SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Commission File Number December 31, 1993 0-7674 FIRST FINANCIAL BANKSHARES, INC. (Exact Name of Registrant as Specified in its Charter) Texas 75-0944023 (State of Incorporation) (I.R.S. Employer Identification No.) 400 Pine Street, Abilene, Texas 79601 (Address of Executive Offices) (Zip Code) Registrant's Telephone Number (915) 675-7155 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $10.00 Per Share (Title of Class) 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 . The aggregate market value of voting stock held by nonaffiliates of the registrant was $135,477,693 as of March 18, 1994. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 3,971,367 Documents Incorporated by Reference None TABLE OF CONTENTS Item Page PART I 1. Business . . . . . . . . . . . . . . . . . . . . . . . 1 2. Properties . . . . . . . . . . . . . . . . . . . . . .19 3. Legal Proceedings. . . . . . . . . . . . . . . . . . .21 4. Submission of Matters to a Vote of Security Holders. .21 PART II 5. Market for Registrant's Common Stock and Related Security Holder Matters. . . . . . . . . . . . . . .21 6. Selected Financial Data. . . . . . . . . . . . . . . .22 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . .23 8. Financial Statements and Supplementary Data. . . . . .31 9. Changes in and Disagreements with Accountants and Financial Disclosure . . . . . . . .50 PART III 10. Directors and Executive Officers of the Registrant . .50 11. Director and Officer Compensation. . . . . . . . . . .53 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . .58 13. Certain Relationships and Related Transactions . . . .59 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8K. . . . . . . . . . . . . . . .59 Signatures PART I Item 1. Business A. Organization and General Development of Business First Financial Bankshares, Inc. (the "Registrant" or "Bankshares"), is a Texas corporation duly registered as a multi- holding company under the Bank Holding Company Act of 1956, as amended. On December 31, 1993 Bankshares owned (through its wholly-owned Delaware subsidiary) all of the capital stock of six banks located in Texas: First National Bank of Abilene, Abilene, Texas ("First Abilene"); Hereford State Bank, Hereford, Texas ("Hereford"); First National Bank Sweetwater, Texas ("First Sweetwater"); Eastland National Bank, Eastland, Texas ("Eastland"); First National Bank in Cleburne, Cleburne, Texas ("First Cleburne"); and Stephenville Bank & Trust, Stephenville, Texas ("Stephenville"). Bankshares was formed in 1956 at the direction of the Board of Directors of the Farmers and Merchants National Bank of Abilene (a national bank organized in Abilene, Texas, in 1889, changing its name to First National Bank of Abilene in 1957). The corporation's initial name was F & M Operating Company (F & M), and it was originally authorized to and did issue ten shares of stock having a par value of $100.00 each. The ten shares were issued to three officers of the Bank under a trust agreement by which the three trustees would hold the F & M stock for the ratable benefit of the shareholders of First National Bank of Abilene. The original purposes in organizing the corporation were to provide a separate entity to own, operate and maintain parking lots, parking garages, buildings and real estate, and to buy, sell and lease personal property such as bank notes and automobiles. In 1968, F & M purchased 200,000 shares of newly authorized and issued stock of Bank of Commerce, Abilene, Texas ("BOC"). The purchase was made after the State Banking Commission of Texas required that new capital funds be injected into BOC. In the resulting increased capitalization of BOC, the authorized and outstanding shares of BOC common stock were increased from 300,000 to 700,000, with the 400,000 new shares being offered at $2.00 per share. In addition, F & M acquired by proxy assignments the power to vote an additional 66,000 shares of BOC stock. These proxies expired January 1, 1975. The First National Bank Employees' Profit Sharing Trust originally purchased 28,177 shares of BOC stock. In November, 1971, the Board of Directors of First Abilene authorized the reorganization of F & M into a multi-bank holding company and the commencement of proceedings to effect a merger which would permit First Abilene to be wholly-owned by the holding company. The merger was submitted for review and approval by federal regulatory authorities in April, 1972. B. Reorganization, Mergers, and Acquisitions F & M's reorganization was accomplished in September, 1972. Its name was changed to First Abilene Bankshares, Inc., and it was recapitalized by reducing the par value of its stock to $10.00 per share and increasing the authorized shares to 500,000. The merger was approved in January, 1973 and became effective in April of that same year. As a result, the shareholders of First Abilene became shareholders in Bankshares, and Bankshares became the owner of all of the outstanding shares of First Abilene (except for the qualifying shares owned by directors). In 1974, Bankshares acquired the remaining outstanding common stock of BOC (except for six shares amounting to approximately .01%) by an offer (registered under the Securities Act of 1933) to exchange one share of Bankshares' common stock for each 13-1/3 outstanding shares of BOC common stock. The exchange was effected on May 1, 1974. In late 1987 Bankshares purchased the remaining six shares of BOC stock, paying $82.00 in cash for each share. Effective April 1, 1974, Bankshares acquired all the outstanding capital stock of Hereford through an offer (also registered under the Securities Act of 1933) to exchange one share of Bankshares' common stock and $175 cash for each outstanding share of Hereford. Effective September 4, 1981, Bankshares acquired all the outstanding capital stock of First Sweetwater through an offer (registered under the 1933 Act) to exchange one share of Bankshares' common stock for each outstanding share of First Sweetwater stock. Effective June 8, 1982, Bankshares acquired all of the outstanding capital stock of Eastland through an offer (registered under the 1933 Act) to exchange 3-1/2 shares of Bankshares' common stock for each outstanding share of Eastland stock. Effective July 31, 1987, American National Bank of Abilene ("American National") was merged with and into First Abilene. Following approval of the merger by the Board of Directors and Shareholders of each bank, all of the issued and outstanding common stock of American National were tendered for exchange and First Abilene paid $11.50 for each of American National's 200,000 shares of common stock. The merger was approved by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the United States Department of Justice. The premises formerly occupied by American National, both its main banking offices and drive-in banking facility, are now being operated by First Abilene as a branch bank. On July 21, 1988, Hereford acquired 11,576 shares of First Tule Bancorp, Inc. in Tulia, Texas, a registered bank holding company, the principal asset of which is all, or substantially all, of the capital stock of The First National Bank, Tulia, Texas. Although the Bank Holding Company Act of 1956, as amended, generally requires approval of the Federal Reserve Board prior to acquiring more than 5% of the outstanding capital stock of any bank or bank holding company, the acquisition by Hereford of the First Tule Bancorp, Inc. stock was effected under an exemption for acquisitions of voting securities in satisfaction of debt previously contracted. The shares of First Tule Bancorp, Inc. were transferred to Hereford in partial satisfaction of indebtedness owed to Hereford by three individuals and secured, in part, by such shares of stock in First Tule Bancorp, Inc. Since the date it acquired the stock, Hereford has been attempting to sell or otherwise dispose of the stock, but has been unable to do so because of pending litigation against the subsidiary bank of First Tule Bancorp, Inc. Full disclosure of the acquisition by Hereford of the First Tule Bancorp, Inc. stock was made to federal and state banking authorities and continued holding of the stock was approved by bank regulatory authorities while Hereford attempted to sell such stock. However, under the Bank Holding Company Act (and Regulation Y adopted by the Federal Reserve Board pursuant to the Act), Hereford was required to dispose of the First Tule Bancorp, Inc. stock within five (5) years after having acquired the same, but has not been able to do so. While Hereford is in technical violation of the Act and Regulation Y, such circumstance exists with the knowledge and apparent acquiescence of federal and state banking authorities and neither Registrant nor Hereford has any reason to believe that any adverse action will be taken against Hereford or Registrant by reason of Hereford's continued ownership of the shares of First Tule Bancorp, Inc. so long as Hereford, in good faith, continues its efforts to liquidate or dispose of such shares. Neither First Tule Bancorp, Inc. nor The First National Bank, Tulia, Texas, is deemed or considered to be a subsidiary of the Registrant. By reason of the recent settlement or other disposition of the remaining lawsuits against the subsidiary bank of First Tule Bancorp, Inc., as well as efforts being made by the remaining shareholders of First Tule Bancorp, Inc. to find a purchaser for their shares or those of The First National Bank, Tulia, Texas, Registrant and Hereford are hopeful that a purchaser for Hereford's shares of First Tulia Bancorp, Inc. can now be found. Effective January 1, 1989, BOC was merged with and into First Abilene and its state charter surrendered to the State of Texas for cancellation. First Abilene received all of the assets of BOC and assumed all of its liabilities. The banking offices and drive-in facility of BOC are now being operated as a branch banking facility of First Abilene. The merger and branch banking action was undertaken to achieve greater efficiency from the combined operation of First Abilene and BOC and to provide improved convenience for each bank's customers. In January of 1990, Bankshares' Board of Directors authorized a state franchise tax savings program designed to substantially reduce the amount of corporate franchise taxes paid by Bankshares. Pursuant to that program, a second bank holding company was formed in the State of Delaware, First Abilene Bankshares of Delaware, Inc. (the "Delaware BHC"). With the approval of the Federal Reserve Board, and effective March 28, 1990, the Delaware BHC became the owner and holder of all of the outstanding shares of Bankshares' subsidiary banks and, in turn, the Delaware BHC became the sole subsidiary of Bankshares and is wholly-owned and controlled by Bankshares. The corporate offices of the Delaware BHC are located in the State of Delaware and, as defined by Texas franchise tax statutes, the new subsidiary is not considered to be doing business in the State of Texas. Effective December 21, 1990, the Delaware BHC, using funds provided by Bankshares, purchased all of the outstanding stock of The First National Bank of Cleburne, in Cleburne, Texas, for $4,700,000 in cash. On December 3, 1992, the Texas Secretary of State issued a Certificate of Incorporation for First Financial Investments, Inc., which is, or shall become, a wholly-owned subsidiary of Bankshares and the initial capital of which shall consist of $100,000 represented by 100,000 shares of common stock to be issued to Bankshares. First Financial Investments, Inc. ("FFI") was intended to be a securities brokerage subsidiary and on or about December 8, 1992, Bankshares submitted to the Federal Reserve Board its Application to Engage in Non-Banking Activity (Form FR Y-4) to engage, de novo, in providing securities brokerage services pursuant to Section 225.25(b)(15) of FRB Regulation Y and Section 4(c)(a) of the Bank Holding Company Act of 1956, as amended. At the end of 1992 Bankshares and FFI were engaged in the process of securing all approvals, and meeting all other requirements, for FFI to become a broker-dealer registered with the National Association of Securities Dealers, the Securities and Exchange Commission and the Texas State Securities Board. At that time it was anticipated that the activities of FFI would be limited to buying and selling stocks, bonds and other securities as agent for the account of the customers of Bankshares' subsidiaries, which securities would include equities, mutual funds and municipal, corporate and government bonds, but without providing investment advice or research services. Securities brokerage services shall be provided on, or adjacent to, the premises and banking offices of Bankshares' subsidiary banks. It was anticipated that Bankshares, through FFI, would begin providing securities brokerage services during the second quarter of 1993. On February 3, 1993 Bankshares received Federal Reserve approval to engage, de novo, in providing securities brokerage services through FFI. Following the lapse of time in which FFI was to begin operations under this approval, Bankshares notified the Federal Reserve that plans to offer brokerage services through a separate subsidiary were being delayed. As an alternative, Bankshares' subsidiary banks will be providing brokerage services through a shared employee arrangement with a national brokerage firm (The Stephens Company, headquartered in Little Rock, Arkansas). First Sweetwater was the only subsidiary operating under such an arrangement at December 31, 1993. Effective February 25, 1993, the Delaware BHC, using funds provided by Bankshares, acquired all the outstanding capital stock of Stephenville Bank & Trust Co., Stephenville, Texas, through an offer (registered under the 1933 Act) to pay $7,750,000 to the Stephenville shareholders for all the Stephenville Bank & Trust's outstanding stock. Effective September 23, 1993, First Cleburne acquired by purchase the Cleburne, Texas Branch office facility of Bank One, Texas, N.A., and assumed deposit liabilities of approximately $19 million. The aggregate value of the land, buildings, loans and other assets purchased by First Cleburne was approximately $2 million. The former Bank One facility is now being operated as a branch office of First Cleburne. On October 26, 1993, at a Special Shareholders Meeting called for such purpose, the name of the Registrant was changed to First Financial Bankshares, Inc. Similarly, the corporate name of the Delaware BHC was changed to First Financial Bankshares of Delaware, Inc. effective December 7, 1993. On December 7, 1993, Bankshares entered into a Stock Exchange Agreement and Plan of Reorganization ("the Exchange Agreement") with Concho Bancshares, Inc., a Texas corporation and bank holding company ("Concho") and Concho's subsidiary, Southwest Bank of San Angelo, a Texas state bank located in the City of San Angelo, Tom Green County, Texas. Pursuant to the Exchange Agreement, Bankshares has made an offer (registered under the 1933 Act) to acquire all (but not less than 90%) of the outstanding capital (common) stock of Concho. If the requisite number of shares of Concho stock are tendered for exchange and other conditions precedent to closing are satisfied, Bankshares will exchange 1.15 shares of its common stock for each share of Concho stock received; provided that no fractional shares of Bankshares stock will be issued and cash will be paid in lieu of issuing fractional shares on the basis of each share of Bankshares stock having a Market Value (as defined in the Exchange Agreement) of $41.50 per share. If the exchange offer is consummated, Concho will be merged with and into the Delaware BHC and Southwest Bank of San Angelo will become a subsidiary of the Delaware BHC. C. Mode of Conducting Business Bankshares operates principally in order to give the affiliated banks access to additional management and technical resources which help them to improve or expand their banking services while continuing their local activity and autonomy. Each of the affiliated banks operates under the day-to-day management of its Board of Directors and officers, with substantial authority in making decisions concerning their own investments, loan policies, interest rates and service charges. Bankshares provides assistance to the affiliated banks, especially with respect to decisions concerning major capital expenditures, employee fringe benefits, including pension plans, group insurance, dividend policies, appointment of officers and directors of affiliated banks and their compensation. The internal audit and loan review functions are centralized at Bankshares. Each of these corporate staff groups perform on-site operational audits and loan reviews of the subsidiary banks. Bankshares, through First Abilene, provides advice to and specialized services for the affiliated banks in such areas as lending, investments, purchasing, advertising, public relations, and computer services. In addition, through First Abilene, Bankshares coordinates various transactions among the affiliated banks, including loan participation. Bankshares makes the services of the Trust Department of First Abilene available to customers of the other affiliated banks, as well as investment and computer services. Such specialized services are not ordinarily offered by smaller banks. Each Bankshares' subsidiary is engaged in the general commercial banking business consisting of the acceptance of checking, savings and time deposits, the making of loans, transmitting funds and performing such other banking services as are usual and customary for commercial banks. While all subsidiary banks, with the exception of Eastland, have trust powers only First Abilene, First Sweetwater, and Stephenville have active trust departments. The trust departments offer a complete range of services to individuals, associations and corporations. They include the administration of estates, testamentary trusts and various types of living trusts and agency accounts. Other sources of revenue are services for businesses, including administering pension, profit sharing and other employee benefit plans, acting as stock transfer agents or stock registrar, and providing paying agent services. D. Competition Commercial banking in Texas is very competitive and Bankshares, holding less than 1% of deposits, represents only a minor segment of the industry. Success is dependent upon being able to compete in the areas of interest rates paid or charged and scope of services offered and prices charged therefore. Subsidiary banks of Bankshares compete in their respective service areas with highly competitive banks, savings and loan associations, small loan companies, credit unions and brokerage firms, all of which are engaged in providing financial products and services. First Abilene, the largest of Bankshares' subsidiary banks, competes in the City of Abilene with three locally owned banks and the branches of two major regional banks. At December 31, 1993, First Abilene was the largest of this group on the basis of local market share. First Abilene also competes with savings and loan institutions, finance companies, brokerage firms and credit unions located in the City of Abilene. Hereford is the smaller of two banks serving Hereford, Texas and must also compete with larger banks located in larger cities in its general area. First Sweetwater is the only bank located in Sweetwater, Texas, although a smaller bank in another town operates a branch office in Sweetwater. In 1989 First Sweetwater acquired certain assets and assumed the deposit liabilities of Texas Bank and Trust Company, a failed bank which, at the time, was the only other bank located in Sweetwater. Although located within the 16-county area surrounding Abilene, First Sweetwater does not directly compete with banks located in Abilene. Eastland is the largest of five banks in Eastland County, Texas. Although it, too, lies within the geographic area served by First Abilene, Eastland is not in direct competition with First Abilene. First Cleburne is located in Johnson County and competes with local branches of three area banks, as well as branches of three major regional banks. Stephenville is located in Erath County and competes with local branches of major regional holding companies, a savings and loan association, and a locally owned bank. The Registrant's business is not dependent upon any single customer or upon any few customers, the loss of any one of which would have a materially adverse effect upon the business of Bankshares. Customers of Bankshares and its subsidiaries include its officers and directors, as well as other entities with which they are affiliated. It is the policy of Bankshares and its subsidiaries to make loans to officers and directors, and entities with which they are affiliated in the ordinary course of business. When such loans are made, they are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. E. Employees The Registrant and its subsidiaries employed approximately 485 full-time employees at February 8, 1994. Management believes that its employee relations have been and will continue to be good. F. Supervision and Regulation Bankshares is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered as such with the Federal Reserve Board. Bankshares is subject to the reporting requirements of, and supervision and examination by, the Federal Reserve Board under the provisions of the Act. As a bank holding company, Bankshares is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require. The Federal Reserve Board may also make examination of Bankshares and its subsidiaries or "affiliates." The Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before the holding company may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank which is not majority- owned. (As noted in Section B of this Item 1, however, Hereford State Bank, a subsidiary of the Registrant, has acquired more than 5% of the voting shares of First Tule Bancorp, Inc. under an exemption from the prior approval requirements of the Act and Regulation Y, but is required to divest itself of such shares as soon as reasonably possible.) The Act provides that the Federal Reserve Board shall not approve any acquisition, merger or consolidation which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States, or any other proposed acquisition, merger or consolidation, the effect of which may be substantially to lessen competition or to tend to create a monopoly in any section of the country, or which in any other manner would be a restraint of trade, unless the anticompetitive effects of the proposed combination are clearly the convenience and needs of the community to be served. Further, a bank holding company is prohibited from engaging in certain tie-in arrangements in connection with the extension of credit or provisions of any property or service. With certain limited exceptions, the Act provides that a bank holding company may not engage in any business other than that of banking, managing or controlling banks and other authorized subsidiaries of which it owns or controls 25% or more of the voting shares, and may not own or control more than 5% of the voting shares of any company which is not a bank. Among the exceptions, one provides services to the bank holding company or its subsidiary banks. Another exception permits a bank holding company to acquire shares which are eligible for investment by a national banking association. In addition, the Act permits a bank holding company to acquire shares of any company, the activities of which the Federal Reserve Board, after due notice and opportunity for hearing, has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In approving acquisitions by bank holding companies of banks and companies engaged in banking-related activities, the Federal Reserve Board considers a number of factors, including the expected benefits to the public such as greater convenience, increased competition or gains in efficiency as weighed against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between new activities and activities commenced through acquisition of a going concern. The Federal Reserve Board has issued regulations setting forth certain activities regarded as closely related to banking or managing or controlling banks and thus permissible for bank holding companies. Such activities include, among others: (1) the making or acquiring of loans or other extensions of credit; (2) the servicing of loans for any person; (3) the performing of certain trust functions; (4) the making of equity and debt investments in projects or corporations designated primarily to promote community welfare; (5) providing bookkeeping and data processing services for the internal operations of a bank holding company and its subsidiaries, and the storing and processing of other banking, financial or related economic data, such as performing payroll, accounts receivable or payable, or billing services; (6) acting as an insurance agent or broker under certain circumstances and with respect to certain types of insurance; (7) providing certain securities brokerage services; (8) certain leasing of real and personal property; (9) insurance underwriting and insurance activities; (10) underwriting and dealing in government obligations and money market instruments; (11) acting or servicing as an investment or financial advisor; (12) real estate and personal property appraising; (13) consumer financial counseling; and (14) tax planning and preparation. Regulations have also been issued with respect to ownership by bank holding companies of so-called "non-bank banks," i.e., banks which do not accept demand deposits or do not make commercial loans. The Federal Reserve Board has cease-and-desist powers over parent holding companies and nonbanking subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. Registered bank holding companies are required to divest themselves of all activities not permitted by these regulations. The Act prohibits the acquisition by a bank holding company of shares of a bank located outside the state in which the operations of its banking subsidiaries are principally conducted unless such an acquisition is specifically authorized by statute of the state in which the bank is located. Further, the Act and the Federal Reserve Board's regulations thereunder prohibit a bank holding company and its subsidiaries from certain tie-in arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services. A subsidiary bank of a bank holding company is subject to certain restrictions imposed by the Federal Reserve Act with regard to (i) loans or extensions of credit to the bank holding company or any of its subsidiaries, (ii) the purchase of or investment in securities issued by the bank holding company or any of its subsidiaries, (iii) the purchase of other assets from the bank holding company or any of its subsidiaries, and (iv) the acceptance of securities issued by the bank holding company or any of its subsidiaries as collateral for a loan or extension of credit. The Texas Banking Code of 1943, as amended, grants to the Banking Commissioner of Texas the authority to disapprove any acquisition (or activity regulated by Section 4 of the Bank Holding Company Act of 1956, as amended, which does not include the acquisition of banks or certain banking activities), by a bank holding company doing business in the State, unless he finds that is can reasonably be expected to produce benefits to the public, such as greater convenience or increased competition, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Prior to 1987 the banking laws of the State of Texas did not permit acquisition by an out-of-state bank holding company of a Texas state bank, a national bank located in Texas or a bank holding company owning or controlling a state or national bank located in Texas. However, by amendments to the Texas Banking Code which became effective January 1, 1987, a bank located in the State of Texas, or a bank holding company owning or controlling a bank located in Texas, may be acquired by an out-of-state bank holding company upon compliance with the provisions of the Banking Code and the Commissioner's regulations. First Abilene, First Sweetwater, First Cleburne, and Eastland are chartered under the National Bank Act and are subject to the supervision and regulation of, and are regularly examined by, the Comptroller of the Currency of the United States. Hereford and Stephenville are chartered under the Texas Banking Code and are similarly supervised, regulated and examined by the Banking Commissioner of the State of Texas. The supervision and regulation of the banks by all of these authorities is primarily intended to protect the interest of depositors, though shareholders are likewise benefited. Various requirements and restrictions under the laws of the United States and the State of Texas affect the operations of each of the banks, including the requirement to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, and restrictions relating to investments and other activities. First Abilene, Hereford, First Sweetwater, First Cleburne, Eastland, and Stephenville are members of the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Act requires that the Federal Deposit Insurance Corporation approve any merger or consolidation by or with an insured bank or any establishment of branches by an insured bank, and it is also empowered to regulate interest rates paid by insured banks. The approval of the Federal Deposit Insurance Corporation must also be obtained by an insured bank before it retires any part of its common or preferred stocks or retires any part of its capital notes or debentures. However, an insured bank which is a member of the Federal Reserve System is regulated with respect to the foregoing matters by the Federal Reserve System. In addition, the Federal Deposit Insurance Act makes applicable to insured banks provisions of the federal banking laws which establish limitations with respect to loans to, extensions of credit to, or purchases of securities from affiliates. Affiliates include any bank holding company of which a bank is a subsidiary and any other subsidiary of a bank holding company of which the bank is a subsidiary. Bankshares and each of its subsidiary banks are affiliates of each other. First Abilene, First Sweetwater, First Cleburne and Eastland are member banks of the Federal Reserve System. By being a member bank in good standing, each of such banks has available the bank credit facilities of the Federal Reserve Bank of Dallas, and thus may obtain discounts, advancements and accommodations from that Reserve Bank. As a condition of membership in the Federal Reserve System, First Abilene, First Sweetwater, First Cleburne and Eastland must hold shares of stock in the Federal Reserve Bank of Dallas. First Abilene had paid $990,000, First Sweetwater $150,000, First Cleburne $171,000 and Eastland $105,000, for such stock. Pursuant to law, each bank has paid only one-half of the par value of such shares and is subject in the future to a call for the remaining 50% should it be determined that such a call is in the best interest of the Federal Reserve Bank. As member banks, First Abilene, First Sweetwater, First Cleburne, and Eastland are subject to the regulations of the Board of Governors of the Federal Reserve System and to the limitations and restrictions imposed upon the Bank by such regulations and by the Federal Reserve Act. Bankshares, Hereford, and Stephenville may be deemed to be "affiliates" within the meaning of such Act, which imposes restrictions on loans by subsidiary banks to Bankshares on investments by those banks in the stock or securities of Bankshares and on the use of such stock or securities as collateral security for loans by those banks to any borrower. Bankshares is also subject to certain restrictions with respect to engaging in the business of issuing, underwriting, public sale and distribution of securities. The ability of Bankshares to pay dividends is largely dependent upon the amount of dividends declared by the Delaware BHC and its subsidiary banks and any subsequently-acquired affiliated banks. Under the Texas Banking Code of 1943, as amended, before any dividend may be paid to Bankshares by an affiliated state bank, the state bank must transfer to "certified surplus" an amount which is not less than 10% of the net profits of such bank earned since the last dividend was declared; provided, however, that a transfer is not required to certified surplus of a sum which would increase the certified surplus to more than the capital of the bank. Under the Federal Reserve Act, the approval of the Federal Reserve Board is required if dividends declared by any subsidiary state bank which is a member of the Federal Reserve System in any year should exceed the total of net profits for that year combined with the retained net profits for the preceding two years. Approval of the Comptroller of the Currency, or his designate, is required for any dividend to Bankshares from an affiliated national bank if the total of all dividends, including any proposed dividend, declared by such bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock of such bank. At December 31, 1993, approximately $9,605,000 was available for the declaration of dividends by Bankshares' subsidiary banks without approval of regulatory agencies. All dividends declared by subsidiary banks are paid to the Delaware BHC and dividends must then be declared and paid by the Delaware BHC to Bankshares. Stockholders of banks (including bank holding companies which own stock in banks) may be compelled by bank regulatory authorities to invest additional capital, in the event their bank's experience either significant operating losses or rapid growth of loans or deposits. In addition, Bankshares may also be required to provide additional capital to the banks which it acquires, as a condition to obtaining the approvals and consents of regulatory authorities in connection with such acquisitions. The State of Texas has various usury laws that place ceilings on interest rates that can be charged by banks on particular kinds of loans or on loans to particular classes of borrowers. Moreover, the federal government, by statute and regulation, preempted, for certain categories of loans and for designated periods of time, the usury laws of the several states and imposed or, in some cases, removed ceilings on interest rates for particular kinds of loans or on loans to particular classes of borrowers. Commercial banking is affected not only by general economic conditions but also by the fiscal and monetary policies of the Federal Reserve Board. Changes in the discount rate on member bank borrowings, availability of borrowings at the "discount window," open market operations, the imposition of and changes in reserve requirements against member banks' deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates and the placing of limits on interest rates which member banks may pay on time and savings deposits are some of the instruments of fiscal and monetary policy available to the Federal Reserve Board. These fiscal and monetary policies influence to a significant extent the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings deposits. Bankshares is unable to predict the nature or the extent of the effects on its business and earnings which fiscal or monetary policies or economic controls may have in the future. In 1986 the Texas Constitution was amended to permit limited branch banking in Texas. Although the Constitutional amendment and legislation authorized only limited branch banking, a federal court decision in June of 1988 and a later opinion of the Texas Attorney General held that national banks and state-chartered banks in Texas have State-wide branch banking authority. G. Statistical Disclosure Information related to industry segments and foreign operations required by Regulation S-K is not applicable. Information required by Guide 3, "Statistical Disclosure by Bank Holding Companies", and in accordance with the instructions set forth in such Guide, is set forth in the following tables. 1. Average daily balances sheets. 2. Income and average yield on interest-earning assets and expense and average rate on interest-bearing liabilities. 3. Analysis of changes in interest income and interest expense. 4. Composition of investment securities. 5. Maturity and yield on securities. 6. Composition of loans. 7. Loan maturities and sensitivity to changes in interest rates. 8. Risk elements. 9. Loan loss experience and allowance for loan losses. 10. Composition of deposits. 11. Maturity distribution of time certificates of $100,000 or more. 12. Return on equity and assets. Table 1 - Average Daily Balance Sheets The following table shows the Company's consolidated balances of assets, liabilities and capital computed principally on an average daily basis for the three years ended December 31, 1993 (000's omitted): Year ended December 31, ASSETS 1993 1992 1991 Cash and due from banks $ 46,311$ 42,451$ 43,787 Interest-bearing deposits in banks 957 1,016 3,170 Federal funds sold 47,112 44,934 59,167 Taxable investment securities 393,784 346,420 302,795 Tax-exempt investment securities 14,152 13,573 20,489 Net loans 352,555 312,483 303,756 Bank premises and equipment 25,697 25,150 26,669 Other assets 18,701 19,556 20,106 $ 899,269 $ 805,583 $ 779,939 LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits $ 160,223 $ 137,956 $ 132,766 Time deposits 642,547 579,245 563,696 Total deposits 802,770 717,201 696,462 Federal funds purchased and other short-term borrowings 51 679 1,068 Dividends payable 1,084 860 736 Long-term debt -- -- 1,902 Other liabilities 6,328 8,2098,514 Shareholders' equity 89,036 78,634 71,257 $ 899,269 $ 805,583 $ 779,939 Table 2 - Income and Average Yield on Interest-Earning Assets and Expense and Average Rate on Interest-Bearing Liabilities The following table shows the interest income and average yield on interest-earning assets and interest expense and average rate on interest-bearing liabilities for the three years ended December 31, 1993, (000's omitted). The calculations of average yields and rates are based upon the average daily balances in Table 1. Non-accrual loans are included in the average daily balance of loans and any interest income recognized on a cash basis is included in interest income on loans: 1993 1992 1991 Income Yield Income Yield Income Yield (Expense) (Rate) Expense)(Rate) (Expense) (Rate) Federal funds sold $ 1,371 2.9% $ 1,506 3.4% $ 3,365 5.5% Interest-earning deposits 46 4.8 49 4.8 237 7.5 Taxable investment securities 22,997 5.9 24,801 7.2 24,482 8.3 Tax-exempt investment securities (1) 1,131 8.0 1,286 9.4 2,105 9.5 Loans (1) 29,284 8.3 28,443 8.9 32,516 10.4 Interest income 54,829 6.8 56,085 7.7 62,705 9.0 Time deposits (18,016)(2.9) (21,395)(3.7) (31,951)(5.7) Federal funds purchased and other short-term borrowings (2)(2.9) (20)(3.5) (43) (5.3) Long-term debt -- -- -- -- (244)(9.9) Interest expense (18,018)(2.9) (21,415) (3.7) (32,238)(5.7) Net interest income and spread $ 36,811 3.9% $ 34,670 4.0% $ 30,467 3.3% Net interest yield (2) 4.6% 4.8% 4.4% (1) Income and yield on tax-exempt investment securities and tax-exempt loans have been adjusted to a tax-equivalent basis based upon the Federal income tax rate of 34.4% in 1993 and 34% in 1992 and 1991, adjusted for disallowed interest deductions in accordance with Federal income tax regulations. (2) The net yield on interest-earning assets is computed by dividing net interest income by total interest-earning assets. Table 3 - Analysis of Changes in Interest Income and Interest Expense The following table sets forth the dollar amount of increase (decrease) in interest income and interest expense resulting from changes in the volume of interest-earning assets and interest-bearing liabilities and from changes in yields and rates (000's omitted): 1993 Compared to 1992 1992 Compared to 1991 Yield/ Yield/ Volume Rate Total Volume Rate Total Federal funds sold and interest-bearing deposits$ 92$ (230)$ (138) $ (1,074) $ (973) $(2,047) Taxable investment securities 3,418(5,222) (1,804) 4,282 (3,963) 319 Tax-exempt investment securities (1) 51 (206) (155) (738) (81) (819) Loans (1) 1,727 (886) 841 656 (4,729) (4,073) Interest income 5,288 (6,544) (1,256) 3,126 (9,746) (6,620) Time deposits 2,368(5,747)(3,379) 1,056 (11,612) (10,556) Federal funds purchased and other short-term borrowings (18) -- (18) (7) (16) (23) Long-term debt -- -- -- (244) -- (244) Interest expense 2,350 (5,747) (3,397) 805 (11,628) (10,823) Net interest income $ 2,938 $ (797)$ 2,141 $ 2,321 $ 1,882 $ 4,203 (1) Income on tax-exempt investment securities and tax-exempt loans has been adjusted to a tax-equivalent basis based upon the Federal income tax rate of 34.4% in 1993 and 34% in 1992 and 1991, adjusted for disallowed interest deductions in accordance with Federal income tax regulations. Note: Volume/rate variances (changes in volume times changes in rate) have been allocated to amounts attributable to changes in volume and to changes in rates in proportion to the amounts directly attributable to those changes. Table 4 - Composition of Investment Securities The table below sets forth the composition of investment securities at the dates indicated: December 31, 1993 1992 1991 U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 363,737,702 $ 331,819,344 $ 311,347,277 Obligations of states and political subdivisions 17,484,96512,461,59717,220,534 Mortgage-backed securities 39,092,949 24,932,410 26,234,199 Total debt securities 420,315,616 369,213,351 354,802,010 Other securities 1,420,000 1,420,000 1,420,000 Total investment securities $ 421,735,616 $ 370,633,351 $ 356,222,010 Table 5 - Maturity and Yield on Securities The following table shows the maturities of investment securities at December 31, 1993, and the weighted average yields (for tax-exempt obligations on a fully taxable basis assuming a 34.4% tax rate adjusted for disallowed interest deductions in accordance with Federal income tax regulations) of such securities: Maturing After one butAfter five but Within one yearwithin five years within ten yearsAfter ten years Amount Yield Amount Yield Amount YieldAmount Yield U.S. Treasury$ 28,179,272 5.7% $ 61,629,849 4.7%$ - - % $ - - - % U.S. Government agencies 71,226,117 6.4 210,896,510 5.2 19,950,321 6.0 10,948,582 6.7 State and political subdivisions 3,386,021 8.2 9,131,063 7.3 3,184,878 6.3 1,783,003 8.7 Other - - - - - - 1,420,000 - $ 102,791,4106.3%$ 281,657,422 5.2% $23,135,199 6.1% $ 14,151,585 6.9% Table 6 - Composition of Loans The table below sets forth the amount of loans outstanding at the end of the years indicated, according to type of loan: 1993 1992 1991 1990 1989 Real estate loans: Construction $ 5,340,796 $ 3,500,484 $ 2,196,053 $ 2,708,183 $ 2,722,880 Mortgage 73,501,64277,917,54283,138,995 86,327,332 65,549,591 Commercial, financial and agricultural loans 208,811,960 178,578,608 166,887,515 186,906,944 173,756,350 Installment loans to individuals 88,836,683 71,294,708 58,399,955 43,419,655 33,531,600 Total loans $376,491,081 $331,291,342 $310,622,518 $319,362,114 $275,560,421 Table 7 - Loan Maturities and Sensitivity to Changes in Interest Rates The amounts of total loans (excluding real estate mortgages and installment consumer loans) outstanding as of December 31, 1993, which, based on remaining scheduled repayments of principal, are due in (1) one year or less, (2) more than one year but less than five years, and (3) more than five years, are shown in the following table. The amounts due after one year are classified according to the sensitivity to changes in interest rates. Aggregate maturities of loan balances which are due: After one year In one yearbut within After or less five years five years Real estate construction $ 4,851,051$ 489,745 $ - Commercial, financial and agricultural loans 151,873,254 45,535,080 11,403,626 Loans with maturities after one year for which: Interest rates are fixed or predetermined $ 21,527,072 Interest rates are floating or adjustable 35,901,379 $ 57,428,451 Table 8 - Risk Elements The following table shows the outstanding balances of accruing loans which were 90 days or more past due: 90 Days or more Date Past Due December 31, 1993 $ 58,141 December 31, 1992 576,162 December 31, 1991 74,206 December 31, 1990 243,552 December 31, 1989 75,345 At December 31, 1993, 1992, 1991, 1990, and 1989, there were loans totaling $2,787,764, $1,951,168, $3,540,844, $5,641,195, and $3,040,553, respectively, which had been placed on a nonaccrual basis. Loans are placed on a nonaccrual basis 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. At December 1990 loans aggregating $44,696 had been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no such restructured loans at December 31, 1993, 1992, 1991, and 1989. Had interest been earned on the nonaccrual loans outstanding at December 31, 1993, 1992, 1991, and 1990 at the original rate, the Company would have accrued approximately $377,000, $327,000, $525,000 and $500,000 for the years ended December 1993, 1992, 1991, and 1990, respectively. The Company actually recognized approximately $53,000, $0, $1,000 and $3,000, respectively. At December 31, 1993, potential problem loans that management had serious doubts as to the ability of the borrower to comply with present loan payment terms totaled approximately $522,616. Also at December 31, 1993, the Company had loans outstanding to companies in farm and agriculture related industries of approximately $60,543,752, representing 16.1% of total loans. At December 31, 1993, 1992, 1991, 1990 and 1989, the allowance for loan losses has been allocated within the categories of loans set forth below, according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred. Table 8 - Risk Elements - Continued The amount of such components and the ratio of the corresponding loan amounts to total loans outstanding are as follows: Ratio of Loan Amount to Allowance Total Loans Amount Outstanding December 31, 1993 Construction loans $ 88,646 1.4% Mortgage loan 3,271,486 19.5 Commercial, financial and agricultural loans 2,721,324 55.5 Installment loans to individuals 2,304,371 23.6 $ 8,385,827 100.0% December 31, 1992 Construction loans $ 100,554 1.1% Mortgage loans 2,434,284 23.5 Commercial, financial and agricultural loans 4,105,353 53.9 Installment loans to individuals 1,059,813 21.5 $ 7,700,004 100.0% December 31, 1991 Construction loans $ 59,995 .8% Mortgage loans 2,254,516 26.7 Commercial, financial and agricultural loans 3,635,434 53.7 Installment loans to individuals 1,211,189 18.8 $ 7,161,134 100.0% December 31, 1990 Construction loans $ 53,021 .8% Mortgage loans 2,485,960 26.6 Commercial, financial and agricultural loans 3,992,854 57.6 Installment loans to individuals 769,962 15.0 $ 7,301,797 100.0% December 31, 1989 Construction loans $ 157,849 1.0% Mortgage loans 846,582 23.8 Commercial, financial and agricultural loans 2,991,212 63.0 Installment loans to individuals 352,126 12.2 $ 4,347,769 100.0% Table 9 - Loan Loss Experience and Allowance for Loan Losses The following table summarizes the daily average amount of net loans outstanding; changes in the allowance for loan losses arising from loans charged off, and recoveries on loans previously charged off, by loan category; additions to the allowance which have been charged to operating expense; and the ratio of net loans charged off to average loans outstanding: 1993 1992 1991 1990 1989 Daily average amount of net loans outstanding$352,555,000 $312,483,000 $303,756,000 $263,314,000 $266,040,000 Balances of allowance for loan losses at beginningof period$ 7,700,004 $ 7,161,134 $ 7,301,797 $ 4,347,769 $ 4,141,150 Loans charged off Commercial, financial and agricultural 1,125,569 1,042,373 1,749,075 1,819,962 3,327,936 Loans to individuals 471,472 636,089 521,598 571,462 863,916 All other loans 338,449 167,487 362,420 13,137 56,683 Total loans charged off 1,935,490 1,845,949 2,633,093 2,404,561 4,248,535 Recoveries of loans previously charged off Commercial, financial and agricultural 1,152,759 1,221,734 1,168,849 927,295 401,744 Loans to individuals 310,697 169,202 176,583 164,567 281,384 All other loans 100,625 53,813 26,998 7,500 4,958 Total recoveries 1,564,081 1,444,749 1,372,430 1,099,362 688,086 Net loans charged off 371,409 401,2001,260,663 1,305,199 3,560,449 Reserves established from acquisition of Bank 712,222 - - 1,564,227 - Additions to allowance charged to operating expense (1)<H1> 345,010 940,070 1,120,000 2,695,000 3,767,068 Balance at end of period $ 8,385,827 $ 7,700,004 $ 7,161,134 $ 7,301,797 $ 4,347,769 Ratio of net charge offs to the daily average amount of loans outstanding .10% .13% .42% .50% 1.34% <H1> (1) Additions to the allowance were based primarily on historical experience, current economic conditions, and the condition of the loan portfolio at year-end.Table 10 - - Composition of Deposits The following table presents the average daily amount and the average rate paid on deposits (000's omitted): 1993 1992 1991 Amount Rate Amount Rate Amount Rate Noninterest bearing demand deposits $ 160,223 0.0% $ 137,9560.0% $ 132,766 0.0% Interest bearing demand deposits 154,490 2.9 130,9032.7 110,228 4.5 Savings and money market accounts 173,222 3.1 140,7963.1 121,130 5.0 Time deposits: Less than $100,000 238,828 228,892 245,416 $100,000 or more 76,007 78,654 86,922 Total time deposits 314,835 4.3% 307,5464.4% 332,338 6.3% Total deposits $ 802,770 $ 717,201 $ 696,462 Table 11 - Maturity Distribution of Time Certificates of $100,000 or More Time certificates of $100,000 or more outstanding at December 31, 1993 will mature as follows (000's omitted): Under 3 months $ 33,872 3 to 6 months 19,975 6 to 12 months 11,955 Over 12 months 12,211 $ 78,013 Table 12 - Return on Equity and Assets The ratio of net earnings to average shareholders' equity and daily average total assets and certain other ratios are presented below: Year ended December 31, 1993 1992 1991 Before Cumulative Change in Accounting for Income Taxes Percentage of net earnings to Average total assets 1.35% 1.37% 1.12% Average shareholders' equity 13.59% 13.98% 12.15% Percentage of dividends declared per common share to earnings per common share 34.04% 32.00% 34.79% After Cumulative Change in Accounting for Income Taxes Percentage of net earnings to Average total assets 1.47% 1.37% 1.12% Average shareholders' equity 14.86% 13.98% 12.15% Percentage of dividends declared per common share to earnings per common share 37.61% 32.00% 34.79% Percentage of average shareholders' equity to daily average total assets 9.90% 9.76% 9.18% Item 2. Properties A. First Financial Bankshares/First National Bank of Abilene The principal offices of Bankshares and First Abilene are located in the First National Bank Building at 400 Pine Street in downtown Abilene, Texas. First Abilene occupies the first four floors of the building and the remaining six floors of this 170,842 square foot facility are available for lease to tenants. The First National Bank Building is connected to the First National West Building, a six-story modern facility owned by First Abilene which contains 52,800 square feet of lease space which is rented to business and professional tenants. First Abilene began occupying the First National Bank Building in June of 1984 and, at the same time, a new four-level drive-in parking garage was completed immediately South across the street from the new bank building, which is connected to the bank building by an over-the-street, enclosed pedestrian bridge. The total cost of the project was $14,000,000. Until January 1, 1989, both the new First National Bank Building and the connected parking garage were owned by a joint venture between First Abilene and the Trammell Crow Company. Effective January 1, 1989, First Abilene purchased the interest of Trammell Crow Company and is now the sole owner of the First National Bank building and the connecting parking garage. A note payable to Aetna Life Insurance Company in the amount of $ 7,000,000 which was previously secured by this property was paid in full during 1991. First Abilene also owns a five-story office building known as the First National/Ely Building, which is located directly south across the street from the First National West Building and connected to the First National West Building by an underground pedestrian tunnel. The First National/Ely Building contains approximately 34,000 square feet of space and is leased to business and professional tenants. The premises also includes a ground level parking lot with spaces for 22 cars which are leased to tenants and others. Both the First National/Ely Building and the parking lot are situated on land leased by First Abilene. The lease has 20 years remaining at this time and provides an option to purchase the underlying property for $360,000. First Abilene owns and operates a 17-lane drive-in banking facility which was completed in 1981 and which is also located on Pine Street, two blocks north of First Abilene's main banking facilities. In 1987 First Abilene completed construction of a branch banking facility located at the northwest corner of North Judge Ely Boulevard and East North Tenth Street in the City of Abilene. The cost of the site was $412,383 and the construction cost for the building and improvements was $ 554,318. The new branch banking facility includes a one-story office building containing 2,960 square feet and six lane drive-in facility. As a result of the merger between First Abilene and American National, First Abilene acquired title to the drive-in banking facility owned by American National on Buffalo Gap Road in the southwest part of the City of Abilene, Texas. The drive-in facility is located on 2.23 acres of land adjoining a five-story office building in which American National leased office space for its banking operations. Following its merger with American National First Abilene entered into a 10-year lease covering 11,009 square feet of office space on the ground floor of the building adjacent to the drive-in facility, which office space includes all, or substantially all, of the space formerly leased and occupied by American National for its primary banking facility. In addition to the original 10-year term of the lease, the lease provides three renewal options on the leased premises, each option being for a renewal term of five years. The drive-in banking facility was constructed to provide for seventeen (17) lanes, but only eight drive-in teller windows and lanes are presently being utilized. As a result of the merger between First Abilene and BOC, First Abilene acquired title to the banking faaility at the corner of South 14th and Willis Streets in Abilene, Texas, occupying the first floor and renting 27,000 square feet of office space to tenants. The building is of steel reinforced concrete and masonry construction with air conditioning throughout. The building was constructed in 1966 and is of modern design. It was purchased from C M & M, a partnership, subject to a mortgage and promissory note payable to Connecticut General Life Insurance Company. BOC did not assume the mortgage note, but the property was conveyed to the Bank by warranty deed dated March 30, 1967, subject to the mortgage. The mortgage note was paid in full in 1991. BOC's facilities are located on six (6) acres of land, all of which is subject to the above-described mortgage. During 1978 BOC conveyed approximately 4-1/2 acres (not included in the above six acres) of its property (considered to be surplus) for fair market value to an individual from Fort Worth, Texas, who developed the property into offices and parking. In 1976 a 12-lane drive-in facility located adjacent to the main banking facility was completed. In 1982 BOC completed construction of an addition to the teller service area for the drive-in facility at an estimated cost of $200,000. In December 1984, BOC purchased property (approximately 1.85 acres) located on Southwest Drive in the City of Abilene, Texas for future construction of a full-service banking facility. The cost of such property was $344,937.02. As a result of the mergers of American National and BOC with First Abilene and the operation of the banking facilities of American National and BOC as branch banks of First Abilene, it is unlikely that First Abilene, which acquired all of BOC's assets in the merger, will proceed with construction of banking facilities at the property on Southwest Drive and the property is presently listed for sale. B. Hereford State Bank Hereford owns its main banking house located at 212 North Sampson Street, Hereford, Texas. The building contains 16,000 square feet (not including drive-in facilities) and is of concrete block-brick face construction with air conditioning throughout. This new facility was completed during 1977. The drive-in complex is 12 years old, is of brick construction, and is connected to the bank by a walk-through tunnel. C. First National Bank, Sweetwater, Texas First Sweetwater owns its main banking house located at 201 Elm Street in The City of Sweetwater, Texas. The building contains 20,000 square feet and is constructed of steel-reinforced concrete and marble, with air conditioning throughout. The building was constructed in 1974 and is of modern design. First Sweetwater also maintains a drive-in facility located on the same premises as its main banking facility. In December 1987, First Sweetwater completed construction of a basement to its banking facility at a cost of $289,000. D. Eastland National Bank Eastland owns its banking facilities located at 201 East Main Street in Eastland, Texas. The building contains 13,000 square feet and is of steel and stucco construction with air conditioning throughout. It was constructed in 1980 and is of modern design. Eastland also maintains a drive-in facility located on the same premises as its main banking facility. E. The First National Bank of Cleburne First Cleburne owns its banking facilities located at 403 North Main Street in Cleburne, Texas. The building contains 18,000 square feet and is of steel and brick masonry construction with air conditioning throughout. it was constructed in 1978 and is of modern design. Cleburne also maintains a drive-in facility located on the same premises as its main banking facility. On September 23, 1993 First Cleburne acquired the Cleburne branch of Bank One Texas, N.A. The building is of brick masonry construction, contains 4,400 square feet and includes a drive-in teller window. Now operating as a branch of First Cleburne, the facility is located approximately 3 miles west of the main office. F. Stephenville Bank & Trust Stephenville Bank & Trust owns its banking facility which is located at 298 West Washington in Stephenville, Texas. The building is a brick masonry structure with approximately 10,000 square feet. Stephenville owns and operates a drive-in facility that is located across the street from their main banking facility, and a branch facility consisting of 1,000 square feet located on the west side of the city. Item 3. Legal Proceedings 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. Other than routine litigation in the normal course of business, there are no material pending legal proceedings to which Bankshares, the Delaware BHC or its subsidiary banks or any of their properties are subject, nor are there any known material legal proceedings involving directors, officers or affiliates of Bankshares. Item 4. Submission of Matters to a Vote of Security Holders Following the required notice to shareholders of record at the close of business on September 15, 1993, a special meeting of shareholders was held on October 26, 1993. The purpose of the meeting was to approve a proposal by the Board of Directors to amend the Company's Articles of Incorporation and change the Company's name to First Financial Bankshares, Inc. Proxies were solicited pursuant to Regulation 14a of the 1934 Act. A total of 3,412,004 votes were cast: 3,359,565 for, 41,558 against and 10,881 abstain. A total of 329,798 shares were not voted. PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters As of February 8, 1994 there were 1,230 holders of Bankshares' stock reflected on its records. Except for shares held by First Abilene and First Sweetwater in various fiduciary capacities (see Item 12 following), no shareholder or shareholder group known to Bankshares owns five percent (5%) or more of Bankshares' issued and outstanding stock. Market, price and dividend information about the stock for the past three years is set forth on page 30 under Item 7. Restrictions on Bankshares' present or future ability to pay dividends have been discussed under Item 1, above, under the topic "Supervision and Regulation." Item 6. Selected Financial Data First Financial Bankshares, Inc. Selected Consolidated Financial Data (Dollars in thousands, except per share data) Year ended December 31, 1993 1992 1991 1990 1989 Summary Income Statement Information: Interest income $ 54,438 $ 55,574 $ 61,822 $ 57,804 $ 58,062 Interest expense 18,018 21,415 32,238 31,443 32,233 Net interest income 36,420 34,159 29,584 26,361 25,829 Provision for loan losses 345 940 1,120 2,695 3,767 Non-interest income 9,840 8,649 8,371 7,953 6,669 Non-interest expense 28,190 25,881 24,413 21,280 20,587 Income before income taxes 17,725 15,987 12,422 10,339 8,144 Provision for income taxes 5,747 4,998 3,777 2,756 1,824 Net income before cumulative effect of accounting change11,978 10,989 8,645 7,583 6,320 Cumulative effect of accounting change<F1>(1) 1,255 - - - - Net income $ 13,233 $ 10,989 $ 8,645 $ 7,583 $ 6,320 Per Share Data<F2>(2): Net income before cumulative effect of accounting change$ 3.20 $ 2.95 $ 2.35 $ 2.06 $ 1.67 Net income per share 3.53 2.95 2.35 2.06 1.67 Cash dividends declared1.20 0.95 0.82 0.70 0.60 Book value at period end 24.14 21.87 20.00 18.44 17.06 Earnings performance ratios<F3>(3): Return on average assets 1.35 %1.37 % 1.12 % 1.13 % 0.96 % Return on average equity 13.59 13.98 12.15 11.71 10.17 Summary balance sheet data (period-end): Investment securities $ 421,736 $ 370,633 $ 356,222 $ 287,533 $ 263,067 Loans, net of allowance for loan loss368,105 323,591 303,461 312,060 271,213 Total assets 924,630 839,474 834,500 794,863 688,588 Deposits 828,431 750,445 751,172 709,010 609,443 Total liabilities 834,187 758,041 760,972 727,037 625,653 Total shareholders' equity 90,443 81,433 73,528 67,826 62,935 Asset quality ratios: Allowance for loan loss/Period-end loans 2.23 %2.32 % 2.31 % 2.29 % 1.58 % Nonperforming assets/Period-end loans plus foreclosed assets 1.14 1.26 2.12 2.76 2.29 Net charge-offs/Average loans .10 .13 .42 .80 1.32 Capital ratios<F4>(4): Shareholders' equity/Assets 9.78 %9.70 % 8.81 % 8.53 % 9.14 % Leverage ratio<F5>(5) 9.63 9.55 8.69 - - Total risk-based captial ratio<F6>(6)18.45 18.65 17.23 - - Dividend payout ratio 34.04 32.00 34.79 33.95 35.80 <F1>(1) Adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." <F2>(2) Historical amounts adjusted for stock dividends and stock splits. <F3>(3) Computed on net income before cumulative accounting adjustment <F4>(4) Computed using period-end balances. <F5>(5) Shareholders' equity less intangibles (goodwill and core deposit premium)/total assets less intangibles. <F6>(6) Shareholders' equity less intangibles plus allowance for loan losses (to the extent allowed under regulatory guidelines)/risk- weighted assets. Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations This discussion is provided on pages 24 through 30. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION REVIEW OF OPERATING RESULTS Net earnings from operations for 1993 were $11.9 million or 9.00% above the $10.9 million earned in 1992. On a per share basis, 1993 operating earnings of $3.20 were 8.5% above the $2.95 reported in 1992. The lower percentage gain in earnings per share is due to a higher number of average shares and resulted from the exercise of stock options during 1993. For earnings per share calculation purposes, these shares are considered outstanding for the full year. Additionally, during 1993 the Company recorded a nonrecurring gain of $1.2 million, or $ .33 per share, which represented the cumulative effect of the adoption of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The Company earned $8.6 million, or $2.35 per share, during 1991. Excluding the nonrecurring gain, return on average assets for 1993 was 1.35% compared to 1.37% in 1992 and 1.12% in 1991. Also exclusive of the nonrecurring gain, the Company's 1993 return on shareholders' equity was 13.59% compared to 13.98% in 1992 and 12.15% in 1991. The Company's 1993 earnings reflect favorable interest margins, increased non-interest revenue, and a lower loan loss provision. The earnings gain in 1992 related primarily to increased net interest income. The 1992 consolidated operating results do not include the operations of Stephenville Bank & Trust Co. which was acquired in a cash purchase in February 1993. Consequently, comparability of 1993 income and expense items to the prior year is affected. This discussion will highlight those items materially affected and considered meaningful to the analysis of 1993 results. Net Interest Income - For analysis purposes in this discussion, interest income has been adjusted for the tax benefit of tax exempt securities and loans. On a taxable equivalent basis, net interest income in 1993 totaled $36.8 million, an increase of $2.1 million over the 1992 amount which was $4.2 million higher than 1991. Table 1 provides the income and average yield earned on earning assets and the interest expense and average rate paid on interest bearing liabilities for the years 1991 through 1993. Table 2 presents year to year changes in net interest income and allocates the changes between the amount attributable to the variances in average volume and rates. The 1993 increase in net interest income is attributed to growth in earning assets, a substantial amount of which relates to the addition of the Stephenville bank, offset by a slight decrease in the interest spread and net yield. The lower spread and yield reflects the 1993 maturities of higher yielding fixed rate investments which were reinvested at the lower current market rates. The Company's near term projection shows further reduction in the net yield which reached a record high in 1992 when the drop in market interest rates drove down funding costs. Earning asset growth was also a significant factor contributing to the 1992 increase in net interest income. Table 1 - Analysis of Average Rates and Yields (000's omitted): 1993 1992 1991 Income/ Yields/ Income/Yields/ Income/ Yields/ (Expense) Rates (Expense) Rates (Expense) Rates Short-term investments $ 1,417 2.97% $ 1,555 3.38% $ 3,602 5.78% Taxable investment securities22,997 5.92 24,801 7.16 24,482 8.32 Tax-exempt investment securities 1,131 8.01 1,286 9.37 2,105 9.51 Loans 29,284 8.31 28,443 8.89 32,516 10.37 Total interest income 54,829 6.80 56,085 7.74 62,705 9.03 Interest bearing deposits (18,016) (2.85) (21,395) (3.70)(31,951) (5.71) Short-term borrowings (2) (2.96) (20) (3.52) (43) (5.34) Long-term debt - - - - (244) (9.86) Total interest expense (18,018) (2.85) (21,415) (3.70) (32,238) (5.72) Net interest income and spread $ 36,811 3.95% $ 34,670 4.04% $ 30,467 3.31% Net interest yield 4.57% 4.78% 4.38% Table 2 - Analysis of Changes in Interest Income and Interest Expense (000's omitted): 1993 Compared to 1992 1992 Compared to 1991 Volume Rate Total Volume Rate Total Short-term investments $ 92 $ (230) $ (138) $ (1,074) $ (973) $(2,047) Taxable investment securities 3,418 (5,222) (1,804) 4,282 (3,963) 319 Tax-exempt investment securities 51 (206) (155) (738) (81) (819) Loans 1,727 (886) 841 656 (4,729) (4,073) Interest income 5,288 (6,544) (1,256) 3,126 (9,746) (6,620) Interest bearing deposits 2,368 (5,747) (3,379) 1,056 (11,612) (10,556) Short-term borrowings (18) - (18) (7) (16) (23) Long-term debt - - - (244) - (244) Interest expense 2,350 (5,747) (3,397) 805 (11,628) (10,823) Net interest income $ 2,938 $ (797) $ 2,141 $ 2,321 $ 1,882 $ 4,203 Provision for Loan Losses - The provision for loan losses is a charge to earnings for potential losses inherent in the loan portfolio. The amount of provision is determined based on an evaluation of the adequacy of the allowance for losses on loans which is described in Note 1 to the consolidated financial statements. A number of factors enter into the determination of the provision, and the amount of losses cannot always be predicted with certainty. The 1993 provision totaled $345 thousand as compared to $940 thousand in 1992 and $1.1 million in 1991. This trend in lower provisions is attributed to improvement in problem credits and lower net charge offs. Net charge offs as a percent of average loans were .10%, .13%, and .42%, respectively, for 1993, 1992, and 1991. Note 3 to the consolidated financial statements summarizes the changes in the allowance for loan loss account which amounted to 2.23% of loans at December 31, 1993, as compared to 2.32% the prior year-end. Table 3 presents the components of nonperforming assets at December 31, 1993, which includes $900 thousand added from the Stephenville acquisition. Table 3 - Nonperforming Assets (000's omitted): At December 31, 1993 1992 1991 Nonaccrual loans $ 2,788 $ 1,951 $ 3,541 Loans past due 90 days or more 58 576 74 Nonperforming loans 2,846 2,527 3,615 Foreclosed assets 1,474 1,678 3,018 Total nonperforming assets $ 4,320 $ 4,205 $ 6,633 As a % of loans and foreclosed assets 1.14% 1.26% 2.12% Other Income - Other income increased 13.8% in 1993 to $9.8 million as compared to $8.6 million and $8.3 million, respectively, in 1992 and 1991. The Stephenville bank accounted for $538 thousand of the $1.2 million increase recorded in 1993. Trust fees amounted to $2.9 million in 1993 compared to $2.7 million in 1992 which was slightly below the 1991 total. Service fees on deposit accounts in 1993 increased 7.1% from the 1992 amount which reflected a 12.4% gain over 1991. These increases relate primarily to growth in transaction account activity. Table 4 presents year to year changes for other income. Other miscellaneous represents various revenue items, including recoveries of amounts taken as losses in prior years. During 1993 such recoveries were approximately $200 thousand higher than the prior year. In order to reduce the level of investment in a federally-sponsored lending agency, two subsidiary banks sold debt securities of that agency which resulted in a $62 thousand gain and also contributed to the 1993 increase in other miscellaneous income. Table 4 - Other Income (000's omitted): Increase Increase 1993 (Decrease) 1992 (Decrease) 1991 Trust department income $ 2,946 $ 176 $ 2,770 $ (30) $ 2,800 Service fees on deposit accounts 4,766 461 4,305 475 3,830 Mastercard merchant fees 493 103 390 (56) 446 Safe deposit rental fees 237 18 219 (9) 228 Exchange fees 187 31 156 4 152 Data processing fees 105 (37) 142 (16) 158 Other miscellaneous 1,106 439 667 (91) 758 $ 9,840$ 1,191 $ 8,649$ 277 $ 8,372 Other Expenses - Non-interest expense for 1993 totaled $28.2 million, an increase of $2.3 million, or 8.9%, over 1992. The 1992 total of $25.9 million was $1.5 million, or 6.0%, over 1991. Excluding the operating expenses at the Stephenville bank which was purchased in February, 1993, total non-interest expenses in 1993 were up by only $235 thousand from the prior year. The largest component of non-interest expense is salaries and employee benefits which increased $1.8 million, or 14.5% in 1993. The addition of the Stephenville bank accounted for $1.0 million of the increase. Total salaries and employee benefits in 1992 totaled $12.4 million, an increase of $834 thousand, or 7.2%, from 1991. Net occupancy expense of $2.1 million in 1993 was slightly below 1992 and was due primarily to lower property taxes. The 1992 increase over 1991 resulted from higher depreciation and insurance expense. Equipment-related expenses for 1993 were up 4.1% with the increase resulting primarily from higher depreciation. Equipment expenses in 1992 were virtually unchanged from 1991. In 1994 the Company's lead bank, First National Bank of Abilene, will install a new data processing system and begin adding to the Abilene data center the affiliate banks which are now processed by outside service providers. The capital expenditures for the new data processing system and facilities plus related conversion expenses are projected to total approximately $4.5 million Company-wide. The expected increase in the Company's future data processing expense will be offset to some extent by the elimination of fees now being paid to outside sources and expected operating efficiencies. Also in 1994, Stephenville Bank & Trust will have projected capital expenditures of $1.8 million related to the relocation of its main banking office. FDIC insurance expense in 1993 was $148 thousand higher than 1992 and was due primarily to acquisitions. The 1992 amount was $188 thousand higher than 1991 and was caused by a rate increase. Correspondent Bank charges represent fees paid primarily by First National Bank of Abilene to its major upstream correspondent banks for check clearing services. This expense also includes the cost of clearing items for non affiliated banks which utilize First National Bank of Abilene as their primary clearing bank. In those situations First National Bank of Abilene recovers its cost through account analysis fees or deposit balances. Year to year changes for this expense relate to volume. Other miscellaneous as shown in Table 5 consists of outside director fees, travel, communication, insurance, and various other operating expenses. The 1993 total of other miscellaneous includes $356 thousand for the settlement of legal claims against one of the subsidiary banks. The Company utilizes the ratio of total non-interest expense to net revenue (taxable equivalent net interest income plus other income) as a key indicator of operating efficiency. As shown in Table 5, the ratio increased slightly in 1993 following a decrease in 1992 and compared favorably to the Company's Federal Reserve peer group average of 65.55%. Table 5 - Other Expenses (000's omitted): Increase Increase 1993 (Decrease) 1992 (Decrease) 1991 Salaries $ 11,132 $ 1,395 $ 9,737 $ 490 $ 9,247 Profit sharing 1,102 57 1,045 214 831 Pension and other benefits 2,010 348 1,662 131 1,531 14,244 1,800 12,444 835 11,609 Net occupancy 2,119 (34) 2,153 154 1,999 Equipment expense 1,780 70 1,710 33 1,677 FDIC insurance expense 1,762 148 1,614 188 1,426 Correspondent bank service charges 836 67 769 (6) 775 Printing and supplies745 23 722 122 600 Outside data processing fees 551 (51) 602 21 581 Postage 689 33 656 58 598 Advertising 509 4 505 103 402 Professional fees 551 12 539 191 348 Other miscellaneous 4,404 237 4,167 (231) 4,398 Total noninterest expense $ 28,190 $ 2,309 $ 25,881 $ 1,468 $24,413 As a % of Net Revenue 60.43% 59.75% 62.86% Income Taxes - Income tax expense for 1993 amounted to $5.7 million compared to $4.9 million in 1992 and $3.8 million in 1991. During 1993 the new tax law increased the rate paid on taxable income above $10 million to 35%. The effective tax rates on pre-tax income were 32.4%, 31.3%, and 28.3% for years 1993, 1992, and 1991, respectively. Note 6 to the consolidated financial statements provides additional analysis of income tax expense for these years. BALANCE SHEET REVIEW Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Investments", requires all entities to disclose the fair value of their financial investment assets and liabilities. Note 7 to the consolidated financial statements provides the required disclosures and describes the methodologies which the Company used to determine fair values. Due to the wide range of permitted valuation techniques and numerous estimates given the absence of active secondary markets, the reasonable comparability between financial institutions may be affected. Comments in this discussion pertain to recorded book values which are based on historical costs. Total Assets - Total assets at December 31, 1993, totaled $924.6 million, up from $839.4 million at the end of 1992, with the increase due largely to the addition of the $88 million asset Stephenville bank and a $20 million asset branch office acquired by the First National Bank in Cleburne. On a daily average basis, total assets were $899.3 million in 1993 as compared to $805.5 million in 1992. Investment Securities - At December 31, 1993, the investment portfolio was $421.7 million, an increase of $51.1 million, or 13.8%, over the previous year-end balance. The increase over the prior year is attributed to the 1993 acquisitions and consisted primarily of U. S. Treasury and U. S. Government agency securities. Note 2 to the consolidated financial statements provides further detail on the mix, maturities, and values of the securities portfolio at December 31, 1993. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", was issued in 1993 and requires that such securities be classified as held-to-maturity, available-for-sale, or trading. Securities classified as held-to-maturity will be recorded at amortized cost. Securities classified as available-for-sale will be recorded at fair value, with unrealized gains and losses reported in a separate component of shareholders' equity. Securities classified as trading will be recorded at fair value, with unrealized gains and losses included in earnings. The Company will adopt this accounting standard at the beginning of 1994 and expects that the resulting adjustment to assets and equity will not be material. Loans - Total loans at December 31, 1993, amounted to $376.5 million, up $45.2 million, or 13.6%, from the 1992 year-end balance, $24.6 million of which related to the Stephenville acquisition. Overall, the change reflects an increase of $30.2 million in commercial loans, an increase of $17.5 million in consumer loans, and $2.5 million decrease in real estate loans. During 1993 total loans averaged $361.1 million which was $48.6 million, or 12.8%, above the prior year average. Deposits - Total deposits at December 31, 1993, amounted to $828.4 million as compared to $750.4 million at the end of 1992. Excluding the deposits at the Stephenville bank and the Cleburne branch, total deposits were down $15.1 million from the prior year-end and reflect movement of bank interest-bearing deposits to higher yielding nonbank investments. Excluding the effect of the acquisitions, non-interest bearing deposits were virtually unchanged from the 1992 year-end balance. For the year, total deposits averaged $802.8 million as compared to the 1992 average of $717.2 million. Capital - At the end of 1993, total shareholders' equity was $90.4 million, up $9.0 million from December 31, 1992. The Company's total risk-based capital ratio at year-end was 18.5% compared to 18.7% at December 31, 1992. The risk-based guideline assigns weighted levels of risk to asset categories to measure capital adequacy and requires a minimum ratio of 8.0%. On April 27, 1993, the Board of Directors approved a 10% stock dividend which was paid June 1, 1993. The Company does not anticipate any significant changes in dividend policy which has yielded cash dividend payout ratios of 34.0%, 32.0%, and 34.8%, respectively, in 1993, 1992, and 1991. Liquidity Position - Liquidity is the ability of the Company to meet its cash needs as they arise. Such cash needs can develop from loan demand, deposit withdrawals and acquisition opportunities. The statements of cash flows which are included in the consolidated financial statements present the changes in cash and cash equivalents which consist of cash and due from banks and Federal funds sold. The subsidiary banks continue to maintain relatively low loan to deposit ratios (combined 44.9% at December 31, 1993) and highly liquid investment portfolios with short maturities. In view of these factors and the parent company's $5.0 million available line of credit, Management considers the current liquidity position to be adequate. Asset/Liability Management - Asset/liability management is the funding and investment strategies necessary to maintain an appropriate balance between interest-sensitive assets and liabilities. It is the policy of the Company that each subsidiary establish asset/liability policies for balance sheet management. Interest-sensitivity analysis is one of the tools used to monitor interest rate risk resulting from periodic mismatches or "gap" in the maturities of assets and liabilities. The consolidated interest sensitivity ratios at December 31, 1993, as shown in Table 6, remain relatively unchanged from the prior year-end. Historically, the strong core deposit base which does not reprice on a contractual basis has protected the Company from the earnings volatility indicated in the analysis. Table 6 - Interest Sensitivity Analysis (000's omitted): Within 3 4-6 7-12 1-5 Over 5 Months Months Months Years Years Total Interest-earning assets: Total loans $ 205,476 $ 19,290 $ 27,296 $ 114,161 $ 10,264 $ 376,487 Investment securities 40,755 15,977 66,743 267,844 30,418 421,737 Short-term investments 38,356 194 493 100 39,143 Total interest-earning assets 284,587 35,461 94,532 382,105 40,682 837,367 Interest-bearing liabilities: Transaction deposit accounts 280,998 280,998 Time deposits 201,993 72,603 52,039 41,936 1 368,572 Total interest-bearing liabilities $ 482,991 $ 72,603 $ 52,039 $ 41,936 $ 1 $ 649,570 Interest sensitivity gap $ (198,404) $ (37,142)$ 42,493 $ 340,169 $ 40,681 $ 187,797 Cumulative interest sensitivity gap (198,404) (235,546) (193,053) 147,116 187,797 187,797 Ratio of interest sensitive assets to interest sensitive liabilities 0.59 0.49 1.82 9.11 - Cumulative ratio of interest sensitive assets to interest sensitive liabilities 0.59 0.58 0.68 1.23 3.32 Cumulative interest sensitivity gap as a percent of earning assets-23.69% -28.13%-23.05% 17.57% 22.43% Market and Dividends - The following Table 7 provides the high and low bid prices and dividends paid with respect to the Company's common stock for the periods indicated. All amounts have been adjusted for the 10% stock dividend on June 1, 1993. On November 1, 1993, the Company's stock was listed on the NASDAQ National Market under the trading symbol FFIN. Table 7 - Common Stock Data Dividends Quarter High Low Declared 1993 Fourth $ 41.50 $ 40.00$ 0.32 Third 40.00 39.00 0.32 Second 39.00 37.00 0.32 First 37.00 35.50 0.25 1992 Fourth $ 35.50 $ 31.00$ 0.25 Third 31.00 23.00 0.25 Second 23.00 20.00 0.25 First 20.00 18.00 0.21 1991 Fourth $ 18.00 $ 17.50 $ 0.21 Third 17.50 16.50 0.21 Second 16.50 16.00 0.21 First 16.00 15.50 0.19 Table 8-Quarterly Financial Data (Unaudited) (Dollars in thousands, except per share data) 1993 4th 3rd 2nd 1st Summary Income Statement Information: Interest income $ 13,648 $ 13,677 $ 13,734 $ 13,379 Interest expense 4,524 4,476 4,565 4,453 Net interest income 9,124 9,201 9,169 8,926 Provision for loan losses (8) 172 108 73 Net interest income after provision for loan losses 9,132 9,029 9,061 8,853 Non-interest income 2,745 2,449 2,383 2,263 Non-interest expense 7,583 6,956 7,151 6,500 Income before income taxes 4,294 4,522 4,293 4,616 Provision for income taxes 1,407 1,480 1,375 1,485 Net income before cumulative effect of accounting change 2,887 3,042 2,918 3,131 Cumulative effect of accounting change<F1>(1) - - - 1,255 Net income $ 2,887 $ 3,042 $ 2,918 $ 4,386 Per Share Data<F2>(2): Net income before cumulative effect of accounting change $ 0.77 $ 0.81 $ 0.78 $ 0.84 Net income per share 0.77 0.81 0.78 1.17 Cash dividends declared 0.32 0.32 0.32 0.25 Book value at period end 24.14 23.70 23.24 22.80 Market value (period end) bid 41.50 40.00 39.00 37.00 Market value (bid): High 41.50 40.00 39.00 37.00 Low 40.00 39.00 37.00 35.50 Quarterly Financial Data (Unaudited) - continued (Dollars in thousands, except per share data) 1992 4th 3rd 2nd 1st Summary Income Statement Information: Interest income $ 13,448$ 13,599 $ 14,030 $ 14,497 Interest expense 4,586 5,041 5,591 6,197 Net interest income 8,862 8,558 8,439 8,300 Provision for loan losses 318 136 226 260 Net interest income after provision for loan losses 8,544 8,422 8,213 8,040 Non-interest income 2,231 2,110 2,093 2,215 Non-interest expense 6,780 6,342 6,226 6,533 Income before income taxes 3,995 4,190 4,080 3,722 Provision (benefit) for income taxes 1,270 1,331 1,263 1,134 Net income $ 2,725$ 2,859 $ 2,817 $ 2,588 Per Share Data<F2>(2): Net income per share $ 0.73$ 0.76 $ 0.76 $ 0.70 Cash dividends declared 0.25 0.25 0.25 0.21 Book value at period end 21.87 21.38 20.90 20.42 Market value (period end) bid 35.50 31.00 23.00 20.00 Market value (bid): High 35.50 31.00 23.00 20.00 Low 31.00 23.00 20.00 18.00 <F1>(1) Adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." <F2>(2) Historical amounts adjusted for stock dividends and stock splits. The quarterly price range of the Company's stock is the closing price, as reported by The Principal/Eppler, Guerin & Turner, Inc., of Abilene, Texas. The Company's stock was traded local over-the-counter prior to November 1, 1993, the effective date of listing on the NASDAQ National Market. Such over-the-counter market quotations reflect inter-dealer prices without retail markup, markdown, or commission and may not necessarily represent actual transactions. Item 8. Financial Statements and Supplementary Data The independent auditor s report, and consolidated financial statements of Bankshares at December 31, 1993 and 1992 and for each of the three years in the period ended December 31 are provided on pages 32 through 49. Also included for the year ended December 31, 1993 (first required year) is management s report on responsibility for the financial statements. FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1993 AND 1992 ASSETS 1993 1992 CASH AND DUE FROM BANKS<N2>(Note 2) $ 51,171,307$ 61,836,625 FEDERAL FUNDS SOLD 38,356,000 40,705,000 Total cash and cash equivalents 89,527,307102,541,625 INTEREST-BEARING DEPOSITS IN BANKS 787,000 791,000 INVESTMENT SECURITIES (market value of $426,312,702 in 1993 and $377,596,751 in 1992)<N2>(Note 2) 421,735,616 370,633,351 LOANS<N3><N13>(Notes 3 and 13) 376,491,081 331,291,342 Less- Allowance for loan losses 8,385,827 7,700,004 Net loans 368,105,254 323,591,338 BANK PREMISES AND EQUIPMENT, net<N4><N8>(Notes 4 and 8) 27,227,71624,290,301 OTHER ASSETS 17,247,039 17,626,219 Total assets $924,629,932 $839,473,834 LIABILITIES AND SHAREHOLDERS' EQUITY DEMAND DEPOSITS $179,112,763$162,327,571 TIME DEPOSITS<N5>(Note 5) 649,318,566 588,117,556 Total deposits 828,431,329 750,445,127 DIVIDENDS PAYABLE 1,198,940913,892 OTHER LIABILITIES 4,556,424 6,681,857 Total liabilities 834,186,693 758,040,876 COMMITMENTS AND CONTINGENCIES<N8>(Note 8) SHAREHOLDERS' EQUITY<N14>(Note 14): Common stock, $l0 par value; authorized 5,000,000 shares; issued and outstanding 3,746,687 shares in 1993 and 3,384,785 shares in 1992 37,466,870 33,847,850 Capital surplus 13,672,409 4,299,902 Retained earnings 39,303,960 43,285,206 Total shareholders' equity 90,443,239 81,432,958 Total liabilities and shareholders' equity$924,629,932 $839,473,834 The accompanying notes are an integral part of these consolidated statements. FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 1993 1992 1991 INTEREST INCOME: Interest and fees on loans $29,277,659 $28,356,420 $32,373,815 Interest on investment securities- Taxable 22,996,639 24,800,45524,481,871 Exempt from federal income tax 746,195 862,0111,364,203 Interest on federal funds sold and interest-bearing deposits in banks 1,417,218 1,555,290 3,601,927 54,437,711 55,574,176 61,821,816 INTEREST EXPENSE: Interest on time deposits<N5>(Note 5) 18,016,432 21,394,40431,950,828 Interest on federal funds purchased and other short-term borrowings 1,510 20,385 43,147 Interest on long-term debt - - 244,314 18,017,942 21,414,789 32,238,289 Net interest income 36,419,76934,159,387 29,583,527 PROVISION FOR LOAN LOSSES<N3>(Note 3) 345,010 940,070 1,120,000 Net interest income after provision for loan losses 36,074,759 33,219,317 28,463,527 OTHER INCOME: Trust department income 2,945,840 2,769,8932,800,421 Service fees on deposit accounts 4,766,464 4,305,3493,830,398 Other 2,128,187 1,574,105 1,740,797 9,840,491 8,649,347 8,371,616 OTHER EXPENSE: Salaries and employee benefits 14,244,21512,443,926 11,609,106 Net occupancy expense 2,119,222 2,152,9111,998,982 Equipment expense 1,780,223 1,709,5401,677,174 FDIC assessments 1,761,566 1,614,4591,426,307 Correspondent bank service charges 836,376 768,707 774,427 Other expenses 7,448,892 7,191,778 6,926,964 28,190,494 25,881,321 24,412,960 EARNINGS BEFORE INCOME TAXES 17,724,75615,987,343 12,422,183 INCOME TAX EXPENSE<N6>(Note 6) 5,746,509 4,998,018 3,777,146 NET EARNINGS BEFORE CUMULATIVE ADJUSTMENT FOR CHANGE IN ACCOUNTING FOR INCOME TAXES 11,978,247 10,989,325 8,645,037 CUMULATIVE ADJUSTMENT FOR CHANGE IN ACCOUNTING FOR INCOME TAXES<N1>(Note 1) 1,254,808 - - NET EARNINGS $13,233,055 $10,989,325$ 8,645,037 Earnings per share before cumulative adjustment for change in accounting for income taxes $3.20 $2.95$2.35 Net earnings per share $3.53 $2.95 $2.35 The accompanying notes are an integral part of these consolidated statements. FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 Common Stock Capital Retained Shares Amount Surplus Earnings BALANCE at December 31, 1990 2,229,795 $22,297,950 $15,278,625 $30,249,364 Net earnings - - - 8,645,037 Stock issuances 12,591 125,910 132,867 - Cash dividends declared, $.82 per share - - - (3,009,534) Purchase and retirement of common stock (7,345) (73,450) (50,460) (68,896) BALANCE at December 31, 1991 2,235,041 22,350,410 15,361,032 35,815,971 Net earnings - - - 10,989,325 Stock issuances 31,228 312,280 124,030 - Stock split, 3 for 2 effective June 1, 1992 1,118,516 11,185,160 (11,185,160) - Cash dividends declared, $.95 per share - - - (3,520,090) BALANCE at December 31, 1992 3,384,785 33,847,850 4,299,902 43,285,206 Net earnings - - - 13,233,055 Stock issuances 23,386 233,860 48,388 - Cash dividends declared, $1.20 per share - - - (4,505,022) Stock dividend, 10% 338,516 3,385,160 9,324,119 (12,709,279) BALANCE at December 31, 1993 3,746,687 $37,466,870 $13,672,409 $39,303,960 The accompanying notes are an integral part of these consolidated statements. FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993, 1992, AND 1991 1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 13,233,055 $ 10,989,325 $ 8,645,037 Adjustments to reconcile net earnings to net cash provided by operating activities- Depreciation and amortization 2,175,585 2,175,971 2,369,782 Provision for loan losses 345,010 940,070 1,120,000 Premium amortization, net of discount accretion 5,189,292 3,699,508 2,623,097 Gain on sale of investment securities (61,638) - (22,500) Deferred federal income tax benefit (1,417,478)(375,613) (65,102) (Increase) decrease in other assets 2,750,474 2,144,239 (751,351) Increase (decrease) in other liabilities (2,772,707) (1,026,941) 321,850 Total adjustments 6,208,538 7,557,234 5,595,776 Net cash provided by operating activities 19,441,593 18,546,559 14,240,813 CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest-bearing deposits in banks 194,000 394,000 1,704,000 Cash and cash equivalents received through acquisition, net of payment for stock<N16>(Note 16) 5,511,888 - - Cash and cash equivalents received through purchase of assets and liabilities, net of cash paid<N16>(Note 16) 16,876,513 - - Proceeds from sale of investment securities8,682,805 - 22,500 Proceeds from maturities of investment securities 186,331,303 152,773,289 105,922,563 Purchase of investment securities (203,916,974) (170,884,138) (177,234,187) Net (increase) decrease in loans (20,103,090) (21,630,385) 6,010,111 Capital expenditures (3,620,335) (733,162)(805,653) Proceeds from sale of other assets 1,750,925 1,670,580 1,150,857 Net cash used in investing activities (8,292,965) (38,409,816) (63,229,809) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits 2,879,995 (568,380) 5,820,958 Net increase (decrease) in time deposits (23,105,215)(158,067) 36,343,680 Net decrease in other short-term borrowings - (934,192) (289,548) Repayment of long-term debt - - (8,064,367) Payments to repurchase common stock - - (192,806) Proceeds of stock issuances 282,248 436,310 258,777 Dividends paid (4,219,974) (3,388,462) (2,895,686) Net cash provided by (used in) financing activities (24,162,946) (4,612,791) 30,981,008 NET DECREASE IN CASH AND CASH EQUIVALENTS (13,014,318) (24,476,048) (18,007,988) CASH AND CASH EQUIVALENTS, beginning of year 102,541,625 127,017,673 145,025,661 CASH AND CASH EQUIVALENTS, end of year $ 89,527,307 $102,541,625 $127,017,673 The accompanying notes are an integral part of these consolidated statements. FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1993, 1992, AND 1991 <N1>1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: A summary of significant accounting policies of First Financial Bankshares, Inc. and subsidiaries (the "Company," formerly First Abilene Bankshares, Inc.) applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both generally accepted accounting principles and prevailing practices of the banking industry. Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Investment Securities Investment securities are stated at cost adjusted for premium amortization and discount accretion, which are recognized as adjustments to interest income using the interest method. The adjusted cost of the identified investments sold is used to determine security gains and losses. The Company had no trading securities at December 31, 1993 or 1992, and has the positive intent and ability to hold investment securities until maturity. 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 allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible based upon management's review and evaluation of the loan portfolio. The factors considered in the evaluation of the loans include 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. 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. Per Share Data Earnings per share are based on the weighted average number of common shares and common share equivalents outstanding in 1993, 1992, and 1991 of 3,746,687, 3,723,264, and 3,676,268, respectively, adjusted retroactively for stock dividends and splits. Common share equivalents represent the dilutive effect of stock options. Additionally, dividends per share have been retroactively adjusted for the effect of stock dividends and splits. Reclassifications Certain 1992 and 1991 amounts have been reclassified to conform to the 1993 presentation. Statement of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Change in Accounting for Income Taxes In February 1992, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was issued. This statement requires an asset and liability approach for financial accounting and reporting for income taxes and supersedes "Accounting for Income Taxes" required by Statement of Financial Accounting Standards No. 96 and APB Opinion No. 11. The Company adopted this statement effective January 1, 1993, with the resulting cumulative adjustment to income increasing other assets by $1,254,808. Accounting Standards Not Yet Adopted In May 1993, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was issued. This statement requires management to classify debt and equity securities as held-to-maturity, available-for-sale, or trading based on their intent. Securities classified as held-to-maturity will be recorded at amortized cost. Securities classified as available-for-sale will be recorded at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. Securities classified as trading will be recorded at fair value, with unrealized gains and losses included in earnings. This statement is effective for fiscal years beginning after December 15, 1993. It is to be initially applied as of the beginning of the fiscal year and cannot be applied retroactively. The Company will adopt this statement during the first quarter of 1994. The resulting adjustment to assets and stockholders' equity is not expected to be material. In May 1993, Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," was issued. This statement requires that impaired loans, within the scope of the statement, be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or market price or the fair value of the collateral if the loan is collateral dependent. This statement applies to fiscal years beginning after December 15, 1994, and is not expected to have a material effect on the accompanying financial statements. <N2>2. CASH AND INVESTMENT SECURITIES: Certain subsidiary banks are required to maintain reserve balances with the Federal Reserve Bank. During 1993 and 1992, such average balances totaled approximately $13,974,000 and $12,622,000, respectively. The amortized cost, estimated market values, and gross unrealized gains and losses of investment securities as of December 31, 1993 and 1992, are as follows: December 31, 1993 Gross Gross Estimated Amortized UnrealizedUnrealized Market Cost Gains Losses Value U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 363,737,702 $ 4,282,799 $ (581,805) $ 367,438,696 Obligations of states and political subdivisions 17,484,965 239,978 (62,245) 17,662,698 Mortgage-backed securities 39,092,949 836,425 (138,066) 39,791,308 Total debt securities 420,315,616 5,359,202 (782,116) 424,892,702 Other securities 1,420,000 - - 1,420,000 Total investment securities $ 421,735,616 $ 5,359,202 $ (782,116) $ 426,312,702 December 31, 1992 Gross Gross Estimated Amortized UnrealizedUnrealized Market Cost Gains Losses Value U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 331,819,344 $ 6,635,976$ (707,436) $ 337,747,884 Obligations of states and political subdivisions 12,461,597 290,413 (36,269) 12,715,741 Mortgage-backed securities 24,932,410 804,631 (23,915) $ 25,713,126 Total debt securities 369,213,351 7,731,020 (767,620) 376,176,751 Other securities 1,420,000 - - 1,420,000 Total investment securities $ 370,633,351 $ 7,731,020$ (767,620) $ 377,596,751 The Company and its subsidiaries invest 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 and asset-backed securities. The expected maturities of these securities at December 31, 1993, were computed by using scheduled amortization of balances and historical prepayment rates. The amortized cost and estimated market value of debt securities at December 31, 1993, by contractual and expected maturity, are shown below. Estimated Amortized Market Cost Value Due in one year or less $102,791,410 $104,250,183 Due after one year through five years 281,657,422 284,429,016 Due after five years through ten years 23,135,199 23,309,729 Due after ten years 12,731,585 12,903,774 Total debt securities $420,315,616 $424,892,702 Investment securities carried at approximately $91,098,000 and $84,658,000 at December 31, 1993 and 1992, respectively, were pledged as collateral for public or trust fund deposits and for other purposes required or permitted by law. <N3>3. LOANS AND ALLOWANCES FOR LOAN LOSSES: Major classifications of loans are as follows: December 31, 1993 1992 Commercial, financial, and agricultural $ 208,811,960 $ 178,578,608 Real estate - construction 5,340,796 3,500,484 Real estate - mortgage 73,501,642 77,917,542 Installment 95,457,007 77,713,964 383,111,405 337,710,598 Unearned income (6,620,324) (6,419,256) Total loans $ 376,491,081 $ 331,291,342 At December 31, 1993 and 1992, the Company was carrying nonaccrual loans of approximately $2,788,000 and $1,951,000, respectively. Had these loans performed according to their original contract terms, the Company would have accrued interest of approximately $377,000 and $327,000 for the years ended December 31, 1993 and 1992, respectively, as compared to amounts actually recognized of approximately $53,000 and $0, respectively. In management's opinion, the allowance for loan losses is adequate to absorb any losses which may arise from these and other loans in the portfolio. Changes in the allowance for loan losses are summarized as follows: Year Ended December 31, 1993 1992 1991 Balance at beginning of year$7,700,004 $7,161,134 $7,301,797 Allowance of acquired bank (Note 16) 712,222 - - Provision charged to operations345,010 940,070 1,120,000 Loans charged off (1,935,490) (1,845,949) (2,633,093) Recoveries 1,564,081 1,444,749 1,372,430 BALANCE AT END OF THE YEAR $ 8,385,827 $ 7,700,004 $ 7,161,134 <N4>4. BANK PREMISES AND EQUIPMENT: The following is a summary of bank premises and equipment: December 31, 1993 1992 Land $ 4,165,743 $ 3,121,168 Buildings 26,773,800 26,068,479 Furniture and equipment 11,212,839 10,188,525 Leasehold improvements 6,631,728 4,342,804 48,784,110 43,720,976 Accumulated depreciation and amortization (21,556,394) (19,430,675) $ 27,227,716 $ 24,290,301 <N5>5. TIME DEPOSITS: Time deposits of $100,000 or more totaled approximately $78,013,000 and $75,623,000 at December 31, 1993 and 1992, respectively. Interest expense on these deposits was approximately $2,335,000, $3,551,000, and $5,895,000 during 1993, 1992, and 1991, respectively. <N6>6. INCOME TAXES: The Company files a consolidated federal income tax return. Income tax expense (benefit) is comprised of the following: Year Ended December 31, 1993 1992 1991 Current federal income tax$ 5,909,179 $ 5,373,631 $ 3,477,897 Deferred federal income tax benefit (162,670) (375,613) (65,102) State income tax - - 364,351 Income tax expense $ 5,746,509 $ 4,998,018 $ 3,777,146 During 1993, the federal income tax rate for the Company's taxable income greater than $10,000,000 changed from 34 percent to 35 percent. The adjustment to the Company's deferred tax assets and liabilities for this change was insignificant. The provision for income tax expense (benefit), as a percentage of pretax earnings, differs from the statutory federal income tax rate as follows: As a Percent of Pretax Earnings 1993 1992 1991 Expected tax expense 34.4% 34.0% 34.0% Reductions in taxes resulting from interest income exempt from federal income tax (1.5)% (2.2)% (5.0)% Other (0.5)% (0.5)% (0.7)% Income tax expense 32.4% 31.3% 28.3% The approximate effects of each type of difference that gave rise to the Company's deferred tax assets and liabilities at December 31, 1993, are as follows: Asset Liability Total Tax basis of loans in excess of financial statement basis $ 2,888,398 $ - $ 2,888,398 Financial statement basis of fixed assets in excess of tax basis - (1,183,552)(1,183,552) Nondeductible write-downs and adjustments to other real estate owned and repossessed assets 275,060 - 275,060 Accretion on investments recognized for financial reporting purposes, but not recognized for tax purposes- (107,071) (107,071) Benefits of a subsidiary bank net operating loss carryforward 961,534 - 961,534 Other 938 - 938 $ 4,125,930 $ (1,290,623) 2,835,307 Valuation allowance (480,767) Net deferred tax asset $ 2,354,540 At December 31, 1993, the First National Bank in Cleburne ("Cleburne"), a subsidiary bank, had a net operating loss carryforward for federal income tax purposes of approximately $2,747,000. In its consolidated return, subject to certain yearly limitations, the Company can utilize Cleburne's preacquisition net operating loss carryforward to offset future consolidated taxable income only to the extent Cleburne has future taxable income. If not used, the net operating loss carryforward expires as follows: $1,822,000 in 2001, $560,000 in 2002, and $365,000 in 2005. The valuation allowance was established to recognize the uncertainty of realization of the benefit related to Cleburn's net operating loss carryforward. The following summarizes the changes in the allowance account: Initial allowance established at January 1, 1993 $524,638 Reduction in valuation allowance based on current period utilization of net operating loss carryforward (43,871) Valuation allowance at December 31, 1993 $480,767 <N7>7. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires all entities to disclose the estimated fair value of its financial instrument assets and liabilities. For the Company, as for most financial institutions, approximately 95% of its assets and 99% of its liabilities are considered financial instruments as defined in Statement No. 107. Many of the Company's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. It is also the Company's general practice and intent to hold its financial instruments to maturity and to not engage in trading or sales activities. Therefore, significant estimations and present value calculations were used by the Company for the purposes of this disclosure. Estimated fair values have been determined by the Company using the best available data, as generally provided in the Company's Regulatory Reports, and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances.The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 1993 were as follows: - Financial instruments actively traded in a secondary market have been valued using quoted available market prices. Estimated Estimated Recorded Recorded Fair Fair Book Book Value Value Balance Balance 1993 1992 1993 1992 Cash and due from banks $ 51,171,307 $ 61,836,625 $ 51,171,307 $ 61,836,625 Federal funds sold38,356,00040,705,000 38,356,000 40,705,000 Interest-bearing deposits in banks 787,000 791,000 787,000 791,000 Investment securities (Note 2) 426,312,702 377,596,751 421,735,616 370,633,351 - Financial instruments with stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities. Financial instrument assets with variable rates and financial instrument liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the recorded book balance. Estimated EstimatedRecordedRecorded Fair Fair Book Book Value Value Balance Balance 1993 1992 1993 1992 Deposits with stated maturities $308,512,178 $294,625,218 $306,806,246 $292,975,617 Deposits with no stated maturities 521,625,083 457,569,510 521,625,083 457,469,510 Net loans 372,915,014 329,113,894 368,105,254 323,591,338 Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company's remaining assets and liabilities which are not considered financial instruments have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company's deposits is required by Statement No. 107 nor has the Company estimated its value. There is no material difference between the notional amount and the estimated fair value of off-balance-sheet unfunded loan commitments which total $82,053,000 and $67,356,000 at December 31, 1993 and 1992, respectively, and are generally priced at market at the time of funding. Letters of credit discussed in Note 9 have an estimated fair value based on fees currently charged for similar agreements. At December 31, 1993 and 1992, fees related to the unexpired term of the letters of credit are not significant. Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. <N8>8. 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 should have no material adverse effects upon the results of operations or financial condition of the Company. The Company has an unused line of credit with a bank under which it may borrow up to $5,000,000 at the London Interbank Offered Rate plus 1%, adjusted for reserves and deposit insurance expense. The line of credit is unsecured and matures on August 1, 1994. The Company paid no fee to secure the unused line of credit and accordingly has not estimated a fair value of the unused line of credit at December 31, 1993 or 1992. The Company leases portions of its banking premises under operating leases. Total rental expense for these leases was approximately $246,000, $224,000, and $224,000 for the years ended December 31, 1993, 1992, and 1991, respectively. The Company is a lessor for portions of its banking premises. Total rental income for all leases included in net occupancy expense was approximately $1,214,000, $1,219,000, and $1,318,000 for the years ended December 31, 1993, 1992, and 1991, respectively. At December 31, 1993, approximate future minimum lease commitments and lease receivables are summarized as follows: Lease Lease CommitmentsReceivables 1994 $ 200,400$ 778,900 1995 205,400 489,800 1996 212,400 216,700 1997 123,900 76,400 1998 and Thereafter - - Total $ 742,100$1,561,800 <N9>9. 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 balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on- balance-sheet instruments. Contract or Notional Amount Financial instruments whose contract amounts represent credit risk- Commitments to extend credit $ 82,053,000 Standby letters of credit 3,394,000 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 is 73%. <N10>10. 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. <N11>11. 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 sets forth the plan's funded status and amounts recognized in the Company's balance sheet at December 31, 1993 and 1992. December 31, 1993 1992 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $4,257,607 and $3,830,354 in 1993 and 1992, respectively$ 4,369,543 $ 3,962,429 Projected benefit obligation for service rendered to date $ (4,776,193) $ (4,248,923) Plan assets at fair value, primarily corporate bonds and equity securities 6,422,398 6,294,282 Plan assets in excess of projected benefit obligation 1,646,205 2,045,359 Unrecognized net gain from past experience different than that assumed and effects of changes in assumptions (271,131) (576,034) Unrecognized net asset at January 1, 1987, being recognized over 10.7 years (534,298) (676,502) Prepaid pension cost included in other assets$ 840,776 $ 792,823 Net pension cost (credit) for the years ended December 31, 1993, 1992, and 1991, included the following components: Year Ended December 31, 1993 1992 1991 Service cost - benefits earned during the period $ 358,084 $ 307,643 $ 291,861 Interest cost on projected benefit obligation 369,861 322,416 289,606 Actual return on plan assets (282,192)(578,291)(426,068) Net amortization and deferral (398,544) (78,592) (185,584) Net periodic pension cost (credit) $ 47,209 $ (26,824) $ (30,185) The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations was 8.5% and 4.0%, respectively. The expected long-term rate of return on assets was 8.5%. Under the provisions of the Tax Reform Act of 1986, the Company was required to amend its pension plan by December 31, 1992, with an effective date of January 1, 1989. During 1992, the Company amended the pension plan without causing a significant change in funding requirements or future benefits. 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. Profit sharing plan costs were $1,037,000, $1,045,000, and $831,000 in 1993, 1992, and 1991, respectively. <N12>12. DIVIDENDS FROM SUBSIDIARIES: At December 31, 1993, approximately $9,605,000 was available for the declaration of dividends by the Company's subsidiary banks without the prior approval of regulatory agencies. <N13>13. LOANS TO RELATED PARTIES: An analysis of the changes in loans to officers, directors, principal shareholders, or associates of such persons for the two years ended December 31, 1993, (determined as of each respective year-end) follows: Balance at Balance at BeginningAdditional End of Period Loans Payments of Period Year ended December 31, 1993$27,289,817 $65,681,463 $(59,130,059) $33,841,221 Year ended December 31, 1992$26,641,481 $37,703,642 $(39,982,661) $24,362,462 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. <N14>14. STOCK OPTION PLAN: The Company has adopted 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, 1993, the Company had reserved 260,691 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. At December 31, 1993, 48,709 shares were exercisable. An analysis of stock option activity for the years ended December 31, 1993 and 1992, is as follows: Number Option Price of Shares of Shares Options outstanding at December 31, 1991 155,969 $10.77 - 18.18 Canceled (1,237) $18.18 Exercised (35,726) $10.77 - 13.77 Granted - - Options outstanding at December 31, 1992 119,006 $10.77 - 18.18 Canceled (500) $40.00 Exercised (23,822) $10.77 - 18.18 Granted 25,650 $40.00 Options outstanding at December 31, 1993 120,334 $10.77 - 40.00 Stock options have been adjusted retroactively for the effects of stock dividends and splits. 15. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY: Condensed Balance Sheets-December 31, 1993 and 1992 1993 1992 ASSETS Cash in subsidiary bank $ 460,649$ 162,211 Investment securities 8,185,20411,463,022 Investment in subsidiaries, at equity 82,380,55369,766,514 Excess of cost over fair value of tangible assets acquired909,593 955,728 Other assets 316,125 148,021 Total assets $92,252,124 $82,495,496 LIABILITIES AND SHAREHOLDERS' EQUITY Total liabilities $ 1,808,885 $ 1,062,538 Shareholders' equity- Common stock 37,466,870 33,847,850 Capital surplus 13,672,4094,299,902 Retained earnings 39,303,960 43,285,206 Total shareholders' equity 90,443,239 81,432,958 Total liabilities and shareholders' equity $92,252,124 $82,495,496 Condensed Statements of Earnings For the Years Ended December 31, 1993, 1992, and 1991 1993 1992 1991 INCOME Cash dividends from subsidiary banks$ 8,935,000 $ 9,365,000$7,700,000 Excess of earnings over dividends of subsidiary banks 4,860,292 1,997,734 1,317,760 Other income 550,543 589,051 448,444 14,345,835 11,951,785 9,466,204 EXPENSES Salaries and employee benefits829,148 694,927 617,778 Franchise taxes 5,799 4,428 11,030 Other operating expenses 505,323 430,390 359,628 1,340,270 1,129,745 988,436 EARNINGS BEFORE INCOME TAXES 13,005,565 10,822,040 8,477,768 Income tax benefit 251,862 167,285 167,269 Net earnings before cumulative adjustment for change in accounting for income taxes 13,257,427 10,989,3258,645,037 Cumulative adjustment for change in accounting for income taxes (24,372) - - NET EARNINGS $13,233,055 $10,989,325 $ 8,645,037 Condensed Statements of Cash Flows For the Years Ended December 31, 1993, 1992, and 1991 1993 1992 1991 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $13,233,055 $10,989,325 $8,645,037 Adjustments to reconcile net earnings to net cash provided by operating activities- Excess of earnings over dividends of subsidiary banks (4,860,292) (1,997,734) (1,317,760) Depreciation 21,177 19,811 15,610 Discount accretion, net of premium amortization (30,616) (64,838) (65,389) Amortization of excess of cost over fair value of assets acquired 46,135 46,135 46,135 (Increase) decrease in other assets (117,587) (42,140) 16,713 Increase (decrease) in liabilities 461,298 34,390 (100,873) Net cash provided by operating activities 8,753,170 8,984,949 7,239,473 CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of Stephenville Bank & Trust (7,750,000) - - Capital expenditures (71,693) (22,513) (7,505) Proceeds from maturity of investment securities 20,800,000 18,000,000 3,700,000 Purchases of investment securities (17,495,313) (26,402,477) (6,630,318) Net cash used in investing activities (4,517,006) (8,424,990) (2,937,823) CASH FLOWS FROM FINANCING ACTIVITIES: Payments to repurchase common stock - - (192,806) Proceeds of stock issuance 282,248 436,310 258,777 Cash dividends paid (4,219,974) (3,388,462) (2,895,686) Net cash used in financing activities (3,937,726) (2,952,152) (2,829,715) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 298,438 (2,392,193) 1,471,935 CASH IN SUBSIDIARY BANK AT BEGINNING OF THE YEAR 162,211 2,554,404 1,082,469 CASH IN SUBSIDIARY BANK AT END OF THE YEAR $ 460,649 $ 162,211 $2,554,404 <N16>16. ACQUISITION: Effective February 1993, the Company purchased 100% of the outstanding common and preferred stock of Stephenville Bank & Trust ("Stephenville") for $7,750,000 in cash. The fair market value of net assets acquired exceeded the purchase price by approximately $317,500. This excess (negative goodwill) was applied to reduce long-term assets (primarily bank premises). The value assigned to assets acquired and liabilities assumed is as follows: Assets acquired (primarily cash, securities, and loans) $87,419,000 Liabilities assumed (primarily deposits) 79,669,000 Cash paid for stock 7,750,000 The unaudited pro forma consolidated results of operations, as if Stephenville had been acquired as of the beginning of 1992, are as follows: 1993 1992 Interest income $ 55,276,000 $ 60,650,000 Net earnings 13,350,000 11,653,000 Earnings per share 3.56 3.13 The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had the purchase been made at the beginning of 1992. <N17>17. CASH FLOW INFORMATION: Supplemental information on cash flows and noncash transactions is as follows: Year Ended December 31, 1993 1992 1991 Supplemental cash flow information- Interest paid $22,013,739 $22,659,559 $33,081,506 Federal income taxes paid 6,256,742 5,515,8294,164,214 Schedule of noncash investing and financing activities- Assets acquired through foreclosure 530,950 569,360 1,468,822 <N18>18. SUBSEQUENT EVENT (UNAUDITED): In March 1994, the Company completed a business combination to be accounted for as a pooling of interests with Concho Bankshares, Inc. ("Concho") and its wholly owned subsidiary, Southwest Bank of San Angelo. In connection with the transaction, Concho shareholders exchanged substantially all of their common stock at the rate of one share of Concho common stock for 1.15 shares of the Company's common stock. The following supplemental information presents the effects of the combination of the Company and Concho on the accompanying reported financial position and results of operations as of and for the years ended: 1993 1992 1991 Total assets $1,017,983,000 $ 928,338,000$ 915,308,000 Total equity 96,605,000 87,139,000 78,615,000 Interest income 60,206,000 61,441,000 68,127,000 Net earnings 13,746,000 11,734,000 9,076,000 Earnings per share 3.49 2.96 2.31 FIRST FINANCIAL BANKSHARES, INC. MANAGEMENT'S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The Management of First Financial Bankshares, Inc. is responsible for the preparation, integrity and fair presentation of its annual financial statements as of December 31, 1993, and the year then ended. The financial statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on judgments and estimates made by management. Management has also prepared the other information included in this Annual Report and is responsible for its accuracy and consistency with the financial statements. The annual financial statements referred to above have been audited by Arthur Andersen & Co., 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 & Co. during the audit were valid and appropriate. Kenneth T. Murphy Curtis R. Harvey Chairman of the Board Executive Vice President and Chief Executive Officer and Chief Financial Officer ARTHUR ANDERSEN & CO. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of First Financial Bankshares, Inc.: We have audited the accompanying consolidated balance sheets of First Financial Bankshares, Inc., formerly First Abilene Bankshares, Inc. (a Texas corporation), and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Note 1 to the consolidated financial statements, effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and changed its method of accounting for income taxes. 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, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Arthur Andersen & Co. Dallas, Texas, January 12, 1994 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III Item 10. Directors and Executive Officers of the Registrant a.) Election of Directors A Board of Directors is to be elected at the annual meeting. Each Director elected will hold office until the next annual meeting of the shareholders and until his or her successor shall be elected and qualified. Under the Bylaws of the Company, an individual may not stand for election or reelection as Director upon attainment of 72 years of age unless such individual owns at least 1% of the outstanding shares of the Company and is less than 75 years of age. While Bylaws of the Company fix the number of Directors at a number not less than three nor more than thirty, fifteen nominees are named and proposed by management. The reason that the number of Directors authorized exceeds the number of nominees is to avoid the necessity of amending the Bylaws of the Company each time that it would appear to be to the advantage of the Company to increase the number of its Directors. The proxies accompanying the proxy statement mailed to shareholders cannot be voted by the proxy committee for a greater number of persons than the number of nominees named. Other Directors could be elected after nominations from the floor at the annual meeting if such nominees each receive a majority vote of the shareholders. Although the management of the Company does not contemplate that any of the nominees will be unable to serve, if such a situation arises prior to the annual meeting, the proxy committee will vote in accordance with its best judgment. During the last full year, four regular quarterly meetings of the Board of Directors were called and held. All directors were able to attend at least 75% of the aggregate of the meetings of the Board of Directors and the meetings held by all committees of the Board on which they served. Directors who are not officers of the Company receive $800 for each Board meeting attended. First Financial Bankshares, Inc. does not have a standing nominating or compensation committee of the Board of Directors. The Company has a standing Executive Committee whose responsibilities include functioning as a compensation committee and a nominating committee with appropriate recommendations to the entire Board. The Executive Committee met nine times during 1993 and, among other items, considered and took action on matters relating to its capacity as Compensation and/or Nominating Committee. In its capacity as Nominating Committee, the Executive Committee will consider director nominations from security holders. There are no prescribed procedures which the security holder must follow. The Company has a Directors' Audit Committee which has the responsibility of acting on behalf of the Board in receiving and reviewing both internal and external audit reports. During 1993 the Audit Committee met two times. The Company also has an Administrative Committee for the Profit Sharing, Pension and Flexible Spending Account Benefit Plans. Pursuant to the 1992 Incentive Stock Option Plan for Key Employees of First Financial Bankshares, Inc. and its Subsidiaries, the Board of Directors has also appointed a Stock Option Committee composed of five members. Directors who are not officers of the Company receive $400 for each committee meeting attended. b.) Executive Officers Term of Years Served Principal Occupation Name Age Office Office In Such Office During Past 5 Years Kenneth T. Murphy 56 Chairman, 1 year 7 years Chairman, President and Chief President and Executive Officer; Chairman, Chief Executive First National Bank of Abilene, Officer Abilene, Texas*<A1> Curtis R. Harvey 48 ExecutiveVice 1 year 3 years Executive Vice President and President and Chief Financial Officer since Chief Financial December 1, 1990; Officer Executive Vice President, Bank One, Texas, N.A. <A1>*The bank shown is a subsidiary of the Company. c.) Compliance with Section 16(a) of the Exchange Act During 1993 only one person subject to the reporting requirements of Section 16(a) of the Exchange Act failed to file or timely file reports required in connection therewith. Dian Owen was elected as a Director of the Company at the annual meeting held in April of 1993 and a Form 3 (Initial Statement of Beneficial Ownership of Securities) was filed at that time. However, the original Form 3 inadvertently omitted certain shares of the Company's stock owned by Ms. in street name. In addition, Ms. Owen either was not aware of, or simply overlooked, her responsibility to report acquisition by her of share of the Company's stock during the six-month period preceding her election and during the remainder of the Company's fiscal year following her election. A Form 5 was filed by Dian Owen on January 26, 1994 covering Ms. Owen's ownership and acquisitions of the Company's stock which should have been previously reported by her. The names and principal occupations of Registrant's Directors, together with the length of service as a Director are as follows: Years as Principal Occupation Name Age Office Director (1) During Last Five Years J. Allen Baird 71 Director 30 Chairman, Mrs Baird's Bakeries, Inc. since December 16, 1992; President, Mrs. Baird's Bakeries, Inc. F. Scott Dueser (2) 40 Director 3 President and Chief Executive Officer, First National Bank of Abilene, Abilene, Texas*<A1>,since May 18, 1993; President, First National Bank of Abilene, Abilene, Texas*<A1>,January 15,1991,to May 18, 1993; Executive Vice President, First National Bank of Abilene, Abilene, Texas*<A1> Patrick N. Gerald 54 Director 13 Chairman and President, First National Bank, Sweetwater, Sweetwater,Texas*<A1> Robert E. Hitt 69 Director 21 Investments <B2>(2)<B3>(3) <B4>(4)<B5>(5) Ralph N. Hooks <B2>(2)<B3>(3) 74 Director 38 Chairman, Lydick-Hooks Roofing Company Joe B. Matthews (5) 49 Director 6 Geologist Raymond A. McDaniel, 60 Director 2 McDaniel & Associates Jr.<B3>(3) Bynum Miers<B5>(5) 57 Director 2 Ranching and Investments Kenneth T. Murphy (2) 56 Chairman, 22 See "Executive Officers" on Page 6 President and Chief Executive Officer, Director Dian Graves Owen 54 Director 1 Chairman, Owen Healthcare, Inc. James M. Parker 63 Director 21 President, Parker Properties, Inc. <B2>(2)<B3>(3)<B4>(4) W.V. Ramsey, Jr.,M.D. 66 Director 23 Chairman, Abilene Aero, Inc. since <B2>(2)<B3>(3)<B4>(4) July 1, 1991; Radiology Associates Craig Smith 51 Director 4 Chairman and President, Hereford State Bank, Hereford, Texas*<A1> H.T. Wilson<B2>(2) <B5>(5) 66 Director 11 Chairman, Eastland National Bank, Eastland, Texas*<A1> Stanley P. Wilson <B5>(5) 71 Director 23 Retired Executive Vice President and General Counsel, Central and South West Corporation <B1>(1) The years indicated are the approximate number of years each person has continuously served as Director of the Company, or, prior thereto, of First National Bank of Abilene, which became a wholly-owned subsidiary of the Company in April, 1973, when all the then Directors of First National Bank of Abilene became Directors of the Company. <B2>(2) This Director/Nominee is a member of the Executive Committee. <B3>(3) This Director/Nominee is a member of the Stock Option Committee. <B4>(4) This Director/Nominee is a member of the Administrative Committee of the Company Profit Sharing and Pension Plan. <B5>(5) This Director/Nominee is a member of the Directors' Audit Committee. Item 11. Director and Officer Compensation a.) Directors who are not officers of the Company receive $800 for each Board meeting attended and $400 for each committee meeting attended. b.) Officer Compensation The following table provides individual compensation information on the Chief Executive Officer and the four most highly compensated officers of the Company and its subsidiaries. SUMMARY COMPENSATION TABLE Long Term Annual Compensation Compensation Awards Number of All Other Securities Compen- Underlying sation Name and Principal Position Year Salary($)Options(#)(1)<C1>($)(2)<c2> Kenneth T. Murphy, Chairman, 1993 $ 257,0003,000 $ 26,516 President & CEO-First Financial 1992 237,000 - 27,650 Bankshares, Inc. 1991 217,750 4,950 22,981 F. Scott Dueser, President & CEO 1993 151,250 2,000 18,382 First National Bank of Abilene 1992 130,000 - 16,305 1991 114,167 3,300 12,415 Patrick N. Gerald, Chairman and 1993 132,000 1,000 14,031 President & CEO-First National Bank, 1992 125,000 - 13,702 Sweetwater 1991 121,000 1,650 11,713 Craig Smith, Chairman and President 1993 124,500 1,000 15,299 & CEO-Hereford State Bank 1992 117,500 - 15,905 1991 110,000 2,475 13,745 Curtis R. Harvey, Executive Vice Pres- 1993 117,000 1,000 13,050 ident & CFO-First Financial Bankshares, 1992 110,000 - 13,024 Inc. 1991 105,000 2,475 10,852 <C1>(1) Adjusted for stock splits and stock dividends. <C2>(2) The Company's contribution to Profit Sharing Plan. The following table contains information concerning options granted during the past fiscal year under the Company's Incentive Stock Option Plan to the Company's Chief Executive Officer and four other most highly compensated Executive Officers. Option Grants in Last Fiscal Year Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term Number of % of Total SecuritiesOptions Underlying Granted toExercise Options Employees or Base Granted in Fiscal Price Expiration Name <D1>(#)(1) Year ($/Sh) Date 5% ($) 10% ($) Kenneth T. Murphy 3,000 11.70%$ 40.00 06/29/03 $ 70,581 $ 183,468 F. Scott Dueser 2,000 7.80 40.00 06/29/03 47,054 122,312 Patrick N. Gerald 1,000 3.90 40.00 06/29/03 23,527 61,156 Craig Smith 1,000 3.90 40.00 06/29/03 23,527 61,156 Curtis R. Harvey 1,000 3.90 40.00 06/29/03 23,527 61,156 <D1>(1) Granted under Incentive Stock Option Plan. The following table contains information concerning each exercise of stock options during the last fiscal year by each of the persons named below and the fiscal year-end value of unexercised options. Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values Number of Securities Value of Underlying Unexercised Number of Unexercised In-the-Money Securities Options at FY- Options at Underlying End<E1>(#)(1) FY-End ($) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise (#) Realized ($) UnexercisableUnexercisable Kenneth T. Murphy 4,343$ 113,536 7,797 213,248 9,683 170,485 F. Scott Dueser 2,723 77,611 660 15,391 5,729 100,869 Patrick N. Gerald - - 2,617 71,575 3,954 69,617 Craig Smith 1,851 50,921 495 11,543 4,614 81,237 Curtis R. Harvey 495 11,296 - - 2,980 36,982 (1) Adjusted for stock splits and stock dividends Pension Plan The Company's Pension Plan requires annual contributions sufficient to provide the pension benefits accruing to employees under the Plan. The annual benefit for a participant in the Pension Plan who retires on his normal retirement date is the Accrued Benefit at December 31, 1988, plus 1.25% of average compensation multiplied by years of service from January 1, 1989. "Average Compensation" is the average compensation during the 10 years immediately preceding the date of determination. Compensation means the total amount paid to an employee during the year including bonuses, commissions, and overtime pay, but excluding reimbursed expenses, director fees, group insurance benefits and pension and profit sharing contributions. There are provisions in the Plan for early retirement with reduced benefits. There is no vesting of Plan benefits until a participant has 5 or more years of credited service with participating employers. Full (100%) vesting occurs upon the completion of 5 years of credited service or upon reaching age 65 without regard to credited service. The following table illustrates estimated retirement benefits under the Company Pension Plan for persons in specified remuneration and years of service categories and which benefits are payable annually for life with 10 years certain. The benefits listed in the table are not subject to any deduction for social security or other offset amounts. This illustration does not reflect any benefit which a participant may have accrued at December 31, 1988. PENSION PLAN TABLE Years of Service Remuneration 15 20 25 30 35 $ 25,000 $ 4,688 $ 6,250 $ 7,813 $ 9,375 $ 10,938 50,000 9,375 12,500 15,625 18,750 21,875 75,000 14,063 18,750 23,438 28,125 32,813 100,000 18,750 25,000 31,250 37,500 43,750 125,000 23,438 31,250 39,063 46,875 54,688 150,000 28,125 37,500 46,875 56,250 65,625 200,000 37,500 50,000 62,500 75,000 87,500 250,000 46,875 62,500 78,125 93,750 109,375 The maximum annual pension benefit payable allowable under current law is $112,221. As of December 31, 1993, Mr. Murphy was credited with 23 years of service under the Company Pension Plan, Mr. Gerald was credited with 18 years of service, Mr. Smith was credited with 24 years of service, Mr. Dueser was credited with 17 years of service, and Mr. Harvey was credited with 3 years of service. The covered compensation of each of these officers and directors during 1993 was $235,840, $132,966, $124,500, $152,482, and $118,810, respectively. In 1992 the Board of Directors approved a deferred compensation agreement between First Financial Bankshares, Inc. and Kenneth T. Murphy, Chairman, President and Chief Executive Officer. The agreement was made in recognition of his contribution to the success of the Company and as an inducement to remain, subject to the discretion of the Board of Directors, in the emloy of the Company. The agreement provides that following retirement in December 2002, or such later date as may be mutually agreed upon by the parties, the Company will pay Mr. Murphy, or his beneficiary, the sum of $6,250 per month for a period of 84 months. The monthly amount is considered to be an appropriate level of supplemental income to partially offset Mr. Murphy's reduction in personal income following retirement and is based on an analysis of the difference in projected final year compensation and retirement compensation. The agreement also provides for 70% vesting at age 62, 80% vesting at age 63, and 90% vesting at age 64. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No person who served as a member of the Executive Committee in its capacity as Compensation Committee was, during the past fiscal year, an officer or employee of the Company or any of its subsidiaries, or had any relationship requiring disclosure except for Mr. Tom Wilson who is a former subsidiary bank officer. However, committee members Ralph Hooks, James Parker, and Dr. Wayne Ramsey, Jr. did obtain loans from a subsidiary bank during the past year. In each case, such loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. No executive officer of the Company served as a member of the Compensation Committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company. EXECUTIVE COMMITTEE REPORT ON EXECUTIVE COMPENSATION During the past fiscal year the Company's executive compensation program was administered by the Executive Committee acting in the capacity of Compensation Committee. The Company's executive compensation program consists of base salary, profit sharing, and incentive stock options. With the exception of the Chief Executive Officer, the base salaries for the executive officers named on page 6 of this Notice are reviewed in December of each year with adjustments made effective January 1. Included among the factors which the Committee considers when approving annual base salaries are: attainment of planned goals and objectives, scope of responsibility (asset size of subsidiary bank and/or degree of influence on the Company's profitability and operations), tenure with the Company, evaluation input from subsidiary bank directors, and relationship of base salary to the base salaries of other members of the executive officer group. The base salary for Mr. Murphy was reviewed in March 1993 with an adjustment made effective April 1, 1993. The increase was based on the following factors: - - The Company's financial performance for 1992 which reflected a 27% increase in net income. - - Performance of Chief Executive Officer's duties which relate primarily to leading and -managing the Company within the broad guidelines set by the Board of Directors. - - Successful negotiation and completion of acquisition transaction. - - Base salary compared to Wyatt Data Services compensation survey data for chief executive officers of similar size organizations within the industry. - - Subjective evaluations of Mr. Murphy's contribution to the overall success of the Company. Stock options are granted under the Incentive Stock Option Plan upon recommendation of the Stock Option Committee of the Board of Directors. The Executive Committee believes that the Stock Option Plan is an integral part of the executive compensation program which encourages key employees to align their long-range interest with those of shareholders by accomplishing longer-term corporate goals. When granting options to all named executive officers for 1993, the Committee evaluated the total number of shares available, the number of unexercised options held by the individual, Company's and individual's performance, and the individual's level of responsibility. The following line graph compares cumulative total shareholder return with a performance indication of the overall stock market, the S&P 500 Stock Index, and a nationally-recognized banking industry index, the Keefe, Bruyette and Woods, Inc. (KBW) 50 Total Return Index, which is comprised of fifty of the nation's top banking companies. The required graphical presentation has been filed under separate cover of Form SE. Robert E. Hitt W.V. Ramsey, Jr., M.D. Ralph N. Hooks H.T. Wilson James Parker Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of certain beneficial owners. There is no person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is known to the Registrant to be the beneficial owner of more than five percent of any class of the Registrant's voting securities. However, as of December 31, 1993, First Abilene and First Sweetwater held of record in various fiduciary capacities an aggregate of 803,156 shares, or 21.4% of the Company's issued and outstanding common stock. These subsidiaries of the Company had sole power to vote 386,275 shares and 64,548 shares, respectively. First Abilene also shared with other persons, the power to vote the remaining 352,423 shares. All of the shares held by each subsidiary Bank which are registered in its name as fiduciary, or in the name of its nominee, are owned by many different accounts, each of which is governed by a separate instrument which sets forth the powers of the fiduciary with regard to the securities held in such account. b.) Security ownership of management Set forth in the following table is certain information as of December 31, 1993 as to the number of shares of Common Stock beneficially owned by each director of the Company, by each nominee for election as a director, by the Company's chief executive officer and its four other most highly compensated executive officers, and by the officers and directors of the Company as a group. Number of Shares Beneficially Percent Name Owned of Class J. Allen Baird 7,344 0.2 F. Scott Dueser 19,733 0.5 Patrick N. Gerald 12,401 0.3 Robert E. Hitt 41,439 1.1 Ralph N. Hooks 78,255 2.0 Joe B. Matthews 1,131 - Raymond McDaniel, Jr. 11,757 0.3 Bynum Miers 10,575 0.3 Kenneth T. Murphy 37,871 1.0 Dian Graves Owen 9,938 0.3 James M. Parker 158,777 4.0 W. V. Ramsey, Jr., M.D. 85,000 2.3 Craig Smith 18,221 0.5 H. T. Wilson 41,349 1.0 Stanley P. Wilson 7,101 0.2 Curtis R. Harvey 660 - All Officers and Directors as a group 546,167 13.8 c.) Changes in control There have been no events to the Registrant's knowledge which have or will result in a change of control of the Registrant. PART IV Item 13. Certain Relationships and Related Transactions Certain of Registrant's officers and directors are customers of one or more of Registrant's subsidiary banks, as are corporations and other business entities with which directors of Bankshares are affiliated as directors, officers or principals. All loans to directors and officers of Bankshares, or to persons and firms with which they are or may be affiliated, were and are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not, and do not, involve more than the normal risk of collectibility or present other unfavorable features. None of the transactions involving Bankshares' subsidiaries and Bankshares' officers and directors, or other businesses with which they may be affiliated, have been classified or disclosed as nonaccrual, past due, restructured or potential problems. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The consolidated financial statements of the Registrant filed with this report are included on pages 33 through 51. There were no financial statement schedules filed as a part of this report. Such information, to the extent applicable, has been made a part of the consolidated financial statements or included elsewhere in this report. An 8-K Current Report was filed during the fourth quarter of 1993 with regard to the Stock Exchange Agreement between the Registrant Concho Bancshares, Inc., and Southwest Bank of San Angelo. An 8-K Current Report was filed during the fourth quarter of 1993 with regard to Articles of Amendment to the Articles of Incorporation adopted at a Special Meeting of the Shareholders held October 26, 1993. An 8-K Current Report was filed during the fourth quarter of 1993 with regard to the branch acquisition by a subsidiary of the Registrant (First National Bank in Cleburne). The Registrant's Articles of Incorporation and Bylaws and material contracts have been filed with the Securities and Exchange Commission in "Exhibits to Form S-15" under Registration No. 2- 73141. Copies of the following documents were filed with the Form 10-K Annual Report for the fiscal year ended December 31, 1984. 1. Joint Venture Agreement between First National Bank of Abilene and Grow-Griffin #1. 2. Lease Agreement between First National Bank of Abilene and Crow/First Joint Venture. 3. Deferred Compensation Agreement between Bankshares and Walter F. Johnson. The following documents were filed with the Form 10-K Annual Report for the fiscal year ended December 31, 1988. 1. Articles of Amendment to the Articles of Incorporation adopted at the 1988 Annual Meeting of Shareholders. 2. Restated Bylaws adopted by the Board of Directors on January 24, 1989. The following documents were filed with the Form 10-K Annual Report for the fiscal year ended December 31, 1992. 1. Amendment to Registrant's Bylaws effective January 28, 1992, relative to emeritus directors. 2. Deferred Compensation Agreement between Bankshares and Kenneth T. Murphy, Chairman of the Board, Chief Executive Officer and President of the Registrant. Listed below are all of the financial reports, schedules and exhibits filed with this report: See Exhibit 1. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST FINANCIAL BANKSHARES, INC. (Registrant) By: /S/ KENNETH T. MURPHY By: /S/ CURTIS R. HARVEY KENNETH T. MURPHY, Chairman CURTIS R. HARVEY, Executive of the Board, President, Vice President, Chief Financial Chief Executive Officer and Officer, Controller and Chief Director Accounting Officer Date: March 25 , 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE Director March , 1994 J. Allen Baird /S/ F. SCOTT DUESER Director March 8 , 1994 F. Scott Dueser Director March 8 , 1994 Patrick N. Gerald /S/ ROBERT E. HITT Director March 15 , 1994 Robert E. Hitt /S/ RALPH N. HOOKS Director March 29 , 1994 Ralph N. Hooks /S/ JOE B. MATTHEWS Director March 15 , 1994 Joe B. Matthews /S/ RAYMOND A. McDANIEL, JR. Director March 9 , 1994 Raymond A. McDaniel, Jr. /S/ BYNUM MIERS Director March 9 , 1994 Bynum Miers Director March , 1994 Dian Graves Owen /S/ JAMES M. PARKER Director March 9 , 1994 James M. Parker /S/ W.V. RAMSEY, JR., M.D. Director March 9 , 1994 W.V. Ramsey, Jr., M.D. Director March , 1994 Craig Smith /S/ H.T. WILSON Director March 15 , 1994 H.T. Wilson /S/ STANLEY P. WILSON Director March 15 , 1994 Stanley P. Wilson