AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 1994.OCTOBER 1, 1997
REGISTRATION NO. 33-51861
================================================================================333-_____________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------------------------------
FIRST FINANCIAL BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
---------------------------------------------
TEXAS 6712 75-0944023
(STATE OR OTHER JURISDICTION (PRIMARY STANDARDOF (I.R.S. EMPLOYER
OF INCORPORATION INDUSTRIAL CLASSIFICATIONOR ORGANIZATION) IDENTIFICATION NO.)
OR ORGANIZATION)6712
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
400 PINE STREET
ABILENE, TEXAS 79601
(915) 675-7155627-7155
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CURTIS R. HARVEY
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
FIRST FINANCIAL BANKSHARES, INC.
400 PINE STREET
ABILENE, TEXAS 79601
(915) 675-7155627-7155
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
---------------------------------------------
Copies to:
N. KATHLEEN FRIDAY, P.C. DAVID L. BUHRMANN PATRICK J. KENNEDY, JR.RICHARD G. WILLIAMS
AKIN, GUMP, STRAUSS, MCMAHON, SUROVIK, SUTTLE, KENNEDY & BARIS, L.L.P.SHANNON, GRACEY, RATLIFF
HAUER & FELD, L.L.P. BUHRMANN, COBBP.C. & HICKS, P.C. 112 EAST PECAN STREETMILLER, L.L.P.
1700 PACIFIC AVENUE, P.O. BOX 3679 SUITE 1775
SUITE 4100 ABILENE, TX 79604 SAN ANTONIO, TX 782051600 BANK ONE TOWER
DALLAS, TEXAS 75201-461875201-4675 500 THROCKMORTON
FORT WORTH, TEXAS 76102
PAUL L. CANNON
MCMAHON, SUROVIK, SUTTLE,
BUHRMANN, COBB, HICKS & GILL,
400 PINE STREET, SUITE 800
ABILENE, TEXAS 79601
Approximate date of commencement of proposed sale to public: As soon as
practicable after the registration statement becomes effective.
---------------------------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box:
[_]
---------------------------------------------
CALCULATION OF REGISTRATION FEE
============================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED(1) REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(1)
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock...................... 216,454 $19.93 $4,313,928 $1,307.12
============================================================================================================================
(1) The registration fee has been computed pursuant to Rule 457(f)(2) under the
Securities Act of 1933, as amended (the "Securities Act"), based on the book
value of the shares of Common Stock of Southlake Bancshares, Inc. at June 30,
1997 that may be exchanged for the securities being registered.
-----------------------
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act, or until the registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
===============================================================================================================================================================
FIRST FINANCIAL BANKSHARES, INC.
CROSS-REFERENCE SHEET SHOWING LOCATIONINFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLE OR NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE PROSPECTUSSECURITIES LAWS OF INFORMATION REQUIRED BY ITEMS OF FORM S-4
FORM S-4 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
- -------------------------------- ------------------
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus....... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................... Inside Front Cover Page; Available Information;
Incorporation by Reference; Table of Contents
3. Ratio of Earnings to Fixed Charges and Other
Information.................................. Prospectus Summary; Summary Financial Data;
Pro Forma Combined Selected Financial Data;
Comparative Per Share Data
4. Terms of the Transaction..................... The Exchange Offer; Description of First Financial
Capital Stock; Comparison of Shareholder Rights
5. Pro Forma Financial Information.............. Pro Forma Combined Selected Financial Data
6. Material Contacts With the Company Being
Acquired..................................... *
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
be Underwriters.............................. *
8. Interests of Named Experts and Counsel....... *
9. Disclosure of Commission Position on
Indemnification of Securities Act Liabilities *
10. Information with Respect to S-3 Registrants.. Available Information; Incorporation by Reference;
Prospectus Summary; Summary Financial Data;
Certain Regulatory Considerations; Information
About First Financial
11. Incorporation of Certain Information by
Reference.................................... Incorporation by Reference
12. Information with Respect to S-2 or S-3
Registrants.................................. *
13. Incorporation of Certain Information by
Reference.................................... *
14. Information with Respect to Registrants Other
than S-3 or S-2 Registrants.................. *
15. Information With Respect to S-3 Companies.... *
16. Information With Respect to S-2 or S-3
Companies.................................... *
17. Information With Respect to Companies Other
than S-2 or S-3 Companies.................... Prospectus Summary; Summary Financial Data;
Information About Concho; Consolidated Financial
Statements
18. Information if Proxies, Consents or
Authorizations are to be Solicited........... *
19. Information if Proxies, Consents, or
Authorizations are not to be Solicited, or in
an Exchange Offer............................ The Exchange Offer; Incorporation by Reference;
Information About Concho
- -----------
* Not applicable.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ Information contained herein is subject to completion or amendment. A +
+ registration statement relating to these securities has been filed with the +
+ Securities and Exchange Commission. These securities may not be sold nor +
+ may offers to buy be accepted prior to the time the registration statement +
+ becomes effective. This Prospectus shall not constitute an offer to sell or +
+ the solicitation of an offer to buy nor shall there be any sale of these +
+ securities in any State in which such offer, solicitation or sale would be +
+ unlawful prior to registration or qualification under the securities laws +
+ of any State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 1994OCTOBER 1, 1997
OFFERING CIRCULAR/
- ------------------
PROSPECTUS
- ----------
OFFER TO EXCHANGE
ALL OUTSTANDING
SHARES OF COMMON STOCK OF
CONCHOSOUTHLAKE BANCSHARES, INC.
FOR
SHARES OF COMMON STOCK OF
FIRST FINANCIAL
BANKSHARES, INC.
----------------
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., ABILENE, TEXAS TIME,
ON March 10, 1994__________, 1997
First Financial Bankshares, Inc., a Texas corporation ("First Financial" or
the "Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying letter of transmittal (the "Letter
of Transmittal," and together with this Prospectus, the "Exchange Offer"), to
exchange shares of its voting common stock, par value $10.00 per share ("First
Financial Common Stock"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement
(as defined herein) of which this Prospectus is a part, for all of the issued
and outstanding shares of common stock of ConchoSouthlake Bancshares, Inc., a Texas
corporation ("Concho"Southlake"), par value $0.50$1.00 per share ("ConchoSouthlake Common Stock").
Upon consummation of the Exchange Offer, each outstanding share of ConchoSouthlake
Common Stock tendered in the Exchange Offer will, subject to certain provisions
with respect to fractional shares, be exchanged (the "Exchange") for 1.15.894 shares
of First Financial Common Stock, subject to certain adjustments.adjustment described herein. As a
result, up to 242,119 shares of Southlake Common Stock will be exchanged for a
maximum of 216,454 shares of First Financial Common Stock.
Subject to the terms and conditions of the Exchange Offer, First Financial
will accept for exchange all shares of ConchoSouthlake Common Stock that are validly
tendered on or prior to 5:00 p.m., Abilene, Texas time, on the date the Exchange
Offer expires, which will be March 10, 1994__________, 1997 (the "Expiration Date"), unless
the Exchange Offer is extended. Once shares of ConchoSouthlake Common Stock are
tendered in the Exchange Offer, they may not be withdrawn. The Exchange Offer is
subject to certain conditions, including a condition that at least 90%, or such
higher amount as shall be necessary in order for the acquisition to be accounted
for as a pooling of interests (the "Required Amount"), of the outstanding
ConchoSouthlake Common Stock be tendered in the Exchange Offer. See "The Exchange
Offer--Conditions to Consummation of the Exchange Offer; Termination."
Upon consummation of the Exchange Offer, it is anticipated that ConchoSouthlake
will be merged (the "Merger") with and into a wholly-owned subsidiary of First Financial and that any
remaining Concho ShareholdersSouthlake shareholders will receive in the Merger the same
consideration they would have received had they participated in the Exchange
Offer, subject to their rights to dissent tofrom the Merger. This Prospectus also
relates to the shares of First Financial Common Stock that may be issued in the
Merger.
Prior to the Exchange Offer, there has been no public market for the
ConchoSouthlake Common Stock. The First Financial Common Stock is traded in the
over-the-counter market and reported on the NASDAQ
National Market under the trading symbol "FFIN." On February 1, 1994,____________, 1997, the
closing sales price of the First Financial Common Stock, as reported by NASDAQ,
was $43.50.$__________.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------------
The date of this Prospectus is February 8, 1994____________, 1997
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL FIRST FINANCIAL ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF CONCHOSOUTHLAKE COMMON STOCK IN ANY
JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
AVAILABLE INFORMATION
First Financial Bankshares, Inc. (which until October 26, 1993 was named
"First Abilene Bankshares, Inc.") is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission""SEC"). TheSuch reports, proxy statements and other
information filed
by the Company with the Commission canmay be inspected and copied at the Commissionpublic reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 10549,20549; and at
the followingits regional offices of the Commission:located at 7 World Trade Center, New York, New York 10048;10048
and Northwestern Atrium Center, 500 West Madison Street, RoomSuite 1400, Chicago, Illinois 60661-2511. Copies of
such information canmaterials may also be obtained from the Public Reference Section of the Commission,SEC
at 450 Fifth Street, N.W., Washington, D.C. 10549, at20549, upon payment of certain fees
prescribed rates.by the SEC. The SEC also maintains a site on the World Wide Web, the
address of which is http://www.sec.gov., that contains reports, proxy and
information statements and other information regarding reporting companies that
file electronically with the SEC.
This Prospectus constitutes a part of a registration statement (the
"Registration Statement") filed by the CompanyFirst Financial with the CommissionSEC under the
Securities Act.Act of 1933, as amended (the "Securities Act"). As permitted by the
rules and regulations of the Commission,SEC, this Prospectus does not contain all of the
information contained in the Registration Statement and the exhibits and
schedules thereto, and reference is hereby made to the Registration Statement
and the exhibits and schedules thereto for further information with respect to
the CompanyFirst Financial and the securities offered hereby. Statements contained herein
concerning the provisions of any documents filed as an exhibit to the
Registration Statement or otherwise filed with the CommissionSEC are not necessarily
complete, and in each instance reference is made to the copy of such document so
filed. Each such statement is qualified in its entirety by such reference.
INCORPORATION BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS, OTHER THAN EXHIBITS
TO SUCH DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE THEREIN,
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY SHAREHOLDER OF
CONCHOSOUTHLAKE TO WHOM THIS PROSPECTUS IS DELIVERED, UPON ORAL OR WRITTEN REQUEST TO
CURTIS R. HARVEY, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, FIRST
FINANCIAL BANKSHARES, INC., P.O. BOX 701,400 PINE STREET, ABILENE, TEXAS 79604,79601, TELEPHONE
NUMBER (915) 675-7155.627-7155. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY MARCH 1, 1994.______________, 1997.
First Financial's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992,1996, First Financial's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1993,1997 and June 30, 1993 and September 30, 19931997, and First Financial's Current
Reports on Form 8-K dated April 23, 1993, September 23,
1993, October 26, 1993,May 27, 1997 and December 7, 1993,August 27, 1997, in each case filed
with the CommissionSEC pursuant to Section 13 of the Exchange Act, and the description of
First Financial Common Stock which is contained in First Financial's
Registration Statement on Form 8-A dated March 29, 1974, filed under Section 12
of the Exchange Act, as amended by Amendment No. 1 to Form 8-A on Form 8-A/A No.
1 dated January 7, 1994 and Amendment No. 2 to Form 8-A on Form 8-A/A No. 2
dated November 20, 1995, are incorporated into this Prospectus by reference.
All documents filed by First Financial pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act after the date of this Prospectus shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the respective dates of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded 2
for purposes of
2
this Prospectus to the extent that such statement is modified or superseded by a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein. Any such statement
so modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
No person is authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representation must not be relied upon as having been
authorized by First Financial or Concho.Southlake. This Prospectus does not constitute
an offering within any jurisdiction to any person to whom it is unlawful to make
such offer within such jurisdiction.
The information herein concerning First Financial has been obtained from
various filings by First Financial under the Exchange Act and from management.
The information herein concerning ConchoSouthlake has been obtained from the
management of Concho.Southlake.
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY..................................................... 5
The Parties.......................................................... 5
Summary of the Transaction........................................... 6
SUMMARY FINANCIAL DATA................................................. 9
FIRST FINANCIAL AND SUBSIDIARIES SELECTED FINANCIAL DATA............... 10
CONCHO AND SUBSIDIARIES SELECTED FINANCIAL DATA........................ 11
FIRST FINANCIAL AND SUBSIDIARIES AND CONCHO AND SUBSIDIARIES PRO FORMA
COMBINED SELECTED FINANCIAL DATA..................................... 12
COMPARATIVE PER SHARE DATA............................................. 13
THE EXCHANGE OFFER..................................................... 15
General.............................................................. 15
Background of the Exchange Offer..................................... 15
First Financial Reasons for the Exchange Offer....................... 16
Concho's Reasons for the Exchange Offer.............................. 16
Operations After the Merger.......................................... 17
The Exchange Rate.................................................... 17
The Expiration Date.................................................. 18
Conditions to Consummation of the Exchange Offer; Termination........ 18
Exchange of Shares and Certificates.................................. 20
Guaranteed Delivery Procedures....................................... 21
Fractional Shares.................................................... 21
No Withdrawal Rights................................................. 22
Regulatory Approvals Required........................................ 22
Federal Income Tax Consequences...................................... 22
Exchange Agent....................................................... 23
Resale by Concho Affiliates.......................................... 23
Anticipated Merger and Dissenting Shareholders' Rights............... 24
Accounting Treatment................................................. 25
CERTAIN REGULATORY CONSIDERATIONS...................................... 25
General.............................................................. 25
Payment of Dividends................................................. 25
Certain Transactions by First Financial with its Affiliates.......... 26
Capital.............................................................. 26
First Financial Support of the First Financial Banks................. 28
PROSPECTUS SUMMARY........................................................... 5
The Parties.......................................................... 5
Summary of the Transaction........................................... 6
SUMMARY FINANCIAL DATA.......................................................10
FIRST FINANCIAL AND SUBSIDIARIES SELECTED FINANCIAL DATA.....................11
SOUTHLAKE AND SUBSIDIARY SELECTED FINANCIAL DATA.............................12
FIRST FINANCIAL AND SUBSIDIARIES AND SOUTHLAKE AND SUBSIDIARY PRO
FORMA COMBINED SELECTED FINANCIAL DATA....................................13
FIRST FINANCIAL AND SUBSIDIARIES, SOUTHLAKE AND SUBSIDIARY, AND
TCB-SAN ANGELO PURCHASE PRO FORMA COMBINED SELECTED FINANCIAL DATA.......14
COMPARATIVE PER SHARE DATA...................................................15
THE EXCHANGE OFFER...........................................................16
General..............................................................16
Background of the Exchange Offer.....................................16
First Financial's Reasons for the Exchange Offer.....................17
Southlake's Reasons for the Exchange Offer...........................17
Operation After the Exchange Offer and Merger........................18
The Exchange Rate....................................................19
The Expiration Date..................................................19
Conditions to Consummation of the Exchange Offer; Termination........19
Exchange of Shares and Certificates..................................21
Guaranteed Delivery Procedures.......................................22
Fractional Shares....................................................22
No Withdrawal Rights.................................................23
Regulatory Approvals Required........................................23
Federal Income Tax Consequences......................................23
Exchange Agent.......................................................24
Resale by Southlake Affiliates.......................................24
Anticipated Merger and Dissenting Shareholders' Rights...............25
Accounting Treatment.................................................26
CERTAIN REGULATORY CONSIDERATIONS............................................26
General..............................................................26
Payment of Dividends.................................................28
Certain Transactions by First Financial with its Affiliates..........28
Capital..............................................................29
First Financial Support of the First Financial Banks.................31
Interstate Banking and Branching Act.................................31
Pending and Proposed Legislation.....................................32
3
PAGE
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FDIC Insurance Assessments........................................... 28
FDICIA............................................................... 28
DESCRIPTION OF FIRST FINANCIAL CAPITAL STOCK........................... 29
COMPARISON OF SHAREHOLDER RIGHTS....................................... 30
Board of Directors................................................... 30
Indemnification and Limitation of Liability of Directors and
Officers............................................................ 30
Special Meetings of Shareholders..................................... 31
INFORMATION ABOUT FIRST FINANCIAL...................................... 31
General.............................................................. 31
1993 Fourth Quarter Results.......................................... 32
Market Prices of and Dividends Paid on First Financial Common Stock.. 32
INFORMATION ABOUT CONCHO............................................... 33
General.............................................................. 33
Market Area.......................................................... 33
Services............................................................. 33
Competition.......................................................... 34
Employees............................................................ 34
Properties........................................................... 34
Market for and Dividends Paid on Concho Common Stock................. 34
Security Ownership of Certain Beneficial Owners...................... 34
Security Ownership of Management..................................... 35
SELECTED CONSOLIDATED FINANCIAL DATA OF CONCHO......................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION OF CONCHO....................................... 39
LEGAL MATTERS.......................................................... 54
EXPERTS................................................................ 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF CONCHO................... 55
ANNEX A - OPINION OF ARMSTRONG, BACKUS & CO., L.L.P.
ANNEX B - ARTICLE 5.16 OF THE TEXAS BUSINESS CORPORATION ACT
DESCRIPTION OF FIRST FINANCIAL CAPITAL STOCK.................................32
COMPARISON OF SHAREHOLDER RIGHTS.............................................32
Board of Directors...................................................33
Indemnification of Directors and Officers............................33
Special Meetings of Shareholders.....................................33
INFORMATION ABOUT FIRST FINANCIAL............................................33
General..............................................................33
Recent Developments..................................................34
Market Prices of and Dividends Paid on First Financial Common Stock..35
INFORMATION ABOUT SOUTHLAKE..................................................36
General..............................................................36
Market Area..........................................................36
Services.............................................................37
Competition..........................................................37
Employees............................................................37
Properties...........................................................37
Market for and Dividends Paid on Southlake Common Stock..............37
Security Ownership of Certain Beneficial Owners......................37
Security Ownership of Management.....................................38
SELECTED CONSOLIDATED FINANCIAL DATA OF SOUTHLAKE............................39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF SOUTHLAKE................................................40
LEGAL MATTERS................................................................56
EXPERTS......................................................................56
4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. As this summary is necessarily incomplete, reference is made
to, and this summary is qualified in its entirety by, the more detailed
information contained or incorporated by reference in this Prospectus and the
Annexes hereto. Shareholders of ConchoSouthlake are urged to read the Prospectus and
the Annexes hereto in their entirety.
THE PARTIES
The CompanyFirst Financial is a Texas corporation and a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA").
On October
28, 1993, the Company changed its name from "First Abilene Bankshares, Inc." to
"First Financial Bankshares, Inc." First Financial owns, through its wholly-owned Delaware subsidiary, First Financial Bankshares of Delaware, Inc.,
all of the
capital stock of sixeight banks organized and located in Texas: 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; and Stephenville Bank and Trust Co.,
Stephenville, Texas; San Angelo National Bank, San Angelo, Texas and Weatherford
National Bank, Weatherford, Texas (collectively, the "First Financial Banks").
First Financial operates principally in order to give the First Financial Banks
access to additional management and technical resources, which enablehelp them to
provide expandedimprove or expand their banking services while continuing their local activity
and autonomy.identity. The First Financial Banks are engaged in the general commercial
banking business consisting of the acceptance of checking, savings and time
deposits, the making of loans, including bank credit card services, transmitting
funds and performing such other banking services as are usual and customary for
commercial banks. While all First Financial Banks, with the exception of
Eastland National Bank, have trust powers, only First National Bank of Abilene, First National Bank,
Sweetwater, and Stephenville Bank and Trust Co. have active trust departments.
The trust departments offer a complete range of services to individuals,
associations and corporations. The First Financial Banks also administer
pension, profit sharing and other employee benefit plans, act as stock transfer
agents or stock registrars for corporations and provide paying agent services.
In addition, First National Bank of Abilene, The First National Bank in
Cleburne, San Angelo National Bank and Weatherford National Bank provide
securities brokerage services through arrangements with various third parties.
As of SeptemberJune 30, 1993,1997, First Financial and its consolidated subsidiaries had total
assets of approximately $906.8 million,$1.3 billion, total deposits of approximately $809.1 million,$1.1
billion, total loans (net of allowance for loan losses) of approximately $359.1$572.5
million and total shareholders' equity of approximately $88.7$137.2 million. First
Financial's principal executive offices are located at 400 Pine Street, Abilene,
Texas 79601, and its telephone number is (915) 675-7155.627-7155. See "Information About
First Financial."
Concho Bancshares, Inc.On September 26, 1997, San Angelo National Bank, a subsidiary bank of First
Financial, acquired certain assets and assumed certain liabilities of Texas
Commerce Bank-San Angelo, National Association ("Concho"TCB-San Angelo") in a
transaction that will be accounted for as a purchase transaction (the "TCB-San
Angelo Purchase"). See "Information about First Financial--Recent
Developments."
Southlake is a one bank holding company formed in 19791987 and incorporated in
the State of Texas. ConchoSouthlake owns all100% of the capital
stock of SouthwestTexas National Bank of San Angelo, ("Texas
("Southwest Bank" or "SWB"National").
Southwest Bank is chartered, a national bank having its principal office in the StateCity of
Southlake, Tarrant County, Texas. Texas National, which began operations in
1975,1985, is federally chartered and
its deposits are insured by the Federal Deposit Insurance
Corporation. Southwest
Bank's wholly owned subsidiary, SWB Investment Centre, Inc. ("SWB Investment"Corporation (the "FDIC"),
operates as. Southlake and Texas National are located approximately
20 miles northeast of downtown Fort Worth, Texas, and within the Fort Worth-
Dallas metropolitan area. In addition, Texas National maintains a registered investment advisor. Southwest Bank conducts business
principally in Tom Green County through itsbranch
location in San Angelo,Trophy Club, Denton County, Texas. The
market area of SWB Investment is also Tom Green County, with a small amount
derived from other area counties. Southwest BankTexas National provides a full
range of both commercial and consumer banking services, including loans,
checking accounts, savings programs, safe deposit facilities, access to
automated teller machines, and credit card programs. The bank does not offer
trust services. SWB Investment
offers investment advice to customers who may execute trades with the bank
through its discount brokerage operation or through its affiliation with
Stephens, Inc. of Little Rock, Arkansas. As of SeptemberJune 30, 1993, as adjusted
to reflect the rescission in November 1993 of an earlier treasury stock purchase
by Concho of 16,267 shares of Concho Common Stock for $344,860, Concho1997, Southlake and its consolidated subsidiariessubsidiary
had total assets of approximately $89.5$53.6 million, total deposits of approximately
$80.9$49.1 million, total loans (net of allowance for loan losses) of approximately
$43.4$25.4 million and total shareholders' equity of approximately $6.2$4.2 million.
Concho'sSouthlake's principal executive offices are located at 3471 Knickerbocker, San Angelo,3205 E. Highway 114,
Southlake, Texas 76906-041076092 and its telephone number is (915) 944-2502.(817) 488-5544. See
"Information about Concho".Southlake."
5
SUMMARY OF THE TRANSACTION
THE EXCHANGE OFFER
Pursuant to a Stock Exchange Agreement and Plan of Reorganization dated as
of December 7, 1993 by and amongAugust 18, 1997, between First Financial Concho and Southwest BankSouthlake and Texas National
(the "Exchange Agreement"), First Financial is offering to acquire from the
shareholders of ConchoSouthlake (the "Concho"Southlake Shareholders") all outstanding shares
of ConchoSouthlake Common Stock in exchange for shares of First Financial Common Stock
at the exchange rate specified below. THE CONCHOSOUTHLAKE BOARD OF DIRECTORS HAS
UNANIMOUSLY DETERMINED THAT THE EXCHANGE OFFER IS FAIR TO THE CONCHOSOUTHLAKE
SHAREHOLDERS. See "The Exchange Offer."
THE EXCHANGE RATE
First Financial will issue and exchange 1.15.894 shares of First Financial
Common Stock for each share of ConchoSouthlake Common Stock tendered by the ConchoSouthlake
Shareholders who accept the Exchange Offer during the time period the Exchange
Offer is in effecteffect; provided, however, that if First Financial, prior to
consummation of the Exchange Offer, shall issue any additional shares of First
Financial Common Stock pursuant to any stock dividend or stock split, the rate
of exchange (the "Exchange Rate"). See "The Exchange Offer -- The Exchange Rate." shall be adjusted so as to prevent dilution of
the exchanging Southlake Shareholders. First Financial will not issue any
fractional shares of First Financial Common Stock. ConchoSouthlake Shareholders who
would otherwise be entitled to receive fractional shares of First Financial
Common Stock will be paid in cash for such fractional shares based upon the Market Value (as defined herein)a value
of $39.75 per share of First Financial Common Stock as of January 28, 1994, the date which is ten days
prior to the date upon which the Registration Statement of which this Prospectus
is a part became effective. As of such date, the Market Value per share of
First Financial Common Stock was $41.50.Stock. See "The Exchange Offer-The
Exchange Rate."
THE EXPIRATION DATE
Unless otherwise extended by First Financial, the offer by First Financial
to exchange First Financial Common Stock for ConchoSouthlake Common Stock shall
terminate at 5:00 p.m., Abilene, Texas time on March 10, 1994______________, 1997 (the
"Expiration Date").
CONDITIONS TO CONSUMMATION OF THE EXCHANGE OFFER; TERMINATION
Consummation of the Exchange Offer is subject to certain conditions,
including without limitation, the valid tender by ConchoSouthlake Shareholders of at least ninety
percent (90%)the
Required Amount of ConchoSouthlake Common Stock; the receipt of all required
regulatory approvals and the lapse of certain waiting periods with respect to
such approvals; the receipt by First Financial of an opinion from its
independent accountants that the transaction will be accounted for as a "pooling
of interests"; the receipt by ConchoSouthlake of an opinion from its independent
public accountants and/or tax counsel that the Exchange will not be considered a
taxable event for federal income tax purposes; the receipt by ConchoFirst Financial of
the
written agreement of the holders of thirteen promissory notes issued by Concho
of such holders' willingness to consent to the transfer of such obligations and
certain collateral securing them to Southwest Bank; the receipt ofan opinion of counsel for Southlake as to certain corporate matters;matters regarding
Southlake and Texas National; the receipt by Southlake of an opinion of counsel
for First Financial as to certain corporate matters regarding First Financial;
the absence of any material changesadverse change in the financial condition of either ConchoFirst
Financial, Southlake or Southwest Bank; andTexas National; the absence of legal or governmental
action with respect to the Exchange Offer; the receipt by First Financial of a
satisfactory Phase I Environmental Assessment Report covering all properties
owned by Southlake and Texas National; appropriate action shall have been taken
to freeze the Southlake Bancshares Employee Stock Ownership Plan (the "KSOP")
and First Financial shall be satisfied with respect to certain other matters
concerning the KSOP; Southlake and Texas National shall have terminated certain
other employee benefit plans; Southlake shall have redeemed and canceled all
outstanding shares of Southlake Preferred Stock; and no outstanding options
requiring the issuance or sale of, or otherwise relating to, any capital stock
of Southlake or Texas National shall exist as of the consummation of the
Exchange Offer.
The Exchange Offer may be terminated at any time (a) by mutual consent of
First Financial and Concho,Southlake, (b) by either partyFirst Financial if any of the other
partyparties shall have breached a representation or warranty or covenant which
constitutes a material adverse change from that represented in the Exchange
Agreement or if
6
any of the conditions to consummating the Exchange Offer are not satisfied or
waived, (c) by Southlake if First Financial shall have breached a representation
or warranty or covenant which constitutes a material adverse change from that
represented in the Exchange Agreement or if any of the conditions to
consummating the Exchange Offer are not satisfied or waived, (d) by First
Financial or (c)Southlake if the Exchange Offer is not consummated by either partyJanuary 31,
1998, or (e) by First Financial or Southlake if a court or governmental body
shall have taken any action restraining, enjoining or otherwise prohibiting the
Exchange or the Merger
6
(as defined herein) and such action shall be final and nonappealable. If the
Exchange Offer is terminated without the acceptance by First Financial of any
shares of ConchoSouthlake Common Stock tendered, all shares so tendered will be
promptly returned to the tendering ConchoSouthlake Shareholders. See "The Exchange
Offer - -ConditionsConditions to Consummation of the Exchange; Termination."
EXCHANGE OF SHARES AND CERTIFICATES
The ConchoSouthlake Shareholders are receiving with this Prospectus a letter of
transmittal for acceptance of the Exchange Offer (the "Letter of Transmittal").
Each ConchoSouthlake Shareholder wishing to accept the Exchange Offer must complete,
sign and date the Letter of Transmittal, or a facsimile thereof, in accordance
with the instructions contained herein and therein, and mail or otherwise
deliver the Letter of Transmittal, or such facsimile, together with the
certificates reflecting ownership of ConchoSouthlake Common Stock (the "Concho"Southlake
Common Stock Certificates") to be exchanged and any other required documentation
to the Exchange AgentTrust Department of First National Bank of Abilene (the "Exchange Agent")
at the address set forth herein and therein. The delivery of the Letter of
Transmittal with the ConchoSouthlake Common Stock Certificates shall be deemed to
constitute an acceptance of the Exchange Offer to the extent of the number of
shares of ConchoSouthlake Common Stock reflected on the ConchoSouthlake Common Stock
Certificates accompanying the Letter of Transmittal.
Upon expiration of the Exchange Offer and satisfaction of certain
conditions to the consummation of the Exchange Offer, if First Financial
receives written notice from the Exchange Agent that at least ninety percent (90%)the Required Amount of the
outstanding shares of ConchoSouthlake Common Stock have been validly tendered to First
Financial, then First Financial will promptly cause to be issued and mailed to
ConchoSouthlake Shareholders who have tendered shares of ConchoSouthlake Common Stock, by
registered mail, certificates of First Financial Common Stock ("First Financial
Common Stock Certificates") representing 1.15.894 shares (subject to adjustment as
herein described) of First Financial Common Stock for each share of ConchoSouthlake
Common Stock received by the Exchange Agent. Any cash payment to which a
ConchoSouthlake Shareholder may be entitled in place of fractional shares of First
Financial Common Stock will be included with the First Financial Common Stock
Certificates mailed to the ConchoSouthlake Shareholders.
Any beneficial holder whose shares of ConchoSouthlake Common Stock are registered
in the name of such holder's broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender in the Exchange Offer should contact the
registered holder promptly and instruct such registered holder to tender on his
or her behalf. If such beneficial holder wishes to tender on his or her own
behalf, such beneficial holder must, prior to completing and executing the
Letter of Transmittal and delivering the ConchoSouthlake Common Stock Certificates,
either make appropriate arrangements to register ownership of the shares of
ConchoSouthlake Common Stock in such holder's name or obtain a properly completed
stock power from the registered holder. The transfer of record ownership may
take considerable time. See "The Exchange Offer - Exchange of Shares and
Certificates."
GUARANTEED DELIVERY PROCEDURES
ConchoSouthlake Shareholders who wish to tender their shares of ConchoSouthlake Common
Stock and whose ConchoSouthlake Common Stock Certificates are not immediately
available or who cannot deliver their ConchoSouthlake Common Stock Certificates and a
properly completed Letter of Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the Expiration Date may
tender their shares of ConchoSouthlake Common Stock according to the guaranteed
delivery procedures set forth in "The Exchange Offer -- GuaranteedOffer--Guaranteed Delivery
Procedures."
7
NO WITHDRAWAL RIGHTS
Shares tendered pursuant to the Exchange Offer may not be withdrawn.
THE EXCHANGE AGENT
The Exchange Agent for purposes of the Exchange Offer discussed herein
shall be the Trust Department of First National Bank of Abilene, Third Floor,
400 Pine Street, Abilene, Texas 79601.
FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Exchange Offer is conditioned on receipt by ConchoSouthlake
of a written opinion from its independent accountants and/or tax counsel that
the exchange of shares of ConchoSouthlake Common Stock will not be considered a
taxable event for federal income tax purposes. ConchoSouthlake has received an opinion
to such effect from its independent accountants, Armstrong, BackusJudd, Thomas, Smith & Co., L.L.P.Company,
P.C. A copy of their opinion, which is subject to certain qualifications and
assumptions, is attached hereto as Annex A. See "The Exchange Offer -- FederalOffer--Federal
Income Tax Consequences."
ANTICIPATED MERGER AND DISSENTING SHAREHOLDERS' RIGHTS
First Financial anticipates that, upon consummation of the Exchange Offer,
ConchoSouthlake will be merged (the "Merger") with and into a wholly-owned Delaware
subsidiary of the CompanyFirst Financial with any
remaining ConchoSouthlake Shareholders receiving in the Merger the same consideration
they would have received had they participated in the Exchange Offer, subject to
their rights to dissent from the Merger. See "The Exchange Offer --AnticipatedOffer--Anticipated
Merger and Dissenting Shareholders' Rights."
REGULATORY APPROVALS
The Exchange Offer and Merger are subject to prior approval by the Federal
Reserve Board. The approvalBoard of
Governors of the Federal Reserve BoardSystem (the "Federal Reserve Board").
Regulatory approval has been obtained. See "The Exchange Offer--Regulatory
Approvals Required."
INTERESTS OF CERTAIN PERSONS IN THE EXCHANGE
As of December 15, 1993,September 30, 1997, the directors and executive officers of ConchoSouthlake
beneficially owned 49,465136,958 shares of ConchoSouthlake Common Stock, representing
approximately 25%56.6% of ConchoSouthlake Common Stock outstanding. See "Information
about Concho--SecuritySouthlake--Security Ownership of Management."
FORWARD - LOOKING STATEMENTS
This Prospectus contains or incorporates by reference forward-looking
statements within the meaning of Section 27A of the Securities Act, including
statements of goals, intentions and expectations as to future trends, plans,
events or results of operations of First Financial or Southlake. These
statements are based upon current and anticipated economic conditions,
nationally and in First Financial's markets, governmental monetary and fiscal
policies, interest rates, competitive factors and other conditions, which, by
their nature, are subject to risks and uncertainties that may cause actual
results to differ materially from those expressed or implied by such forward-
looking statements. Readers are cautioned against placing undue reliance on any
such forward-looking statement.
8
SUMMARY FINANCIAL DATA
The following tables present on aselected historical basis selected consolidated financial
data for (i)each of First Financial (ii) Concho, and (iii)Southlake, combined pro forma financial
data for First Financial and Concho. TheSouthlake and combined pro forma financial data for
First Financial, Southlake and the TCB-San Angelo Purchase. The historical
financial data for First Financial for each year in the five-year period ended
December 31, 1996 are based onderived from the audited consolidated financial statements
of First Financial and Concho, respectively,
incorporated herein by reference orreference. The historical financial
data for Southlake as of December 31, 1995 and 1996 and for the years ended
December 31, 1994, 1995 and 1996 are derived from the audited consolidated
financial statements of Southlake contained elsewhere in this ProspectusProspectus. The
historical financial data for First Financial and Southlake as of June 30, 1996
and 1997 and for the six months ended June 30, 1996 and 1997 are derived from
the unaudited financial statements of First Financial and Southlake,
respectively, and in the respective opinions of First Financial and Southlake,
include all normal recurring adjustments necessary for a fair presentation of
such information. Operating results for the six months ended June 30, 1997 are
not necessarily indicative of the results that may be achieved for the year
ending December 31, 1997. The financial data should be read in conjunction with
the applicable consolidated financial statements including the notes thereto. As notedof First Financial and
Southlake incorporated herein by reference or included elsewhere in the tables, certain historical
financial data for Concho for the nine months ended September 30, 1993 have been
adjusted to reflect the rescission in November 1993 of an earlier treasury stock
purchase by Concho of 16,267 shares of Concho Common Stock.this
document.
The pro forma data give effect to the Exchange and the Merger, in each case
accounted for as a pooling of interests and based upon a conversion of each
share of ConchoSouthlake Common Stock into 1.15.894 shares of First Financial Common
Stock. The pro forma data are prepared on the assumption that First Financial
acquired Southlake and consummated the TCB-San Angelo Purchase as of the date of
the balance sheet and as of the beginning of the period presented for the year
ended December 31, 1996 and for the six months ended June 30, 1997. The pro
forma balance sheet and income statement data for earlier periods also assume
that First Financial acquired Southlake as of the beginning of each such period.
Years prior to 1996 exclude the TCB-San Angelo Purchase. All per share data of
First Financial have been adjusted to reflect the ten percent (10%) stock dividend paid to First Financial shareholders in the second quarter of 1993.splits and stock dividends.
The unaudited pro forma financial information presented is for
informational purposes only and is not necessarily indicative of results of
operations or financial position that would have been reported had the Exchange
or the Merger, as the case may be, or the TCB-San Angelo Purchase been completed
at the beginning of the period or as of the date for which such unaudited pro
forma information is presented, nor is such information indicative of future
results of operations or financial position.
9
FIRST FINANCIAL AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINESIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBERJUNE 30,
------------------------------------------------------ ---------------------------
1988 1989 1990 1991 1992---------------------------------------------------------- ----------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- ----------- ----------- ----------------------- ------------ ---------- ---------- ---------- ----------
CONSOLIDATED SUMMARY OF
INCOME STATEMENT DATA:
Interest income...............income..................... $ 55,32964,718 $ 58,06262,995 $ 57,80464,621 $ 61,82274,657 $ 55,57484,176 $ 42,12641,667 $ 40,78943,888
Interest expense.............. 31,168 32,233 31,443 32,238 21,415 16,828 13,494expense.................... 25,692 21,513 22,416 29,448 33,731 16,701 17,800
-------- -------- -------- -------- -------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Net interest income........... 24,161 25,829 26,361 29,584 34,159 25,298 27,295income................. 39,026 41,482 42,205 45,209 50,445 24,966 26,088
Provision (credit) for loan losses..... 3,743 3,767 2,695 1,120 940 623 352losses.. 1,216 511 (882) 168 1,200 883 397
Noninterest income............ 6,052 6,669 7,953 8,371 8,649 6,418 7,095income.................. 10,312 12,940 12,313 15,030 15,842 7,744 8,701
Noninterest expense........... 20,189 20,587 21,280 24,413 25,881 19,101 20,607expense................. 30,239 33,428 34,635 34,400 37,570 18,314 19,773
-------- -------- -------- -------- -------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Income before income taxes.... 6,281 8,144 10,339 12,422 15,987 11,992 13,431taxes.......... 17,883 20,483 20,765 25,671 27,517 13,513 14,619
Provision (benefit) for income taxes ....................... 1,011 1,824 2,756 3,777 4,998 3,728 4,340taxes.......... 5,478 6,615 6,805 8,656 9,395 4,621 4,947
-------- -------- -------- -------- -------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Net income before cumulative
effect of accounting change . 5,270 6,320 7,583 8,645 10,989 8,264 9,091change........ 12,405 13,868 13,960 17,015 18,122 8,892 9,672
Cumulative effect of
accounting change(1) ....................... -- 1,005 -- -- -- -- --
-- 1,255
-------- -------- -------- -------- -------- -------- ------------------ ---------- ---------- ---------- ---------- ----------
Net income....................income.......................... $ 5,27012,405 $ 6,32014,873 $ 7,58313,960 $ 8,64517,015 $ 10,98918,122 $ 8,2648,892 $ 10,3469,672
======== ======== ======== ======== ======== ======== ================== ========== ========== ========== ========== ==========
Net income per First Financial
Common Share before cumulative
effect of accounting change ...........change(2)...... $ 1.351.50 $ 1.67 $ 2.061.68 $ 2.352.04 $ 2.952.16 $ 2.221.06 $ 2.431.15
======== ======== ======== ======== ======== ======== ================== ========== ========== ========== ========== ==========
Net income per First
Financial Common Share......Share(2).......... $ 1.351.50 $ 1.671.79 $ 2.061.68 $ 2.352.04 $ 2.952.16 $ 2.221.06 $ 2.761.15
======== ======== ======== ======== ======== ======== ================== ========== ========== ========== ========== ==========
CONSOLIDATED PER SHARE DATA
APPLICABLE TO FIRST FINANCIAL
COMMON STOCK:
Net income....................income(2)....................... $ 1.351.50 $ 1.671.79 $ 2.061.68 $ 2.352.04 $ 2.952.16 $ 2.221.06 $ 2.761.15
Cash dividends declared....... 0.55 0.60declared............. 0.49 0.62 0.70 0.82 0.95 0.70 0.880.78 0.87 0.42 0.47
Book value at period end...... 15.83 17.06 18.44 19.94 21.87 21.38 23.70end............ 10.93 12.17 13.05 14.38 15.62 14.96 16.30
CONSOLIDATED BALANCE SHEET
DATA AT PERIOD END:
Investment securities......... $256,210 $263,067 $287,533 $356,222 $370,633 $359,182 $407,261securities............... $430,227 $ 482,885 $ 490,950 $ 481,117 $ 511,789 $ 509,679 $ 529,439
Loans, net of allowance
for loan losses ................. 277,630 271,213 312,060 303,461 323,591 307,291 359,095losses.................... 380,009 427,627 437,686 497,735 563,459 531,327 572,463
Total assets.................. 672,025 688,588 794,863 834,500 839,474 798,546 906,788
Deposits...................... 601,857 609,443 709,007 751,172 750,445 709,594 809,126assets........................ 976,146 1,069,389 1,066,982 1,125,887 1,262,041 1,185,974 1,269,020
Deposits............................ 875,398 960,389 950,251 997,578 1,121,881 1,051,312 1,122,041
Total liabilities............. 611,386 625,654 727,037 760,972 758,041 718,983 818,098liabilities................... 886,072 968,660 958,465 1,005,859 1,130,880 1,060,832 1,131,853
Total shareholders' equity.... 60,638 62,935 67,826 73,528 81,433 79,563 88,690
- ----------------------------equity.......... 90,074 100,729 108,517 120,028 131,161 125,142 137,167
- -----------------------
(1) As of January 1, 1993, First Financial recorded the cumulative effect of the
change in accounting for income taxes to comply with Statement of Financial
Accounting Standards No. 109.
(2) In March 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") was issued and will require restatement of
the earnings per share ("EPS") reported above effective December 31, 1997.
Under SFAS 128, First Financial will report basic EPS and EPS assuming
dilution. The basic EPS would have been $1.15 and $1.07 for the six months
ended June 30, 1997 and 1996, respectively, and $2.16, $2.04 and $1.68 for
the years ended December 31, 1996, 1995 and 1994, respectively. The EPS
assuming dilution would have been $1.14 and $1.07 for the six months ended
June 30, 1997 and 1996, respectively, and $2.15, $2.04 and $1.67 for the
years ended December 31, 1996, 1995 and 1994, respectively.
10
CONCHOSOUTHLAKE AND SUBSIDIARIESSUBSIDIARY
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINESIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBERJUNE 30,
----------------------------------------------------- ------------------
1988 1989 1990 1991--------------------------------------------------- -----------------
1992 1992 1993 1994 1995 1996 1996 1997
------- -------- ----------- ---------- ------- -------- -------- --------- -------- ---------------
CONSOLIDATED SUMMARY OF
INCOME STATEMENT DATA:
Interest income.............income................ $ 5,7142,270 $ 6,1182,338 $ 6,4372,494 $ 6,3052,989 $ 5,8673,261 $ 4,5141,593 $ 4,4791,752
Interest expense............ 3,585 4,050 4,028 3,674 2,788 2,172 1,758
-------- -------- -------- -------- -------- -------- --------expense............... 998 816 885 1,060 1,086 543 579
------- ------- ------- ------- ------- ------- -------
Net interest income......... 2,129 2,068 2,409 2,631 3,079 2,342 2,721income............ 1,272 1,522 1,609 1,929 2,175 1,050 1,173
Provision for loan losses... 590 247 195 120 205 67 105losses...... -- 18 35 68 72 36 36
Noninterest income.......... 634 405 714 861 1,116 835 857income............. 482 560 560 632 899 609 302
Noninterest expense......... 2,079 2,235 2,609 2,894 3,054 2,310 2,519
-------- -------- -------- -------- -------- -------- --------expense............ 1,408 1,575 1,681 1,781 2,146 1,044 1,121
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes ..................... 94 (9) 319 478 936 800 954taxes..... 346 489 453 712 856 579 318
Provision (benefit) for income taxes .............. -- -- -- 47 191 225 348
-------- -------- -------- -------- -------- -------- --------taxes..... 96 102 111 172 167 143 54
------- ------- ------- ------- ------- ------- -------
Net income before cumulative
effect of accounting change
........................... 94 (9) 319 431 745 575 606change... 250 387 342 540 689 436 264
Cumulative effect of
accounting change(1) ................ -- (34) -- -- -- -- --
-- (231)
-------- -------- -------- -------- -------- -------- --------------- ------- ------- ------- ------- ------- -------
Net income..................... $ 250 $ 353 $ 342 $ 540 $ 689 $ 436 $ 264
======= ======= ======= ======= ======= ======= =======
Net income (loss)........... $ 94 $ (9) $ 319 $ 431 $ 745 $ 575 $ 375
======== ======== ======== ======== ======== ======== ========
Net income (loss) per ConchoSouthlake
Common Share before
cumulative effect
of accounting change change(2)....... $ 0.451.32 $ (0.04)1.98 $ 1.521.71 $ 2.052.56 $ 3.703.14 $ 2.842.00 $ 3.01(2)
======== ======== ======== ======== ======== ======== ========1.16
======= ======= ======= ======= ======= ======= =======
Net income (loss) per ConchoSouthlake
Common Share.....Share(2)............... $ 0.451.32 $ (0.04)1.80 $ 1.521.71 $ 2.052.56 $ 3.703.14 $ 2.842.00 $ 1.86(2)
======== ======== ======== ======== ======== ======== ========1.16
======= ======= ======= ======= ======= ======= =======
CONSOLIDATED PER SHARE DATA
APPLICABLE TO CONCHOSOUTHLAKE
COMMON STOCK:
Net income (loss)...........income(2).................. $ 0.451.32 $ (0.04)1.80 $ 1.521.71 $ 2.052.56 $ 3.703.14 $ 2.842.00 $ 1.86(2)1.16
Cash dividends declared.....declared........ -- 0.25 0.25 0.25 0.25-- -- -- -- -- --
Book value at period end.... 19.14 20.58 21.79 24.21 28.30 27.70 30.55(2)end....... 9.33 11.19 11.98 15.62 18.78 17.23 19.93
CONSOLIDATED BALANCE SHEET
DATA AT PERIOD END:
Investment securities....... $ 20,006 $ 18,220 $ 21,813 $ 28,697 $ 33,807 $ 32,018 $34,798securities.......... $10,024 $10,957 $13,531 $10,156 $10,241 $15,088 $14,398
Loans, net of allowance
for loan losses ............... 33,518 33,734 34,627 39,158 42,597 43,458 43,364losses............... 12,854 17,006 18,770 21,971 25,975 23,272 25,427
Total assets................ 66,360 71,396 72,089 80,808 88,864 84,447 89,455(2)
Deposits.................... 58,953 65,082 65,535 73,665 81,097 76,867 80,903
Short-term borrowings.......
Long-term debt..............assets................... 34,459 36,507 38,653 46,725 50,944 47,632 53,654
Deposits....................... 31,824 33,641 35,101 42,891 46,741 43,475 49,056
Total liabilities........... 62,354 67,071 67,506 75,720 83,158 78,861 83,294liabilities(3)........... 32,693 34,315 36,249 43,590 47,021 44,032 49,433
Total shareholders' equity.. 4,006 4,325 4,583 5,088 5,706 5,586 6,161(2)equity(4).. 1,766 2,192 2,404 3,135 3,923 3,600 4,221
- ------------------------------------------------------
(1) As of January 1, 1993, ConchoSouthlake recorded the cumulative effect of the
change in accounting for income taxes to comply with Statement of Financial
Accounting Standards No. 109.
(2) As adjustedIn March 1997, SFAS 128 was issued and will require restatement of the EPS
reported above effective December 31, 1997. Under SFAS 128, Southlake would
report basic EPS and EPS assuming dilution. The basic EPS would have been
$1.25 and $2.12 for the six months ended June 30, 1997 and 1996,
respectively, and $3.32, $2.69 and $1.75 for the years ended December 31,
1996, 1995 and 1994, respectively. The EPS assuming dilution would have been
$1.16 and $2.00 for the six months ended June 30, 1997 and 1996,
respectively, and $3.14, $2.56 and $1.71 for the years ended December 31,
1996, 1995 and 1994, respectively.
(3) Includes minority interest.
(4) After June 30, 1997 and prior to reflect the rescission in November 1993date of an earlier
treasury stock purchase by Conchothis Prospectus, Southlake
redeemed all of 16,267its issued and outstanding shares of Conchopreferred stock for an
aggregate redemption price of $7,200.00, and 30,299 shares of Southlake
Common Stock for
$344,860.were acquired by officers and directors of Texas National
pursuant to the exercise of outstanding stock options.
11
FIRST FINANCIAL AND SUBSIDIARIES AND
CONCHOSOUTHLAKE AND SUBSIDIARIESSUBSIDIARY
PRO FORMA COMBINED SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINESIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBERJUNE 30,
------------------------------------ -----------------------
1990 1991 1992 1992 1993----------------------
1994 1995 1996 1996 1997
----------- ---------- ----------- --------------------- ----------
CONSOLIDATED SUMMARY OF
INCOME STATEMENT DATA:
Interest income..............................income..................... $ 64,24167,115 $ 68,12777,646 $ 61,44187,437 $ 46,64043,260 $ 45,26845,640
Interest expense............................. 35,471 35,912 24,203 19,000 15,252
-------- -------- -------- -------- --------expense.................... 23,301 30,508 34,817 17,244 18,379
---------- ---------- ---------- ---------- ----------
Net interest income.......................... 28,770 32,215 37,238 27,640 30,016income................. 43,814 47,138 52,620 26,016 27,261
Provision (credit) for loan losses.................... 2,890 1,240 1,145 690 457losses.. (847) 236 1,272 919 433
Noninterest income........................... 8,667 9,232 9,765 7,253 7,952income.................. 12,873 15,662 16,741 8,353 9,003
Noninterest expense.......................... 23,889 27,307 28,935 21,411 23,126
-------- -------- -------- -------- --------expense................. 36,316 36,181 39,716 19,358 20,894
---------- ---------- ---------- ---------- ----------
Income before income taxes................... 10,658 12,900 16,923 12,792 14,385taxes.......... 21,218 26,383 28,373 14,092 14,937
Provision for income taxes................... 2,756 3,824 5,189 3,953 4,688
-------- -------- -------- -------- --------taxes.......... 6,916 8,828 9,562 4,764 5,001
---------- ---------- ---------- ---------- ----------
Net income before cumulative effect of
accounting change .......................... 7,902 9,076 11,734 8,839 9,697
Cumulative effect of accounting change(1).... -- -- -- -- 1,024
-------- -------- -------- -------- --------
Net income...................................income.......................... $ 7,90214,302 $ 9,07617,555 $ 11,73418,811 $ 8,8399,328 $ 10,721
======== ======== ======== ======== ========9,936
========== ========== ========== ========== ==========
Net income per First
Financial Common Share
before cumulative effect of accounting
change .....................................Share............. $ 2.031.68 $ 2.312.06 $ 2.962.19 $ 2.241.09 $ 2.44(2)
======== ======== ======== ======== ========
Net income per First Financial Common Share.. $ 2.03 $ 2.31 $ 2.96 $ 2.24 $ 2.70(2)
======== ======== ======== ======== ========1.15
========== ========== ========== ========== ==========
CONSOLIDATED PER SHARE DATA
APPLICABLE TO FIRST FINANCIAL
COMMON SHARES:STOCK:
Net income...................................income.......................... $ 2.031.68 $ 2.312.06 $ 2.972.19 $ 2.241.09 $ 2.70(2)1.15
Cash dividends declared......................declared............. 0.70 0.82 0.95 0.70 0.880.78 0.87 0.42 0.47
Book value at period end..................... 18.42 19.95 21.98 21.54 23.87(2)end............ 13.06 14.45 15.73 14.28 16.42
CONSOLIDATED BALANCE SHEET
DATA AT PERIOD END:
Investment securities........................ $309,346 $384,919 $404,440 $391,200 $442,059securities............... $ 504,481 $ 491,273 $ 522,030 $ 524,767 $ 543,837
Loans, net of allowance for
loan losses...... 346,687 342,619 366,188 350,749 402,459losses........................ 456,456 519,706 589,434 554,599 597,890
Total assets................................. 866,952 915,308 928,338 882,993 996,243(2)
Deposits..................................... 774,542 824,837 831,542 786,461 890,029assets........................ 1,105,635 1,172,612 1,312,985 1,233,606 1,322,674
Deposits............................ 985,352 1,040,469 1,168,622 1,094,787 1,171,097
Short-term borrowings........................ 1,314 2,272 173 450 130borrowings............... 90 85 110 90 115
Long-term debt............................... 9,364 -- 1,151 1,260 1,174debt...................... 1,642 550 37 75 37
Total shareholders' equity 72,409 78,615 87,139 85,149 94,851(2)equity.......... 110,921 123,163 135,084 128,742 141,388
12
FIRST FINANCIAL AND SUBSIDIARIES,
SOUTHLAKE AND SUBSIDIARY, AND
TCB-SAN ANGELO PURCHASE
PRO FORMA COMBINED SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ------------------------
1996 (1) 1996 (1) 1997 (1)
---------- ---------- ----------
CONSOLIDATED SUMMARY OF INCOME
STATEMENT DATA:
Interest income................................. $ 98,057 $ 48,877 $ 50,689
Interest expense................................ 40,394 20,021 21,057
---------- ---------- ----------
Net interest income............................. 57,663 28,856 29,632
Provision for loan losses....................... 1,272 919 433
Noninterest income.............................. 18,111 9,072 9,743
Noninterest expense............................. 45,215 22,250 23,721
---------- ---------- ----------
Income before income taxes...................... 29,287 14,759 15,221
Provision for income taxes...................... 9,939 5,111 5,019
---------- ---------- ----------
Net income......................................... $ 19,348 $ 9,648 $ 10,202
========== ========== ==========
Net income per First Financial Common Share........ $ 2.25 $ 1.13 $ 1.18
========== ========== ==========
CONSOLIDATED PER SHARE DATA APPLICABLE
TO FIRST FINANCIAL COMMON STOCK:
Net Income...................................... $ 2.25 $ 1.13 $ 1.18
Cash dividends declared......................... 0.87 0.42 0.47
Book value at period end........................ 15.80 14.38 16.55
CONSOLIDATED BALANCE SHEET DATA AT
PERIOD END:
Investment securities......................... $ 601,704 $ 616,779 $ 621,084
Loans, net of allowance for loan losses....... 589,434 603,411 663,361
Total assets.................................. 1,477,325 1,399,982 1,470,139
Deposits...................................... 1,328,786 1,253,476 1,319,692
Short-term borrowings......................... 110 90 115
Long-term debt................................ 6,037 6,075 6,037
Total shareholders' equity.................... 135,621 129,599 142,510
- ---------------------------------------------------
(1) As of January 1, 1993, First FinancialThe accompanying pro forma combined data include adjustments for (i)
reductions to interest income for securities sold and Concho recordedincreases to interest
expense for funds borrowed to facilitate the cumulative
effectconsummation of the change in accounting forTCB-San
Angelo Purchase, (ii) goodwill amortization and (iii) the related income taxes to comply with Statement
of Financial Accounting Standards No. 109.
(2) As adjusted to reflect the rescission in November 1993 of an earlier
treasury stock purchase by Concho of 16,267 shares of Concho Common Stock for
$344,860.
12tax
effects.
13
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth for the First Financial Common Stock and the
ConchoSouthlake Common Stock certain historical, pro forma and pro forma equivalent
per share financial information. The pro forma data give effect to the Exchange
and the Merger, in each case accounted for as a pooling of interests and based
upon a conversion of each share of ConchoSouthlake Common Stock into 1.15.894 shares of
First Financial Common Stock. The pro forma financial data have been included as
required by the rules of the CommissionSEC and are provided for comparative purposes only.
The information presented below should be read in conjunction with the separate
financial statements of First Financial and Concho,Southlake, including the applicable
notes, included or incorporated by reference elsewhere herein. All per share
data of First Financial have been adjusted to reflect the ten
percent (10%) stock dividend paid to First Financial shareholders in the second
quarter of 1993. Historical Concho financial data for the nine months ended
September 30, 1993 have been adjusted to reflect the rescission in November 1993
of an earlier treasurysplits and stock
purchase by Concho of 16,267 shares of Concho
Common Stock for $344,860.dividends.
The unaudited pro forma financial information presented is for
informational purposes only and is not necessarily indicative of results of
operations or financial position that would have been reported had the Exchange
or the Merger, as the case may be, been completed at the beginning of the period
or as of the date for which such unaudited pro forma information is presented,
nor is such information indicative of future results of operations or financial
position.
FIRST FINANCIAL CONCHO
----------------------- ------------------------------SOUTHLAKE
---------------------------------------- -------------------------------------------
PRO FORMA PRO FORMA EQUIVALENT PRO FORMA
HISTORICAL COMBINED HISTORICAL(2)TOTAL(2) HISTORICAL PRO FORMA(3) TOTAL(4)
---------- --------------- ------------ ---------- ------------- ------------ --------------
Common Shareholders' Equity:
COMMON SHAREHOLDERS' EQUITY:
December 31, 1992.......................... $19.94 $21.98 $28.30 $25.34
September1996.............. $15.62 $15.73 $15.80 $18.78 $14.07 $14.13
June 30, 1993......................... 23.70 23.87 30.55 27.45
Cash Dividends Declared:1997.................. 16.30 16.42 16.55 19.93 14.68 14.79
CASH DIVIDENDS DECLARED:(1)
Year ended December 31:
1990.....................................1994........................... $ 0.70 $ 0.70 $ 0.250.70 $ 0.81
1991..................................... 0.82 0.82 0.25 0.94
1992..................................... 0.95 0.95 0.25 1.09
Nine- $ 0.63 $ 0.63
1995........................... 0.78 0.78 0.78 - 0.69 0.69
1996........................... 0.87 0.87 0.87 - 0.78 0.78
Six Months ended SeptemberJune 30, 1993..... 0.88 0.88 -- 1.01
Net Income:1997. 0.47 0.47 0.47 - 0.42 0.42
NET INCOME:
Year ended December 31, 1990:
Primary..................................1994:
Primary...................... $ 2.061.68 $ 2.021.68 $ 1.521.68 $ 2.321.71 $ 1.51 $ 1.51
Fully diluted............................ 2.06 2.02 1.52 2.32diluted................ 1.68 1.68 1.68 1.71 1.51 1.51
Year ended December 31, 1991:
Primary.................................. 2.35 2.32 2.05 2.671995:
Primary...................... 2.04 2.06 2.06 2.56 1.84 1.84
Fully diluted............................ 2.35 2.32 2.05 2.67diluted................ 2.04 2.06 2.06 2.56 1.84 1.84
Year ended December 31, 1992:
Primary.................................. 2.95 2.97 3.70 3.411996:
Primary...................... 2.16 2.19 2.25 3.14 1.96 2.02
Fully diluted............................ 2.95 2.97 3.70 3.41
Ninediluted................ 2.16 2.19 2.25 3.14 1.96 2.02
Six Months ended SeptemberJune 30, 1993:(4)
Primary.................................. 2.43 2.44 3.01 2.811997:
Primary...................... 1.15 1.15 1.18 1.16 1.03 1.06
Fully diluted............................ 2.43 2.44 3.01 2.81diluted................ 1.15 1.15 1.18 1.16 1.03 1.06
- ----------------------------------------------
(1) The First Financial pro forma combined dividends per share amounts represent
historical dividends declared per share only on First Financial Common
Stock.
(2) Historical Concho financial dataThe First Financial pro forma total per share amounts include First
Financial, Southlake, and assets and liabilities acquired in the TCB-San
Angelo Purchase for the nineyear ended December 31, 1996 and for the six months
ended SeptemberJune 30, 1993 have been adjusted1997 and 1996. Years prior to reflect the rescission in November 1993 of an
earlier treasury stock purchase by Concho of 16,267 shares of Concho Common
Stock for $344,860.
13
1996 include First Financial
and Southlake only.
(3) The ConchoSouthlake pro forma equivalent per share amounts are calculated by
multiplying the First Financial pro forma combined per share amounts by the
Exchange Rate of 1.15..894. See "The Exchange Offer."
(4) ForThe Southlake pro forma total per share amounts include First Financial,
Southlake, and assets and liabilities acquired in the nineTCB-San Angelo
Purchase for the year ended December 31, 1996 and for the six months ended
SeptemberJune 30, 1993,1997 and 1996. Years prior to 1996 include First Financial and
Southlake only. Such amounts are calculated by multiplying the First
Financial pro forma total per share data is based on
continuing operations before cumulative effectamounts by the Exchange Rate of the change in accounting
for income taxes..894.
14
THE EXCHANGE OFFER
The information in this Prospectus concerning the terms of the Exchange
Offer is a summary only and is qualified in its entirety by reference to the
Exchange Agreement which is incorporated herein by reference.
GENERAL
Pursuant to the Exchange Agreement, First Financial is offering to acquire
from the ConchoSouthlake Shareholders all of the issued and outstanding ConchoSouthlake
Common Stock. In exchange for each share of ConchoSouthlake Common Stock, the
ConchoSouthlake Shareholders shall receive 1.15.894 shares of First Financial Common
Stock, unless
certain conditions require adjustmentssubject to adjustment to the Exchange Rate.Rate described herein. See "-- The"--The
Exchange Rate."
At least ninety percent (90%)The Required Amount of the ConchoSouthlake Common Stock must be tendered by the
ConchoSouthlake Shareholders in order for the Exchange to occur. The Exchange Offer is
also subject to certain other conditions. See "-- Conditions"--Conditions to Consummation of
the Exchange Offer."
BACKGROUND OF THE EXCHANGE OFFER
Southwest Bank is a correspondentFrom time to time, Southlake received unsolicited inquiries from various
bank customerholding companies regarding the possible acquisition of First National Bank of
Abilene. Through that relationship,Southlake. In June
1994, Mr. Kenneth Murphy, the Chairman, President and Chief Executive Officer of
First Financial, visited withand Mr. David Drake,
theBarry K. Emerson, Chairman, President and Chief
Executive Officer of Concho, in December 1992 to obtain
information aboutSouthlake, informally discussed a possible acquisition of
Southlake by First Financial. In the brokerage operation at Southwest Bank. Southwest Bank
provided brokerage services through an arrangement with the Stephens Co., andfall of 1994, First Financial was considering establishingconducted a
similar operation. Over the next
several months there were additional discussions about brokerage services.due diligence review of Southlake and representatives of First Financial had beenand
Southlake held several meetings to negotiate a possible acquisition. In December
1994, First Financial and Southlake, however, mutually agreed to terminate
negotiations as each party determined that the timing was not appropriate.
During the ensuing years, Messrs. Emerson and Murphy periodically discussed
on an informal basis a possible acquisition of Southlake by First Financial.
In February 1997, Mr. Murphy telephoned Mr. Emerson and reiterated First
Financial's interest in exploring a possible acquisition of Southlake. Mr.
Emerson responded that Southlake would be interested in a possible transaction
but that discussions should be deferred until later in the San Angelo market for several years and
during a visit on April 30, 1993,year when results of
operations would be available from Southlake's new service branch in Trophy Club
which opened in November 1996.
In May 1997, Mr. Emerson telephoned Mr. Murphy asked Mr. Drake if Conchoand indicated that Southlake
would have any interestbe interested in discussing the possibility of becoming associated with
First Financial.
Following several telephone discussions,entering into further discussions.
On June 4, 1997, Mr. Murphy met with Mr. Emerson and they discussed a
possible acquisition. Mr. Emerson informed Mr. Murphy that Southlake would
prefer a stock-for-stock exchange or merger. On June 25, 1997, Mr. Murphy and
Mr. Curtis Harvey, Executive Vice President and Chief Financial Officer of First
Financial, met with Concho's ExecutiveMr. Emerson to discuss further the possible terms of an
acquisition and a preliminary range of pricing.
On July 1, 1997, Mr. Emerson met with the Merger and Acquisitions Committee
on June 1, 1993. During the meeting Mr. Murphy
stated that First Financial considered Southwest Bank an attractive acquisition
candidate and inquired as to whether Concho would be interested in entertaining
an offer. Prior to the approach by First Financial,of the Board of Directors of Concho had adoptedSouthlake, which consists of Mr. Emerson, Wade
Donnell, Derrell Johnson, James Ridenour and John Thompson, to inform them of
the status of the discussions with First Financial.
On July 8, 1997, the members of the Merger and Acquisitions Committee
(other than Mr. Johnson, who was following a strategic business plan that called for
growth primarily through internal means. The plan included the possibility of
Concho acquiring other banks, but did not contemplate Concho being acquired. In
light of First Financial's indication of interest, Concho's Executive Committee
decidedunable to proceedattend) met with further discussions. Messrs. Murphy and
Harvey met with the Concho Executive Committee again on
June 22, 1993. During the meeting Mr. Murphy presented various alternative
initial proposals for structuring an acquisition of Concho byat First Financial's offices in Abilene. Thereafter, First Financial
including a one-for-one stock exchange. Subsequent to the meeting, Mr. Drake
contacted Mr. Murphy and informed him that Concho would entertainperformed an offer which
included a stock exchange valued at 1.5 times Concho book value.initial due diligence review of Southlake.
15
On July 15, 1997, Messrs. Murphy and Harvey met with Mr. Drake in San Angelo on July 12, 1993, to discuss furtherattended a meeting of the
possible offer by First Financial.
The ConchoSouthlake Board of Directors held several meetings in late July and early
August to discuss the possible transaction and ultimately concluded,acquisition. The Southlake
Board authorized Mr. Emerson to commence negotiating a definitive agreement with
First Financial.
Following the assistancemeeting of its outside advisors, that an exchange offer valued at 1.5 times
Concho's book value was fair. In reaching its conclusion, the ConchoSouthlake's Board of Directors relied in parton July 15, 1997,
Messrs. Emerson, Murphy and Harvey held further discussions regarding price. It
was agreed that price per share should equal two times the book value per share
of Southlake Common Stock, or $35.52. It was further agreed that the exchange
rate would be based on the adviceper share market value of its financial consulting firm, FinSer
Corporation, which evaluatedFirst Financial Common
Stock at a mutually agreed future date.
On July 22, 1997, the financial conditionBoard of Directors of First Financial met and
authorized Messrs. Murphy and Harvey to negotiate a definitive agreement with
Southlake.
During the ensuing weeks, representatives of First Financial and Southlake
and their respective counsel negotiated the relative benefitsterms of the offerExchange Agreement and
the Merger and Acquisitions Committee met to Concho Shareholders. FinSer Corporation
informally advisedreview the Concho Board that, in its opinion,exchange rate and other
terms of the offer was fair and
reasonable in light of current market conditions.
15
On August 17, 1993, First Financial and Concho executed a Letter of Intent
which contemplated a stock exchange ratio of 1.2 shares of First Financial stock
for each share of Concho stock.transaction. During the period August 19, 1993, through
September 24, 1993, First Financial performed a due diligence review at
Southwest Bank andcourse of negotiations, the parties began negotiating a definitive agreement.
Following execution of the Letter of Intent, Concho informed First Financialagreed
that a former stockholder of Concho had asserted a claim against Concho with
respect to Concho's purchase in May 1993 of 16,267 shares of Concho Common Stock
from such former stockholder. On November 29, 1993, Concho and the former
stockholder resolved the matter by rescinding the May 1993 stock purchase. As a
result of the additional shares outstanding following the rescission, First
Financial and Concho agreed to adjust the exchange ratio from 1.2 to 1.15, and
First Financial and Concho executed the Stock Exchange Agreement on December 7,
1993. In agreeing to the adjustment in the exchange ratio, the Concho Board of
Directors noted that since the date of execution of the Letter of Intent,to be used to determine the market value of First Financial Common
Stock had increased approximately $2.00
per share based onfor purposes of calculating the NASDAQ quoted bid price. The Concho Board considered
this increase andExchange Rate would be the fact that the exchange ratio is 1.5 times the book value
of Concho in approving the Stock Exchange Agreement. For these and other reasons
described below, the Concho Board believed it was in the best interestlast business
day of the Concho Shareholderscalendar month preceding the date First Financial received written
notice of approval by the Federal Reserve Board to haveacquire Southlake.
On August 18, 1997, the opportunity to accept or reject the Exchange
Offer.
In early February 1994, Mr. Tim Turner, who is a director of Concho and owner
of 232 shares of Concho Common Stock, together with his wife sent a letter
to other Concho Shareholders informing them that they oppose the Exchange Offer
and requesting Concho Shareholders not to tender their shares to First
Financial. The Turners stated that they opposed the Exchange Offer primarily
because Concho would lose its independent status which, they believe, is the
primary reason for Concho's success.
On February 7, 1994, theSouthlake Board of Directors of Concho met to discussand approved the
Turners' concerns. The Board of Directors reviewed the due diligence it had
conducted with respect toExchange Agreement, and later that day, Southlake and First Financial and its other subsidiary banks and
also First Financial's plans to leave Southwest Bank's existing Board
substantially intact and to retain the existing officers and staff of Southwest
Bank. See "The Exchange Offer--Operations Afterexecuted
the Exchange Offer and Merger."
The Board of Directors concluded that it was satisfied that although Concho
would become part of a larger holding company, it would retain sufficient local
control and involvement so as to maintain its community bank character.Agreement.
FIRST FINANCIALFINANCIAL'S REASONS FOR THE EXCHANGE OFFER
It is part of First Financial's current business strategy to expand its
activities to areas in Texas where management believes there are long-term
opportunities that will benefit First Financial and its shareholders. First
Financial recently acquired two other community banks which has enabled First
Financial to increase its penetration of the Texas banking markets. The
acquisition of ConchoSouthlake will allow First Financial to continue its expansion
and enter the San AngeloSouthlake market, which, is larger than those served by recent
acquisitions,management believes, has substantial
growth potential, thereby providing even greater asset and earnings growth
opportunities.
First Financial also views favorably the perceived compatibility of the
ConchoSouthlake management team with management of First Financial and its demonstratedperceived
success in providing quality banking services.
In addition, First Financial believes that in light of the acceleration in
the number and size of combinations currently occurring within the financial and
banking industries and the likelihood that future changes in banking laws will
provide further impetus to consolidation of banking entities, it is desirable
for First Financial to continue to grow through acquisition of quality community
banks in favorable markets.
CONCHOSOUTHLAKE'S REASONS FOR THE EXCHANGE OFFER
The terms of the Exchange Offer, including the Exchange Rate, were the
result of arms' length negotiations between First Financial and ConchoSouthlake and
their respective representatives. ConchoSouthlake consulted with its own legal counsel
and
financial advisors during the course of negotiations. The ConchoSouthlake Board of Directors believes
that the Exchange Offer is fair to the shareholders of
Concho.Southlake Shareholders. In reaching a
conclusion to approve the Exchange Offer, Concho'sSouthlake's Board of Directors
considered a number of factors. Concho'sSouthlake's Board of Directors did not assign
any relative or specific weights to the factors considered. Among other things,
the ConchoSouthlake Board of Directors considered:
1. The financial terms of the Exchange Offer. In this regard, Concho'sSouthlake's Board
-----------------------------------------
of
----------------------------------------- Directors took into account the premium represented by the consideration
offered to ConchoSouthlake Shareholders in relation to the book value per share of
Concho'sSouthlake Common Stock. Concho'sSouthlake's Board of Directors was of the view that
the Exchange Rate represented a fair multiple of Concho'sSouthlake's per share book
value and historical and projected earnings. Concho'sSouthlake's Board of Directors
also considered the financial terms of other recent business combinations
16
in
the banking industry and determined that the financial terms of the Exchange
Offer compared favorably to such other transactions;transactions.
16
2. Certain financial and other information concerning First Financial. Such
------------------------------------------------------------------
information included, but was not limited to, the financial condition, asset
quality, historical earnings and historical operations of First Financial Common Stock and
the dividend yield of First Financial Common Stock;Stock.
3. The terms, other than the financial terms, and structure of the Exchange
------------------------------------------------------------------------
Offer. In particular, the ConchoSouthlake Board of Directors considered the
-----
anticipated tax-free nature of the Exchange Offer to ConchoSouthlake Shareholders
receiving First Financial Common Stock in exchange for the shares of
ConchoSouthlake Common Stock.
In addition to the above factors, the proposed Exchange Offer and Merger
reflect the judgment of the Board of Directors of ConchoSouthlake that Concho'sSouthlake's
business can be benefittedbenefited by the resources and experience of First Financial,
that the Exchange Offer and Merger may produce an entity better able to meet
competitive challenges inherent in the banking industry, and that the
affiliation of First Financial and ConchoSouthlake could provide operational benefits
and efficiencies. The ConchoSouthlake Board of Directors believes that the Exchange
Offer would allow shareholders of ConchoSouthlake Shareholders to exchange their shares for a security
in a company which has a broader market appeal and thus a more liquid
investment. First Financial Common Stock is traded on the NASDAQ National
Market; thus Southlake Shareholders would have greater liquidity by holding
First Financial stock rather than shares of Southlake, for which there is no
established public trading market. In addition, while ConchoSouthlake historically has
been in the position to pay cashnot paid dividends, to Concho
Shareholders during the past several years at the rate of $.25 per annum, First Financial has declared cash dividends per share of
$1.20, $.96$.87, $.78 and $.82$.70 during the years ended December 31, 1993, 19921996, 1995 and 1991,1994,
respectively.
Furthermore, if the Exchange and Merger are consummated, Southlake
Shareholders of
Concho would hold shares in a larger banking organization which would tend
to lessen the risk that local market factors in San AngeloSouthlake would affect the value
of their investment. In addition, theThe resources of a larger banking organization would tend
to benefit ConchoSouthlake Shareholders as a result of its ability to compete in the
larger marketplace. The ConchoSouthlake Board of Directors also believes that, if the
exchange isExchange and Merger are consummated, its subsidiary, Southwest Bank,Texas National, will
continue to retain its community bank character even though it will be a
subsidiary of a substantially larger bank holding company.
First Financial has grown through acquisition of
community banks, and its acquisition strategy is to allow these independent
community banks to continue to operate as such even though they are part of a
larger holding company. In this regard, it is anticipated that the existing
Board of Directors of Southwest Bank would remain essentially the same and that
the officers and staff would continue to be employed and to manage Southwest
Bank. This should enable the continuation of local control, decision making and
a presence in the community which Southwest Bank serves.
Finally, in addition to the strategic location of Southwest Bank in the San
Angelo market being a major contribution to First Financial, Southwest Bank's
subsidiary, SWB Investment Company, would be provided with an attractive
opportunity to expand its business to the customer base of First Financial and
its other subsidiary banks. This should provide an attractive growth opportunity
for Concho Shareholders.
OPERATIONSOPERATION AFTER THE EXCHANGE OFFER AND MERGER
If the Exchange Offer is consummated, First Financial will own at least 90%
of the outstanding ConchoSouthlake Common Stock. If the subsequent Merger is consummated as
presently anticipated, ConchoSouthlake will become a wholly-owned subsidiary ofbe merged with and into First Financial.
See "The Exchange Offer--Anticipated Merger and Dissenting Shareholders'
Rights."
First Financial's acquisition strategy isFinancial operates principally in order to allowgive its affiliated banks
access to additional management and technical resources which help them to
improve or expand their banking services while continuing their local activity
and identity. Each of the independent communityaffiliated banks acquired by it to continue to operateoperates under the day-to-day
management of its board of directors and officers, with substantial autonomy even
though they are part of a larger holding company.authority in
making decisions concerning their own investments, loan policies, interest rates
and service charges. First Financial presently
anticipates thatprovides assistance to the existing Boardaffiliated
banks, especially with respect to decisions concerning major capital
expenditures, employee fringe benefits, including pension plans, group
insurance, dividend policies, appointment of Directorsofficers and directors of
Southwestaffiliated banks and their compensation. The internal audit and loan review
functions are centralized at First Financial. Each of these corporate staff
groups performs on-site operational audits and loan reviews of the subsidiary
banks. First Financial, through First National Bank would remain
essentially the same other thanof Abilene, provides advice
to and specialized services for the additions of Messrs. Murphyaffiliated banks in such areas as lending,
investments, purchasing, advertising, public relations, and Harvey.
First Financial also intends to retain the existing officers and staff of
Southwest Bank.computer services.
17
THE EXCHANGE RATE
First Financial will issue and exchange 1.15.894 shares of First Financial
Common Stock for each share of ConchoSouthlake Common Stock tendered by the ConchoSouthlake
Shareholders who accept the Exchange Offer during the time period the Exchange
Offer is in effect; provided, however, that if First Financial, prior to the
consummation of the proposed Exchange Offer, shall issue any additional shares of First
Financial Common Stock pursuant to any stock dividend or stock split, approved by
the Board of Directors of First Financial, the
Exchange Rate shall be appropriately adjusted to reflect such stock dividend or
stock split.
17
First Financial will not issue any fractional shares of First Financial
Common Stock. ConchoStock pursuant to the Exchange Offer or the Merger. Southlake
Shareholders who would otherwise be entitled to receive fractional shares of
First Financial Common Stock will be paid in cash for such fractional shares
based upon the Market Valuea value of $39.75 per share of First Financial Common Stock as of the date which is ten days prior to the date upon which the
Registration Statement of which this Prospectus is a part became effective. For
purposes hereof, the "MARKET VALUE" of First Financial Common Stock means the
per share closing bid price of the First Financial Common Stock in the
over-the-counter market in accordance with quotations supplied by The Principal
- -- Eppler Guerin & Turner or other authoritative source. As of such date, the
Market Value per share of First Financial Common Stock was $ 41.50.Stock.
THE EXPIRATION DATE
Unless otherwise extended by First Financial, the Exchange Offer shall
terminate at 5:00 p.m., Abilene, Texas time on March 10, 1994 (the "Expiration
Date").______________, 1997.
CONDITIONS TO CONSUMMATION OF THE EXCHANGE OFFER; TERMINATION
Consummation of the Exchange Offer is subject to the satisfaction of a
number of conditions, including:including the following:
(1) the expiration of all mandatory waiting periods and the existence in
full force and effect of all regulatory approvals, filings, registrations and
notifications;notifications, including the approval by the Federal Reserve Board of the
acquisition by First Financial of all of the issued and outstanding capital
stock of Southlake;
(2) the receipt by First Financial of an opinion from its independent
accountants that the transaction contemplated by the Exchange Agreement may be
properly accounted for as a pooling-of-interests, and the receipt by ConchoSouthlake
from its independent accountants and/or tax counsel that the Exchange by the
ConchoSouthlake Shareholders will not be considered a taxable event for federal income
tax purposes;
18
(3) the accuracy of all the respective representations and warranties of
Concho, Southwest BankSouthlake, Texas National and First Financial in the Exchange Agreement as of
the date of this Prospectus and as of the date of consummation of the Exchange
Offer (the "Consummation"Closing Date");
(4) the performance of all of the respective obligations and agreements and
compliance with all covenants and conditions by Concho, Southwest BankSouthlake, Texas National and
First Financial contemplated by the Exchange Agreement prior to or on the
ConsummationClosing Date;
(5) no outstanding options requiring the issuance or sale of, or otherwise
relating to, any capital stock of Southlake or Texas National shall exist as of
the Closing Date;
(6) the absence of any order, judgment or decree or proceeding or
litigation by any court, governmental body or regulatory authority pertaining to
the Exchange Offer;
(6)(7) the declaration by the CommissionSEC that the Registration Statement filed by
First Financial pursuant to the Securities Act covering the shares of First
Financial Common Stock to be issued in the Exchange is effective and that no
stop orders have been grantedissued or threatened and that First Financial, ConchoSouthlake
and Southwest
BankTexas National shall have complied with all applicable state and federal
securities laws relating to the Exchange Offer;
(7)(8) the absence of any material adverse change in the financial conditions
of Concho, Southwest BankFirst Financial, Southlake or SWB InvestmentTexas National between July 31, 1993June 30, 1997 and the
ConsummationClosing Date;
(8)18
(9) receipt by First Financial and ConchoSouthlake of certain legal opinions in
form and substance satisfactory to the respective parties;
(9)(10) the valid tender of ninety percent (90%)the Required Amount of the issued and outstanding
shares of ConchoSouthlake Common Stock to First Financial;
(11) the receipt by First Financial of a satisfactory Phase I Environmental
Assessment report covering all real property owned or held by Southlake or Texas
National;
(12) Southlake and (10)Texas National shall have taken such action as is
necessary to freeze the written agreementKSOP and First Financial shall be satisfied that the
KSOP is a qualified plan under, and in full compliance with, the Employee
Retirement Income Security Act of certain noteholders1974, the Internal Revenue Code of 1986, and
all other applicable laws, rules and regulations and that no facts or
circumstances exist which, in the opinion of First Financial and its counsel,
may result in liability to consentFirst Financial, Southlake or Texas National or any
of their directors, officers or employees arising out of, or in connection with,
administration of the KSOP or the freeze of the KSOP if the Exchange and Merger
are consummated; and
(13) Southlake and Texas National shall have taken such action as is
necessary to (i) terminate the transfer
of certain property by Concho to Southwest Bank,Texas National Executives' Supplemental Income
Plan, the assumption by Southwest
Bank of certain debt owed by ConchoTexas National Directors' Deferred Income Plan and the releaseTexas National
Officers' Bonus Plan (collectively, the "Plans") and removal(ii) eliminate all
liability of various
liens, security interestsSouthlake and pledges of common stock of Southwest Bank pursuant
toTexas National under the terms of the Exchange Agreement.Plans.
The Exchange Agreement and the Exchange Offer may be terminated at any time
prior to the ConsummationClosing Date:
(a) by mutual written consent of First Financial and Concho;Southlake;
(b) by First Financial if there is a breach of a representation or warranty
made by ConchoSouthlake or Texas National which constitutes a material adverse
change from that represented in the Exchange Agreement or if any of the
conditions to closing are not satisfied for reasons other than lack of
diligence by First Financial or waived by First Financial;
(c) by ConchoSouthlake if there is a breach of a representation or warranty made
by First Financial which constitutes a material adverse change from that
represented in the Exchange Agreement or if any of the conditions to
closing are not satisfied for reasons other than lack of diligence by
Southlake or waived by Concho;Southlake;
(d) by First Financial or ConchoSouthlake, if the Exchange OfferClosing Date shall not have
commencedoccurred by April 30, 1994January 31, 1998 or such later date agreed to in writing by
First Financial, or Concho;Southlake and Texas National; or
(e) by First Financial or ConchoSouthlake if any court of competent jurisdiction
or other governmental body shall have issued an order, decree or ruling or
taken any other action restraining, enjoining or otherwise prohibiting the
Exchange or the Merger, and such order, decree, ruling or other action
shall have been final and nonappealable.
19
Whether or not the transactions contemplated by the Exchange Agreement are
consummated, each of the parties to the Exchange Agreement shall be responsible
for their respective fees and expenses incident to the negotiation, preparation,
execution and consummation of the transactions contemplated by the Exchange
Agreement, including attorneys' and accountants' fees and expenses.
19
EXCHANGE OF SHARES AND CERTIFICATES
A ConchoSouthlake Shareholder's delivery of a properly completed and executed
Letter of Transmittal and ConchoSouthlake Common Stock Certificates, prior to the
Expiration Date, to the Exchange Agent at the address provided herein shall be
deemed to constitute an acceptance of the Exchange Offer described in the
Prospectus as to the number of shares registeredreflected on the ConchoSouthlake Common Stock
Certificates surrendered.
Except as otherwise provided below, all signatures on a Letter of
Transmittal must be guaranteed by a firm that is a bank, broker, dealer, credit
union, savings association or other entity which is a member in good standing of
a registered national
securities exchangethe Security Transfer Agent's Medallion Program, the Stock Exchange Medallion
Program or the National Association of Securities Dealers,New York Stock Exchange, Inc., or
by a commercial bank or trust company having Medallion Signature Program (each,
an office or correspondent in the
United States (an "Eligible Institution"). Signatures on a Letter of Transmittal need not be
guaranteed (a) if the Letter of Transmittal is signed by the registered holder
of the shares of ConchoSouthlake Common Stock tendered therewith and such holder has
not completed the box entitled "Special Exchange Instructions" on the Letter of
Transmittal or (b) if such shares of ConchoSouthlake Common Stock are tendered for the
account of an Eligible Institution. See Instructions 1 and 3 of the Letter of
Transmittal.
THE METHOD OF DELIVERY OF CONCHOSOUTHLAKE COMMON STOCK CERTIFICATES AND THE
LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS
AT THE ELECTION AND RISK OF THE CONCHOSOUTHLAKE SHAREHOLDERS. INSTEAD OF DELIVERY BY
MAIL, IT IS RECOMMENDED THAT CONCHOSOUTHLAKE SHAREHOLDERS USE AN OVERNIGHT OR HAND
DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. CONCHOSOUTHLAKE COMMON STOCK CERTIFICATES AND LETTERS OF TRANSMITTAL
SHOULD BE SENT TO THE EXCHANGE AGENT, WHICH IS THE TRUST DEPARTMENT OF FIRST
NATIONAL BANK OF ABILENE.
If any First Financial Common Stock Certificate is to be issued in a name
other than that in which the ConchoSouthlake Common Stock Certificate surrendered for
exchange is registered, the certificate so surrendered must be properly endorsed
or otherwise be in proper form for transfer, and the person requesting such
exchange must pay to First Financial or the Exchange Agent any applicable
transfer or other taxes required by reason of the issuance of the certificate.
Any beneficial holder whose shares of ConchoSouthlake Common Stock are registered in
the name of his or her broker, dealer, commercial bank, trust company or other
nominee and who wishes to tender should contact such registered holder promptly
and instruct such registered holder to tender on his or her own behalf. If such
beneficial holder wishes to tender on his or her own behalf, such beneficial
holder must, prior to completing and executing the Letter of Transmittal and
delivering the ConchoSouthlake Common Stock Certificates, either make appropriate
arrangements to register ownership of the ConchoSouthlake Common Stock to be tendered
in such holder's name or obtain a properly completed stock power from the
registered holder.
If the Letter of Transmittal is signed by a person other than the
registered holder of any ConchoSouthlake Common Stock listed therein, the ConchoSouthlake
Common Stock Certificates reflecting ownership of ConchoSouthlake Common Stock must be
endorsed or accompanied by appropriate stock powers which authorize such person
to tender the ConchoSouthlake Common Stock on behalf of the registered holder, in
either case signed as the name of the registered holder or holders appears on
the ConchoSouthlake Common Stock Certificates.
If the Letter of Transmittal or any ConchoSouthlake Common Stock Certificates or
stock powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of a corporation or others acting in a fiduciary or
representative capacity, such persons should indicate when signing and, unless
waived by First Financial, evidence satisfactory to First Financial of their
authority to so act must be submitted with the Letter of Transmittal.
20
Upon expiration of the Exchange Offer and satisfaction of certain
conditions set forth in the Exchange Agreement, promptly after First Financial
receives written notice from the Exchange Agent indicating that at least ninety percent
(90%)the Required
Amount of the outstanding shares of ConchoSouthlake Common Stock have been validly
tendered, each outstanding share of ConchoSouthlake Common Stock tendered to First
Financial will be exchanged for shares of First Financial Common Stock at the
Exchange Rate calculated as described under the caption "-- The"--The Exchange Rate,"
and First Financial Common Stock Certificates reflecting the Exchange shall be
delivered to the ConchoSouthlake Shareholders by registered mail.
20
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered shares of ConchoSouthlake Common
Stock will be determined by First Financial in its sole discretion, which
determination will be final and binding. First Financial reserves the absolute
right to reject any and all shares of ConchoSouthlake Common Stock not properly
tendered or any shares of ConchoSouthlake Common Stock First Financial's acceptance of
which would, in the opinion of counsel for First Financial, be unlawful. First
Financial reserves the absolute right to waive any irregularities or conditions
of tenders as to particular shares of ConchoSouthlake Common Stock. Unless waived, any
defects or irregularities in connection with tenders of shares of ConchoSouthlake
Common Stock must be cured within such time as First Financial shall determine.
Neither First Financial nor the Exchange Agent nor any other person shall be
under any duty to give notification of defects or irregularities with respect to
tenders of shares of ConchoSouthlake Common Stock nor shall any of them incur any
liability for failure to give such notification. Tenders of shares of ConchoSouthlake
Common Stock will not be deemed to have been made until such irregularities have
been cured or waived. Any ConchoSouthlake Common Stock Certificates received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such ConchoSouthlake Common Stock
Certificates unless otherwise provided in the Letter of Transmittal, as soon as
practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
ConchoSouthlake Shareholders who wish to tender their shares of ConchoSouthlake Common
Stock and (i) whose ConchoSouthlake Common Stock Certificates are not immediately
available, or (ii) who cannot deliver their ConchoSouthlake Common Stock Certificates,
the Letter of Transmittal or any other required documents to the Exchange Agent
prior to the Expiration Date, may effect a tender if:
(1) the tender is made through an Eligible Institution;
(2) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the holder of ConchoSouthlake Common Stock, the certificate number
or numbers of such ConchoSouthlake Common Stock and the amount of ConchoSouthlake Common
Stock tendered, stating that the tender is being made thereby, and guaranteeing
that, within five (5) business days after the Expiration Date, the Letter of
Transmittal, together with the ConchoSouthlake Common Stock Certificates registeringrepresenting
the ConchoSouthlake Common Stock to be tendered in proper form for transfer and any
other documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(3) such properly completed and executed Letter of Transmittal, together
with the certificates representing all tendered ConchoSouthlake Common Stock in proper
form for transfer and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five (5) business days after the
Expiration Date.
FRACTIONAL SHARES
No fractional shares of First Financial Common Stock will be exchanged for
shares of ConchoSouthlake Common Stock. In lieu thereof, each ConchoSouthlake Shareholder
having a fractional interest resulting from the exchange of ConchoSouthlake Common
Stock for First Financial Common Stock will be paid by First Financial an amount
in cash 21
for such fractional share based upon the Market Value (as defined)a value of $39.75 per share of
First Financial Common Stock as of the date which is ten days prior to the date
upon which the Registration Statement of which this Prospectus is a part became
effective. As of such date, the Market Value per share of First Financial Common
Stock was $41.50. Any cash payment to which a Concho Shareholder may be
entitled will be included with such Concho Shareholder's First Financial Common
Stock Certificates when such certificates are mailed to the Concho Shareholder.Stock.
NO WITHDRAWAL RIGHTS
Tenders of shares of ConchoSouthlake Common Stock pursuant to the Exchange Offer
are irrevocable, and once such shares are tendered, they may not be withdrawn.
21
REGULATORY APPROVALS REQUIRED
The Board of Governors of the Federal Reserve System (the "Federal Reserve
Board")Board must approve First Financial's acquisition of
ConchoSouthlake and Southwest BankTexas National under Section 3 of the Bank Holding Company Act of 1956, as amended. The Federal
Reserve BoardBHCA. Regulatory approval
has approved the acquisition.been obtained.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material U.S.United States Federal income
tax consequences of the Exchange and Merger, including certain consequences to
holders of ConchoSouthlake Common Stock who are citizens or residents of the United
States and who hold their shares as capital assets. ItThis summary does not
discuss all tax consequences that may be relevant to the ConchoSouthlake Shareholders
subject to special Federal income tax treatment (such as insurance companies,
dealers in securities, certain retirement plans, financial institutions, tax
exempt organizations or foreign persons), or to ConchoSouthlake Shareholders who
acquired their shares of ConchoSouthlake Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation. The summary does not
address the state, local or foreign tax consequences of the Exchange Offer, if
any.
ConchoSouthlake has received an opinion from its independent public accountants,
Armstrong, BackusJudd, Thomas, Smith & Co., L.L.P.,Company, P.C.
with respect to certain Federal income tax consequences of the Exchange Offer. A
copy of their opinion, which is subject to certain qualifications and
assumptions, is attached hereto as Annex A, and the following summary of their
opinion is qualified in its entirety by reference thereto. Subject to the
qualifications and assumptions set forth in their opinion, Armstrong, BackusJudd, Thomas, Smith &
Co., L.L.P. areCompany, P.C. is of the opinion that, for Federal income tax purposes:
1. The Exchange and Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code (the "Code"), and
First Financial Concho and First Financial Bankshares of Delaware, Inc.Southlake each will be a party to the reorganization
within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by the ConchoSouthlake Shareholders upon receipton the
exchange of their shares of Southlake Common Stock solely for shares of
First Financial Common Stock inpursuant to the terms of the Exchange
Agreement to the extent of such exchange for their Concho Common Stock,
except for any gain or loss recognized(except as provided below with
respect to Concho Shareholders
who receive cash in lieu of fractional share interests in First Financial
Common Stock or pursuant to the exercise of statutory dissenter rights.shares).
3. The aggregate Federal income tax basis of the shares of First Financial Common
Stock received by the Concho Shareholders in exchange for theirwhich shares of ConchoSouthlake Common Stock are exchanged pursuant to
the Exchange and Merger will be the same as the aggregate adjusted
tax basis of their Conchosuch shares of
Southlake Common Stock exchanged therefor, less the taxany proportionate part of
such basis ifallocable to any allocated to fractional interest in any share interests.
22
of First
Financial Common Stock.
4. The holding period for the shares of the First Financial Common Stock received byfor
which the
Concho Shareholders in exchange for their shares of ConchoSouthlake Common Stock in
the hands of the Concho Shareholdersare exchanged will include the
holding period of their Conchothe Southlake Common Stock they are exchanged therefor.
A Concho Shareholdertherefor,
provided that such shares of Southlake Common Stock were held as a capital
asset on the date of the Exchange.
5. Southlake Shareholders who receivesreceive cash in lieu of a fractional share
interest in First Financial Common Stock will be treated as having received
the cash in redemption of the fractional share interest. The receipt of cash in lieu of a
fractional share interest should generally result in capitaland gain or loss
to the
holderwill be recognized in an amount equal to the difference between the amount of cash
received and the portionproportionate part of the holder's Federal income tax basis in the Concho Common Stock allocable to the fractional
share interest.interest, which gain or loss will be a capital gain or loss if the
Southlake Common Stock was a capital asset in the hands of the shareholder.
Such capital gain or loss will be long-term capital gain or loss if the
holder's holding period for the First Financial Common Stock received,
determined as set forth above, is longer than one year. The effective tax
rate on any resulting net long-term capital gain for Southlake Shareholders
who are individuals will generally depend on the shareholder's holding
period for the shares of First Financial Common Stock received, determined
as set forth above, and the income tax brackets under which the shareholder
is taxed. For individual shareholders, the maximum capital gains tax rate
on property held more than eighteen months is 20 percent and the maximum
capital gains tax rate on property held more than one year, but not more
than eighteen months, is 28 percent.
22
A ConchoSouthlake Shareholder who dissents from the Exchange and Merger and
receives cash in exchange for shares of ConchoSouthlake Common Stock will recognize
capital gain or loss equal to the difference between the amount of cash received
and the holder's Federal income tax basis in the shares.shares, provided that the
Southlake Common Stock was a capital asset in the hands of the shareholder at
the time of the exchange. Such capital gain or loss will be long-term capital
gain or loss if the holder has helddissenting Southlake Shareholder's holding period for the
shares for moreSouthlake Common Stock exchanged is longer than one year as of the effective timedate of the
merger.Exchange. The effective tax rate on any resulting net long-term capital gain
for a dissenting Southlake Shareholder who is an individual will generally
depend on the dissenting shareholder's holding period for shares of Southlake
Common Stock and the income tax brackets under which the dissenting shareholder
is taxed.
THE INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND IS BASED ON THE INTERNAL REVENUE CODE (AND AUTHORITIES THEREUNDER) AS IN
EFFECT ON THE DATE OF THIS PROSPECTUS, WITHOUT CONSIDERATION OF THE PARTICULAR
FACTS OR CIRCUMSTANCES OF ANY SHAREHOLDER. CONCHOSOUTHLAKE SHAREHOLDERS ARE URGED TO
CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE FEDERAL INCOME TAX
CONSEQUENCES OF THE EXCHANGE IN THEIR PARTICULAR SITUATIONS, AS WELL AS THE TAX
CONSEQUENCES UNDER ANY APPLICABLE STATE, LOCAL OR FOREIGN TAX LAWS.
EXCHANGE AGENT
The Trust Department of First National Bank of Abilene has been appointed
as the Exchange Agent for the Exchange. Questions and requests for additional
copies of this Prospectus should be directed to the Exchange Agent addressed as
follows:
By mail, overnight, courier or hand delivery: Trust Department
First National Bank of Abilene
Third Floor
400 Pine Street
Abilene, Texas 79601
By facsimile transmission: (915) 675-7342627-7342
For confirmation by telephone: (915) 675-7100627-7003
RESALE BY CONCHOSOUTHLAKE AFFILIATES
The shares of First Financial Common Stock issuable to ConchoSouthlake
Shareholders upon consummation of the Exchange Offer have been registered under
the Securities Act, but such registration does not cover the resales by
affiliates of ConchoSouthlake ("ConchoSouthlake Affiliates"). First Financial Common Stock
received and beneficially owned by those ConchoSouthlake Shareholders who are deemed
to be ConchoSouthlake Affiliates may be resold without registration as provided for by
Rule 145 under the Securities Act, or as otherwise permitted. The term ConchoSouthlake
Affiliate is defined to include any person who, directly or indirectly,
controls, or is controlled by, or is under common control with ConchoSouthlake at or
during the time period covered by the Exchange Agreement. Each ConchoSouthlake
Affiliate who desires to resell the First Financial Common Stock must sell such
First Financial Common Stock either
23
(i) pursuant to an effective registration
statement under the Securities Act; (ii) in accordance with the applicable
provisions of Rule 145 under the Securities Act; or (iii) in a transaction
which, in the opinion of counsel for the ConchoSouthlake Affiliate or as described in
a "no-action" or interpretive letter from the Commission,SEC, in each case reasonably
satisfactory in form and substance to First Financial, is exempt from the
registration requirements of the Securities Act. Rule 145(d) requires that
persons deemed to be ConchoSouthlake Affiliates resell their First Financial Common
Stock pursuant to certain of the requirements of Rule 144 under the Securities
Act if such First Financial Common Stock is sold within the first two (2) yearsyear after the
receipt thereof. After two (2) yearsone year if such person is not an affiliate of First
Financial and First Financial is current in the filing of its
23
periodic securities law reports, a former ConchoSouthlake Affiliate may freely resell
the First Financial Common Stock received in the Exchange Offer without
limitation. After three (3)two years from the issuance of the First Financial Common
Stock, if such person is not an affiliate of First Financial at the time of sale
and has not been so for at least three (3) months prior to such sale, such person
may freely resell such First Financial Common Stock, without limitation,
regardless of the status of First Financial's periodic securities law reports.
Each ConchoSouthlake Affiliate will deliver to First Financial a written
agreement to the effect that no sale will be made of any shares of First
Financial Common Stock received in the Exchange Offer by a ConchoSouthlake Affiliate
except (i) in accordance with the Securities Act; and (ii) if, as it expects to
do, First Financial utilizes pooling-of-interests accounting in accounting for
the Exchange Offer, until such time as First Financial shall publish the
financial results of at least thirty (30) days of post-Exchange operations of
First Financial. The First Financial Common Stock Certificates issued to
ConchoSouthlake Affiliates in the Exchange Offer may contain an appropriate
restrictive legend, and appropriate stop transfer orders may be given to the
Exchange Agent for such certificates.
ANTICIPATED MERGER AND DISSENTING SHAREHOLDERS' RIGHTS
First Financial anticipates that upon consummation of the Exchange Offer,
First FinancialSouthlake will contribute the shares of Concho Common Stock acquired in
the Exchange Offer to First Financial Bankshares of Delaware, Inc., a
wholly-owned subsidiary of First Financial ("FFB Delaware"), and Concho will
then be merged (the "Merger") with and into FFB DelawareFirst Financial pursuant to Article 5.16
of the Texas Business Corporation Act (the "TBCA"). In the event that not all of
the outstanding ConchoSouthlake Common Stock is tendered for exchange in the Exchange
Offer, within ten (10) days after the effective date of the Merger, FFB
DelawareFirst
Financial shall provide notice of the Merger to the ConchoSouthlake Shareholders who
did not elect to participate in the Exchange Offer. The consideration to be
issued in the Merger shall be the same as that in the Exchange Offer. A
ConchoSouthlake Shareholder who elects to dissent from the Merger (a "Dissenting
Shareholder") must follow specific procedures in order to perfect its
dissenter's rights.
Within twenty (20) days of mailing of the notice of the Merger, the
Dissenting Shareholders must make a written demand on FFB DelawareFirst Financial for the
fair value of their shares of ConchoSouthlake Common Stock. The fair value of such
shares shall be the value thereof as of the day before the effective date of the
Merger, excluding any appreciation or depreciation in anticipation of the
Merger. The Dissenting Shareholders must include in their demands information as
to the number and estimated fair value of shares owned by such shareholders. Any
Dissenting Shareholder who fails to make a demand within the twenty (20) day
period shall be bound by the terms and the consideration provided in the Merger.
Within ten (10) days of receipt of a Dissenting Shareholder's written
demand, FFB DelawareFirst Financial shall either accept such demand or reject it and make a
counter-offer as to the fair value of the ConchoSouthlake Common Stock. Upon the
agreement
between FFB DelawareFirst Financial and the Dissenting Shareholder as to the fair value of
the ConchoSouthlake Common Stock, FFB DelawareFirst Financial shall pay the agreed fair value of
the shares of ConchoSouthlake Common Stock owned by such Dissenting Shareholder in
exchange for endorsed ConchoSouthlake Common Stock Certificates representing such
shares. The Dissenting Shareholder shall, at that time, cease to have any
interest in FFB Delaware.such shares. If a Dissenting Shareholder is unable to reach an
agreement with FFB DelawareFirst Financial as to the fair value of the ConchoSouthlake Common
Stock, the specific remedies provided in ArticleArticles 5.12, 5.13 and 5.16 of the
TBCA for determination of fair
24
value by a court of law shall be available to
such shareholder. ArticleArticles 5.12, 5.13 and 5.16 of the TBCA isare attached to this
Prospectus as Annex B.
ACCOUNTING TREATMENT
First Financial expects to account for the Exchange as a pooling-of-interestspooling-of-
interests and expects to receive the written opinion of Arthur Andersen & Co.LLP that
it is appropriate to do so.
24
CERTAIN REGULATORY CONSIDERATIONS
GENERAL
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. A change in
applicable law or regulation may have a material effect on the business of First
Financial.
As a bank holding company, First Financial is subject to regulation under
the BHCA and its examination and reporting requirements. Under the BHCA, bank
holding companies may not (subject to certain limited exceptions) directly or
indirectly acquire the ownership or control of more than five percent (5%) of
any class of voting shares or substantially all of the assets of any company,
including a bank, without the prior written approval of the Federal Reserve
Board. In addition, bank holding companies are generally prohibited under the
BHCA from engaging in nonbanking activities, except certain activities which the
Federal Reserve Board, by regulation, determines to be closely related to
banking, or to managing or controlling banks. Examples of activities which the
Federal Reserve Board has determined to be closely related to banking, or to
managing or controlling banks, include (1) the making or acquiring of loans or
other extensions of credit; (2) servicing of loans; (3) performing certain trust
functions; (4) providing bookkeeping and data processing services for a bank
holding company and its subsidiaries; (5) providing certain securities brokerage
services; and (6) acting or serving as an investment or financial advisor.
The BHCA provides that the Federal Reserve Board shall not approve any
acquisition, merger or consolidation the effect of which may be to substantially
lessen competition in the banking industry, which would tend to create a
monopoly in any section of the country, or which in any other manner would be a
restraint of trade, unless the anti-competitive effects of the proposed
combination are clearly outweighed by the convenience and needs of the community
to be served. In approving acquisitions by bank holding companies of banks and
companies engaged in banking-related activities, the Federal Reserve Board
considers, 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.).
First National Bank of Abilene, First National Bank, Sweetwater, The First
National Bank in Cleburne, Eastland National Bank, San Angelo National Bank and
Weatherford National Bank are all chartered under the National Bank Act and are
subject to supervision and regulation, as well as regular examination, by the
Office of the Comptroller of the Currency (the "OCC"). Hereford State Bank and
Stephenville Bank and Trust Co. were chartered under the Texas Banking Code
(which, effective September 1, 1995, was replaced by the newly-adopted Texas
Banking Act) and are similarly supervised, regulated and examined by the Banking
Commissioner of the State of Texas. Supervision and regulation of banks by
federal and state banking authorities is primarily intended to protect the
interests of depositors, although shareholders are likewise benefited. Various
requirements and restrictions under the laws of the United States and the State
of Texas affect the operations of each subsidiary bank, including the
requirement to maintain reserves against deposits, restrictions on the nature
and amount of loans which may be made and the interest that may be charged
thereon, and restrictions relating to investments and other activities.
Each First Financial Bank is a member of the FDIC. The Federal Deposit
Insurance Act requires that the FDIC approve any merger or consolidation by or
with an insured bank, or any establishment of branches by an insured bank, and
it 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
which are also members of the Federal Reserve System, however, are regulated
with respect to the foregoing matters by the Federal Reserve System.
All of First Financial's subsidiary banks must pay assessments to the FDIC
for federal deposit insurance protection under a risk-based assessment system.
FDIC-insured depository institutions that are
25
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, 1996, the assessment
rate for each of First Financial's subsidiary banks is at the lowest level risk-
based premium available.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking agencies to take "prompt corrective action"
in respect to depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "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, which will include a risk-based capital measure, a leverage ratio
capital measure and certain exceptions.other factors. Regulations establishing the specific
capital tiers provide that a well-capitalized institution must have a total
risk-based capital ratio of at least ten percent (10%), a Tier 1 risk-based
capital ratio of at least six percent (6%), and a Tier 1 leverage ratio of at
least five percent (5%), and not be subject to any specific capital order or
directive. For an institution to be adequately capitalized, it must have a total
risk-based capital ratio of at least eight percent (8%), a Tier 1 risk-based
capital ratio of at least four percent (4%), and a leverage ratio of at least
four percent (4%) [in some cases three percent (3%)]. Under current regulations,
First Financial's subsidiary banks would be considered to be well capitalized as
of December 31, 1996.
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 bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of five percent (5%) of the bank's
assets at the time it became "undercapitalized" or the amount needed to comply
with the plan. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parent's general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive
compensation, and permits regulatory action against a financial institution that
does not meet such standards.
Banking agencies have recently adopted final regulations which mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as a part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, these banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
PAYMENT OF DIVIDENDS
First Financial is a legal entity separate and distinct from its banking
and other subsidiaries. Most of First Financial's revenues result from dividends
paid to it by its Delaware holding company subsidiary, which receives dividends
from its bank subsidiaries. There are statutory and regulatory requirements
applicable to the payment of dividends by subsidiary banks as well as by First
Financial to its shareholders.
26
Each state bank subsidiary 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 or the Office of the Comptroller of the
Currency (the "OCC"),OCC, as the case may be, for
the declaration and payment of dividends if the total of all dividends declared
by the board of directors of such bank in any year will exceed the total of (i)
such bank's net profits (as defined and interpreted by regulation) for that year
plus (ii) the retained net profits (as defined and interpreted by regulation)
for the preceding two (2) 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). UnderEffective September 1, 1995, the newly adopted Texas
Banking Code of 1943, as amended, before anyAct eliminated the requirement under the predecessor code that, prior to
paying a dividend, may be
paid to First Financial by an affiliated state bank, thea state bank must transfer to "certified surplus" an amount
which is not less than ten percent (10%) of the net profits of such bank earned
since the last dividend was declared; provided, however, that a transfer iswas not
required to certified surplus of a sum which would increase the certified
surplus to more than the capital of the bank.
During 1996, the First Financial Banks paid an aggregate of $19.0 million
in dividends. Under the foregoing dividend restrictions, in 1993at December 31, 1996
the First Financial Banks, without obtaining governmental approvals, could have
declared additional aggregate dividends of approximately $18.5$8.6 million from
retained net profits. During
1993, the First Financial Banks paid $8.9 million in dividends.
The payment of dividends by First Financial and its subsidiaries is also
affected by various regulatory requirements and policies, such as the
requirement to maintain adequate capital above regulatory guidelines.
25
In
addition, if, in the opinion of the applicable regulatory authority, 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), such authority may require, after notice and
hearing, that such bank cease and desist from such 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 Federal Deposit
Insurance Corporation (the "FDIC")FDIC have issued
policy statements which provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
CERTAIN TRANSACTIONS BY FIRST FINANCIAL WITH ITS AFFILIATES
There are also various legal restrictions on the extent to which First
Financial can borrow or otherwise obtain credit from, or engage in certain other
transactions with, its depository subsidiaries. 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: (i)
in the case of any one such affiliate, the aggregate amount of "covered
transactions" of the insured depository institution and its subsidiaries cannot
exceed ten percent (10%) of the capital stock and the surplus of the insured
depository institution; and (ii) in the case of all affiliates, the aggregate
amount of "covered transactions" of the insured depository institution and its
subsidiaries cannot exceed twenty percent (20%) 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.
"Covered transactions" are defined by statute to include a loan or extension of
credit to the affiliate, a purchase of securities issued by an affiliate, a
purchase of assets from the affiliate (unless otherwise exempted by the Federal
Reserve Board), the acceptance of securities issued by the affiliate as
collateral for a loan and the issuance of a guarantee, acceptance, or letter of
credit for the benefit of an affiliate. 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.
27
CAPITAL
The Federal Reserve Board has adopted risk based capital guidelines for
bank holding companies. The minimum guidelines for the ratio of total capital
("Total Capital") to risk weighted assets (including certain off-balance-sheet
activities, such as standby letters of credit) is eight percent (8%). From
year-end 1991 until year-end 1992, the minimum ratio was 7.25%. 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 ("Tier 1 Capital").
The remainder 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. These guidelines provide for a
minimum Tier 1 Capital leverage ratio (Tier 1 Capital to totalaverage assets for
current quarter, less goodwill) of three percent (3%) for bank holding companies
that meet certain specified criteria, including having the highest regulatory
rating. All other bank holding companies will generally be required to maintain
a minimum Tier 1 Capital leverage ratio of three percent (3%) plus an additional
cushion of 100 to 200 basis points. The Federal Reserve Board has not advised
First Financial of any specific minimum Tier 1 Capital 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 substantially above the minimum supervisory levels without
significant reliance on intangible assets (e.g., goodwill, core deposit
intangibles and purchased mortgage servicing rights).
Furthermore, the guidelines indicate that the
Federal Reserve Board has indicated that it will continue to consider a
"tangible Tier 1 Capital leverage ratio" (deducting all intangibles) in
evaluating proposals for expansion or new activities. As of September 30, 1993,
the "tangible Tier 1 Capital leverage ratios" of First Financial, Concho and pro
26
forma (giving effect to the Exchange and the Merger) for First Financial and
Concho combined were 9.63%, 6.89% and 9.38% respectively.
The following tables set forth the Tier 1 Capital to risk-weighted assets
ratios, the total capital to risk-weighted assets ratios and the Tier 1 leverage
ratios for First Financial and ConchoSouthlake individually and on a pro forma
combined basis as of certain dates and periods. Such pro forma combined data is
derived from the financial information of First Financial and ConchoSouthlake at SeptemberJune
30 or December 31 for each of the periods presented below and gives effect to
the Exchange and the Merger.
28
Tier 1 Capital to Risk-Weighted Assets Ratio
(in each case calculated pursuant to the
risk-based capital guidelines)
Pro Forma Pro Forma
As of: First Financial ConchoFirst Financial(1) Southlake Combined
- ------ ---------------- ------------------ ---------- ---------
September
June 30, 1993... 17.14% 12.17% 16.69%1997...... 19.51% 17.61% 12.31% 17.39%
December 31, 1992.... 17.22 13.39 16.901996.. 18.90% 11.78% 18.57%
December 31, 1991.... 15.73 11.64 15.381995.. 19.33% 10.75% 18.95%
December 31, 1994.. 20.03% 9.43% 19.68%
Total Capital To Risk-Weighted Assets Ratio
(in each case calculated pursuant to the
risk-based capital guidelines)
Pro Forma Pro Forma
As of: First Financial ConchoFirst Financial(1) Southlake Combined
- ------ ---------------- ------------------ ---------- ---------
September
June 30, 1993... 18.39% 13.35% 17.93%1997...... 20.76% 18.74% 13.18% 18.51%
December 31, 1992.... 18.72 14.75 18.381996.. 20.15% 12.56% 19.80%
December 31, 1991.... 17.23 12.90 16.861995.. 20.57% 11.51% 20.18%
December 31, 1994.. 21.27% 10.10% 21.30%
Tier 1 Leverage Ratio
Pro Forma Pro Forma
As of: First Financial ConchoFirst Financial(1) Southlake Combined
- ------ ---------------- ------------------ ---------- -------------------
September
June 30, 1993... 9.63% 6.89% 9.38%1997...... 10.57% 9.40% 7.94% 9.35%
December 31, 1992.... 9.59 6.89 9.281996.. 10.40% 7.95% 10.31%
December 31, 1991.... 8.69 6.30 8.481995.. 10.91% 7.04% 10.67%
December 31, 1994.. 10.19% 5.95% 10.14%
- -----------------
(1) The ratios as of June 30, 1997 include the TCB-San Angelo Purchase. See
"Information about First Financial--Recent Developments."
In addition to the Federal Reserve Board capital standards, Texas-chartered
banks must also comply with the capital requirements imposed by the Texas
Banking Department. Although neither the Texas Banking CodeAct nor the regulations
promulgated thereunder specify any minimum capital-to-assets ratio that must be
maintained by a Texas-chartered bank, the Texas Banking Department has a policy
that generally requires Texas-chartered banks to maintain a minimum 6% ratio of
stockholders equity (stated capital, surplus capital, surplus and undivided
profits or retained earnings) to total assets. As of September 30, 1993,December 31, 1996, all
Texas-chartered banks owned by First Financial as well as Concho, exceeded the minimum ratio.
27
Failure to meet capital guidelines could subject an insured bank to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC and a prohibition on the taking of brokered deposits. See "FDICIA" below.
Bankdeposits, and bank
regulators continue to indicate their desire to raise capital requirements
applicable to banking organizations beyond their current levels.
However, the management of First Financial is unable to predict whether and when
higher capital requirements might be imposed and, if they are imposed, at what
levels and on what schedule.29
FIRST FINANCIAL SUPPORT OF THE FIRST FINANCIAL BANKS
Under Federal Reserve Board policy, First Financial is expected to act as a
source of financial strength to each of its subsidiary banks and to commit
resources to support each of such subsidiaries. This support may be required at
times when, absent such Federal Reserve Board policy, First Financial would not
otherwise be required to provide it.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable
for any loss incurred by, or reasonably expected to be incurred by, the FDIC
after August 9, 1989 in connection with (i) the default of a commonly controlled
FDIC-insured depository institution, or (ii) any assistance provided by the FDIC
to any commonly controlled FDIC-insured depository institution "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.
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 payment of the
deficiency by assessment upon the bank's shareholders, pro rata, and to the
extent necessary, if any such assessment is not paid by any shareholder after
three (3) months' notice, to sell the stock of such shareholder to make good the
deficiency.
FDIC INSURANCE ASSESSMENTS
The First Financial Banks areINTERSTATE BANKING AND BRANCHING ACT
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Interstate Banking and Branching Act"), a bank holding company is
able to acquire banks in states other than its home state. Prior to September
29, 1995, interstate acquisitions by bank holding companies were subject to
FDIC deposit insurance assessments.Federal law, which provided that no application to acquire shares of a bank
located outside of the state in which the operations of the acquiring bank
holding company were principally conducted would be approved by the Federal
Reserve Board unless such acquisition was specifically authorized by the laws of
the state in which the bank whose shares are to be acquired was located.
The FDIC setInterstate Banking and Branching Act also authorizes banks to merge
across state lines, therefore creating interstate branches, beginning June 1,
1997. Under such legislation, each state has the opportunity to "opt out" of
this provision, thereby prohibiting interstate branching in such states, or to
"opt in" at an assessment rate for the Bank Insurance Fund ("BIF") of 0.195
percent for periodsearlier time, thereby allowing interstate branching within that
state prior to June 30, 1991,1, 1997. Furthermore, pursuant to such 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 such de novo branching. Texas has
-- ----
adopted legislation to "opt out" of the interstate branching provisions (which
Texas law currently expires on September 2, 1999).
PENDING AND PROPOSED LEGISLATION
Proposals to change the laws and an assessment rateregulations 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 0.23
percent effectiveany such
proposals or bills being enacted and the impact they might have on June 30, 1991. On September 15, 1992 the FDIC approved the
implementation of a transition risk-based deposit premium assessment system
under which each depositary institution will be placed in one of nine assessment
categories based on certain capital and supervisory measures. The assessment
rates under the new system will range from 0.23 percent to 0.31 percent
depending upon the assessment category into which the insured institution is
placed. The new assessment system became effective January 1, 1993. The First
Financial Banks were assessed a weighted average rate of 0.115 percent for the
first six-month assessment period. It is possible that BIF assessments willand its subsidiaries cannot be further increased and it is possible that there may be special additional
assessments in the future. A significant increase in the assessment rate or a
special additional assessment could have an adverse impact on First Financial's
results of operations.
FDICIA
Among other things, the Federal Deposit Insurance Corporation Improvement Act
of 1992 ("FDICIA") requires the federal banking agencies to take "prompt
corrective action" in respect of depository institutions that do not meet
minimum capital requirements. FDICIA establishes five capital tiers: "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
28
relevant capital measures, which will include a risk-based capital measure, a
leverage ratio capital measure and certain other factors.
Regulations establishing the specific capital tiers have been recently
enacted. Under these regulations, for an institution to be well capitalized it
must have a total risk-based capital ratio ofdetermined at least ten percent (10%), a Tier
1 risk-based capital ratio of at least six percent (6%), and a Tier 1 leverage
ratio of at least five percent (5%), and not be subject to any specific capital
order or directive. For an institution to be adequately capitalized it must
have a total risk-based capital ratio of at least eight percent (8%), a Tier 1
risk-based capital ratio of at least four percent (4%), and a leverage ratio of
at least four percent (4%) (in some cases three percent (3%)). Under these new
regulations, the First Financial Banks would be considered to be well
capitalized as of December 31, 1992.
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. Undercapitalized depository institutions are subject to
growth limitations and are required to submit a capital restoration plan. The
federal banking agencies may not accept a capital plan without determining,
among other things, that the plan is based on realistic assumptions and is
likely to succeed in restoring the depository institution's capital.
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 the total
assets and cessation of receipt of deposits from correspondent banks.
Critically undercapitalized institutions are subject to the appointment of a
receiver or conservator.this time.
DESCRIPTION OF FIRST FINANCIAL CAPITAL STOCK
The following description contains a summary of all of the material
features of the capital stock of First Financial but does not purport to be
complete and is subject to and qualified in its entirety by reference to the
First Financial Articles of Incorporation, which are filed as exhibits to
documents incorporated by reference herein and by reference to the applicable
provisions of the Texas
Business Corporation Act.TBCA. See also "COMPARISON OF SHAREHOLDER RIGHTS" below. The
following description should be read carefully by the ConchoSouthlake Shareholders.
30
First Financial's total authorized capital stock consists of 5,000,00010,000,000
shares of First Financial Common Stock with a par value of $10.00 per share.
There is no authorized preferred stock. As of December 31, 1993,June 30, 1997, there were issued
and outstanding 3,746,6878,415,136 shares of First Financial Common Stock.
The holders of First Financial Common Stock ("First Financial
Shareholders") are entitled to receive such dividends as may from time to time
be declared by the First Financial Board of Directors. First Financial
Shareholders are entitled to one vote per share of First Financial Common Stock
on every issue submitted to them as First Financial Shareholders at a meeting of
shareholders or otherwise. In the event of liquidation, First Financial
Shareholders are entitled to share ratably, after satisfaction in full of the
prior rights of creditors, in all assets of First Financial available for
distribution to First Financial Shareholders. First Financial Shareholders do
not have preemptive or cumulative voting rights. All shares of First Financial
Common Stock now issued and outstanding are fully paid and nonassessable.
29
COMPARISON OF SHAREHOLDER RIGHTS
In the event that the Exchange is consummated, ConchoSouthlake Shareholders whose
shares of ConchoSouthlake Common Stock are tendered in the Exchange Offer will become
First Financial Shareholders. Their rights will be governed by Texas law, the
First Financial Articles of Incorporation (the "First Financial Charter") and
the Bylaws of First Financial (the "First Financial Bylaws").
Certain differences between the rights of ConchoSouthlake Shareholders and First
Financial Shareholders are set forth below. As both ConchoSouthlake and First
Financial are organized under the laws of Texas, these differences primarily
arise from various provisions of the First Financial Charter, the First
Financial Bylaws, the ConchoSouthlake Articles of Incorporation (the "Concho"Southlake
Charter") and the Bylaws of ConchoSouthlake (the "Concho"Southlake Bylaws"). This summary
contains a description of the material differences in shareholder rights, but is
not meant to be relied upon as an exhaustive list or detailed description of the
provisions discussed herein and is qualified in its entirety by reference to the
TBCA, the First Financial Charter, the First Financial Bylaws, the ConchoSouthlake
Charter and the ConchoSouthlake Bylaws.
BOARD OF DIRECTORS
The First Financial Bylaws provide that the number of directors
constituting the First Financial Board of Directors shall be not less than three
and not more than thirty. Persons eligible for election to the First Financial
Board of Directors are First Financial Shareholders who, at the date of the
annual meeting of shareholders at which the Board is elected, (i) have not
attained the age of 72 years, or (ii) have not attained the age of 75 years and
own one percent (1%) or more of the outstanding shares of First Financial Common
Stock. Any director of First Financial may be removed, with or without cause, by
the holders of a majority of the shares outstanding.
The ConchoSouthlake Bylaws provide that the number of directors constituting the
ConchoSouthlake Board of Directors shall be four, butdetermined by resolution of the numberSouthlake
Board of Directors may be increased
or decreased (provided such decrease does not shortenby the time of service ofshareholders at any incumbent director) from time to time by amendment to the Concho Bylaws;
provided, however, that the number of directorsmeeting thereof, but shall
never be less than one.three. At any meeting of ConchoSouthlake Shareholders called
expressly for the purpose of removing a director, any director or the entire
ConchoSouthlake Board of Directors may be removed, with or without cause, by a vote of
the holders of a majority of the shares then entitled to vote at any election of
directors.
INDEMNIFICATION AND LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
The First Financial Charter provides that, to the fullest extent permitted by
applicable law, no First Financial director shall be liable to First Financial
or the First Financial Shareholders for monetary damages for or with respect to
any acts or omissions in his or her capacity as a director, except in the case
of liability for (i) a breach of a duty of loyalty to First Financial or its
shareholders, (ii) an act or omission not in good faith or that involves
intentional misconduct or a knowing violation of the law, (iii) a transaction
from which a director received an improper benefit, (iv) an act or omission for
which the liability of a director is expressly provided by statute, or (v) an
act related to an unlawful stock repurchase or payment of a dividend.
The First Financial Charter also provides that each director, officer, employee
and agent of First Financial shall be indemnified for all expenses incurred in
connection with any action, suit, proceeding or claim to which he or she is
named a party or otherwise by virtue of holding such position; provided,
however, that no indemnification of employees or agents (other than directors or
officers) will be made without express
31
authorization of the Board of Directors. The First Financial Charter provides
that such indemnification shall be provided to the fullest extent permitted by
applicable law.
30
The ConchoSouthlake Charter and Bylaws do not provide that Concho shall indemnify itsfor the indemnification of
officers or directors and
officers against expenses actually and necessarily incurred by such person in
connection with the defense of any action, suit, or proceeding, whether civil or
criminal, in which he or she is made a party by reason of being or having been
such director or officer, except in relation to matters as to which he or she
shall be adjudged in such action, suit or proceeding to be liable for negligence
or misconduct in performance of duty. Neither the Concho Charter nor the Concho
Bylaws contain a limitation of liability provision.
Special Meetings of ShareholdersSouthlake.
SPECIAL MEETINGS OF SHAREHOLDERS
The First Financial Bylaws provide that a special meeting of shareholders
may be called by (i) a majority of the Board of Directors, or (ii) by the Chief
Executive Officer joined by at least three members of the Board of Directors, or
(iii) by shareholders holding voting rights of not less than 20% of the stock of
the corporation.
The ConchoSouthlake Bylaws provide that a special meeting of the shareholders may
be called by the President, and shall be called by the President or Secretary at
the request in writing of a majority of the Board of Directors or at the
request in writing ofby any five or more shareholders owning
not less than 10%30% of all the shares
entitled to vote at the meetings.stock of Southlake.
INFORMATION ABOUT FIRST FINANCIAL
GENERAL
First Financial is a Texas corporation and a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA").BHCA. First Financial owns, through its wholly-owned
Delaware subsidiary, First Financial Bankshares of Delaware, Inc., all of the
capital stock of sixeight banks
organized and located in Texas: 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; and Stephenville Bank and Trust Co.,
Stephenville, Texas; San Angelo National Bank, San Angelo, Texas; and
Weatherford National Bank, Weatherford, Texas (collectively, the "First
Financial Banks"). As of SeptemberJune 30, 1993,1997, First Financial and its consolidated
subsidiaries had total assets of approximately $906.8 million,$1.3 billion, total deposits of
approximately $809.1 million,$1.1 billion, total loans (net of allowance for loan losses) of
approximately $359.1$572.5 million and total shareholders' equity of approximately
$88.7$137.2 million.
First Financial operates principally in order to give the First Financial
Banks access to additional management and technical resources which help them to
improve or expand their banking and other services while continuing their local
activity and autonomy.identity. Each of the First Financial Banks operates under the day-to-dayday-
to-day management of its Boardboard of Directorsdirectors and officers, with substantial
authority in making decisions concerning its own investments, loan policies,
interest rates and service charges. First Financial provides assistance to the
First Financial Banks, especially with respect to decisions concerning major
capital expenditures, employee fringe benefits, including pension plans and
group insurance, dividend policies, appointment of officers and directors of
First Financial Banks and their compensation. The internal audit and loan review
functions are centralized at First Financial. Each of these corporate staff
groups performs on-site operational audits and loan reviews of the subsidiary
banks. First Financial, through First National Bank of Abilene, provides advice
to and specialized services for the First Financial Banksaffiliated banks in such areas as taxation,
lending, techniques,
investments, purchasing, advertising, public relations
automation procedures and computer services. In addition, First Financial
coordinates various transactions among the First Financial Banks, including loan
participations. First Financial makes the services of the Trust Department of
First National Bank of Abilene available to customers of the other First
Financial Banks, as well as investment and computer services.
Each First Financial Bank is engaged in the general commercial banking
business consisting of the acceptance of checking, savings and time deposits,
the making of loans, including bank credit card services, transmitting funds and performing such other banking
services as are usual and customary for commercial banks.
31
In addition to
First National Bank of Abilene, First National Bank, Sweetwater, and
Stephenville Bank and Trust Co. have active trust departments. The trust
departments offer a complete range of services to individuals, associations and
corporations, including the administration of estates, testamentary trusts and
various types of living trusts and agency accounts. Other sources of revenue are
services for businesses, including administering pension, profit sharing, and
other employee benefit plans, acting as stock transfer agent or stock registrar,
and providing paying agent services. First National Bank of Abilene, The First
National Bank in Cleburne, San Angelo National Bank and Weatherford National
Bank provide brokerage services through arrangements with various third parties.
32
Commercial banking in Texas is very competitive. Ascompetitive and First Financial,
holding less than 1% of December 31, 1992, the
latest date of compilation by the Federal Reserve Bank in Dallas, Texas, there
were 85 multi-bank holding companies existing or operating in the State of
Texas. Representing .64%deposits, represents only a minor segment of the
market, First Financial was ranked seventh on
the basis of total deposits. The competition from holding companies is largely
centered in efforts to obtain larger deposits and procure outlets for funds for
available lending.industry. Success is dependent upon being able to compete in these
areas, as well as in the areas of
interest rates paid or charged and scope of services offered and prices charged
therefor. In addition to competition from otherSubsidiary banks theof First Financial Banks will
also continue to be subject to substantial competition from other financial
institutions, such ascompete in their respective
service areas with 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.
First Financial's principal executive offices are located at 400 Pine
Street, Abilene, Texas 79601, and its telephone number is (915) 675-7155.627-7155. For
further information concerning First Financial which is incorporated herein by
reference from certain publicly-filed documents, see "Incorporation by
Reference."
1993 FOURTH QUARTER RESULTSRECENT DEVELOPMENTS
On January 14, 1994,May 27, 1997, San Angelo National Bank (f/k/a Southwest Bank of San
Angelo) ("Southwest Bank"), a subsidiary bank of First Financial, announced resultsentered into a
Purchase and Assumption Agreement (the "Agreement") with TCB-San Angelo,
pursuant to which Southwest Bank agreed to purchase certain assets and assume
certain liabilities (including deposit liabilities) of its operationsthe banking business of
TCB-San Angelo in the City of San Angelo, Texas. The transaction (other than the
acquisition of TCB-San Angelo's trust business) was consummated on September 26,
1997. Closing of the acquisition of the trust business is expected to occur
during the first quarter of 1998.
The assets to be acquired (the "Acquired Assets") by Southwest Bank
pursuant to the Agreement include (1) three banking facilities (land and
buildings) located in the City of San Angelo, Texas, together with all their
furniture, furnishings, equipment and fixtures, (2) all loans of TCB-San Angelo,
other than certain loans which were specifically excluded, and (3) the stock of
all subsidiaries of TCB-San Angelo. Pursuant to the terms of the Agreement,
Southwest Bank will acquire and assume the trust business of TCB-San Angelo by
acquiring all of the issued and outstanding capital stock of San Angelo Trust
Company, National Association, a subsidiary trust company to be formed by TCB-
San Angelo to which all of the trust business and assets of TCB-San Angelo shall
be transferred in accordance with applicable federal and Texas banking laws. In
addition to deposit liabilities, Southwest Bank assumed certain other
liabilities, including safekeeping and safe deposit liabilities, and certain
other contracts, leases and other agreements (collectively, with the deposit
liabilities, the "Assumed Liabilities").
TCB-San Angelo is a national banking association which is indirectly
wholly-owned by Chase Manhattan Corporation. The principal banking office of
TCB-San Angelo is located at 301 West Beauregard in the City of San Angelo,
Texas, and TCB-San Angelo has a drive-in facility at 222 South Koenighein and a
branch facility at 3399 Knickerbocker Road in the City of San Angelo. As of
August 31, 1997, TCB-San Angelo had deposit liabilities of $148.3 million, total
liabilities of $148.7 million, loans in the amount of $67.6 million and total
assets held for sale of $74.4 million. The purchase price for the yearbanking and
three months ended December 31, 1993.
For the Three Months For the Year Ended
Ended December 31 December 31
-------------------- ------------------
1992 1993 1992 1993
------ ------ ------ ------
(Dollars in thousands, except per share data)
Net Interest Income
After Provision for
Loan Losses............................ $ 8,544 $ 9,132 $33,219 $36,075
Earnings before Income
Taxes.................................. 3,995 4,294 15,987 17,725
Net Earnings before Cumulative
Adjustment for Change in
Accounting for Income Taxes............ 2,725 2,888 10,989 11,978
Net Earnings After
Cumulative Adjustment for
Change in Accounting for
Income Taxes........................... 2,725 2,887 10,989 13,233
Earnings Per Share before
Cumulative Adjustment.................. $ 0.74 $ 0.77 $ 2.95 $ 3.20
Earnings Per Share after
Cumulative Adjustment.................. $ 0.74 $ 0.77 $ 2.95 $ 3.53
trust business of TCB-San Angelo was equal to the sum of (1) an amount equal to
the aggregate book value of the Acquired Assets minus the aggregate book value
-----
of the Assumed Liabilities, both determined as of the closing date, plus (2) a
----
premium of $16,800,000. Although Southwest Bank did not receive any cash, cash
equivalents or investment assets of TCB-San Angelo, TCB-San Angelo was required
to pay to Southwest Bank, in cash, at closing, the amount by which the book
value of the Assumed Liabilities exceeded the sum of the book value of the
Acquired Assets and the premium to be paid by Southwest Bank. Pursuant to the
foregoing, TCB-San Angelo transferred to Southwest Bank funds totaling
approximately $57.5 million, in addition to the loans, banking premises and
facilities and other Acquired Assets.
Contemporaneously with entering into the Agreement with TCB-San Angelo,
Southwest Bank made application to the OCC to convert Southwest Bank from a
Texas state banking association to a national banking association under the
charter of San Angelo National Bank. Conversion of Southwest Bank to San Angelo
National Bank occurred on September 26, 1997.
33
MARKET PRICES OF AND DIVIDENDS PAID ON FIRST FINANCIAL COMMON STOCK
First Financial Common Stock is traded in the over-the-counter market. Since November 1, 1993, the First Financial Common Stock has been reportedtraded on
the NASDAQ National Market under the trading symbol "FFIN." The following table
sets forth, for the periods indicated, the high and low bid prices and cash
dividends declared per share of First Financial Common Stock. The information
with respect to price quotations was obtained from The Principal/Eppler, Guerin &
Turner,Financial
Securities, Inc. of Abilene, Texas, a securities brokerage firm, ("Eppler Guerin"),
and have been
adjusted to reflect a three for two stock split effective June 1,
1992splits and a ten percent (10%) stock dividend paid to First Financial shareholders
in the second quarter of 1993.dividends.
DIVIDENDS
HIGH LOW DECLARED
------ ------ ------------- ---------
1995:
1991:
First Quarter.......... $16.00 $15.50 $0.19Quarter......................... $16.50 $15.75 $0.18
Second Quarter.........Quarter........................ 19.50 16.50 16.00 0.210.20
Third Quarter.......... 17.50 16.50 0.21Quarter......................... 20.50 18.75 0.20
Fourth Quarter......... 18.00 17.50 0.21
1992:Quarter........................ 20.75 19.25 0.20
1996:
First Quarter.......... 20.00 18.00 .21Quarter......................... $22.75 $20.75 $0.20
Second Quarter......... 23.00 20.00 .25Quarter........................ 29.25 22.75 0.22
Third Quarter.......... 31.00 23.00 .25Quarter......................... 29.25 24.75 0.22
Fourth Quarter......... 35.50 31.00 .25
32
1993:Quarter........................ 30.50 27.50 0.22
1997:
First Quarter..........Quarter......................... $31.25 $22.50 $0.22
Second Quarter........................ 37.00 35.5029.25 0.25
Second Quarter......... 39.00 37.00 0.32
Third Quarter.......... 40.00 39.00 0.32
Fourth Quarter......... 41.50 40.00 0.32
1994:
First Quarter (through February 4, 1994)...... 41.50 41.50 --September 29,
1997)................................. 45.00 36.00 0.25
On December 6, 1993August 15, 1997 (the last trading day preceding the execution of the
Exchange Agreement), the last sales price of First Financial Common Stock, as
reported by NASDAQ, was $43.50$39.50 per share. On February 1, 1994__________, 1997 (the last
practicable date prior to the mailing of this Prospectus), the last sales price
of First Financial Common Stock, as reported by NASDAQ, was $43.50$____________ per
share.
CONCHOSOUTHLAKE SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
FIRST FINANCIAL COMMON STOCK. NO ASSURANCE CAN BE GIVEN CONCERNING THE MARKET
PRICE OF FIRST FINANCIAL COMMON STOCK BEFORE OR AFTER THE DATE ON WHICH THE
EXCHANGE IS CONSUMMATED. THE MARKET PRICE OF FIRST FINANCIAL COMMON STOCK WILL
FLUCTUATE BETWEEN THE DATE OF THIS PROSPECTUS AND THE DATE ON WHICH THE EXCHANGE
IS CONSUMMATED AND THEREAFTER.
The timing and amount of future dividends on First Financial Common Stock
will depend upon earnings, cash requirements, the financial condition of First
Financial and its subsidiaries, applicable government regulations and other
factors deemed relevant by the Board of Directors of First Financial. As
described under "Certain Regulatory Considerations," various state and federal
laws limit the ability of the First Financial Banks to pay dividends to First
Financial.
On December 31, 1993,September 12, 1997, there were 1,2041,559 holders of record of First
Financial Common Stock.
34
INFORMATION ABOUT CONCHOSOUTHLAKE
GENERAL
ConchoSouthlake is a one bank holding company formed in 19791987 and incorporated in
the State of Texas. ConchoSouthlake owns all100% of the capital stock of Southwest Bank.
SouthwestTexas National
Bank is chartered("Texas National"), a national bank having its principal office in the StateCity
of Southlake, Tarrant County, Texas. Texas National, which began operations in
1975,1985, is federally chartered and its deposits areis insured by the Federal Deposit Insurance Corporation. SWB's
wholly owned subsidiary, SWB Investment, operates as a registered investment
advisor.FDIC.
MARKET AREA
Southwest BankSouthlake and Texas National are located approximately 20 miles northeast
of downtown Fort Worth, Texas and within the Fort Worth-Dallas metropolitan
area. In addition, Texas National maintains a branch location in Trophy Club,
Denton County, Texas. Through its two locations, Southlake conducts business
principally in Tom Green County through its
location in San Angelo, Texas. The market area of SWB Investment is also Tom
Green County, with a small amount derived from other area counties.Tarrant and Denton Counties and surrounding areas.
SERVICES
Southwest BankTexas National provides a full range of both commercial and consumer
banking services including loans, checking accounts, savings programs, safe
deposit facilities, access to automated teller machines, and credit card
programs. The bank does not offer trust services.
SWB Investment offers investment advice to
customers
33
who may execute trades with the bank through its discount brokerage operation or
through its affiliation with Stephens, Inc. of Little Rock, Arkansas.
COMPETITION
The business of banking in Concho'sTexas National's market area is highly
competitive. In San
Angelo sevenSouthlake, eight other banks operate with eleveneight locations. Competition isTexas
National also high
fromcompetes with credit unions, saving and loan associations,
investment brokers, insurance companies, and mortgage companies.
EMPLOYEES
As of September 30, 1993, ConchoAugust 31, 1997, Southlake and its subsidiaries employed 4621 full time
and 123 part time people.employees.
PROPERTIES
Southwest Bank's only locationTexas National has two locations. Its principal office is inlocated at 3205
E. Highway 114, Southlake, Texas, 76092 and a five storyfull service branch office tower in San Angelo,is
located at Trophy Club, Texas. The bank occupies the basement and first and second floors. The third,
fourth, and fifth floors, owned by Concho, are leased to non-affiliated tenants.
MARKET FOR AND DIVIDENDS PAID ON CONCHOSOUTHLAKE COMMON STOCK
There is no established public trading market for ConchoSouthlake Common Stock.
ConchoSouthlake Common Stock is not listed on a national securities exchange and is
not authorized for quotation on an interdealer quotation system. As of December 15,
1993,September
30, 1997, there were 23936 holders of record of ConchoSouthlake Common Stock. ConchoSouthlake
has not paid dividends on ConchoSouthlake Common Stock in prior years, but payment of future dividends
is not assured.since inception.
35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of December 15, 1993,September 30, 1997, the management of ConchoSouthlake knew of no person,
other than those listed below (the "5% Southlake Shareholders"), owning
beneficially more than 5% of the ConchoSouthlake Common Stock.
Shares of ConchoSouthlake Percentage of
Common Stock Outstanding
Name and Address of Beneficial Owner Beneficially Owned(1) ConchoSouthlake Common Stock
- --------------------------------------- ----------------------- -------------------------------------------------------- --------------------- ----------------------
Wilbur Carr Brown 17,830 8.84%
1974 OverhillCarmen Blankenship 12,800 5.29%
1311 W. Irving Blvd.
Irving, Texas 75061
James E. Burger 14,840 6.13%
334 Pebblebrook Drive
San Angelo,Grapevine, Texas 76904
First National Bank of West76051
Barry K. Emerson 24,829 10.25%
4356 Homestead Drive
Roanoke, Texas 16,267 8.07%
P.O. Box 1241
Lubbock,76262
Derrell E. Johnson 18,840 7.78%
2503 Hillside Court
Southlake, Texas 79408
Jack Drake & Sons 12,250(2) 6.07%
P. O. Box 60410
San Angelo,76092
Wayne Lee 23,190 9.58%
3220 W. Southlake Blvd., Suite C
Southlake, Texas 76906
H.D. Eakman 9,942 4.93%
1686 La Villa Circle
San Angelo,76092
James R. Ridenour 14,840 6.13%
1030 Diamond Blvd.
Southlake, Texas 7690476092
ESOP 13,533 5.59%
3205 E. Highway 114
Southlake, Texas 76092
34
O.L. Schuch 11,047(3) 5.48%
3714 Vista del Arroyo
San Angelo, Texas 76904
John W. West 17,876 8.86%
P. O. Box 1329
San Angelo, Texas 76902
- --------------------------------
(1) As determined in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended.
(2) 358 shares are in the name of David B. Drake while 11,892 are held by Jack
Drake & Sons, a partnership 50% owned by David Drake.
(3) 10,333 shares are in the name of O. L. Schuch while 714 shares are held by
his wife Dorothy Schuch.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as to the shares of ConchoSouthlake
Common Stock beneficially owned by each director and executive officer and for
all directors and executive officers as a group as of December 15, 1993.September 30, 1997.
Shares of ConchoSouthlake
Common Stock Percentage of ConchoSouthlake
Name Beneficially Owned(1) Common Stock Outstanding
- ---- --------------------- ------------------------
Michael L. Boyd 845 *
David B. Drake 12,250 (2) 6.07%
H.D. Eakman 9,942 (3) 4.93%
Dan Cravy M.D. 6,368 3.16%
Ingram Hartje, III 833 *
Joe Mertz 1,400 *
William Pfluger 3,572 1.77%
Craig Porter 1,727 *
O.L. Schuch 11,047 (4) 5.48%
Tim Turner, D.V.M. 232 *
David Lupton 424 *
Doug Eakman 825 *James E. Burger 14,840 6.13%
Wade Donnell 8,047 3.32%
Jack Dortch 8,840 3.65%
Barry K. Emerson 24,829 10.25%
Grover G. Fickes 10,692 4.42%
Derrell E. Johnson 18,840 7.78%
Wayne Lee 23,190 9.58%
Robert S. Mundlin 3,000 1.24%
James R. Ridenour 14,840 6.13%
John E. Thompson 9,840 4.06%
------- -----
All directors and executive
officers as a group: 49,465 24.53%group 136,958 56.57%
======= =====
- --------------------
* Indicates beneficial ownership is less than one percent.
(1) Each director and executive of Concho has sole voting and investment powers
with respect to all shares of Concho Common Stock shown as beneficially
owned by such director or executive officer except as
3536
otherwise indicated in the following footnotes. Beneficial ownership is
determined in accordance with Rule 13d-3 promulgated under the Securities
Exchange Act of 1934, as amended.
(2) 358 shares are in the name of David B. Drake while 11,892 are held by Jack
Drake & Sons, a partnership 50% owned by David Drake.
(3) 7,617 shares are in the name of H. D. Eakman while 2,325 shares are held by
Pecos Street Pharmacy, an entity owned by Mr. Eakman.
(4) 10,333 shares are in the name of O. L. Schuch while 714 shares are held by
his wife Dorothy Schuch.
After giving effect to the First Financial Common Stock to be issued in the
Exchange and the Merger, and based on the number of shares of First Financial
Common Stock outstanding as of December 31, 1993,September 30, 1997, no director or executive
officer of ConchoSouthlake or 5% Southlake Shareholder will beneficially own more than
one percent (1%) of the outstanding First Financial Common Stock immediately
after the Exchange and the Merger. There areAlso, after the Exchange, no commitments at this time for the issuance of shares to any
officer, director or
other major stockholders.
36executive officer of Southlake or 5% Southlake Shareholder will beneficially own
any outstanding shares of Southlake Common Stock.
37
SELECTED CONSOLIDATED FINANCIAL DATA OF CONCHOSOUTHLAKE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
The following tables present selected historical consolidated financial
data of Concho,Southlake as of the dates and for the periods indicated. As noted in the
tables, certain data for the nine months ended September 30, 1993 have been
adjusted to reflect the rescission in November 1993 of an earlier treasury stock
purchase by Concho of 16,267 shares of Concho Common Stock for $344,860. Results of
operations for the ninesix months ended SeptemberJune 30, 19931997 are not necessarily indicative
of results for a full fiscal year. The financial data should be read in
conjunction with the historical consolidated financial statements of ConchoSouthlake
and related notes included elsewhere herein.
(dollars in thousands, except per share data)
Nine Months
Years Ended DecemberSIX MONTHS ENDED
YEAR ENDED DECEMBER 31, Ended
-------------------------------------------------------------- SeptemberJUNE 30,
1988 1989 1990 1991------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- ------------- --------------------- ------------ --------------------------- --------- --------
OPERATING RESULTS:
Net interest income...................income......... $ 2,1291,272 $ 2,0681,522 $ 2,4091,609 $ 2,6311,929 $ 3,0792,175 $ 2,7211,050 $ 1,173
Provision for loan losses............. 590 247 195 120 205 105losses... -- 18 35 68 72 36 36
Noninterest income.................... 634 405 714 861 1,116 857income.......... 482 560 560 632 899 609 302
Noninterest expense................... 2,079 2,235 2,609 2,894 3,054 2,519expense......... 1,408 1,575 1,681 1,781 2,146 1,044 1,121
------- ------- ------- ------- ------- ------- -------
Income before income taxes............ 94 (9) 319 478 936 954
Provisions (benefit)taxes.. 346 489 453 712 856 579 318
Provision for income taxes - - - 47 191 348taxes.. 96 102 111 172 167 143 54
------- ------- ------- ------- ------- ------- -------
Net income before
cumulative effect of
accounting change ................... 94 (9) 319 431 745 606change.......... 250 387 342 540 689 436 264
Cumulative effect of
accounting change
..................................... - - - - - (231)change(1)....... -- (34) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............................income.................. $ 94250 $ (9)353 $ 319342 $ 431540 $ 745689 $ 375436 $ 264
======= ======= ======= ======= ======= ======= =======
Net income per ConchoSouthlake
Common Share before
cumulative effect
of accounting change ...................change....... $ 0.45 $(0.04A)1.32 $ 1.521.98 $ 2.051.71 $ 3.702.56 $ 3.01(2)3.14 $ 2.00 $ 1.16
======= ======= ======= ======= ======= ======= =======
Net income per ConchoSouthlake
Common Share..........................Share............... $ 0.45 $(0.04A)1.32 $ 1.521.80 $ 2.051.71 $ 3.702.56 $ 1.86(2)3.14 $ 2.00 $ 1.16
======= ======= ======= ======= ======= ======= =======
FINANCIAL POSITION:
Assets................................ $66,360 $71,396 $72,089 $80,808 $88,864 $ 89,455(2)
Loans................................. 33,518 33,734 34,627 39,158 42,597 43,364Total assets................ $34,459 $36,507 $38,653 $46,725 $50,944 $47,632 $53,654
Loans, net of allowance
for loan losses............ 12,854 17,006 18,770 21,971 25,975 23,272 25,427
Investment Securities................. 20,006 18,220 21,813 28,697 33,807 34,798
Deposits.............................. 58,953 65,082 65,535 73,665 81,097 80,903
Stockholders' equity.................. 4,006 4,325 4,583 5,088 5,706 6,161(2)securities....... 10,024 10,957 13,531 10,156 10,241 15,088 14,398
Deposits.................... 31,824 33,641 35,101 42,891 46,741 43,475 49,056
Total shareholders' equity.. 1,766 2,192 2,404 3,135 3,923 3,600 4,221
SIGNIFICANT RATIOS:
Return on assets...................... 0.14% -0.01% 0.46% 0.57% 0.89% 0.42%assets............ 0.80% 1.00% 0.90% 1.28% 1.46% 1.87% 1.05%
Return on equity...................... 2.18 -0.21 6.88 9.52 15.93 16.24equity............ 11.43% 14.38% 14.53% 19.64% 19.39% 25.83% 13.12%
Net interest margin................... 3.64 3.48 3.93 3.95 4.15 4.45margin......... 5.08% 5.28% 5.19% 5.70% 5.78% 5.63% 5.81%
Earning assets to assets.............. 89.16 86.93 87.71 88.04 89.08 91.66assets.... 85.28% 84.27% 85.90% 85.40% 85.22% 85.31% 85.72%
Book value per share(1)...............share(2)..... $ 19.149.33 $ 20.5811.19 $ 21.7911.98 $ 24.2115.62 $ 28.30 $30.55(2)18.78 $ 17.23 $ 19.93
(Footnotes appear on following page)
37
_____________________- -------------------------
(1) At period end
(2) As adjusted to reflectof January 1, 1993, Southlake recorded the rescission in November 1993 of an earlier
treasury stock purchase by Concho of 16,267 shares of Concho Common Stock
for $344,860. Without such adjustment, net income per Concho Common Share
before cumulative effect of the
change in accounting change was $3.12, netfor income per
Concho Common Share was $1.93, assets were $89,110, stockholders' equity was
$5,817 and book value per share was $31.38.taxes to comply with Statement of Financial
Accounting Standards No. 109.
(2) At period end.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CONCHOSOUTHLAKE
INTRODUCTION
Included in this review are the following sections:
I. Overview of Operations
II. Net Interest Income
III. Asset Quality
IV. Deposits
V. Return on Equity and Assets
VI. Noninterest Income and Expense and Income Taxes
VII. Liquidity and Interest Rate Sensitivity
VII.VIII. Capital
VIII.IX. Discussion of First NineSix Months of 1993ended June 30, 1997 versus First NineSix Months of
1992
IX. Summary Operating Results for the Three Months and Year Ended December
31, 1993ended
June 30, 1996
This discussion should be read in conjunction with the financial
statements, notes and tables included elsewhere in this Prospectus. Definitions
of terms used in this discussion include:
Average Balances
All average balances are calculated on the basis of daily averages. Interim
period annualizations are based on actual days in the relevant period.
Fully Taxable Equivalent Basis (FTE):
Income on earning assets which is subject to either a reduced rate or zero
rate of income tax has been adjusted to give effect to the statutory federal
income tax rate of 34%. Where appropriate, yield calculations include these
adjustments.
Net Interest Income:
Interest and related fee income on earning assets (FTE basis where
appropriate) reduced by total interest expense on interest bearing liabilities.
Net Interest Margin:
Net interest income on an FTE basis expressed as a percent of average
earning assets.
39
I. OVERVIEW OF OPERATIONS
General
Concho Bancshares, Inc. is a one bank holding company formed in 1979Net income for 1996 was $689 thousand as compared to $540 thousand for 1995
and owns
a majority interest in the Southwest Bank of San Angelo, Texas. Southwest Bank
has a wholly owned subsidiary, SWB Investment Centre, Inc., a registered
investment advisor.
Results of Operations
Concho's earnings increased 35.1%, and 72.9%, in the years ended 1991 and
1992, respectively. 1990's net income of $319,114$342 thousand for 1994. The 1996 increase was a significant increase
over the net loss of $9,399 experienced in 1989. The improved earnings trend isprimarily attributable to
higher net interest income and increases inincreased noninterest income. Increased net
interest income was the primary factor in the 1995 increase over 1994.
On a per share basis, 1996 net income amounted to $3.14 as compared to
$2.56 for 1995. In 1994 Southlake earned $1.71 per share. Return on average
assets for 1996 was 1.46 percent as compared to 1.28 percent for 1995 and .90
percent for 1994. Return on average equity for 1996 was 19.39 percent as
compared to 19.64 percent for 1995 and 14.53 percent for 1994.
Net Interest Income
-------------------
On a taxable equivalent basis, net interest income in 19911996 totaled $2.3
million, an increase of $281 thousand over the 1995 amount, which was 9.2% over 1990$350
thousand higher than 1994. These yearly increases have resulted primarily from a
higher volume of average earning assets and 1992 was 17% over 1991.
Concho'sdeposits. Table 1 provides the
income and average yield earned on earning assets and the interest expense and
average rate paid on interest-bearing liabilities for the years 1994 through
1996. Table 2 presents year-to-year changes in net interest marginsincome and allocates
the changes attributable to variances in volumes and rates. The net interest
margin which measures net interest income as a percentage of average earning
assets amounted to 5.78 percent in 1996 as compared to 5.70 percent in 1995 and
5.19 percent in 1994. The improvement in 1996 is attributed to an increase in
the level of noninterest liabilities to fund earning assets. Growth in average
loans was the primary factor contributing to the 1995 increase over 1994.
Provision for 1990, 1991Loan Losses
-------------------------
In 1996 the provision for loan losses charged against earnings amounted to
$72 thousand as compared to $68 thousand in 1995 and 1992$35 thousand in 1994. Net
charge offs in 1996 amounted to $31 thousand, up from $21 thousand in 1995 but
below the 1994 total of $37 thousand. Nonperforming assets at December 31, 1996,
totaled $599 thousand compared to $592 thousand at the end of 1995 and $325
thousand at the end of 1994. During 1996 nonaccrual loans increased $178
thousand, while foreclosed assets decreased $170 thousand. The 1995 increase
resulted from an increase in foreclosed assets. Table 7 provides the components
of nonperforming assets and Table 8 provides an analysis of the Allowance for
Loan Losses. Management is not aware of any classified loan not properly
classified as nonperforming and considers the Allowance for Loan Losses to be
adequate.
Noninterest Income
------------------
Table 12 presents the detail of noninterest income which amounted to $899
thousand in 1996 as compared to $632 thousand in 1995. Gain on sale of
foreclosed assets in 1996 was the primary factor contributing to the increase
over the prior year total. In 1995, the gain on sale of foreclosed assets and
higher real estate mortgage fees accounted for the increase over the 1994 total.
Noninterest Expense
-------------------
Noninterest expense for 1996 amounted to $2.1 million, which was $365
thousand above the prior year total. In 1995, noninterest expense amounted to
$1.8 million compared to $1.7 million in 1994. Table 12 provides detail of
noninterest expense and the changes from the prior year. An important measure in
determining effectiveness in managing noninterest expenses is efficiency ratio,
which is calculated by dividing the noninterest expense by the sum of net
interest income on a tax-equivalent basis and noninterest
40
income. Southlake's efficiency ratios were 3.93%, 3.95%66.56 percent, 66.55 percent and
4.15%,74.53 percent in 1996, 1995 and 1994, respectively.
AssetIncome tax expense for 1996 totaled $167 thousand as compared to $172
thousand for 1995 and Liability$111 thousand for 1994. Southlake's effective tax rates on
pretax income were 19.5 percent, 24.2 percent and 24.5 percent, respectively,
for the years 1996, 1995 and 1994. The lower effective tax rate for 1996
resulted from an increase in tax-exempt investment securities.
Balance Sheet Review
Total assets at the end of 1996 were $50.9 million, up $4.2 million, or 9
percent, from the December 31, 1992 amounted1995, total. During 1996, total assets averaged
$47.2 million as compared to $88,864,346, representing$42.0 million during 1995.
Investment Securities
---------------------
At December 31, 1996, the investment securities portfolio totaled $10.2
million, virtually unchanged from the prior year end. At December 31, 1996,
securities with an amortized cost of $7.3 million were classified as securities
held-to-maturity and securities with a 10%
increase over the year end totalmarket value of $80,808,176 in 1991.$2.9 million were
classified as securities available-for-sale. Total investment securities including federal funds sold were $36,356,858 at
year end 1992,
reflecting a 15% growth over 1991. Investments as a percentyear-end 1996 included structured notes with an amortized cost of total assets at
year's end were 39.1%$200 thousand
and 40.9% asan approximate market value of 1991$199 thousand. Tables 3 and 1992. Loans net4 provide detail
relating to the maturities and fair values of reserves and
unearned interest grew by 8.8% in 1992 to $42,596,605. The growth was
concentrated in commercial real estate loans. Total deposits increased by
$7,430,444 to end 1992 at $81,095,173. Transaction account balances grew by
$7,738,459 while time deposits declined by $308,015.
Nonperforming assets totaled $638,371the investment portfolio at
December 31, 1992, a total1996 and 1995.
Loans
-----
Total loans at December 31, 1996, amounted to $26.2 million, an increase of
$4.0 million, or 18.0 percent, from year-end 1995. As shown in Table 5,
commercial loans accounted for approximately half of the 1996 increase. The loan
totals reflect loans made to businesses and individuals located in the primary
market served by Texas National. Loans in the real estate mortgage
classification generally provide for repricing intervals that was
$225,974 belowprotect Texas
National from the rate risk inherent in long term fixed rate mortgages.
Deposits
--------
Deposits, which represent the primary source of funding, totaled $46.7
million at the end of 1996. When compared to the previous year-end balance.
40total,
deposits increased $3.9 million, or 9.0 percent. 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
Asset and Liability Management
Interest Rate Risk
------------------
Southlake manages its assets and liabilities to control the exposure of its
net interest income and capital to risks associated with interest rate changes
to achieve growth in net interest income. Texas National has an asset liability
committee which monitors interest rate risk and compliance with investment
policies. Interest-sensitivity gap and simulation analysis are among the ways
that Texas National tracks interest rate risk. From time to time it may be
necessary for Texas National to reallocate investable funds or make pricing
adjustments to better position itself for interest rate movements. As presented
in Table 13, the interest-sensitivity gap analysis as of December 31, 1996,
reflects a slight positive repricing gap in the one-year horizon which protects
Texas National from significant interest rate risk. Southlake uses no off-
balance-sheet financial instruments to manage interest rate risk.
41
TableLiquidity
---------
Liquidity is the ability of Southlake to meet cash demands as they arise.
Such needs can develop from loan demand or deposit withdrawals. 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 Federal funds credit lines
with correspondent banks. Given the strong core deposit base and relatively low
loan deposit ratio maintained at Texas National, Southlake management considers
the current liquidity position to be adequate.
Parent Company Funding Sources and Dividends
Southlake's ability to service debt has been dependent on funds derived
from Texas National. These funds historically have been produced by intercompany
dividends. At December 31, 1996, approximately $1.3 million was available for
the payment of intercompany dividends by Texas National without the prior
approval of regulatory agencies. Due to previous debt service requirements,
Southlake has not paid dividends to shareholders.
42
II. NET INTEREST INCOME
TABLE 1 - Average Daily Balance Sheets AVERAGE BALANCES AND AVERAGE YIELDS AND RATES (000'S OMITTED)--
ConchoSOUTHLAKE
The following table shows Concho'sSouthlake consolidated balances of assets,
liabilities and capital computed principally on an average daily basis for the
three years ended December 31, 1992 (000's omitted):
Year Ended December 31,
------------------------------
ASSETS 1990 1991 1992
- --------------------------- ------- ------------ -------
Cash and due from banks $ 3,041 $ 3,407 $ 3,801
Interest-bearing deposits in banks 2,089 41 --
Federal funds sold 2,090 2,883 2,767
Taxable investment securities 21,538 25,952 29,701
Tax-exempt investment securities -- -- --
Net loans 35,558 37,682 41,717
Bank premises and equipment 3,277 3,168 3,167
Other assets 2,270 2,463 2,124
------- ------- -------
Total Assets $69,863 $75,596 $83,277
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------
Non-interest-bearing demand deposits $ 8,095 $ 8,284 $11,168
Interest-bearing demand deposits 24,769 26,283 30,007
Time deposits 30,516 34,127 35,982
------- ------- -------
Total deposits 63,380 68,694 77,157
Federal funds purchased and other 125 1,258 277
short-term borrowings
Dividends payable 5 5 5
Long-term debt 1,280 -- 723
Other liabilities 434 616 411
Shareholders' equity 4,639 5,023 5,397
------- ------- -------
Total Liabilities and Equity $69,863 $75,596 $83,277
======= ======= =======
41
[II. NET INTEREST INCOME
TABLE 2 - INCOME AVERAGE AND YIELD ON INTEREST-EARNING ASSETS AND EXPENSE AND
AVERAGE RATE ON INTEREST-BEARING LIABILITIES -- CONCHO
The following table shows the
interest income and average yield on interest-earning assets and interest
expense and average rate on interest-bearing liabilities for the three years
ended December 31, 1992,1996, (000's omitted). The calculations of average yields and
rates are based upon the average daily balances in Table 1.balances. Non-accrual loans are included
in the average daily balance of loans and any interest income recognized on a
cash basis is included in interest income on loans:
1990 1991 1992
----------------- ----------------- -----------------
INCOME YIELD INCOME YIELD INCOME YIELD
(EXPENSE) (RATE) (EXPENSE) (RATE) (EXPENSE) (RATE)
--------- ------ --------- ------ --------- ------
Federal funds sold $ 187 8.95% $ 221 7.67% $ 120 4.34%
Interest-earning deposits 197 9.43 6 8.98 -- --
Taxable investment securities 1,924 8.93 2,158 8.32 1,929 6.49
Tax-exempt investment
securities (1) -- -- -- -- -- --
Net loans (1) 4,129 11.61 3,921 10.41 3,818 9.15
------ ----- ------ ----- ------ ----
Interest income 6,437 10.51 6,306 9.47 5,867 7.91
Interest-bearing deposits 3,869 7.00 3,553 5.88 2,665 4.04
Federal funds purchased and other
short-term borrowings 11 8.8 121 9.62 14 5.05
Long-term debt 148 11.56 -- -- 109 9.50
------ ----- ------ ----- ------ ----
Interest expense 4,028 7.11 3,674 5.96 2,788 4.14
------ ----- ------ ----- ------ ----
Net interest income and spread $2,409 3.40% $2,632 3.51% $3,079 3.77%
====== ===== ====== ===== ====== ====
Net interest yield (2) 3.93% 3.95% 4.15%
===== ===== ====
- -----------------------
(1) Income and yield on tax-exempt investment securities and tax-exempt loans
have been adjusted to a tax-equivalent basis based upon the Federal income
tax rate of 34%, adjusted for disallowed interest deductions in accordance
with Federal income tax regulations.
(2) The net yield on interest-earning assets is computed by dividing net
interest income by total interest-earning assets.
42
TABLE 3 - ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE -- CONCHO
The following table sets forth the dollar amount of increase (decrease) in
interest income resulting from changes in the volume of interest-earning assets
and interest-bearing liabilities and from changes in yields and rates (000's
omitted):
1991 Compared to 1990 1992 Compared to 1991
---------------------------- ---------------------------------------
Volume Rate Total Volume Rate Total1996 1995 1994
--------------------------- --------------------------- --------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- ------ ----------- ----------- ------------------------- -------- -------- ------- ------- -------- -------
Federal funds sold and
interest- earning
deposits ................
ASSETS
Short-term investments..... $ (120)3,854 $ (37)215 5.58% $ (157)3,268 $ (12)193 5.91% $ (95)3,975 $ (107)168 4.23%
Taxable investment
securities .............. 394 (160) 234 312 (541) (229)securities................ 5,944 329 5.53 6,552 365 5.57 7,377 399 5.41
Tax-exempt investment
securities(1) ........... -- -- -- -- -- --
Loans(1)............. 6,909 441 6.38 5,242 338 6.45 4,046 250 6.18
Loans (2).................. 244 (452) (208) 420 (523) (103)
---- ----- ----- ----23,499 2,426 10.32 20,831 2,208 10.60 17,186 1,762 10.25
------- ------- ------- ------ Interest income........... 518 (649) (131) 720 (1,159) (439)
Time deposits............. 361 (677) (316) 326 (1,214) (888)
Federal funds purchased
and other short-term
borrowings .............. 100 10 110 (94) (13) (107)
Long-term debt............ (148) -- (148) 109 -- 109
---- ----- ----- ---- ------- ------
Total earning assets.. 40,206 3,411 8.48 35,893 3,104 8.65 32,584 2,579 7.91
Cash and due from banks.... 3,373 3,000 2,579
Bank premises and equipment 1,929 1,729 1,541
Other assets............... 1,898 1,587 1,388
Allowance for loan losses.. (229) (180) (160)
------- ------- -------
Total assets.......... $47,177 $42,029 $37,932
======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest expense.......... 313 (667) (354) 341 (1,227) (886)
---- ----- ----- ----bearing deposits.. $28,276 $ 1,060 3.75% $26,414 $1,001 3.79% $23,913 $ 831 3.48%
Short-term borrowings...... 115 7 6.09 28 2 7.14
Long-term debt............. 277 26 9.70 536 52 9.70 536 52 9.70
------- ------- ------- ------ ------- ------
Total interest bearing
liabilities.......... 28,553 1,086 3.80 27,065 1,060 3.92 24,477 885 3.62
Noninterest-bearing
deposits.................. 14,748 11,963 10,946
Other liabilities.......... 323 252 156
------- ------- -------
Total liabilities..... 43,624 39,280 35,579
Shareholders' equity....... 3,553 2,749 2,353
------- ------- -------
Total liabilities and
shareholders' equity.. $47,177 $42,029 $37,932
======= ======= =======
------- ------ ------
Net interest income ...... $205income........ $ 18 $ 223 $379 $ 68 $ 4472,325 $2,044 $1,694
======= ====== ======
Rate Analysis
Interest income/earning
assets.................. 8.48% 8.65% 7.91%
Interest expense/earning
assets.................. 2.70 2.95 2.72
---- ----- ----- ---- ------- ----------
Net yield on
earning assets..... 5.78% 5.70% 5.19%
==== ==== ====
- -----------------------------
(1) IncomeComputed on tax-exempt investment securities and tax-exempt loans has been
adjusted to a tax-equivalent basis based upon the Federal incomeassuming a marginal tax rate of 34%, adjusted for disallowed interest deductions.
(2) Nonaccrual loans are included in accordance with
Federal income tax regulations.
Note: Volume/rate variances (changes in volume times changes in rate) have been
allocated to amounts attributable to changes in volume and to changes in
rates in proportion to the amounts directly attributable to those changes.loans.
43
TABLE 42 - CHANGES IN INTEREST INCOME AND INTEREST EXPENSE (000'S OMITTED)--
SOUTHLAKE
1996 COMPARED TO 1995 1995 COMPARED TO 1994
--------------------------------- ---------------------------------
CHANGE ATTRIBUTABLE TO TOTAL CHANGE ATTRIBUTABLE TO TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
------------- --------- ------- ------------- --------- -------
Short-term investments..... $ 35 $(13) $ 22 $(30) $ 55 $ 25
Taxable investment
securities................. (34) (2) (36) (45) 11 (34)
Tax-exempt investment
securities (1)............. 107 (4) 103 74 14 88
Loans...................... 283 (65) 218 374 72 446
---- ---- ---- ---- ---- ----
Interest income............ 391 (84) 307 373 152 525
---- ---- ---- ---- ---- ----
Interest bearing deposits.. 71 (12) 59 87 83 170
Short-term borrowings...... (7) - (7) 6 (1) 5
Long-term debt............. (25) (1) (26) - - -
Interest expense........... 38 (12) 26 93 82 175
---- ---- ---- ---- ---- ----
Net interest income........ $353 $(72) $281 $280 $ 70 $350
==== ==== ==== ==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 34%.
TABLE 3 - COMPOSITION OF INVESTMENT SECURITIES -- CONCHO(000'S OMITTED)--SOUTHLAKE
The table below sets forth the composition of investment securities at the dates
indicated:
AT DECEMBER 31,
-------------------------------------
1990 1991 1992
----------- ----------- ---------------------------------
1996 1995 1994
------ ------ ------
Held-to-Maturity at Amortized Cost
- ----------------------------------
U.S. Treasury.............. $ 3,029,425 $ 5,100,869 $17,511,071Treasury obligations and obligations of
U.S. Government agencies... 11,764,443 13,320,280 12,211,810
Other...................... 7,019,625 10,275,665 4,083,940
----------- ----------- -----------
$21,813,493 $28,696,814 $33,806,821
=========== =========== ===========corporations and agencies........ $ 308 $ -- $ 250
Obligations of states and political subdivisions.. 7,047 6,358 4,535
Mortgage-backed securities........................ -- -- --
------ ------ ------
Total debt securities............................ 7,355 6,358 4,785
Other securities.................................. -- -- --
------ ------ ------
$7,355 $6,358 $4,785
====== ====== ======
AT DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
Available-for-Sale at Fair Value
- --------------------------------
U.S. Treasury obligations and obligations of
U.S. Government corporations and agencies........ $2,775 $3,688 $8,636
Obligations of states and political subdivisions.. -- -- --
Mortgage-backed securities........................ -- -- --
------ ------ ------
Total debt securities............................ 2,775 3,688 8,636
Other securities.................................. 111 111 111
------ ------ ------
$2,886 $3,799 $8,747
====== ====== ======
44
TABLE 54 - MATURITY AND YIELD ONYIELDS OF DEBT SECURITIES -- CONCHOHELD AT DECEMBER 31, 1996--
SOUTHLAKE
The following table shows the maturities of investment securities at December
31, 19921996 and the weighted average yields (for tax exempt obligations on a fully
taxable basis assuming a 34% tax rate adjusted for disallowed interest
deductions in accordance with Federal income tax regulation) of such securities:securities
(000's omitted):
MATURING
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS ----------------------- ------------------- ------------------ ---------------------------TOTAL
--------------- ----------------- ---------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD -----------AMOUNT YIELD
------ ---------------- ------ -------- ------- ------------- ------------- ------ ----- ------ ----- ------ -----
Held-to-Maturity - at
- ---------------------
Amortized Cost
--------------
U.S. Treasury $2,545,219 5.08% 14,965,852 5.53%obligations and
obligations of U.S. Government
corporations and agencies $ -- --308 5.50% $ -- --% U.S. Government agencies 6,236 11.42 893,425 2.96 325,741 6.92 10,986,409 6.75
Other 1,145,216 4.60$ -- --% $ -- --% $ 308 5.50%
Obligations of states and
political subdivisions 1,816 6.42 4,521 6.31 710 7.37 -- -- 7,047 6.45%
Mortgage-backed securities -- -- -- -- 2,938,724 6.74
---------- ------- ------------ -- -- -- -- --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $2,124 6.29% $4,521 6.31% $ 710 7.37% $ -- --% $7,355 6.41%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
MATURING
---------------------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS TOTAL
--------------- ----------------- ---------------- --------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- --------------- ----- ------ ----- ------ ----- ------ -----
Available-for-Sale
- ------------------
at Fair Value
-------------
U.S. Treasury obligations and
obligations of U.S. Government
corporations and agencies $ 750 6.05% $2,025 6.39% $ -- --% $ -- --% $2,775 6.30%
Obligations of states and
political subdivisions -- -- -- -- -- -- -- -- -- --
Mortgage-backed securities -- -- -- -- -- -- -- -- -- --
------ ---- ------------ ------ $3,696,671 4.94% $15,859,277 5.39%---- ------ ---- ------ ---- ------ ----
Total $ 325,741 6.92%750 6.05% $2,025 6.39% $ 13,925,133 6.75%
========== ======= ========== ===== =========-- --% $ -- --% $2,775 6.30%
====== ==== ============ ====== ==== ====== ==== ====== ==== ====== ====
45
TABLE 65 - COMPOSITION OF LOANS -- CONCHOLOANS--SOUTHLAKE
The table below sets forth the amount of loans outstanding at the end of the
years indicated, according to type of loan (000's omitted):
1988 1989 1990 1991DECEMBER 31,
-------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Real estate loans:
Construction.................... $ 2,264 $ 1,400 $ 1,827 $ 1,250 $ 1,659
Mortgage........................ 7,834 8,928 8,471 8,307 7,886
Commercial, financial, and agricultural..................... 17,213 18,447 15,650 20,380 22,333
Installment loans to individuals.. 6,820 8,231 8,943 9,574 11,343agricultural.. $ 7,773 $ 5,430 $ 5,285 $ 4,499 $ 2,248
Real estate--construction................ 5,981 5,170 3,778 4,581 2,513
Real estate--mortgage.................... 8,034 7,440 6,651 5,149 4,717
Consumer................................. 4,431 4,135 3,212 2,936 3,532
------- ------- ------- ------- -------
Total loans................... $34,131 $37,006 $34,891 $39,511 $43,221$26,219 $22,175 $18,926 $17,165 $13,010
======= ======= ======= ======= =======
TABLE 76 - LOAN MATURITIES AND INTEREST SENSITIVITY TO CHANGES IN INTEREST RATES -- CONCHOAT DECEMBER 31, 1996--
SOUTHLAKE
The amounts of total loans (excluding real estate mortgages and installment
consumer loans) outstanding as of December 31, 1992,1996, which, based on remaining
scheduled repayments of principal, are due in (i) one year or less, (ii) more
than one year but less than five years, and (iii) more than five years, are
shown in the following table. The amounts due after one year are classified
according to the sensitivity to changes in interest rates. Aggregate maturities
of loan balances which are due:
44
After one year
In one year but within AfterOVER ONE YEAR
ONE YEAR THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -------
Commercial, financial and agricultural............ $2,425 $5,348 $-- $ 7,773
Real estate - construction........................ 5,650 331 -- 5,981
------ ------ --- -------
$8,075 $5,679 $-- $13,754
====== ====== === =======
MATURITIES
AFTER
ONE YEAR
----------
Loans with fixed interest rates................... $5,054
Loans with floating or less five years five years
------------adjustable interest rates.. 625
------
$5,679
======
46
III. ASSET QUALITY
TABLE 7 - NONPERFORMING ASSETS (000'S OMITTED)--SOUTHLAKE
AT DECEMBER 31,
--------------------------------------
PAST DUE AND NON-ACCRUAL LOANS: 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Nonaccrual loans........................... $ 178 $ -- $ -- $ -- $ 115
Loans past due 90 days or more............. -- 1 6 2 --
Restructured loans......................... -- -- -- -- --
----- ----- ----- ----- -----
Nonperforming loans...................... 178 1 6 2 115
Foreclosed assets.......................... 421 591 319 415 352
----- ----- ----- ----- -----
Total nonperforming assets............... $ 599 $ 592 $ 325 $ 417 $ 467
===== ===== ===== ===== =====
As a % of loans and foreclosed properties.. 2.25% 2.60% 1.69% 2.37% 3.49%
LOAN CONCENTRATIONS
As of December 31, 1996, there were no concentrations of loans exceeding 10%
to any industry segment except as disclosed in Table 5 herein.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
ALLOCATION ALLOCATION ALLOCATION ALLOCATION ALLOCATION
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
---------- ---------- ---------- ---------- ----------
Real estate construction..........................- construction.............. $ 1,275,17256 $ 383,51947 $ --31 $ 42 $ 30
Real estate - mortgage.................. 75 68 55 47 57
Commercial, financial and agricultural loans...... 12,598,033 6,632,548 3,102,007
Loans with maturities after one year for which:
Interest rates are fixed or predetermined....... $15,293,010
Interest rates are floating or adjustable....... 18,222agricultural.. 72 50 44 41 27
Consumer................................ 41 38 26 27 43
---------- $15,311,232
===========---------- ---------- ---------- ----------
$ 244 $ 203 $ 156 $ 158 $ 157
========== ========== ========== ========== ==========
ALLOCATION AS PERCENT OF TOTAL LOANS
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
Real estate - construction.............. 22.8% 23.3% 20.0% 26.7% 19.3%
Real estate - mortgage.................. 30.6 33.6 35.1 30.0 36.3
Commercial, financial and agricultural.. 29.6 24.5 27.9 26.2 17.3
Consumer................................ 16.9 18.6 17.0 17.1 27.1
---------- ---------- ---------- ---------- ----------
100.0% 100.0% 100.0% 100.0% 100.0%
========== ========== ========== ========== ==========
III. ASSET QUALITY47
TABLE 8 - RISK ELEMENTS -- CONCHO
PAST DUE AND NON-ACCRUAL LOANS: 1988 1989 1990 1991 1992
---------- ----------- ---------- --------- --------
Non-accrual loans................................. $445,834 $237,829 $643,157 $864,345 $638,371
Loans 90+ days past due........................... 153,343 951,318 240,321 454,111 145,105
Restructured loans................................ 753,233 821,122 1,073,088 -- --
Interest accrued and lost on non-accrual loans ... 60,411 28,988 101,317 72,867 96,044
Interest actually received on non-accrual loans .. -- -- -- -- --
Loans in serious doubt to be repaid as of December 31, 1993 - $ 317,931
==========
Outstanding loan & farm & agricultural loans: 3.80% Percentage of total loans
=====
At December 31, 1988, 1989, 1990, 1991, and 1992, the allowance for loan losses
has been allocated within the categories of loans set forth below, according to
the amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred. The amount of such components and the ratio of the
corresponding loan amounts to total loans outstanding are as follows:
RATIO OF LOAN
ALLOWANCE AMOUNT TO TOTAL
DECEMBER 31, 1992 AMOUNT LOANS OUTSTANDING
- ------------------ --------- -----------------
Constructions loans $ 17,101 3.84%
Mortgage loans 85,592 18.25
Commercial, financial and agricultural loans 332,483 51.67
Installment loans to individuals 163,558 26.24
-------- -----
$598,734 100.00%
======== ======
December 31, 1991
- ------------------
Construction loans $ 14,677 3.16%
Mortgage loans 100,902 21.03
Commercial, financial and agricultural loans 304,631 51.58
45
Installment loans to individuals 126,929 24.23
-------- ------
$547,139 100.00%
======== ======
December 31, 1990
- ------------------
Construction loans $ 16,396 5.24%
Mortgage loans 88,359 24.28
Commercial, financial and agricultural loans 312,281 44.85
Installment loans to individuals 92,981 25.63
-------- ------
$510,017 100.00%
======== ======
December 31, 1989
- ------------------
Construction loans $ 8,285 3.78%
Mortgage loans 38,663 24.12
Commercial, financial and agricultural loans 423,529 49.86
Installment loans to individuals 41,654 22.24
-------- ------
$512,131 100.00%
======== ======
December 31, 1988
- ------------------
Construction loans $ 8,572 6.63%
Mortgage loans 43,367 22.95
Commercial, financial and agricultural loans 497,693 50.44
Installment loans to individuals 62,761 19.98
-------- ------
$612,393 100.00%
======== ======
46
TABLE 9 - LOAN LOSS EXPERIENCE ANDANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES -- CONCHO(000'S OMITTED)--SOUTHLAKE
The following table summarizes the daily average amount of net loans
outstanding; changes in the allowance for loan losses arising from loans charged
off, and recoveries on loans previously charged off, by loan category; additions
to the allowance which have been charged to operating expense; and the ratio of
net loans charged off to average loans outstanding:
1988 1989 1990 19911996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -------------------- -------- -------- -------- --------
Daily average amount of net loans outstanding ............ $33,185,480 $33,543,512 $35,557,501 $37,682,141 $41,716,845
=========== =========== =========== =========== ===========
Balance of allowance for loan losses at beginning of
period ..................................................January 1,...... $ 505,264203 $ 612,393156 $ 512,131158 $ 510,016157 $ 547,139
Loans charged off
- ------------------207
Charge-offs:
Commercial, financial and
agricultural.................... 463,593 364,648 267,039 72,000 127,696
Loans to individuals...................................... 39,625 10,905 14,365 17,620 53,260agriculture.............. 15 15 22 34 43
Consumer.................. 25 15 19 8 18
All other loans........................................... 13,694 -- 12,387 3,225 --
----------- ----------- ----------- ----------- -----------
Total loans charged off................................... 516,912 375,553 293,791 92,845 180,956
Recoveries of loans previously charged off
- --------------------------------------------
Commercial, financial and agricultural.................... 32,263 24,058 95,095 6,946 26,117
Loans to individuals...................................... 1,778 4,723 1,581 3,022 1,434
All other loans...........................................other................. -- -- -- -- --
----------- ----------- ----------- ----------- ------------------- -------- -------- -------- --------
Total recoveries.......................................... 34,041 28,791 96,676 9,968 27,551
----------- ----------- ----------- ----------- -----------
Net loans charged off..................................... 482,871 346,762 197,115 82,877 153,405
Additions to allowance charged to operating expense (1)... 590,000 246,500 195,000 120,000 205,000
----------- ----------- ----------- ----------- -----------off.... 40 30 41 42 61
Recoveries:
Commercial, financial and
agriculture.............. 4 8 3 11 8
Consumer.................. 5 1 1 14 3
All other................. -- -- -- -- --
-------- -------- -------- -------- --------
Total recoveries........... 9 9 4 25 11
-------- -------- -------- -------- --------
Net charge-offs............ 31 21 37 17 50
Provision for loan losses.. 72 68 35 18 --
-------- -------- -------- -------- --------
Balance at end of period..................................December 31,.... $ 612,393244 $ 512,131203 $ 510,016156 $ 547,139158 $ 598,734
=========== =========== =========== =========== ===========
Ratio of net charge offs to the daily 157
======== ======== ======== ======== ========
Loans at year-end.......... $ 26,219 $ 22,175 $ 18,926 $ 17,165 $ 13,010
Average loans.............. 23,499 20,831 17,186 15,146 13,882
Net charge-offs/average
amount of
loans outstanding ....................................... 1.46% 1.03% 0.55%loans..................... 0.13% 0.10% 0.22% 0.37%
=========== =========== =========== =========== ===========0.11% 0.36%
Allowance for loan
losses/year-end loans..... 0.93 0.92 0.82 0.92 1.21
Allowance for loan
losses/nonperforming
assets.................... 40.73 34.29 48.00 37.89 33.62
- ----------------------------
(1) Additions to the allowance were based primarily on historical experience,
current economic conditions, and the condition of the loan portfolio at
year-end.
IV. DEPOSITS
TABLE 109 - COMPOSITION OF DEPOSITS -- CONCHODEPOSITS--SOUTHLAKE
The following table presents the average daily amount and the average rate
paid on deposits (000's omitted):
47
1990 1991 1992
--------------- ----------------- --------------
AMOUNT1996 1995 1994
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE AMOUNTBALANCE RATE AMOUNTBALANCE RATE
------- ------ ------- -------- ------ ------------- ------- ------- -------
Noninterest bearing demand
deposits $ 8,095 $ 8,284 $ 9,568
Interest bearing$14,748 --% $11,963 --% $10,946 --%
Interest-bearing demand
deposits
20,359 6.61% 21,708 5.06% 23,170 3.27%Interest-bearing checking 4,572 1.57 4,237 1.86 3,882 1.91
Savings and money market
accounts 4,410 4.97 4,575 5.01 6,837 3.3312,021 2.99 12,166 3.15 12,932 3.53
Time deposits Less thanunder
$100,000 17,850 21,590 23,1185,868 5.27 5,570 5.10 4,781 4.41
Time deposits of $100,000
or more 12,666 12,537 12,8645,815 5.50 4,441 5.72 2,318 3.88
------- ------- -------
Total timeinterest-bearing
deposits 30,516 7.55 34,127 6.52 35,982 4.6728,276 3.75 26,414 3.79 23,913 3.48
------- ------- -------
Total deposits $63,380 $68,694 $75,55743,024 $38,377 $34,859
======= ======= =======
48
TABLE 1110 - REMAINING MATURITY DISTRIBUTION OF TIME CERTIFICATESDEPOSITS OF $100,000 OR MORE --
CONCHO
Time certificates of $100,000 or more outstanding at December 31, 1992 will
mature as follows (000's omitted):TIME DEPOSITS
(000'S OMITTED)--SOUTHLAKE
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
Under 3three months $ 5,910
3 to 6$3,724
Over three through
twelve months 3,157
6 to 121,395
Over twelve months 2,841
Over 12 months 1,100
-------
$13,008
=======875
------
$5,994
======
V. RETURN ON EQUITY AND ASSETS
TABLE 1211 - RETURN ON EQUITY AND ASSETS -- CONCHO
The ratio of net earnings to average shareholders' equity and daily average
total assets and certain other ratios are presented below:ASSETS--SOUTHLAKE
Year ended December 31,
----------------------------
1990 1991 1992
-------- -------- ---------------------------------------
1996 1995 1994
------ ------ ------
Percentage of net earnings
to:
Average total assets 0.46% 0.57%1.46% 1.28% 0.90%
Average shareholders'
equity 6.92 8.62 12.7319.39 19.64 14.53
Percentage of dividends declared per common
share to earnings per common share 16.39 12.12 7.02-- -- --
Percentage of average shareholders' equity
to daily average total assets 6.64 6.64 7.067.53 6.54 6.20
48
VI. NONINTEREST INCOME AND EXPENSE AND INCOME TAXES
Noninterest income in 1992 was $1,118,654, representing a 29.8% improvement
over 1991. The consistent rise in noninterest income is due primarily to
increases in service charge revenues and from improved volumes in the subsidiary
bank's investment center. Service charge income increased from $448,156 in 1990
to $517,572 in 1991 and $630,855 in 1992 and resulted from volume and pricing
increases.
The reserve for loan losses is reviewed by management and the board of
directors on a monthly basis and maintained at levels determined by analyzing
the risk of losses in the loan portfolio. This risk is calculated by rating
individual loans and applying quantitative and subjective considerations to
arrive at an adequate level of reserves. As the quality of the loan portfolio
improved, the provision dropped from $195,000 in 1990 to $120,000 in 1991. The
provision rose to $205,000 in 1992 due to an increase in consumer loan losses.
The reserve balance at year end 1992 totalling $598,734 represents 1.41% of net
loans as compared to 1.40% in 1991 and 1.47% in 1990.
Noninterest expenses totalled $3,053,852 in 1992 for a 5.5% increase over the
$2,893,116 incurred in 1991. The increase reflects a $152,107 increase in
salaries and a $50,413 increase in employee benefits. Employee benefits rose
principally due to a $8,187 increase in matching of the 401(k) pension plan and
a $25,000 contribution to the profit sharing plan. FDIC deposit insurance
expense in 1992 amounted to $165,847 as compared to $135,700 in 1991 and $73,877
in 1990. These increases reflect the higher rates assessed by the FDIC. In 1991,
a non-recurring expense of $50,000 was incurred from a settlement of a disputed
claim by the Internal Revenue Service resulting from the failure by a bank
customer to pay federal withholding taxes. A consulting firm, employed in 1990
to make recommendations regarding profit improvement opportunities, completed
its work in 1992 resulting in a one-time expense of $69,975. There was a
non-recurring gain of $67,500 in 1992 due to the resignation of a director and
the corresponding cancellation of the director's deferred compensation plan.
Concho has benefited from a tax loss carryforward in each of the years
discussed. The benefits, which amounted to $108,477, $164,469, and $67,727 in
1990, 1991 and 1992, respectively, were fully exhausted in 1992.TABLE 12 - NONINTEREST INCOME AND NONINTEREST EXPENSE -- CONCHOEXPENSE--SOUTHLAKE
NONINTEREST INCOME (000'S OMITTED):
1990 1991 1992
------ ------ ------INCREASE INCREASE
1996 (DECREASE) 1995 (DECREASE) 1994
---- ---------- ---- ---------- ----
Noninterest income
Service chargesfees on deposit
accounts.accounts.................. $366 $ 4489 $357 $ 5184 $353
Gain on sale of assets..... 247 226 21 (12) 33
Other:
Miscellaneous income.... 115 63 52 26 26
Real estate mortgage
fees................... 100 17 83 58 25
Merchant credit card
fees................... 44 (54) 98 (4) 102
Other service fees...... 27 6 21 - 21
---- ---- ---- ---- ----
286 32 254 80 174
---- ---- ---- ---- ----
$899 267 $632 $ 631
Securities gains (losses)........... (48) (5) (85)
Other............................... 316 349 573
------ ------ ------
Total noninterest income.......... 716 862 1,119
------ ------ ------
Noninterest expense
Salaries and related costs.......... 1,195 1,198 1,401
Net occupancy....................... 282 303 318
Equipment expense................... 113 114 125
Professional services............... 110 249 218
Data processing..................... 105 115 118
Stationery and supplies............. 65 62 66
Business development................ 89 91 62
Foreclosed asset expense............ 170 249 181
Other expense....................... 480 512 565
------ ------ ------
Total noninterest expense......... 2,609 2,893 3,054
------ ------ ------
Net noninterest expense........... 1,893 2,031 1,935
Net noninterest expense as percent
of average assets ................ 2.71% 2.69% 2.32%72 $560
==== ==== ==== ==== ====
49
VII. LIQUIDITY AND INTEREST RATE SENSITIVITY
The cash flow requirements of Concho are satisfied through lease income and
dividends from the bank subsidiary. The bank subsidiary maintains a high level
of liquidity within its asset mix by continually monitoring maturing investment
securities and loans. The bank also has a $1,000,000 unfunded line of credit for
short term liquidity needs.
Through active asset/liability management, interest rate risk is controlled to
minimize the impact of fluctuating interest rates on earnings and the market
values of assets. Although interest rates changed significantly from 1990 to the
end of 1992, Concho's net interest margin remained very stable. This stability
is attributable to successfully matching volumes of assets and liabilities in
similar maturities.
ASSET AND LIABILITY MATURITY REPRICING SCHEDULENONINTEREST EXPENSE (000'S OMITTED):
$(thousands)
DECEMBER 31, 1992
----------------------------------------------------------------------------------------------
RATE-SENSITIVE WITHIN
----------------------------------------------------------------------------------------------
FLOATING 1-30 31-60 61-90 91-180 181-365 1-5 OVER
RATE DAYS DAYS DAYS DAYS DAYS YEARS 5 YEARS TOTAL
--------- -------- -------- -------- -------- -------- ------- -------INCREASE INCREASE
1996 (DECREASE) 1995 (DECREASE) 1994
------ ---------- ------ ---------- ------
Salaries................... $ 814 $ 128 $ 686 $ 103 $ 583
Payroll taxes.............. 49 6 43 4 39
KSOP....................... 16 (40) 56 6 50
Medical and other benefits. 43 10 33 4 29
------ ------ ------ ------ ------
922 104 818 117 701
Net occupancy.............. 91 6 85 1 84
Equipment expense.......... 136 22 114 13 101
Other:
Advertising and business
development.............. 230 163 67 (13) 80
Other miscellaneous....... 145 51 94 (7) 101
Outside data processing... 114 24 90 10 80
Director fees............. 76 1 75 (5) 80
Credit card and ATM....... 73 (62) 135 (9) 144
Outside operations........ 69 15 54 7 47
Printing and supplies..... 61 29 32 (3) 35
Postage and courier....... 51 2 49 7 42
Legal and accounting fees. 49 19 30 6 24
Insurance................. 34 7 27 (5) 32
Other real estate expense. 33 9 24 9 15
Correspondent bank service
fees..................... 30 8 22 2 20
Communications............ 30 6 24 4 20
FDIC insurance expense.... 2 (39) 41 (33) 74
------ ------ ------- ------- -------
997 233 764 (30) 794
------ ------ ------- ------- -------
Total Noninterest Expense $2,146 $ 365 $ 1,781 $ 101 $ 1,680
====== ====== ======= ======= =======
As a % of Tax Equivalent
Net Revenue 66.56% 66.55% 74.53%
VII. LIQUIDITY AND INTEREST RATE SENSITIVITY
TABLE 13 - INTEREST SENSITIVITY ANALYSIS--SOUTHLAKE (000'S OMITTED)
WITHIN 3 4 - 6 7 - 12 1 - 5 OVER 5
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
-------- ------ ------ ------- ------- -------
ASSETS
Interest-earning assets:
Total loans............................ $13,143 $2,993 $2,606 $ 7,477 $ -- $26,219
Investment securities.................. 701 175 1,999 6,545 711 10,131
Short-term investments. $ 2,550 $ $ $ $ $ $ $ $ 2,550
Investment securities.. 9,117 1,378 222 212 576 1,302 15,866 5,134 33,807
Loans:
Commercial........... 14,210 2,632 1,127 1,451 2,871 2,679 6,542 31,512
R/E Construction..... 1,035 35 113 141 297 628 475 1,357 4,081
Consumer............. 4,102 145 127 125 367 671 914 1,151 7,602investments................. 7,000 -- -- -- -- 7,000
------- -------- ------- ------- -------- ------- -------- ------- -------
Total loans........ 19,347 2,812 1,367 1,717 3,535 3,978 7,931 2,508 43,195
------- -------- ------- ------- -------- ------- -------- ------- -------
Total earning
assets............ 31,014 4,190 1,589 1,929 4,111 5,280 23,797 7,642 79,552
Loan loss reserve.... (599) (599)
Cash & due from banks 4,747 4,747
Other assets....... 5,164 5,164
------- -------- ------- ------- -------- ------------- ------ ------- ------- -------
Total assets....... $35,761 $ 4,190 $ 1,589 $ 1,929 $ 4,111 $ 5,280 $23,797 $12,207 $88,864
======= ======== ======= ======= ======== ======= ======= ======= =======
LIABILITIES & EQUITY
Deposits:
Demand deposits...... $13,002 $interest-earning assets.......... 20,844 3,168 4,605 14,022 711 43,350
Interest-bearing liabilities:
Transaction deposit accounts.......... 17,121 -- $ -- $ -- $ -- $17,121
Time deposits......................... 5,639 1,258 1,849 4,437 -- $ -- $ -- $13,002
NOW, Savings & MMDA.. 32,18713,183
Borrowed funds........................ -- -- -- -- -- --
-- 32,187
CD's less-than
$100,000............ -- 2,891 1,831 3,004 6,630 5,667 2,891 -- 22,914
CD's greater-than
$100,000............ 101 2,445 1,632 1,732 3,750 2,232 1,100 -- 12,992
------- -------- ------- ------- -------- ------- ------- ------- -------
Total deposits..... 45,290 5,336 3,463 4,736 10,380 7,899 3,991 -- 81,095
Other borrowings....... 85 -- -- -- -- -- 1,154 -- 1,239
Other liabilities......Mortgage notes payable................ -- -- -- -- -- --
-- 824 824
Equity................. -- -- -- -- -- -- -- 5,706 5,706
------- --------- ------- ------- -------- ------------- ------ ------- ------- -------
Total liab. &
equity............ $45,375interest-bearing
liabilities........................ $22,760 $1,258 $1,849 $ 5,3364,437 $ 3,463 $ 4,736 $ 10,380 $ 7,899 $ 5,145 $ 6,530 $88,864
======= ======== ======== ======= ======== ======= ======= ======= =======-- $30,304
------- ------ ------ ------- ------- -------
Interest sensitivity gap. (9,614)gap............... $(1,916) $1,910 $2,756 $ (1,146) (1,874) $(2,807) $ (6,269) $(2,619) $18,652 $ 5,6779,585 711 13,046
Cumulative gap........... (9,614) (10,760) (12,634) (15,441) (21,710) (24,329) (5,677)interest sensitivity gap.... (1,916) (6) 2,750 12,335 13,046 13,046
Ratio of interest sensitive
assets to interest sensitive
liabilities.......................... 0.92 2.52 2.49 3.16 --
Cumulative ratio of interest
sensitive assets to interest
sensitive liabilities................ 0.92 1.00 1.11 1.41 1.43
Cumulative interest sensitivity
gap to total
assets.................. -10.82% -12.11% -14.22% -17.38% -24.43% -27.38% -6.39%
======== ========= ======== ======== ======== ======== ========
December 31, 1991:
Cumulative gap........... (2,493) $(10,691) $(12,288) $(15,350) $(19,278) $(21,827) $(12,897)
Cumulative gap to total
assets.................. -3.09% -13.23% -15.21% -19.00% -23.86% -27.01% -15.96%
======== ========= ======== ======== ========= ======== ========as a percent of earning
assets............................... (4.42)% (0.01)% 6.34% 28.45% 30.09%
VIII. CAPITAL
At year end 1992, total shareholders' equity was $5,706,199, an increase of
$618,544 over December 31, 1991. Concho's risk based capital ratio has risen
from 12.79% in 1990 to 14.30% at year end 1992. This ratio is well above the
minimum 8.00% required by federal regulations. Book value of Concho's stock at
year-end 1992 was $28.30 per share, or a 16.9% increase over 1991's $24.21 per
share. Concho has declared an annual cash dividend of $.25 per share each of the
past three years.
50
VIII. DISCUSSION OF NINE MONTHS ENDED SEPTEMBER 30, 1993 VERSUS NINE MONTHS
ENDED SEPTEMBER 30, 1992
GENERAL
Net interest income for the first nine months of 1993 was $2,720,676, which
represents a 16.2% increase over the same period in 1992 due primarily to an
improving net interest margin. Net earnings were reduced by $231,213 as a result
of an accounting change conforming with the requirements of FAS No. 109. This
one-time adjustment reduced net earnings to $375,026 for the nine months, down
35% from the $574,673 for the same period in 1992. Total assets were
$89,110,076, up 5.5%, and total deposits showed a similar increase to
$80,902,873. While total outstanding loans have declined less than one percent,
investment securities have increased almost 9% to $34,795,540. Nonperforming
assets have declined during 1993 by $367,351 to $1,129,954. Shareholders' equity
has increased to $5,816,604, up 4.1% from 1992's $5,586,083. This increase in
equity is after a purchase into treasury of 16,267 shares at a cost of $344,860.
In November 1993, the purchase of these shares was rescinded, resulting in the
shares being reissued and $344,860 being refunded to Concho. As adjusted to
reflect such rescission, shareholders' equity at September 30, 1993 would have
been $6,161,464.
51
TABLE 14 - AVERAGE BALANCES INCOME AND EXPENSES,AVERAGE YIELDS AND RATES (1)
$(thousands)- SOUTHLAKE (000'S
OMITTED):
NINESIX MONTHS ENDED SEPTEMBERJUNE 30,
------------------------------------------------------
1992 19931997 1996
-------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense RateAVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------- ------- -------- ------- -------- ------- -------
ASSETS
Short-term investments................ $ 2,7174,612 $ 97 4.77%118 5.12% $ 2,8384,299 $ 74 3.49%
Investment securities:
Taxable............................. 28,667 1,459 6.80 34,077 1,444 5.67
Tax exempt.......................... -- -- -- -- -- --116 5.40%
Taxable investment securities......... 4,241 128 6.04 6,449 175 5.43
Tax-exempt investment securities (1).. 7,244 235 6.49 6,679 211 6.31
Loans (2)............................. 27,029 1,350 9.99 22,367 1,162 10.39
------- ------ ------- ------
Total securities................... 28,667 1,459 6.80 34,077 1,444 5.67
Loans: (2)
Commercial.......................... 27,856 2,027 9.73 31,149 2,052 8.81
R/E construction.................... 1,978 125 8.45 2,160 136 8.42
R/E mortgage........................ 4,868 307 8.4 3,871 266 9.19
Consumer............................ 7,016 499 9.51 6,624 508 10.25
------- ------ ------- ------
Total loans........................ 41,718 2,958 9.48 43,804 2,962 9.04
------- ------ ------- ------
Total earning assets............... 73,102 4,514 8.26 80,719 4,480 7.42assets................ 43,126 1,831 8.49 39,794 1,664 8.36
Cash and due from banks............... 3,392 3,316
Bank premises and equipment........... 2,412 1,761
Other assets.......................... 9,164 8,4971,645 1,987
Allowance for loan losses............. (263) (211)
------- -------
Total assets....................... 82,266 89,216assets........................ $50,312 $46,647
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing deposits........ 8,932 12,636
Interest checking................... 23,412 593 3.39 25,521 506 2.65
Savings............................. 2,775 67 3.23 3,182 59 2.48
Money market accounts............... 3,850 108 3.75 5,293 115 2.90
Time deposits:
CD's less-than $100,000............. 23,318 864 4.95 22,944 652 3.80
CD's greater-than $100,000:......... 12,634 450 4.76 11,652 339 3.89Interest-bearing deposits............. $30,219 $ 578 3.83% $28,253 $ 528 3.74%
Long-term debt........................ 309 15 9.71
------- ------ ------- -------------
Total deposits..................... 74,921 2,082 3.72 81,228 1,671 2.75
Other borrowings.................... 1,263 90 9.53 1,272 88 9.25
------- ------ ------- ------
Total interest-bearing liabilities. 67,252 2,172 4.32 69,864 1,759 3.37
------ ------interest bearing liabilities.. 30,219 578 3.83 28,562 543 3.80
Noninterest-bearing deposits.......... 15,709 14,427
Other liabilities..................... 685 955360 282
------- -------------
Total liabilities................... 76,869 83,455
Stockholders'46,288 43,271
Shareholders' equity.................. 5,397 5,7614,024 3,376
------- -------
Total liabilities and equity....... $82,266 $89,216shareholders'
equity.............................. $50,312 $46,647
======= =======
Net interest income................... 2,342 4.28 2,721 4.51
Provision for loan losses............. (67) -0.12 (105) -0.17
------ ------ ------$1,253 $ 1,121
====== =======
RATE ANALYSIS
Interest income/earning assets........ 8.49% 8.36%
Interest expense/earning assets....... 2.68 2.73
---- ------
Net funds function.................... $2,275 4.16 $2,616 4.34
====== ====== ======yield on earning assets......... 5.81% 5.63%
==== ======
- -------------------
(1) Fully taxable equivalentComputed on a tax-equivalent basis assuming a marginal tax rate of 34%.
(2) Nonaccrual loans are included in loan balances
52loans.
51
RATE VOLUME ANALYSIS (1)(2)TABLE 15 - CHANGES IN INTEREST INCOME AND INTEREST EXPENSE - SOUTHLAKE (000'S
OMITTED):
$(thousands)SIX MONTHS ENDED JUNE 30,
1997 COMPARED TO 1996
--------------------------------
CHANGE INATTRIBUTABLE TO
---------------------- TOTAL
VOLUME RATE VOLUME
-----------------------------
INCOME/EXPENSE EFFECT EFFECT
- --------------------------------------------------------------CHANGE
------ -------- ------
Earning assets:
Short-term investments........ (23) (26)investments................ $ 3
Investment securities:
Taxable..................... (15) (244) 229
Tax exempt.................. --
----133 $ (131) $ 2
Taxable investment securities......... 55 (102) (47)
Tax-exempt investment securities (1).. 246 (222) 24
Loans................................. 1,646 (1,458) 188
------ ----
Total investments......... (15) (244) 229
Loans:
Commercial.................. 25 (192) 217
R/E construction............ 11 (0) 11
R/E mortgage................ (41) 28 (69)
Consumer.................... 9 39 (30)
---- ------ ----
Total loans............... 4 (137) 141
---- ------ ----
Total interest income... (34) (457) 423
---- ------------- ----
Interest bearing liabilities:income...................... 2,080 (1,913) 167
------ ------- ----
Interest-bearing deposits............. 601 (551) 50
Short-term borrowings................. - - -
Long-term debt........................ (15) - (15)
------ ------- ----
Interest checking............. (87) (129) 42
Savings....................... (8) (16) 8
Money market accounts......... 7 (24) 31
Time deposits
CD's less-than $100,000..... (212) (201) (11)
CD's greater-than $100,000:. (111) (82) (29)
----expense..................... 586 (551) 35
------ ----
Total deposits............ (411) (541) 130
Other borrowings.............. (2) (3) 1
---- ------ ----
Total interest expense........ (413) (479) 66
---- ------------- ----
Net interest income........... $379 $22 $357
====income.................. $1,494 $(1,362) $132
====== ======= ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 34%.
52
TABLE 16 - ------------------
(1) Fully taxable equivalent basis
(2) The unallocated portion of the total change has been prorated into rate and
volume components
53
Noninterest Income and ExpenseNONINTEREST INCOME AND EXPENSE - SOUTHLAKE (000'S OMITTED):
$(thousands)NONINTEREST INCOME:
FOR THE NINESIX MONTHS
ENDED SEPTEMBERJUNE 30, CHANGE
------------------------- -----------------
1992 1993--------------- ---------------
1996 1997 $ %
------ ------ ------- ------------ ------
Noninterest Income.............
Service chargesfees on deposits..deposit accounts......... $ 425178 $ 474207 $ 49 11.53%
Trust fees...................
Securities gains (losses)....
Other........................ 409 383 (26) -6.3629 16.29%
Net gain (loss) on sale of assets........ 272 (13) (285) --
Other:
Miscellaneous income.................... 65 45 (20) (30.77)
Real estate mortgage fees............... 59 22 (37) (62.71)
Merchant credit card fees............... 22 24 2 9.09
Other service fees...................... 13 17 4 30.77
------ ------ --------- -------
159 108 (51) (32.08)
------ ------ ----- -------
Total noninterest income... 834 857 23 2.76income.............. $ 609 $ 302 $(307) (50.41)%
====== ====== ===== =======
NONINTEREST EXPENSE:
Salaries $ 338 $ 402 $ 64 18.93%
Payroll taxes 24 32 8 33.33
KSOP 27 3 (24) (88.89)
Medical and other benefits 22 22 -- --
------ ------ --------- -------
Noninterest Expense
Salaries411 459 48 11.68
Net occupancy............................ 38 65 27 71.05
Equipment expense........................ 64 101 37 57.81
Other:
Advertising and related costs... 1,061 1,155 94 8.86
Net occupancy................ 234 267 33 14.10
Equipment expense............ 182 176 (6) -3.30
Professional services........ 121 211 90 74.38
Data processing.............. 94 82 (12) -12.77
Stationerybusiness development.... 179 60 (119) (66.48)
Other miscellaneous..................... 57 57 -- --
Outside data processing................. 53 71 18 33.96
Director fees........................... 31 37 6 19.35
Credit card and supplies...... 52 76 24 46.15
Business development......... 48 59 11 22.92
Foreclosed asset expense..... 139 120 (19) -13.67ATM..................... 39 37 (2) (5.13)
Outside operations...................... 31 49 18 58.06
Printing and supplies................... 23 43 20 86.96
Postage and courier..................... 25 31 6 24.00
Legal and accounting fees............... 34 37 3 8.82
Insurance............................... 16 19 3 18.75
Other expense................ 379 373 (6) -1.58real estate expense............... 15 14 (1) (6.67)
Correspondent bank service fees......... 15 15 -- --
Communications.......................... 13 26 13 100.00
------ ------ --------- -------
531 496 (35) (6.59)
------ ------ ----- -------
Total noninterest expense.. 2,310 2,519 209 9.05
------ ------ ---- -------
Net noninterest expense.. $1,476 $1,662 $186 12.60%expense............. $1,044 $1,121 $ 77 7.38%
====== ====== ========= =======
Net noninterest expense
asAs a percent% of average
assets .................. 1.78% 1.86%tax-equivalent net revenue.. 60.36% 72.09%
====== ======
53
VIII. CAPITAL
At December 31, 1996, consolidated shareholders' equity was $3.9 million,
or 7.7 percent of total assets, compared to $3.1 million, or 6.7 percent of
total assets, at December 31, 1995. In accordance with Statement of Financial
Accounting Standards No. 115, Southlake's unrealized losses on securities
available-for-sale are reported as a reduction in shareholders' equity. At
December 31, 1996 and 1995, unrealized losses amounted to $4 thousand and $3
thousand respectively. During 1996, consolidated shareholders' equity averaged
$3.5 million, or 7.5 percent of average assets, compared to the 1995 average of
$2.7 million, or 6.5 percent of average assets.
Banking system 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 percent to 100 percent.
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 intangibles by quarter-to-date average assets less
intangibles. Regulatory minimums for the risk-based and leverage ratios are 8.00
percent and 4.00 percent, respectively. At December 31, 1996, Southlake's total
risk-based and leverage ratios were 12.56 percent and 7.95 percent,
respectively.
IX. SUMMARY OPERATING RESULTS FOR THE THREEDISCUSSION OF SIX MONTHS AND YEAR
ENDED DECEMBERJUNE 30, 1997 VERSUS SIX MONTHS ENDED
JUNE 30, 1996
Overview of Operations
For the six months ended June 30, 1997, Southlake's net income amounted to
$264 thousand, or $1.16 per share, compared to $436 thousand, or $2.00 per
share, earned in the first half of 1996. Return on average assets and return on
average equity for the six months ended June 30, 1997, amounted to 1.05 percent
and 13.12 percent, respectively. Southlake's return on average assets and return
on average equity for the same period last year amounted to 1.87 percent and
25.83 percent.
Net interest income on a tax equivalent basis for the first six months of
1997 was $132 thousand above the 1996 amount and resulted primarily from loan
growth. The net interest margin for the six months ended June 30, 1997, was 5.81
percent, up from 5.63 percent for 1996. The provision for loan losses for the
first half of 1997 totaled $36 thousand, and was unchanged from the 1996 amount.
Total noninterest income for the six months ended June 30, 1997, amounted
to $302 thousand as compared to the prior year total of $609 thousand. The
decrease in total noninterest income is attributed to a $285 thousand decline in
gain on sale of foreclosed assets. For the first six months of 1997, service
fees on deposits increased $29 thousand compared to the 1996 amount. Other
noninterest income, which includes merchant credit card fees, real estate
mortgage fees, ATM transaction fees, and various other miscellaneous service-
related fees and income, totaled $108 thousand and was down $51 thousand from
the 1996 amount. The decrease resulted primarily from lower real estate mortgage
fees.
Noninterest expense for the six months ended June 30, 1997, totaled $1.12
million as compared to $1.04 million during the same period in 1996. The
increase is attributable primarily to higher employee, occupancy, and equipment
costs associated with a branch opening in January 1997.
Balance Sheet Review
Consolidated assets at June 30, 1997, totaled $53.6 million as compared to
$50.9 million at year-end 1996 and $47.6 million at June 30, 1996. Since year-
end 1996, investment securities have increased $4.1 million and loans have
decreased $491 thousand. The balance sheets presented reflect normal recurring
adjustments and accruals. The net unrealized loss in the investment portfolio at
June 30, 1997, totaled $34 thousand. At June 30, 1997, Southlake did not hold
any CMOs. Amortized cost of structured notes at June 30,
54
1997, totaled $200 thousand as compared to an approximate market value of $199
thousand. Total deposits at June 30, 1997, amounted to $49.1 million, up $2.4
million from December 31, 1993
For the Three Months For the Year Ended
Ended December 31 December 31
-------------------- -------------------
1992 1993 1992 1993
------- ------- ------- -------
(Dollars in thousands, except per share data)
Net Interest Income $ 625 $ 672 $ 2,874 $ 3,287
After Provision for
Loan Losses
Earnings before Income 140 152 939 1,106
Taxes
Net Earnings before 174 157 748 763
Cumulative Adjustment due
to Change in Accounting
Principle
Net Earnings After 174 157 748 532(1)
Cumulative Adjustment due
to Change in Accounting
Principle
Earnings per Share before $ 0.86 $ 0.78 $ 3.71 $ 3.78
Cumulative Adjustment
Earnings per Share after $ 0.86 $ 0.78 $ 3.71 $ 2.64
Cumulative Adjustment
- ------------------
(1) Reflects cumulative effect1996, and up $5.7 million from the June 30, 1996,
amount.
Nonperforming assets at June 30, 1997, totaled $533 thousand, or 2.00
percent of Concho's adoptionloans and foreclosed assets, and were down $66 thousand from the
December 31, 1996, amount. Foreclosed asset expense remains immaterial. At June
30, 1997, the allowance for loan losses amounted to .54 percent of FAS 109 regardingnonperforming
assets. Management is not aware of any material classified credits not properly
disclosed as nonperforming and considers the methodallowance for loan losses to be
adequate.
Liquidity and Capital
Southlake's consolidated statements of accounting for federal income taxes. The change resultedcash flows are presented elsewhere
in a one
time chargethis document. At June 30, 1997, management believes that the balance sheet
reflects adequate liquidity and the parent company has no debt. Total equity
capital amounted to income of $231,213$4.2 million at June 30, 1997, which was recorded during the third
quarter of 1993.up from $3.9
million at year-end 1996 and $3.6 million at June 30, 1996. Southlake's risk-
based capital and leverage ratios at June 30, 1997, were 13.10 percent and 7.89
percent, respectively.
LEGAL MATTERS
The legality of the First Financial Common Stock to be issued in connection
with the Exchange Offer and Merger will be passed upon by McMahon, Surovik,
Suttle, Buhrmann, CobbHicks & Hicks,Gill, P.C.
EXPERTS
The consolidated financial statements of First Financial as of December 31,
19921996 and 19911995 and for each of the years in the three-year period ended December
31, 1992,1996, incorporated by reference in this prospectus and elsewhere in the
registration statement have been audited by Arthur Andersen & Co.,LLP, independent
public accountants, as indicated in their report dated January 13, 1993,10, 1997, with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in accounting and auditing.auditing in giving said
reports.
The consolidated financial statements of ConchoSouthlake as of December 31, 19921996
and 19911995 and for each of the years in the three-year period ended December 31,
1992,1996, included in this prospectus and elsewhere in the registration statement
have been audited by Armstrong, BackusJudd, Thomas, Smith & Co., L.L.P.Company, P.C., independent public
accountants, as indicated in their report dated February 12, 1993,September 19, 1997, with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing.
54auditing in giving said reports.
55
INDEX TO CONCHOSOUTHLAKE BANCSHARES, INC.'S AND SUBSIDIARY
FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED DECEMBER 31,
1990, 1991 AND 1992
Report of Independent Public Accountants...............................Page
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE YEARS ENDED
DECEMBER 31, 1996, 1995 AND 1994
Independent Auditors' Report.................................. F-2
Consolidated Balance Sheets as of
December 31, 1996 and 1995.................................. F-3
Consolidated Statements of Income for the three years ended
December 31, 1996, 1995 and 1994............................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the three years ended December 31, 1996, 1995 and 1994.. F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996, 1995 and 1994........................ F-6
Notes to Consolidated Financial Statements.................... F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS
ENDED JUNE 30, 1997 AND JUNE 30, 1996
Compilation Report............................................ F-22
Consolidated Balance Sheets as of June 30, 1997 and 1996...... F-23
Consolidated Statements of Income for the three months and
six months ended June 30, 1997 and 1996..................... F-24
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1997 and 1996............... F-25
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.................................. F-26
F-1
Consolidated Balance Sheets as of December 31, 1991 and 1992........... F-2
Consolidated Statements of Income for three years ended December 31,
1990, 1991 and 1992................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the
three years ended December 31, 1990, 1991 and 1992.................... F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1990, 1991 and 1992...................................... F-7
Notes to Consolidated Financial Statements............................. F-9
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1992 AND SEPTEMBER 30, 1993
Compilation Report..................................................... F-25
Consolidated Balance Sheets as of September 30, 1992 and 1993.......... F-26
Consolidated Statements of Earnings for the nine months
ended September 30, 1992 and 1993..................................... F-27
Consolidated Statements of Changes in Stockholders' Equity for the
nine months ended September 30, 1992 and 1993......................... F-29
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1992 and 1993........................................... F-31
Notes to Consolidated Financial Statements............................. F-33
55
[JUDD, THOMAS, SMITH & COMPANY, P.C. LETTERHEAD APPEARS HERE]
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
Board of Directors Conchoand Stockholders
Southlake Bancshares, Inc.
INDEPENDENT AUDITOR'S REPORT
----------------------------Southlake, Texas
We have audited the accompanying consolidated balance sheets of ConchoSouthlake
Bancshares, Inc. (a Texas corporation) and subsidiarySubsidiary as of December 31, 19921996 and 19911995, and the
related consolidated statements of income, changes in shareholders'stockholders' equity, and
cash flows for each of the three years in the period
ended December 31, 1992.1996, 1995 and 1994.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 auditaudits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ConchoSouthlake
Bancshares, Inc. and subsidiarySubsidiary as of December 31, 19921996 and 1991,1995, and the
results of theirits operations and theirits cash flows for each of the three years in the period ended
December 31, 1992,1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
Armstrong, Backus/S/ JUDD, THOMAS, SMITH & Co., L.L.P.
February 12, 1993
F-1COMPANY
September 19, 1997
F-2
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------AS OF DECEMBER 31,
1992 AND 1991
ASSETS
------
1992 1991
----------- -----------1996 1995
------------ ------------
Assets
Cash and due from banks (Note 1) $ 4,747,0853,436,740 $ 4,957,0324,671,647
Interest earning deposits in banks 100,000 115,794
Federal funds sold (Note 1) 2,550,000 2,900,0007,000,000 6,220,000
Investment securities: (Notes 1
& 2)
United States government 17,511,071 5,100,869
United States agencies 12,211,810 13,320,280
Collateralized mortgage obligations 2,938,724 8,249,479
Corporate bonds -0- 300,215
Stocksecurities
Available-for-sale 2,775,775 3,688,021
Held-to-maturity 7,355,124 6,357,722
Other investment securities 110,500 110,500
Loans, net 25,975,071 21,971,147
Premises and equipment, net 2,370,478 1,682,675
Accrued interest receivable 381,745 387,292
Other real estate 421,296 591,102
Prepaid expenses 116,735 111,371
Cash surrender value of life insurance 603,194 545,560
Goodwill, net of accumulated amortization of $51,344
and $45,842 for 1996 and 1995, respectively 168,702 174,204
Other assets 128,558 98,224
------------ ------------
Total assets $ 50,943,918 $ 46,725,259
============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing demand $ 16,437,992 $ 14,114,516
Interest bearing 30,302,614 28,776,940
------------ ------------
46,740,606 42,891,456
Accrued interest payable 54,469 63,414
Other liabilities 220,641 156,242
Note payable - 475,000
------------ ------------
Total liabilities 47,015,716 43,586,112
Minority interest 5,244 4,593
Stockholders' equity
Preferred stock - 8% nonvoting, cumulative, $1.00 par value,
1,000,000 shares authorized: 7,200 issued and outstanding 7,200 7,200
Common stock - $1.00 par value, 1,000,000 shares authorized:
208,880 and 200,700 shares in 1996 and 1995 issued
and outstanding 208,880 200,700
Surplus 1,052,449 959,814
Retained earnings 2,658,712 1,970,198
Unrealized loss on available-for-sale securities (4,283) (3,358)
------------ ------------
Total stockholders' equity 3,922,958 3,134,554
------------ ------------
Total liabilities and stockholders' equity $ 50,943,918 $ 46,725,259
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
SOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
Interest income
Loans (including fees) $ 2,426,114 $ 2,207,598 $ 1,761,565
Taxable securities 329,278 365,077 399,485
Tax-exempt securities 291,329 223,253 164,833
Deposits in banks 5,850 11,383 35,943
Federal Home Loan Bank 303,337 -0-
Mutual funds (net of unrealized loss
of $ 122,927sold 208,686 181,917 131,886
----------- ----------- -----------
Total interest income 3,261,257 2,989,228 2,493,712
----------- ----------- -----------
Interest expense
Interest bearing money-market
and $ 171,297) 841,916 1,725,972
Loans (net of unearnedsavings deposits 358,588 383,140 455,618
N.O.W. and super N.O.W. deposits 71,793 78,976 74,031
Time deposits, $100,000 and over 319,759 254,434 90,746
Other time deposits 309,634 283,970 210,905
Interest on note payable 26,081 52,660 52,121
Federal funds purchased 15 7,285 1,728
----------- ----------- -----------
Total interest expense 1,085,870 1,060,465 885,149
----------- ----------- -----------
Net interest income of
$ 373,174 and $ 383,588 and
allowance2,175,387 1,928,763 1,608,563
Provision for loan losses of
$ 598,734 and $ 547,354) (Notes 1, 42,596,605 39,157,619
4 & 9)
Land, building and equipment, net (Notes 1, 2,967,864 2,956,751
5 & 9)
Other real estate 853,229 686,225
Accrued interest 844,681 766,894
Other assets (Note 8) 498,024 686,840
Other assets (Note 8) 498,024 686,84072,000 68,000 35,000
----------- ----------- TOTAL ASSETS $88,864,346 $80,808,176-----------
Net interest income after
provision for loan losses 2,103,387 1,860,763 1,573,563
----------- ----------- -----------
Other income
Service charges on deposit accounts 366,130 357,283 353,213
Other operating revenue 285,001 253,771 174,454
Net gain on sale of assets 247,463 20,734 32,682
----------- ----------- -----------
Total other income 898,594 631,788 560,349
----------- ----------- -----------
Other expense
Salaries 813,790 686,028 582,596
Other employee benefits 108,319 132,164 118,425
Net occupancy expense 91,373 84,612 83,538
Other operating expenses 1,131,116 877,554 895,128
Minority interest 955 678 621
----------- ----------- -----------
Total other expenses 2,145,553 1,781,036 1,680,308
----------- ----------- -----------
Income before income taxes 856,428 711,515 453,604
Income taxes (167,338) (171,756) (111,204)
----------- ----------- -----------
Net income $ 689,090 $ 539,759 $ 342,400
=========== =========== ===========
Primary earnings per common share $ 3.14 $ 2.56 $ 1.71
=========== =========== ===========
The accompanying notes are an integral part of this statement.
F-2these financial statements.
F-4
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 19921996, 1995 AND 1991
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES
-----------1994
1992 1991
----------- -----------Unrealized
Gain
Paid-In (Loss) on
Capital in Available-
Common Stock Preferred Stock Excess of Retained For-Sale
Shares Amount Shares Amount Par Earnings Securities Total
------- -------- ------ ------ ---------- ---------- ---------- ----------
Deposits: (Note 1)
Demand $13,002,139
Balance, December 31, 1993 195,900 $195,900 7,200 $7,200 $ 8,861,389
NOW 29,225,118 25,627,409
Savings 2,961,858 2,342,693
Time,899,814 $1,089,191 $ 100,000 and over 12,992,397 13,775,576
Other time 22,913,661 23,057,662
Federal funds purchased (Note 1) 85,000 170,000
Accrued interest 210,548 305,496
Federal$2,192,105
Net income tax payable 181,858 47,000
Mortgage payable (Note 10) 1,239,164 1,167,622
Other liabilities (Note 8) 325,782 345,700
Minority interests 20,622 19,974342,400 342,400
Common stock issued 4,800 4,800 60,000 64,800
Dividends paid on preferred (576) (576)
stock
Current year unrealized loss
on available-for-sale securities,
net of applicable deferred taxes (195,140) (195,140)
------- -------- ----- ------ ---------- ---------- --------- ----------
Balance, December 31, 1994 200,700 200,700 7,200 7,200 959,814 1,431,015 (195,140) 2,403,589
Net income 539,759 539,759
Dividends paid on preferred
stock (576) (576)
Current year unrealized gain
on available-for-sale securities,
net of applicable deferred taxes 191,782 191,782
------- -------- ----- ------ ---------- ---------- --------- ----------
Balance, December 31, 1995 200,700 200,700 7,200 7,200 959,814 1,970,198 (3,358) 3,134,554
Net income 689,090 689,090
Common stock issued 8,180 8,180 92,635 100,815
Dividends paid on preferred (576) (576)
stock
Current year unrealized loss on
available-for-sale securities, net
of applicable deferred taxes (925) (925)
------- -------- ----- ------ ---------- ---------- --------- ----------
Balance, December 31, 1996 208,880 $208,880 7,200 $7,200 $1,052,449 $2,658,712 $ (4,283) $3,922,958
======= ======== ===== ====== ========== ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
F-5
SOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
----------- ----------- TOTAL LIABILITIES $83,158,147 $75,720,521
-----------
-----------
Commitments and Contingencies (Notes 7 & 12)
SHAREHOLDERS' EQUITY
--------------------
Operating activities
Common stock, parNet income $ 689,090 $ 539,759 $ 342,400
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 72,000 68,000 35,000
Depreciation and amortization 150,376 149,069 128,871
Loss (gain) on sale of investments 24,583 11,412 (32,682)
Other gains on sale of assets (272,046) (32,146) (750)
Donation of bank property 137,000 - -
Increase in cash surrender value $ .50,
500,000 shares authorized,
210,270 shares issued,
201,653 and 210,168 shares
outstanding, respectively $ 105,135 $ 105,135
Additional paid-in capital 4,660,218 4,660,218
Retained earnings (Note 11) 1,189,750 496,807
Treasury stock (126,356) (3,825)
Unrealized loss on investmentof life insurance (57,634) (71,288) (164,554)
Change in mutual funds (Note 2) (122,548) (170,680)prepaid expenses (5,364) (40,201) (2,642)
Change in interest receivable 5,547 (68,080) (27,373)
Change in interest payable (8,945) 18,319 2,497
Change in other liabilities 64,399 35,667 92,527
Minority interest 955 678 621
Change in other - net (30,133) (49,127) (3,182)
----------- ----------- TOTAL SHAREHOLDERS' EQUITY $ 5,706,199 $ 5,087,655-----------
Net cash provided by operating activities 769,828 562,062 370,733
----------- ----------- TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $88,864,346 $80,808,176-----------
Investing activities
Net change in time deposits with banks 15,794 282,206 1,187,000
Maturities of held-to-maturity securities 762,315 545,000 130,000
Maturities and sales of available-for-sale securities 5,612,828 5,984,713 2,882,563
Purchases of held-to-maturity securities (1,803,552) (2,164,990) (1,056,548)
Purchases of available-for-sale securities (4,709,293) (745,687) (4,805,690)
Net change in funding and principal collections on loans (4,398,524) (3,351,008) (1,798,518)
Net change in federal funds sold (780,000) (6,220,000) 1,180,000
Expenditures for premises and equipment (1,116,259) (359,560) (33,810)
Proceeds from sale of premises and equipment 324,339 108,230 1,039
Proceeds from sale of foreclosed property 613,227 96,892 95,941
Purchase of other real estate - (297,040) -
----------- ----------- -----------
Net cash used in investing activities (5,479,125) (6,121,244) (2,218,023)
----------- ----------- -----------
Financing activities
Net increase in demand and savings deposits 2,746,993 2,326,754 2,422,552
Principal payment on debt (475,000) - (125,000)
Proceeds from the issuance of common stock 100,816 - 64,800
Net change in federal funds purchased - (505,000) 505,000
Net change in customer time deposits 1,102,157 5,464,676 (962,911)
Dividends paid (576) (576) (576)
----------- ----------- -----------
Net cash provided by financing activities 3,474,390 7,285,854 1,903,865
----------- ----------- -----------
Net (decrease) increase in cash and due from banks (1,234,907) 1,726,672 56,575
Cash and due from banks, beginning of year 4,671,647 2,944,975 2,888,400
----------- ----------- -----------
Cash and due from banks, end of year $ 3,436,740 $ 4,671,647 $ 2,944,975
=========== =========== ===========
The accompanying notes are an integral part of this statement.
F-3these financial statements.
F-6
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1992, 1991 AND 1990
1992 1991 1990
----------- ----------- -----------1996 1995 1994
---------- ---------- ----------
INTEREST INCOME (Notes 1,Supplemental schedule of noncash investing
and financing activities:
Other real estate acquired in
settlement of loans $ 322,600 $ 81,868 $ - --------------- 4 & 9)
Interest and fees on loans $3,818,426 $3,921,071 $4,129,104
Interest on Federal funds 119,555 215,081 187,083
Interest on deposits with
banks -0- 6,136 197,262
Interest on investment
securities:
United States government 618,308 264,546 212,494
United States agencies 928,353 1,092,400 978,479
Corporate bonds 23,556 46,935 121,670
Mutual funds 78,716 193,403 307,234
Collateralized mortgage
obligations 280,111 566,257 303,858
---------- ---------- ----------
$5,867,025 $6,305,829 $6,437,184
---------- ---------- ----------
INTEREST EXPENSE
- ----------------
Interest on deposits $2,665,097 $3,553,188 $3,868,666
Interest on Federal funds 2,933 5,081 10,417
Interest on mortgage
payable (Note 10) 119,512 115,766 148,660
---------- ---------- ----------
$2,787,542 $3,674,035 $4,027,743
---------- ---------- ----------
Net interest income $3,079,483 $2,631,794 $2,409,441
Provision for loan losses (Notes 1
& 4) 205,000 120,000 195,000
---------- ---------- ----------
Net Interest Income
After Provision for Loan
Losses $2,874,483 $2,511,794 $2,214,441
---------- ---------- ----------
OTHER OPERATING INCOME
- ----------------------
Pension administration
fees $ 7,700 $ 20,000 $ 24,000
Gain (loss) on sale of
assets (9,939) (57,072) 6,578
Securities gains (losses) (85,405) (4,495) (48,738)
Service charges 630,855 517,572 448,156
Rents 88,717 96,162 61,956
FHLB dividends 3,587 -0- -0-
Other 483,139 289,513 223,593
---------- ---------- ----------
$1,118,654 $ 861,680 $ 715,545
---------- ---------- ----------
Total Interest and Other
Operating Income $3,993,137 $3,373,474 $2,929,986
The accompanying notes are an integral part of this statement.
F-4
CONCHO BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
(Continued)
1992 1991 1990
----------- ----------- -----------
OTHER OPERATING EXPENSES
- ------------------------
Salaries $1,227,319 $1,075,212 $1,055,743
Employee benefits (Note 3) 173,193 122,780 139,511
Occupancy expense (Notes 1, 5 & 9) 318,013 303,254 281,834
Other expenses (Notes 1, 8 & 12) 1,490,746 1,526,134 1,271,694
Capitalized loan costs (Note 4) (155,419) (134,264) (139,891)
$3,053,852 $2,893,116 $2,608,891
---------- ---------- ----------
NET INCOME BEFORE INCOME TAXES $ 939,285 $ 480,358 $ 321,095
---------- ---------- ----------
FEDERAL INCOME TAX (Note 6)
- ------------------
Current $ 191,000 $ 47,000 $ -0-
Deferred -0- -0- -0-
---------- ---------- ----------
Total Federal Income
Tax $ 191,000 $ 47,000 $ -0-
---------- ---------- ----------
NET INCOME BEFORE
MINORITY INTEREST $ 748,285 $ 433,358 $ 321,095
---------- ---------- ----------
NET INCOME ATTRIBUTABLE
TO MINORITY INTEREST $ 2,809 $ 2,100 $ 1,981
---------- ---------- ----------
NET INCOME (LOSS) $ 745,476 $ 431,258 $ 319,114
========== ========== ==========
EARNINGS PER SHARE (Note 1)Sale of foreclosed real estate
financed through loans $ 3.68- $ 2.0531,500 $ 1.52-
========== ========== ==========
Supplemental cash flow information:
Income tax paid $ 238,472 $ 202,747 $ 113,417
========== ========== ==========
Interest paid $1,094,863 $1,041,126 $ 883,148
========== ========== ==========
The accompanying notes are an integral part of this statement.
F-5
CONCHO BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
UNREALIZED
LOSS ON
RETAINED INVESTMENTS
COMMON TREASURY EARNINGS IN MUTUAL
STOCK SURPLUS STOCK (DEFICIT) FUNDS TOTAL
----------- ----------- ---------- ---------- ---------- -----
BALANCE,
12-31-89 $ 105,135 $4,660,218 $ (3,825) $(148,455) (288,005) $4,325,068
Dividends
$ .25/share (52,568) (52,568)
Unrealized
appreciation on
investment in
mutual funds
(Note 2) (55,453) (55,453)
Loss realized on
sale of mutual
funds 46,639 46,639
Net income 319,114 319,114
----------- ---------- ---------- ---------- --------- ---------
BALANCE,
12-31-90 $ 105,135 $4,660,218 $(3,825) $ 118,091 $(296,819) $4,582,800
Dividends
$ .25/share (52,542) (52,542)
Unrealized
appreciation on
investment in
mutual funds
(Note 2) 4,297 4,297
Loss realized on
sale of mutual
funds 121,842 121,842
Net income 431,258 431,258
----------- ---------- ---------- ---------- --------- ---------
BALANCE,
12-31-91 $ 105,135 $4,660,218 $(3,825) $ 496,807 $(170,680) $5,087,655
Dividends
$. 25/share (52,533) (52,533)
Unrealized
depreciation on
investment in
mutual funds
(Note 2) (37,009) (37,009)
Loss realized on
sale of mutual
funds 85,141 85,141
Purchase of 8,515
shares of stock for
the treasury (122,531) (122,531)
Net income 745,476 745,476
----------- ---------- ---------- ---------- ---------- ---------
BALANCE,
12-31-92 $ 105,135 $4,660,218 $ (126,356) $ 1,189,750 $ (122,548) $5,706,199
=========== ========== ========== =========== ========== ==========
The accompanying notes are an integral part of this statement.
F-6
CONCHO BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
1992 1991 1990
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Interest received from:
Loans $ 3,972,863 $ 4,010,129 $ 4,270,969
Investment securities 2,041,812 2,255,816 2,133,031
Federal funds sold 119,555 215,081 187,083
Rental income 88,717 96,162 61,956
Service fees 630,855 552,500 475,356
Other income 434,798 266,693 213,876
Interest paid to depositors (2,783,267) (3,539,487) (3,895,189)
Interest paid on Federal funds
purchased (2,933) (5,081) (10,417)
Interest paid on mortgage
indebtedness (100,353) (117,970) (149,395)
Cash paid to suppliers and
employees (2,926,346) (2,662,218) (2,427,895)
Recoveries of bad debts 27,336 9,968 96,676
Redemption of cash value of life
insurance 238,274 -0- -0-
Federal income tax paid (56,142) -0- -0-
----------- ----------- -----------
Net cash provided by operating
activities $ 1,685,169 $ 1,081,593 $ 956,051
----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sales of
investment securities $1,060,075 $3,995,054 $ 402,072
Proceeds from maturities of
investment securities 8,387,673 2,992,816 6,356,985
Purchase of investment
securities (14,851,183) (12,975,169) (7,625,944)
Federal funds sold, net 350,000 2,200,000 1,028,000
Federal funds purchased, net (85,000) 80,000 15,000
Net (increase) in loans made
to customers (4,050,974) (4,936,416) (2,079,275)
Purchase of fixed assets (157,242) (54,370) (10,925)
Proceeds from sale of other
assets and other real estate
owned 252,828 394,749 282,672
Cost incurred on other real
estate owned (128,205) -0- -0-
----------- ----------- -----------
Net cash used in investing
activities $(9,222,028) $(8,303,336) $(1,631,415)
----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase in demand
deposits,
NOW accounts and savings
accounts $ 8,357,623 $ 1,806,699 $ 601,980
Net increase (decrease) in
time deposits (927,180) 6,322,734 (183,386)
Payments on mortgage
indebtedness (60,837) (132,001) (70,576)
Dividends paid (52,542) (52,568) (52,568)
Cash received on refinance of
note payable 132,379 -0- -0-
Cash paid for treasury stock (122,531) -0- -0-
----------- ----------- -----------
Net cash provided by financing
activities $ 7,326,912 $ 7,944,864 $ 295,450
----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents $ (209,947) $ 723,121 $ (379,914)
Cash and cash equivalents,
beginning of year 4,957,032 4,233,911 4,613,825
----------- ----------- -----------
Cash and cash equivalents, end of
year $ 4,747,085 $ 4,957,032 $ 4,233,911
=========== =========== ===========
The accompanying notes are an integral part of this statement.these financial statements.
F-7
CONCHO BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
1992 1991 1990
----------- ----------- ----------
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net income $ 745,476 $ 431,258 $319,114
---------- ---------- --------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization $ 135,910 $ 127,431 $149,069
Amortization of construction period
interest 10,219 10,219 10,219
Amortization of intangibles 4,000 4,000 4,000
Provision for loan losses 205,000 120,000 195,000
Loss on sale of investment
securities 85,405 4,495 48,738
Loss on sale of assets 9,939 57,072 (6,578)
Amortization of loan premium -0- -0- 3,027
Amortization of capitalized loan
fees 131,505 126,083 124,257
Accretion of bond discount (39,825) (26,409) (28,606)
Amortization of bond premium 296,180 44,487 19,328
Recoveries on bad debts 27,336 9,968 96,676
Capitalized net loan costs (155,419) (134,263) (139,891)
Charge-offs - other real estate
owned and other assets 113,648 184,290 150,133
Net income attributable to minority
interest 2,809 2,100 1,981
(Increase) decrease in interest
receivable (77,787) 31,820 34,608
(Increase) decrease in other assets 170,773 (41,359) (60,725)
Increase (decrease) in interest
payable (99,012) 11,497 (27,258)
Increase (decrease) in other
liabilities (15,846) 118,904 62,959
Increase in federal income tax
payable 134,858 -0- -0-
---------- ---------- --------
Total adjustments $ 939,693 $ 650,335 $636,937
---------- ---------- --------
Net cash provided by operating activities $1,685,169 $1,081,593 $956,051
========== ========== ========
The accompanying notes are an integral part of this statement.
F-8
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 1:1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies adopted by Concho Bancshares, Inc., the
Company, are summarized below.
Consolidation - The consolidated financial statements include Concho
-------------the accounts of Southlake
Bancshares, Inc. (the Company) and its 99.9% owned subsidiary, Texas National
Bank (the Bank). Both the Company and the Bank are incorporated in the State of
Texas. Southlake Bancshares, Inc. and Subsidiary provides a variety of banking
services to individuals and businesses through its subsidiary, Southwest Banktwo branches in Southlake and
Trophy Club. Its primary source of San Angelo, after
eliminationrevenue is loans to customers who are
primarily middle-income individuals and small to mid-sized businesses. The
accounting and reporting policies of significant intercompany accounts. A consolidated federal
income tax return is filed with ConchoSouthlake Bancshares, Inc.'s subsidiary, Southwest
Bank of San Angelo. Concho Bancshares, Inc. owns 99.69% and Subsidiary
conform to generally accepted accounting principles and to general practices
within the banking industry. The following are descriptions of the outstanding
common stockmore
significant of Southwest Bankthose policies. All material intercompany transactions and
accounts have been eliminated upon consolidation.
Investment Securities
- ---------------------
The Company uses Statement of San Angelo.
Cash flows - For purposes of reporting cash flows, cashFinancial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and cash equivalents
----------
include cash on hand and amounts due from banks. Cash flows from loans, demand
deposits, NOW accounts, savings accounts, federal funds purchased and sold, and
certificates of deposit,Equity Securities. Pursuant to
SFAS No. 115, investment securities that are reported net.
Investment securities - Securities held for investment, other than mutual
---------------------
funds,short-term resale are
statedclassified as trading securities and carried at fair value. Debt securities that
management has the ability and intent to hold to maturity are classified as
held-to-maturity and carried at cost, adjusted for amortization of premiumspremium and
accretion of discounts computed onusing methods approximating the straight-line method over the period from date of
purchase to date of maturity. This method doesinterest method.
Securities which do not result in amounts that are
materially different from that required by generally accepted accounting
principles. The investment in mutual funds is stated at the lower of aggregate
cost or market asmeet either of the balance sheet date.
Interest incomepreviously mentioned categories are
classified as available-for-sale and are carried at fair value. Realized and
unrealized gains and losses on loans - Interesttrading securities are included in net income.
Unreal ized gains and losses on commercial, real estate and student
------------------------
loans issecurities available-for-sale are recognized as
earned based upondirect increases or decreases in stockholders' equity net of deferred income
tax.
Costs of securities sold are recognized using the principal amounts outstanding.
Interest on installment loans is recognized as earned based on the rule of
seventy-eightsspecific identification
method.
BuildingCompany Premises and equipmentEquipment
- Building------------------------------
The Company's premises and equipment are stated at cost less ----------------------
accumulated
depreciation, which is computed byusing the straight-line method over estimated
useful lives ranging from three to forty years.
Major expenditures for property and accelerated cost
recovery system methods. Accumulatedthose which substantially increase useful
lives are capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. When assets are retired or otherwise disposed of, their costs and
related accumulated depreciation amounts are removed from the accounts with the
resulting gains or losses included as income.
Goodwill
- --------
Goodwill is amortized on the straight-line basis over forty years.
Federal Income Taxes
- --------------------
The Company files a consolidated income tax return with its subsidiary. Income
taxes are allocated on a separate return basis pursuant to a tax-sharing
agreement.
The Company uses SFAS No. 109, Accounting for Income Taxes, which requires an
asset and liability approach to financial accounting and reporting for income
taxes. The difference between the financial statement and tax bases of December 31, 1992assets
and 1991liabilities is $ 2,075,690determined annually. Deferred income tax assets and
$ 1,930,523, respectively. Maintenanceliabilities are computed for those differences that have future tax consequences
using the currently enacted tax laws and repairs are
chargedrates that apply to
expense as incurred while improvements are capitalized and
depreciated over the useful life of such improvements.
Allowance for loan losses - The allowance for loan losses is available for
-------------------------
losses incurred on loans and is increased by provisions charged to operating
expenses and reduced by charge-offs, net of recoveries. The allowance is based
on management's evaluation of the adequacy of the reserve. This evaluation
encompasses consideration of past loss experience and other factors, including
changes in the composition and volume of the portfolio, the relationship of the
allowance to the portfolio, and current economic conditions.
F-9F-8
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 1:1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, (CONTINUED)
AmortizationCONTINUED
the periods in which they are expected to affect taxable income. Income tax
expense is the current tax payable for the period plus or minus the net change
in the deferred tax assets and liabilities.
Allowance for Loan Losses
- Certain-------------------------
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.
Loans
- -----
Unearned discount on installment loans is recognized as income over the terms of
the loans by the interest method. Interest on other loans is calculated by using
the simple interest method on daily balances of the principal amount
outstanding. Loans on which the accrual of interest has been discontinued are
designated as nonaccrual loans. Accrual of interest on loans is discontinued
either when reasonable doubt exists as to the full, timely collection of
interest or principal or when a loan becomes contractually past due by ninety
days or more with respect to principal or interest. Generally when a loan is
placed on nonaccrual status, all interest previously accrued but not collected
is reversed against current period income. Income on such loans is then
recognized to the extent that cash is received and where the future collection
of principal is probable. Accruals are resumed on loans when they are brought
fully current with respect to interest and principal and when, in the judgment
of management, the loan is estimated to be fully collectible as to both
principal and interest.
Loan origination fees and certain direct loan origination costs associated withare amortized
over the appropriate lending or commitment period.
Other Real Estate Owned
- -----------------------
Other real estate owned is stated at the lower of fair value or the recorded
investment at date of foreclosure. At foreclosure, if fair value is less than
the Company's recorded investment, services
------------
have been capitalized anda write-down is recognized through a charge
to the allowance for loan losses. Declines in fair value subsequent to
foreclosure are being amortizedrecognized by the straight-line method over
a period of 60 months. Total amortization expense for 1992, 1991 and 1990 was
$ 4,000 each year.
Per Share Data - Earnings per share are based on the weighted average number of
--------------
common shares outstanding in 1992, 1991 and 1990 of 202,387, 210,168 and
210,168, respectively.
NOTE 2: INVESTMENT SECURITIES
At December 31, 1992 and 1991 the subsidiary held mutual fund investmentscharge to earnings with a cost basis of $ 964,843 and $ 1,897,269, respectively. The portfolios of
these mutual funds consisted of obligationscorresponding write-
down of the United States governmentasset.
Cash Flows
- ----------
For purposes of reporting cash flows, the Company has defined cash and agencies. As of December 31, 1992 and 1991, the aggregate cost of mutual fund
investments exceeded their aggregate market value by $ 122,927 and $ 171,297
respectively.
Investment securities showncash
equivalents as those amounts included in the balance sheet are reflected netcaption "Cash and due
from banks."
Estimates
- ---------
The preparation of accumulated accretionconsolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and amortization.
Atassumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-9
SOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. INVESTMENT SECURITIES
Securities held-to-maturity at December 31, 1992 and 1991,1996 consist of the amortized cost, estimated market values, and
the gross unrealized gains and losses of investments in debt securities were as
follows:following:
December 31, 1992
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized MarketFair
Cost Gains Losses Value
---------- ---------- ----------- ----------
Tax-exempt securities $7,046,858 $19,100 $(24,420) $7,041,538
Federal agency securities 308,266 - (1,798) 306,468
---------- ------- -------- ----------
$7,355,124 $19,100 $(26,218) $7,348,006
========== ======= ======== ==========
Securities available-for-sale at December 31, 1996 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ----------- -----------
United States government $17,511,071 $277,758 $(25,073) $17,763,756
United States agencies 12,211,810 352,867 (58,156) 12,506,521
Collateralized mortgage
obligation 2,938,724 84,839 (91,733) 2,931,830
Corporate bonds and notes -0- -0- -0- -0-
-----------U.S. Treasury obligations $1,834,768 $10,396 $ - $1,845,164
Federal agency securities 947,495 - (16,884) 930,611
---------- ------- -------- ----------
$2,782,263 $10,396 $(16,884) $2,775,775
========== ======= ======== ==========
Securities held-to-maturity at December 31, 1995 consist of the following:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- Total debt----------
Tax-exempt securities $32,661,605 $715,464 $ (174,962) $33,202,107
=========== ========$6,357,722 $33,095 $(26,701) $6,364,116
========== ================== ======== ==========
Continued
F-10
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 2:2. INVESTMENT SECURITIES, (CONTINUED)
The carrying value and approximate market value of debt securitiesCONTINUED
Securities available-for-sale at December 31, 1992, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have1995 consist of the right to call or prepay obligations with or without call or
prepayment penalties.following:
Carrying Approximate
Value Market Value
----------- ------------
Due in one year or less $ 2,545,483 $ 2,575,470
Due after one year through five years 18,181,825 18,392,451
Due after five years through ten years -0- -0-
Due after ten years 11,934,297 12,234,186
----------- -----------
$32,661,605 $33,202,107
=========== ===========
December 31, 1991
----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized MarketFair
Cost Gains Losses Value
---------- ---------- ----------- ----------- ----------------------
U.S. Treasury obligations $2,195,525 $8,833 $ (3,944) $2,200,414
Federal agency securities 1,499,960 812 (13,165) 1,487,607
---------- ------ -------- ----------
$3,695,485 $9,645 $(17,109) $3,688,021
========== ====== ======== ==========
The following is a summary of maturities of securities as of December 31, 1996:
Held-to-Maturity Available-for-Sale
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- --------- ---------- -----------
United States governmentAmounts maturing in:
One year or less $2,123,776 $2,122,061 $ 5,100,869748,453 $ 151,602 $ -0- $ 5,252,471
United States agencies 13,320,280 540,340 (10,220) 13,850,400
Collateralized mortgage obligation 8,249,479 141,603 (62,403) 8,328,679
Corporate bonds and notes 300,215 8,035 -0- 308,250
----------- -----------749,687
After one to five years 4,520,806 4,512,817 2,033,810 2,026,088
After five to ten years 710,542 713,128 - -
After ten years - - - -
---------- -----------
Total debt securities $26,970,843 $ 841,580 $ (72,623) $27,739,800
=========== ===========---------- ---------- ----------
$7,355,124 $7,348,006 $2,782,263 $2,775,775
========== ===================== ========== ==========
ContinuedSecurities with carrying v alues of $4,517,407 and $3,781,737 at December 31,
1996 and 1995, respectively, were pledged to secure U.S. government deposits and
other public funds as required or permitted by law.
During 1996, the Company sold available-for-sale securities for total proceeds
of $3,525,993, resulting in gross realized losses of $24,583. During 1995, the
Company sold available-for-sale securities for total proceeds of $4,084,704,
resulting in gross realized losses of $11,412. During 1994, the Company sold
available-for-sale securities for total proceeds of $2,382,563, resulting in
gross realized gains of $43,254 and gross realized losses of $10,572.
F-11
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 2: INVESTMENT SECURITIES (CONTINUED)
The carrying value and approximate market value of debt securities3. LOANS
Loans outstanding at December 31 1991, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.detailed as follows:
Carrying Approximate
Value Market Value1996 1995
----------- -----------------------
Due in one yearCommercial and single-pay consumer $ 6,412,944 $ 3,701,831
Real estate - construction 5,981,404 5,170,429
Real estate - mortgage 8,034,215 7,440,814
Installment 4,532,814 4,180,279
Credit card 349,251 398,690
Lease financing loans 1,349,315 1,723,505
Overdrafts 9,626 3,954
----------- -----------
Total Loans 26,669,569 22,619,502
Less: Unearned income (450,813) (445,072)
Less: Allowance for loan losses (243,685) (203,283)
----------- -----------
Loans, net $25,975,071 $21,971,147
=========== ===========
At December 31, 1996, the Company had nonaccrual loans of approximately
$178,000. If interest on those loans had been accrued at their original rates,
such income would have approximated $12,000. There were no nonaccrual loans at
December 31, 1995 and 1994.
Loans, excluding credit card loans, non-accrual loans and overdrafts, at fixed
interest rates and variable interest rates at December 31, are as follows:
1996 1995
----------- -----------
Fixed rates $20,689,408 $16,717,356
Variable rates 5,451,432 5,499,502
----------- -----------
$26,140,840 $22,216,858
=========== ===========
The following table shows the maturity distribution of the fixed rate loans at
December 31:
1996 1995
----------- -----------
Three months or less $ 300,2152,751,691 $ 308,250
Due after one1,730,246
Three through twelve months 4,344,776 3,834,961
One year through five years 6,583,200 6,760,060
Due afteryear 2,734,331 10,531,934
Over five years through ten years 504,339 512,538
Due after ten years 19,583,089 20,158,952858,610 620,215
----------- -----------
$26,970,843 $27,739,800$20,689,408 $16,717,356
=========== ===========
Obligations of the United States government with par values of $ 3,000,000,
were pledged to secure various deposits as of December 31, 1992 and 1991.
NOTE 3: PENSION AND PROFIT SHARING PLANS
The subsidiary has a non-contributory profit-sharing plan available to all
regular employees who have completed six months of service. Contributions
to this plan are at the discretion of the subsidiary's board of directors.
The subsidiary also sponsors a defined contribution plan, whereby it
matches 100% of employee contributions up to 4% of their compensation and
50% of contributions on the next 2% of compensation. Total expense,
relating to the defined contribution plan for the years ended December 31,
1992, 1991 and 1990 was $ 42,154, $ 33,967 and $ 34,824, respectively and
are included in employee benefits in the consolidated statements of
income. For the year ended December 31, 1992 the subsidiary's board of
directors elected to contribute $ 25,000 to the profit sharing plan.
Administrative fees of the plans are paid by the subsidiary. Employer
contributions of both plans vest according to the following schedule:
LENGTH OF SERVICE VESTING
----------------- -------
2 years 20%
3 years 30%
4 years 40%
5 years 60%
6 years 80%
7 years 100%
F-12
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 4: LOANS AND4. ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
December 31, December 31,
1992 1991
------------ ------------
Commercial, financial and agricultural $32,561,474 $26,479,060
Real estate 4,162,896 5,659,592
Installment, net of unearned discount 3,821,648 4,825,862
Student loans 4,101,729 3,314,090
Overdrafts 28,742 26,198
Participations sold (1,481,150) (599,829)
----------- -----------
Total loans, net of unearned discount $43,195,339 $39,704,973
Less allowance for loan losses 598,734 547,354
----------- -----------
NET LOANS $42,596,605 $39,157,619
=========== ===========
Non-accrual loans are as follows:
Principal balances of loans on
non-accrual status $ 638,371 $ 864,346
=========== ===========
Approximate interest foregone related to
non-accrual loans $ 68,000 $ 66,000
=========== ===========
ChangesAn analysis of transactions in the allowance for loan losses wereis presented as follows:
December 31, December 31, December 31,
1992 1991 1990
------------ ------------ ------------1996 1995 1994
--------- --------- ---------
BALANCE, BEGINNING OF YEARBalance - January 1 $203,283 $155,960 $158,201
Provision for loan losses 72,000 68,000 35,000
Recoveries 8,688 9,139 3,898
Loans charged-off (40,286) (29,816) (41,139)
-------- -------- --------
Balance - December 31 $243,685 $203,283 $155,960
======== ======== ========
NOTE 5. PREMISES AND EQUIPMENT
An analysis of premises and equipment is as follows:
1996 1995
----------- -----------
Land $ 547,354539,249 $ 510,017 $ 512,131
Provision charged to operations 205,000 120,000 195,000
Loans charged off (180,956) (92,631) (293,790)
Recoveries 27,336 9,968 96,676
------------ ------------ ------------
BALANCE, END OF YEAR $ 598,734 $ 547,354 $ 510,017
============ ============ ============578,272
Bank building and improvements 1,471,145 1,035,303
Furniture and equipment 887,753 497,681
---------- ----------
2,898,147 2,111,256
Less, accumulated depreciation (527,669) (428,581)
---------- ----------
Premises and equipment, net $2,370,478 $1,682,675
========== ==========
Total depreciation expense for 1996, 1995 and 1994 amounted to $118,342,
$109,965 and $111,990, respectively.
F-13
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
During the year ended6. INTEREST BEARING DEPOSITS
Interest bearing deposits at December 31 1988, the subsidiary changed its methodare summarized as follows:
1996 1995
----------- -----------
N.O.W. and super N.O.W. accounts $ 5,449,121 $ 4,833,237
Money market accounts 10,185,380 10,294,249
Savings accounts 1,487,201 1,570,699
Individual retirement accounts 1,832,164 1,802,288
Certificates of deposit
Under $100,000 5,356,029 4,222,656
Over $100,000 2,992,719 3,053,811
State and political subdivisions (over $100,000) 3,000,000 3,000,000
----------- -----------
$30,302,614 $28,776,940
=========== ===========
Related party deposits totaled $363,664 and $340,881 at December 31, 1996 and
1995, respectively.
Certificates of accounting for nonrefundable feesdeposit and costs associated with lending
activities to comply with the requirementsindividual retirement accounts issued in amounts of
Statement of Financial
Accounting Standards No. 91. Under the new accounting method, certain
lending related costs are capitalized into the loan balance$100,000 or more and amortized
against interest income over the term of the loan. Total capitalized loan
cost and related amortizationtheir remaining maturities at December 31 are as follows:
Beginning of End of
the Year the Year
Unamortized Capitalized Unamortized
Loan Costs Loan Costs Amortization Loan Costs
------------ ----------- ------------ -----------1996 1995
---------- ----------
1992 $ 156,576 $155,419 $ 131,534 $ 180,461
========= ======== ========= =========
1991 $ 148,396 $134,263 $ 126,083 $ 156,576
========= ======== ========= =========
1990 $ 132,762 $139,891 $ 124,257 $ 148,396
========= ======== ========= =========Three months or less $3,723,863 $3,856,883
Three through twelve months 1,394,908 1,880,919
Over twelve months 874,948 316,009
---------- ----------
$5,993,719 $6,053,811
========== ==========
Loans, net of participations sold, at variable and fixed interest rates
as of December 31, 1992 are as follows:
Variable Fixed
----------- -----------
Commercial, including overdrafts $14,807,576 $16,383,126
=========== ===========
Real estate $ 1,445,205 $ 2,636,055
=========== ===========
Installment $ 428,414 $ 3,393,234
=========== ===========
Student $ -0- $ 4,101,729
=========== ===========
Original maturities for each loan category as of December 31, 1992 are as
follows:
Commercial - less than 1 year to 30 years
Real estate - 1 year to 30 years
Installment - less than 1 year to 10 years
Student - 1 to 2 years
F-14
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBERNOTE 7. NOTE PAYABLE
The Company had a note payable to a bank bearing an interest rate of .5% above
the bank's prime lending rate. The note matures on July 31, 1992, 1991 AND 19901998 with provisions
for interest payments to be made quarterly. Principal payments include $113,383
due on July 31, 1997 and the remaining principal is due at maturity. The
outstanding balance at December 31, 1995 was $475,000. The note was paid in full
on December 31, 1996. The note was collateralized by 191,700 shares of the
issued and outstanding common stock of the Southlake Bancshares, Inc.
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)8. REGULATORY MATTERS
The subsidiary routinely sells its student loansBank must obtain prior approval from the Office of the Comptroller of the
Currency if the total of cash dividends declared in any calendar year exceed the
total of net profits (as defined) of that year combined with the total of the
retained net profits (as defined) of the preceding two years. At December 31,
1996, the Bank could have declared dividends of $1,302,925 without prior
approval of the Office of the Comptroller of the Currency.
The Bank was required to maintain reserve balances with the Panhandle Plains
Higher Education Agency priorFederal Reserve
Bank. During 1996 and 1995, such average balances totaled approximately $425,000
and $375,000, respectively.
The Bank is subject to various regulatory capital requirements administered by
the loans reaching repayment stage. These
loans are sold at face value. For 1992, 1991federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and 1990,possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
subsidiary sold
approximately $ 2,351,013, $ 2,619,000 and $ 2,038,000, respectively, of
these loans under this program.
NOTE 5: LAND, BUILDING AND EQUIPMENT
Major classifications of these assets are as follows:
December 31, December 31, December 31,
1992 1991 1990
------------ ------------ ------------
Land $ 327,000 $ 327,000 $ 327,000
Buildings 3,711,293 3,691,363 3,688,863
Leasehold improvements 145,077 145,077 141,877
Automobiles 58,528 31,895 14,316
Furniture and fixtures 743,263 691,939 675,163
Assets not in service 58,393 -0- -0-
---------- ---------- ----------
$5,043,554 $4,887,274 $4,847,219
Accumulated depreciation
and amortization $2,075,690 $1,930,523 $1,804,829
---------- ---------- ----------
Land, building and
equipment, net $2,967,864 $2,956,751 $3,042,390
========== ========== ==========
Depreciation and
amortization
expense $ 146,129 $ 137,650 $ 159,288
========== ========== ==========
NOTE 6: FEDERAL INCOME TAXES
Deferred income taxes arise from timing differences resulting from income
and expense items reported for financial accounting and tax purposes in
different periods. The principal sources of timing differences are
different depreciation methods for tax and financial purposes, and
differences in tax and financial accounting for deferred compensation
arrangements, bad debt losses and bond discount accretion. No deferred
federal income taxes have been recorded in theseBank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
following table) 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, 1996 and 1995, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1996 and 1995, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Bank 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 institution's category.
The Company's actual capital amounts and ratios are also presented in the table.
F-15
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 6: FEDERAL INCOME TAXES (CONTINUED)
The components of income tax expense are:8. REGULATORY MATTERS, CONTINUED
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions:
-------------------- --------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ---------- ---------- ----------- ----------
As of December 31, December 31, December 31,
1992 1991 1990
------------ ------------ ------------1996
Current income taxes:
Federal $ 251,629 $ 56,357 $ -0-
Minimum tax credit (12,050) -0- -0-
General business credit (48,579) (9,357) -0-
---------- --------- -------
Total current taxes $ 191,000 $ 47,000 $ -0-
---------- --------- -------
Deferred tax expense
(benefit): $ -0- $ -0- $ -0-
---------- --------- -------capital
(to risk weighted assets) $4,003,185 12.56% >/- $2,548,960 >/- 8.00% >/- $3,186,200 >/- 10.00%
Tier I Capital
(to risk weighted assets) $3,752,300 11.78% >/- $1,274,480 >/- 4.00% >/- $1,911,720 >/- 6.00%
Tier I Capital
(to average assets) $3,752,300 7.95% >/- $1,887,080 >/- 4.00% >/- $2,358,850 >/- 5.00%
As of December 31, 1995
Total income tax expense $ 191,000 $ 47,000 $ -0-
========== ========= =======capital
(to risk weighted assets) $3,168,226 11.51% >/- $2,201,840 >/- 8.00% >/- $2,752,300 >/- 10.00%
Tier I Capital
(to risk weighted assets) $2,957,743 10.75% >/- $1,100,920 >/- 4.00% >/- $1,651,380 >/- 6.00%
Tier I Capital
(to average assets) $2,957,743 7.04% >/- $1,681,160 >/- 4.00% >/- $2,101,450 >/- 5.00%
A reconciliationNOTE 9. FEDERAL INCOME TAXES
Other assets in the accompanying balance sheet includes the following amounts
of incomedeferred tax expense at the statutory rate to income tax
at the bank's effective rate is as follows:assets and liabilities:
December 31, December 31, December 31,
1992 1991 1990
------------ ------------ ------------1996 1995
--------- ---------
Tax at statutory rateDeferred tax liability $ 319,356 $ 164,469 $ 108,477
Tax benefit from net
operating loss
carryforward (67,727) (164,469) (108,477)
Minimum(4,644) $(3,431)
Deferred tax credit (12,050) -0- -0-
Tax on limitation of use of
net operating loss
carryforward for
alternative minimumassets 153,590 83,146
-------- -------
Net deferred tax purposes -0- 56,357 -0-
General business credit (48,579) (9,357) -0-
---------- ---------- ----------
Income tax expense $ 191,000 $ 47,000 $ -0-
========== ========== ==========asset $148,946 $79,715
======== =======
F-16
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 6:9. FEDERAL INCOME TAXES, (CONTINUED)
A consolidatedCONTINUED
The net deferred tax return is filed with the Company's subsidiary, Southwest
Bank of San Angelo. The above tax computations are based on the incomes
and tax attributesassets consists of the consolidated entity.
The consolidated entity has availablefollowing at December 31, 1992, 1991 and 1990,
unused net operating loss carryforwards31:
1996 1995
--------- --------
Employee benefits $ 62,427 $40,237
Contributions 28,730 -
Loan fees 19,503 17,116
Depreciation 5,568 2,168
Bad debts 37,362 23,625
Investment securities (1,456) (1,142)
Accretion (3,188) (2,289)
-------- -------
$148,946 $79,715
======== =======
The components of $ -0-, $ 133,500 and $ 749,908,
respectively, which may be applied against future taxable income. These
net operating loss carryforwards will expireincome tax expense are as follows:
Year of December 31, December 31, December 31,
Expiration 1992 1991 1990
---------- ------------ ------------ ------------1996 1995 1994
--------- --------- ---------
1991 $ -0- $ -0- $ 96,107
1999 -0- -0- 55,649
2000 -0- -0- 181,303
2001 -0- -0- 142,707
2002 -0- -0- 25,175
2004 -0- 133,500 248,967Current
Federal $238,472 $202,747 $113,417
State - - -
-------- -------- --------
238,472 202,747 113,417
Deferred federal (71,134) (30,991) (2,213)
-------- -------- --------
Income tax expense $167,338 $171,756 $111,204
======== ======== ========
InvestmentThe Company's income tax credit resultingexpense differed from the purchasestatutory federal rate of equipment is accounted
for using the "flow-through" method, which recognizes the benefit in the
period in which the assets which give rise to the credit are placed in
service. At December 31, 1992, 1991 and 1990, unused investment tax
credits totalling $ -0-, $ 26,032 and $ 37,009, respectively, were
available for carryforward which expire34%
as follows:
Year of
Expiration 1992 1991 19901996 1995 1994
---------- ------------ ------------ --------------------- ---------
1991Statutory rate applied to earnings
before income taxes $ -0-291,186 $241,915 $154,225
Effect of tax exempt income (123,882) (80,936) (61,271)
Non-deductible expenses and
other items 34 10,777 18,250
--------- -------- --------
Income tax expense $ -0- $ 183
1992 -0- -0- 277
1993 -0- -0- 8,116
1994 -0- -0- 1,591
1995 -0- 2,853 3,663
1996 -0- 8,105 8,105
1997 -0- 8,000 8,000
1998 -0- 5,487 5,487
1999 -0- 745 745
2000 -0- 842 842167,338 $171,756 $111,204
========= ======== ========
F-17
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 6: FEDERAL INCOME TAXES (CONTINUED)
As10. RELATED PARTY TRANSACTIONS
In the ordinary course of December 31, 1992 , 1991 and 1990,business, the Company has availableand expects to continue to
have transactions, including borrowings, with its employees, officers, directors
and their affiliates. In the opinion of management, such transactions are on the
same terms, including interest rates and collateral requirements, as those
prevailing at the time for carryforward jobs tax creditscomparable transactions with unaffiliated persons.
The following is a recap of $ -0-, $ 20,927 and $ 20,927,
respectively, which expire as follows:the aggregate activity of such loans:
Year of
Expiration 1992 1991 19901996 1995
---------- ------ --------- ---------
1992Balance - January 1 $ -0-475,429 $211,968
Borrowings 372,961 322,656
Repayments (344,103) (59,195)
--------- --------
Balance - December 31 $ 13,474 $ 13,474
1993 -0- 7,453 7,453504,287 $475,429
========= ========
NOTE 7:11. EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a qualified employee stock ownership plan with a 401(k)
provision. The plan covers all employees who have attained age 20 1/2 with at
least 1,000 hours of service in a plan year. Participants are allowed to make
salary reduction contributions up to 15% of compensation, not to exceed the
Internal Revenue Code tax deductible maximum. The Board of Directors may, at
their discretion, contribute to participant accounts by matching employee salary
deferrals, contributing basic contributions to all nonhighly compensated
participants in order to satisfy the nondiscrimination requirements of the
Internal Revenue Code, and/or make optional contributions to all participant
accounts allocated based upon total relative compensation.
Discretionary Company contributions of $16,000, $56,042 and $50,004 were made
during 1996, 1995 and 1994, respectively. At December 31, 1996, 15,900 shares of
Southlake Bancshares, Inc. had been purchased by the employee stock ownership
plan.
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The subsidiaryCompany 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, andstandby
letters of credit. Thosecredit and financial guarantees. These financial instruments involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. The contract amounts of those
instruments reflect the extent of involvement the subsidiaryBank has in particular classes
of financial instruments.
F-18
SOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED
The subsidiary'sCompany's exposure to credit loss in the event of nonperformance by the
other party to the financial instrumentsinstrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The subsidiaryCompany uses the same credit
policies and collateral requirements in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk at December
31, 1996 are as follows:
Contract
Amount1996
----------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $4,740,485
Letters$8,063,598
==========
Standby letters of Credit 726,980
----------
$5,467,465credit and financial guarantees written $ 126,225
==========
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; therefore,upon, the total commitment amounts do not necessarily
represent future cash requirements. The subsidiaryCompany evaluates each customer's
creditworthiness on a case by casecase-by-case basis. The amount of the collateral obtained,
if deemed necessary by the subsidiaryCompany upon extension of credit, is based uponon
management's credit evaluation.
F-18
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 7: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK (CONTINUED)
Lettersevaluation of the counterparty. Collateral held varies but
may include customer deposits, accounts receivable, inventory, property, plant,
and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the bankCompany to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond financing, and
similar transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
NOTE 8: DEFERRED COMPENSATION
The subsidiary maintains a deferred compensation plan for its directors
funded by13. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the purchaseCompany's business activity is with customers located within twenty
five miles of life insurance policies on each participant.
Other pertinent financial information relating to the subsidiary's deferred
compensation plans is as follows:
December 31, December 31, December 31,
1992 1991 1990
------------ ------------ ------------
Life insurance premiums paid $ 5,600 $ 4,400 $ 4,800
============ ============ ============
Cash surrender value of life
insurance policies $ 244,957 $ 407,863 $ 369,599
============ ============ ============
Accrued deferred compensation
liability $ 100,548 $ 107,235 $ 78,383
============ ============ ============
Current year deferred
compensation expense $ 22,744 $ 28,852 $ 25,559
============ ============ ============
The deferred compensation plan of a former director was discontinued during
1992. The subsidiary recognized a gain of $ 67,514 from the discontinuance
of this director's plan.
NOTE 9: RELATED PARTY TRANSACTIONSBank. As of December 31, 19921996, the Company's loans to and
1991, certain officers and directors and
companies in which they have a beneficial ownership were indebted to the
subsidiaryguarantees of obligations of borrowers in the aggregate amountconstruction and land development
industry were $5,981,404. The Company grants interim construction and land
development loans to customers throughout its lending area. Although the Company
has a diversified loan portfolio, a substantial portion of $ 789,332its debtors' ability
to honor their contracts is dependent upon the construction and $ 1,191,456,
respectively. On January 21, 1992, the company issued notes to certain
customers and directors that are more fully described in Note 10.land development
economic sector.
F-19
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 10: NOTES PAYABLE
Notes payable at14. DEFERRED COMPENSATION PLANS
The Company has established nonqualified deferred compensation plans covering
all executive officers and directors. The amount of liability attributable to
the plans for 1996 and 1995 were $165,085 and $121,219, respectively. The amount
of expense attributable to the plans for 1996, 1995 and 1994 were $30,812,
$46,311 and $68,464, respectively.
NOTE 15. STOCK OPTIONS
The Company has outstanding non-statutory stock option agreements and incentive
stock option agreements. Under the non-statutory stock option agreements, the
Company has granted stock options of 27,560 shares to certain officers and
directors. The options are fully exercisable from the grant date up to fifteen
years therefrom. Under the incentive stock option agreement, the Company has
granted stock options of 11,359 shares to Bank officers. The options are fully
exercisable one year from grant date up to ten years therefrom.
Following is a summary of the status of the stock options during December 31,
1992 represents 13 individual promissory
notes issued to certain of the company's customers1996, 1995 and directors. Each
note was issued for $ 100,000 and all notes bear the same terms, maturity
date and collateral. The collateral for these notes is held at Bank of the
West, San Angelo, Texas. The terms of these notes are as follows:1994:
Non-statutory Incentive
Stock Options Stock Options
----------------- ------------------
Grant date 1992 1996 1992 1992
-------- ------- ------- ---------
Date of notes January 21, 1992
Maturity date January 21, 1997
Collateral Real Estate and 119,504
shares of Southwest Bank
common stock
Interest rate 9.50%
Payments 19 quarterly payments of
Outstanding at December 31, 1993 22,720 - 5,679 5,680
Granted - - - -
Exercised - - - -
------- ------ ------ --------
Outstanding at December 31, 1994 22,720 - 5,679 5,680
Granted - - - -
Exercised - - - -
------- ------ ------ --------
Outstanding at December 31, 1995 22,720 - 5,679 5,680
Granted - 4,840 - -
Exercised (2,840) - - (2,840)
------- ------ ------ --------
Outstanding at December 31, 1996 19,880 4,840 5,679 2,840
======= ====== ====== ========
Exercise price $ 50,702.86, including
interest beginning April 21, 1992;
balance due at maturity.
Following are the maturities of this note over the next five years:
199310.50 $16.47 $11.55 $ 88,178
1994 96,857
1995 106,392
1996 116,865
1997 830,872
----------
Total $1,239,164
==========10.50
======= ====== ====== ========
The mortgage payable at December 31, 1991 represents a note payable to a
local financial institution. The terms of this note are as follows:
Date of note June 1, 1989
Maturity date May 1, 1992
Collateral Real Estate
Interest rate CNB prime, not to exceed 12%
Monthly payment $ 15,414 (principal and interest)
Following areexercise price per share closely approximates the maturities of this note overfair market value on the
next five years:
1992 $1,167,622
==========
Total $1,167,622
==========
date each option was granted.
F-20
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 11: RETAINED16. EARNINGS Banking regulations limitPER SHARE
Primary earnings per share amounts are computed based on the amountweighted average
number of dividendsshares actually outstanding plus the shares that maywould be paid without
prior approvaloutstanding
assuming conversion and exercise of dilutive stock options, which are considered
to be common stock equivalents. The number of shares that would be issued from
the exercise of stock options has been reduced by the number of shares that
could have been purchased from the proceeds at the average market price of the
Bank's regulatory agency.
NOTE 12: LEASEScompany's stock.
The subsidiary leases computer equipmentfollowing data show the amounts used in computing primary earnings per share
and an automobile under four
agreements determined to be operating leases. The provisionsthe effect on the weighted average number of these
lease agreements are described as follows:shares of dilutive potential
common stock:
Computer
Computer Computer Equipment
Equipment Equipment ---------
#1 #2 Automobile #3
--------- --------- ---------- ---------
Primary lease term 36 mos 36 mos 30 mos 36 mos
Date of lease 12-27-89 08-23-89 10-04-89 01-29-90
Lease renewal option at
expiration of primary term 24 mos 24 mos 18 mos 24 mos
Primary term:
Year one $ 5,664 $ 1,950 $ 531 $ 345
Year two 6,231 2,145 531 380
Year three 6,854 2,359 531 418
Option period:
Year one 7,539 2,595 531 459
Year two 8,141 2,846 531 467
Penalty for non-renewal 18,626 6,430 -0- 1,136
Minimum future rental payments under the primary and optional terms of
these lease agreements as of December 31, 1992, 1991 and 1990 for each of
the next five years and in the aggregate are as follows:
F-21
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 12: LEASES (CONTINUED)
1992 1991 19901996 1995 1994
-------- -------- --------
1991 $ -0- $ -0- $ 113,101
1992 -0- 98,478 98,478
1993 122,596 418 418
1994 117,012 -0- -0-
1995 8,141 -0- -0-
--------- --------- ---------
Total $ 247,749 $ 98,896 $ 211,997
========= ========= =========
Lease expense under all operating leases is as follows:
1992 1991 1990Net income available to common stockholders
used in primary EPS $688,514 $539,183 $341,824
======== ======== ========
Weighted average number of common
shares used in basic EPS 207,362 200,700 196,032
Effect of dilutive securities:
Stock options 12,286 9,802 4,765
-------- -------- --------
Non-cancelable operating leases $ 98,478 $ 113,101 $ 110,843
Other leases 41,008 24,027 16,667
--------- --------- ---------
Total $ 139,486 $ 137,128 $ 127,510
========= ========= =========Weighted number of common shares
stock used in primary EPS 219,648 210,502 200,797
======== ======== ========
The primary termsFully diluted earnings per share amounts are not presented for 1996, 1995 and
1994 because they are not materially dilutive.
NOTE 17. SUBSEQUENT EVENTS
On August 18, 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") whereby First Financial Bankshares, Inc. (First Financial)
will acquire all of the automobile lease expired during 1992. The
Subsidiary did not elect to extend the termissued and outstanding shares of the automobile lease.
Computer equipment leases #1Company in exchange
for shares of the voting common stock of First Financial. Each outstanding share
of common stock of the Company will be converted into .894 shares of First
Financial common stock, valued at $39.75 on the market value date. The Company
will be merged with and #2 were extendedinto First Financial. The closing date is expected to
occur during the last forty-five days of 1997. Pursuant to the optional periods
during 1992.
Other leases are agreementsAgreement, the
Board of Directors of the Company shall adopt, prior to closing, resolutions to
terminate the Bank Executives' Supplemental Income Plan, the Bank Directors'
Deferred Income Plan, and the Bank Officers' Bonus Plan and eliminate all
liability under whichthese plans. Additionally, a resolution to freeze and terminate
the subsidiary leases certain
equipment.employee stock ownership plan will be adopted prior to the closing date.
On August 29, 1997, the Company redeemed all of its outstanding preferred stock
from its shareholders for $7,200.
As of September 16, 1997, all of the stock options outstanding as of December
31, 1996, had been exercised. The termsCompany received proceeds totaling $352,400
from the exercise of these agreements do not extend for more than one
year from the balance sheet date or they are cancelable at the optionoptions.
F-21
[JUDD, THOMAS, SMITH & COMPANY, P.C. LETTERHEAD APPEARS HERE]
- --------------------------------------------------------------------------------
Board of the lessee.
NOTE 13: CHANGE OF ACCOUNTING PRINCIPLE
In February 1992, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 109, Accounting for Income
---------------------
Taxes, which supersedes substantially all existing authoritative literature
-----
for accounting for income taxesDirectors and requires deferred tax balances to be
adjusted to reflect the tax rates in effect when those amounts are expected
to become payable or refundable. The Statement is required to be applied
in the Company's 1993 financial statements (earlier application is
permitted), either by restating prior-period financial statements or by
recognizing the cumulative effect of the change in the year of adoption.
The Company plans to recognize the cumulative effect of the change in 1993
when it adopts the Statement. The Company would have a deferred income tax
liability of $ 189,417 under the measurement principles of SFAS No. 109.
F-22
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires all entities to disclose the
estimated fair value of its financial instrument assets and liabilities.
For the Company, as for most financial institutions, approximately 95% of
its assets and 99% of its liabilities are considered financial instruments
as defined in Statement No. 107. 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. It
is also the Company's general practice and intent to hold its financial
instruments to maturity and to not engage in trading or sales activities.
Therefore, significant estimations and present value calculations were used
by the Company for the purpose of this disclosure.
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, 1992, were as follows:
*Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
ESTIMATED RECORDED
FAIR BOOK
VALUE BALANCE
----------- ----------
Cash and due from banks $ 4,747,085 $ 4,747,085
Federal funds sold 2,550,000 2,550,000
Investment securities (Note 2) 34,347,360 33,806,858
*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.
ESTIMATED RECORDED
FAIR BOOK
VALUE BALANCE
----------- ----------
Deposits with stated maturities $ 36,061,445 $ 35,906,058
Deposits with no stated maturities 45,189,115 45,189,115
Mortgage payable 1,334,415 1,239,164
F-23
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 1992, 1991 AND 1990
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
ESTIMATED RECORDED
FAIR BOOK
VALUE BALANCE
----------- -----------
Net loans $ 43,125,697 $ 42,596,605
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 by Statement No.
107 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 $ 4,740,485 and are
generally priced at market at the time of funding. Letters of credit
discussed in Note 7 have an estimated fair value based on fees currently
charged for similar agreements. At December 31, 1992, fees related to the
unexpired term of the letters of credit are not significant.
Management is concerned that 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.
F-24
ConchoStockholders
Southlake Bancshares, Inc.
San Angelo,Southlake, Texas
COMPILATION REPORT
------------------
We have compiled the accompanying consolidated balance sheets of ConchoSouthlake
Bancshares, Inc. and Subsidiary as of SeptemberJune 30, 19931997 and 1992,1996, and the related
consolidated statements of earnings,income, changes in stockholders' equity and cash
flows for the ninesix months then ended and the consolidated statements of earningsincome
for the three months ended SeptemberJune 30, 19931997 and 1992,1996, in accordance with the standards establishedStatements
on Standards for Accounting and Review Services issued by the American Institute
of Certified Public Accountants.
A compilation is limited to presenting in the form of financial statements
information that is the representation of management. We have not audited or
reviewed the accompanying consolidated financial statements and, accordingly, do
not express an opinion or any other form of assurance on them.
However, we did become aware
of a departure from generally accepted accounting principles that is described
in the following paragraph.
StatementsConsolidated statements of cash flows for the three month periods ended SeptemberJune 30,
19931997 and 19921996 have not been presented. Generally accepted accounting principles
require a statement of cash flows to be presented for each period for which
results of operations are provided when financial statements report both
financial position and results of operations.
Management has elected to omit substantially all of the disclosures required by
generally accepted accounting principles. If the omitted disclosures were
included in the financial statements, they might influence the user's
conclusions about the Company's financial position, results of operations, and
cash flows. Accordingly, these financial statements are not designed for those
who are not informed about such matters.
The consolidated balance sheet as of December 31, 19921996 was audited by us as part
of an audit of ConchoSouthlake Bancshares, Inc'sInc. consolidated financial statements, and
we expressed an unqualified opinion on those financial statements in our report
dated February
12, 1993,September 19, 1997 but we have not performed any auditing procedures since
that date.
Armstrong, Backus/s/ JUDD, THOMAS, SMITH & Co., L.L.P.
December 6, 1993
F-25COMPANY
September 19, 1997
F-22
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
UNAUDITED AUDITED
----------------------------- -------------
SEPTEMBER-Unaudited- -Audited-
June 30, DECEMBERJune 30, December 31,
-----------------------------1997 1996 1996
------------ 1993 1992 1992
-------------- ------------- ------------------------- ------------
Assets
ASSETS:
Cash and due from banks (Note 1) $ 3,519,7693,774,328 $ 3,593,7363,998,968 $ 4,747,0853,436,740
Interest earning deposits in banks 100,000 100,000 100,000
Federal funds sold (Note 1) 2,500,000 -0- 2,550,0005,680,000 1,540,000 7,000,000
Investment securities: (Notes 1 & 2)
U. S. Treasurysecurities
Available-for-sale 4,130,311 7,657,302 2,775,775
Held-to-maturity 10,156,936 7,320,507 7,355,124
Other investment securities 110,500 110,500 110,500
Loans, net 25,427,341 23,272,453 25,975,071
Premises and government agencies 28,563,616 26,619,044 29,722,881equipment, net 2,417,808 1,745,500 2,370,478
Accrued interest receivable 403,276 405,554 381,745
Other 6,231,924 5,399,085 4,083,977real estate 362,571 421,296 421,296
Prepaid expenses 75,616 93,567 116,735
Cash surrender value of life insurance 617,378 552,776 603,194
Goodwill, net 165,951 171,453 168,702
Other assets 231,767 241,919 128,558
------------ ------------ ------------
Total investment securitiesassets $ 34,795,54053,653,783 $ 32,018,12947,631,795 $ 33,806,858
Loans (Notes 1, 4, 7 & 9) 44,219,942 44,399,838 43,568,513
Less: Allowance for loan losses 596,602 559,411 598,734
Unearned discount 259,357 382,651 373,17450,943,918
============ ============ ============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing demand $ 17,827,607 $ 15,581,160 16,436,992
Interest bearing 31,228,039 27,894,077 30,303,614
------------ ------------ ------------
Net loans $ 43,363,983 $ 43,457,776 $ 42,596,605
Bank premises and equipment, net (Notes 1, 5 & 9) 2,837,744 2,921,942 2,967,86449,055,646 43,475,237 46,740,606
Accrued interest payable 61,237 49,946 54,469
Other assets (Note 8) 2,093,104 2,455,566 2,195,934
------------ ------------ ------------
TOTAL ASSETS $ 89,110,140 $ 84,447,149 $ 88,864,346
============ ============ ============
LIABILITIES:
Non-interest bearing deposits (Note 1) $ 12,701,741 $ 11,391,192 $ 13,002,139
Interest bearing depositsliabilities 310,840 227,151 220,641
Note payable - demand (Note 1) 33,933,148 29,808,496 32,186,976
Interest bearing deposits275,000 - time (Note 1 & 2) 34,267,984 35,667,049 35,906,058
------------ ------------ ------------
Total deposits $ 80,902,873 $ 76,866,737 $ 81,095,173
Short-term borrowings (Note 10) 130,000 -0- -0-
Mortgage payable (Note 10) 1,173,589 1,259,703 1,239,164
Other liabilities (Note 8) 1,087,074 734,626 823,81049,427,723 44,027,334 47,015,716
Minority interest 5,367 4,928 5,244
Stockholders' equity
Preferred stock 7,200 7,200 7,200
Common stock 211,820 208,880 208,880
Surplus 1,080,976 1,052,449 1,052,449
Retained earnings 2,922,566 2,406,040 2,658,712
Unrealized loss on available-for-sale securities (1,869) (75,036) (4,283)
------------ ------------ ------------
TOTAL LIABILITIES $ 83,293,536 $ 78,861,066 $ 83,158,147Total stockholders' equity 4,220,693 3,599,533 3,922,958
------------ ------------ ------------
SHAREHOLDERS' EQUITY:
Common stock,Total liabilities and stockholders' equity $ .50 par value; 500,000 shares
authorized, 210,270 shares issued, 185,386,
201,690 and 201,653 shares outstanding,
respectively53,653,783 $ 105,135 $ 105,135 $ 105,135
Capital surplus 4,660,218 4,660,218 4,660,218
Retained earnings (Note 11) 1,564,776 1,071,480 1,189,750
Treasury stock, cost (471,216) (125,968) (126,356)
Unrealized loss on securities, net (Note 2) (42,309) (124,782) (122,548)
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 5,816,604 $ 5,586,083 $ 5,706,199
------------ ------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 89,110,140 $ 84,447,149 $ 88,864,34647,631,795 50,943,918
============ ============ ============
SeeRead accountants' compilation report.
The accompanying notes are an integral part of this statement.
F-26report
F-23
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------INCOME
UNAUDITED
------------------------------------------------------------
Three Months Ended NineSix Months Ended
SeptemberJune 30, SeptemberJune 30,
------------------------------------------------------------
1993 1992 1993 19921997 1996 1997 1996
----------- ----------- ----------- -----------
Interest income
Loans (including fees) $ 685,750 $ 610,842 $ 1,350,449 $ 1,162,758
Taxable securities 74,933 105,917 127,645 174,564
Tax-exempt securities 84,216 73,227 155,412 139,617
Deposits in banks 1,443 1,442 2,885 2,884
Federal funds sold 60,556 32,071 115,434 112,588
----------- ----------- ----------- -----------
Total interest income 906,898 823,499 1,751,825 1,592,411
----------- ----------- ----------- -----------
Interest expense
Interest bearing money-market and
savings deposits 17,987 16,863 33,159 32,958
N.O.W. and super N.O.W. deposits 15,348 16,830 31,157 34,288
Time deposits, $100,000 and over 88,552 77,352 172,036 161,183
Other time deposits 171,670 147,459 342,106 299,422
Interest on note payable - 2,403 - 15,010
----------- ----------- ----------- -----------
Total interest expense 293,557 260,907 578,458 542,861
----------- ----------- ----------- -----------
Net interest income 613,341 562,592 1,173,367 1,049,550
Provision for loan losses 18,000 18,000 36,000 36,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 595,341 544,592 1,137,367 1,013,550
----------- ----------- ----------- -----------
Other income
Service charges on deposit accounts 110,054 90,811 207,435 178,365
Other operating revenue 60,723 73,008 107,529 158,787
Net gain (loss) on sale of assets - 272,046 (12,792) 272,046
----------- ----------- ----------- -----------
Total other income 170,777 435,865 302,172 609,198
----------- ----------- ----------- -----------
Other expense
Salaries 200,878 167,766 401,941 338,191
Other employee benefits 29,832 35,845 56,662 72,912
Net occupancy expense 32,243 23,201 64,771 38,040
Other operating expenses 301,920 387,229 597,650 594,204
Minority interest 228 379 360 600
----------- ----------- ----------- -----------
Total other expenses 565,101 614,420 1,121,384 1,043,947
----------- ----------- ----------- -----------
Income before income taxes 201,017 366,037 318,155 578,801
Income taxes (35,741) (83,029) (54,301) (142,959)
----------- ----------- ----------- -----------
Net income $ 165,276 $ 283,008 $ 263,854 $ 435,842
=========== =========== =========== ===========
Read accountants' compilation report.
F-24
SOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Unrealized
Gain (Loss)
On Investment
Securities
Common Stock Preferred Stock Pain-In Considered
------------------- ----------------- Capital in Retained Available-
Shares Amount Shares Amount Excess of Par Earnings for-Sale Total
------- -------- ------ -------- ------------- ---------- ---------- ----------
INTEREST INCOME: (Notes 1, 2, 4 & 9)
Loans, including fees $ 992,324 $ 993,549 $2,961,602 $2,958,264
Investment income - taxable 464,625 477,927 1,443,962 1,458,478
Interest on federal funds sold and
other 36,392 31,183 73,847 97,100
---------- ---------- ---------- -------------
Total interest income $1,493,341 $1,502,659 $4,479,411 $4,513,842
---------- ---------- ---------- -------------
INTEREST EXPENSE:
Interest bearing deposits $ 548,974 $ 644,014 $1,670,440 $2,082,399
Term and other indebtedness (Note 10) 30,512 30,269 88,295 89,733
---------- ---------- ---------- -------------
Total interest expense $ 579,486 $ 674,283 $1,758,735 $2,172,132
---------- ---------- ---------- -------------
NET INTEREST INCOME $ 913,855 $ 828,376 $2,720,676 $2,341,710
Provision for loan losses (Notes 1 & 4) 59,000 37,000 105,000 67,000
---------- ---------- ---------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES $ 854,855 $ 791,376 $2,615,676 $2,274,710
---------- ---------- ---------- -------------
OTHER INCOME:
Service fees on deposit accounts $ 163,378 $ 144,065 $ 474,432 $ 425,457
Other 135,365 194,442 382,648 409,340
---------- ---------- ---------- -------------
Total other income $ 298,743 $ 338,507 $ 857,080 $ 834,797
---------- ---------- ---------- -------------
OTHER EXPENSE:
Salaries and employee benefits (Note 3) $ 391,792 $ 370,150 $1,155,421 $1,060,860
Net occupancy and equipment expenses (Notes 5 & 12) 91,220 79,998 267,186 233,579
Equipment rentals, depreciation and
maintenance (Notes 5 & 12) 55,781 64,317 176,369 182,450
FDIC assessments 45,954 41,869 134,342 123,978
Correspondent bank service charges 16,034 14,720 44,970 42,130
Other (Notes 1, 4 & 8) 230,232 222,522 740,229 666,837
---------- ---------- ---------- -------------
Total other expense $ 831,013 $ 793,576 $2,518,517 $2,309,834
---------- ---------- ---------- -------------
EARNINGS BEFORE INCOME TAXES $ 322,585 $ 336,307 $ 954,239 $ 799,673
Provision for income tax (Note 6) 119,000 110,000 348,000 225,000
---------- ---------- ---------- -------------
See accountants' compilation report.
The accompanying notes are an integral part of this statement.
F-27
CONCHO BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
(CONTINUED)
UNAUDITED
----------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1993 1992 1993 1992
---------- ---------- ---------- ------------
EARNINGS BEFORE CUMULATIVE
ADJUSTMENT (Note 13)Balance December 31, 1995 200,700 $200,700 7,200 $ 203,5857,200 $ 226,307959,814 $1,970,198 $ 606,239 $ 574,673
Cumulative adjustment - change in
accounting principle ( -0-) -0- ( 231,213) -0-(3,358) $3,134,554
Net income 435,842 435,842
Unrealized loss on investment
securities considered
available-for-sale (71,678) (71,678)
Common stock issued 8,180 8,180 92,635 100,815
------- -------- ------ -------- ---------- ---------- -------- ----------
Balance June 30, 1996 208,880 $208,880 7,200 $ 7,200 $1,052,449 $2,406,040 $(75,036) $3,599,533
======= ======== ====== ======== ========== ========== ======== ==========
Balance December 31, 1996 208,880 $208,880 7,200 $ 7,200 $1,052,449 $2,658,712 $ (4,283) $3,922,958
Net income 263,854 263,854
Unrealized gain on investment
securities considered
available-for-sale 2,414 2,414
Common stock issued 2,940 2,940 28,527 31,467
------- -------- ------ -------- ---------- ---------- NET EARNINGS AFTER CUMULATIVE
ADJUSTMENT DUE TO CHANGE IN
ACCOUNTING PRINCIPLE-------- ----------
Balance June 30, 1997 211,820 $211,820 7,200 $ 203,5857,200 $1,080,976 $2,922,566 $ 226,307 $ 375,026 $ 574,673(1,869) $4,220,693
======= ======== ====== ======== ========== ========== ========== ==========
EARNINGS PER SHARE BEFORE
CUMULATIVE ADJUSTMENT* $ 1.10 $ 1.12 $ 3.12 $ 2.84
========== ========== ========== ==========
NET EARNINGS PER SHARE AFTER
CUMULATIVE ADJUSTMENT* $ 1.10 $ 1.12 $ 1.93 $ 2.84
========== ========== ========== ==========
DIVIDENDS PER SHARE** $ 0.00 $ 0.00 $ 0.00 $ 0.00
========== ========== ================== ==========
*Earnings per share are calculated using weighted average shares outstanding
for each period presented.
**Dividends per share are calculated using actual number of shares outstanding
at the end of each period presented.
SeeRead accountants' compilation report.
The accompanying notes are an integral part of this statement.
F-28F-25
CONCHO BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
---------------------------------------------------------
UNAUDITED
----------------------------------------------
CAPITAL STOCK
-------------- CAPITAL RETAINED
SHARES AMOUNT SURPLUS EARNINGS
-------- ---------- ---------- -----------
BALANCES AT JANUARY 1, 1992 210,270 $ 105,135 $4,660,218 $ 496,807
Net earnings - year to date 574,673
Purchase treasury stock
Decrease in unrealized loss (Note 2)
-------- ---------- ---------- -----------
BALANCES AT SEPTEMBER 30, 1992 210,270 $ 105,135 $4,660,218 $ 1,071,480
======== ========== ========== ===========
BALANCES AT JANUARY 1, 1993 210,270 $ 105,135 $4,660,218 $ 1,189,750
Net earnings - year to date 375,026
Purchase treasury stock
Deferred FIT benefit on
unrealized loss (Note 13)
Decrease in unrealized loss (Note 2)
-------- ---------- ---------- -----------
BALANCES AT SEPTEMBER 30, 1993 210,270 $ 105,135 $4,660,218 $ 1,564,776
======== ========== ========== ===========
See accountants' compilation report.
The accompanying notes are an integral part of this statement.
F-29
UNAUDITED
- -----------------------------------------------------------
TREASURY STOCK UNREALIZED TOTAL
- -------------------------- LOSS ON STOCKHOLDERS'
SHARES AMOUNT SECURITIES EQUITY
- ---------- --------- ------------ -------------
102 ($ 3,825) ($ 170,680) $ 5,087,655
574,673
8,478 ( 122,143) (122,143)
45,898 45,898
------ ---------- ------------ -------------
8,580 ($ 125,968) ($ 124,782) $ 5,586,083
====== ========== ============ =============
8,617 ($ 126,356) ($ 122,548) $ 5,706,199
375,026
16,267 ( 344,860) (344,860)
41,688 41,688
38,551 38,551
------ ---------- ------------ -------------
24,884 ($ 471,216) ($ 42,309) $ 5,816,604
====== ========== ============ =============
F-30
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------FOR THE SIX MONTHS ENDED JUNE 30,
UNAUDITED
----------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
1993 1992
---------------- ----------------1997 1996
----------- -----------
Operating activities
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earningsincome $ 375,026263,854 $ 574,673435,842
Adjustments to reconcile net earningsincome
to net cash provided by operating activities:
Depreciation and amortization 125,401 105,597activities
Provision for loan losses 105,000 67,000
Loss36,000 36,000
Depreciation and amortization 126,389 (5,574)
Other (gains) losses on sale/write downsale of assets 99,363 164,364
Premium amortization, net12,792 (272,046)
Donation of discount accretion 253,177 170,342
Changesbank property - 137,000
Increase in other assets and
liabilities:
Increase (decrease)cash surrender value of life insurance (14,184) (7,216)
Change in prepaid expenses 41,119 17,804
Change in interest receivable (21,531) (18,262)
Change in interest payable 6,768 (13,468)
Change in other liabilities 367,322 (1,233)
(Increase) decrease90,198 70,909
Minority interest 360 600
Change in other assets ( 327,318) ( 243,695)
------------- --------------- net (104,696) (106,889)
----------- -----------
Net cash provided by operating activities $ 997,971 $ 837,048
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:437,069 274,700
----------- -----------
Investing activities
Net change in time deposits with banks - 15,794
Maturities of held-to-maturity securities 875,000 511,398
Maturities and sales of available-for-sale securities 250,000 950,000
Purchases of held-to-maturity securities (3,702,882) (1,409,211)
Purchases of available-for-sale securities (1,607,245) (5,028,948)
Net change in funding and principal collections on loans 511,730 (1,659,906)
Net change in federal funds sold 1,320,000 4,680,000
Expenditures for premises and equipment (138,524) (428,668)
Proceeds from sale of investment
securities $ 656,621 $ 754,176
Proceeds from maturity of investment
securities 4,287,501 6,379,250
Purchase of investment securities (6,182,353) (10,651,159)
Net (increase) in loans (494,288) (4,653,370)
Purchase of property, plantpremises and equipment (53,619) (70,788)- 324,339
Proceeds from sale of fixed and other
assets 46,120 -0-
Net (increase) decrease in Fed Funds
sold 50,000 2,900,000
------------- --------------foreclosed property 45,933 613,227
----------- -----------
Net cash (used) byused in investing activities ($ 1,690,018) ($ 5,341,891)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:(2,445,988) (1,431,975)
----------- -----------
Financing activities
Net increase in demand deposits $ 1,432,955 $ 3,843,667
Net increase inand savings deposits 232,390 524,5301,297,893 1,633,033
Principal payment on debt - (200,000)
Proceeds from the issuance of common stock 31,467 100,815
Net (decrease)change in customer time deposits (1,857,645) (1,166,190)
Cash received on short-term
borrowings 130,000 -0-
Net (decrease) in Fed Funds purchased (10,000) (100,000)
Principal paid on long-term debt (65,576) (40,297)
Cash received on refinance of
long-term debt -0- 132,379
Dividends paid (52,533) (52,542)
Purchase of treasury stock ( 344,860) -0-
------------- --------------1,017,147 (1,049,252)
----------- -----------
Net cash provided (used) by financing activities ($ 535,269) $ 3,141,547
------------- --------------2,346,507 484,596
----------- -----------
Net increase (decrease) in cash and cash
equivalents ($ 1,227,316) ($ 1,363,296)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 4,747,085 4,957,032
------------- --------------
CASH AND CASH EQUIVALENTS
AT END OF PERIODdue from banks 337,588 (672,679)
Cash and due from banks, beginning of year 3,436,740 4,671,647
----------- -----------
Cash and due from banks, end of year $ 3,519,7693,774,328 $ 3,593,736
============= ==============3,998,968
=========== ===========
SeeRead accountants' compilation report.
The accompanying notes are an integral part of this statement.
F-31F-26
CONCHOSOUTHLAKE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------FOR THE SIX MONTHS ENDED JUNE 30,
UNAUDITED
-------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1993 1992
----------- -----------1997 1996
-------- --------
SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
AssetsSupplemental schedule of noncash
investing and financing activities:
Other real estate acquired through foreclosurein
settlement of loans $ 75,319 $ 446,561
Parent purchased 8,478 shares of its
stock from subsidiary $ -0- $ 122,143
OTHER DISCLOSURES:
Interest paid $ 1,772,413 $ 2,268,340
Federal income- $322,600
======== ========
Supplemental cash flow information:
Income tax paid $ 298,257 $ 42,10665,910 $207,956
======== ========
Interest paid $571,713 $540,204
======== ========
SeeRead accountants' compilation report.
F-27
ANNEX A
[LETTERHEAD OF JUDD, THOMAS, SMITH & COMPANY, P.C. APPEARS HERE]
September 19, 1997
The accompanying notes are an integral partBoard of this statement.
F-32
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies adopted by ConchoDirectors
Southlake Bancshares, Inc., the
Company, are summarized below.
Consolidation - The consolidated financial statements include Concho
-------------
3205 E. Highway 114
Southlake, Texas 76092
Gentlemen:
We have consulted with Southlake Bancshares, Inc. and its subsidiary, Southwest Bankin connection with the
proposed merger (the "Merger") of San Angelo, after
elimination of significant intercompany accounts. A consolidated federal
income tax return is filed with ConchoSouthlake Bancshares, Inc.'s subsidiary,
Southwest Bank of San Angelo. Concho Bancshares, Inc. owns 99.69% of the
outstanding common stock of Southwest Bank of San Angelo.
Cash flows - For purposes of reporting cash flows, cash ("Southlake"), a
Texas corporation, with and cash
----------
equivalents include cash on hand and amounts due from banks. Cash flows
from loans, demand deposits, NOW accounts, savings accounts, federal funds
purchased and sold, and certificates of deposit, are reported net.
Investment securities - Securities held for investment, other than mutual
---------------------
funds, are stated at cost, adjusted for amortization of premiums and
accretion of discounts computed on the straight-line method over the period
from date of purchase to date of maturity. The investment in mutual funds
is stated at the lower of aggregate cost or market as of the balance sheet
date.
Interest income on loans - Interest on commercial, real estate and student
------------------------
loans is recognized as earned based upon the principal amounts
outstanding. Interest on installment loans is recognized as earned based
on the rule of seventy-eights method.
Building and equipment - Building and equipment are stated at cost less
----------------------
accumulated depreciation computed by the straight-line and accelerated cost
recovery system methods. Accumulated depreciation as of September 30, 1993
and 1992 is $ 2,117,360 and $ 1,949,468, respectively. Maintenance and
repairs are charged to expense as incurred while improvements are
capitalized and depreciated over the useful life of such improvements.
Allowance for loan losses - The allowance for loan losses is available for
-------------------------
losses incurred on loans and is increased by provisions charged to
operating expenses and reduced by charge-offs, net of recoveries. The
allowance is based on management's evaluation of the adequacy of the
reserve. This evaluation encompasses consideration of past loss experience
and other factors, including changes in the composition and volume of the
portfolio, the relationship of the allowance to the portfolio, and current
economic conditions.
See accountants' compilation report.
F-33
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization - Certain costs associated with the Company's investment
------------
services have been capitalized and are being amortized by the straight-line
method over a period of 60 months. Total amortization expense for the nine
months ended September 30, 1993 and 1992 was $ 3,000 each period.
NOTE 2: INVESTMENT SECURITIES
At December 31, 1992 and September 30, 1993 and 1992 the subsidiary held
mutual fund investments with a cost basis of $ 964,843, $ 715,122 and
$ 1,070,889, respectively. The portfolios of these mutual funds consisted
of obligations of the United States government and agencies. As of
December 31, 1992 and September 30, 1993 and 1992, the aggregate cost of
mutual fund investments exceeded their aggregate market value by $ 122,927,
$ 84,213 and $ 125,168 respectively.
Investment securities shown in the balance sheet are reflected net of
accumulated accretion and amortization.
At December 31, 1992 and September 30, 1993 and 1992, the amortized cost,
estimated market values, and the gross unrealized gains and losses of
investments in debt securities were as follows:
DECEMBER 31, 1992
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
United States government $ 17,511,071 $ 277,758 ($ 25,073) $ 17,763,756
United States agencies 12,211,810 352,867 (58,156) 12,506,521
Collateralized mortgage
obligation 2,938,724 84,839 (91,733) 2,931,830
Corporate bonds and notes -0- -0- -0- -0-
------------ --------- ---------- ------------
Subtotal $ 32,661,605 $ 715,464 ($ 174,962) $ 33,202,107
FHLB stock 303,337 -0- -0- 303,337
------------ --------- ---------- ------------
Total $ 32,964,942 $ 715,464 ($ 174,962) $ 33,505,444
============ ========= ========== ============
Continued
See accountants' compilation report.
F-34
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1992 (Audited)
Nine Months Ended September 30, 1993 and 1992 (Unaudited)
NOTE 2: INVESTMENT SECURITIES (Continued)
The carrying value and approximate market value of debt securities at
December 31, 1992, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
CARRYING APPROXIMATE
VALUE MARKET VALUE
------------ -------------
Due in one year or less $ 2,545,483 $ 2,575,470
Due after one year through five years 18,181,825 18,392,451
Due after five years through ten years -0- -0-
Due after ten years 11,934,297 12,234,186
----------- -----------
$32,661,605 $33,202,107
=========== ===========
SEPTEMBER 30, 1993
------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------- -------------- -------------- -------------
United States government $ 18,939,208 $ 473,763 $ -0- $ 19,412,971
United States agencies 9,624,408 277,011 ( 31,188) 9,870,231
Collateralized mortgage
obligation 5,290,015 50,631 ( 36,385) 5,304,261
Corporate bonds and notes -0- -0- -0- -0-
------------- -------------- -------------- -------------
Subtotal $ 33,853,631 $ 801,405 ($ 67,573) $ 34,587,463
FHLB stock 311,000 -0- -0- 311,000
------------- -------------- -------------- -------------
Total $ 34,164,631 $ 801,405 ($ 67,573) $ 34,898,463
============= ============== ============== =============
Continued
See accountants' compilation report.
F-35
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1992 (Audited)
Nine Months Ended September 30, 1993 And 1992 (Unaudited)
NOTE 2: INVESTMENT SECURITIES (Continued)
The carrying value and approximate market value of debt securities at
September 30, 1993, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
Carrying Approximate
Value Market Value
------------- -------------
Due in one year or less $ 8,093,560 $ 8,195,341
Due after one year through five years 13,442,299 13,795,043
Due after five years through ten years 969,024 969,158
Due after ten years 11,348,748 11,627,923
----------- -----------
$33,853,631 $34,587,465
=========== ===========
September 30, 1993
------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ------------ -----------
United States government $14,369,400 $ 473,412 $ -0- $14,842,812
United States agencies 12,249,644 467,437 ( 24,725) 12,692,356
Collateralized mortgage
obligation 3,852,632 72,615 ( 36,730) 3,888,517
Corporate bonds and notes 300,032 718 -0- 300,750
----------- ----------- ------------ -----------
Subtotal $30,771,708 $ 1,014,182 ($61,455) $31,724,435
FHLB stock $ 300,700 -0- -0- 300,700
----------- ----------- ------------ -----------
Total $31,072,408 $ 1,014,182 ($61,455) $32,025,135
=========== =========== ========= ===========
Continued
See accountants' compilation report.
F-36
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 2: INVESTMENT SECURITIES (CONTINUED)
The carrying value and approximate market value of debt securities at
September 30, 1992, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
CARRYING APPROXIMATE
VALUE MARKET VALUE
----------- ------------
Due in one year or less $ 808,448 $ 825,594
Due after one year through five years 15,989,021 16,461,594
Due after five years through ten years 423,558 430,376
Due after ten years 13,550,681 14,006,871
----------- -----------
$30,771,708 $31,724,435
=========== ===========
Obligations of the United States government with par values of $ 3,000,000,
$ 2,500,000 and $ 4,025,728, were pledged to secure various deposits as of
December 31, 1992 and September 30, 1993 and 1992, respectively.
NOTE 3: PENSION AND PROFIT SHARING PLANS
The subsidiary has a non-contributory profit-sharing plan available to all
regular employees who have completed six months of service. Contributions
to this plan are at the discretion of the subsidiary's board of directors.
The subsidiary also sponsors a defined contribution plan, whereby it
matches 100% of employee contributions up to 4% of their compensation and
50% of contributions on the next 2% of compensation. Total expense,
relating to the defined contribution plan for the nine months ended
September 30, 1993 and 1992 was $ 33,693, and $ 37,603, respectively and
are included in employee benefits in the consolidated statements of income.
Administrative fees of the plans are paid by the subsidiary. Employer
contributions of both plans vest according to the following schedule:
LENGTH OF SERVICE VESTING
----------------- -------
2 years 20%
3 years 30%
4 years 40%
5 years 60%
6 years 80%
7 years 100%
See accountants' compilation reports.
F-37
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
December 31, 1992 (Audited)
Nine Months Ended September 30, 1993 and 1992 (Unaudited)
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
SEPTEMBER 30, SEPTEMBER 31,
1993 1992 1992
----------- ----------- -------------
Commercial $33,191,260 $32,075,609 $32,561,474
Real estate 4,063,054 4,459,462 4,162,896
Installment, net of
unearned discount 2,828,785 3,934,979 3,821,648
Student loans 4,791,072 4,304,375 4,101,729
Overdrafts 33,714 22,093 28,742
Participations sold ( 947,300) ( 779,331) ( 1,481,150)
----------- ----------- -----------
Total loans, net of
unearned discount $43,960,585 $44,017,187 $43,195,339
Less allowance for loan
losses 596,602 559,411 598,734
----------- ----------- -----------
NET LOANS $43,363,983 $43,457,776 $42,596,605
=========== =========== ===========
Non-accrual loans are as follows:
Principal balances of loans
on non-accrual status $ 701,469 $ 795,417 $ 638,371
=========== =========== ===========
Approximate interest
foregone related to
non-accrual loans $ 42,000 $ 53,000 $ 68,000
=========== =========== ===========
Changes in the allowance for
loan losses were as follows:
BALANCE, BEGINNING
OF PERIOD $ 598,734 $ 547,354 $ 547,354
Provision charged to
operations 105,000 67,000 205,000
Loans charged off ( 156,246) ( 80,889) ( 180,956)
Recoveries 49,114 25,946 27,336
----------- ----------- -----------
BALANCE, END OF
PERIOD $ 596,602 $ 559,411 $ 598,734
=========== =========== ===========
See accountants' compilation reports.
F-38
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (Audited)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (Unaudited)
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
During the year ended December 31, 1988, the subsidiary changed its method
of accounting for nonrefundable fees and costs associated with lending
activities to comply with the requirements of Statement of Financial
Accounting Standards No. 91. Under the new accounting method, certain
lending related costs are capitalized into the loan balance and amortized
against interest income over the term of the loan. Total capitalized loan
cost and related amortization are as follows:
BEGINNING OF END OF
THE PERIOD THE PERIOD
UNAMORTIZED CAPITALIZED UNAMORTIZED
LOAN COSTS LOAN COSTS AMORTIZATION LOAN COSTS
------------ ---------- ------------ -----------
December 31, 1992 $156,576 $155,419 $131,534 $180,461
======== ======== ======== ========
September 30, 1993 $180,461 $115,569 $115,635 $180,395
======== ======== ======== ========
September 30, 1992 $156,576 $119,000 $ 95,115 $180,461
======== ======== ======== ========
Loans at variable and fixed interest rates as of September 30, 1993 and
1992 are as follows:
December 31, 1992 September 30, 1993 September 30, 1992
------------------------ ------------------------ ------------------------
Variable Fixed Variable Fixed Variable Fixed
----------- ----------- ----------- ----------- ----------- -----------
Commercial,
including
overdrafts $14,807,576 $16,383,126 $12,604,611 $19,748,620 $16,317,339 $15,084,251
=========== =========== =========== =========== =========== ===========
Real estate $ 1,445,205 $ 2,636,055 $ 837,375 $ 3,150,122 $ 1,006,537 $ 3,369,706
=========== =========== =========== =========== =========== ===========
Installment $ 428,414 $ 3,393,234 $ 113,325 $ 2,715,460 $ 432,848 $ 3,502,131
=========== =========== =========== =========== =========== ===========
Student $ -0- $ 4,101,729 $ -0- $ 4,791,072 $ -0- $ 4,304,375
=========== =========== =========== =========== =========== ===========
Original maturities for each loan category as of December 31, 1992 and
September 30, 1993 and 1992 are as follows:
Commercial - less than 1 year to 30 years
Real estate - 1 year to 30 years
Installment - less than 1 year to 10 years
Student - 1 to 2 years
See accountants' compilation reports.
F-39
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 4: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The subsidiary routinely sells its student loans to the Panhandle Plains
Higher Education Agency prior to the loans reaching repayment stage. For
the nine months ended September 30, 1993 and 1992, the subsidiary sold
approximately $ 2,561,871 and $ 1,619,700, respectively, of these loans
under this program.
NOTE 5: LAND, BUILDING AND EQUIPMENT
Major classifications of these assets are as follows:
September 30, September 30, December 31,
1993 1992 1992
------------- ------------- -------------
Land $ 327,000 $ 327,000 $ 327,000
Buildings 3,719,533 3,701,945 3,711,293
Leasehold improvements 147,900 145,077 145,077
Automobiles 58,528 49,271 58,528
Furniture and fixtures 732,702 734,768 743,263
Assets not in service -0- -0- 58,393
----------- ----------- -----------
$ 4,985,663 $ 4,958,061 $ 5,043,554
Accumulated depreciation and
amortization 2,147,919 2,036,119 2,075,690
----------- ----------- -----------
Land, building and equipment,
net $ 2,837,744 $ 2,921,942 $ 2,967,864
=========== =========== ===========
Depreciation and amortization
expense $ 125,401 $ 105,597 $ 146,129
=========== =========== ===========
NOTE 6: FEDERAL INCOME TAXES
Concho Bancshares, Inc. files a consolidated tax return with it's sole
subsidiary, Southwest Bank of San Angelo. The provisions for federal
income taxes for the nine month periods ended September 30, 1993 and 1992
are based on the incomes and tax attributes of the consolidated entity.
Income tax expense for the nine months ended September 30, 1993 and 1992,
is based on the Company's estimate of the effective tax rates expected to
be applicable for the full year.
See accountants' compilation reports.
F-40
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 7: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The subsidiary 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 letters of credit. Those instruments involve elements of credit
risk in excess of the amount recognized in the balance sheet. The contract
amounts of those instruments reflect the extent of involvement the
subsidiary has in particular classes of financial instruments.
The subsidiary's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend
credit and letters of credit is represented by the contractual amount of
those instruments. The subsidiary uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. The contract amounts of these commitments are as follows:
September 30, December 31,
1993 1992
-------------- -------------
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $ 6,364,572 $ 4,740,485
Letters of Credit 790,234 726,980
----------- -----------
$ 7,154,806 $ 5,467,465
=========== ===========
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 may expire without being drawn upon; therefore, the total
commitment amounts do not necessarily represent future cash requirements.
The subsidiary evaluates each customer's creditworthiness on a case by case
basis. The amount of collateral obtained if deemed necessary by the
subsidiary upon extension of credit is based upon management's credit
evaluation.
See accountants' compilation reports.
F-41
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 7: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK (CONTINUED)
Letters of credit are conditional commitments issued by the bank 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.
NOTE 8: DEFERRED COMPENSATION
The subsidiary maintains a deferred compensation plan for its directors
funded by the purchase of life insurance policies on each participant.
Other pertinent financial information relating to the subsidiary's deferred
compensation plans is as follows:
September 30, September 30, December 31,
1993 1992 1992
------------- ------------- ------------
Life insurance premiums paid $ 3,200 $ 4,480 $ 5,600
========== ========== ==========
Cash surrender value of life
insurance policies $ 265,487 $ 235,967 $ 244,957
========== ========== ==========
Accrued deferred compensation
liability $ 123,174 $ 94,862 $ 100,548
========== ========== ==========
Current year deferred
compensation expense $ 22,626 $ 17,298 $ 22,744
========== ========== ==========
NOTE 9: RELATED PARTY TRANSACTIONS
As of December 31, 1992 and September 30, 1993 and 1992, certain officers
and directors and companies in which they have a beneficial ownership were
indebted to the subsidiary in the aggregate amount of $ 789,332, $ 883,813
and $ 884,207, respectively. On January 31, 1992, the company issued notes
to certain customers and directors that are more fully described in Note
10.
See accountants' compilation reports.
F-42
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 10: NOTES PAYABLE
Notes payable represents one note payable to a local financial institution
and 13 individual promissory notes issued to certain of the company's
customers and directors. Original principal amount of the note payable to
the financial institution was $ 130,000. Each of the 13 individual
promissory notes was issued for $ 100,000 and all bear the same terms,
maturity date and collateral. The collateral for the 13 promissory notes
is held at Bank of the West, San Angelo, Texas. The terms of these notes
are as follows:
LENDER
----------------------------------------------
Bank of the West 13-Various
---------------- ----------------------------
Date of note(s) June 2, 1993 January 21, 1992
Maturity date June 2, 1994 January 21, 1997
Collateral Unsecured Real estate and 119,504
shares of Southwest
Bank common stock
Interest rate 7.00% 9.50%
Payments Balance due at 19 quarterly payments
maturity of $ 50,702.86,
including interest,
beginning April 21,
1992; balance due at
maturity
Following are the maturities of these notes over the next five years:
1993-94 $ 224,611
1994-95 103,924
1995-96 114,154
1996-97 860,900
1997-98 -0-
-----------
Total $ 1,303,589
===========
See accountants' compilation reports.
F-43
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 11: RETAINED EARNINGS
Banking regulations limit the amount of dividends that may be paid without
prior approval of the Bank's regulatory agency.
NOTE 12: LEASES
As of December 31, 1992 and September 30, 1992, the subsidiary leased
computer equipment under agreements determined to be operating leases. The
provisions of these lease agreements are described as follows:
Computer Computer Computer
Equipment Equipment Equipment
Lease #1 Lease #2 Lease #3
--------- --------- ---------
Primary lease term 36 mos 36 mos 36 mos
Date of lease 12-27-89 08-23-89 01-29-90
Lease renewal option at
expiration of primary term 24 mos 24 mos 24 mos
Monthly lease amount
Primary term:
Year one $ 5,664 $ 1,950 $ 345
Year two 6,231 2,145 380
Year three 6,854 2,359 418
Option period:
Year one 7,539 2,595 459
Year two 8,141 2,846 467
Penalty for non-renewal 18,626 6,430 1,136
See accountants' compilation reports.
F-44
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 12: LEASES (CONTINUED)
Minimum future rental payments under the primary and optional terms of
these lease agreements as of December 31, 1992 and September 30, 1992 for
each of the next five years and in the aggregate are as follows:
September 30, December 31,
1992 1992
------------- ------------
1993 $ 126,125 $ 122,596
1994 130,528 117,012
1995 17,683 8,141
1996 -0- -0-
1997 -0- -0-
------------- ------------
Total $ 274,336 $ 247,749
============= ============
As of September 30, 1993, the subsidiary leased computer equipment under an
agreement determined to be an operating lease. The lease agreements that
previously existed were terminated and combined into one lease agreement
dated February 23, 1993. The provisions of this agreement are described as
follows:
Primary term 36 mos.
Date of lease 2-23-93
Lease renewal option at
expiration of primary term 24 mos.
Primary term $ 6,890/mo.
Option period $ 6,890/mo.
Penalty for non-renewal $ 20,150
Minimum future rental payments under the primary and optional terms of this
lease agreement as of September 30, 1993 for each of the next five years
and in the aggregate are as follows:
1994 $ 82,680
1995 82,680
1996 82,680
1997 82,680
1998 27,560
---------
Total $ 358,280
=========
See accountants' compilation reports.
F-45
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 12: LEASES (CONTINUED)
Lease expense under all operating leases is as follows:
September 30, September 30,
1993 1992
------------- -------------
Non-cancelable operating leases $ 64,987 $ 88,706
Other leases 26,588 21,256
------------- -------------
Total $ 91,575 $ 109,962
============= =============
Other leases are agreements under which the subsidiary leases certain
equipment. The terms of these agreements do not extend for more than one
year from the balance sheet date or they are cancelable at the option of
the lessee.
NOTE 13: CHANGE IN ACCOUNTING PRINCIPLE
During the nine month period ended September 30, 1993, the Company changed
its method of accounting for federal income taxes to conform with the
requirements of Statement of Financial Accounting Standards No. 109. No
effect on federal income taxes for the nine months ended September 30, 1993
has been recorded based upon the application of the new accounting
principle. Financial statements for periods ended prior to January 1, 1993
have not been restated, and the cumulative effect of the change of
$ 231,213 ($ 1.19 per share) is shown as a one-time charge to income in the
September 30, 1993 income statement.
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires all entities to disclose the
estimated fair value of its financial instrument assets and liabilities.
For the Company, as for most financial institutions, approximately 95% of
its assets and 99% of its liabilities are considered financial instruments
as defined in Statement No. 107. 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. It
is also the Company's general practice and intent to hold its financial
instruments to maturity and to not engage in trading or sales activities.
Therefore, significant estimations and present value calculations were used
by the Company for the purpose of this disclosure.
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, 1992, and September
30,1993 were as follows:
See accountants' compilation reports.
F-46
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
*Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
ESTIMATED RECORDED
FAIR BOOK
VALUE BALANCE
--------------------------- ---------------------------
September 30, December 31, September 30, December 31,
1993 1992 1993 1992
------------- ------------ ------------- ------------
Cash and due from banks $ 3,519,769 $ 4,747,085 $ 3,519,769 $ 4,747,085
Federal funds sold 2,500,000 2,550,000 2,500,000 2,550,000
Investment securities
(Note 2) 35,529,372 34,347,360 34,795,540 33,806,858
*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.
ESTIMATED RECORDED
FAIR BOOK
VALUE BALANCE
--------------------------- ---------------------------
September 30, December 31, September 30, December 31,
1993 1992 1993 1992
------------- ------------ ------------- ------------
Deposits with stated
maturities $ 34,433,825 $ 36,061,445 $ 34,267,984 $ 35,906,058
Deposits with no stated
maturities 46,634,889 45,189,115 46,634,889 45,189,115
Mortgage payable 1,268,920 1,334,415 1,173,589 1,239,164
Net loans 43,393,878 43,125,697 43,363,983 42,596,605
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 by Statement No.
107 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 $ 4,740,485 and
$ 6,364,572 at December 31, 1992 and September 30, 1993, respectively, and
are generally priced at market at the time of funding. Letters of credit
discussed in Note 7 have an estimated fair value based on fees currently
charged for similar agreements. At December 31, 1992 and September 30,
1993, fees related to the unexpired term of the letters of credit are not
significant.
See accountants' compilation reports.
F-47
CONCHO BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1992 (AUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1993 AND 1992 (UNAUDITED)
NOTE 14: FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Management is concerned that 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.
NOTE 15: SUBSEQUENT EVENT
On November 29, 1993, the Company rescinded the May 1993 purchase of
16,267 shares of stock into the treasury at the original purchase price of
$344,860. This agreement was entered into in complete settlement of a claim
asserted by the stockholder relating to the possible acquisition of the
company by First Financial Bankshares, Inc. The Company agreed to
repurchase("First
Financial"), a Texas corporation, upon the shares of stock at the same purchase priceterms and conditions set forth in the event that
the proposed stock exchange offer by First Financial Bankshares, Inc. is
not consummated.
See accountants' compilation reports.
F-48
Annex A
February 4, 1994
The Board of Directors
Concho Bancshares, Inc.
P. O. Box 60410
San Angelo, Texas 76906
Dear Sirs
Pursuant to Section 2.2 of the
Stock Exchange Agreement and Plan of Reorganization (the "Exchange Agreement")
dated as of December 7, 1993 (the "Agreement") among First
Financial Bankshares, Inc. ("First Financial"), Concho Bancshares, Inc.
("Concho") and Southwest Bank of San Angelo ("Southwest Bank"), our opinion has
been requestedAugust 18, 1997. At your request, in connection with respect to certainthe closing of the
FederalMerger, we are rendering an opinion concerning certain federal income tax
consequences of the exchange byMerger.
In arriving at the Concho shareholders of their Concho stock for First
Financial voting common stock (the "Stock Exchange") and the merger of Concho
with and into First Financial Bankshares of Delaware, Inc. ("FFB Delaware"), a
wholly-owned subsidiary of First Financial (the "Merger"). This opinion letter
-------------------
supersedes our opinion letter dated December 17, 1993.
- ------------------------------------------------------
In rendering our opinion,opinions expressed below, we have reviewed the Agreement and such other
documents as we have deemed necessary or appropriate. We have relied upon the accuracy
and completeness of the facts, information, covenantsfollowing:
(i) the Exchange Agreement;
(ii) the Prospectus and representations containedProxy Statement (together, the "Prospectus")
included in the AgreementRegistration Statement on Form S-4 filed with the
Securities and Exchange Commission by First Financial in
connection with the Merger, as amended through the date hereof;
and
(iii) such other documents.
Furthermore,corporate records of Southlake and First Financial as we
have deemed appropriate.
Defined terms used but not defined herein have the same meaning as in the
Prospectus.
We have assumed that the Stocktransactions contemplated by the Exchange and MergerAgreement
will be consummated in accordance withtherewith and as described in the AgreementProspectus
and that the Merger will qualify as a statutory merger under applicable laws of
the State law.
In renderingof Texas and the United States.
Based upon and subject to the foregoing, it is our opinion we have consideredthat, under currently
applicable law, the applicable provisionsExchange and Merger will constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury Regulations
promulgated thereunder, pertinent judicial authorities, interpretive rulingsand that, accordingly, the following will be the material federal
income tax consequences of the Internal Revenue ServiceExchange and such other authorities as we have considered
relevant. It should be noted that statutes, regulations, judicial decisions and
administrative interpretations are subject to change at any time and, in some
circumstances, with retroactive effect. A material change in the authorities
upon which our opinion is based could affect our conclusions. However, we
assume no obligation to revise or supplement this opinion if any subsequent
change were to occur.
Requisite to a tax-free reorganization under the Code is a continuity of
interest in the business enterprise on the part of those persons who were the
owners of the enterprise prior to the reorganization. Accordingly, the Concho
shareholders, as a group, will be required to satisfy the continuity of interest
doctrine through a post-exchange continuing ownership
The Board of Directors
Concho Bancshares, Inc.
February 4, 1994
Page 2
of the First Financial voting common stock received in the Stock Exchange. In
this regard, a disposition by the Concho shareholders of a substantial portion
(in the aggregate) of their post-exchange First Financial shares which is
pursuant to a plan, intention or arrangement existing at the time of the Stock
Exchange will result in a failure to satisfy the continuity of interest
doctrine. The Internal Revenue Service takes the position that 50 percent (in
the aggregate) constitutes a "substantial portion." A failure to satisfy the
continuity of interest doctrine will result in the Stock Exchange being a
taxable transaction to the Concho shareholders. In rendering our opinion, we
have assumed that the continuity of interest doctrine can and will be satisfied.
Also requisite to a tax-free reorganization under the Code is a continuity of
the business enterprise under the modified corporate form. The continuity of
business enterprise doctrine requires that the acquiring corporation either
continue the acquired corporation's historic business or use a significant
portion of the acquired corporation's historic business assets in a business.
Accordingly, in order to satisfy the continuity of business enterprise doctrine,
First Financial and/or one or more of its controlled subsidiaries will be
required to either continue the historic business of Concho and Southwest Bank
or use a significant portion of the historic business assets of Concho and
Southwest Bank in a business. A failure to satisfy the continuity of business
enterprise doctrine will result in the Stock Exchange being a taxable
transaction to the Concho shareholders. In rendering our opinion, we have
assumed that the continuity of business enterprise doctrine will be satisfied.
In addition to the requirements noted in the foregoing for a tax-free
reorganization under the Code, there is the requirement that, immediately after
a stock-for-stock exchange, the acquiring corporation must have control of the
acquired corporation. For purposes of the reorganization provisions of the
Code, the term "control" means the ownership of stock possessing at least 80
percent of the total combined voting power of all classes of stock entitled to
vote and at least 80 percent of the total number of shares of all other classes
of stock of the corporation. Therefore, in order to satisfy the control
requirement, First Financial and/or one or more of its controlled subsidiaries
will have to own at least 80 percent of the outstanding stock of Concho
immediately after the Stock Exchange. If the Stock Exchange is consummated with
First Financial acquiring less than 80 percent of the outstanding stock of
Concho, the Stock Exchange will be a taxable transaction to the Concho
shareholders. In rendering our opinion, we have assumed that the control
requirement will be satisfied.
Based solely upon and subject to the foregoing, we are of the opinion that under
current law:Merger:
1. The Stock Exchange and Merger will be treated as a corporate
reorganization within the meaning of Section 368(a) of the Code,
and First Financial Concho and FFB DelawareSouthlake each will be a party to the
reorganization within the meaning of Section 368(b) of the Code.
2. No gain or loss will be recognized by the Concho shareholders upon
receiptSouthlake Shareholders
on the exchange of their shares of Southlake Common Stock solely
for shares of First Financial Common Stock pursuant to the terms
of the Exchange Agreement to the extent of such exchange (except
as provided below with respect to fractional shares).
A-1
The Board of Directors Concho Bancshares,- Southlake Bankshares, Inc.
February 4, 1994
Page 3
First Financial voting common stock in exchange for their Concho
stock, except for any gain or loss recognized with respect to
shareholders who receive cash in lieu of fractional share interests in
First Financial voting common stock or pursuant to the exercise of
statutory dissenter rights.September 19, 1997
- -------------------------------------------------------------------------------
3. The aggregate Federalfederal income tax basis of the shares of First Financial
voting common stock received by the Concho shareholders in
exchangeCommon Stock for theirwhich shares of Concho stockSouthlake Common Stock are
exchanged pursuant to the Exchange and Merger will be the same as
the aggregate adjusted tax basis of their Concho stocksuch shares of Southlake Common Stock exchanged
therefor, less the taxany proportionate part of such basis ifallocable to
any allocated to fractional interest in any share interests.of First Financial Common
Stock.
4. The holding period for the shares of the First Financial voting common stock received
byCommon Stock
for which the Concho shareholders in exchange for their shares of Concho
stock in the hands of the Concho shareholdersSouthlake Common Stock are exchanged will
include the holding period of their Concho stockthe Southlake Common Stock they are
exchanged therefor.
Excepttherefor, provided that such shares of Southlake Common
Stock were held as a capital asset on the date of the Exchange.
5. Southlake Shareholders who receive cash in lieu of a fractional
share interest in First Financial Common Stock will be treated as
having received the cash in redemption of the fractional share
interest, and gain or loss will be recognized in an amount equal
to the difference between the cash received and the proportionate
part of basis allocable to the fractional share interest, which
gain or loss will be a capital gain or loss if the Southlake
Common Stock was a capital asset in the hands of the shareholder.
Such capital gain or loss will be long-term capital gain or loss
if the holder's holding period for the First Financial Common
Stock received, determined as set forth above, weis longer than one
year.
The effective tax rate on any resulting net long-term capital
gain for Southlake Shareholders who are individuals will
generally depend on the shareholder's holding period for the
shares of First Financial Common Stock received, determined as
set forth above, and the income tax brackets under which the
shareholder is taxed. For individual shareholders, the maximum
capital gains tax rate on property held more than eighteen months
is 20 percent and the maximum capital gains tax rate on property
held more than one year, but not more than eighteen months, is 28
percent.
This opinion may not be applicable to (1) Southlake shareholders who received
their Southlake Common Stock pursuant to the exercise of employee stock options
or otherwise as compensation, or (2) Southlake shareholders who are not citizens
or residents of the United States. We express no opinion as to the laws of any
jurisdiction other than the income tax consequences,
whether Federal, State or local,laws of the Stock Exchange and Merger, or of any
transactions related thereto. We are furnishing this opinion to you solely in
connection with Section 2.2 of the Agreement. This opinion is solely for your
benefit and is not to be used, circulated, quoted or otherwise referred to for
any purpose without our prior consent.United States.
We hereby consent to the references made to us in the Summary and under the
heading "The Exchange Offer - Certain Federal Income Tax Consequences" in the
Offering Circular/Prospectus of First Financial Relating to the Stock Exchange,
and to the inclusionfiling of this opinion as an Annex towith the Offering
Circular/ProspectusSecurities and the filing of this opinionExchange
Commission as an exhibit to the Registration Statement, on Form S-4and to the reference to
this opinion under the caption "Summary of whichthe Transaction -- Federal Income Tax
Consequences," under the caption "The Exchange Offer -- Federal Income Tax
Consequences," and elsewhere in the Prospectus. In giving such Offering Circular/Prospectusconsent, we do
not hereby admit that we are in the category of persons whose consent is
a part.required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
ARMSTRONG, BACKUS/s/ JUDD, THOMAS, SMITH & CO., L.L.P.COMPANY
Judd, Thomas, Smith & Company, P.C.
A-2
ANNEX B
ARTICLEART.5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS
AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1) (a) With respect to proposed corporate action that is submitted to a
vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action, setting
out that the shareholder's right to dissent will be exercised if the action is
effective and giving the shareholder's address, to which notice thereof shall be
delivered or mailed in that event. If the action is effected and the shareholder
shall not have voted in favor of the action, the corporation, in the case of
action other than a merger, or the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the action
is effected, deliver or mail to the shareholder written notice that the action
has been effected, and the shareholder may, within ten (10) days from the
delivery or mailing of the notice, make written demand on the existing,
surviving, or new corporation (foreign or domestic) or other entity, as the case
may be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
proceeding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and class
of the shares owned by the shareholder and the fair value of the shares as
estimated by the shareholder. Any shareholder failing to make demand within the
ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the case
of action other than a merger, and the surviving or new corporation (foreign or
domestic) or other entity that is liable to discharge the shareholder's right of
dissent, in the case of a merger, shall, within ten (10) days after the date the
action is effected, mail to each shareholder of record as of the effective date
of the action notice of the fact and date of the action and that the shareholder
may exercise the shareholder's right to dissent from the action. The notice
shall be accompanied by a copy of this Article and any articles or documents
filed by the corporation with the Secretary of State to effect the action. If
the shareholder shall not have consented to the taking of the action, the
shareholder may, within twenty (20) days after the mailing of the notice, make
written demand on the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, for payment of the fair value of
the shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was delivered
to the corporation pursuant to Section A of Article 9.10 of this Act, excluding
any appreciation or depreciation in anticipation of the action. The demand shall
state the number and class of shares owned by the dissenting shareholder and the
fair value of the shares as estimated by the shareholder. Any shareholder
failing to make demand within the twenty (20) day period shall be bound by the
action.
B-1
(2) Within twenty (20) days after receipt by the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, of a
demand for payment made by a dissenting shareholder in accordance with
Subsection (1) of this Section, the corporation (foreign or domestic) or other
entity shall deliver or mail to the shareholder a written notice that shall
either set out that the corporation (foreign or domestic) or other entity
accepts the amount claimed in the demand and agrees to pay that amount within
ninety (90) days after the date on which the action was effected, and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the corporation
(foreign or domestic) or other entity of the fair value of the shares, together
with an offer to pay the amount of that estimate within ninety (90) days after
the date on which the action was effected, upon receipt of notice within sixty
(60) days after that date from the shareholder that the shareholder agrees to
accept that amount and, in the case of shares represented by certificates, upon
the surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall be
made within ninety (90) days after the date on which the action was effected
and, in the case of shares represented by certificates, upon surrender of the
certificates duly endorsed. Upon payment of the agreed value, the shareholder
shall cease to have any interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
B-2
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the date
of the filing of the articles of merger, the surviving corporation is the owner
of all the outstanding shares of the other corporations, domestic or foreign,
that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action.
If the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
B-3
ART.5.13. PROVISIONS AFFECTING REMEDIES
OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance with
either Article 5.12 or 5.16 OF TEXAS BUSINESS CORPORATION ACTof this Act shall not thereafter be entitled to vote
or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance with
either Article 5.12 or 5.16 of this Act may withdraw such demand at any time
before payment for his shares or before any petition has been filed pursuant to
Article 5.12 or 5.16 of this Act asking for a finding and determination of the
fair value of such shares, but no such demand may be withdrawn after such
payment has been made or, unless the corporation shall consent thereto, after
any such petition has been filed. If, however, such demand shall be withdrawn
as hereinbefore provided, or if pursuant to Section B of this Article the
corporation shall terminate the shareholder's rights under Article 5.12 or 5.16
of this Act, as the case may be, or if no petition asking for a finding and
determination of fair value of such shares by a court shall have been filed
within the time provided in Article 5.12 or 5.16 of this Act, as the case may
be, or if after the hearing of a petition filed pursuant to Article 5.12 or
5.16, the court shall determine that such shareholder is not entitled to the
relief provided by those articles, then, in any such case, such shareholder and
all persons claiming under him shall be conclusively presumed to have approved
and ratified the corporate action from which he dissented and shall be bound
thereby, the right of such shareholder to be paid the fair value of his shares
shall cease, and his status as a shareholder shall be restored without prejudice
to any corporate proceedings which may have been taken during the interim, and
such shareholder shall be entitled to receive any dividends or other
distributions made to shareholders in the interim.
B-4
ART.5.16. MERGER OF SUBSIDIARY OR SUBSIDIARIES
INTO PARENT CORPORATION
QUALIFICATIONS
A. In any case in which at least ninety (90%) percent of the outstanding
shares of each class and series of a domestic or foreign corporation or
corporations is owned by another domestic or foreign corporation, and at least
one of such corporations is a domestic corporation and the other or others are
domestic corporations or foreign corporations organized under the laws of a
jurisdiction that permit such a merger, the corporation having such share
ownership may (1) mergermerge such other domestic or foreign corporation or
corporations into itself, (2) mergermerge itself into such other corporation, or (3)
mergermerge itself and one or more of such corporations into another of such domestic
or foreign corporations:
(a) in the event that the corporation having such share ownership will be
a surviving corporation in the merger, by executing and filing articles of
merger in accordance with Section B of this Article; or
(b) in the event that the corporation having such share ownership will
not be a surviving corporation in the merger, by the corporation having such
share ownership adopting a plan of merger in the manner required by Article 5.03
of this Act, except that no action under Section 5.03 shall be required to be
taken by the corporation or corporations whose shares are so owned, and
executing and filing articles of merger in accordance with Section B of this
Article.
SIGNATURE OF ARTICLES; CONTENTS
B. The articles of merger shall be signed on behalf of the parent
corporation by an officer and shall set forth:
(1) The name of the parent corporation, and the name or names of the
subsidiary corporations and the respective jurisdiction under which each such
corporation is organized.
(2) The number of outstanding shares of each class of each subsidiary
corporation and the number of such shares of each class owned by the parent
corporation.
(3) A copy of the resolution adopted by the board of directors of the
parent corporation to so merge and the date of the adoption thereof. If the
parent corporation does not own all the outstanding shares of each class of each
subsidiary corporation that is a party to the merger, the resolution shall state
the terms and conditions of the merger, including the cash or other property,
including shares, obligations, evidences of ownership, rights to purchase
securities, or other securities of any person or entity or any combination of
the shares, 1
obligations, evidences of ownership, rights, or other securities, to
be used, paid or deliverydelivered by the surviving corporation upon surrender of each
share of the subsidiary corporation or corporations not owned by the parent
corporation.
B-5
(4) If the surviving corporation is a foreign corporation, the address,
including street number if any, of its registered or principal office in the
jurisdiction under whose laws it is governed. If the surviving corporation is a
foreign corporation, on the merger taking effect the surviving foreign
corporation is deemed to (a) appoint the Secretary of State of this state as its
agent for service of process to enforce an obligation or the rights of
dissenting shareholders of each domestic corporation that is a party to the
merger, and (b) agree that it will promptly pay to the dissenting shareholders
of each domestic corporation that is a party to the merger the amount, if any,
to which they are entitled under this Article.
(5) If a plan of merger is required by Section A of this Article to be
adopted in the manner required by Article 5.03 of this Act, the information
required by Section A of Article 5.04 of this Act.
C. DELIVERY TO SECRETARY OF STATE; DUTIES. The original and a copy of the
articles of merger shall be delivered to the Secretary of State. If the
Secretary of State finds that such articles conform to law;law, he shall, when all
fees and franchise taxes have been paid as required by law:
(1) Endorse on the original and the copy the word "Filed," and the month,
day and year of the filing thereof.
(2) File the original in his office.
(3) Issue a certificate of merger to which he shall affix the copy and
deliver them to the surviving corporation or its representative.
D. EFFECTIVE DATE AND EFFECT. The effective date and the effect of such
merger shall be the same as provided in Articles 5.05 and 5.06 of this Act if
the surviving corporation is a domestic corporation. If the surviving
corporation is a foreign corporation, the effective date and the effect of such
merger shall be the same as in the case of the merger of domestic corporations
except in so far as the laws of such other jurisdiction provide otherwise.
REMEDY OF MINORITY SHAREHOLDERS
E. In the event all of the shares of a subsidiary domestic corporation that
is a party to a merger effected under this Article are not owned by the parent
corporation immediately prior to the merger, the surviving corporation (foreign
or domestic) shall, within ten (10) days after the effective date of the merger,
mail to each shareholder of record of each subsidiary domestic corporation a
copy of the articles of merger and notify the shareholder that the merger has
become effective. Any such shareholder who holds shares of a class or series
that would have been entitled to vote on the merger if it had been effected
pursuant to Article 5.03 of this Act shall have the right to dissent from the
merger and demand payment of the fair value for his shares in lieu of the cash
or other property to be used, paid or delivered to such shareholder 2
upon the
surrender of such shareholder's shares pursuant to the terms and conditions of
the merger, with the following procedure:
B-6
(1) Such shareholder shall within twenty (20) days after the mailing
of the notice and copy of the articles of merger make written demand on the
surviving corporation, domestic or foreign, for payment of the fair value of his
shares. The fair value of the shares shall be the value thereof as of the day
before the effective date of the merger, excluding any appreciation or
depreciation in anticipation of such act. The demand shall state the number and
class of the shares owned by the dissenting shareholder and the fair value of
such shares as estimated by him. Any shareholder failing to make demand within
the twenty (20) day period shall be bound by the corporate action.
(2) Within ten (10) days after receipt by the surviving corporation
of a demand for payment by the dissenting shareholder of the fair value of his
shares in accordance with Subsection (1) of this section, the corporation
(foreign or domestic) shall deliver or mail to the dissenting shareholder a
written notice which shall either set out that the corporation (foreign or
domestic) accepts the amount claimed in the demand and agrees to pay such amount
within ninety (90) days after the date on which the corporate action was
effected and, in the case of shares represented by certificates, upon the
surrender of the shares certificates duly endorsed, or shall contain an estimate
by the corporation of the fair value of such shares, together with an offer to
pay the amount of that estimate within ninety (90) days after the date on which
such corporate action was effected, upon receipt of notice within sixty (60)
days after that date from the shareholder that the shareholder agrees to accept
that amount and, in the case of shares represented by certificates, upon the
surrender of the shares certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
dissenting shareholder and the surviving corporation (foreign or domestic),
payment for the shares shall be made within ninety (90) days after the date on
which the corporate action was effected and, in the case of shares represented
by certificates, upon surrender of his certificate or certificates representing
such shares. Upon payment of the agreed value, the dissenting shareholder shall
cease to have any interest in such shares or in the corporation.
(4) If, within sixty (60) days after the date on which such corporate
action was effected, the shareholder and the surviving corporation (foreign or
domestic) do not so agree, then the dissenting shareholder or the corporation
(foreign or domestic) may, within sixty (60) days after the expiration of the
sixty (60) day period, file a petition in any court of competent jurisdiction in
the county in which the principal office of the corporation is located, asking
for a finding and determination of the fair value of the shareholder's shares as
provided in Section B of Article 5.12 of this Act and thereupon the parties
shall have the rights and duties and follow the procedure set forth in Sections
B to D inclusive of Article 5.12.
(5) In the absence of fraud in the transaction, the remedy provided by
this Article to a shareholder objecting to the corporate action is the exclusive
remedy for the recovery of the value of his shares or money damages to the
shareholder with respect to the corporate action. If the surviving corporation
(foreign or domestic) complies with the requirements of this Article, any such
shareholder who fails to comply with the requirements of this Article shall not
be 3
entitled to bring suit for the recovery of the value of his shares or money
damages to such shareholder with respect to such corporate action.
B-7
DISSENTING SHAREHOLDERS
F. If a plan of merger is required by Section A of this Article to be adopted
in the manner required by Article 5.03 of this Act, the provisions of Articles
5.11 and 5.12 of this Act shall apply to the rights of the shareholders of the
parent corporation to dissent from such merger. Except as otherwise provided in
this Article, the provisions of Articles 5.11 and 5.12 of this Act shall not be
applicable to a merger effected under the provisions of this Article. The
provisions of Article 5.13 of this Act shall be applicable to any merger
effected under the provisions of this Article to the extent provided in Article
5.13 of this Act.
4B-8
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
Item 20. Indemnification of Officers and Directors.
------------------------------------------
Article 2.02-1 of the Texas Business Corporation Act (the "TBCA") provides
that a Texas corporation, such as First Financial Bankshares, Inc. ("First
Financial"), may indemnify a director or officer of the corporation against
judgments, penalties (including excise and similar taxes), fines, settlements
and reasonable expenses (including court costs and attorneys' fees) incurred in
connection with any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative, any
appeal in such an action, suit or proceeding, and any inquiry or investigation
that could lead to such an action, suit or proceeding, because the person is or
was a director ofor officer of the corporation. In order to be entitled to such
indemnification, the director ofor officer must have conducted himself in good
faith and reasonably believed (i) in the case of conduct in his official
capacity with the corporation, that his conduct was in the corporation's best
interest,interests, (ii) in all other cases, that his conduct was at least not opposed to
the corporation's best interest,interests, and (iii) in the case of any criminal
proceeding, thathe had no reasonable cause to believe his conduct was not unlawful.
Article 2.02-1 of the TBCA provides that a director or officer may not be
indemnified for proceedings in which the person is found liable on the basis
that a personal benefit was improperly received by him or in which the person is
found liable to the corporation. Article 2.02-1 of the TBCA provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under the corporation's
articles of incorporation or any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise.
The First Financial Articles of Incorporation provide that, to the fullest
extent permitted by applicable law, each director, officer, employee and agent
of First Financial shall be indemnified for all expenses incurred in connection
with any action, suit, proceeding or claim to which he or she is named a party
or otherwise by virtue of holding such position; provided, however, that no
indemnification of employees or agents (other than directors or officers) will
be made without express authorization of the Board of Directors.
The First Financial Articles of Incorporation also provide that, to the
fullest extent permitted by applicable law, no First Financial director shall be
liable to First Financial or the First Financial shareholders for monetary
damages for or with respect to any acts or omissions in his or her capacity as a
director, except in the case of liability for (i) a breach of a duty of loyalty
to First Financial or its shareholders, (ii) an act or omission not in good
faith or that involves intentional misconduct or a knowing violation of the law,
(iii) a transaction from which a director received an improper benefit, (iv) an
act or omission for which the liability of a director is expressly provided by
statute, or (v) an act related to an unlawful stock repurchase or payment of a
dividend.
II-1
Item 21. Exhibits and Financial Statement Schedules.
------------------------------------------
(a) Exhibits. The following exhibits are filed as part of this
Registration Statement.
II-1
Item 601
Regulation S-K
Exhibit Reference
Number Description
- ------------------ -------------------------------------------------------
2*Item 601
Regulation S-K
Exhibit Reference
Number Description
- ----------------- ------------------------------------------------------------
*2.1 Stock Exchange Agreement and Plan of Organization dated
as of December 7, 1993 by and Plan of Reorganization
dated as of August 18, 1997 between First Financial
Bankshares, Inc., Concho Bancshares, Inc. and Southwest
Bank of San Angelo.
3.1* Articles of Incorporation, and all amendments thereto,
of the Registrant (incorporated by reference from
Exhibit 1 of the Registrant's Amendment No. 1 to Form
8-A filed on Form 8-A/A No. 1 on January 7, 1994).
3.2* Amended and Restated Bylaws of the Registrant, and all
amendments thereto (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* Specimen certificate for 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).
5.1* Opinion and Consent of McMahon, Surovik, Suttle,
Buhrmann, Cobb & Hicks, P.C.
8.1** Opinion and Consent of Armstrong, Backus & Co., L.L.P.
15.1* Letter from Armstrong, Backus & Co., L.L.P. regarding
unaudited interim financial information.
23.1* Consent of McMahon, Surovik, Suttle, Buhrmann, Cobb &
Hicks, P.C. (included in Exhibit 5.1).
23.2** Consent of Armstrong, Backus & Co., L.L.P. (included in
Exhibit 8.1).
23.3** Consent of Arthur Andersen & Co., Southlake Bancshares, Inc., and Texas
National Bank.
*2.2 Purchase and Assumption Agreement dated May 27, 1997 by
and between Southwest Bank of San Angelo and Texas
Commerce Bank - San Angelo, National Association.
**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 Specimen certificate for 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).
***5.1 Opinion and Consent of McMahon, Surovik, Suttle,
Buhrmann, Hicks & Gill, P.C.
*8.1 Opinion and Consent of Judd, Thomas, Smith & Company,
P.C.
*15.1 Letter from Judd, Thomas, Smith & Company, P.C.
regarding unaudited interim financial information.
*21 Subsidiaries of the Registrant.
***23.1 Consent of McMahon, Surovik, Suttle, Buhrmann, Hicks &
Gill, P.C. (included in Exhibit 5.1).
*23.2 Consent of Judd, Thomas, Smith & Company, P.C.
(included in Exhibit 8.1).
*23.3 Consent of Arthur Andersen LLP, independent certified public
accountants (auditors for First Financial Bankshares,
Inc.).
II-2
23.4** Consent of Armstrong, Backus & Co., L.L.P., independent
certified public accountants (auditors for Concho
Bancshares, Inc.).
24* Powers of Attorney (see the signature pages to this
Form S-4 Registration Statement).
99** Form of Letter of Transmittal and related Exchange
Offer documents.
--------------------------------------------
* Previously filed.
** Filed herewith.
*23.4 Consent of Judd, Thomas, Smith & Company, P.C.,
independent public accountants (auditors for Southlake
Bancshares, Inc.).
*24 Powers of Attorney (see the signature pages to this
Form S-4 Registration Statement).
*99 Form of Letter of Transmittal.
- --------------
*Filed herewith
**Incorporated by reference
***To be filed by amendment
(b) Financial Statement Schedules. Financial Statement Schedules have been omitted because
they are not
required.applicable.
Item 22. Undertakings.
------------
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by sectionSection 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to sectionSection 13(a) or sectionSection 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
sectionSection 15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement shall be deemed to
II-3
be a new registration statement relatedrelating to the securities
II-3
offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Itemsitems of the applicable form.
(d) The undersigned registrant undertakes that every prospectusprospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of sectionSection 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Abilene,
State of Texas, on the 7th30th day of February, 1994.September, 1997.
FIRST FINANCIAL BANKSHARES, INC.
By: *
-----------------------------------------/s/ KENNETH T. MURPHY
------------------------------------------
Kenneth T. Murphy, Chairman of the Board,
President and Chief Executive Officer
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 (including post-effective amendments and
amendments thereto) to this Registration Statement 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 Act of 1933, as amended, this Amendment
No. 1 to
Registration Statement has been signed on the 7th30th day of February,
1994,September, 1997, by
the following persons in the capacities indicated.
Signature Title
- --------- -----
/s/ Curtis R. Harvey Executive Vice President and
- ------------------------------
Curtis R. Harvey Chief Financial and Accounting Officer
Director
- ------------------------------
J. Allen BairdSignature Title
--------- -----
/s/ CURTIS R. HARVEY Executive Vice President, Chief Financial
- ------------------------------
Curtis R. Harvey Officer, Controller and Chief Accounting Officer
/s/ JOE CANON Director
- ------------------------------
Joe Canon
/s/ MAC A. COALSON Director
- ------------------------------
Mac A. Coalson
/s/ F. SCOTT DUESER Director
- ------------------------------
F. Scott Dueser
Director
- ------------------------------
Patrick N. Gerald
* Director
- ------------------------------
Robert E. Hitt
* Director
- ------------------------------
Ralph N. Hooks
Director
- ------------------------------
Joe B. Matthews
II-5
* Director
- ------------------------------
Raymond A. McDaniel, Jr.
* Director
- ------------------------------
Bynum Miers
* Chairman of the Board, President,
- ------------------------------
Kenneth T. Murphy Chief Executive Officer and Director
* Director
- ------------------------------
Dian Graves Owen
* Director
- ------------------------------
James Parker
* Director
- ------------------------------
W.V. Ramsey, Jr., M.D.
Director
- ------------------------------
Craig Smith
Director
- ------------------------------
H.T. Wilson
* Director
- ------------------------------
Stanley P. Wilson
*By: /s/ Curtis R. Harvey
--------------------------
Curtis R. Harvey
Attorney in Fact
/s/ ROBERT E. HITT Director
- ------------------------------
Robert E. Hitt
/s/ RAYMOND A. McDANIEL, JR. Director
- ------------------------------
Raymond A. McDaniel, Jr.
/s/ BYNUM MIERS Director
- ------------------------------
Bynum Miers
/s/ KENNETH T. MURPHY Chairman of the Board, President,
- ------------------------------
Kenneth T. Murphy Chief Executive Officer and Director
Director
- ------------------------------
Dian Graves Owen
/s/ JAMES M. PARKER Director
- ------------------------------
James M. Parker
/s/ JACK D. RAMSEY, M.D. Director
- ------------------------------
Jack D. Ramsey, M.D.
Director
- ------------------------------
Craig Smith
Director
- ------------------------------
H.T. Wilson
/s/ WALTER F. WORTHINGTON Director
- ------------------------------
Walter F. Worthington
II-6
Exhibit Index
Item 601
Regulation S-K
Exhibit Reference
Number Description
- ------------------ -------------------------------------------------------
8.1 Opinion and Consent of Armstrong, Backus & Co., L.L.P.
23.2 Consent of Armstrong, Backus & Co., L.L.P. (included in
Exhibit 8.1).
23.3 Consent of Arthur Andersen & Co.EXHIBIT INDEX
Item 601
Regulation S-K
Exhibit Reference
Number
- ------
*2.1 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.
*2.2 Purchase and Assumption Agreement dated May 27, 1997 by
and between Southwest Bank of San Angelo and Texas
Commerce Bank - San Angelo, National Association.
**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 Specimen certificate for 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).
***5.1 Opinion and Consent of McMahon, Surovik, Suttle,
Buhrmann, Hicks & Gill, P.C.
*8.1 Opinion and Consent of Judd, Thomas, Smith & Company,
P.C.
*15.1 Letter from Judd, Thomas, Smith & Company, P.C.
regarding unaudited interim financial information.
*21 Subsidiaries of the Registrant.
***23.1 Consent of McMahon, Surovik, Suttle, Buhrmann, Hicks &
Gill, P.C. (included in Exhibit 5.1).
*23.2 Consent of Judd, Thomas, Smith & Company, P.C.
(included in Exhibit 8.1).
*23.3 Consent of Arthur Andersen LLP, independent certified public
accountants (auditors for First Financial Bankshares,
Inc.).
23.4 Consent of Armstrong, Backus & Co., L.L.P., independent
certified public accountants (auditors for Concho
Bancshares, Inc.).
99 Form of Letter of Transmittal and related Exchange
Offer Documents
*23.4 Consent of Judd, Thomas, Smith & Company, P.C.,
independent public accountants (auditors for Southlake
Bancshares, Inc.).
*24 Powers of Attorney (see the signature pages to this
Form S-4 Registration Statement).
*99 Form of Letter of Transmittal.
- --------------
*Filed herewith
**Incorporated by reference
***To be filed by amendment