest rate risk to be a significant market risk
for us. See "Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations" for disclosure regarding this market risk.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear beginning on page F-1.
Quarterly Results of Operations
The following tables set forth certain unaudited historical quarterly
financial data for each of the eight consecutive quarters in fiscal 1999 and
1998. This information is derived from unaudited consolidated financial
statements that include, in our opinion, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation when read in
conjunction with our consolidated financial statements and notes thereto
included elsewhere in this Form 10-K. The amounts related to our common stock
have been adjusted to give effect to all stock dividends and stock splits.
<TABLE>
<CAPTION>
1999
------------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Summary Income Statement Information:
Interest income $ 28,152 $ 27,692 $ 27,139 $ 27,029
Interest expense 11,123 10,833 10,635 10,746
--------- --------- --------- --------
Net interest income 17,029 16,859 16,504 16,283
Provision for loan losses 767 486 308 470
--------- --------- --------- --------
Net interest income after provision for loan losses 16,262 16,373 16,196 15,813
Noninterest income 6,173 6,106 6,177 6,061
Noninterest expense 13,027 13,014 12,959 12,968
--------- --------- --------- --------
Earnings before income taxes 9,408 9,465 9,414 8,906
Provision for income taxes 2,850 2,932 2,942 2,779
--------- --------- --------- --------
Net earnings $ 6,558 $ 6,533 $ 6,472 $ 6,127
========= ========= ========= ========
Per Share Data:(1)
Net earnings per share $ 0.66 $ 0.66 $ 0.64 $ 0.62
Net earnings per share, assuming dilution 0.66 0.66 0.64 0.61
Cash dividends declared 0.30 0.275 0.275 0.275
Book value at period-end 17.91 17.72 17.40 17.29
Common stock sales price:(1)
High $ 34.44 $ 34.77 $ 37.00 $ 36.13
Low 29.13 30.00 30.00 31.25
Close 30.75 33.25 31.75 32.38
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Summary Income Statement Information:
Interest income $ 27,748 $ 28,187 $ 28,080 $ 27,853
Interest expense 11,289 11,625 11,620 11,758
--------- --------- --------- --------
Net interest income 16,459 16,562 16,460 16,095
Provision for loan losses 445 260 284 151
--------- --------- --------- --------
Net interest income after provision for loan losses 16,014 16,302 16,176 15,944
Noninterest income 5,646 5,756 5,493 5,456
Noninterest expense 13,176 13,315 12,952 12,979
--------- --------- --------- --------
Earnings before income taxes 8,484 8,743 8,717 8,421
Provision for income taxes 2,661 2,812 2,843 2,795
--------- --------- --------- --------
Net earnings $ 5,823 $ 5,931 $ 5,874 $ 5,626
========= ========= ========= ========
Per Share Data:(1)
Net earnings per share $ 0.58 $ 0.60 $ 0.59 $ 0.57
Net earnings per share, assuming dilution 0.58 0.60 0.58 0.57
Cash dividends declared 0.275 0.250 0.250 0.227
Book value at period-end 17.03 16.79 16.26 15.90
Common stock sales price:(1)
High $ 37.00 $ 40.00 $ 38.58 $ 39.55
Low 30.91 31.59 35.57 35.23
Close 35.00 32.39 36.08 36.59
- --------------
(1) Per share data adjusted for stock splits and stock dividends.
</TABLE>
22
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP has served as our independent accountants since 1990.
There have been no disagreements between our management and our current
independent accountants relating to accounting practices and procedures or
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from our proxy statement for our 2000 annual meeting of shareholders, or our
2000 proxy statement, under the captions "Proposal 1 -- Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from our 2000 proxy statement under the caption "Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from our 2000 proxy statement under the captions "Proposal 1 -- Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from our 2000 proxy statement under the caption "Interest in Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Earnings for the years ended December 31,
1999, 1998 and 1997 Consolidated Statements of Comprehensive Earnings
for the years ended December 31, 1999, 1998 and 1997 Consolidated
Statements of Shareholders' Equity for the years ended December 31,
1999, 1998 and 1997 Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997 Notes to the Consolidated
Financial Statements
(2) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not
required, are not applicable or have been included in our consolidated
financial statements.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in the
Exhibit Index immediately following our financial statements.
23
<PAGE>
The exhibits listed herein will be furnished upon written request to
Curtis R. Harvey, Executive Vice President and Chief Financial Officer,
First Financial Bankshares, Inc., 400 Pine Street, Abilene,Texas 79601,
and payment of a reasonable fee that will be limited to our
reasonable expense in furnishing such exhibits.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date: March 13, 2000 By: /S/ KENNETH T. MURPHY
---------------------
Chairman of the Board,
President, Chief Executive
Officer and Director
The undersigned directors and officers of First Financial Bankshares, Inc.
hereby constitute and appoint Curtis R. Harvey, with full power to act and with
full power of substitution and resubstitution, our true and lawful
attorney-in-fact with full power to execute in our name and behalf in the
capacities indicated below any and all amendments to this report and to file the
same, with all exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission and hereby ratify and confirm all that
such attorney-in-fact or his substitute shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/S/ KENNETH T. MURPHY Chairman of the Board, President, Chief March 13, 2000
- ------------------------------------ Executive Officer and Director
Kenneth T. Murphy
/S/ CURTIS R. HARVEY Executive Vice President, Chief Financial March 13, 2000
- ------------------------------------ Officer, Controller and Chief Accounting
Curtis R. Harvey Officer
/S/ JOSEPH E. CANON Director March 21, 2000
- ------------------------------------
Joseph E. Canon
/S/ MAC A. COALSON Director March 16, 2000
- ------------------------------------
Mac A. Coalson
/S/ DAVID COPELAND Director March 21, 2000
- ------------------------------------
David Copeland
/S/ F. SCOTT DUESER Director March 21, 2000
- ------------------------------------
F. Scott Dueser
Director March __, 2000
- ------------------------------------
Kade L. Matthews
/S/RAYMOND A. McDANIEL,JR. Director March 21, 2000
- ------------------------------------
Raymond A. McDaniel, Jr.
/S/ BYNUM MIERS Director March 21, 2000
- ------------------------------------
Bynum Miers
/S/ DIAN GRAVES STAI Director March 21, 2000
- ------------------------------------
Dian Graves Stai
<PAGE>
/S/ JAMES M. PARKER Director March 21, 2000
- ------------------------------------
James M. Parker
/S/ JACK D. RAMSEY Director March 21, 2000
- ------------------------------------
Jack D. Ramsey
Director March __, 2000
- ------------------------------------
Craig Smith
Director March __, 2000
- ------------------------------------
F. L. Stephens
/S/ WALTER F. WORTHINGTON Director March 23, 2000
- ------------------------------------
Walter F. Worthington
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
FIRST FINANCIAL BANKSHARES, INC. CONSOLIDATED FINANCIAL STATEMENTS
Management's Report on Responsibility for the Financial Statements......... F-2
Report of Independent Public Accountants................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets.......................................... F-3
Consolidated Statements of Earnings.................................. F-4
Consolidated Statements of Comprehensive Earnings.................... F-5
Consolidated Statements of Shareholders' Equity...................... F-6
Consolidated Statements of Cash Flows................................ F-7
Notes to Consolidated Financial Statements........................... F-8
F-1
<PAGE>
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The Management of First Financial Bankshares, Inc. is responsible for the
preparation, integrity, and fair presentation of its annual financial statements
as of December 31, 1999 and 1998, and for the three years in the period ended
December 31, 1999. The financial statements have been prepared in accordance
with generally accepted accounting principles and, as such, include amounts
based on judgments and estimates made by Management. Management has also
prepared the other information included in this Annual Report and is responsible
for its accuracy and consistency with the financial statements.
The annual financial statements referred to above have been audited by Arthur
Andersen LLP, who have been given unrestricted access to all financial records
and related data, including minutes of all meetings of shareholders and the
Board of Directors. Management believes that all representations made to Arthur
Andersen LLP during the audits were valid and appropriate.
Kenneth T. Murphy Curtis R. Harvey Curtis R. Harvey
Chairman of the Board Executive Vice President
and Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of First Financial
Bankshares, Inc. (a Texas corporation) and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of earnings, comprehensive
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Financial Bankshares,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Dallas, Texas, Arthur Andersen LLP
January 12, 2000
F-2
<PAGE>
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998
-------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ -------------- --------------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 119,228,650 $ 84,237,577
FEDERAL FUNDS SOLD 68,741,408 116,091,417
-------------- --------------
Total cash and cash equivalents 187,970,058 200,328,994
INTEREST-BEARING DEPOSITS IN BANKS 4,080 203,911
INVESTMENT IN SECURITIES:
Securities held-to-maturity (market value of $414,407,070 in
1999 and $419,252,100 in 1998) 422,362,918 414,302,781
Securities available-for-sale, at market value 233,854,837 211,588,088
LOANS 797,275,325 779,544,287
Less- Allowance for loan losses 8,937,542 8,988,320
-------------- --------------
Net loans 788,337,783 770,555,967
BANK PREMISES AND EQUIPMENT, net 41,536,094 42,927,162
GOODWILL, net 20,156,671 21,798,277
OTHER ASSETS 29,146,756 24,941,695
-------------- --------------
Total assets $1,723,369,197 $1,686,646,875
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
NONINTEREST-BEARING DEPOSITS $ 340,513,737 $ 334,719,132
INTEREST-BEARING DEPOSITS 1,184,190,709 1,170,136,708
-------------- --------------
Total deposits 1,524,704,446 1,504,855,840
DIVIDENDS PAYABLE 2,992,292 2,736,689
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 9,637,734 386,958
OTHER LIABILITIES 7,371,782 9,218,130
-------------- --------------
Total liabilities 1,544,706,254 1,517,197,617
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 20,000,000 shares; issued and
outstanding 9,974,306 and 9,952,683 shares
in 1999 and 1998, respectively 99,743,060 99,526,830
Capital surplus 60,517,351 60,375,373
Retained earnings 22,495,259 8,015,303
Unrealized (loss) gain on investment in securities
available-for-sale, net (4,092,727) 1,531,752
-------------- --------------
Total shareholders' equity 178,662,943 169,449,258
-------------- --------------
Total liabilities and shareholders' equity $1,723,369,197 $1,686,646,875
============== ==============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 68,706,710 $ 70,882,942 $ 62,608,256
Interest on investment in securities-
Taxable 32,022,205 33,382,559 33,347,596
Exempt from federal income tax 4,807,845 3,058,861 1,699,442
Interest on federal funds sold and interest-bearing
deposits in banks 4,475,866 4,543,295 3,818,744
-------------- ------------- -------------
110,012,626 111,867,657 101,474,038
-------------- ------------- -------------
INTEREST EXPENSE:
Interest on time deposits 43,120,569 46,133,721 41,613,665
Other 216,988 158,669 121,249
-------------- ------------- -------------
43,337,557 46,292,390 41,734,914
-------------- ------------- -------------
Net interest income 66,675,069 65,575,267 59,739,124
PROVISION FOR LOAN LOSSES 2,030,833 1,139,500 1,114,000
-------------- ------------- -------------
Net interest income after provision for
loan losses 64,644,236 64,435,767 58,625,124
-------------- ------------- -------------
NONINTEREST INCOME:
Trust department income 5,097,606 4,748,751 3,988,309
Service fees on deposit accounts 13,321,553 11,838,173 10,651,395
Real estate mortgage fees 1,291,282 1,358,271 803,310
Net gain (loss) on securities transactions - 42,230 (381)
Other 4,773,061 4,363,717 4,043,180
-------------- ------------- -------------
24,483,502 22,351,142 19,485,813
-------------- ------------- -------------
NONINTEREST EXPENSE:
Salaries and employee benefits 26,945,492 26,678,822 23,772,176
Net occupancy expense 3,819,129 4,185,224 3,798,148
Equipment expense 4,118,272 4,090,955 3,677,620
Goodwill amortization 1,641,407 1,654,682 747,731
Other expenses 15,409,051 15,812,342 14,526,064
-------------- ------------- -------------
51,933,351 52,422,025 46,521,739
-------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES 37,194,387 34,364,884 31,589,198
INCOME TAX EXPENSE 11,503,846 11,110,945 10,562,739
-------------- ------------- -------------
NET EARNINGS $ 25,690,541 $ 23,253,939 $ 21,026,459
============== ============= =============
NET EARNINGS PER SHARE (BASIC) $ 2.58 $ 2.34 $ 2.12
============== ============= =============
NET EARNINGS PER SHARE, ASSUMING DILUTION $ 2.57 $ 2.33 $ 2.11
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET EARNINGS $25,690,541 $23,253,939 $21,026,459
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized (loss) gain on investment in securities
available-for-sale, before tax (8,653,045) 1,777,853 1,009,314
Reclassification adjustment for realized (gains) losses on
investment in securities included in net earnings, before tax - (42,230) 381
------------ ------------ ------------
Total other items of comprehensive earnings (8,653,045) 1,735,623 1,009,695
------------ ------------ ------------
OTHER COMPREHENSIVE EARNINGS, before income taxes 17,037,496 24,989,562 22,036,154
INCOME TAX (BENEFIT) EXPENSE RELATED TO OTHER ITEMS
OF COMPREHENSIVE EARNINGS (3,028,566) 607,468 353,393
------------ ------------ ------------
COMPREHENSIVE EARNINGS $ 20,066,062 $ 24,382,094 $ 21,682,761
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on
Investment
Common Stock in Securities Total
---------------------- Capital Retained Available Shareholders'
Shares Amount Surplus Earnings For Sale, Net Equity
--------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 7,093,143 $70,931,430 $37,119,732 $28,606,966 $(248,422) $136,409,706
Business combination by immaterial
pooling-of-interests 216,442 2,164,420 (521,224) 2,658,712 (4,283) 4,297,625
Net earnings - - - 21,026,459 - 21,026,459
Stock issuances 34,873 348,730 (2,810) - - 345,920
Cash dividends declared, $0.88 per share - - - (8,274,806) - (8,274,806)
Stock split-up,effected in the form of a
25% dividend 1,681,394 16,813,940 - (16,813,940) - -
Change in unrealized gain (loss) on
investment in securities available-
for-sale, net - - - - 656,302 656,302
--------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1997 9,025,852 90,258,520 36,595,698 27,203,391 403,597 154,461,206
Net earnings - - - 23,253,939 - 23,253,939
Cash dividends declared, $1.00 per share - - - (9,687,469) - (9,687,469)
Stock issuances 23,257 232,570 60,857 - - 293,427
Stock dividend, 10% 903,574 9,035,740 23,718,818 (32,754,558) - -
Change in unrealized gain (loss) on
investment in securities available-
for-sale, net - - - - 1,128,155 1,128,155
--------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1998 9,952,683 99,526,830 60,375,373 8,015,303 1,531,752 169,449,258
Net earnings - - - 25,690,541 - 25,690,541
Cash dividends declared,$1.125 per share - - - (11,210,585) - (11,210,585)
Stock issuances 21,623 216,230 141,978 - - 358,208
Change in unrealized gain (loss) on
investment in securities available-
for-sale, net - - - - (5,624,479) (5,624,479)
--------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1999 9,974,306 $99,743,060 $60,517,351 $22,495,259 $(4,092,727) $178,662,943
========= =========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 25,690,541 $ 23,253,939 $ 21,026,459
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization 6,015,481 6,157,299 5,006,176
Provision for loan losses 2,030,833 1,139,500 1,114,000
Premium amortization, net of discount accretion 2,819,747 2,320,788 998,159
Gain on sale of assets (242,786) (39,576) (38,723)
Deferred federal income tax benefit (189,462) (110,993) (144,067)
Increase in other assets (755,821) (1,109,754) (2,077,395)
(Decrease) increase in other liabilities (1,826,348) 4,049,267 (3,816,030)
------------ ------------ ------------
Total adjustments 7,851,644 12,406,531 1,042,120
------------ ------------ ------------
Net cash provided by operating activities 33,542,185 35,660,470 22,068,579
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest-bearing deposits in banks 199,831 194,760 589,823
Cash and cash equivalents received through purchase of
assets and liabilities, net of cash paid - - 70,702,534
Acquisitions, net of cash and cash equivalents received - - 10,436,740
Activity in available-for-sale securities-
Sales - 23,910,732 10,325,207
Maturities 41,136,148 103,760,577 124,360,581
Purchases (73,621,717) (143,739,172) (266,783,072)
Activity in held-to-maturity securities-
Maturities 114,528,929 218,953,525 234,268,378
Purchases (123,843,038) (213,301,021) (166,632,094)
Net increase in loans (20,100,242) (38,950,855) (50,559,186)
Capital expenditures (4,136,657) (4,267,677) (5,215,797)
Proceeds from sale of other assets 1,453,017 1,171,448 405,476
------------ ------------ ------------
Net cash used in investing activities (64,383,729) (52,267,683) (38,101,410)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits 5,794,605 10,559,002 10,638,143
Net increase in interest-bearing deposits 14,054,001 5,588,110 90,416,339
Net increase in securities sold under agreements to repurchase 9,250,776 386,958 -
Net (decrease) increase in other short-term borrowings (20,000) (6,541,958) 6,090,000
Proceeds of stock issuances 358,208 293,427 345,920
Dividends paid (10,954,982) (9,113,679) (7,993,195)
------------ ------------ ------------
Net cash provided by financing activities 18,482,608 1,171,860 99,497,207
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (12,358,936) (15,435,353) 83,464,376
CASH AND CASH EQUIVALENTS, beginning of year 200,328,994 215,764,347 132,299,971
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $187,970,058 $200,328,994 $215,764,347
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1999, 1998, AND 1997
---------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Nature of Operations
- --------------------
First Financial Bankshares, Inc. (a Texas corporation) ("Bankshares") is a
multi-bank holding company which owns (through its wholly owned Delaware
subsidiary) all of the capital stock of nine banks located in Texas as of
December 31, 1999. Those subsidiary banks are First National Bank of Abilene;
Hereford State Bank; First National Bank, Sweetwater; Eastland National Bank;
The First National Bank in Cleburne; Stephenville Bank & Trust Co.; San Angelo
National Bank; Weatherford National Bank; and Texas National Bank, Southlake.
Each subsidiary bank's primary source of revenue is providing loans and banking
services to consumers and commercial customers in the market area in which the
subsidiary is located.
A summary of significant accounting policies of Bankshares and subsidiaries
(collectively, the "Company") applied in the preparation of the accompanying
consolidated financial statements follow. The accounting principles followed by
the Company and the methods of applying them are in conformity with both
generally accepted accounting principles and prevailing practices of the banking
industry.
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of foreclosed real
estate, deferred income tax assets, and fair value of financial instruments.
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of
Bankshares and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
F-8
<PAGE>
Investment In Securities
- ------------------------
Management classifies debt and equity securities as held-to-maturity,
available-for-sale, or trading based on their intent. Debt securities that
management has the positive intent and ability to hold to maturity are
classified as held-to-maturity and recorded at cost, adjusted for amortization
of premiums and accretion of discounts, which are recognized as adjustments to
interest income using the interest method. Securities not classified as
held-to-maturity or trading are classified as available-for-sale and recorded at
fair value, with unrealized gains and losses, net of deferred taxes, excluded
from earnings and reported in a separate component of shareholders' equity.
Securities classified as trading are recorded at fair value, with unrealized
gains and losses included in earnings. The Company had no trading securities at
December 31, 1999, 1998, or 1997.
Loans and Allowance for Loan Losses
- -----------------------------------
Loans are stated at the amount of unpaid principal, reduced by unearned income
and an allowance for loan losses. Unearned income on installment loans is
recognized in income over the terms of the loans in decreasing amounts using a
method which approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amounts outstanding. Management has elected to expense net loan
origination costs, a method which does not materially differ from deferring and
amortizing such amounts as an adjustment to yield. The allowance for loan losses
is established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible based upon management's
review and evaluation of the loan portfolio. The allowance for loan losses is
increased by charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
general economic conditions, the financial condition of the borrower, the value
and liquidity of collateral, delinquency, prior loan loss experience, and the
results of periodic reviews of the portfolio. Accrual of interest is
discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower's financial
condition is such that collection of interest is doubtful.
The Company's policy requires measurement of an impaired collateral dependent
loan based on the fair value of the collateral. Other loan impairments are
measured based on the present value of expected future cash flows or the loan's
observable market price. At December 31, 1999 and 1998, all significant impaired
loans have been determined to be collateral dependent and have been measured
utilizing the fair value of the collateral.
Bank Premises and Equipment
- ---------------------------
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the life of the respective lease or
the estimated useful lives of the improvements, whichever is shorter.
F-9
<PAGE>
Excess of Cost Over Fair Value of Tangible Assets Acquired (Goodwill)
- ---------------------------------------------------------------------
Goodwill, relating to acquisitions of certain subsidiary banks, is being
amortized by the straight-line method over periods of 15 and 40 years.
Securities Sold Under Agreements To Repurchase:
- -----------------------------------------------
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
the cash received in connection with the transaction. The Company is required to
provide additional securities as collateral at 110% of the borrowed value.
Segment Reporting
- -----------------
The Company has determined that it operates one line of business (community
banking) located in a single geographic area (Texas).
Recent Accounting Standard
- --------------------------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. In June 1999,
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB No.
133," was issued as an amendment to SFAS 133 which delayed the effective date
for all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company plans to adopt SFAS 133 on January 1, 2001, and does not expect the
adoption of the statement to have a significant impact on its financial position
or results of operation.
Per Share Data
- --------------
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under
SFAS 128, net earnings per share ("EPS") are computed by dividing net earnings
by the weighted average number of shares of common stock outstanding during the
period. The Company calculates dilutive EPS assuming all outstanding options to
purchase common stock have been exercised at the beginning of the year (or the
time of issuance, if later.) The dilutive effect of the outstanding options is
reflected by application of the treasury stock method, whereby the proceeds from
the exercised options are assumed to be used to purchase common stock at the
average market price during the period. The following table reconciles the
computation of basic EPS to dilutive EPS:
F-10
<PAGE>
<TABLE>
<CAPTION>
Weighted
Net Average Per Share
Earnings Shares Amount
----------- ---------- ---------
<S> <C> <C> <C>
For the year ended December 31, 1999:
Net earnings per share, basic $25,690,541 9,961,315 $ 2.58
=========
Effect of stock options - 44,534
----------- ----------
Net earnings per share, assuming dilution $25,690,541 10,005,849 $ 2.57
=========== ========== =========
For the year ended December 31, 1998:
Net earnings per share, basic $23,253,939 9,939,910 $ 2.34
=========
Effect of stock options - 56,277
----------- ----------
Net earnings per share, assuming dilution $23,253,939 9,996,187 $ 2.33
=========== ========== =========
For the year ended December 31, 1997:
Net earnings per share, basic $21,026,459 9,905,482 $ 2.12
=========
Effect of stock options - 66,339
----------- ----------
Net earnings per share, assuming dilution $21,026,459 9,971,821 $ 2.11
=========== ========== =========
</TABLE>
Earnings and dividends per share have been retroactively adjusted for the effect
of stock dividends and splits.
Reclassifications
- -----------------
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.
Statements of Cash Flows
- ------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold.
Accounting for Income Taxes
- ---------------------------
The Company's provision for income taxes is generally based on income before
taxes adjusted for permanent differences between financial reporting and taxable
income. Deferred income taxes are provided for temporary differences between
financial reporting and taxable income.
2. CASH AND INVESTMENT IN SECURITIES:
----------------------------------
Certain subsidiary banks are required to maintain reserve balances with the
Federal Reserve Bank. During 1999 and 1998, such average balances totaled
approximately $7,041,000 and $7,374,000, respectively.
F-11
<PAGE>
The amortized cost, estimated fair values, and gross unrealized holding gains
and losses of the Company's investment in securities as of December 31, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ -------- ----------- ------------
<S> <C> <C> <C> <C>
Securities held-to-maturity-
U.S. Treasury securities and
Obligations of U.S.
government corporations and agencies $283,735,707 $103,589 $(6,158,131) $277,681,165
Obligations of state and
political subdivisions 86,907,891 122,893 (1,251,539) 85,779,245
Corporate bonds 5,142,414 - (71,575) 5,070,839
Mortgage-backed securities 46,082,567 32,859 (722,705) 45,392,721
Other securities 494,339 - (11,239) 483,100
------------ -------- ----------- ------------
Total investment in debt
securities held-to-maturity $422,362,918 $259,341 $(8,215,189) $414,407,070
============ ======== =========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ------- ----------- ------------
<S> <C> <C> <C> <C>
Securities available-for-sale-
U.S. Treasury securities and
obligations of U.S.
government corporations and agencies $105,290,356 $65,391 $(2,563,368) $102,792,379
Obligations of state and
political subdivisions 50,407,650 2,727 (2,210,591) 48,199,786
Corporate bonds 39,376,949 567 (809,898) 38,567,618
Mortgage-backed securities 41,939,488 20,348 (801,683) 41,158,153
------------ ------- ----------- ------------
Total investment in debt
securities available-for- 237,014,443 89,033 (6,385,540) 230,717,936
sale
Other securities 3,136,901 - - 3,136,901
------------ ------- ----------- ------------
Total investment in securities
available-for-sale $240,151,344 $89,033 $(6,385,540) $233,854,837
============ ======= =========== ============
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Securities held-to-maturity-
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $293,400,457 $3,839,931 $(160,574) $297,079,814
Obligations of state and
political subdivisions 66,764,133 1,005,216 (37,883) 67,731,466
Corporate bonds 9,479,912 46,087 (5,345) 9,520,654
Mortgage-backed securities 44,633,072 303,585 (42,455) 44,894,202
Other securities 25,207 757 - 25,964
------------ ---------- --------- ------------
Total investment in debt
securities held-to-maturity $414,302,781 $5,195,576 $(246,257) $419,252,100
============ ========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Securities available-for-sale-
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $104,255,679 $1,205,568 $ (93,564) $105,367,683
Obligations of state and
political subdivisions 33,255,223 685,446 (77,496) 33,863,173
Corporate bonds 25,984,410 433,116 (14,499) 26,403,027
Mortgage-backed securities 42,579,364 285,231 (69,191) 42,795,404
------------ ---------- --------- ------------
Total investment in debt
securities available-for-
sale 206,074,676 2,609,361 (254,750) 208,429,287
Other securities 3,158,801 - - 3,158,801
------------ ---------- --------- ------------
Total investment in securities
available-for-sale $209,233,477 $2,609,361 $(254,750) $211,588,088
============ ========== ========= ============
</TABLE>
F-13
<PAGE>
The Company invests in securities that have expected maturities that differ from
their contractual maturities. These differences arise because borrowers may have
the right to call or prepay obligations with or without a prepayment penalty.
These securities include collateralized mortgage obligations (CMOs) and
asset-backed securities. The expected maturities of these securities at December
31, 1999, were computed by using scheduled amortization of balances and
historical prepayment rates. At December 31, 1999 and 1998, the Company did not
hold any CMOs that entail higher risks than standard mortgage-backed securities.
Total investment in debt securities at December 31, 1999 and 1998, included
structured notes with an amortized cost basis of $7,006,000 and $7,014,000,
respectively, and an estimated fair value of $6,942,000 and $6,971,000,
respectively.
The amortized cost and estimated fair value of debt securities at December 31,
1999, by contractual and expected maturity, are shown below.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
----------------------------- ------------------------------
Amortized Estimated Amortized Estimated
Cost Basis Fair Value Cost Basis Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due within one year $ 87,688,486 $ 87,253,110 $ 25,595,399 $ 25,272,777
Due after one year through five years 283,558,635 277,149,793 140,195,763 137,191,489
Due after five years through ten years 42,339,198 41,400,138 36,119,246 34,926,713
Due after ten years 8,776,599 8,604,029 35,104,035 33,326,957
------------ ------------ ------------ ------------
Total debt securities $422,362,918 $414,407,070 $237,104,443 $230,717,936
============ ============ ============ ============
</TABLE>
Securities, carried at approximately $211,143,000 and $164,215,000 at December
31, 1999 and 1998, respectively, were pledged as collateral for public or trust
fund deposits and for other purposes required or permitted by law.
There were no sales of investment securities during the year ended December 31,
1999. During 1998 and 1997, sales of investments in securities that were
classified as available-for-sale totaled $23,910,732 and $10,325,207,
respectively. Gross realized gains from the 1998 and 1997 sales were $44,064 and
$4,642, respectively. Gross realized losses for the 1998 and 1997 sales were
$1,834 and $5,023, respectively. Specific identification was used to determine
cost in computing the realized gains and losses.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
------------------------------------
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial, and agricultural $297,966,325 $278,647,355
Real estate - construction 43,039,241 36,721,221
Real estate - mortgage 208,895,129 198,446,750
Consumer 249,397,767 272,100,492
------------ ------------
799,298,462 785,915,818
Unearned income (2,023,137) (6,371,531)
------------ ------------
Total loans $797,275,325 $779,544,287
============ ============
</TABLE>
F-14
<PAGE>
The Company's recorded investment in impaired loans and the related valuation
allowance are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------ ------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Impaired loans-
Valualtion allowance required $1,552,000 $548,604 $2,866,000 $586,867
========== ======== ========== ========
</TABLE>
The average recorded investment in impaired loans for the years ended December
31, 1999 and 1998, was approximately $2,589,000 and $3,659,000, respectively.
The Company had approximately $2,089,000 and $3,169,000 in nonperforming assets
at December 31, 1999 and 1998, respectively, of which approximately $1,416,000
and $2,784,000 represented recorded investments in impaired loans. No additional
funds are committed to be advanced in connection with impaired loans.
Interest payments received on impaired loans are recorded as interest income
unless collections of the remaining recorded investment is doubtful, at which
time payments received are recorded as reductions of principal. The Company
recognized interest income on impaired loans of approximately $63,000, $135,000
and $230,000 during the years ended December 31, 1999, 1998, and 1997,
respectively, of which approximately $23,000, $17,000 and $63,000 represented
cash interest payments received and recorded as interest income. If interest on
impaired loans had been recognized on a full accrual basis during the years
ended December 31, 1999, 1998 and 1997, respectively, such income would have
approximated $249,000, $400,000 and $439,000.
The allowance for loan losses as of December 31, 1999 and 1998, is presented
below. Management has evaluated the adequacy of the allowance for loan losses by
estimating the probable losses in various categories of the loan portfolio which
are identified below:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Allowance for loan losses provided for-
Loans specifically evaluated as impaired $ 548,604 $ 586,862
Remaining portfolio 8,388,938 8,401,458
---------- ----------
Total allowance for loan losses $8,937,542 $8,988,320
========== ==========
</TABLE>
F-15
<PAGE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
Balance at beginning of year $ 8,988,320 $ 10,632,441 $ 9,797,543
Add-
Allowance of acquired bank - - 1,443,685
Provision for loan losses 2,030,833 1,139,500 1,114,000
Loan recoveries 1,739,641 1,375,048 1,403,876
Deduct-
Loan charge-offs (3,821,252) (4,158,669) (3,126,663)
----------- ------------ -----------
Balance at end of year $ 8,937,542 $ 8,988,320 $10,632,441
=========== ============ ===========
</TABLE>
An analysis of the changes in loans to officers, directors, principal
shareholders, or associates of such persons for the years ended December 31,
1999 and 1998 (determined as of each respective year-end) follows:
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Additional End
of Period Loans Payments of Period
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1999 $49,715,002 $70,731,259 $74,405,640 $46,040,621
=========== =========== =========== ===========
Year ended December 31, 1998 $40,965,711 $49,520,091 $41,962,879 $48,522,923
=========== =========== =========== ===========
</TABLE>
In the opinion of management, those loans are on substantially the same terms,
including interest rates and collateral requirements, as those prevailing at the
time for comparable transactions with unaffiliated persons.
4. BANK PREMISES AND EQUIPMENT:
----------------------------
The following is a summary of bank premises and equipment:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Land $ 7,092,511 $ 8,031,111
Buildings 44,307,341 43,628,814
Furniture and equipment 28,250,768 26,677,460
Leasehold improvements 5,991,659 6,523,911
------------ ------------
85,642,279 84,861,296
Less- accumulated depreciation and amortization (44,106,185) (41,934,134)
------------ ------------
$ 41,536,094 $ 42,927,162
============ ============
</TABLE>
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
amounted to $3,932,695, $4,196,134 and $3,819,891, respectively.
F-16
<PAGE>
5. TIME DEPOSITS:
--------------
Time deposits of $100,000 or more totaled approximately $157,337,000 and
$162,772,000 at December 31, 1999 and 1998, respectively. Interest expense on
these deposits was approximately $8,146,000, $8,705,000, and $8,322,000 during
1999, 1998, and 1997, respectively.
At December 31, 1999, the scheduled maturities of time deposits having a term of
more than one year are as follows:
2000 $39,449,000
2001 13,541,000
2002 8,110,000
2003 4,083,000
2004 15,000
Thereafter -
-----------
$65,198,000
6. NOTE PAYABLE:
-------------
Bankshares has a line of credit with a nonaffiliated bank under which it could
borrow up to $25,000,000. The line of credit is unsecured and matures on June
30, 2000. Bankshares paid no fee to secure the unused line of credit and,
accordingly, did not estimate a fair value of the unused line of credit at
December 31, 1999 and 1998. In September 1997, Bankshares borrowed $6,200,000
under the line of credit at the London Interbank Offering Rate plus 1.0% (6.8%
at December 31, 1997). Interest was payable quarterly beginning December 31,
1997, with principal due in 20 quarterly installments beginning September 30,
1998. Bankshares repaid all borrowings under the line of credit in September
1998.
F-17
<PAGE>
7. INCOME TAXES:
-------------
The Company files a consolidated federal income tax return. Income tax expense
(benefit) is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current federal income tax $11,693,308 $11,221,938 $10,706,806
Deferred federal income tax benefit (189,462) (110,993) (144,067)
----------- ----------- -----------
Income tax expense $11,503,846 $11,110,945 $10,562,739
=========== =========== ===========
</TABLE>
The provision for income tax expense, as a percentage of pretax earnings,
differs from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
As a Percent of Pretax Earnings
-------------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
Reductions in tax rate resulting from
interest income exempt from
federal income tax (4.5)% (3.1)% (1.9)%
Other 0.4 % 0.4% 0.3%
---- ---- ----
Effective income tax rate 30.9 % 32.3% 33.4%
==== ==== ====
</TABLE>
F-18
<PAGE>
The approximate effects of each type of difference that gave rise to the
Company's deferred tax assets and liabilities at December 31, 1999 and 1998, are
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets-
Tax basis of loans in excess of financial statement basis $2,906,556 $2,624,001
Benefits of a subsidiary bank net operating loss
carryforward 249,907 368,511
Recognized for financial reporting purposes but not
for tax purposes-
Deferred compensation 508,669 404,310
Write-downs and adjustments to other
real estate owned and repossessed assets 39,367 200,669
Net unrealized loss on investment in securities
available-for-sale 2,204,609 -
Other deferred tax assets 348,395 341,436
---------- ----------
Total deferred tax assets $6,257,503 $3,938,927
1999 1998
---------- ----------
Deferred tax liabilities-
Financial statement basis of fixed assets in excess of
tax basis $1,623,207 $1,557,765
Recognized for financial reporting purposes but not
for tax purposes-
Accretion on investments 190,711 207,828
Pension plan contribution 545,978 535,436
Net unrealized gain on investment in securities
available-for-sale - 819,209
Other deferred tax liabilities 11,783 115,224
---------- ----------
Total deferred tax liabilities 2,371,679 3,235,462
---------- ----------
Valuation allowance (3,173) (34,094)
---------- ----------
Net deferred tax asset $3,882,651 $ 669,371
========== ==========
</TABLE>
At December 31, 1999, the First National Bank in Cleburne ("Cleburne"), a
subsidiary bank, had a net operating loss carryforward for federal income tax
purposes of approximately $714,000. In its consolidated return, subject to
certain yearly limitations, the Company can utilize Cleburne's pre-acquisition
net operating loss carryforward to offset future consolidated taxable income
only to the extent Cleburne has future taxable income. If not used, the net
operating loss carryforward expires as follows: $349,000 in 2002, and $365,000
in 2005.
F-19
<PAGE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The Company is required to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Company, as for most financial
institutions, over 90% of its assets and liabilities are considered financial
instruments as defined by generally accepted accounting principles. Many of the
Company's financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction.
Estimated fair values have been determined by the Company using the best
available data, as generally provided in the Company's regulatory reports, and
an estimation methodology suitable for each category of financial instruments.
For those loans and deposits with floating interest rates, it is presumed that
estimated fair values generally approximate the recorded book balances. The
estimation methodologies used, the estimated fair values, and recorded book
balances at December 31, 1999 and 1998, were as follows:
o Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
<TABLE>
<CAPTION>
Estimated Recorded
Fair Book
Value Balance
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Cash and due from banks $119,228,650 $ 84,237,577 $119,228,650 $ 84,237,577
Federal funds sold 68,741,408 116,091,417 68,741,408 116,091,417
Interest-bearing deposits in banks 4,080 203,911 4,080 203,911
Investment in securities 648,261,907 630,840,188 656,217,755 625,890,869
Securities sold under agreements
to repurchase 9,637,734 386,958 9,637,734 386,958
</TABLE>
F-20
<PAGE>
o Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating current
market for similar assets and liabilities. Financial instrument assets with
variable rates and financial instrument liabilities with no stated maturities
have an estimated fair value equal to both the amount payable on demand and the
recorded book balance.
<TABLE>
<CAPTION>
Estimated Recorded
Fair Book
Value Balance
------------------------------- --------------------------------
1999 1998 1999 1998
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Deposits with stated maturities $ 511,535,742 $536,329,398 $ 512,254,716 $533,565,174
Deposits with no stated
maturities 1,012,449,730 971,290,666 1,012,449,730 971,290,666
Net loans 786,036,737 776,056,313 788,337,783 770,555,967
</TABLE>
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
The Company's remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Company's deposits is required nor has the Company estimated its value. There is
no material difference between the notional amount and the estimated fair value
of off-balance-sheet unfunded loan commitments which total approximately
$107,993,000 and $195,719,000 at December 31, 1999 and 1998, respectively, and
are generally priced at market at the time of funding. Standby letters of credit
discussed in Note 10 have an estimated fair value based on fees currently
charged for similar agreements. December 31, 1999, 1998, and 1997 fees related
to the unexpired term of the standby letters of credit are not significant.
Reasonable comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates which
must be made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
9. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company is engaged in legal actions arising from the normal course of
business. In management's opinion, the Company has adequate legal defenses with
respect to these actions, and the resolution of these matters will have no
material adverse effects upon the results of operations or financial condition
of the Company.
The Company leases a portion of its bank premises and equipment under operating
leases and is a lessor for portions of its banking premises. Total rental income
for all leases included in net occupancy expense is approximately $1,336,000,
$1,436,000, and $1,341,000 for the years ended December 31, 1999, 1998, and
1997, respectively. At December 31, 1999, approximate future minimum lease
commitments, net of lease receivables, are not significant.
F-21
<PAGE>
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
--------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Contract or
Notional Amount
---------------
Financial instruments whose contract amounts
represent credit risk-
Commitments to extend credit $107,993,000
Standby letters of credit 4,418,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The average collateral value held on
letters of credit exceeds the contract amount.
11. CONCENTRATION OF CREDIT RISK:
-----------------------------
The Company grants commercial, retail, agriculture, and residential loans to
customers primarily in North Central and West Texas. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the local economic sector.
12. PENSION AND PROFIT SHARING PLANS:
---------------------------------
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and a percentage of the
employee's qualifying compensation during the final years of employment. The
Company's funding policy is to contribute annually the amount necessary to
satisfy the Internal Revenue Service's funding standards. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
F-22
<PAGE>
The following table provides a reconciliation of the plan's benefit obligations
and fair value of plan assets over the two-year period ended December 31, 1999,
and a statement of the funded status as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Reconciliation of benefit obligations-
Benefit obligation at January 1 $ 10,376,211 $ 8,279,256
Service cost - benefits earned during the period 874,008 690,383
Interest cost on projected benefit obligation 725,205 637,149
Plan amendment for retirees - 283,779
Actuarial (gain) loss (738,685) 1,007,861
Benefits paid (442,901) (522,217)
------------ ------------
Benefit obligation at December 31 10,793,838 10,376,211
------------ ------------
Reconciliation of fair value of plan assets-
Fair value of plan assets at January 1 9,981,047 9,583,507
Actual return on plan assets 1,249,409 338,264
Employer contributions 907,708 581,493
Benefits paid (442,901) (522,217)
------------ ------------
Fair value of plan at December 31 11,695,263 9,981,047
------------ ------------
Funded status-
Funded status at December 31 901,425 (395,164)
Unrecognized loss from past experience different
than that assumed and effects of changes in
assumptions 618,632 1,645,964
Unrecognized prior-service cost 247,857 265,818
------------ ------------
Net amount recognized (prepaid pension cost included
in other assets) $ 1,767,914 $ 1,516,618
============ ============
</TABLE>
F-23
<PAGE>
Net periodic pension cost for the years ended December 31, 1999, 1998, and 1997,
included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
--------- --------- -----------
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 874,008 $ 690,383 $ 636,371
Interest cost on projected benefit obligation 725,205 637,149 560,262
Expected return on plan assets (993,649) (867,303) (730,486)
Amortization of transition asset - - (131,387)
Amortization of prior-service cost 17,961 17,961 -
Amortization of unrecognized net loss 32,887 - -
--------- --------- -----------
Net periodic pension cost $ 656,412 $ 478,190 $ 334,760
========= ========= ===========
</TABLE>
The following table sets forth the rates used in the actuarial calculations of
the present value of benefit obligations and the rate of return on plan assets:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 7.5% 6.75% 7.5%
Rate of increase in future compensation levels 4% 4% 4%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
</TABLE>
As of December 31, 1999 and 1998, the fair value of the plan's assets included
Company stock valued at approximately $303,000 and $345,000, respectively.
The Company's pension plan was amended as of February 1, 1998, to increase
benefit payments to retired participants. The effect of the amendment was to
increase the pension benefit obligation by $283,779. The prior-service costs
related to the amendment are amortized on a straight-line basis over the average
remaining service period of the active participants.
The Company also provides a profit sharing plan, which covers substantially all
full-time employees. The profit sharing plan is a defined contribution plan and
allows employees to contribute up to 5% of their base annual salary. Employees
are fully vested to the extent of their contributions and become fully vested in
the Company's contributions over a seven-year period. Costs related to the
Company's defined contribution plan totaled $2,111,000, $2,027,000, and
$1,824,000 in 1999, 1998, and 1997, respectively.
13. DIVIDENDS FROM SUBSIDIARIES:
----------------------------
At December 31, 1999, approximately $18,600,000 was available for the
declaration of dividends by the Company's subsidiary banks without the prior
approval of regulatory agencies.
F-24
<PAGE>
14. REGULATORY MATTERS:
-------------------
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, each of Bankshares'
subsidiaries must meet specific capital guidelines that involve quantitative
measures of the subsidiaries' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The subsidiaries'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and each of its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined), to average assets (as defined). Management believes as of December 31,
1999 and 1998, that Bankshares and each of its subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 1999 and 1998, the most recent notification from each
respective subsidiaries' primary regulator categorized each of Bankshares'
subsidiaries as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institutions' category. Bankshares' and its
significant subsidiaries' actual capital amounts and ratios are presented in the
table below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------------- ---------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --- -------------- ----- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk-Weighted
Assets):
Consolidated $ 171,537,000 18% =>$ 75,680,000 => 8% N/A N/A
First National Bank of Abilene $ 57,611,000 16% =>$ 28,481,000 => 8% =>$ 35,602,000 => 10%
San Angelo National Bank $ 25,675,000 18% =>$ 11,117,000 => 8% =>$ 13,896,000 => 10%
Weatherford National Bank $ 16,786,000 18% =>$ 7,507,000 => 8% =>$ 9,384,000 => 10%
Tier I Capital (to Risk-Weighted
Assets):
Consolidated $ 162,599,000 17% =>$ 37,840,000 => 4% N/A N/A
First National Bank of Abilene $ 54,386,000 15% =>$ 14,241,000 => 4% =>$ 21,361,000 => 6%
San Angelo National Bank $ 24,440,000 18% =>$ 5,558,000 => 4% =>$ 8,338,000 => 6%
Weatherford National Bank $ 15,925,000 17% =>$ 3,754,000 => 4% =>$ 5,630,000 => 6%
Tier I Capital (to Average
Assets):
Consolidated $ 162,599,000 10% =>$ 50,681,000 => 3% N/A N/A
First National Bank of Abilene $ 54,386,000 9% =>$ 18,806,000 => 3% =>$ 31,344,000 => 5%
San Angelo National Bank $ 24,440,000 9% =>$ 8,132,000 => 3% =>$ 13,553,000 => 5%
Weatherford National Bank $ 15,925,000 9% =>$ 5,196,000 => 3% =>$ 8,660,000 => 5%
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------------- ---------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --- -------------- ----- -------------- ------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted
Assets):
Consolidated $ 155,108,000 17% =>$ 72,945,000 => 8% N/A N/A
First National Bank of Abilene $ 55,164,000 16% =>$ 26,864,000 => 8% =>$ 33,580,000 => 10%
San Angelo National Bank $ 24,291,000 17% =>$ 11,680,000 => 8% =>$ 14,599,000 => 10%
Weatherford National Bank $ 15,667,000 18% =>$ 7,083,000 => 8% =>$ 8,853,000 => 10%
Tier I Capital (to Risk-Weighted
Assets):
Consolidated $ 146,119,000 16% =>$ 36,472,000 => 4% N/A N/A
First National Bank of Abilene $ 51,952,000 15% =>$ 13,432,000 => 4% =>$ 20,148,000 => 6%
San Angelo National Bank $ 23,018,000 16% =>$ 5,840,000 => 4% =>$ 8,760,000 => 6%
Weatherford National Bank $ 14,844,000 17% =>$ 3,541,000 => 4% =>$ 5,312,000 => 6%
Tier I Capital (to Average
Assets):
Consolidated $ 146,119,000 9% =>$ 48,585,000 => 3% N/A N/A
First National Bank of Abilene $ 51,952,000 9% =>$ 17,764,000 => 3% =>$ 29,606,000 => 5%
San Angelo National Bank $ 23,018,000 9% =>$ 8,046,000 => 3% =>$ 13,410,000 => 5%
Weatherford National Bank $ 14,844,000 9% =>$ 5,019,000 => 3% =>$ 8,364,000 => 5%
</TABLE>
F-26
<PAGE>
15. STOCK OPTION PLAN:
------------------
The Company has an incentive stock plan to provide for the granting of options
to senior management of the Company at prices not less than market at the date
of grant. At December 31, 1999, the Company had allocated 317,757 shares of
stock for issuance under the plan. The plan provides that options granted are
exercisable after two years from date of grant at a rate of 20% each year
cumulatively during the 10-year term of the option. An analysis of stock option
activity for the years ended December 31, 1999, 1998, and 1997, is presented in
the table and narrative below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- --------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------- ------ ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 136,708 $23.76 124,739 $16.79 165,810 $14.44
Granted - - 45,430 36.59 4,813 28.36
Exercised (21,623) 16.57 (24,830) 11.81 (40,848) 8.46
Canceled (4,585) 22.54 (8,631) 24.89 (5,036) 17.90
------- ------ ------- ------ -------- ------
Outstanding, end of year 110,500 $25.22 136,708 $23.76 124,739 $16.79
======= ====== ======= ====== ======= ======
Exercisable at end of year 48,791 $16.92 54,435 $15.77 45,064 $12.51
======= ====== ======= ====== ======= ======
Weighted average fair value of
options granted at date of issue $10.92 $10.84
====== ======
</TABLE>
The options outstanding at December 31, 1999, have exercise prices between $8.45
and $36.59 with a weighted average exercise price of $25.22 and a weighted
average remaining contractual life of 6 years. Stock options have been adjusted
retroactively for the effects of stock dividends and splits.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," under which no compensation cost
has been recognized for options granted. Had compensation cost for the plan been
determined consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced by insignificant amounts on a pro
forma basis for the years ended December 31, 1999, 1998 and 1997. The fair value
of the options granted in 1998 and 1997 was estimated using an accepted options
pricing model with the following weighted-average assumptions: risk-free
interest rate of 5.86%; expected dividend yield of 2.48%; expected life of 5
years; and expected volatility of 27.81% for the 1998 grant and 29.49% for the
1997 grant.
F-27
<PAGE>
16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
-------------------------------------------------
Condensed Balance Sheets as of December 31, 1999 and 1998
- ---------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ------------ ------------
<S> <C> <C>
Cash in subsidiary bank $ 214,168 $ 638,625
Interest-bearing deposits in banks 14,117,903 4,958,496
------------ ------------
Total cash and cash equivalents 14,332,071 5,597,121
Investment in subsidiaries, at equity 166,077,563 165,903,291
Goodwill, net 834,527 890,103
Other assets 1,213,833 950,244
------------ ------------
Total assets $182,457,994 $173,340,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Total liabilities $ 3,795,051 $ 3,891,501
Shareholders' equity-
Common stock 99,743,060 99,526,830
Capital surplus 60,517,351 60,375,373
Retained earnings 22,495,259 8,015,303
Unrealized (loss) gain on investment in securities
available-for-sale, net (4,092,727) 1,531,752
------------ ------------
Total shareholders' equity 178,662,943 169,449,258
------------ ------------
Total liabilities and shareholders' equity $182,457,994 $173,340,759
============ ============
</TABLE>
F-28
<PAGE>
Condensed Statements of Earnings-
For the Years Ended December 31, 1999, 1998, and 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income-
Cash dividends from subsidiary banks $21,729,622 $15,500,000 $16,350,000
Excess of earnings over dividends of
subsidiary banks 5,798,751 8,716,499 5,083,830
Other income 816,430 640,633 1,377,445
----------- ----------- -----------
28,344,803 24,857,132 22,811,275
----------- ----------- -----------
Expenses-
Salaries and employee benefits 1,041,660 1,002,919 1,220,436
Other operating expenses 2,415,987 1,098,817 753,649
----------- ----------- -----------
3,457,647 2,101,736 1,974,085
----------- ----------- -----------
Earnings before income taxes 24,887,156 22,755,396 20,837,190
Income tax benefit 803,385 498,543 189,269
----------- ----------- -----------
Net earnings $25,690,541 $23,253,939 $21,026,459
=========== =========== ===========
</TABLE>
F-29
<PAGE>
Condensed Statements of Cash Flows-
For the Years Ended December 31, 1999, 1998, and 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities-
Net earnings $25,690,541 $ 23,253,939 $ 21,026,459
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Excess of earnings over
dividends of subsidiary banks (5,798,751) (8,716,499) (5,083,830)
Depreciation 28,566 31,269 38,802
Discount accretion, net of premium
amortization - (15,117) (730,260)
Amortization of goodwill 55,576 53,090 46,135
Increase in other assets (296,818) (390,985) (204,916)
(Decrease) increase in liabilities (352,053) 117,783 237,572
----------- ------------ ------------
Net cash provided by operating
activities 19,327,061 14,333,480 15,329,962
----------- ------------ ------------
Cash flows from investing activities-
Capital expenditures 4,663 (48,519) (54,638)
Capital contribution to subsidiary - - (28,000,000)
Cash acquired in acquisition - - 316,500
Proceeds from maturities of securities - 1,510,000 74,088,129
Purchases of securities - (1,494,883) (54,711,342)
----------- ------------ ------------
Net cash provided by (used in)
investing activities 4,663 (33,402) (8,361,351)
----------- ------------ ------------
Cash flows from financing activities-
Proceeds of stock issuances 358,208 293,427 345,920
Proceeds from debt - - 6,200,000
Repayments of debt - (4,700,000) (1,500,000)
Cash dividends paid (10,954,982) (9,113,679) (7,993,195)
----------- ------------ ------------
Net cash used in financing activities (10,596,774) (13,520,252) (2,947,275)
----------- ------------ ------------
Net increase in cash and cash equivalents 8,734,950 779,826 4,021,336
Cash and cash equivalents, beginning of year 5,597,121 4,817,295 795,959
----------- ------------ ------------
Cash and cash equivalents, end of year $14,332,071 $ 5,597,121 $ 4,817,295
=========== ============ ============
</TABLE>
F-30
<PAGE>
17. BUSINESS COMBINATIONS:
----------------------
In December 1998, the Company exchanged 411,683 shares of its common stock for
substantially all of the outstanding shares of Cleburne State Bank ("Cleburne
State"). The Cleburne State shareholders received 2.1073 shares of the Company's
common stock for each share of Cleburne State common stock owned. The
accompanying consolidated financial statements of the Company give effect to
this business combination which has been accounted for as a
pooling-of-interests. Accordingly, the accounts of Cleburne State have been
combined with those of the Company to reflect the results of these companies on
a combined basis for all periods presented. Certain reclassifications of the
historical results of these companies have been made to conform with the 1998
and 1997 presentation. During the first quarter of 1999, Cleburne State Bank was
merged into The First National Bank in Cleburne.
The Company's consolidated financial data for the years ended December 31, 1998
and 1997, have been restated as follows:
<TABLE>
<CAPTION>
Cleburne
Company State Combined
----------- ---------- -----------
<S> <C> <C> <C>
Year ended December 31, 1998-
Net interest income $62,005,218 $3,570,049 $65,575,267
Net earnings 22,169,886 1,084,053 23,253,939
Year ended December 31, 1997-
Net interest income $56,423,615 $3,315,509 $59,739,124
Net earnings 20,063,105 963,354 21,026,459
</TABLE>
In November 1997, the Company exchanged 216,442 shares of its common stock for
all the outstanding shares of Southlake Bancshares, Inc. ("Southlake") and its
wholly owned subsidiary, Texas National Bank. The Southlake shareholders
received 0.894 shares of the Company's common stock for each share of Southlake
common stock owned. The consolidated financial statements of the Company for
1997 give effect to the merger, which was accounted for as a
pooling-of-interests. Due to immateriality, the transaction was recorded as an
adjustment to shareholders' equity as of January 1, 1997.
In September 1997, the Company, through a bank subsidiary, acquired certain
assets of Texas Commerce Bank - San Angelo for $16,800,000 in cash, and the
assumption of certain liabilities (primarily deposits). The total purchase price
exceeded the fair market value of net assets acquired by approximately
$18,000,000, which was recorded by the Company as goodwill to be amortized using
a straight-line method over a period of 15 years.
F-31
<PAGE>
18. CASH FLOW INFORMATION:
----------------------
Supplemental information on cash flows and noncash transactions is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Supplemental cash flow information-
Interest paid $43,625,728 $46,486,952 $ 40,902,991
Federal income taxes paid 11,750,380 11,259,747 10,319,430
Schedule of noncash investing and financing activities-
Debt assumed in acquisition - - 5,600,000
Assets acquired through foreclosure 417,800 78,720 40,585
Purchase business combinations-
Assets acquired - - 85,044,000
Liabilities assumed - - 155,747,000
</TABLE>
F-32
<PAGE>
EXHIBIT INDEX
Item 601
Regulation S-K
Exhibit Reference
Number Description
- ------ -------------------------------------------------------------
2.1 -- Stock Exchange Agreement and Plan of Reorganization, dated as
of September 4, 1998, between First Financial Bankshares,
Inc. and Cleburne State Bank (incorporated by reference from
Exhibit 2.1 of the Registrant's Form S-4, filed on October
2, 1998 (Reg. No. 333-65235)).
2.2 -- Amendment No. 1 to Stock Exchange Agreement and Plan of
Reorganization, dated as of October 30, 1998, between First
Financial Bankshares, Inc. and Cleburne State Bank
(incorporated by reference from Exhibit 2.2 of the
Registrant's Amendment No. 1 to Form S-4, filed on November
3, 1998 (Reg. No. 333-65235)).
2.3 -- Stock Exchange Agreement and Plan of Reorganization, dated
as of August 18, 1997, between First Financial Bankshares,
Inc., Southlake Bancshares, Inc. and Texas National Bank
(incorporated by reference from Exhibit 2.1 of the
Registrant's Form S-4, filed on October 1, 1997
(Reg. No. 333-36919)).
2.4 -- Purchase and Assumption Agreement, dated May 27, 1997, by
and between Southwest Bank of San Angelo and Texas Commerce
Bank-- San Angelo, National Association (incorporated by
reference from Exhibit 2.2 of the Registrant's Form S-4,
filed on October 1, 1997 (Reg. No. 333-36919)).
3.1 -- Articles of Incorporation, and all amendments thereto,
of the Registrant(incorporated by reference from Exhibit 1
of the Registrant's Amendment No. 2 to Form 8-A filed on
Form 8-A/A No. 2 on November 21, 1995).
3.2 -- Amended and Restated Bylaws, and all amendments thereto,
of the Registrant (incorporated by reference from Exhibit
2 of the Registrant's Amendment No. 1 to Form 8-A filed on
Form 8-A/A No. 1 on January 7, 1994).
4.1 -- Specimen certificate of First Financial Common Stock
(incorporated by reference from Exhibit 3 of the Registrant's
Amendment No. 1 to Form 8-A filed on Form 8-A/A No. 1 on
January 7, 1994).
10.1 -- Deferred Compensation Agreement, dated October 28, 1992,
between Bankshares and Kenneth T. Murphy (incorporated by
reference from Exhibit 4 of the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1992).
10.2 -- Revised Deferred Compensation Agreement, dated December
28, 1995, between Bankshares and Kenneth T. Murphy
(incorporated by reference from Exhibit 2 of the Registrant's
Form 10-K Annual Report for the fiscal year ended December
31, 1995).
10.3 -- Executive Recognition Plan (incorporated by reference
from Exhibit 2 of the Registrant's Form 10-K Annual Report
for the fiscal year ended December 31, 1996).
10.4 -- Form of Executive Recognition Agreement (incorporated by
reference from Exhibit 3 of the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1996).
10.5 -- 1992 Incentive Stock Option Plan (incorporated by reference
from Exhibit 10.5 of the Registrant's Form 10-K Annual Report
for the fiscal year ended December 31, 1998).
*21.1 -- Subsidiaries of the Registrant.
I-1
<PAGE>
Item 601
Regulation S-K
Exhibit Reference
Number Description
- ------ -------------------------------------------------------------
24.1 -- Power of Attorney (included on signature page of this
Form 10-K).
27.1 -- Financial Data Schedule (included in SEC-filed copy only.)
- ---------------
*Filed herewith
I-2
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
Place of Percentage of Voting
Name of Subsidiary Organization Securities Owned
- ------------------ ------------ ----------------
First Financial Bankshares of Delaware 100%
Delaware, Inc.
First Financial Investments, Inc. Texas 100%
First National Bank of Abilene Texas 100%*
Abilene Texas
Hereford State Bank Texas 100%*
Hereford, Texas
First National Bank, Sweetwater Texas 100%*
Sweetwater, Texas
Eastland National Bank Texas 100%*
Eastland, Texas
The First National Bank in Cleburne Texas 100%*
Cleburne, Texas
Stephenville Bank & Trust Co. Texas 100%*
Stephenville, Texas
San Angelo National Bank Texas 100%*
San Angelo, Texas
Weatherford National Bank Texas 100%*
Weatherford, Texas
Texas National Bank Texas 100%*
Southlake, Texas
* By First Financial Bankshares of Delaware, Inc.
All subsidiaries (other than First Financial Investments, Inc. which,
as of December 31, 1999, had not yet been formally organized) are included in
the consolidated financial statements.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 119,229
<INT-BEARING-DEPOSITS> 4
<FED-FUNDS-SOLD> 68,741
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 233,855
<INVESTMENTS-CARRYING> 422,363
<INVESTMENTS-MARKET> 414,407
<LOANS> 797,275
<ALLOWANCE> 8,938
<TOTAL-ASSETS> 1,723,369
<DEPOSITS> 1,524,704
<SHORT-TERM> 9,748
<LIABILITIES-OTHER> 10,254
<LONG-TERM> 0
0
0
<COMMON> 99,743
<OTHER-SE> 78,920
<TOTAL-LIABILITIES-AND-EQUITY> 1,723,369
<INTEREST-LOAN> 68,707
<INTEREST-INVEST> 36,830
<INTEREST-OTHER> 4,476
<INTEREST-TOTAL> 110,013
<INTEREST-DEPOSIT> 43,121
<INTEREST-EXPENSE> 43,338
<INTEREST-INCOME-NET> 66,675
<LOAN-LOSSES> 2,031
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 51,933
<INCOME-PRETAX> 37,194
<INCOME-PRE-EXTRAORDINARY> 25,691
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,691
<EPS-BASIC> 2.58
<EPS-DILUTED> 2.57
<YIELD-ACTUAL> 4.54
<LOANS-NON> 1,389
<LOANS-PAST> 63
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 390
<ALLOWANCE-OPEN> 8,988
<CHARGE-OFFS> 3,821
<RECOVERIES> 1,740
<ALLOWANCE-CLOSE> 8,938
<ALLOWANCE-DOMESTIC> 8,938
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
