SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-7674
First Financial Bankshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Texas 75-0944023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 Pine Street
Abilene, Texas 79601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (915) 627-7155
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 8, 2001, the aggregate market value of voting stock held by
non-affiliates was $276,635,282.
As of March 8, 2001, there were 9,851,477 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Certain information called for by Part III is incorporated by reference to
the Proxy Statement for the 2001 Annual Meeting of our shareholders which will
be filed with the Securities and Exchange Commission not later than 120 days
after December 31, 2000.
TABLE OF CONTENTS
Page
----
FORWARD-LOOKING STATEMENTS....................................................1
PART I
ITEM 1. BUSINESS..................................................1
ITEM 2. PROPERTIES...............................................12
ITEM 3. LEGAL PROCEEDINGS........................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.....................................13
ITEM 6. SELECTED FINANCIAL DATA..................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK....................................................23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......25
ITEM 11. EXECUTIVE COMPENSATION...................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................25
SIGNATURES
i
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
and similar expressions, as they relate to us or our management, identify
forward-looking statements. These forward-looking statements are based on
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including but not limited to general economic conditions,
actions taken by the Federal Reserve Board, legislative and regulatory actions
and reforms, competition from other financial institutions and financial holding
companies, fluctuation in interest rates, changes in the demand for loans,
fluctuations in value of collateral and loan reserves and other factors
described in "PART II, Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations." Such statements reflect the
current views of our management with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
General
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First Financial Bankshares, Inc., a Texas corporation, is a multi-bank
holding company registered under the Bank Holding Company Act of 1956, or BHCA.
As such, we are supervised by the Board of Governors of the Federal Reserve
System, or Federal Reserve Board, as well as several other state and federal
regulators. We were formed as a bank holding company in 1956 under the original
name F & M Operating Company, but our banking operations date back to 1890, when
Farmers and Merchants National Bank opened for business in Abilene, Texas. By
virtue of a series of reorganizations, mergers, and acquisitions since 1956, we
now own, through our wholly-owned Delaware subsidiary, First Financial
Bankshares of Delaware, Inc., nine banks organized and located in Texas. These
nine banks are First National Bank of Abilene, Abilene, Texas; Hereford State
Bank, Hereford, Texas; First National Bank, Sweetwater, Texas; Eastland National
Bank, Eastland, Texas; First Financial Bank, National Association, Cleburne,
Texas (formerly named The First National Bank in Cleburne); Stephenville Bank
and Trust Co., Stephenville, Texas; San Angelo National Bank, San Angelo, Texas;
Weatherford National Bank, Weatherford, Texas; and Texas National Bank,
Southlake, Texas.
Our service centers are located primarily in North Central and West Texas.
Considering the branches and locations of all our subsidiary banks, as of
December 31, 2000, we had 25 financial centers across Texas, with seven
locations in Abilene, two locations in Cleburne, two locations in Stephenville,
two locations in San Angelo, three locations in Weatherford, and one location
each in Hereford, Sweetwater, Eastland, Southlake, Aledo, Alvarado, Burleson,
Trophy Club, and Roby.
First Financial Bankshares, Inc.
- --------------------------------
We provide management and technical resources and policy direction to our
subsidiary banks, which enables them to improve or expand their banking services
while continuing their local activity and identity. Each of our subsidiary banks
operates under the day-to-day management of its own board of directors and
officers, with substantial authority in making decisions concerning their own
investments, loan policies, interest rates, and service charges. We provide
resources and policy direction in, among other things, the following areas:
o asset and liability management;
o accounting, budgeting, planning and insurance;
o capitalization; and
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o regulatory compliance.
In particular, we assist our subsidiary banks with, among other things,
decisions concerning major capital expenditures, employee fringe benefits,
including pension plans and group insurance, dividend policies, and appointment
of officers and directors and their compensation. We also perform, through
corporate staff groups or by outsourcing to third parties, internal audits and
loan reviews of our subsidiary banks. Through First National Bank of Abilene, we
provide advice and specialized services for our banks related to lending,
investing, purchasing, advertising, public relations, and computer services.
Services Offered by Our Subsidiary Banks
- ----------------------------------------
Each of our subsidiary banks is a separate legal entity that operates under
the day-to-day management of its own board of directors and officers. Each of
our subsidiary banks provides general commercial banking services, which include
accepting and holding checking, savings and time deposits, making loans,
automated teller machines, drive-in and night deposit services, safe deposit
facilities, transmitting funds, and performing other customary commercial
banking services. Our subsidiary banks also administer pension plans, profit
sharing plans and other employee benefit plans, act as stock transfer agents or
stock registrars for corporations, and provide paying agent services. First
National Bank of Abilene, First National Bank, Sweetwater, Stephenville Bank and
Trust Co. and San Angelo National Bank have active trust departments. The trust
departments offer a complete range of services to individuals, associations, and
corporations. These services include administering estates, testamentary trusts,
various types of living trusts, and agency accounts. In addition, First National
Bank of Abilene, First Financial Bank and San Angelo National Bank provide
securities brokerage services through arrangements with various third parties.
Competition
- -----------
Commercial banking in Texas is highly competitive, and because we hold less
than 1% of the state's deposits, we represent only a minor segment of the
industry. To succeed in this industry, our management believes that our banks
must have the capability to compete in the areas of (1) interest rates paid or
charged; (2) scope of services offered; and (3) prices charged for such
services. Our subsidiary banks compete in their respective service areas against
highly competitive banks, savings and loan associations, small loan companies,
credit unions, and brokerage firms, all of which are engaged in providing
financial products and services and some of which are larger than our subsidiary
banks in terms of capital, resources and personnel.
Our business does not depend on any single customer or any few customers,
the loss of any one of which would have a materially adverse effect upon our
business. Although we have a broad base of customers that are not related to us,
our customers also occasionally include our officers and directors, as well as
other entities with which we are affiliated. With our subsidiary banks we may
make loans to officers and directors, and entities with which we are affiliated,
in the ordinary course of business. We make these loans on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons. Loans to directors,
officers and their affiliates are also subject to certain restrictions under
federal and state banking laws.
Employees
- ---------
With our subsidiary banks we employed approximately 706 full-time
equivalent employees at March 1, 2001. Our management believes that our employee
relations have been and will continue to be good.
Supervision and Regulation
- --------------------------
Both federal and state laws extensively regulate bank holding companies and
banks. These laws (and the regulations promulgated thereunder) are primarily
intended to protect depositors and the deposit insurance fund of the Federal
Deposit Insurance Corporation, or FDIC, although shareholders are also
benefited. The following information describes particular laws and regulatory
provisions relating to bank holding companies and banks. This discussion is
qualified in its entirety by reference to the particular laws and regulatory
provisions. A change in any of these laws or regulations may have a material
effect on our business and the business of our subsidiary banks.
2
Bank Holding Companies
Because we are a bank holding company, we are subject to regulation under
the BHCA and its examination and reporting requirements. The BHCA provides that
bank holding companies may not:
(1) engage in any activities other than banking, managing and controlling
banks, furnishing services to a bank that it owns and controls, or engaging in
certain activities closely related to banking. Examples of activities that the
Federal Reserve Board has determined to be closely related to banking, or to
managing or controlling banks, include:
o the making or acquiring of loans or other extensions of credit;
o servicing of loans;
o performing certain trust functions;
o acting or serving as an investment or financial advisor;
o providing certain securities brokerage services as agent for customers;
and
o providing bookkeeping and data processing services for a bank holding
company and its subsidiaries; or
(2) (subject to certain limited exceptions) directly or indirectly acquire
the ownership or control of more than five percent of any class of voting shares
or assets of any company, including a bank, without the prior written approval
of the Federal Reserve Board.
The BHCA provides that the Federal Reserve Board cannot approve any
acquisition, merger or consolidation that may
o substantially lessen competition in the banking industry,
o create a monopoly in any section of the country, or
o be a restraint of trade.
However, the Federal Reserve Board may approve such a transaction if the
convenience and needs of the community clearly outweigh any anti-competitive
effects. Specifically, the Federal Reserve Board would consider, among other
factors, the expected benefits to the public (greater convenience, increased
competition, greater efficiency, etc.) against the risks of possible adverse
effects (undue concentration of resources, decreased or unfair competition,
conflicts of interest, unsound banking practices, etc.). Also, see
"--Supervision and Regulation--Capital" for discussion of capital requirements
of bank holding companies and "--Our Support of Our Subsidiary Banks" for
discussion of support requirements of bank holding companies.
Gramm-Leach-Bliley Act
Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking, as described above. The Gramm-Leach-Bliley Act, which took effect on
March 12, 2000, dismantled many Depression-era restrictions against affiliation
between banking, securities and insurance firms by permitting bank holding
companies to engage in a broader range of financial activities, so long as
certain prudential safeguards are observed. Specifically, bank holding companies
may elect to become "financial holding companies" that may affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature or incidental to a financial activity. Thus, with the
enactment of the Gramm-Leach-Bliley Act, banks, securities firms and insurance
companies find it easier to acquire or affiliate with each other and cross-sell
financial products. The new act permits a single financial services organization
to offer a more complete array of financial products and services than
historically was permitted.
The enactment of the Gramm-Leach-Bliley Act was a pivotal point in the
history of the financial services industry. Under the new legislation, the
Federal Reserve Board serves as the primary "umbrella" regulator of financial
holding companies with supervisory authority over each parent company and
limited authority over its subsidiaries. The primary regulator of each
subsidiary of a financial holding company will depend on the type of activity
conducted by the subsidiary. For example, broker-dealer subsidiaries will be
regulated largely by securities regulators and insurance subsidiaries will be
regulated largely by insurance authorities.
3
A bank holding company may become a financial holding company under the new
statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company that falls out of compliance with such requirement
may be required to cease engaging in certain activities. Any bank holding
company that does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company Act.
A financial holding company is essentially a bank holding company with
significantly expanded powers. Under the Gramm-Leach-Bliley Act, among the
activities that will be deemed "financial in nature" for financial holding
companies are, in addition to traditional lending activities, securities
underwriting, dealing in or making a market in securities, sponsoring mutual
funds and investment companies, insurance underwriting and agency activities,
activities which the Federal Reserve Board determines to be closely related to
banking, and certain merchant banking activities.
In January 2001, the Federal Reserve Board and the Secretary of the
Treasury promulgated final regulations governing the scope of permissible
merchant banking investments which are those made under Section 4(k)(4)(H) of
the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act, which
authorizes a financial holding company, directly or indirectly as principal or
on behalf of one or more persons, to acquire or control any amount of shares,
assets or ownership interests of a company or other entity that is engaged in
any activity not otherwise authorized for the financial holding company under
Section 4 of the Bank Holding Company Act. Under the regulation, the types of
ownership that may be acquired include shares, assets or ownership interests of
a company or other entity including debt or equity securities, warrants,
options, partnership interests, trust certificates or other instruments
representing an ownership interest in a company or entity whether voting or
nonvoting. The merchant banking investments may be made by the financial holding
company or any of its subsidiaries, other than a depository institution or
subsidiary of a depository institution. Before acquiring or controlling a
merchant banking investment, a financial holding company must either be or have
a securities affiliate registered under the Securities Exchange Act of 1934 or a
qualified insurance affiliate. The regulation places restrictions on the ability
of a financial holding company to become involved in the routine management or
operation of any of its portfolio companies. The regulation also provides that a
financial holding company may own or control shares, assets and ownership
interests pursuant to the merchant banking provisions only for such period of
time as to enable the sale or disposition on a reasonable basis consistent with
the financial viability of the financial holding company's merchant banking
investment activities. Special provisions are also included in the regulation
governing the investment by a financial holding company in private equity funds.
The Federal Reserve Board and Secretary of Treasury have also requested
public comment on the issue of whether to add the activities of real estate
brokerage and real estate management to the list of permissible activities for
financial holding companies and financial subsidiaries of national banks. We
cannot predict whether the proposal will be adopted or the form any final rule
might take.
The Federal Reserve Board, the OCC, and the FDIC have proposed for comment
a rule which would establish special minimum regulatory capital requirements for
equity investments in non-financial companies. The proposed capital treatment
would apply symmetrically to equity investments of banks and bank holding
companies and would apply a series of marginal capital charges on covered equity
investments that increase with the level of a banking organization's overall
exposure to equity investments relative to the organization's Tier 1 Capital.
After withdrawing an earlier proposal, this is the second proposal the agencies
have made of this nature and we cannot predict what final form the regulation
may take.
We have not elected to become a financial holding company. We do not
believe that the Gramm-Leach-Bliley Act will have a material adverse effect on
our operations in this regard in the near term, but we will continue to analyze
the effect of the act on our operations and our competition in the coming years.
Our management believes that the Gramm-Leach-Bliley Act will in the long term
increase competition in the market for financial services and products.
Insurance companies and securities firms, which before the passage of the act
were limited in their ability to acquire deposit-taking institutions, will find
it easier to acquire or charter banks.
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Conversely, banks, which before the passage of the act were limited in
their ability to underwrite securities and insurance products, will find it
easier to engage in those activities. To the extent the Gramm-Leach-Bliley Act
permits banks, securities firms and insurance firms to affiliate, the financial
services industry may therefore experience further consolidation. Although to
date only a very small number of significant mergers between banks and
securities firms or banks and insurance firms have been consummated, in the
future an increased amount of consolidation could result in a growing number of
large financial institutions that could compete aggressively with us by offering
a wider variety of financial services than what we and our subsidiary banks
currently offer or intend to offer in the future.
Banks
Federal and state laws and regulations that govern banks have the effect
of, among other things, regulating the scope of business, investments, cash
reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking
associations under the National Bank Act are subject to regulation and
examination by the Office of the Comptroller of the Currency, or OCC. The OCC
supervises, regulates and regularly examines the First National Bank of Abilene,
First National Bank, Sweetwater, First Financial Bank, National Association,
Eastland National Bank, San Angelo National Bank, Weatherford National Bank and
Texas National Bank. The OCC's supervision and regulation of banks is primarily
intended to protect the interests of depositors. The National Bank Act
o requires each national banking association to maintain reserves against
deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
State Banks. Banks that are organized as state banks under Texas law are
subject to regulation and examination by the Banking Commissioner of the State
of Texas. The Commissioner regulates and supervises, and the Texas Banking
Department regularly examines, Hereford State Bank and Stephenville Bank and
Trust Co. The Commissioner's supervision and regulation of banks is primarily
designed to protect the interests of depositors. Texas law
o requires each state bank to maintain reserves against deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
See "--Supervision and Regulation--Payment of Dividends" for discussion of
restrictions on a bank's ability to pay dividends and "--Supervision and
Regulation--Capital" for a discussion of capital requirements of our subsidiary
banks.
Deposit Insurance
Each of our subsidiary banks is a member of the FDIC. The FDIC provides
deposit insurance protection that covers all deposit accounts in FDIC-insured
depository institutions and generally does not exceed $100,000 per depositor.
Our subsidiary banks must pay assessments to the FDIC under a risk-based
assessment system for federal deposit insurance protection. FDIC-insured
depository institutions that are members of the Bank Insurance Fund pay
insurance premiums at rates based on their risk classification. Institutions
assigned to higher risk classifications (i.e., institutions that pose a greater
risk of loss to their respective deposit insurance funds) pay assessments at
higher rates than institutions that pose a lower risk. An institution's risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to bank regulators. In addition, the
FDIC can impose special assessments to cover the costs of borrowings from the
U.S. Treasury, the Federal Financing Bank and the Bank Insurance Fund member
banks. As of December 31, 2000, the assessment rate for each of our subsidiary
banks is at the lowest level risk-based premium available.
5
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, or FIRREA, an FDIC-insured depository institution can be held liable for
any losses incurred by the FDIC in connection with (1) the "default" of one of
its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one
of its FDIC-insured subsidiaries "in danger of default." "Default" is defined
generally as the appointment of a conservator or receiver, and "in danger of
default" is defined generally as the existence of certain conditions indicating
that a default is likely to occur in the absence of regulatory assistance.
The Federal Deposit Insurance Act, or FDIA requires that the FDIC review
(1) any merger or consolidation by or with an insured bank, or (2) any
establishment of branches by an insured bank. The FDIC is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also
required before an insured bank retires any part of its common or preferred
stock, or any capital notes or debentures. Insured banks that are also members
of the Federal Reserve System, however, are regulated with respect to the
foregoing matters by the Federal Reserve System.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other
subsidiaries. We receive most of our revenue from dividends paid to us by our
Delaware holding company subsidiary. Similarly, the Delaware holding company
subsidiary receives dividends from our bank subsidiaries. Described below are
some of the laws and regulations that apply when either we or our subsidiary
banks pay dividends.
Each state bank that is a member of the Federal Reserve System and each
national banking association is required by federal law to obtain the prior
approval of the Federal Reserve Board and the OCC, respectively, to declare and
pay dividends if the total of all dividends declared in any calendar year would
exceed the total of (1) such bank's net profits (as defined and interpreted by
regulation) for that year plus (2) its retained net profits (as defined and
interpreted by regulation) for the preceding two calendar years, less any
required transfers to surplus. In addition, these banks may only pay dividends
to the extent that retained net profits (including the portion transferred to
surplus) exceed bad debts (as defined by regulation).
Our subsidiary banks paid aggregate dividends of approximately $21.0
million in 2000 and approximately $20.6 million in 1999. Under the dividend
restrictions discussed above, as of December 31, 2000, our subsidiary banks,
without obtaining governmental approvals, could have declared in the aggregate
additional dividends of approximately $21.6 million from retained net profits.
To pay dividends, we and our subsidiary banks must maintain adequate
capital above regulatory guidelines. In addition, if the applicable regulatory
authority believes that a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), the authority
may require, after notice and hearing, that such bank cease and desist from the
unsafe practice. The Federal Reserve Board and the OCC have each indicated that
paying dividends that deplete a bank's capital base to an inadequate level would
be an unsafe and unsound banking practice. The Federal Reserve Board, the OCC
and the FDIC have issued policy statements that recommend that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.
Affiliate Transactions
The Federal Reserve Act and the FDIA restrict the extent to which we can
borrow or otherwise obtain credit from, or engage in certain other transactions
with, our depository subsidiaries. These laws regulate "covered transactions"
between insured depository institutions and their subsidiaries, on the one hand,
and their nondepository affiliates, on the other hand. "Covered transactions"
include a loan or extension of credit to a nondepository affiliate, a purchase
of securities issued by such an affiliate, a purchase of assets from such an
affiliate (unless otherwise exempted by the Federal Reserve Board), an
acceptance of securities issued by such an affiliate as collateral for a loan,
and an issuance of a guarantee, acceptance, or letter of credit for the benefit
of such an affiliate. The "covered transactions" that an insured depository
institution and its subsidiaries are permitted to engage in with their
nondepository affiliates are limited to the following amounts:
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(1) in the case of any one such affiliate, the aggregate amount of "covered
transactions" cannot exceed ten percent of the capital stock and the surplus of
the insured depository institution; and (2) in the case of all affiliates, the
aggregate amount of "covered transactions" cannot exceed twenty percent of the
capital stock and surplus of the insured depository institution. In addition,
extensions of credit that constitute "covered transactions" must be
collateralized in prescribed amounts. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. Finally, when we and our subsidiary banks conduct transactions
internally among us, we are required to do so at arm's length.
Capital
Bank Holding Companies. The Federal Reserve Board has adopted risk-based
capital guidelines for bank holding companies. The ratio of total capital to
risk weighted assets (including certain off-balance-sheet activities, such as
standby letters of credit) must be a minimum of eight percent. At least half of
the total capital is to be composed of common shareholders' equity, minority
interests in the equity accounts of consolidated subsidiaries and a limited
amount of perpetual preferred stock, less goodwill, which is collectively
referred to as Tier 1 Capital. The remainder of total capital may consist of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. Bank holding companies that meet
certain specified criteria, including having the highest regulatory rating, must
maintain a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average
assets for the current quarter, less goodwill) of three percent. Bank holding
companies that do not have the highest regulatory rating will generally be
required to maintain a higher Tier 1 Capital leverage ratio of three percent
plus an additional cushion of 100 to 200 basis points. The Federal Reserve Board
has not advised us of any specific minimum leverage ratio applicable to it. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions.
Such strong capital positions must be kept substantially above the minimum
supervisory levels without significant reliance on intangible assets (e.g.,
goodwill, core deposit intangibles and purchased mortgage servicing rights). As
of December 31, 2000, our capital ratios were as follows: (1) Tier 1 Capital to
Risk-Weighted Assets Ratio, 17.75%; (2) Total Capital to Risk-Weighted Assets
Ratio, 18.74%; and (3) Tier 1 Capital Leverage Ratio, 10.40%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991,
or FDICIA established five capital tiers with respect to depository
institutions: "well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution's capital tier will depend upon where its capital levels
are in relation to various relevant capital measures, including (1) risk-based
capital measures, (2) a leverage ratio capital measure and (3) certain other
factors. Regulations establishing the specific capital tiers provide that a
"well-capitalized" institution will have a total risk-based capital ratio of ten
percent or greater, a Tier 1 risk-based capital ratio of six percent or greater,
and a Tier 1 leverage ratio of five percent or greater, and not be subject to
any written regulatory enforcement agreement, order, capital directive or prompt
corrective action derivative. For an institution to be "adequately capitalized,"
it will have a total risk-based capital ratio of eight percent or greater, a
Tier 1 risk-based capital ratio of four percent or greater, and a Tier 1
leverage ratio of four percent or greater (in some cases three percent). For an
institution to be "undercapitalized," it will have a total risk-based capital
ratio that is less than eight percent, a Tier 1 risk-based capital ratio less
than four percent or a Tier 1 leverage ratio less than four percent (or a
leverage ratio less than three percent if the institution is rated composite 1
in its most recent report of examination, subject to appropriate federal banking
agency guidelines). For an institution to be "significantly undercapitalized,"
it will have a total risk-based capital ratio less than six percent, a Tier 1
risk-based capital ratio less than three percent, or a Tier 1 leverage ratio
less than three percent. For an institution to be "critically undercapitalized,"
it will have a ratio of tangible equity to total assets equal to or less than
two percent. FDICIA requires federal banking agencies to take "prompt corrective
action" against depository institutions that do not meet minimum capital
requirements. Under current regulations, we were "well capitalized" as of
December 31, 2000.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
"undercapitalized." An "undercapitalized" institution must develop a capital
restoration plan and its parent holding company must guarantee that
institution's compliance with such plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of five percent of the
institution's assets at the time it became "undercapitalized" or the amount
needed to bring the institution into compliance with all capital standards.
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Furthermore, in the event of the bankruptcy of the parent holding company,
such guarantee would take priority over the parent's general unsecured
creditors. If a depository institution fails to submit an acceptable capital
restoration plan, it shall be treated as if it is significantly
undercapitalized. "Significantly undercapitalized" depository institutions may
be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become "adequately capitalized," requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the appointment
of a receiver or conservator. Finally, FDICIA requires the various regulatory
agencies to set forth certain standards that do not relate to capital. Such
standards relate to the safety and soundness of operations and management and to
asset quality and executive compensation, and permit regulatory action against a
financial institution that does not meet such standards.
If an insured bank fails to meet its capital guidelines, it may be subject
to a variety of other enforcement remedies, including a prohibition on the
taking of brokered deposits and the termination of deposit insurance by the
FDIC. Bank regulators continue to indicate their desire to raise capital
requirements beyond their current levels.
In addition to FDICIA capital standards, Texas-chartered banks must also
comply with the capital requirements imposed by the Texas Banking Department.
Neither the Texas Finance Code nor its regulations specify any minimum
capital-to-assets ratio that must be maintained by a Texas-chartered bank.
Instead, the Texas Banking Department determines the appropriate ratio on a bank
by bank basis, considering factors such as the nature of a bank's business, its
total revenue, and the bank's total assets. As of December 31, 2000, all of our
Texas-chartered banks exceeded the minimum ratios applied to them.
Our Support of Our Subsidiary Banks
Under Federal Reserve Board policy, we are expected to commit resources to
support each of our subsidiary banks. This support may be required at times
when, absent such Federal Reserve Board policy, we would not otherwise be
required to provide it. In addition, any loans we make to our subsidiary banks
would be subordinate in right of payment to deposits and to other indebtedness
of our banks. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and be subject to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require the bank's
shareholders to pay the deficiency on a pro-rata basis. If any shareholder
refuses to pay the pro-rata assessment after three months notice, then the
bank's board of directors must sell an appropriate amount of the shareholder's
stock at a public auction to make up the deficiency. To the extent necessary, if
a deficiency in capital still exist and the bank refuses to go into liquidation,
then a receiver may be appointed to wind up the bank's affairs.
Interstate Banking and Branching Act
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, or Riegle-Neal Act, a bank holding company is able to acquire banks in
states other than its home state. Prior to September 29, 1995, federal law
provided that the Federal Reserve Board could only approve interstate
acquisitions by bank holding companies that were specifically authorized by the
laws of the state in which the bank whose shares were to be acquired was
located.
The Riegle-Neal Act also authorized banks to merge across state lines,
thereby creating interstate branches, beginning June 1, 1997. Under this act,
each state had the opportunity to "opt out" of this provision, thereby
prohibiting interstate branching in such states, or to "opt in" at an earlier
time, thereby allowing interstate branching within that state prior to June 1,
1997. Furthermore, pursuant to this act, a bank is now able to open new branches
in a state in which it does not already have banking operations, if the laws of
such state permit it to do so. Although Texas had adopted legislation to "opt
out" of the interstate branching provisions, recent judicial decisions and Texas
legislation have superseded this "opt-out" legislation. Accordingly, both the
OCC and the Texas Banking Department are presently accepting applications for
interstate merger and branching transactions, subject to certain limitations on
ages of the banks to be acquired and the total amount of deposits within the
state a bank holding company may control. Since our primary service area is
Texas, these developments are not expected to have any material impact on our
growth strategy. We may, however, face increased competition from out-of-state
banks that branch or make acquisitions in our primary markets.
8
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA subjects a bank to
regulatory assessment to determine if the institution meets the credit needs of
its entire community, including low- and moderate-income neighborhoods served by
the bank, and to take that determination into account in its evaluation of any
application made by such bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition of shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. Our subsidiary banks have taken significant actions to comply
with the CRA, and each has received at least a "satisfactory" commendation in
its most recent review by federal regulators with respect to its compliance with
the CRA. Both the United States Congress and the banking regulatory authorities
have proposed substantial changes to the CRA and fair lending laws, rules and
regulations, and there can be no certainty as to the effect, if any, that any
such changes would have on our subsidiary banks.
Consumer Laws And Regulations
We are also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the following
list is not exhaustive, these laws and regulations include the Truth in Lending
Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing
Act, among others. These laws and regulations mandate various disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. These and
other laws also limit finance charges or other fees or charges earned in our
activities. We must comply with the applicable provisions of these consumer
protection laws and regulations as part of our ongoing customer relations.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements
emphasizing the importance of technology risk management and supervision in
evaluating the safety and soundness of depository institutions. Banks are
contracting increasingly with outside vendors to provide data processing and
core banking functions. The use of technology-related products, services,
delivery channels and processes expose a bank to various risks, particularly
operational, privacy, security, strategic, reputation and compliance risk. Banks
are generally expected to successfully manage technology-related risks with all
other risks to ensure that a bank's risk management is integrated and
comprehensive, primarily through identifying, measuring, monitoring and
controlling risks associated with the use of technology.
Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking
agencies are required to establish appropriate standards for financial
institutions regarding the implementation of safeguards to ensure the security
and confidentiality of customer records and information, protection against any
anticipated threats or hazards to the security or integrity of such records and
protection against unauthorized access to or use of such records or information
in a way that could result in substantial harm or inconvenience to a customer.
The agencies have published a joint final rule which is effective July 1, 2001.
Among other matters, the rule requires each bank to implement a comprehensive
written information security program that includes administrative, technical and
physical safeguards relating to customer information.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide
its customers with a notice of privacy policies and practices. Section 502
prohibits a financial institution from disclosing nonpublic personal information
about a consumer to nonaffiliated third parties unless the institution satisfies
various notice and opt-out requirements and the customer has not elected to opt
out of the disclosure. Under Section 504, the agencies are authorized to issue
regulations as necessary to implement notice requirements and restrictions on a
financial institution's ability to disclose nonpublic personal information about
consumers to nonaffiliated third parties. In June 2000, the federal banking
agencies issued a final rule, effective November 13, 2000, but compliance with
which is optional until July 1, 2001.
9
Under the rule, all banks must develop initial and annual privacy notices
which describe in general terms the bank's information sharing practices. Banks
that share nonpublic personal information about customers with nonaffiliated
third parties must also provide customers with an opt-out notice and a
reasonable period of time for the customer to opt out of any such disclosure
(with certain exceptions). Limitations are placed on the extent to which a bank
can disclose an account number or access code for credit card, deposit, or
transaction accounts to any nonaffiliated third party for use in marketing.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, that affect the national supply of credit.
The Federal Reserve Board regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial
institution deposits, and restricting certain borrowings by financial
institutions and their subsidiaries. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banks in
the past and are expected to continue to do so in the future.
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The Gramm-Leach-Bliley Act has especially
created an increased level of rule-making and debate on the structure of the
United States banking system. The likelihood and timing of any proposals or
bills being enacted and the impact they might have on us and our subsidiary
banks cannot be determined at this time.
Statistical Disclosure
- ----------------------
The following tables provide information required by the Exchange Act
Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" that has
not been included in "PART II, Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Composition of Loans (in thousands):
December 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Commercial, financial and agricultural..... $ 295,032 $ 297,966 $ 278,647 $ 286,630 $ 240,271
Real estate-- construction................. 40,610 43,039 36,721 34,100 22,887
Real estate-- mortgage..................... 290,920 208,895 198,447 177,658 152,350
Consumer................................... 232,709 247,375 265,729 245,068 189,307
--------- --------- --------- --------- ---------
$ 859,271 $ 797,275 $ 779,544 $ 743,456 $ 604,815
========= ========= ========= ========= =========
Loan Concentrations
Other than the classifications shown above, we had no loans outstanding at
December 31, 2000 that represented more than 10% of total loans.
Maturity Distribution and Interest Sensitivity of Loans at December 31,
2000 (in thousands):
The following tables summarize maturity and yield information for the
commercial, financial, and agricultural and real estate construction portion of
the loan portfolio as of December 31, 2000:
10
After One
Year
One Year Through After Five
or less Five Years Years Total
------------- ------------- ----------- -------------
Commercial, financial, and agricultural $ 202,912 $ 80,680 $ 11,440 $ 295,032
Real estate-- construction........... 37,781 2,829 -- 40,610
------------- ------------- ----------- -------------
$ 240,693 $ 83,509 $ 11,440 $ 335,642
============= ============= =========== =============
Maturities
After One Year
-----------
Loans with fixed interest rates.................... $ 62,583
Loans with floating or adjustable interest rates... 32,366
-----------
$ 94,949
Potential Problem Loans
Certain loans classified for regulatory purposes as doubtful, substandard,
or special mention are included in the nonperforming loan table. Also included
in the classified loans are certain other loans that are deemed to be potential
problems. Potential problem loans are those loans that are currently performing
but where known information about trends or uncertainties or possible credit
problems of the borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with present repayment terms, possibly
resulting in the transfer of such loans to nonperforming status. These potential
problem loans totaled $2.0 million as of December 31, 2000.
Composition of Investment Securities (in thousands):
December 31, 2000 December 31, 1999 December 31, 1998
------------------------ ------------------------ ----------------------
Amortized Est. Fair Amortized Est. Fair Amortized Est. Fair
Cost Value Cost Value Cost Value
---------- ---------- ---------- --------- --------- ---------
Held-to-maturity at amortized cost
- ----------------------------------
U.S. Treasury obligations and
obligations of U.S. government
corporations and agencies... $ 251,418 $ 251,921 $ 283,736 $ 277,681 $ 293,400 $ 297,080
Obligations of states and
political subdivisions...... 82,344 83,067 86,908 85,779 66,764 67,731
Mortgage-backed securities...... 53,541 54,006 46,083 45,393 44,634 44,894
Other securities................ 4,615 4,597 5,636 5,554 9,505 9,547
---------- ---------- ---------- --------- --------- ---------
Total....................... $ 391,918 $ 393,591 $ 422,363 $ 414,407 $ 414,303 $ 419,252
========== ========== ========== ========= ========= =========
Available-for-sale
- ------------------
U.S. Treasury obligations and
obligations of U.S. government
corporations and agencies... $ 102,872 $ 103,322 $ 105,290 $ 102,792 $ 104,256 $ 105,368
Obligations of states and
political subdivisions...... 58,544 59,610 50,408 48,200 33,255 33,863
Mortgage-backed securities...... 47,963 48,551 41,940 41,158 42,579 42,795
Other securities................ 50,463 50,852 42,513 41,705 29,143 29,562
---------- ---------- ---------- --------- --------- ---------
Total....................... $ 259,842 $ 262,335 $ 240,151 $ 233,855 $ 209,233 $ 211,588
========== ========== ========== ========= ========= =========
Analysis of the Allowance for Loan Losses (in thousands, except
percentages):
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Balance at January 1,................................. $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
Allowance established from purchase acquisitions...... -- -- -- 1,444 800
--------- --------- --------- --------- ---------
8,938 8,988 10,632 11,241 10,450
Charge-offs:
Commercial, financial and agricultural.............. 950 1,038 1,267 836 1,214
Consumer............................................ 1,998 2,747 2,786 2,127 1,476
All other........................................... 45 36 106 164 74
--------- --------- --------- --------- ---------
Total loans charged off............................... 2,993 3,821 4,159 3,127 2,764
11
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Recoveries:
Commercial, financial and agricultural.............. 391 632 532 726 389
Consumer............................................ 855 936 811 643 380
All other........................................... 299 172 32 35 142
--------- --------- --------- --------- ---------
Total recoveries...................................... 1,545 1,740 1,375 1,404 911
--------- --------- --------- --------- ---------
Net charge-offs....................................... 1,448 2,081 2,784 1,723 1,853
Provision for loan losses............................. 2,398 2,031 1,140 1,114 1,200
--------- --------- --------- --------- ---------
Balance at December 31,............................... $ 9,888 $ 8,938 $ 8,988 $ 10,632 $ 9,797
========= ========= ========= ========= =========
Loans at year-end..................................... $ 859,271 $ 797,275 $ 779,544 $ 743,456 $ 604,815
Average loans......................................... 817,603 779,283 770,183 657,325 575,658
Net charge-offs/average loans......................... 0.18% 0.27% 0.36% 0.26% 0.32%
Average for loan losses/year-end loans................ 1.15 1.12 1.15 1.43 1.62
Allowance for loan losses/nonperforming loans......... 278.85 615.56 322.84 255.58 288.57
Allocation of Allowance for Loan Losses (in thousands):
2000 1999 1998 1997 1996
--------- --------- ---------- ---------- ---------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
--------- --------- ---------- ---------- ---------
Commercial, financial and agricultural........ $ 3,394 $ 3,340 $ 3,213 $ 4,099 $ 3,892
Real estate-- construction.................... 468 483 423 488 370
Real estate-- mortgage........................ 3,348 2,342 2,288 2,541 2,468
Consumer...................................... 2,678 2,773 3,064 3,504 3,067
--------- --------- ---------- ---------- ---------
Total..................................... $ 9,888 $ 8,938 $ 8,988 $ 10,632 $ 9,797
========= ========= ========== ========== =========
Percent of Total Loans:
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Commercial, financial and agricultural................ 34.33% 37.37% 35.74% 38.55% 39.73%
Real estate-- construction............................ 4.73 5.40 4.71 4.59 3.78
Real estate-- mortgage................................ 33.86 26.20 25.46 23.90 25.19
Consumer.............................................. 27.08 31.03 34.09 32.96 31.30
Available Information
- ---------------------
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the Securities and Exchange Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public
at the Securities and Exchange Commission's web site at http://www.sec.gov. No
information from this web page is incorporated by reference herein.
ITEM 2. PROPERTIES
Our principal office is located in the First National Bank Building at 400
Pine Street in downtown Abilene, Texas. We lease approximately 2,300 square feet
from First National Bank of Abilene, which owns the building, under a lease
agreement that expires December 31, 2004. Our subsidiary banks collectively own
25 banking facilities, some of which are detached drive-ins, and they also lease
four banking facilities. Our management considers all of our existing locations
to be quality facilities and well-suited for conducting the business of banking.
We believe that our existing facilities are adequate to meet our requirements
and our subsidiary banks' requirements for the foreseeable future.
12
ITEM 3. LEGAL PROCEEDINGS
With our subsidiary banks we are parties to a number of lawsuits arising in
the ordinary course of our banking business. However, there are no material
pending legal proceedings to which we, our subsidiary banks or our other direct
and indirect subsidiaries, or any of their properties, are subject. Other than
regular, routine examinations by state and federal banking authorities, there
are no proceedings pending or known to be contemplated by any governmental
authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock, par value $10.00 per share, is traded on the Nasdaq
National Market under the trading symbol FFIN. See "Item 8--Financial Statements
and Supplementary Data--Quarterly Financial Data" for the high, low and closing
sales prices as reported by the Nasdaq National Market for our common stock for
the periods indicated. As of March 16, 2001, we had 1,648 shareholders of
record.
See "Item 8--Financial Statements and Supplementary Data--Quarterly
Financial Data" for the frequency and amount of cash dividends paid by us. Also,
see "PART I--Item 1--Business--Regulation and Supervision" for restrictions on
our present or future ability to pay dividends, particularly those restrictions
arising under federal and state banking laws.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years ended
December 31, 2000, 1999, 1998, 1997 and 1996, have been derived from our audited
consolidated financial statements. The selected financial data should be read in
conjunction with "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements.
The results of operations presented below are not necessarily indicative of the
results of operations that may be achieved in the future. The amounts related to
shares of our common stock have been adjusted to give effect to all stock
dividends and stock splits.
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Summary Income Statement Information:
Interest income $ 117,950 $ 110,013 $ 111,868 $ 101,474 $ 89,164
Interest expense 48,829 43,338 46,292 41,735 35,699
---------- ---------- ---------- ---------- ----------
Net interest income 69,121 66,675 65,576 59,739 53,465
Provision for loan losses 2,398 2,031 1,140 1,114 1,200
Noninterest income 25,947 24,484 22,351 19,486 16,491
Noninterest expense 51,692 51,934 52,422 46,522 39,829
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 40,978 37,194 34,365 31,589 28,927
Provision for income taxes 12,662 11,504 11,111 10,563 9,884
---------- ---------- ---------- ---------- ----------
Net earnings $ 28,316 $ 25,690 $ 23,254 $ 21,026 $ 19,043
========== ========== ========== ========== ==========
Per Share Data:
Net earnings per share $ 2.85 $ 2.58 $ 2.34 $ 2.12 $ 1.98
Net earnings per share, assuming dilution 2.84 2.57 2.33 2.11 1.97
Cash dividends declared 1.29 1.125 1.00 0.88 0.79
Book value at period-end 19.90 17.91 17.03 15.56 14.20
Earnings performance ratios:
Return on average assets 1.67% 1.53% 1.44% 1.46% 1.51%
Return on average equity 15.39 14.84 14.51 14.37 14.72
Summary Balance Sheet Data (Period-end):
Investment securities $ 654,253 $ 656,218 $ 625,891 $ 616,018 $ 541,451
Loans 859,271 797,275 779,544 743,456 604,815
Total assets 1,753,814 1,723,369 1,686,647 1,657,044 1,332,645
Deposits 1,519,874 1,524,704 1,504,856 1,488,709 1,185,440
Total liabilities 1,557,693 1,544,706 1,517,198 1,502,583 1,196,236
Total shareholders' equity 196,121 178,663 169,449 154,461 136,409
Asset quality ratios:
Allowance for loan losses/period-end loans 1.15% 1.12% 1.15% 1.43% 1.62%
Nonperforming assets/period-end loans plus
foreclosed assets 0.48 0.26 0.41 0.68 0.69
Net charge offs/average loans 0.18 0.27 0.36 0.26 0.32
Capital ratios:
Average shareholders' equity/average assets 10.86% 10.30% 9.89% 10.16% 10.24%
Leverage ratio (1) 10.40 9.62 9.02 8.28 10.27
Tier 1 risk-based capital (2) 17.75 17.19 16.03 14.76 18.73
Total risk-based capital (3) 18.74 18.13 17.01 15.95 19.95
Dividend payout ratio 45.23 43.64 41.66 41.24 40.32
- --------------------------------
<FN>
(1) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
fourth quarter average assets less intangible assets.
(2) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
risk-adjusted assets.
(3) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
plus allowance for loan losses to the extent allowed under regulatory
guidelines by risk-adjusted assets.
</FN>
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of the major elements of our
consolidated balance sheets as of December 31, 2000 and 1999, and statements of
earnings for the years 1998 through 2000 should be reviewed in conjunction with
our consolidated financial statements, accompanying notes, and selected
financial data presented elsewhere in this Form 10-K. All amounts and prices
related to our common stock have been adjusted to give effect to all stock
splits and stock dividends.
Results of Operations
Performance Summary. Net earnings for 2000 were $28.3 million, an increase
of $2.6 million, or 10.2%, over net earnings for 1999 of $25.7 million. Net
earnings for 1998 were $23.3 million. The increase in net earnings for 2000 was
primarily attributable to an increase in net interest income resulting primarily
from the growth in average earning assets and an increase in noninterest income
resulting primarily from increases in service fees on deposit accounts and gain
on securities transactions. The increase in net earnings for 1999 was primarily
attributable to an increase in net interest income resulting primarily from the
growth in average earning assets and an increase in noninterest income resulting
primarily from an increase in service fees on deposit accounts.
On a per share basis, net earnings were $2.85 for 2000 as compared to $2.58
for 1999 and $2.34 for 1998. When calculated on a cash basis which excludes the
after tax effect of goodwill amortization, our earnings per share amounted to
$2.97 for 2000, $2.70 for 1999, and $2.46 for 1998. Return on average assets was
1.67% for 2000 as compared to 1.53% for 1999 and 1.44% for 1998. Return on
average equity was 15.39% for 2000 as compared to 14.84% for 1999 and 14.52% for
1998.
Net Interest Income. Net interest income is the difference between interest
income on earning assets and the interest expense on liabilities incurred to
fund those assets. Our earning assets consist primarily of loans and securities.
Our liabilities to fund those assets consist primarily of interest-bearing
deposits. Net interest income was $71.9 million in 2000 as compared to $69.0
million in 1999 and $67.0 million in 1998. These increases were primarily due to
growth in the volume of earning assets. Average earning assets were $1.538
billion in 2000, as compared to $1.519 billion in 1999, which were $49.2 million
higher than 1998. The 2000 increase is attributable to higher average investment
securities, primarily tax-exempt securities, which increased $16.0 million, and
higher average loans which increased $38.3 million. These increases were funded
primarily from a reduction in average Federal funds sold which decreased $39.8
from the prior year average. The 1999 increase was due primarily to an increase
in average tax-exempt investment securities, which were up $49.0 million. Table
1 allocates the increases in tax-equivalent net interest income for 2000 and
1999 between the amount of increase attributable to volume and rate.
Table 1 -- Changes in Interest Income and Interest Expense (in thousands):
2000 Compared to 1999 1999 Compared to 1998
-------------------------------------- -----------------------------------
Change Attributable to Change Attributable to
------------------------ Total ---------------------- Total
Volume Rate Change Volume Rate Change
---------- ---------- ---------- --------- --------- ---------
Short-term investments.......... $ (1,974) $ 646 $ (1,328) $ 274 $ (341) $ (67)
Taxable investment securities... 246 1,289 1,535 (429) (932) (1,361)
Tax-exempt investment securities
(1)......................... 1,032 315 1,347 2,773 (157) 2,616
Loans (1)....................... 3,384 3,459 6,843 838 (2,992) 2,154
---------- ---------- ---------- --------- --------- ---------
Interest income............. 2,688 5,709 8,397 3,456 (4,422) (966)
Interest-bearing deposits....... (394) 5,012 4,618 1,338 (4,352) (3,014)
Short-term borrowings........... 613 261 874 154 (95) 59
---------- ---------- ---------- --------- --------- ---------
Interest expense............ 219 5,273 5,492 1,492 (4,447) (2,955)
---------- ---------- ---------- --------- --------- ---------
Net interest income......... $ 2,469 $ 436 $ 2,905 $ 1,964 $ 25 $ 1,989
========== ========== ========== ========= ========= =========
- ---------------
<FN>
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
</FN>
15
The net interest margin, which measures tax-equivalent net interest income
as a percentage of average earning assets is illustrated below in Table 2 for
the years 1998 through 2000. In 2000, the net interest margin amounted to 4.68%,
which was up from 4.54% reported in 1999. In 1998, the net interest margin
amounted to 4.56%. Our improved net interest margin in 2000 resulted primarily
from an increase in average loans which were funded through a reduction in lower
yielding Federal funds sold. Our 4.54% net interest margin in 1999 was slightly
below the prior year but showed improvement toward the end of 1999 as market
rates increased.
Table 2 -- Average Balances and Average Yields and Rates (in thousands,
except percentages):
2000 1999 1998
--------------------------- --------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- --------- ---- ---------- --------- ---- ---------- -------- ----
Assets
Short-term investments..... $ 50,538 $ 3,148 6.23% $ 90,383 $ 4,476 4.95% $ 85,247 $ 4,543 5.33%
Taxable investment securities 544,546 33,557 6.16 540,402 32,022 5.93 547,438 33,383 6.10
Tax-exempt investment
securities (1)............ 125,072 8,389 6.71 109,079 7,042 6.46 67,068 4,426 6.60
Loans (1)(2)............... 817,603 75,652 9.25 779,283 68,809 8.83 770,18 70,963 9.21
---------- --------- ---------- --------- ---------- --------
Total earning assets...... 1,537,759 120,746 7.85 1,519,147 112,349 7.40 1,469,936 113,315 7.71
Cash and due from banks.... 77,727 80,689 72,608
Bank premises and equipment 40,400 41,285 43,524
Other assets............... 28,212 27,478 21,720
Goodwill, net.............. 19,335 21,056 22,466
Allowance for loan losses.. (9,420) (9,016) (9,912)
---------- ---------- ----------
Total assets.............. $1,694,013 $1,680,639 $1,620,342
========== ========== ==========
Liabilities and Shareholders'
Equity
Interest-bearing deposits.. $1,161,175 $ 47,738 4.11% $1,171,892 $ 43,120 3.68% $1,138,858 $ 46,134 4.05%
Short-term borrowings...... 17,621 1,091 6.19 4,607 217 4.71 2,338 158 6.76
---------- --------- ---------- --------- ---------- --------
Total interest-bearing
liabilities............... 1,178,796 48,829 4.14 1,176,499 43,337 3.68 1,141,196 46,292 4.06
Noninterest-bearing deposits 317,659 318,399 306,743
Other liabilities.......... 13,529 12,599 12,108
---------- ---------- ----------
Total liabilities......... 1,509,984 1,507,497 1,460,047
Shareholders' equity......... 184,029 173,142 160,295
---------- ---------- ----------
Total liabilities and
shareholders' equity...... $1,694,013 $1,680,639 $1,620,342
========== ========== ==========
Net interest income.......... $ 71,917 $ 69,012 $ 67,023
========= ========= =========
Rate Analysis:
Interest income/earning
assets..................... 7.85% 7.40% 7.71%
Interest expense/earning
assets..................... 3.18 2.85 3.15
---- ---- ----
Net yield on earning assets 4.68% 4.54% 4.56%
==== ==== ====
- ---------------
<FN>
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
</FN>
Noninterest Income. Noninterest income for 2000 was $25.9 million, an
increase of $1.5 million, or 6.0%, as compared to 1999. This increase was
primarily a result of (i) an increase in trust fees of $396 thousand due
primarily to continued growth in trust assets; (ii) an increase in service fees
on deposit accounts of $752 thousand which reflects growth in the number of
accounts and the volume of transactions processed; and (iii) an increase in net
gain on securities transactions.
Noninterest income for 1999 was $24.5 million, an increase of $2.1 million,
or 9.5%, as compared to 1998. This increase was primarily a result of (i) an
increase in trust fees of $349 thousand due primarily to growth in trust assets;
(ii) an increase in service fees on deposit accounts of $1.5 million, which
reflects growth in the number of accounts and the volume of transactions
processed; and (iii) an increase in ATM fees of $207 thousand which resulted
from an increase in the number of cardholders and the volume of transactions
processed. Table 3 provides comparisons for other categories of noninterest
income.
16
Table 3 -- Noninterest Income (in thousands):
Increase Increase
2000 (Decrease) 1999 (Decrease) 1998
---------- ---------- ---------- ---------- ----------
Trust fees................................... $ 5,494 $ 396 $ 5,098 $ 349 $ 4,749
Service fees on deposit accounts............. 14,074 752 13,322 1,484 11,838
Real estate mortgage fees.................... 1,022 (269) 1,291 (67) 1,358
Net securities gains (losses)................ 530 530 -- (42) 42
ATM fees..................................... 1,554 313 1,241 207 1,034
Other:
Mastercard fees............................ 830 21 809 (63) 872
Miscellaneous income....................... 1,059 62 997 167 830
Safe deposit rental fees................... 395 3 392 1 391
Exchange fees.............................. 224 (32) 256 (125) 381
Credit life fees........................... 237 (47) 284 34 250
Gain (loss) on sale of repossessed assets.. 2 17 (15) (250) 235
Brokerage commissions...................... 252 (2) 254 41 213
Gain on sale of premises and equipment..... 4 (254) 258 248 10
Interest on loan recoveries................ 270 (27) 297 149 148
---------- ---------- ---------- ---------- ----------
Total other............................. 3,273 (259) 3,532 202 3,330
---------- ----------- ---------- ---------- ----------
Total Noninterest Income................... $ 25,947 $ 1,463 $ 24,484 $ 2,133 $ 22,351
========== ========== ========== ========== ==========
Noninterest Expense. Total noninterest expense for 2000 was $51.7 million,
a decrease of $241 thousand as compared to 1999. Noninterest expense for 1999
amounted to a decrease of $489 thousand as compared to 1998. An important
measure in determining whether a banking company effectively managed noninterest
expenses is the efficiency ratio, which is calculated by dividing noninterest
expense by the sum of net interest income on a tax-equivalent basis and
noninterest income. Our efficiency ratios were 53.11% for 2000, 55.55% for 1999,
and 58.65% for 1998.
Salaries and employee benefits totaled $27.1 million, an increase of $132
thousand as compared to 1999. Net occupancy and equipment expense in aggregate
for 2000 decreased by $193 thousand and resulted primarily from lower building
depreciation. Printing, stationery, and supplies expense for 2000 decreased $296
thousand as compared to 1999 and resulted primarily from the initial benefit of
our implementation of a companywide procurement program provided through an
outside vendor. Credit card fees for 2000 decreased $140 thousand as compared to
1999 and resulted primarily from the termination of our cardholder credit card
product. Public relations and business development expense increased $101
thousand as compared to 1999 and reflects our increased emphasis on expanding
our customer base. Other professional and service fees increased $105 thousand
as compared to 1999 and resulted primarily from a review of our student loan
processing area by outside professionals.
Salaries and employee benefits for 1999 totaled $26.9 million, an increase
of $266 thousand as compared to 1998. Net occupancy and equipment expense in the
aggregate for 1999 decreased by $339 thousand and resulted primarily from lower
depreciation and utilities expense. On a combined basis, accounting and legal
fees for 1999 decreased $174 thousand as compared to 1998 and resulted primarily
from a reduction in merger and acquisition expenses. Other miscellaneous expense
totaled $3.7 million for 1999, a decrease of $315 thousand as compared to 1998.
Approximately $160 thousand of this decrease resulted from lower expenses
related to preparation for the Year 2000.
17
Table 4 -- Noninterest Expense (in thousands):
Increase Increase
2000 (Decrease) 1999 (Decrease) 1998
---------- ---------- ---------- ---------- ----------
Salaries..................................... $ 20,963 $ 78 $ 20,885 $ 153 $ 20,732
Medical and other benefits................... 2,664 276 2,388 34 2,354
Profit sharing............................... 1,874 (237) 2,111 84 2,027
Payroll taxes................................ 1,576 15 1,561 (5) 1,566
---------- ---------- ---------- ---------- ----------
Total salaries and employee benefits....... 27,077 132 26,945 266 26,679
Net occupancy expense........................ 3,563 (256) 3,819 (366) 4,185
Equipment expense............................ 4,181 63 4,118 27 4,091
Goodwill amortization........................ 1,641 -- 1,641 (14) 1,655
Other:
Data processing and operation fees......... 1,263 88 1,175 26 1,149
Postage.................................... 1,046 (57) 1,103 (38) 1,141
Printing, stationery and supplies.......... 882 (296) 1,178 76 1,102
Advertising................................ 1,054 13 1,041 (52) 1,093
Correspondent bank service charges......... 1,262 19 1,243 151 1,092
ATM expense................................ 1,000 40 960 137 823
Credit card fees........................... 604 (140) 744 (9) 753
Telephone.................................. 754 84 670 (51) 721
Public relations and business development.. 703 101 602 6 596
Directors' fees............................ 453 (8) 461 (49) 510
Audit and accounting fees.................. 666 44 622 (38) 660
Legal fees................................. 279 (82) 361 (136) 497
Other professional and service fees........ 531 105 426 (36) 462
Regulatory exam fees....................... 424 39 385 (25) 410
Franchise tax.............................. 261 (96) 357 (47) 404
Software amortization...................... 287 (99) 386 (2) 388
Other miscellaneous........................ 3,761 65 3,696 (315) 4,011
---------- ---------- ---------- ---------- ----------
Total other............................. 15,230 (180) 15,410 (402) 15,812
---------- ---------- ---------- ---------- ----------
Total Noninterest Expense.................... $ 51,692 $ (241) $ 51,933 $ (489) $ 52,422
========== ========== ========== ========== ==========
Income Taxes. Income tax expense was $12.7 million for 2000 as compared to
$11.5 million for 1999 and $11.1 million for 1998. Our effective tax rates on
pretax income were 30.9%, 30.9% and 32.3%, respectively, for the years 2000,
1999 and 1998. The decrease for 1999 was due to higher levels of nontaxable
interest income resulting from increased volumes of tax-exempt securities.
Balance Sheet Review
Loans. The loan portfolio is comprised of loans made to businesses,
individuals, and farm and ranch operations located in the primary trade areas
served by our subsidiary banks. Real estate loans represent loans primarily for
new home construction and owner-occupied real estate. The structure of loans in
the real estate mortgage classification generally provides repricing intervals
to minimize the interest rate risk inherent in fixed rate mortgage loans. As of
December 31, 2000, total loans were $859.3 million, an increase of $62.0
million, or 7.8%, as compared to December 31, 1999. As of December 31, 1999,
total loans were $797.2 million, an increase of $17.7 million or 2.3% as
compared to December 31, 1998. Real estate loans as of December 31, 2000,
increased $79.6 million as compared to December 31, 1999. As of December 31,
1999, real estate loans increased $10 million as compared to December 31, 1998.
Commercial loans and consumer loans as of December 31, 2000, decreased $2.9
million and $14.7 million, respectively, as of December 31, 1999. Commercial
loans and consumer loans as of December 31, 1999, increased $6.3 million and
decreased $18.4 million, respectively, as of December 31, 1998. The decrease in
consumer loans for 2000 resulted primarily from a $11.9 million reduction in the
volume of indirect automobile loans and a $3.1 million reduction in credit card
loans. Loans averaged $817.6 million during 2000, an increase of $38.3 million
over the prior year average.
18
Table 5 -- Composition of Loans (in thousands, except percentages):
December 31, 2000 December 31, 1999 December 31, 1998
------------------- -------------------- --------------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------
Commercial, financial and
agricultural.................... $295,032 34.34% $297,966 37.37% $278,647 35.74%
Real estate-- construction........ 40,610 4.73 43,039 5.40 36,721 4.71
Real estate-- mortgage............ 290,920 33.86 208,895 26.20 198,447 25.46
Consumer.......................... 232,709 27.08 247,375 31.03 265,729 34.09
-------- ------ -------- ------ -------- ------
$859,271 100.00% $797,275 100.00% $779,544 100.00%
======== ====== ======== ====== ======== ======
Asset Quality. Loan portfolios of each of our subsidiary banks are subject
to periodic reviews by our centralized independent loan review group as well as
periodic examinations by state and federal bank regulatory agencies. Loans are
placed on nonaccrual status when, in the judgment of management, the
collectibility of principal or interest under the original terms becomes
doubtful. Nonperforming assets, which consist of nonperforming loans and
foreclosed assets, were $4.1 million at December 31, 2000, as compared to $2.1
million at December 31, 1999 and $3.2 million at December 31, 1998. As a percent
of loans and foreclosed assets, nonperforming assets were 0.48% at December 31,
2000, as compared to 0.26% at December 31, 1999 and 0.41% at December 31, 1998.
Management considers the level of nonperforming assets to be manageable and is
not aware of any material classified credit not properly disclosed as
nonperforming at December 31, 2000.
Table 6 -- Nonperforming Assets (in thousands, except percentages):
At December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- ---------- ---------
Nonaccrual loans............................. $ 3,512 $ 1,389 $ 2,717 $ 3,668 $ 2,906
Loans past due 90 days or more............... 34 63 67 134 116
Restructured loans........................... -- -- -- 358 373
---------- ---------- --------- ---------- ---------
Nonperforming loans..................... 3,546 1,452 2,784 4,160 3,395
Foreclosed assets............................ 546 637 385 936 806
---------- ---------- --------- ---------- ---------
Total nonperforming assets.............. $ 4,092 $ 2,089 $ 3,169 $ 5,096 $ 4,201
========== ========== ========= ========== =========
As a % of loans and foreclosed assets........ 0.48% 0.26% 0.41% 0.68% 0.69%
Provision and Allowance for Loan Losses. The allowance for loan losses is
the amount deemed by management as of a specific date to be adequate to provide
for possible losses on loans that may become uncollectible. Management
determines the allowance and the required provision expense by reviewing general
loss experiences and the performances of specific credits. The provision for
loan losses was $2.4 million for 2000 as compared to $2.0 million for 1999 and
$1.1 million for 1998. As a percent of average loans, net loan charge-offs were
0.18% during 2000, 0.27% during 1999 and 0.36% during 1998. The lower net
charge-off ratio for 2000 resulted primarily from a $749 thousand reduction in
consumer-related loan losses. The allowance for loan losses as a percent of
loans was 1.15% as of December 31, 2000, as compared to 1.12% as of December 31,
1999. Management anticipates that the ratio of allowance for loan losses to
loans will remain above 1% in future periods. A key indicator of the adequacy of
the allowance for loan losses is the ratio of the allowance to nonperforming
loans, which consist of nonaccrual loans, loans past due 90 days, and
restructured loans. This ratio for the past five years is disclosed in the
following Table 7.
19
Table 7 -- Loan Loss Experience and Allowance for Loan Losses (in
thousands, except percentages):
2000 1999 1998 1997 1996
---------- ---------- --------- ---------- ---------
Balance at January 1,........................ $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
Allowance established from purchase acquisition -- -- -- 1,444 800
---------- ---------- --------- ---------- ---------
8,938 8,988 10,632 11,241 10,450
Loans charged off............................ 2,993 3,821 4,159 3,127 2,764
Loans recovered.............................. 1,545 1,740 1,375 1,404 911
---------- ---------- --------- ---------- ---------
Net charge-offs.............................. 1,448 2,081 2,784 1,723 1,853
Provision for loan losses.................... 2,398 2,031 1,140 1,114 1,200
---------- ---------- --------- ---------- ---------
Balance at December 31,...................... $ 9,888 $ 8,938 $ 8,988 $ 10,632 $ 9,797
========== ========== ========= ========== =========
Loans at year-end............................ $ 859,271 $ 797,275 $ 779,544 $ 743,456 $ 604,815
Average loans................................ 817,603 779,283 770,183 657,325 575,658
Net charge offs/average loans................ 0.18% 0.27% 0.36% 0.26% 0.32%
Allowance for loan losses/year-end loans..... 1.15 1.12 1.15 1.43 1.62
Allowance for loan losses/nonperforming assets 278.85 615.55 322.84 255.58 288.57
Investment Securities. Investment securities totaled $654.2 million as of
December 31, 2000, as compared to $656.2 million at December 31, 1999. At
December 31, 2000, securities with an amortized cost of $391.9 million were
classified as securities held-to-maturity and securities with a market value of
$262.3 million were classified as securities available-for-sale. As compared to
December 31, 1999, the portfolio at December 31, 2000, reflected (i) a decrease
of $33.8 million in U.S. Treasury and U.S. Government corporations and agencies
securities; (ii) an increase of $6.9 million in tax-exempt obligations of states
and political subdivisions; (iii) an $8.1 million increase in other securities,
primarily corporate bonds; and (iv) a $16.9 million increase in mortgage-backed
securities. The overall portfolio yield of 6.40% at the end of 2000 was up from
the prior year-end yield of 6.15%. We did not hold any collateralized mortgage
obligations that entail higher risks than standard mortgage-backed securities or
structured notes. See Note 2 to the Consolidated Financial Statements for
additional disclosures relating to the maturities and fair values of the
investment portfolio at December 31, 2000 and 1999.
Table 8 -- Maturities and Yields of Investment Securities Held December 31,
2000 (in thousands, except percentages):
Maturing
------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- --------------
Held-to-Maturity: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- ------- ---- -------- ---- ------- ---- ------- ---- -------- ----
U.S. Treasury obligations.. $ 1,509 5.61% $ 4,027 5.46% $ -- --% $ -- --% $ 5,536 5.50%
Obligations of U.S.
Government corporations
and agencies.......... 63,835 5.92 172,122 5.85 6,973 6.97 2,952 7.29 245,882 5.91
Obligations of states and
political subdivisions.. 12,361 6.49 49,539 6.39 10,758 7.24 9,686 8.28 82,344 6.74
Other securities........... 4,615 5.35 -- -- -- -- -- -- 4,615 5.35
Mortgage-backed securities. 3,253 5.36 16,514 6.60 26,129 7.11 7,645 6.89 53,541 6.82
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $85,573 5.94% $242,202 6.00% $43,860 7.12% $20,283 7.61% $391,918 6.20%
======= ==== ======== ==== ======= ==== ======= ==== ======== ====
Maturing
------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- --------------
Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ ------- ---- -------- ---- ------- ---- ------- ---- -------- ----
U.S. Treasury obligations.. $ 3,307 5.94% $ 1,014 6.05% $ -- --% $ -- --% $ 4,321 6.05%
Obligations of U.S.
Government corporations
and agencies.......... 15,666 6.06 52,046 6.23 21,129 6.63 8,148 7.19 96,989 6.37
Obligations of states and
political subdivisions.. 200 6.15 8,716 6.38 6,528 7.36 44,167 7.72 59,611 7.48
Other securities........... 7,402 5.81 40,313 6.46 -- -- 3,137 6.00 50,852 6.34
Mortgage-backed securities. 842 8.16 28,146 6.92 14,134 6.57 7,440 6.92 50,562 6.84
------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total................... $27,417 6.04% $130,235 6.46% $41,791 6.72% $62,892 7.47% $262,335 6.70%
======= ==== ======== ==== ======= ==== ======= ==== ======== ====
20
Maturing
------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- --------------
Total Investment Securities: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------- ------- ---- -------- ---- ------- ---- ------- ---- -------- ----
U.S. Treasury obligations.. $ 4,816 5.84% $ 5,041 5.65% $ -- --% $ -- --% $ 9,857 5.74%
Obligations of U.S.
Government corporations
and agencies.......... 79,501 5.94 224,168 5.94 28,102 6.71 11,100 7.22 342,871 6.04
Obligations of states and
political subdivisions.. 12,561 6.48 58,255 6.39 17,286 7.29 53,853 7.82 141,955 7.05
Other securities........... 12,017 5.64 40,313 6.46 -- -- 3,137 6.00 55,467 6.26
Mortgage-backed securities. 4,095 5.94 44,660 6.80 40,263 6.92 15,085 6.90 104,103 6.83
-------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $112,990 5.97% $372,437 6.16% $85,651 6.93% $83,175 7.51% $654,253 6.40%
======== ==== ======== ==== ======= ==== ======= ==== ======== ====
Deposits. Deposits held by subsidiary banks represent our primary source of
funding. Total deposits were $1.520 billion as of December 31, 2000, as compared
to $1.525 billion as of December 31, 1999 and $1.505 billion as of December 31,
1998. During 2000, approximately $16.5 million of deposits moved into repurchase
agreements and were retained as a source of funding. Table 9 provides a
breakdown of average deposits and rates paid over the past three years and the
remaining maturity of time deposits of $100 thousand or more.
Table 9 -- Composition of Average Deposits and Remaining Maturity of Time
Deposits of $100,000 or More (in thousands, except percentages):
2000 1999 1998
---------------------- ----------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- --------- ----
Noninterest-bearing deposits.... $ 317,659 -- $ 318,399 -- $ 306,743 --
Interest-bearing deposits
Interest-bearing checking.... 252,281 1.59% 248,516 1.43% 240,159 2.01%
Savings and money market
accounts................... 374,396 3.93 379,075 3.42 351,319 3.23
Time deposits under $100,000. 370,093 5.29 378,528 4.88 390,791 5.23
Time deposits of $100,000 or
more....................... 164,405 5.74 165,773 4.91 156,589 5.56
---------- ---- ---------- ---- --------- ----
Total interest-bearing deposits 1,161,175 4.11% 1,171,892 3.68% 1,138,858 4.05%
---------- ---------- ---------
Total average deposits.......... $1,478,834 $1,490,291 $1,445,601
========== ========== ==========
December 31, 2000
-----------------
Three months or less............................... $ 53,270
Over three through six months...................... 39,590
Over six through twelve months..................... 51,672
Over twelve months................................. 20,962
-----------
Total time deposits of $100,000 or more.......... $ 165,494
===========
Capital Resources. Total shareholders' equity was $196.1 million, or 11.18%
of total assets, at December 31, 2000, as compared to $178.7 million, or 10.37%
of total assets, at December 31, 1999. During 2000, total shareholders' equity
averaged $184.0 million, or 10.86% of average assets, as compared to $173.1
million, or 10.30% of average assets, during 1999. Effective July 25, 2000, we
implemented a stock buy back program and, through December 31, 2000, purchased
126,100 shares in the open market at an average cost of $31.13 per share.
Banking regulators measure capital adequacy by means of the risk-based
capital ratio and leverage ratio. The risk-based capital rules provide for the
weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory
capital is then divided by risk-weighted assets to determine the risk-adjusted
capital ratios. The leverage ratio is computed by dividing shareholders' equity
less intangible assets by quarter-to-date average assets less intangible assets.
Regulatory minimums for risk-based and leverage ratios are 8.00% and 3.00%,
respectively. As of December 31, 2000, our total risk-based and leverage ratios
were 18.74% and 10.40%, respectively, as compared to total risk-based and
leverage ratios of 18.13% and 9.62% as of December 31, 1999. In 2000, we
experienced a higher rate of growth in tangible equity capital (6.4%) than
assets (1.8%), which resulted in higher capital ratios as of December 31, 2000,
as compared to December 31, 1999.
21
Interest Rate Risk. Interest rate risk results when the maturity or
repricing intervals of interest-earning assets and interest-bearing liabilities
are different. Our exposure to interest rate risk is managed primarily through
our strategy of selecting the types and terms of interest-earning assets and
interest-bearing liabilities that generate favorable earnings while limiting the
potential negative effects of changes in market interest rates. We use no
off-balance-sheet financial instruments to manage interest rate risk.
Each of our subsidiary banks has an asset/liability committee that monitors
interest rate risk and compliance with investment policies. Each subsidiary bank
tracks interest rate risk by, among other things, interest-sensitivity gap and
simulation analysis. Table 10 sets forth the interest rate sensitivity of our
consolidated assets and liabilities as of December 31, 2000, and sets forth the
repricing dates of our consolidated interest-earning assets and interest-bearing
liabilities as of that date, as well as our projected consolidated interest rate
sensitivity gap percentages for the periods presented. The table is based upon
assumptions as to when assets and liabilities will reprice in a changing
interest rate environment. These assumptions are estimates made by management.
Assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate movements
on our consolidated net interest income.
Table 10 -- Interest Sensitivity Analysis (in thousands, except
percentages):
December 31,
2000
Estimated
2001 2002 2003 2004 2005 Beyond Total Fair Value
---------- -------- -------- -------- -------- -------- ---------- ----------
Loans
Fixed rate loans.... $ 236,361 $ 55,435 $ 82,804 $ 79,895 $ 68,141 $ 65,803 $ 588,439 $ 572,664
Average interest rate 9.33% 9.74% 9.35% 8.46% 9.17% 8.48% 9.14%
Adjustable rate loans 270,832 -- -- -- -- -- 270,832 270,832
Average interest rate 9.91 -- -- -- -- -- 9.91
Investment securities
Fixed rate securities 118,403 113,617 122,043 85,245 39,828 164,785 643,921 645,593
Average interest rate 5.86 5.96 5.97 6.31 6.86 7.23 6.37
Adjustable rate
securities.......... 10,332 -- -- -- -- -- 10,332 10,332
Average interest rate 6.77 -- -- -- -- -- 6.77
Other earning assets
Adjustable rate other 62,334 -- -- -- -- -- 62,334 62,334
Average interest rate 6.47 -- -- -- -- -- 6.47
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
assets................ $ 698,262 $169,052 $204,847 $165,140 $107,969 $230,588 $1,575,858 $1,561,755
Average interest rate 8.09% 7.20% 7.34% 7.35% 8.32% 7.59% 7.76%
Deposits
Fixed rate deposits. $ 430,574 $ 55,583 $ 11,192 $ 5,316 $ 7,768 $ -- $ 510,433 $ 510,173
Average interest rate 6.03% 6.18% 5.71% 5.58% 6.35%% -- 4.99%
Adjustable rate
deposits............. 673,164 -- -- -- -- -- 673,164 673,164
Average interest rate 3.10 -- -- -- -- -- 3.10
Other interest-bearing
liabilities
Adjustable rate other 26,164 -- -- -- -- -- 26,164 26,164
Average interest rate 6.25 -- -- -- -- -- 6.25
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
liabilities......... $1,129,902 $ 55,583 $ 11,192 $ 5,316 $ 7,768 $ -- $1,209,761 $1,209,501
Average interest rate 4.29% 6.18% 5.71% 5.58% 6.35% -- 4.41%
Interest sensitivity gap $ (431,640) $113,469 $193,655 $159,824 $100,201 $230,588 $ 366,097 $ 352,254
Cumulative interest
sensitivity gap..... (431,640) (318,171) (124,516) 35,308 135,509 366,097
Ratio of interest
sensitive assets to
interest sensitive
liabilities......... 61.80 -- -- -- -- --
Cumulative ratio of
interest sensitive
assets to interest
sensitive liabilities 61.80 73.16 89.59 102.94 111.20 130.26
Cumulative interest
sensitivity gap as a
percent of earning
assets.............. (27.39)% (20.19)% (7.90)% 2.24% 8.60% 23.23%
As of December 31, 1999, our 2000 interest-sensitivity gap was ($488.1)
million and its 2000 ratio of interest sensitive assets to interest sensitive
liabilities was 56.76%.
22
Management estimates that, as of December 31, 2000 and December 31, 1999,
an upward shift of interest rates by 200 basis points would result in an
increase of projected net interest income of 3.4% and 1.4%, respectively, and a
downward shift of interest rates by 200 basis points would result in a reduction
in projected net interest income of 6.1% and 4.0%, respectively. These are good
faith estimates and assume that the composition of our interest sensitive assets
and liabilities existing at each year-end will remain constant over the relevant
twelve month measurement period and that changes in market interest rates are
instantaneous and sustained across the yield curve regardless of duration of
pricing characteristics of specific assets or liabilities. Also, this analysis
does not contemplate any actions that we might undertake in response to changes
in market interest rates. In management's belief, these estimates are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. Management believes that
it is unlikely that such changes would occur in a short time period. As
interest-bearing assets and liabilities reprice at different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, our
future results would, in management's belief, be different from the foregoing
estimates, and such results could be material.
Liquidity. Liquidity is our ability to meet cash demands as they arise.
Such needs can develop from loan demand, deposit withdrawals or acquisition
opportunities. Asset liquidity is provided by cash and assets, which are readily
marketable or which will mature in the near future. Liquid assets include cash,
federal funds sold, and short-term investments in time deposits in banks.
Liquidity is also provided by access to funding sources, which include core
depositors and correspondent banks that maintain accounts with and sell federal
funds to our subsidiary banks. Given the strong core deposit base and relatively
low loan deposit ratios maintained at the subsidiary banks, management considers
the current liquidity position to be adequate to meet short- and long-term
liquidity needs.
Parent Company Funding. Our ability to fund various operating expenses,
dividends, and cash acquisitions is generally dependent solely on our own
earnings (without giving effect to our subsidiaries), cash reserves and funds
derived from our subsidiary banks. These funds historically have been produced
by intercompany dividends and management fees that are limited to reimbursement
of actual expenses. We anticipate that our recurring cash sources will continue
to include dividends and management fees from our subsidiary banks. At December
31, 2000, approximately $21.6 million was available for the payment of
intercompany dividends by the subsidiary banks without the prior approval of
regulatory agencies. Also at December 31, 2000, we had $25.0 million available
under a line of credit with an unaffiliated financial institution.
Dividends. Our long-term dividend policy is to pay cash dividends to our
shareholders of between 40% and 45% of net earnings while maintaining adequate
capital to support growth. The dividend payout ratios have amounted to 45.2%,
43.6% and 41.7% of net earnings, respectively, in 2000, 1999 and 1998. Given the
current strong capital position and projected earnings and asset growth rates,
we do not anticipate any change in our current dividend policy.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our management considers interest rate risk to be a significant market risk
for us. See "Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Balance Sheet Review--Interest Rate Risk" for
disclosure regarding this market risk.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements begin on page F-1.
Quarterly Results of Operations
The following tables set forth certain unaudited historical quarterly
financial data for each of the eight consecutive quarters in fiscal 2000 and
1999. This information is derived from unaudited consolidated financial
statements that include, in our opinion, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation when read in
conjunction with our consolidated financial statements and notes thereto
included elsewhere in this Form 10-K. The amounts related to our common stock
have been adjusted to give effect to all stock dividends and stock splits.
2000
---------------------------------------------------
4th 3rd 2nd 1st
---------- --------- ---------- ---------
Summary Income Statement Information:
Interest income $ 30,675 $ 29,848 $ 29,168 $ 28,260
Interest expense 13,312 12,494 11,738 11,285
---------- --------- ---------- ---------
Net interest income 17,363 17,354 17,430 16,975
Provision for loan losses 812 426 419 741
---------- --------- ---------- ---------
Net interest income after provision for loan losses 16,551 16,928 17,011 16,234
Noninterest income 6,239 6,450 6,262 6,466
Net gain on securities transactions 530 -- -- --
Noninterest expense 12,900 12,929 12,924 12,940
---------- --------- ---------- ---------
Earnings before income taxes 10,420 10,449 10,349 9,760
Provision for income taxes 3,191 3,237 3,220 3,014
---------- --------- ---------- ---------
Net earnings $ 7,229 $ 7,212 $ 7,129 $ 6,746
========== ========= ========== =========
Per Share Data:
Net earnings per share $ 0.73 $ 0.73 $ 0.71 $ 0.68
Net earnings per share, assuming dilution 0.73 0.72 0.71 0.68
Cash dividends declared 0.33 0.33 0.33 0.30
Book value at period-end 19.90 19.18 18.66 18.29
Common stock sales price:
High $ 32.13 $ 32.63 $ 29.25 $ 31.00
Low 28.50 26.75 23.94 26.25
Close 31.44 32.06 27.50 26.25
1999
---------------------------------------------------
4th 3rd 2nd 1st
---------- --------- ---------- ---------
Summary Income Statement Information:
Interest income $ 28,152 $ 27,692 $ 27,139 $ 27,029
Interest expense 11,123 10,833 10,635 10,746
---------- --------- ---------- ---------
Net interest income 17,029 16,859 16,504 16,283
Provision for loan losses 767 486 308 470
---------- --------- ---------- ---------
Net interest income after provision for loan losses 16,262 16,373 16,196 15,813
Noninterest income 6,173 6,106 6,177 6,061
Noninterest expense 13,027 13,014 12,959 12,968
---------- --------- ---------- ---------
Earnings before income taxes 9,408 9,465 9,414 8,906
Provision for income taxes 2,850 2,932 2,942 2,779
---------- --------- ---------- ---------
Net earnings $ 6,558 $ 6,533 $ 6,472 $ 6,127
========== ========= ========== =========
Per Share Data:
Net earnings per share $ 0.66 $ 0.66 $ 0.64 $ 0.62
Net earnings per share, assuming dilution 0.66 0.66 0.64 0.61
Cash dividends declared 0.30 0.275 0.275 0.275
Book value at period-end 17.91 17.72 17.40 17.29
Common stock sales price:
High $ 34.44 $ 34.77 $ 37.00 $ 36.13
Low 29.13 30.00 30.00 31.25
Close 30.75 33.25 31.75 32.38
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP has served as our independent accountants since 1990.
There have been no disagreements between our management and our current
independent accountants relating to accounting practices and procedures or
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from our proxy statement for our 2001 annual meeting of shareholders, or our
2001 proxy statement, under the captions "Proposal 1 -- Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from our 2001 proxy statement under the caption "Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from our 2001 proxy statement under the captions "Proposal 1 -- Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from our 2001 proxy statement under the caption "Interest in Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Management's Report on Responsibility for the Financial
Statements
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Earnings for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
None.
25
Schedules not listed above have been omitted because they are
not required, are not applicable or have been included in our
consolidated financial statements.
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in
the Exhibit Index immediately following our financial
statements. The exhibits listed herein will be furnished upon
written request to Curtis R. Harvey, Executive Vice President
and Chief Financial Officer, First Financial Bankshares, Inc.,
400 Pine Street, Abilene, Texas 79601, and payment of a
reasonable fee that will be limited to our reasonable expense
in furnishing such exhibits.
B. Reports on Form 8-K.
We did not file any reports on Form 8-K for the last quarter of the
period covered by this report.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date: March 20 , 2001 By: /S/ F. SCOTT DUESER
---- --------------------------------
F. SCOTT DUESER
President, Chief Executive
Officer and Director
The undersigned directors and officers of First Financial Bankshares, Inc.
hereby constitute and appoint Curtis R. Harvey, with full power to act and with
full power of substitution and resubstitution, our true and lawful
attorney-in-fact with full power to execute in our name and behalf in the
capacities indicated below any and all amendments to this report and to file the
same, with all exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission and hereby ratify and confirm all that
such attorney-in-fact or his substitute shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/S/ KENNETH T. MURPHY Chairman of the Board and Director March 20, 2001
- ----------------------------------------------- --
Kenneth T. Murphy
/S/ CURTIS R. HARVEY Executive Vice President, Chief March 20, 2001
- ----------------------------------------------- Financial Officer, Controller and --
Curtis R. Harvey Chief Accounting Officer
/S/ F. SCOTT DUESER President, Chief Executive Officer March 20, 2001
- ----------------------------------------------- and Director --
F. Scott Dueser
/S/ JOSEPH E. CANON Director March 20, 2001
- ----------------------------------------------- --
Joseph E. Canon
/S/ MAC A. COALSON Director March 21, 2001
- ----------------------------------------------- --
Mac A. Coalson
Name Title Date
---- ----- ----
/S/ DAVID COPELAND Director March 20, 2001
- ----------------------------------------------- --
David Copeland
Director March __, 2001
- -----------------------------------------------
Derrell E. Johnson
Director March __, 2001
- -----------------------------------------------
Kade L. Matthews
/S/ RAYMOND A. MCDANIEL, JR. Director March 20, 2001
- ----------------------------------------------- --
Raymond A. McDaniel, Jr.
/S/ BYNUM MIERS Director March 20, 2001
- ----------------------------------------------- --
Bynum Miers
/S/ JAMES M. PARKER Director March 20, 2001
- ----------------------------------------------- --
James M. Parker
/S/ JACK D. RAMSEY Director March 20, 2001
- ----------------------------------------------- --
Jack D. Ramsey
Director March __, 2001
- -----------------------------------------------
Craig Smith
/S/ DIAN GRAVES STAI Director March 20, 2001
- ----------------------------------------------- --
Dian Graves Stai
Director March __, 2001
- -----------------------------------------------
F. L. Stephens
Name Title Date
---- ----- ----
Director March __, 2001
- -----------------------------------------------
Walter F. Worthington
EXHIBIT INDEX
Item 601
Regulation S-K
Exhibit Reference
Number Exhibits
------ -----------------------------------------------------------------------------------
2.1 -- Stock Exchange Agreement and Plan of Reorganization, dated as of September 4, 1998,
between First Financial Bankshares, Inc. and Cleburne State Bank (incorporated by
reference from Exhibit 2.1 of the Registrant's Form S-4, filed on October 2, 1998
(Reg. No. 333-65235)).
2.2 -- Amendment No. 1 to Stock Exchange Agreement and Plan of Reorganization, dated as of
October 30, 1998, between First Financial Bankshares, Inc. and Cleburne State Bank
(incorporated by reference from Exhibit 2.2 of the Registrant's Amendment No. 1 to
Form S-4, filed on November 3, 1998 (Reg. No. 333-65235)).
2.3 -- Stock Exchange Agreement and Plan of Reorganization, dated as of August 18, 1997,
between First Financial Bankshares, Inc., Southlake Bancshares, Inc. and Texas
National Bank (incorporated by reference from Exhibit 2.1 of the Registrant's Form
S-4, filed on October 1, 1997 (Reg. No. 333-36919)).
2.4 -- Purchase and Assumption Agreement, dated May 27, 1997, by and between Southwest
Bank of San Angelo and Texas Commerce Bank-- San Angelo, National Association
(incorporated by reference from Exhibit 2.2 of the Registrant's Form S-4, filed on
October 1, 1997 (Reg. No. 333-36919)).
3.1 -- Articles of Incorporation, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 1 of the Registrant's Amendment No. 2 to
Form 8-A filed on Form 8-A/A No. 2 on November 21, 1995).
3.2 -- Amended and Restated Bylaws, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 2 of the Registrant's Amendment No. 1 to
Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994).
4.1 -- Specimen certificate of First Financial Common Stock (incorporated by reference
from Exhibit 3 of the Registrant's Amendment No. 1 to Form 8-A filed on Form 8-A/A
No. 1 on January 7, 1994).
10.1 -- Deferred Compensation Agreement, dated October 28, 1992, between the Registrant and
Kenneth T. Murphy (incorporated by reference from Exhibit 4 of the Registrant's
Form 10-K Annual Report for the fiscal year ended December 31, 1992).
10.2 -- Revised Deferred Compensation Agreement, dated December 28, 1995, between the
Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit 2 of the
Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1995).
10.3 -- Executive Recognition Plan (incorporated by reference from Exhibit 2 of the
Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1996).
10.4 -- Form of Executive Recognition Agreement (incorporated by reference from Exhibit 3
of the Registrant's Form 10-K Annual Report for the fiscal year ended December 31,
1996).
10.5 -- 1992 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.5 of
the Registrant's Form 10-K Annual Report for the fiscal year ended December 31,
1998).
*21.1 -- Subsidiaries of the Registrant.
24.1 -- Power of Attorney (included on signature page of this Form 10-K).
- ---------------
*Filed herewith
SUBSIDIARIES OF REGISTRANT
Percentage of Voting
Name of Subsidiary Place of Organization Securities Owned
------------------ --------------------- ----------------
First Financial Bankshares of Delaware, Inc. Delaware 100%
First Financial Investments, Inc. Texas 100%
First National Bank of Abilene* Texas 100%**
Abilene, Texas
Hereford State Bank Texas 100%**
Hereford, Texas
First National Bank, Sweetwater* Texas 100%**
Sweetwater, Texas
Eastland National Bank* Texas 100%**
Eastland, Texas
First Financial Bank, National Association* Texas 100%**
Cleburne, Texas
Stephenville Bank & Trust Co. Texas 100%**
Stephenville, Texas
San Angelo National Bank* Texas 100%**
San Angelo, Texas
Weatherford National Bank* Texas 100%**
Weatherford, Texas
Texas National Bank* Texas 100%**
Southlake, Texas
<FN>
*Federal charter.
**By First Financial Bankshares of Delaware, Inc.
</FN>
All subsidiaries (other than First Financial Investments, Inc. which, as of
December 31, 2000, had not yet begun operations) are included in the
consolidated financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of First Financial
Bankshares, Inc. (a Texas corporation) and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of earnings, comprehensive
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Financial Bankshares,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Dallas, Texas,
January 12, 2001
F-1
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The Management of First Financial Bankshares, Inc. and subsidiaries is
responsible for the preparation, integrity, and fair presentation of its annual
financial statements as of December 31, 2000 and 1999, and for the three years
in the period ended December 31, 2000. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and, as such, include amounts based on judgments and estimates
made by Management. Management has also prepared the other information included
in this Annual Report and is responsible for its accuracy and consistency with
the financial statements.
The annual financial statements referred to above have been audited by Arthur
Andersen LLP, who have been given unrestricted access to all financial records
and related data, including minutes of all meetings of shareholders and the
Board of Directors. Management believes that all representations made to Arthur
Andersen LLP during the audits were valid and appropriate.
Kenneth T. Murphy Curtis R. Harvey
Chairman of the Board, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
F-2
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2000 AND 1999
-------------------------------------------------------
ASSETS 2000 1999
------ -------------- --------------
CASH AND DUE FROM BANKS $ 100,300,424 $ 119,228,650
FEDERAL FUNDS SOLD 62,230,288 68,741,408
-------------- --------------
Total cash and cash equivalents 162,530,712 187,970,058
INTEREST-BEARING DEPOSITS IN BANKS 104,338 4,080
INVESTMENT IN SECURITIES:
Securities held-to-maturity (market value of $393,590,628 in 2000
and $414,407,070 in 1999) 391,918,076 422,362,918
Securities available-for-sale, at market value 262,334,642 233,854,837
-------------- --------------
Total investment in securities 654,252,718 656,217,755
LOANS 859,270,728 797,275,325
Less- Allowance for loan losses 9,887,646 8,937,542
-------------- --------------
Net loans 849,383,082 788,337,783
BANK PREMISES AND EQUIPMENT, net 40,090,733 41,536,094
GOODWILL, net 18,515,304 20,156,671
OTHER ASSETS 28,937,327 29,146,756
-------------- --------------
Total assets $1,753,814,214 $1,723,369,197
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
NONINTEREST-BEARING DEPOSITS $ 336,276,933 $ 340,513,737
INTEREST-BEARING DEPOSITS 1,183,596,767 1,184,190,709
-------------- --------------
Total deposits 1,519,873,700 1,524,704,446
DIVIDENDS PAYABLE 3,256,540 2,992,292
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 26,164,359 9,637,734
OTHER LIABILITIES 8,398,727 7,371,782
-------------- --------------
Total liabilities 1,557,693,326 1,544,706,254
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 20,000,000 shares; 9,983,002
shares issued and 9,856,902 outstanding at December 31, 2000;
9,974,306 shares issued and outstanding at December
31, 1999 99,830,020 99,743,060
Capital surplus 60,592,310 60,517,351
Retained earnings 38,003,195 22,495,259
Treasury stock, at cost (126,100 shares) (3,925,069) --
Unrealized gain (loss) on investment in securities
available-for-sale, net 1,620,432 (4,092,727)
-------------- --------------
Total shareholders' equity 196,120,888 178,662,943
-------------- --------------
Total liabilities and shareholders' equity $1,753,814,214 $1,723,369,197
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 75,474,661 $ 68,706,710 $ 70,882,942
Interest on investment in securities-
Taxable 33,556,796 32,022,205 33,382,559
Exempt from federal income tax 5,770,861 4,807,845 3,058,861
Interest on federal funds sold and interest-bearing
deposits in banks 3,148,277 4,475,866 4,543,295
------------ ------------ ------------
Total interest income 117,950,595 110,012,626 111,867,657
------------ ------------ ------------
INTEREST EXPENSE:
Interest on time deposits 47,737,862 43,120,569 46,133,721
Other 1,091,180 216,988 158,669
------------ ------------ ------------
Total interest expense 48,829,042 43,337,557 46,292,390
------------ ------------ ------------
Net interest income 69,121,553 66,675,069 65,575,267
PROVISION FOR LOAN LOSSES 2,397,750 2,030,833 1,139,500
------------ ------------ ------------
Net interest income after provision for
loan losses 66,723,803 64,644,236 64,435,767
------------ ------------ ------------
NONINTEREST INCOME:
Trust department income 5,494,246 5,097,606 4,748,751
Service fees on deposit accounts 14,073,514 13,321,553 11,838,173
ATM fees 1,554,437 1,241,039 1,033,909
Real estate mortgage fees 1,021,590 1,291,282 1,358,271
Net gain on securities transactions 530,097 -- 42,230
Other 3,273,445 3,532,022 3,329,808
------------ ------------ ------------
Total noninterest income 25,947,329 24,483,502 22,351,142
------------ ------------ ------------
NONINTEREST EXPENSE:
Salaries and employee benefits 27,077,436 26,945,492 26,678,822
Net occupancy expense 3,563,289 3,819,129 4,185,224
Equipment expense 4,180,782 4,118,272 4,090,955
Goodwill amortization 1,641,367 1,641,407 1,654,682
Other expenses 15,229,614 15,409,051 15,812,342
------------ ------------ ------------
Total noninterest expense 51,692,488 51,933,351 52,422,025
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 40,978,644 37,194,387 34,364,884
INCOME TAX EXPENSE 12,662,597 11,503,846 11,110,945
------------ ------------ ------------
NET EARNINGS $ 28,316,047 $ 25,690,541 $ 23,253,939
============ ============ ============
NET EARNINGS PER SHARE (BASIC) $ 2.85 $ 2.58 $ 2.34
============ ============ ============
NET EARNINGS PER SHARE, ASSUMING DILUTION $ 2.84 $ 2.57 $ 2.33
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
NET EARNINGS $ 28,316,047 $ 25,690,541 $ 23,253,939
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized gain (loss) on investment in
securities available-for-sale, before tax 8,789,484 (8,653,045) 1,777,853
Reclassification adjustment for realized gains on
investment in securities included in net earnings,
before tax (530,097) -- (42,230)
------------ ------------ ------------
Total other items of comprehensive earnings 8,259,387 (8,653,045) 1,735,623
------------ ------------ ------------
COMPREHENSIVE EARNINGS, before income taxes 36,575,434 17,037,496 24,989,562
INCOME TAX EXPENSE (BENEFIT) RELATED TO OTHER ITEMS OF
COMPREHENSIVE EARNINGS 3,076,320 (3,028,566) 607,468
------------ ------------ ------------
COMPREHENSIVE EARNINGS $ 33,499,114 $ 20,066,062 $ 24,382,094
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-----------------------------------------------------
Unrealized
Gain
(Loss) on
Investment
Common Stock Treasury in Securities Total
---------------------- Capital Retained Stock, Available Shareholders'
Shares Amount Surplus Earnings at cost For Sale, Net Equity
--------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1997 9,025,852 $90,258,520 $36,595,698 $27,203,391 $ -- $ 403,597 $154,461,206
Net earnings -- -- -- 23,253,939 -- -- 23,253,939
Cash dividends
declared,
$1.00 per share -- -- -- (9,687,469) -- -- (9,687,469)
Stock issuances 23,257 232,570 60,857 -- -- -- 293,427
Stock dividend, 10% 903,574 9,035,740 23,718,818 (32,754,558) -- -- --
Change in unrealized
gain (loss)
on investment
in securities
available-for-
sale, net -- -- -- -- -- 1,128,155 1,128,155
--------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1998 9,952,683 $99,526,830 $60,375,373 $ 8,015,303 $ -- $ 1,531,752 $169,449,258
Net earnings -- -- -- 25,690,541 -- -- 25,690,541
Cash dividends
declared,
$1.125 per share -- -- -- (11,210,585) -- -- (11,210,585)
Stock issuances 21,623 216,230 141,978 -- -- -- 358,208
Change in unrealized
gain (loss)
on investment
in securities
available-for-
sale, net -- -- -- -- -- (5,624,479) (5,624,479)
--------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1999 9,974,306 $99,743,060 $60,517,351 $22,495,259 $ -- $(4,092,727) $178,662,943
Net earnings -- -- -- 28,316,047 -- -- 28,316,047
Cash dividends
declared,
$1.29 per share -- -- -- (12,808,111) -- -- (12,808,111)
Acquisition of
treasury stock -- -- -- -- (3,925,069) -- (3,925,069)
Stock issuances 8,696 86,960 74,959 -- -- -- 161,919
Change in unrealized
gain (loss)
on investment
in securities
available-for-
sale, net -- -- -- -- -- 5,713,159 5,713,159
--------- ----------- ----------- ----------- ----------- ----------- ------------
BALANCE, December 31, 2000 9,983,002 $99,830,020 $60,592,310 $38,003,195 $(3,925,069) $ 1,620,432 $196,120,888
========= =========== =========== =========== =========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-----------------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 28,316,047 $ 25,690,541 $ 23,253,939
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization 5,502,224 6,015,481 6,157,299
Provision for loan losses 2,397,750 2,030,833 1,139,500
Premium amortization, net of discount accretion 1,359,124 2,819,747 2,320,788
Gain on sale of assets (540,304) (242,786) (39,576)
Deferred federal income tax benefit (304,240) (189,462) (110,993)
Increase in other assets (2,567,832) (755,821) (1,109,754)
Increase (decrease) in other liabilities 1,026,945 (1,826,348) 4,049,267
------------ ------------ ------------
Total adjustments 6,873,667 7,851,644 12,406,531
------------ ------------ ------------
Net cash provided by operating activities 35,189,714 33,542,185 35,660,470
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits
in banks (100,258) 199,831 194,760
Activity in available-for-sale securities-
Sales 530,097 -- 23,910,732
Maturities 21,660,247 41,136,148 103,760,577
Purchases (41,804,532) (73,621,717) (143,739,172)
Activity in held-to-maturity securities-
Maturities 87,167,939 114,528,929 218,953,525
Purchases (57,628,266) (123,843,038) (213,301,021)
Net increase in loans (63,728,244) (20,100,242) (38,950,855)
Capital expenditures (2,507,214) (4,136,657) (4,267,677)
Proceeds from sale of other assets 392,305 1,453,017 1,171,448
------------ ------------ ------------
Net cash used in investing activities (56,017,926) (64,383,729) (52,267,683)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in noninterest-bearing
deposits (4,236,804) 5,794,605 10,559,002
Net (decrease) increase in interest-bearing deposits (593,942) 14,054,001 5,588,110
Net increase in securities sold under agreements
to repurchase 16,526,625 9,250,776 386,958
Net decrease in other short-term borrowings -- (20,000) (6,541,958)
Common stock transactions:
Acquisition of treasury stock (3,925,069) -- --
Proceeds of stock issuances 161,919 358,208 293,427
Dividends paid (12,543,863) (10,954,982) (9,113,679)
------------ ------------ ------------
Net cash (used in) provided by financing
activities (4,611,134) 18,482,608 1,171,860
------------ ------------ ------------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (25,439,346) (12,358,936) (15,435,353)
CASH AND CASH EQUIVALENTS, beginning of year 187,970,058 200,328,994 215,764,347
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $162,530,712 $187,970,058 $200,328,994
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 2000, 1999, AND 1998
---------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Nature of Operations
- --------------------
First Financial Bankshares, Inc. (a Texas corporation) ("Bankshares") is a
multi-bank holding company which owns (through its wholly owned Delaware
subsidiary) all of the capital stock of nine banks located in Texas as of
December 31, 2000. Those subsidiary banks are First National Bank of Abilene;
Hereford State Bank; First National Bank, Sweetwater; Eastland National Bank;
First National Bank in Cleburne; Stephenville Bank & Trust Co.; San Angelo
National Bank; Weatherford National Bank; and Texas National Bank, Southlake.
Each subsidiary bank's primary source of revenue is providing loans and banking
services to consumers and commercial customers in the market area in which the
subsidiary is located.
A summary of significant accounting policies of Bankshares and subsidiaries
(collectively, the "Company") applied in the preparation of the accompanying
consolidated financial statements follow. The accounting principles followed by
the Company and the methods of applying them are in conformity with both
accounting principles generally accepted in the United States and prevailing
practices of the banking industry.
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses, and the valuation of
foreclosed real estate, deferred income tax assets, and fair value of financial
instruments.
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of each
of Bankshares' subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
Investment in Securities
- ------------------------
Management classifies debt and equity securities as held-to-maturity,
available-for-sale, or trading based on their intent. Debt securities that
management has the positive intent and ability to hold to maturity are
classified as held-to-maturity and recorded at cost, adjusted for amortization
of premiums and accretion of discounts, which are recognized as adjustments to
interest income using the interest method. Securities not classified as
held-to-maturity or trading are classified as available-for-sale and recorded at
estimated fair value, with unrealized gains and losses, net of deferred taxes,
excluded from earnings and reported in a separate component of shareholders'
equity. Securities classified as trading are recorded at estimated fair value,
with unrealized gains and losses included in earnings. The Company had no
trading securities at December 31, 2000, 1999, or 1998.
Loans and Allowance for Loan Losses
- -----------------------------------
Loans are stated at the amount of unpaid principal, reduced by unearned income
and an allowance for loan losses. Unearned income on installment loans is
recognized in income over the terms of the loans in decreasing amounts using a
method which approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amounts outstanding. The Company expenses its net loan origination
costs, a method which does not materially differ from deferring and amortizing
such amounts as an adjustment to yield. The allowance for loan losses is
established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.
F-8
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectable based upon
management's review and evaluation of the loan portfolio. The allowance for loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on general economic conditions, the financial condition of the
borrower, the value and liquidity of collateral, delinquency, prior loan loss
experience, and the results of periodic reviews of the portfolio. Accrual of
interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of interest is doubtful.
The Company's policy requires measurement of an impaired collateral dependent
loan based on the fair value of the collateral. Other loan impairments are
measured based on the present value of expected future cash flows or the loan's
observable market price. At December 31, 2000 and 1999, all significant impaired
loans have been determined to be collateral dependent and have been measured
utilizing the fair value of the collateral.
Bank Premises and Equipment
- ---------------------------
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the life of the respective lease or
the estimated useful lives of the improvements, whichever is shorter.
Excess of Cost Over Fair Value of Tangible Assets Acquired (Goodwill)
- ---------------------------------------------------------------------
Goodwill, relating to acquisitions of certain subsidiary banks, is being
amortized by the straight-line method over periods of 15 and 40 years.
Securities Sold Under Agreements To Repurchase
- ----------------------------------------------
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
the cash received in connection with the transaction. The Company may be
required to provide additional collateral based on the estimated fair value of
the underlying securities.
Segment Reporting
- -----------------
The Company has determined that it operates one line of business (community
banking) located in a single geographic area (Texas).
Recent Accounting Standard
- --------------------------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133"), was issued.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. The Company
adopted SFAS 133 on January 1, 2001. The statement did not have a significant
impact on its financial position or results of operations.
Statements of Cash Flowsw
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold.
F-9
Accounting for Income Taxes
- ---------------------------
The Company's provision for income taxes is based on income before taxes
adjusted for permanent differences between financial reporting and taxable
income. Deferred income taxes are provided for temporary differences between
financial reporting and taxable income.
Stock Repurchase
- ----------------
On July 25, 2000, the Company approved a stock repurchase plan, authorizing the
repurchase of up to 500,000 shares of the Company's common stock. During the
year ended December 31, 2000, the Company repurchased 126,100 shares of its
common stock. The treasury shares were purchased for $3,925,069 which represents
an average purchase price of $31.13 per share.
Per Share Data
- --------------
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). Under
SFAS 128, net earnings per share ("EPS") are computed by dividing net earnings
by the weighted average number of shares of common stock outstanding during the
period. The Company calculates dilutive EPS assuming all outstanding options to
purchase common stock have been exercised at the beginning of the year (or the
time of issuance, if later). The dilutive effect of the outstanding options is
reflected by application of the treasury stock method, whereby the proceeds from
the exercised options are assumed to be used to purchase common stock at the
average market price during the period. The following table reconciles the
computation of basic EPS to dilutive EPS:
Weighted
Net Average Per Share
Earnings Shares Amount
----------- ---------- ----------
For the year ended December 31, 2000:
Net earnings per share, basic $28,316,047 9,941,075 $ 2.85
==========
Effect of stock options -- 22,684
----------- ----------
Net earnings per share, assuming dilution $28,316,047 9,963,759 $ 2.84
=========== ========== ==========
For the year ended December 31, 1999:
Net earnings per share, basic $25,690,541 9,961,315 $ 2.58
==========
Effect of stock options -- 44,534
----------- ----------
Net earnings per share, assuming dilution $25,690,541 10,005,849 $ 2.57
=========== ========== ==========
For the year ended December 31, 1998:
Net earnings per share, basic $23,253,939 9,939,910 $ 2.34
==========
Effect of stock options -- 56,277
----------- ----------
Net earnings per share, assuming dilution $23,253,939 9,996,187 $ 2.33
=========== ========== ==========
Earnings and dividends per share have been retroactively adjusted for the effect
of stock dividends and splits.
2. CASH AND INVESTMENT IN SECURITIES:
---------------------------------
Certain subsidiary banks are required to maintain reserve balances with the
Federal Reserve Bank. During 2000 and 1999, such average balances totaled
approximately $7,785,000 and $7,041,000 respectively.
The amortized cost, estimated market values, and gross unrealized gains and
losses of the Company's investment in securities as of December 31, 2000 and
1999, are as follows:
F-10
December 31, 2000
------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Estimated
Cost Basis Gains Losses Fair Value
------------ ---------- ----------- ------------
Securities held-to-maturity-
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $251,418,096 $1,412,905 $ (909,401) $251,921,600
Obligations of state and political
subdivisions 82,343,742 984,801 (261,897) 83,066,646
Corporate bonds 4,615,347 -- (18,320) 4,597,027
Mortgage-backed securities 53,540,891 639,820 (175,356) 54,005,355
------------ ---------- ----------- ------------
Total investment in debt securities
held-to-maturity $391,918,076 $3,037,526 $(1,364,974) $393,590,628
============ ========== =========== ============
Securities available-for-sale-
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $102,872,287 $ 722,740 $ (273,607) $103,321,420
Obligations of state and political
subdivisions 58,543,775 1,252,285 (185,798) 59,610,262
Corporate bonds 47,325,730 478,314 (89,070) 47,714,974
Mortgage-backed securities 47,962,976 698,433 (110,324) 48,551,085
------------ ---------- ----------- ------------
Total investment in debt securities
available-for-sale 256,704,764 3,151,772 (658,795) 259,197,741
Other securities 3,136,901 -- -- 3,136,901
------------ ---------- ----------- ------------
Total investment in securities
available for sale $259,841,669 $3,151,772 $ (658,799) $262,334,642
============ ========== =========== ============
F-11
December 31, 1999
------------------------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Estimated
Cost Basis Gains Losses Fair Value
------------ -------- ----------- ------------
Securities held-to-maturity-
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $283,735,707 $103,589 $(6,158,131) $277,681,165
Obligations of state and political
subdivisions 86,907,891 122,893 (1,251,539) 85,779,245
Corporate bonds 5,142,414 -- (71,575) 5,070,839
Mortgage-backed securities 46,082,567 32,859 (722,705) 45,392,721
Other securities 494,339 -- (11,239) 483,100
------------ -------- ----------- ------------
Total investment in debt securities
held-to-maturity $422,362,918 $259,341 $(8,215,189) $414,407,070
============ ======== =========== ============
Securities available-for-sale-
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies $105,290,356 $ 65,391 $(2,563,368) $102,792,379
Obligations of state and political
subdivisions 50,407,650 2,727 (2,210,591) 48,199,786
Corporate bonds 39,376,949 567 (809,898) 38,567,618
Mortgage-backed securities 41,939,488 20,348 (801,683) 41,158,153
------------ -------- ----------- ------------
Total investment in debt securities
available-for-sale 237,014,443 89,033 (6,385,540) 230,717,936
Other securities 3,136,901 -- -- 3,136,901
------------ -------- ----------- ------------
Total investment in securities
available for sale $240,151,344 $89,033 $(6,385,540) $233,854,837
============ ======== =========== ============
The Company invests in securities that have expected maturities that differ from
their contractual maturities. These differences arise because borrowers may have
the right to call or prepay obligations with or without a prepayment penalty.
These securities include collateralized mortgage obligations (CMOs) and
asset-backed securities. The expected maturities of these securities at December
31, 2000, were computed by using scheduled amortization of balances and
historical prepayment rates. At December 31, 2000 and 1999, the Company did not
hold any CMOs that entail higher risks than standard mortgage-backed securities.
Total investment in debt securities at December 31, 1999 included structured
notes with an amortized cost basis of $7,006,000 and an estimated fair value of
$6,942,000.
The amortized cost and estimated fair value of debt securities at December 31,
2000, by contractual and expected maturity, are shown below.
F-12
Held-to-Maturity Available-for-Sale
---------------------------- ----------------------------
Amortized Estimated Amortized Estimated
Cost Basis Fair Value Cost Basis Fair Value
------------ ------------ ------------ ------------
Due within one year $107,323,940 $107,168,610 $ 39,155,994 $ 39,132,290
Due after one year through five years 244,412,661 245,533,915 160,272,452 161,911,231
Due after five years through ten years 28,905,613 29,127,594 17,680,897 17,768,391
Due after ten years 11,275,862 11,760,509 39,595,421 40,385,829
------------ ------------ ------------ ------------
Total debt securities $391,918,076 $393,590,628 $256,704,764 $259,197,741
============ ============ ============ ============
Securities, carried at approximately $237,295,000 and $211,143,000 at December
31, 2000 and 1999, respectively, were pledged as collateral for public or trust
fund deposits and for other purposes required or permitted by law.
During 2000 and 1998, sales of investments in securities that were classified as
available-for-sale totaled $530,097 and $23,910,732, respectively. Gross
realized gains from the 2000 and 1998 sales were $530,097 and $44,064,
respectively, and gross realized losses for the 1998 sales were $1,834. There
were no sales of investment securities in the year ended December 31, 1999. The
specific identification method was used to determine cost in computing the
realized gains and losses.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
-----------------------------------
Major classifications of loans are as follows:
December 31,
---------------------------------
2000 1999
------------ -------------
Commercial, financial and agricultural $295,032,865 $297,966,325
Real estate - construction 40,609,783 43,039,241
Real estate - mortgage 290,920,045 208,895,129
Consumer 233,219,033 249,397,767
------------ ------------
859,781,726 799,298,462
Unearned income (510,998) (2,023,137)
------------ -------------
Total loans $859,270,728 $797,275,325
============ ============
The Company's recorded investment in impaired loans and the related valuation
allowance are as follows:
December 31, 2000 December 31, 1999
-------------------------- --------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- ---------- ---------- --------
Impaired loans-
Valuation allowance required $3,727,631 $1,090,472 $1,552,000 $548,604
========== ========== ========== ========
The average recorded investment in impaired loans for the years ended December
31, 2000 and 1999, was approximately $2,640,000 and $2,589,000, respectively.
The Company had approximately $4,092,000 and $2,089,000 in nonperforming assets
at December 31, 2000 and 1999, respectively, of which approximately $3,539,000
and $1,416,000 represented recorded investments in impaired loans. No additional
funds are committed to be advanced in connection with impaired loans.
Interest payments received on impaired loans are recorded as interest income
unless collections of the remaining recorded investment is doubtful, at which
time payments received are recorded as reductions of principal.
F-13
The Company recognized interest income on impaired loans of approximately
$213,000, $63,000, and $135,000 during the years ended December 31, 2000, 1999,
and 1998, respectively, of which approximately $16,000, $23,000 and $17,000
represented cash interest payments received and recorded as interest income. If
interest on impaired loans had been recognized on a full accrual basis during
the years ended December 31, 2000, 1999, and 1998, respectively, such income
would have approximated $449,000, $249,000 and $400,000.
The allowance for loan losses as of December 31, 2000 and 1999, is presented
below. Management has evaluated the adequacy of the allowance for loan losses by
estimating the losses in various categories of the loan portfolio which are
identified below:
2000 1999
---------- ----------
Allowance for loan losses provided for-
Loans specifically evaluated as impaired $1,090,472 $ 548,604
Remaining portfolio 8,797,174 8,388,938
---------- ----------
Total allowance for loan losses $9,887,646 $8,937,542
========== ==========
Changes in the allowance for loan losses are summarized as follows:
December 31,
------------------------------------------------
2000 1999 1998
---------- ---------- -----------
Balance at beginning of year $8,937,542 $8,988,320 $10,632,441
Add-
Provision for loan losses 2,397,750 2,030,833 1,139,500
Loan recoveries 1,545,080 1,739,641 1,375,048
Deduct-
Loan charge-offs (2,992,726) (3,821,252) (4,158,669)
---------- ---------- -----------
Balance at end of year $9,887,646 $8,937,542 $ 8,988,320
========== ========== ===========
An analysis of the changes in loans to officers, directors, principal
shareholders, or associates of such persons for the years ended December 31,
2000 and 1999 (determined as of each respective year-end) follows:
Balance at Balance at
Beginning Additional End
of Period Loans Payments of Period
----------- ----------- ----------- -----------
Year ended December 31, 2000 $35,575,469 $49,751,374 $56,167,254 $29,159,589
=========== =========== =========== ===========
Year ended December 31, 1999 $49,715,002 $70,731,259 $74,405,640 $46,040,621
=========== =========== =========== ===========
In the opinion of management, those loans are on substantially the same terms,
including interest rates and collateral requirements, as those prevailing at the
time for comparable transactions with unaffiliated persons.
4. BANK PREMISES AND EQUIPMENT:
---------------------------
The following is a summary of bank premises and equipment:
F-14
December 31,
------------------------------
2000 1999
----------- -----------
Land $ 7,104,761 $ 7,092,511
Buildings 46,057,304 44,307,341
Furniture and equipment 22,861,037 28,250,768
Leasehold improvements 5,003,794 5,991,659
----------- -----------
81,026,896 85,642,279
Less- Accumulated depreciation and amortization (40,936,163) (44,106,185)
----------- -----------
$40,090,733 $41,536,094
=========== ===========
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
amounted to $3,700,474, $3,932,695 and $4,196,134, respectively.
5. TIME DEPOSITS:
-------------
Time deposits of $100,000 or more totaled approximately $165,494,000 and
$157,337,000 at December 31, 2000 and 1999, respectively. Interest expense on
these deposits was approximately $10,022,000, $8,146,000 and $8,705,000 during
2000, 1999, and 1998, respectively.
At December 31, 2000, the scheduled maturities of time deposits as follows:
2001 $463,548,000
2002 55,583,000
2003 11,192,000
2004 5,316,000
2005 7,768,000
Thereafter --
------------
$543,407,000
============
6. NOTE PAYABLE:
------------
Bankshares has a line of credit with a nonaffiliated bank under which it could
borrow up to $25,000,000. The line of credit is unsecured and matures on June
30, 2001. Bankshares paid no fee to secure the unused line of credit and,
accordingly, did not estimate a fair value of the unused line of credit at
December 31, 2000 and 1999. The line of credit carries an interest rate of
London Interbank Offering Rate plus 1.0%.
7. INCOME TAXES:
------------
The Company files a consolidated federal income tax return. Income tax expense
(benefit) is comprised of the following:
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Current federal income tax $12,966,837 $11,693,308 $11,221,938
Deferred federal income tax benefit (304,240) (189,462) (110,993)
----------- ----------- -----------
Income tax expense $12,662,597 $11,503,846 $11,110,945
=========== =========== ===========
F-15
The provision for income tax expense, as a percentage of pretax earnings,
differs from the statutory federal income tax rate as follows:
As a Percent of Pretax Earnings
------------------------------------------
2000 1999 1998
---- ---- ----
Statutory federal income tax rate 35.0% 35.0% 35.0%
Reductions in tax rate resulting from
interest income exempt from federal income tax (4.9)% (4.5)% (3.1)%
Other 0.8% 0.4% 0.4%
---- ---- ----
Effective income tax rate 30.9% 30.9% 32.3%
==== ==== ====
The approximate effects of each type of difference that gave rise to the
Company's deferred tax assets and liabilities at December 31, 2000 and 1999, are
as follows:
2000 1999
---------- ----------
Deferred tax assets-
Tax basis of loans in excess of financial statement basis $3,382,025 $2,906,556
Benefits of a subsidiary bank net operating loss carryfoward 131,302 249,907
Deferred compensation 500,260 508,669
Write-downs and adjustments to other real estate owned
and repossessed assets 81,052 39,367
Net unrealized loss on investment in securities
available-for-sale -- 2,204,609
Other deferred tax assets 285,346 348,395
---------- ----------
Total deferred tax assets $4,379,985 $6,257,503
---------- ----------
Deferred tax liabilities-
Financial statement basis of fixed assets in excess of
tax basis $1,503,329 $1,623,207
Accretion on investments 322,689 190,711
Pension plan contribution 571,685 545,978
Net unrealized gain on investment in securities
available-for-sale 872,540 --
Other deferred tax liabilities -- 11,783
---------- ----------
Total deferred tax liabilities 3,270,243 2,371,679
---------- ----------
Valuation allowance -- (3,173)
---------- ----------
Net deferred tax asset $1,109,742 $3,882,651
=========== ==========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
-----------------------------------
The Company is required to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Company, as for most financial
institutions, over 90% of its assets and liabilities are considered financial
instruments as defined by generally accepted accounting principles. Many of the
Company's financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction.
Estimated fair values have been determined by the Company using the best
available data, as generally provided in the Company's regulatory reports, and
an estimation methodology suitable for each category of financial instruments.
For those loans and deposits with floating interest rates, it is presumed that
estimated fair values generally approximate the carrying value. The estimation
methodologies used, the estimated fair values, and carrying values at December
31, 2000 and 1999, were as follows:
F-16
o Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
2000 1999
----------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Cash and due from banks $100,300,424 $100,300,424 $119,228,650 $119,228,650
Federal funds sold 62,230,288 62,230,288 68,741,408 68,741,408
Interest-bearing deposits in banks 104,338 104,338 4,080 4,080
Investment in securities 654,252,718 655,925,270 656,217,755 648,261,907
Securities sold under agreements
to repurchase 26,164,359 26,164,359 9,637,734 9,637,734
o Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating
current market for similar assets and liabilities. Financial
instrument assets with variable rates and financial instrument
liabilities with no stated maturities have an estimated fair value
equal to both the amount payable on demand and the carrying value.
2000 1999
----------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------- -------------
Deposits with stated maturities $529,570,242 $529,310,009 $512,254,716 $511,535,742
Deposits with no stated maturities 990,303,458 990,303,458 1,012,449,730 1,012,449,730
Net loans 849,383,082 843,096,227 788,337,783 786,036,737
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
The Company's remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Company's deposits is required nor has the Company estimated its value. There is
no material difference between the notional amount and the estimated fair value
of off-balance-sheet unfunded loan commitments which total approximately
$85,000,000 and $107,993,000 at December 31, 2000 and 1999, respectively, and
are generally priced at market at the time of funding. Letters of credit
discussed in Note 10 have an estimated fair value based on fees currently
charged for similar agreements. At December 31, 2000 and 1999, fees related to
the unexpired term of the letters of credit are not significant.
Reasonable comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates which
must be made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
9. COMMITMENTS AND CONTINGENCIES:
-----------------------------
The Company is engaged in legal actions arising from the normal course of
business. In management's opinion, the Company has adequate legal defenses with
respect to these actions, and the resolution of these matters will have no
material adverse effects upon the results of operations or financial condition
of the Company.
The Company leases a portion of its bank premises and equipment under operating
leases and is a lessor for portions of its banking premises. Total rental income
for all leases included in net occupancy expense is approximately $1,387,000,
$1,336,000 and $1,436,000, for the years ended December 31, 2000, 1999, and
1998, respectively. At December 31, 2000, approximate future minimum lease
commitments, net of lease receivables, are not significant.
F-17
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
-------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Contract or
Notional Amount
---------------
Financial instruments whose contract amounts represent
credit risk-
Commitments to extend credit $85,000,000
Standby letters of credit 5,500,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The average collateral value held on
letters of credit exceeds the contract amount.
11. CONCENTRATION OF CREDIT RISK:
----------------------------
The Company grants commercial, retail, agriculture, and residential loans to
customers primarily in North Central and West Texas. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the local economic sector.
12. PENSION AND PROFIT SHARING PLANS:
--------------------------------
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and a percentage of the
employee's qualifying compensation during the final years of employment. The
Company's funding policy is to contribute annually the amount necessary to
satisfy the Internal Revenue Service's funding standards. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
The following table provides a reconciliation of the plan's benefit obligations
and fair value of plan assets over the two-year period ended December 31, 2000,
and a statement of the funded status as of December 31, 2000 and 1999:
F-18
2000 1999
----------- -----------
Reconciliation of benefit obligations-
Benefit obligation at January 1 $10,793,838 $10,376,211
Service cost - benefits earned during the period 845,372 874,008
Interest cost on projected benefit obligation 816,583 725,205
Actuarial loss (gain) 565 (738,685)
Benefits paid (570,697) (442,901)
----------- -----------
Benefit obligation at December 31 11,885,661 10,793,838
----------- -----------
Reconciliation of fair value of plan assets-
Fair value of plan assets at January 1 11,695,263 9,981,047
Actual return on plan assets 1,018,391 1,249,409
Employer contributions 721,070 907,708
Benefits paid (570,697) (442,901)
----------- -----------
Fair value of plan at December 31 12,864,027 11,695,263
----------- -----------
Funded status-
Funded status at December 31 978,366 901,425
Unrecognized loss from past experience different
than that assumed and effects of changes in
assumptions 659,593 618,632
Unrecognized prior-service cost 229,896 247,857
----------- -----------
Net amount recognized (prepaid pension cost included in
other assets) $1,867,855 $1,767,914
=========== ===========
Net periodic pension cost for the years ended December 31, 2000, 1999, and 1998,
included the following components:
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
----------- --------- ---------
Service cost - benefits earned during the period $ 845,372 $ 874,008 $ 690,383
Interest cost on projected benefit obligation 816,583 725,205 637,149
Expected return on plan assets (1,058,787) (993,649) (867,303)
Amortization of prior-service cost 17,961 17,961 17,961
Amortization of unrecognized net loss -- 32,887 --
----------- --------- ---------
Net periodic pension cost $ 621,129 $ 656,412 $ 478,190
=========== ========= =========
The following table sets forth the rates used in the actuarial calculations of
the present value of benefit obligations and the rate of return on plan assets:
2000 1999 1998
---- ---- ----
Weighted average discount rate 7.5% 7.5% 6.75%
Rate of increase in future compensation levels 4% 4% 4%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
As of December 31, 2000 and 1999, the fair value of the plan's assets included
Company stock valued at approximately $310,000 and $303,000, respectively.
F-19
The Company's pension plan was amended as of February 1, 1998, to increase
benefit payments to retired participants. The effect of the amendment was to
increase the pension benefit obligation by $283,779. The prior-service costs
related to the amendment are amortized on a straight-line basis over the average
remaining service period of the active participants.
The Company also provides a profit sharing plan, which covers substantially all
full-time employees. The profit sharing plan is a defined contribution plan and
allows employees to contribute up to 5% of their base annual salary. Employees
are fully vested to the extent of their contributions and become fully vested in
the Company's contributions over a seven-year period. Costs related to the
Company's defined contribution plan totaled $1,874,000, $2,111,000, and
$2,027,000 in 2000, 1999 and 1998 respectively.
13. DIVIDENDS FROM SUBSIDIARIES:
---------------------------
At December 31, 2000, approximately $21,600,000 was available for the
declaration of dividends by the Company's subsidiary banks without the prior
approval of regulatory agencies.
F-20
14. REGULATORY MATTERS:
------------------
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, each of Bankshares'
subsidiaries must meet specific capital guidelines that involve quantitative
measures of the subsidiaries' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The subsidiaries'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and each of its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined), to average assets (as defined). Management believes as of December 31,
2000 and 1999, that Bankshares and each of its subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 2000 and 1999, the most recent notification from each
respective subsidiaries' primary regulator categorized each of Bankshares'
subsidiaries as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institutions' category. Bankshares' and its
significant subsidiaries' actual capital amounts and ratios are presented in the
table below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual: Adequacy Purposes: Action Provisions:
-------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------------ --- ------------ --- ------------ ----
As of December 31, 2000:
- -----------------------
Total Capital (to Risk-Weighted Assets):
Consolidated $185,873,000 19% >$79,330,000 > 8% N/A N/A
- -
First National Bank of Abilene $ 63,909,000 17% >$30,153,000 > 8% >$37,691,000 > 10%
- - - -
San Angelo National Bank $ 26,635,000 20% >$10,866,000 > 8% >$13,583,000 > 10%
- - - -
Weatherford National Bank $ 17,488,000 17% >$ 8,245,000 > 8% >$10,306,000 > 10%
- - - -
Tier I Capital (to Risk-Weighted Assets):
Consolidated $175,985,000 18% >$39,665,000 > 4% N/A N/A
- -
First National Bank of Abilene $ 60,329,000 16% >$15,076,000 > 4% >$22,614,000 > 6%
- - - -
San Angelo National Bank $ 25,430,000 19% >$ 5,433,000 > 4% >$ 8,150,000 > 6%
- - - -
Weatherford National Bank $ 16,548,000 16% >$ 4,122,000 > 4% >$ 6,184,000 > 6%
- - - -
Tier I Capital (to Average Assets):
Consolidated $175,985,000 10% >$50,752,000 > 3% N/A N/A
- -
First National Bank of Abilene $ 60,329,000 9% >$19,392,000 > 3% >$32,320,000 > 5%
- - - -
San Angelo National Bank $ 25,430,000 10% >$ 7,603,000 > 3% >$12,671,000 > 5%
- - - -
Weatherford National Bank $ 16,548,000 9% >$ 5,255,000 > 3% >$ 8,759,000 > 5%
- - - -
As of December 31, 1999:
- -----------------------
Total Capital (to Risk-Weighted Assets):
Consolidated $171,537,000 18% >$75,680,000 > 8% N/A N/A
- -
First National Bank of Abilene $ 57,611,000 16% >$28,481,000 > 8% >$37,602,000 > 10%
- - - -
San Angelo National Bank $ 25,675,000 18% >$11,117,000 > 8% >$13,896,000 > 10%
- - - -
Weatherford National Bank $ 16,786,000 18% >$ 7,507,000 > 8% >$ 9,384,000 > 10%
- - - -
Tier I Capital (to Risk-Weighted Assets):
Consolidated $162,599,000 17% >$37,840,000 > 4% N/A N/A
- -
First National Bank of Abilene $ 54,386,000 15% >$14,241,000 > 4% >$21,361,000 > 6%
- - - -
San Angelo National Bank $ 24,440,000 18% >$ 5,558,000 > 4% >$ 8,338,000 > 6%
- - - -
Weatherford National Bank $ 15,925,000 17% >$ 3,754,000 > 4% >$ 5,630,000 > 6%
- - - -
Tier I Capital (to Average Assets):
Consolidated $162,599,000 10% >$50,681,000 > 3% N/A N/A
- -
First National Bank of Abilene $ 54,386,000 9% >$18,806,000 > 3% >$31,344,000 > 5%
- - - -
San Angelo National Bank $ 24,440,000 9% >$ 8,132,000 > 3% >$13,553,000 > 5%
- - - -
Weatherford National Bank $ 15,925,000 9% >$ 5,196,000 > 3% >$ 8,660,000 > 5%
F-21
15. STOCK OPTION PLAN:
-----------------
The Company has an incentive stock plan to provide for the granting of options
to senior management of the Company at prices not less than market at the date
of grant. At December 31, 2000, the Company had allocated 317,000 shares of
stock for issuance under the plan. The plan provides that options granted are
exercisable after two years from date of grant at a rate of 20% each year
cumulatively during the 10-year term of the option. An analysis of stock option
activity for the years ended December 31, 2000, 1999, and 1998, is presented in
the table and narrative below:
2000 1999 1998
--------------------- ----------------------- ----------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------- ------ ------- ------ ------- ------
Outstanding, beginning of year 110,500 $25.22 136,708 $23.76 124,739 $16.79
Granted 48,750 26.00 -- -- 45,430 36.59
Exercised (8,696) 18.62 (21,623) 16.57 (24,830) 11.81
Canceled (7,489) 30.02 (4,585) 22.54 (8,631) 24.89
------- ------ ------- ------ ------- ------
Outstanding, end of year 143,065 $25.64 110,500 $25.22 136,708 $23.76
======= ====== ======= ====== ======= ======
Exercisable at end of year 57,016 $20.46 48,791 $16.92 54,435 $15.77
======= ====== ======= ====== ======= ======
Weighted average fair value of
options granted at date of issue $25.50 $ -- $10.92
====== ====== ======
The options outstanding at December 31, 2000, have exercise prices between $8.45
and $36.59 with a weighted average exercise price of $25.64 and a weighted
average remaining contractual life of 6 years. Stock options have been adjusted
retroactively for the effects of stock dividends and splits.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," under which no compensation cost
has been recognized for options granted. Had compensation cost for the plan been
determined consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced by insignificant amounts on a pro
forma basis for the years ended December 31, 2000, 1999 and 1998. The fair value
of the options granted in 2000 and 1998 was estimated using an accepted options
pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.33% and 5.86%, respectively; expected dividend yield of 5.18%
and 2.48%, respectively; expected life of 6.0 and 5.0 years, respectively; and
expected volatility of 28.31% and 27.81%, respectively.
F-22
16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
------------------------------------------------
Condensed Balance Sheets-December 31, 2000 and 1999
- ---------------------------------------------------
ASSETS 2000 1999
------ ------------ ------------
Cash in subsidiary bank $ 314,866 $ 214,168
Interest-bearing deposits in banks 8,997,055 14,117,903
------------ ------------
Total cash and cash equivalents 9,311,921 14,332,071
Investment in securities 9,995,333 --
Investment in subsidiaries, at equity 179,174,238 166,077,563
Goodwill, net 778,951 834,527
Other assets 1,367,971 1,213,833
------------ ------------
Total assets $200,628,414 $182,457,994
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Total liabilities $ 4,507,526 $ 3,795,051
Shareholders' equity-
Common stock 99,830,020 99,743,060
Capital surplus 60,592,310 60,517,351
Retained earnings 38,003,195 22,495,259
Treasury stock, at cost (3,925,069) --
Unrealized gain (loss) on investment in securities
available-for-sale, net 1,620,432 (4,092,727)
------------ ------------
Total shareholders' equity 196,120,888 178,662,943
------------ ------------
Total liabilities and shareholders' equity $200,628,414 $182,457,994
============ ============
Condensed Statements of Earnings-
For the Years Ended December 31, 2000, 1999, and 1998
- -----------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Income-
Cash dividends from subsidiary banks $21,000,000 $21,729,622 $15,500,000
Excess of earnings over dividends of
subsidiary banks 7,383,516 5,798,751 8,716,499
Gain on sale of investment in securities
available-for-sale 530,097 -- --
Other income 1,325,613 816,430 640,633
----------- ----------- -----------
30,239,226 28,344,803 24,857,132
----------- ----------- -----------
Expenses-
Salaries and employee benefits 1,067,664 1,041,660 1,002,919
Other operating expenses 1,288,508 2,415,987 1,098,817
----------- ----------- -----------
2,356,172 3,457,647 2,101,736
----------- ----------- -----------
Earnings before income taxes 27,883,054 24,887,156 22,755,396
Income tax benefit 432,993 803,385 498,543
----------- ----------- -----------
Net earnings $28,316,047 $25,690,541 $23,253,939
=========== =========== ===========
F-23
Condensed Statements of Cash Flows-
For the Years Ended December 31, 2000, 1999, and 1998
- -----------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Cash flows from operating activities-
Net earnings $28,316,047 $25,690,541 $23,253,939
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Excess of earnings over dividends
of subsidiary banks (7,383,516) (5,798,751) (8,716,499)
Depreciation 26,222 28,566 31,269
Discount accretion, net of premium
amortization (12,133) -- (15,117)
Amortization of goodwill 55,576 55,576 53,090
Gain on sale of securities (530,097) -- --
Increase in other assets (178,092) (296,818) (390,985)
Increase (decrease) in liabilities 448,225 (352,053) 117,783
----------- ----------- -----------
Net cash provided by operating
activities 20,742,232 19,327,061 14,333,480
----------- ----------- -----------
Cash flows from investing activities-
Capital expenditures (2,266) 4,663 (48,519)
Proceeds from maturities of securities
held-to-maturity -- -- 1,510,000
Proceeds from sale of securities
available-for-sale 530,097 -- --
Purchases of securities
held-to-maturity (9,983,200) -- (1,494,883)
----------- ----------- -----------
Net cash (used in) provided by
investing activities (9,455,369) 4,663 (33,402)
----------- ----------- -----------
Cash flows from financing activities-
Proceeds of stock issuances 161,919 358,208 293,427
Repayments of debt -- -- (4,700,000)
Acquisition of treasury stock (3,925,069) -- --
Cash dividends paid (12,543,863) (10,954,982) (9,113,679)
----------- ----------- -----------
Net cash used in financing activities (16,307,013) (10,596,774) (13,520,252)
----------- ----------- -----------
Net increase in cash and cash equivalents (5,020,150) 8,734,950 779,826
Cash and cash equivalents, beginning of year 14,332,071 5,597,121 4,817,295
----------- ----------- -----------
Cash and cash equivalents, end of year $ 9,311,921 $14,332,071 $ 5,597,121
=========== =========== ===========
17. BUSINESS COMBINATION:
--------------------
In December 1998, the Company exchanged 411,683 shares of its common stock for
substantially all of the outstanding shares of Cleburne State Bank ("Cleburne
State"). The Cleburne State shareholders received 2.1073 shares of the Company's
common stock for each share of Cleburne State common stock owned. The
accompanying consolidated financial statements of the Company give effect to
this business combination which has been accounted for as a
pooling-of-interests. Accordingly, the accounts of Cleburne State have been
combined with those of the Company to reflect the results of these companies on
a combined basis for all periods presented. During the first quarter of 1999,
Cleburne State was merged into First Financial Bank, formerly First National
Bank in Cleburne.
F-24
The Company's consolidated financial data for the year ended December 31, 1998
has been restated as follows:
Cleburne
Company State Combined
----------- ---------- -----------
Year ended December 31, 1998-
Net interest income $62,005,218 $3,570,049 $65,575,267
Net earnings 22,169,886 1,084,053 23,253,939
18. CASH FLOW INFORMATION:
---------------------
Supplemental information on cash flows and noncash transactions is as follows:
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Supplemental cash flow information-
Interest paid $48,123,200 $43,625,728 $46,486,952
Federal income taxes paid 13,227,192 11,750,380 11,259,747
Schedule of noncash investing and financing
activities-
Assets acquired through foreclosure 285,195 417,800 78,720
F-25