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, 1996 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) 627-7155
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 $226,488,945 as of February 11, 1997.
The number of shares of common stock outstanding at February 11, 1997,
was 6,721,206.
Documents Incorporated by Reference
Portions of the Notice to Shareholders for the April 22, 1997, Annual
Meeting are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
Item Page
PART I
1. Business.........................................................1
2. Properties......................................................13
3. Legal Proceedings...............................................15
4. Submission of Matters to a Vote of Security Holders.............15
PART II
5. Market for Registrant's Common Stock and Related
Security Holder Matters........................................15
6. Selected Financial Data.........................................16
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations...............17
8. Financial Statements and Supplementary Data.....................27
9. Changes in and Disagreements with
Accountants and Financial Disclosure...........................51
PART III
10. Directors and Executive Officers of the Registrant..............51
11. Executive Officer Compensation..................................51
12. Security Ownership of Certain Beneficial
Owners and Management..........................................51
13. Certain Relationships and Related Transactions..................52
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8K.........................................52
Signatures
PART I
Item 1.Business
A. Organization and General Development of Business
First Financial Bankshares, Inc. (the "Registrant", "Bankshares",
or "Company"), is a Texas corporation duly registered as a multibank holding
company under the Bank Holding Company Act of 1956, as amended. On December 31,
1996 Bankshares owned (through its wholly-owned Delaware subsidiary) all of the
capital stock of eight 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"); Stephenville Bank & Trust Co.,
Stephenville, Texas ("Stephenville"); Southwest Bank of San Angelo, San Angelo,
Texas ("San Angelo"); and Weatherford National Bank, Weatherford, Texas
("Weatherford National").
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 multibank 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 (the "1933 Act") 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 1933 Act)
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 ("OCC"), the Federal Reserve Board, the Federal Deposit
Insurance Corporation ("FDIC") 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 ("First Tule"), 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 ("FNB Tulia"). 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 stock was effected under an exemption for acquisitions of voting
securities in satisfaction of debt previously contracted. The shares of First
Tule 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. Since the date it acquired the stock, Hereford attempted to sell
or otherwise dispose of the stock, but was unable to do so because of pending
litigation against FNB Tulia. Full disclosure of the acquisition by Hereford of
the First Tule 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 stock within five (5) years
after having acquired the same, but had not been able to do so. While Hereford
was in technical violation of the Act and Regulation Y, such circumstance
existed with the knowledge and apparent acquiescence of federal and state
banking authorities and neither Registrant nor Hereford had any reason to
believe that any adverse action would be taken against Hereford or Registrant by
reason of Hereford's continued ownership of the shares of First Tule so long as
Hereford, in good faith, continued its efforts to liquidate or dispose of such
shares. Neither First Tule nor FNB Tulia was deemed or considered to be a
subsidiary of the Registrant. By reason of the settlement or other disposition
of the remaining lawsuits against FNB Tulia, as well as the efforts of the
remaining shareholders of First Tule to find a purchaser for their shares or
those of FNB Tulia, First Tule consummated in June 1995, a Merger and Plan of
Reorganization Agreement with Norwest Corporation which resulted in the shares
of First Tule held by Hereford being exchanged for $1,652,741 cash.
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 First Cleburne 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
would be provided on, or adjacent to, the premises and banking offices of
Bankshares' subsidiary banks. It was anticipated at that time 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. While it still may at some future date provide securities brokerage
services through FFI, Bankshares has notified the Federal Reserve that its plans
to offer brokerage services through a separate subsidiary have been delayed. At
December 31, 1996, four of Bankshares' subsidiary banks (First Abilene, First
Cleburne, San Angelo, and Weatherford National) were providing brokerage
services through third party brokerage firms.
Effective February 25, 1993, the Delaware BHC, using funds provided
by Bankshares, acquired all of the outstanding capital stock of Stephenville for
$7,750,000 in cash. The acquisition was effected through a Stock Purchase and
Sale Agreement between Bankshares, Stephenville and two individuals (the
"Principal Shareholders") owning a majority of the Stephenville stock and a cash
tender offer to the remaining shareholders of Stephenville.
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.
Effective March 10, 1994, pursuant to a certain Stock Exchange
Agreement and Plan of Reorganization dated December 7, 1993, Bankshares acquired
190,622 shares (98.22%) of the issued and outstanding shares of Concho
Bancshares, Inc. ("Concho"), a Texas corporation and bank holding company, which
owned all of the capital stock of San Angelo, a Texas state bank located in the
City of San Angelo, Tom Green County, Texas. San Angelo owned all of the issued
and outstanding capital stock of SWB Investment Centre, Inc. ("SWB"), a Texas
corporation providing securities brokerage services. The shares of Concho common
stock acquired by Bankshares were contributed by Bankshares to the capital of
the Delaware BHC and effective May 1, 1994, pursuant to the corporation laws of
the States of Delaware and Texas, Concho was merged with and into the Delaware
BHC so that San Angelo became a subsidiary of the Delaware BHC. As part of the
merger of the Delaware BHC and Concho, minority shareholders of Concho tendered
an additional 2,649 shares of Concho common stock in exchange for shares of
Bankshares' common stock and cash. In connection with the acquisition of Concho
by Bankshares and the subsequent merger of Concho with and into the Delaware
BHC, Bankshares issued 232,080 shares of its common stock and paid $44,531 in
cash in lieu of issuing fractional shares of Bankshares' common stock.
Effective January 17, 1996, pursuant to a Stock Purchase and Sale
Agreement dated September 7, 1995, Bankshares acquired for $6,394,800 cash all
of the stock of Citizens Equity Corp. ("Citizens Equity"), a Texas corporation
and bank holding company which owned substantially all of the stock of Citizens
National Bank of Weatherford ("Citizens National"), a national bank located in
Weatherford, Texas. Also, effective January 17, 1996, Bankshares acquired for
$1,147,861 cash substantially all of the minority shares of Citizens National.
Simultaneously, Bankshares caused Citizens Equity to redeem all of its preferred
stock so that Bankshares owned 100% of the issued and outstanding shares of the
capital stock of Citizens Equity. Effective March 31, 1996, pursuant to the
corporation laws of the State of Texas, Citizens Equity was merged with and into
Bankshares. Upon completion of the merger the common stock of Citizens National
was contributed by Bankshares to the capital of the Delaware BHC.
Effective January 17, 1996, pursuant to a Stock Exchange Agreement
and Plan of Reorganization dated October 20, 1995, Bankshares acquired 100% of
the issued and outstanding capital stock of Weatherford National Bancshares,
Inc. ("Weatherford Bancshares"), a Texas corporation and bank holding company
which owned all of the capital stock of Parker Bancshares, Inc. ("Parker
Bancshares"), a Delaware corporation which owned all of the stock of Weatherford
National, a national bank located in Weatherford, Texas. In exchange for the
stock of Weatherford Bancshares, Bankshares issued 323,977 shares of common
stock. Effective March 31, 1996, pursuant to the corporation laws of the State
of Texas, Weatherford Bancshares was merged with and into Bankshares. Also
effective March 31, 1996, pursuant to the corporation laws of the states of
Texas and Delaware, Parker Bancshares was merged with and into the Delaware BHC.
Effective April 1, 1996, pursuant to the approval of the OCC,
Citizens National was merged with and into Weatherford National with the
resulting entity operating under the name of Weatherford National Bank.
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 identity. 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.
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. 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. First Abilene and San Angelo
provide securities brokerage services through an arrangement with Link
Investment Services, Inc.
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
therefor. 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.
Bankshares' 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. Loans to directors, officers and their affiliates are also
subject to certain restrictions under federal and state banking laws.
E. Employees
Bankshares and its subsidiaries employed approximately 583
full-time employees at February 1, 1997. 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 (the "Act"), as amended, and it is registered as
such with the Federal Reserve Board. Under the Act, Bankshares is subject to the
reporting requirements of, and to supervision and examination by, the Federal
Reserve Board and Bankshares is required to file with the Federal Reserve Board
an Annual Report and to provide such additional information as the Federal
Reserve Board may require. The Federal Reserve Board may also make examinations
of Bankshares and its subsidiaries or "affiliates."
Under the Act, bank holding companies may not (with certain limited
exceptions) directly or indirectly acquire ownership or control of more than
five percent (5%) of any class of voting shares or substantially all of the
assets of any company, including a bank, without the prior written approval of
the Federal Reserve Board. In addition, bank holding companies are generally
prohibited under the Act from engaging in non-banking activities, except certain
activities which the Federal Reserve Board, by regulation, determines to be
closely related to banking, or to managing or controlling banks. Examples of
activities which the Federal Reserve Board has determined to be closely related
to banking, or to managing or controlling banks, include (1) the making or
acquiring of loans or other extensions of credit; (2) servicing of loans; (3)
performing certain trust functions; (4) providing bookkeeping and data
processing services for a bank holding company and its subsidiaries; (5)
providing certain securities brokerage services; and (6) acting or serving as an
investment or financial advisor.
The Act provides that the Federal Reserve Board shall not approve
any acquisition, merger or consolidation the effect of which may be to
substantially lessen competition in the banking industry, which would tend to
create a monopoly in any section of the country, or which in any other manner
would be a restraint of trade, unless the anti-competitive effects of the
proposed combination are clearly outweighed by the convenience and needs of the
community to be served. In approving acquisitions by bank holding companies of
banks and companies engaged in banking-related activities, the Federal Reserve
Board considers, among other factors, the expected benefits to the public
(greater convenience, increased competition, greater efficiency, etc.) against
the risks of possible adverse effects (undue concentration of resources,
decreased or unfair competition, conflicts of interest, unsound banking
practices, etc.).
First Abilene, First Sweetwater, First Cleburne, Eastland and
Weatherford National are all chartered under the National Bank Act and are
subject to supervision and regulation, as well as regular examination, by the
OCC. Hereford, Stephenville and San Angelo were all chartered under the Texas
Banking Code (which, effective September 1, 1995, was replaced by the
newly-adopted Texas Banking Act) and are similarly supervised, regulated and
examined by the Banking Commissioner of the State of Texas. Supervision and
regulation of banks by federal and state banking authorities is primarily
intended to protect the interests of depositors, although shareholders are
likewise benefited. Various requirements and restrictions under the laws of the
United States and the State of Texas affect the operations of each subsidiary
bank, including the requirement to maintain reserves against deposits,
restrictions on the nature and amount of loans which may be made and the
interest that may be charged thereon, and restrictions relating to investments
and other activities.
First Abilene, Hereford, First Sweetwater, First Cleburne,
Eastland, Stephenville, San Angelo and Weatherford National are members of the
FDIC. The Federal Deposit Insurance Act requires that the FDIC approve any
merger or consolidation by or with an insured bank, or any establishment of
branches by an insured bank, and it is also empowered to regulate interest rates
paid by insured banks. Approval of the FDIC is also required before an insured
bank retires any part of its common or preferred stock, or any capital notes or
debentures. Insured banks which are also members of the Federal Reserve System,
however, are regulated with respect to the foregoing matters by the Federal
Reserve System.
All of Bankshares' subsidiary banks must pay assessments to the
FDIC for federal deposit insurance protection under a risk-based assessment
system. FDIC-insured depository institutions that are members of the Bank
Insurance Fund pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher risk classifications (i.e.,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
bank regulators. In addition, the FDIC can impose special assessments to cover
the costs of borrowings from the U. S. Treasury, the Federal Financing Bank and
the Bank Insurance Fund member banks. As of December 31, 1996, the assessment
rate for each of Bankshares' subsidiary banks is at the lowest level risk-based
premium available.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking agencies to take "prompt corrective action"
in respect to depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well-capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." As a depository institution's capital tier
will depend upon where its capital levels are in relation to various relevant
capital measures, which will include a risk-based capital measure, a leverage
ratio capital measure and certain other factors. Regulations establishing the
specific capital tiers provide that a well-capitalized institution must have a
total risk-based capital ratio of at least ten percent (10%), a Tier 1
risk-based capital ratio of at least six percent (6%), and a Tier 1 leverage
ratio of at least five percent (5%), and not be subject to any specific capital
order or directive. For an institution to be adequately capitalized, it must
have a total risk-based capital ratio of at least eight percent (8%), a Tier 1
risk-based capital ratio of at least four percent (4%), and a leverage ratio of
at least four percent (4%) [in some cases three percent (3%)].
Under current regulations, Bankshares' subsidiary banks would be considered to
be well capitalized as of December 31, 1996.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. An "undercapitalized institution" must develop a capital
restoration plan and its parent holding company must guarantee that bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of five percent (5%) of the bank's
assets at the time it became "undercapitalized" or the amount needed to comply
with the plan. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parent's general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive compensation
and permits regulatory action against a financial institution that does not meet
such standards.
Banking agencies have recently adopted final regulations which
mandate that regulators take into consideration concentrations of credit risk
and risks from non-traditional activities, as well as an institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. This evaluation will be made as a part of the institution's regular
safety and soundness examination. Banking agencies also have recently adopted
final regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, these banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
Capital
The Federal Reserve Board has adopted risk-based capital guidelines
for bank holding companies. The minimum guidelines for the ratio of total
capital ("Total Capital") to risk weighted assets (including certain
off-balance-sheet activities, such as standby letters of credit) is eight
percent (8%). At least half of the Total Capital is to be composed of common
shareholders' equity, minority interests in the equity accounts of consolidated
subsidiaries and a limited amount of perpetual preferred stock, less goodwill
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock and a limited amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum
leverage ratio guidelines for bank holding companies. These guidelines provide
for a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average assets
for current quarter, less goodwill) of three percent (3%) for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a minimum Tier 1 Capital leverage ratio of three percent (3%) plus
an additional cushion of 100 to 200 basis points. The Federal Reserve Board has
not advised Bankshares of any specific minimum Tier 1 Capital leverage ratio
applicable to it. The guidelines also provide that bank holding companies
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels
without significant reliance on intangible assets (e.g., goodwill, core deposit
intangibles and purchased mortgage servicing rights). As of December 31, 1996,
the capital ratios for Bankshares were as follows: (1) Tier 1 Capital to
Risk-Weighted Assets Ratio, 18.90%; (2) Total Capital to Risk-Weighted Assets
Ratio, 20.15%; and (3) Tier 1 Capital Leverage Ratio, 10.40%.
In addition to the Federal Reserve Board capital standards,
Texas-chartered banks must also comply with the capital requirements imposed by
the Texas Banking Department. Although neither the Texas Banking Act nor the
regulations promulgated thereunder specify any minimum capital-to-assets ratio
that must be maintained by a Texas-chartered bank, the Texas Banking Department
has a policy that
generally requires Texas-chartered banks to maintain a minimum
six percent (6%) ratio of stockholders equity (stated capital, surplus capital,
surplus and undivided profits or retained earnings) to total assets. As of
December 31, 1996, all Texas-chartered banks owned by Bankshares exceeded the
minimum ratio.
Failure to meet capital guidelines may subject an insured bank to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC and a prohibition on the taking of brokered deposits, and bank
regulators continue to indicate their desire to raise capital requirements
applicable to banking organizations beyond their current levels.
Bankshares Support of Subsidiary Banks
Under Federal Reserve Board policy, Bankshares is expected to act
as a source of financial strength to each of its subsidiary banks and to commit
resources to support each of such subsidiaries. This support may be required at
times when, absent such Federal Reserve Board policy, Bankshares would not
otherwise be required to provide it.
Under the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989, in connection with (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to any commonly controlled FDIC-insured depository institution "in
danger of default." "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance.
Under the National Bank Act, if the capital stock of a national
bank is impaired by losses or otherwise, the OCC is authorized to require
payment of the deficiency by assessment upon the bank's shareholders, pro rata,
and to the extent necessary, if any such assessment is not paid by any
shareholder after three (3) months' notice, to sell the stock of such
shareholder to make good the deficiency.
Certain Transactions by Bankshares with its Affiliates
There are also various legal restrictions on the extent to which
Bankshares can borrow or otherwise obtain credit from, or engage in certain
other transactions with, its depository subsidiaries. The "covered transactions"
that an insured depository institution and its subsidiaries are permitted to
engage in with their nondepository affiliates are limited to the following
amounts: (i) in the case of any one such affiliate, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed ten percent (10%) of the capital stock and the surplus of the
insured depository institution; and (ii) in the case of all affiliates, the
aggregate amount of covered transactions of the insured depository institution
and its subsidiaries cannot exceed twenty percent (20%) of the capital stock and
surplus of the insured depository institution. In addition, extensions of credit
that constitute covered transactions must be collateralized in prescribed
amounts. "Covered transactions" are defined by statute to include a loan or
extension of credit to the affiliate, a purchase of securities issued by an
affiliate, a purchase of assets from the affiliate (unless otherwise exempted by
the Federal Reserve Board), the acceptance of securities issued by the affiliate
as collateral for a loan and the issuance of a guarantee, acceptance, or letter
of credit for the benefit of an affiliate. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
Payment of Dividends
Bankshares is a legal entity separate and distinct from its banking
and other subsidiaries. Most of Bankshares' revenues result from dividends paid
to it by its Delaware holding company subsidiary, which receives dividends from
its bank subsidiaries. There are both federal and state statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by Bankshares to its shareholders.
Each state bank subsidiary that is a member of the Federal Reserve
System and each national banking association is required by federal law to
obtain the prior approval of the Federal Reserve Board or the OCC, as the case
may be, for the declaration and payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two (2) years, less any required
transfers to surplus. In addition, these banks may only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation). Effective September 1, 1995, the
Texas Banking Act eliminated the requirement under the predecessor code that,
prior to paying a dividend, a state bank must transfer to "certified surplus" an
amount which is not less than ten percent (10%) of the net profits of such bank
earned since the last dividend was declared; provided, however, that a transfer
was not required to certified surplus of a sum which would increase the
certified surplus to more than the capital of the bank. At December 31, 1996,
under the foregoing dividend restrictions, Bankshares' subsidiary banks, without
obtaining governmental approvals, could have declared aggregate dividends of
approximately $8.6 million from retained net profits. During 1996, Bankshares'
subsidiary banks paid an aggregate of $19.0 million in dividends.
The payment of dividends by Bankshares and its subsidiaries is also
affected by various regulatory requirements and policies, such as the
requirement to maintain adequate capital above regulatory guidelines. In
addition, if, in the opinion of the applicable regulatory authority, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), such authority may require, after notice and
hearing, that such bank cease and desist from such practice. The Federal Reserve
Board and the OCC have each indicated that paying dividends that deplete a
bank's capital base to an inadequate level would be unsafe and unsound banking
practice. The Federal Reserve Board, the OCC and the FDIC have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
Interstate Banking and Branching Act
Pursuant to the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank
holding company is able to acquire banks in states other than its home state.
Prior to September 29, 1995, interstate acquisitions by bank holding companies
were subject to federal law which provided that no application to acquire shares
of a bank located outside of the state in which the operations of the acquiring
bank holding company were principally conducted would be approved by the Federal
Reserve Board unless such acquisition was specifically authorized by the laws of
the state in which the bank whose shares are to be acquired was located.
The Interstate Banking and Branching Act also authorizes banks to
merge across state lines, therefore creating interstate branches, beginning June
1, 1997. Under such legislation, each state has the opportunity to "opt out" of
this provision, thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate branching within that
state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now
able to open new branches in a state in which it does not already have banking
operations, if the laws of such state permit such de novo branching. Texas has
adopted legislation to "opt out" of the interstate branching provisions (which
Texas law currently expires on September 2, 1999).
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
such proposals or bills being enacted and the impact they might have on
Bankshares and its subsidiaries cannot be determined at this time.
G. Statistical Disclosure
Information related to industry segments and foreign operations
required by Regulation S-K is not applicable. The following tables provide
information required by Guide 3, "Statistical Disclosure by Bank Holding
Companies", that has not been included in Part II, Item 7.
Table 1 - Composition of Loans (000's omitted):
December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
Commercial, financial,
and agricultural $ 234,625 $ 213,799 $ 177,587 $ 201,432 $ 193,571
Real estate -construction 22,106 19,046 12,901 7,654 3,961
Real estate - mortgage 135,182 117,332 126,840 122,199 106,688
Consumer 180,987 156,752 129,565 105,540 71,913
---------- ---------- ---------- ---------- ----------
$ 572,900 $ 506,929 $ 446,893 $ 436,825 $ 376,133
========== ========== ========== ========== ==========
Loan Concentrations
At December 31, 1996, the Company had $69.6 million in loans
outstanding to agriculture which represented 12.1% of total loans.
Table 2 - Maturity Distribution and Interest Sensitivity of Loans at December
31, 1996 (000's omitted):
Over One
Year
One Year Through Over Five
or less Five years Years Total
Commercial, financial, and agricultural $ 177,055 $ 49,052 $ 8,518 $ 234,625
Real estate - construction 17,164 4,942 - 22,106
---------- ----------- ----------- ----------
$ 194,219 $ 53,994 $ 8,518 $ 256,731
========= ========== ========= =========
Maturities
After One Year
Loans with fixed interest rates $ 34,446
Loans with floating or adjustable interest rates 28,066
----------------
$ 62,512
================
Potential Problem Loans
Certain loans classified for regulatory purposes as doubtful,
substandard, or special mention are included in the nonperforming loan table.
Also included in the classified loans are certain other loans which are deemed
to be potential problems. Potential problem loans are those loans which are
currently performing but where known information about trends or uncertainties
or possible credit problems of the borrowers causes management to have serious
doubts as to the ability of such borrowers to comply with present repayment
terms, possibly resulting in the transfer of such loans to nonperforming status.
These loans totaled $634,048 at December 31, 1996.
Table 3 - Composition of Investment Securities (000's omitted):
Held-to-maturity at amortized cost December 31,
- ---------------------------------- --------------------------------
1996 1995 1994
---------- ---------- --------
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 364,232 $ 370,368 $ 406,087
Obligations of states and political subdivisions 25,798 22,157 19,756
Mortgage-backed securities 62,509 46,563 33,221
--------- --------- ---------
Total debt securities 452,539 439,088 459,064
Other securities 14,085 12,465 -
--------- --------- -----------
$ 466,624 $ 451,553 $ 459,064
======== ======== ========
Available-for-sale at fair value December 31,
- -------------------------------- -------------------------------
1996 1995 1994
--------- --------- ------
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 10,211 $ 4,870 $ 16,920
Obligations of states and political subdivisions 1,292 - -
Mortgage-backed securities 31,910 16,963 12,665
-------- --------- --------
Total debt securities 43,413 21,833 29,585
Other securities 1,752 7,730 2,301
--------- --------- ---------
$ 45,165 $ 29,563 $ 31,886
======== ======== ========
Table 4 - Maturities and Yields of Investment Securities Held December 31, 1996
(000's omitted):
Maturing
Held-to-maturity After one but After five but
at amortized cost Within one year Within five years Within ten years After ten years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasuries $ 42,193 5.50% $ 63,872 6.30% $ - - % $ - - % $106,065 5.98%
U.S. government Agencies 98,629 5.65 155,085 6.11 4,453 6.92 258,167 5.95
States and political subdivisions 3,262 6.04 10,441 6.68 11,012 7.31 1,083 7.92 25,798 6.92
Other 4,250 5.18 9,804 6.42 31 8.02 - - 14,085 6.06
-------------- -------------- ------------- ------------ -------------
148,334 5.60 239,202 6.20 15,496 7.20 1,083 7.92 404,115 6.02
Mortgage-backed securities 6,179 6.30 40,539 6.16 7,740 6.86 8,051 6.00 62,509 6.24
Totals $154,513 5.63% $ 279,741 6.19% $ 23,236 7.09% $ 9,134 6.23% $466,624 6.05%
======== ==== ======== ==== ======= ==== ====== ==== ======= ====
Maturing
After one but After five but
Available-for-sale at fair value Within one year Within five years Within ten years After ten years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasuries $ 499 6.15% $ - - % $ - - % $ - - % $ 499 6.15%
U.S. government Agencies 5,767 5.70 1,952 6.19 1,646 6.55 347 5.41 9,712 6.23
States and political subdivisions 599 7.42 693 8.08 1,292 7.77
Other - - - - - - 1,752 6.00 1,752 6.00
------------- ------------- ------------- ------------- --------------
6,266 5.73 1,952 6.19 2,245 6.78 2,792 6.44 13,255 6.27
Mortgage-backed securities 622 6.58 17,388 6.27 11,827 6.80 2,073 5.62 31,910 6.54
------------- ------------- ------------- ------------- --------------
Totals $ 6,888 5.81% $ 19,340 6.26% $ 14,072 6.80% $ 4,865 6.09% $ 45,165 6.34%
======= ==== ======= ==== ======= ==== ====== ==== ======= ====
Table 5 - Analysis of the Allowance for Loan Losses (000's omitted):
1996 1995 1994 1993 1992
--------- --------- --------- ---------- -------
Balance at January 1, $ 9,194 $ 9,206 $ 9,198 $ 8,476 $ 7,802
Allowance established from
purchase acquisition 800 83 - 712 -
---------- ----------- ------------ ----------- -----------
9,994 9,289 9,198 9,188 7,802
Charge-offs:
Commercial, financial and
agricultural 1,126 279 741 1,233 1,180
Consumer 1,420 720 613 555 695
All other 74 20 28 341 167
----------- ----------- ----------- ----------- ---------
Total loans charged off 2,620 1,019 1,382 2,129 2,042
Recoveries:
Commercial, financial and
agricultural 361 333 1,899 1,205 1,267
Consumer 364 319 291 323 179
All other 142 103 82 100 54
---------- ---------- ---------- ----------- ----------
Total recoveries 867 755 2,272 1,628 1,500
---------- ---------- --------- ---------- ---------
Net (recoveries)/charge-offs 1,753 264 (890) 501 542
Provision/(credit) for
loan losses 1,200 169 (882) 511 1,216
--------- ---------- --------- ---------- ---------
Balance at December 31, $ 9,441 $ 9,194 $ 9,206 $ 9,198 $ 8,476
========= ========= ========= ========= =========
Loans at year-end $ 572,900 $ 506,929 $ 446,892 $ 436,825 $ 388,486
Average loans 545,754 465,495 430,774 415,204 376,237
Net charge-offs/(recoveries)/
average loans 0.32% 0.06% (0.21)% 0.12% 0.14%
Allowance for loan losses/
year-end loans 1.65 1.81 2.06 2.11 2.18
Allowance for loan losses/
nonperforming assets 268.13 444.15 406.45 165.94 143.56
Table 6 - Allocation of Allowance for Loan Losses (000's omitted):
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
Commercial, financial and agricultural $ 3,866 $ 3,878 $ 3,711 $ 4,289 $ 4,235
Real estate-construction 364 345 252 154 121
Real estate - mortgage 2,228 2,128 2,538 2,531 2,207
Consumer 2,983 2,843 2,704 2,224 1,913
--------- --------- --------- --------- ---------
$ 9,441 $ 9,194 $ 9,205 $ 9,198 $ 8,476
========= ========= ========= ========= =========
Allocation as Percent of Total Loans
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
Commercial, financial and agricultural 0.67% 0.76% 0.83% 0.98% 1.09%
Real estate - construction 0.06 0.07 0.06 0.04 0.03
Real estate - mortgage 0.39 0.42 0.57 0.58 0.57
Consumer 0.52 0.56 0.61 0.51 0.49
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 all of the first four floors and utilizes some office
space on the fifth and sixth floors. The remaining office space of this 170,842
square foot facility is available for lease to tenants. The First National Bank
Building is connected to the First National West Building, a six-story facility
owned by First Abilene which contains 52,800 square feet of lease space most of
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
22 spaces, 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 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 Abilene. The
cost of the site was $412,383 and the construction cost for the building and
improvements was $554,318. The branch banking facility includes a one-story
office building and six lane drive-in facility. In 1996, at a cost of $400,000,
the branch facility was expanded to 5,400 square feet.
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 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.
As a result of the merger between First Abilene and BOC, First
Abilene acquired title to the banking facility 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 was completed in 1966 and
is of steel reinforced concrete and masonry construction. In 1976, a 12-lane
drive-in facility located adjacent to the main banking facility was completed
and in 1982, an addition to the teller service area for the drive-in facility
was constructed at a cost of approximately $200,000. In December 1984, BOC
purchased property (approximately 1.85 acres) located on Southwest Drive in
Abilene, Texas, for future construction of a full-service banking facility. The
cost of such property was $344,937. 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 was completed in 1977, contains 16,000
square feet (not including drive-in facilities) and is of concrete block-brick
face construction. A drive-in facility of brick construction 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 was completed in 1974,
contains 20,000 square feet, and is constructed of steel-reinforced concrete and
marble. In 1994 First Sweetwater relocated its drive-in facility to a drive-in
across the street from the main banking facility that had been at one time a
drive-in for another financial institution. First Sweetwater acquired the
property, made improvements, and now operates 13 drive-in lanes at the facility.
The drive-in attached to the main banking facility is not currently in use.
D. Eastland National Bank
Eastland owns its banking facilities located at 201 East Main Street
in Eastland, Texas. The building was completed in 1980, contains 13,000 square
feet, and is of steel and stucco construction. Eastland also maintains a
drive-in facility located on the same premises as its main banking facility.
E. The First National Bank in Cleburne
First Cleburne owns its main banking facilities located at 403 North
Main Street in Cleburne, Texas. The building was completed in 1978, contains
18,000 square feet, and is of steel and brick masonry construction. First
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 Co.
Stephenville owns its banking facility which is located at 2201 South
Loop, in Stephenville, Texas. The building is of steel and brick masonry
structure with approximately 18,000 square feet. At a cost of approximately $1.8
million, construction of the new bank building and drive-in facility was
completed in April 1996. The bank's former premises, a downtown building, was
sold in October 1996.
G. Southwest Bank of San Angelo
San Angelo owns its banking facility located at 3471 Knickerbocker
Road in San Angelo, Texas. The five-story building, including an office tower,
has approximately 29,250 square feet and is of steel and stucco construction.
Approximately 11,800 square feet of the office tower is available for lease and
has a current occupancy rate of approximately 95%. The bank also owns and
operates a drive-in banking facility on the same premises as its main banking
office.
H. Weatherford National Bank
Weatherford National owns three banking facilities located in
Weatherford, Texas and another facility located in nearby Aledo. The main office
is located in a historic downtown Weatherford building which was constructed in
the late 1800's. Weatherford branch locations are of more modern design having
been built in 1984 and 1995. The Aledo location is a temporary modular type
facility. All of the locations have a combined square footage of approximately
30,000 square feet and have drive-in facilities.
Item 3. Legal Proceedings
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. 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 except the following:
As a result of a routine examination of San Angelo by the FDIC, San
Angelo entered into a Memorandum of Understanding (the "Memorandum") with the
FDIC in December 1995, which required San Angelo to develop, adopt and implement
written policies, training programs, formal internal controls, and management
review procedures with respect to consumer credit transactions, consumer real
estate loans and compliance with the requirements of the Bank Secrecy Act. The
Memorandum required that all corrective action prescribed in the Memorandum,
including implementation of the policies, programs, controls and procedures
described therein, be accomplished within 60 days. Following completion of a
routine examination in October 1996, the Memorandum was terminated on December
10, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of
Bankshares during the fourth quarter of Bankshares' fiscal year ending December
31, 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
As of February 11, 1997, there were 1,544 holders of Bankshares'
stock reflected on its records. Except for shares held by First Abilene, First
Sweetwater, and Stephenville 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 two years is set forth in
the Quarterly Financial Data disclosure on page 26 under Item 7. Bankshares'
common stock trades on the Nasdaq National Market tier of the Nasdaq Stock
Market under the symbol FFIN. 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,
1996 1995(1)(5) 1994(1) 1993(1) 1992(1)
---------- --------- --------- --------- ---------
Summary Income Statement Information:
Interest income $ 84,176 $ 74,657 $ 64,621 $ 62,995 $ 64,718
Interest expense 33,731 29,448 22,416 21,513 25,692
--------- --------- --------- --------- ---------
Net interest income 50,445 45,209 42,205 41,482 39,026
Provision (credit) for loan losses 1,200 169 (882) 511 1,216
Noninterest income 15,842 15,030 12,313 12,940 10,312
Noninterest expense 37,570 34,400 34,635 33,428 30,239
--------- --------- --------- --------- ---------
Income before income taxes 27,517 25,671 20,765 20,483 17,883
Provision (benefit) for income taxes 9,395 8,656 6,805 6,615 5,478
---------- ---------- ---------- ---------- ----------
Net income before accounting change 18,122 17,015 13,960 13,868 12,405
Cumulative effect of accounting change (2) - - - 1,005 -
---------- ---------- ---------- ---------- ----------
Net earnings $ 18,122 $ 17,015 $ 13,960 $ 14,873 $ 12,405
========= ========= ========= ========= ==========
Per Share Data (3):
Net earnings per share before cumulative
effect of accounting change $ 2.70 $ 2.55 $ 2.10 $ 2.09 $ 1.88
Net earnings per share 2.70 2.55 2.10 2.24 1.88
Cash dividends declared 1.09 0.97 0.88 0.77 0.61
Book value at period-end 19.52 17.98 16.31 15.21 13.66
Earnings performance ratios (4):
Return on average assets 1.52% 1.59% 1.33% 1.35% 1.33%
Return on average equity 14.65 14.91 13.34 14.22 14.29
Summary Balance Sheet Data (Period-end):
Investment securities $ 511,789 $ 481,117 $ 490,950 $ 482,885 $ 430,227
Loans 572,900 506,929 446,892 436,825 388,485
Total assets 1,262,041 1,125,887 1,066,982 1,069,389 976,146
Deposits 1,121,881 997,578 950,251 960,389 875,398
Total liabilities 1,130,880 1,005,859 958,465 968,660 886,072
Total shareholders' equity 131,161 120,028 108,517 100,729 90,074
Asset quality ratios:
Allowance for loan losses/period-end loans 1.65% 1.81% 2.06% 2.11% 2.18%
Nonperforming assets/period-end loans
plus foreclosed assets 0.61 0.41 0.51 1.26 1.51
Net (recoveries)charge offs/average loans 0.32 0.06 (0.21) 0.12 0.14
Capital ratios:
Average shareholders' equity/average assets 10.35% 10.66% 9.59% 9.45% 9.18%
Leverage ratio (6) 10.40 10.91 9.51 9.28 8.48
Tier 1 risk-based capital (7) 18.90 19.33 16.76 16.90 15.38
Total risk-based capital (8) 20.15 20.57 18.02 18.38 16.86
Dividend payout ratio 40.32 35.63 34.04 32.03 34.81
(1) Restated to reflect pooling-of-interests.
(2) Adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
(3) Historical amounts adjusted for stock dividends and stock splits.
(4) Calculated on net income before cumulative accounting adjustment in 1993.
(5) 1995 net earnings includes $1.3 million, or $.20 per share, in nonrecurring gains from sale of assets.
(6) Shareholders' equity (before unrealized loss on securities available-for-sale) less intangibles/fourth quarter
average assets less intangibles.
(7) Shareholders' equity (before unrealized loss on securities
available-for-sale) less intangibles/risk-adjusted assets.
(8) Shareholders' equity (before unrealized loss on securities
available-for-sale) less intangibles plus allowance for loan losses to the
extent allowed under regulatory guidelines/risk-adjusted assets.
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Management's discussion and analysis of the major elements of the Company's
consolidated balance sheets and statements of income should be reviewed in
conjunction with the consolidated financial statements, accompanying notes, and
selected financial data presented elsewhere in this report.
In January 1996, through an exchange of stock, the Company acquired Weatherford
National Bancshares, Inc. and its subsidiary, Weatherford National. The
transaction was accounted for as a pooling-of-interests and accordingly, prior
periods have been restated to include the operations of Weatherford National.
Also in January 1996, the Company purchased for cash Citizens Equity Corporation
and its subsidiary, Citizens National. Financial data prior to 1996 does not
include the operations of Citizens National; therefore, comparability is
affected. This discussion will highlight items materially affected and
considered meaningful to the analysis of the Company's 1996 operating results
and financial condition. In April 1996, Citizens National was merged into
Weatherford National, with the resulting entity continuing to operate under the
name of Weatherford National Bank.
PERFORMANCE SUMMARY
Net earnings for 1996 was $18.1 million as compared to $17.0 million for 1995,
which included $1.3 million in nonrecurring gains. In 1994, net earnings
amounted to $14.0 million. The 1996 increase was primarily attributable to
higher net interest income generated from higher volume of earning assets and
increased service related fees. Increased net interest income, nonrecurring
gains and a lower FDIC assessment were primary factors in the 1995 increase over
1994.
On a per share basis, 1996 net earnings amounted to $2.70 as compared to $2.55
for 1995, which included approximately $ .20 per share resulting from
nonrecurring gains. In 1994 the Company earned $2.10 per share. Return on
average assets for 1996 was 1.52% as compared to 1.59% (1.47% excluding
nonrecurring gains) for 1995 and 1.33% for 1994. Return on equity for 1996 was
14.65% as compared to 14.91% (13.76% excluding nonrecurring gains) for 1995 and
13.34% for 1994.
Net Interest Income
On a taxable-equivalent basis, net interest income in 1996 totaled $50.9
million, an increase of $5.2 million over the 1995 amount, which was $2.9
million higher than 1994. These yearly increases have resulted primarily from a
higher volume of average earning assets and deposits. Table 1 presents
year-to-year changes in net interest income and allocates the changes
attributable to variances in volumes and rates. Table 2 provides the income and
average yield earned on earning assets and the interest expense and average rate
paid on interest bearing liabilities for the years 1994 through 1996. The net
interest margin which measures net interest income as a percentage of average
earning assets amounted to 4.66% in 1996 as compared to 4.69% in 1995 and 4.49%
in 1994. The modest decline in 1996 reflects a decrease in the average rate
earned on loans coupled with a slight increase in the average rate paid on
interest bearing deposits. Growth in average loans, some of which replaced lower
yielding investment securities, was the primary factor contributing to the 1995
increase in net interest income.
Table 1 - Changes in Interest Income and Interest Expense (000's omitted):
1996 Compared to 1995 1995 Compared to 1994
Change Attributable to Total Change Attributable to Total
Volume Rate Change Volume Rate Change
Short-term investments $ 136 $ (183) $ (47) $ 125 $ 585 $ 710
Taxable investment securities 1,400 1,538 2,938 (654) 1,581 927
Tax-exempt investment securities (1) 283 (111) 172 (136) (48) (184)
Loans (1) 7,221 (752) 6,469 3,006 5,516 8,522
------ ------- ------ ------ ------ ------
Interest income 9,040 492 9,532 2,341 7,634 9,975
------ ------- ------ ------ ------ ------
Interest bearing deposits 3,837 441 4,278 239 6,882 7,121
Short-term borrowings 1 7 8 (8) 15 7
Long-term debt (5) 2 (3) (89) (7) (96)
-------- -------- -------- ------- -------- -------
Interest expense 3,833 450 4,283 142 6,890 7,032
------ ------- ------ ------- ------ ------
Net interest income $ 5,207 $ 42 $ 5,249 $ 2,199 $ 744 $ 2,943
====== ======= ====== ====== ======= ======
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
Table 2 - Average Balances and Average Yields and Rates (000's omitted):
1996 1995 1994
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Short-term investments $ 37,230 $ 2,009 5.40%$ 34,916 $ 2,056 5.89%$ 31,952 $ 1,346 4.21%
Taxable investment securities 486,546 28,877 5.94 455,817 25,939 5.69 468,051 25,021 5.34
Tax-exempt
investment securities (1) 22,509 1,476 6.56 18,496 1,304 7.05 20,356 1,488 7.31
Loans (1) (2) 545,754 52,284 9.58 465,495 45,815 9.84 430,774 37,293 8.66
----------- -------- ----------- -------- ----------- -------
Total earning assets 1,092,039 84,646 7.75 974,724 75,114 7.71 951,133 65,139 6.85
Cash and due from banks 56,279 53,827 58,503
Bank premises and equipment 34,429 31,458 31,798
Other assets 17,709 19,496 19,734
Intangible assets 5,624 1,112 1,149
Allowance for loan losses (10,056) (9,186) (9,392)
----------- ------------ -----------
Total assets $ 1,196,024 $ 1,071,431 $ 1,052,925
========== ============ ===========
Liabilities and
Shareholders' Equity
Interest-bearing deposits $ 848,401 $ 33,689 3.97%$ 750,490 $ 29,411 3.92%$ 742,544 $ 22,290 3.00%
Short-term borrowings 285 36 12.63 280 28 10.00 458 21 4.59
Long-term debt 70 6 8.57 171 95.26 1,108 105 9.48
------------ -------- ----------- --------- ----------- --------
Total interest-
bearing liabilities 848,756 33,731 3.97 750,941 29,448 3.92 744,110 22,416 3.01
-------- --------- --------
Noninterest-bearing deposits 213,757 197,412 196,495
Other liabilities 9,775 8,987 7,659
------------ ------------ -----------
Total liabilities 1,072,288 957,340 948,264
Shareholders' equity 123,736 114,091 104,661
----------- ------------ -----------
Total liabilities and
shareholders' equity $ 1,196,024 $ 1,071,431 $ 1,052,925
========== =========== ===========
Net interest income $ 50,915 $ 45,666 $ 42,723
======= ======== =======
Rate Analysis:
Interest income/earning assets 7.75% 7.71% 6.85%
Interest expense/earning assets 3.09 3.02 2.36
---- ---- ----
Net yield on earning assets 4.66% 4.69% 4.49%
==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
Provision for Loan Losses
In 1996, the provision for loan losses charged against earnings amounted to $1.2
million as compared to $169 thousand in 1995. The increase is attributed to
provisions at subsidiary banks located in markets where severe drought
conditions during 1995 and the early part of 1996 affected farming and cattle
operations. In 1994, significant recoveries of loans previously charged off
permitted a loan loss provision reversal, which resulted in an $882 thousand
credit to earnings. Additional comparative information is provided in the
Allowance for Loan Loss section of this discussion.
Noninterest Income
Table 3 presents the detail of noninterest income which amounted to $15.8
million in 1996 as compared to $15.0 million in 1995. Trust fees were up $388
thousand, or 12.3%, and resulted from a significant $73 million, or 13.7%
increase in Trust assets during 1996. Service fees on deposit accounts increased
$1.8 million. Approximately $650 thousand of the increase is due to the addition
of Citizens National Bank with the remainder resulting from an increase in the
number of accounts and volume of transactions. For 1996, gains on sale of
foreclosed assets decreased $2.0 million and interest on loan recoveries
increased $284 thousand. Brokerage commissions in 1996 were $199 thousand less
than in 1995. In 1996, the Company changed its arrangement with its third party
brokerage service provider whereby fees were received net of expenses. On a net
income basis, profitability from brokerage services moved from a pretax loss of
$177 thousand in 1995 to a pretax profit of $78 thousand in 1996. ATM fees in
1996 increased $176 thousand and resulted from higher transaction volume as well
as increased fees earned from non-customer transactions.
Total noninterest income in 1995 was $2.7 million above the 1994 amount. As
shown in Table 3, nonrecurring gains from the sale of assets taken in debt
settlement arrangements in prior years amounted to $2.1 million in 1995 and was
the primary factor for the significant increase. Interest on loan recoveries and
securities losses were other significant variances in 1995.
Table 3 - Noninterest Income (000's omitted):
Increase Increase
1996 (Decrease) 1995 (Decrease) 1994
-------- ------------- --------- ------------ ---------
Trust department income $ 3,552 $ 388 $ 3,164 $ 266 $ 2,898
Service fees on deposit accounts 8,149 1,769 6,380 167 6,213
Gain on sale of foreclosed assets 125 (1,957) 2,082 2,061 21
Other:
Miscellaneous income 1,180 140 1,040 1 1,039
Interest on loan recoveries 314 284 30 (535) 565
Mastercard fees 752 114 638 36 602
Securities gains (losses) (3) (47) 44 628 (584)
Real estate mortgage fees 568 131 437 (34) 471
Brokerage commissions 201 (199) 400 46 354
Safe deposit rental fees 253 (18) 271 (1) 272
ATM fees 453 176 277 71 206
Exchange fees 298 31 267 11 256
-------- -------- -------- ------- --------
4,016 612 3,404 223 3,181
-------- -------- -------- ------- --------
$ 15,842 $ 812 $ 15,030 $ 2,717 $ 12,313
======= ======== ======= ====== =======
Noninterest Expense
Noninterest expense for 1996 totaled $37.6 million which was $3.2 million above
the 1995 amount. Approximately $2.7 million of the increase is attributed to the
fact that noninterest expenses for Citizens National Bank are not included in
the 1995 total. An important measure in determining effectiveness in managing
noninterest expenses is efficiency ratio, which is calculated by dividing the
noninterest expense by the sum of net interest income on a tax-equivalent basis
and noninterest income. Excluding gains on sale of foreclosed assets, the
Company's efficiency ratios were 56.38%, 58.69% and 62.96% in 1996, 1995 and
1994, respectively.
Total salaries and benefits for 1996 were $19.9 million as compared to $17.5
million in 1995. When employee costs of Citizens National Bank are included in
the prior year total, comparative salaries and benefits for 1996 increased $934
thousand, or 4.9%. Net occupancy expense in 1996 amounted to $3.2 million and
was $557 thousand above the prior year. The increase is attributed primarily to
the opening of a new bank building in Stephenville and the occupancy expense of
Citizens National Bank, which was not included in the prior year amount. Total
equipment expense in 1996 amounted to $2.9 million as compared to $2.5 million
in 1995, with higher depreciation expense the primary factor for the increase.
FDIC expense in 1996 decreased $1.0 million and represents a full year of lower
assessment rates which were implemented in mid-year 1995. Higher 1996 goodwill
amortization relates to the acquisition of Citizens National Bank, which was
accounted for as a purchase. The increase in credit card expense reflects
expense of processing a higher volume of cardholder and merchant transactions.
Professional and service fees decreased $100 thousand from the 1995 total and
resulted from a change in the arrangement with the third party that provides
brokerage services.
Total noninterest expense of $34.4 million for 1995 was $235 thousand below
1994. As shown in Table 4, the reduction in FDIC expense was the primary factor
in the net decrease. Net occupancy expense in 1995 was $365 thousand below the
1994 amount, which included additional depreciation expense resulting from a
change in the estimate for the useful life of certain leasehold improvements.
Legal and accounting fees in 1995 were $187 thousand below 1994 which included
fees related to the acquisition of Concho Bancshares and its subsidiary,
Southwest Bank of San Angelo.
Table 4 - Noninterest Expense (000's omitted):
Increase Increase
1996 (Decrease) 1995 (Decrease) 1994
-------- ----------- -------- ----------- --------
Salaries $ 15,322 $ 1,676 $ 13,646 $ 20 $ 13,626
Payroll taxes 1,164 132 1,032 (11) 1,043
Profit sharing 1,710 321 1,389 208 1,181
Medical and other benefits 1,669 238 1,431 136 1,295
-------- ------- -------- --------- --------
19,865 2,367 17,498 353 17,145
Net occupancy expense 3,166 557 2,609 (365) 2,974
Equipment expense 2,935 393 2,542 349 2,193
Printing, stationary, and supplies 1,017 59 958 2 956
FDIC insurance expense 17 (1,036) 1,053 (1,031) 2,084
Correspondent bank service charges 867 (24) 891 2 889
Other:
Postage 897 121 776 6 770
Advertising 877 5 872 187 685
Outside data processing fees 711 6 705 (32) 737
Credit card fees 634 180 454 59 395
Legal and accounting fees 554 (45) 599 (187) 786
ATM expense 525 88 437 7 430
Public relations and business development 458 112 346 48 298
Directors' fees 406 (27) 433 20 413
Goodwill amortization 401 325 76 0 76
Telephone 394 62 332 15 317
Regulatory exam fees 349 68 281 (31) 312
Other professional and service fees 272 (100) 372 95 277
Courier 268 20 248 156 92
Franchise tax 265 (46) 311 141 170
Other miscellaneous 2,692 85 2,607 (29) 2,636
-------- -------- -------- -------- --------
Total Other 9,703 854 8,849 455 8,394
-------- ------- -------- ------- --------
Total Noninterest Expense $ 37,570 $ 3,170 $ 34,400 $ (235) $ 34,635
======= ======= ======= ======= =======
Income Taxes
Income tax expense for 1996 totaled $9.4 million as compared to $8.7 million for
1995 and $6.8 million for 1994. The Company's effective tax rates on pretax
income were 33.1%, 33.7%, and 32.8%, respectively, for the years 1996, 1995, and
1994.
At December 31, 1996 and 1995, the Company had net deferred tax assets of $1.4
million and $1.6 million, respectively. The approximate effects of each type of
difference that gave rise to the Company's deferred tax assets and liabilities
at December 31, 1996 and 1995, are provided in Note 6 to Consolidated Financial
Statements. The most significant assumption relied upon by management in
concluding that it is more likely than not that the deferred tax assets, net of
the recorded valuation allowance, will be realized in the future is the recent
history of taxable income generated by the Company and the subsidiary bank to
which the net operating loss carryforward relates. On a consolidated basis,
taxable income amounted to approximately $26.5 million, $22.6 million, and $18.7
million in the years ended December 31, 1996, 1995 and 1994, respectively.
The use of the net operating loss carryforward is conditioned upon taxable
income generated by the subsidiary bank. The net operating loss carryforward was
acquired in the purchase of the stock of the subsidiary bank, and under
applicable Internal Revenue Service regulations regarding change of control,
their usage is limited to a predetermined amount in each future period. The net
operating loss carryforward approximates $1.7 million at December 31, 1996, with
a usage limitation of $340,000 per year. The net operating loss carryforward
expires in the years 2001 through 2005. Taxable income generated by the
subsidiary bank before the net operating loss carryforward amounted to
approximately $1.9 million, $1.4 million, and $1.0 million in the years ended
December 31, 1996, 1995 and 1994, respectively.
The valuation allowance was established because full utilization of the net
operating loss carryforward is dependent on future taxable income in years where
the Company is unable to determine that it is more likely than not that taxable
income of the subsidiary bank will be available prior to expiration.
BALANCE SHEET REVIEW
Total assets at the end of 1996 were $1.262 billion, up $136 million from the
December 31, 1995, total. The addition of Citizens National Bank accounted for
approximately $93 million of the 1996 increase from the prior year. During 1996,
total assets averaged $1.196 billion as compared to $1.071 billion during 1995.
Average assets for Citizens National Bank, which are not included in the 1995
total, amounted to $90 million.
Investment Securities
At December 31, 1996, the investment securities portfolio totaled $511.8 million
as compared to $481.1 million the prior year. At December 31, 1996, securities
with an amortized cost of $466.6 million were classified as securities
held-to-maturity and securities with a market value of $45.2 million were
classified as securities available-for-sale. The portfolio is comprised
primarily of U. S. government and government corporations and agencies
securities with relative short maturities. The Company did not hold any CMOs
that entail higher risks than standard mortgage-backed securities. Total
investment securities at year-end 1996 included structured notes with an
amortized cost of $16.5 million and an approximate market value of $16.2
million. Note 2 to the Consolidated Financial Statements provides detail
disclosures relating to the maturities and fair values of the investment
portfolio at December 31, 1996 and 1995.
Loans
Total loans at December 31, 1996, amounted to $572.9 million, an increase of $66
million, or 13.0%, from year-end 1995. Excluding the effect of the addition of
Citizens National Bank on year to year comparisons, loans increased $30 million,
or 5.5%. Table 5 below provides the composition of the loan
portfolio at December 31, 1996 and 1995. As shown, the composition, or percent
of total loans each classification represents, was relatively unchanged from
year to year. The loan totals reflect loans made to businesses, individuals,
and farm and ranch operations located in the primary markets served by the
Company's subsidiary banks. Loans in the real estate mortgage classification
generally provide for repricing intervals that protect the Company from the rate
risk inherent in long term fixed rate mortgages.
Table 5 - Composition of Loans (000's omitted):
December 31, 1996 December 31, 1995
Amount % of Total Amount % of Total
Commercial, financial, and agricultural $ 234,625 40.95% $ 213,799 42.17%
Real estate - construction 22,106 3.86 19,046 3.76
Real estate - mortgage 135,182 23.60 117,332 23.15
Consumer 180,987 31.59 156,752 30.92
-------- ---------- -------- -----------
$ 572,900 100.00% $ 506,929 100.00%
======== ========== ======== ==========
Allowance for Loan Losses
An evaluation of the overall quality of the portfolio is performed to determine
the necessary level of the allowance for loan losses. The evaluation takes into
consideration the classification of loans and the application of loss estimates
to those classifications. The Company has an independent loan review function,
which periodically reviews the loan quality at each of the subsidiary banks. The
subsidiary banks are also subject to periodic examinations by state and federal
banking system examiners. Table 6 below provides activity in the allowance for
loan loss account for the past five years, and Table 7 presents year-end balance
and composition of nonperforming assets that serves as a key indicator of loan
quality. The unfavorable weather conditions and low market prices that farm and
cattle operations experienced in 1995 and the early part of 1996 were the
primary factors contributing to the 1996 increase in net charge- offs, loan loss
provision and nonperforming assets. When compared to the prior year-end total,
$900 thousand of the increase in nonperforming assets at December 31, 1996,
relates to the acquisition of Citizens National Bank. Management was not aware
of any material classified credit not properly disclosed as nonperforming at
December 31, 1996.
Table 6 - Loan Loss Experience and Allowance for Loan Losses (000's omitted):
1996 1995 1994 1993 1992
--------- --------- --------- ---------- ----------
Balance at January 1, $ 9,194 $ 9,206 $ 9,198 $ 8,476 $ 7,802
Allowance established from
purchase acquisition 800 83 - 712 -
---------- ---------- ----------- ---------- ----------
9,994 9,289 9,198 9,188 7,802
Loans charged off 2,620 1,019 1,382 2,129 2,042
Loans recovered 867 755 2,272 1,628 1,500
---------- ---------- --------- --------- ----------
Net (recoveries)/charge-offs 1,753 264 (890) 501 542
Provision/(credit) for loan losses 1,200 169 (882) 511 1,216
--------- ---------- ---------- ---------- ----------
Balance at December 31, $ 9,441 $ 9,194 $ 9,206 $ 9,198 $ 8,476
========= ========= ========= ========= ==========
Loans at year-end $ 572,900 $ 506,929 $ 446,892 $ 436,825 $ 388,486
Average loans 545,754 465,495 430,774 415,204 376,237
Net charge offs/(recoveries)/
average loans 0.32% 0.06% (0.21)% 0.12% 0.14%
Allowance for loan losses/
year-end loans 1.65 1.81 2.06 2.11 2.18
Allowance for loan losses/
nonperforming assets 268.13 444.15 406.45 165.94 143.56
Table 7 - Nonperforming Assets (000's omitted):
At December 31,
1996 1995 1994 1993 1992
------- --------- -------- -------- -------
Nonaccrual loans $ 2,638 $ 1,184 $ 1,305 $ 3,417 $ 2,590
Loans past due 90 days or more 77 181 100 170 731
Restructured loans - - - - -
------- ------- -------- ------- -------
Nonperforming loans 2,715 1,365 1,405 3,587 3,321
Foreclosed assets 806 705 860 1,956 2,583
------- ------- ------- ------ ------
Total nonperforming assets $ 3,521 $ 2,070 $ 2,265 $ 5,543 $ 5,904
====== ====== ====== ====== ======
As a % of loans and
foreclosed properties 0.61% 0.41% 0.51% 1.26% 1.51%
Deposits
Deposits which represent the Company's primary source of funding totaled $1.122
billion at the end of 1996. When compared to the previous year-end total,
deposits increased $124 million, with approximately $84 million of the increase
attributed to the addition of Citizens National Bank. Table 8 below provides a
breakdown of average deposits and rates paid over the past three years and the
remaining maturity of time deposits of $100 thousand or more.
Table 8 - Composition of Deposits and Remaining Maturity of Time
Deposits of $100,000 or more (000's omitted):
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing deposits $ 213,757 - $ 197,412 - $ 196,495 -
Interest-bearing deposits
Interest-bearing checking 187,912 1.98% 179,731 2.14% 185,807 2.03%
Savings and money market accounts 232,579 3.29 182,401 2.98 198,682 2.51
Time deposits under $100,000 310,265 5.19 272,062 5.16 256,955 3.71
Time deposits of $100,000 or more 117,645 5.29 116,296 5.24 101,100 3.89
-------- ----- -------- ----- -------- -----
Total interest-bearing deposits 848,401 3.97 750,490 3.92 742,544 3.00
-------- -------- --------
Total deposits $ 1,062,158 $ 947,902 $ 939,039
======== ======== ========
Remaining Maturity of Time Deposits of $100,000 or More
December 31, 1996
Under three months $ 45,553
Over three through six months 32,331
Over six through twelve months 28,107
Over twelve months 10,917
---------
$ 116,908
Capital
At December 31, 1996, total shareholders' equity was $131.2 million, or 10.39%
of total assets, compared to $120.0 million, or 10.66% of total assets at
December 31, 1995. In accordance with SFAS 115, the Company's unrealized losses,
net of deferred taxes, on securities available-for-sale are reported as a
reduction in shareholders' equity. At December 31, 1996 and 1995, unrealized
losses, net, amounted to $267 thousand and $152 thousand, respectively. During
1996, total shareholders' equity averaged $123.7 million, or 10.35% of average
assets, compared to the 1995 average of $114.0 million, or 10.66% of average
assets.
Banking system regulators measure capital adequacy by means of the risk-based
capital ratio and leverage ratio. The risk-based capital rules provide for the
weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory
capital is then divided by risk-weighted assets to determine the risk-adjusted
capital ratios. The leverage ratio is computed by dividing shareholders' equity
less intangibles by quarter-to-date average assets less intangibles. Regulatory
minimums for the risk-based and leverage ratios are 8.00% and 3.00%,
respectively. At December 31, 1996, the Company's total risk-based and leverage
ratios were 20.15% and 10.40%, respectively.
ASSET AND LIABILITY MANAGEMENT
Interest Rate Risk
The Company manages its assets and liabilities to control the exposure of its
net interest income and capital to risks associated with interest rate changes
to achieve growth in net interest income. Each subsidiary bank has an asset
liability committee which monitors interest rate risk and compliance with
investment policies. Interest-sensitivity gap and simulation analysis are among
the ways that the subsidiary banks track interest rate risk. From time to time
it may be necessary for a subsidiary bank to reallocate investable funds or make
pricing adjustments to better position itself for interest rate movements. As
presented in Table 9, the Company's interest-sensitivity gap analysis as of
December 31, 1996, reflects a negative cumulative repricing gap in the one-year
horizon. Consequently, a sudden and large increase in rates or a dramatic
narrowing in the spread between asset yields and liability costs would result in
an adverse impact on the net interest margin; however, the adverse impact is
more moderate if interest rates follow historical trends and increase gradually.
The Company uses no off-balance-sheet financial instruments to manage interest
rate risk.
Table 9 - 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 $ 246,138 $ 39,016 $ 82,891 $ 188,184 $ 16,671 $ 572,900
Investment securities 59,227 25,137 78,917 297,196 51,312 511,789
Short-term investments 54,410 390 200 195 - 55,195
--------- --------- -------- --------- -------- ---------
Total interest-earning assets 359,775 64,543 162,008 485,575 67,983 1,139,884
Interest-bearing liabilities:
Transaction deposit accounts 334,826 334,826
Time deposits 278,547 108,068 103,369 50,473 27 540,484
Borrowed funds 110 - - 37 - 147
--------- --------- --------- --------- --------- --------
Total interest-bearing liabilities 613,483 108,068 103,369 50,510 27 875,457
--------- --------- --------- --------- --------- --------
Interest-sensitivity gap $ (253,708) $ (43,525) $ 58,639 $ 435,065 $ 67,956 $ 264,427
Cumulative interest-sensitivity gap (253,708) (297,233) (238,594) 196,471 264,427 264,427
Ratio of interest-sensitive
assets to interest-sensitive liabilities 0.59 0.60 1.57 9.61 -
Cumulative ratio of interest-sensitive
assets to interest-sensitive liabilities 0.59 0.59 0.71 1.22 1.30
Cumulative interest-sensitivity gap
as a percent of earning assets (22.26)% (26.08)% (20.93)% 17.24% 23.20%
Liquidity
Liquidity is the ability of the Company to meet cash demands as they arise. Such
needs can develop from loan demand, deposit withdrawals or acquisition
opportunities. Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. Liquid assets include cash,
Federal funds sold, and short-term investments in time deposits in banks.
Liquidity is also provided by access to funding sources which include core
depositors and correspondent banks that maintain accounts with and sell Federal
funds to subsidiary banks of the Company. Given the strong core deposit base and
relatively low loan to deposit ratios maintained at the subsidiary banks,
Management considers the current liquidity position to be adequate.
PARENT COMPANY FUNDING SOURCES AND DIVIDENDS
The Company's ability to fund various operating expenses, dividends, and cash
acquisitions is generally dependent on parent company only earnings, cash
reserves and funds derived from its subsidiaries. These funds historically have
been produced by intercompany dividends and management fees that are limited to
reimbursement of actual expenses. It is anticipated that the Company's recurring
cash sources will continue to include dividends and management fees from
subsidiaries. At December 31, 1996, approximately $8.6 million was available for
the payment of intercompany dividends by the subsidiary banks without the prior
approval of regulatory agencies. Also at December 31, 1996, the Company had $10
million available under a line of credit with an unaffiliated financial
institution. The Company does not anticipate any change in its policy for cash
dividends to shareholders that has yielded payout ratios of 40.3%, 35.6%, and
39.1%, respectively, in 1996, 1995 and 1994.
QUARTERLY FINANCIAL DATA (Unaudited)
(Dollars in thousands, except per share data)
1996
4th 3rd 2nd 1st
Summary Income Statement Information:
Interest income $ 21,463 $ 21,046 $ 20,687 $ 20,980
Interest expense 8,601 8,429 8,275 8,426
-------- -------- -------- ---------
Net interest income 12,862 12,617 12,412 12,554
Provision for loan losses 237 80 365 518
-------- -------- -------- ---------
Net interest income after provision for loan losses 12,625 12,537 12,047 12,036
Noninterest income 4,034 4,064 4,039 3,705
Noninterest expense 9,631 9,624 9,327 8,988
-------- -------- -------- ---------
Income before income taxes 7,028 6,977 6,759 6,753
Provision (benefit) for income taxes 2,400 2,375 2,311 2,309
-------- -------- -------- ---------
Net income $ 4,628 $ 4,602 $ 4,448 $ 4,444
======== ======== ======== =========
Per Share Data (1):
Net income per share $ 0.69 $ 0.69 $ 0.66 $ 0.66
Cash dividends declared 0.28 0.28 0.28 0.25
Book value at period-end 19.52 19.10 18.70 18.36
Market value (period-end bid) 38.00 34.75 36.50 28.50
Market value (bid):
High 38.00 36.50 36.50 28.50
Low 34.50 31.00 28.50 26.00
1995 (2)
4th 3rd 2nd 1st
Summary Income Statement Information:
Interest income $ 19,463 $ 19,155 $ 18,425 $ 17,614
Interest expense 7,854 7,736 7,301 6,557
-------- -------- -------- ---------
Net interest income 11,609 11,419 11,124 11,057
Provision for loan losses 104 43 1 20
-------- -------- -------- ---------
Net interest income after provision for loan losses 11,505 11,376 11,123 11,037
Noninterest income 3,366 3,239 5,256 3,169
Noninterest expense 8,817 8,269 8,807 8,507
-------- -------- -------- ---------
Income before income taxes 6,054 6,346 7,572 5,699
Provision (benefit) for income taxes 2,048 2,139 2,560 1,909
-------- -------- -------- ---------
Net income $ 4,006 $ 4,207 $ 5,012 $ 3,790
======== ======== ======== =========
Per Share Data (1):
Net income per share $ 0.60 $ 0.63 $ 0.75 $ 0.57
Cash dividends declared 0.25 0.25 0.25 0.22
Book value at period-end 17.98 17.62 17.28 19.79
Market value (period-end bid) 26.00 24.00 24.50 20.75
Market value (bid):
High 26.00 25.50 24.50 20.75
Low 24.00 23.50 20.75 19.75
(1) Historical amounts adjusted for stock split effected in the form of a dividend on June 1, 1996.
(2) Restated for pooling-of-interests.
Item 8. Financial Statements and Supplementary Data
The independent auditors' report, and consolidated financial
statements of Bankshares at December 31, 1996 and 1995, and for each of the
three years in the period ended December 31, 1996, are provided on pages 27
through 50. Also included is management's report on responsibility for these
financial statements.
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, 1996 and 1995, and for the three years in the period ended
December 31, 1996. The financial statements have been prepared in accordance
with generally accepted accounting principles and, as such, include amounts
based on judgments and estimates made by Management. Management has also
prepared the other information included in this Annual Report and is responsible
for its accuracy and consistency with the financial statements.
The annual financial statements referred to above have been audited by Arthur
Andersen LLP, who have been given unrestricted access to all financial records
and related data, including minutes of all meetings of shareholders and the
Board of Directors. Management believes that all representations made to Arthur
Andersen LLP during the audits were valid and appropriate.
Kenneth T. Murphy Curtis R. Harvey
Chairman of the Board Executive Vice President
and Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of First Financial
Bankshares, Inc. (a Texas corporation), and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Financial Bankshares,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
January 10, 1997
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
------ ---------------- ----------------
CASH AND DUE FROM BANKS $ 71,677,154 $ 60,858,959
FEDERAL FUNDS SOLD 54,306,156 31,685,000
---------------- ----------------
Total cash and cash equivalents 125,983,310 92,543,959
INTEREST-BEARING DEPOSITS IN BANKS 888,494 1,477,025
INVESTMENT IN SECURITIES:
Securities held-to-maturity (market value of $466,805,918
in 1996 and $454,033,240 in 1995) 466,623,769 451,553,429
Securities available-for-sale, at market value 45,164,802 29,563,133
LOANS 572,900,206 506,929,162
Less- Allowance for loan losses 9,441,466 9,193,571
---------------- ----------------
Net loans 563,458,740 497,735,591
BANK PREMISES AND EQUIPMENT 34,454,587 31,776,992
OTHER ASSETS 25,467,347 21,236,891
---------------- ----------------
Total assets $ 1,262,041,049 $ 1,125,887,020
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
NONINTEREST-BEARING DEPOSITS $ 246,571,720 $ 218,784,465
INTEREST-BEARING DEPOSITS 875,309,732 778,793,883
---------------- ----------------
Total deposits 1,121,881,452 997,578,348
DIVIDENDS PAYABLE 1,881,288 1,554,717
OTHER LIABILITIES 7,117,463 6,726,144
---------------- ----------------
Total liabilities 1,130,880,203 1,005,859,209
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 10,000,000 shares; issued and
outstanding 6,718,886 and 5,339,193 shares in 1996
and 1995, respectively 67,188,860 53,391,930
Capital surplus 36,874,707 36,870,604
Retained earnings 27,363,902 29,917,438
Unrealized loss on investment in securities available-for-sale, net (266,623) (152,161)
---------------- --------------
Total shareholders' equity 131,160,846 120,027,811
---------------- --------------
Total liabilities and shareholders' equity $ 1,262,041,049 $ 1,125,887,020
================ ==============
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, 1996, 1995, AND 1994
1996 1995 1994
------------ ------------ ------------
INTEREST INCOME:
Interest and fees on loans $ 52,283,782 $ 45,814,586 $ 37,292,662
Interest on investment in securities-
Taxable 28,877,437 25,939,349 25,011,917
Exempt from federal income tax 1,005,713 847,319 970,726
Interest on federal funds sold and interest-bearing
deposits in banks 2,009,414 2,056,232 1,345,702
------------ ------------ ------------
84,176,346 74,657,486 64,621,007
----------- ----------- -----------
INTEREST EXPENSE:
Interest on time deposits 33,689,145 29,410,762 22,289,736
Other 42,206 37,363 126,486
------------ ------------ ------------
33,731,351 29,448,125 22,416,222
----------- ----------- -----------
Net interest income 50,444,995 45,209,361 42,204,785
PROVISION (CREDIT) FOR LOAN LOSSES 1,200,000 168,500 (882,000)
------------ ------------- ------------
Net interest income after
provision (credit) for loan losses 49,244,995 45,040,861 43,086,785
----------- ----------- -----------
NONINTEREST INCOME:
Trust department income 3,552,331 3,164,482 2,897,657
Service fees on deposit accounts 8,149,244 6,380,471 6,211,932
Gain on sale of foreclosed assets 125,314 2,082,383 20,759
Other 4,015,168 3,402,931 3,182,774
------------ ------------ ------------
15,842,057 15,030,267 12,313,122
----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 19,865,394 17,498,591 17,145,442
Net occupancy expense 3,165,503 2,609,140 2,974,127
Equipment expense 2,935,525 2,541,790 2,193,073
Printing, stationery, and supplies 1,016,531 958,340 955,791
Correspondent bank service charges 866,865 890,923 888,546
FDIC assessments 16,504 1,053,504 2,084,394
Other expenses 9,703,401 8,847,510 8,393,929
------------ ------------ ------------
37,569,723 34,399,798 34,635,302
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 27,517,329 25,671,330 20,764,605
INCOME TAX EXPENSE 9,395,078 8,655,717 6,804,818
------------ ------------ ------------
NET EARNINGS $ 18,122,251 $ 17,015,613 $ 13,959,787
=========== =========== ===========
NET EARNINGS PER SHARE $ 2.70 $ 2.55 $ 2.10
============ ============ ============
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, 1996, 1995, AND 1994
Unrealized
Gain (Loss)
On Investment
in Securities
Common Stock Capital Retained Available-For
Shares Amount Surplus Earnings Sale, Net
BALANCE, December 31, 1993 4,302,744 $ 43,027,440 $ 15,948,384 $ 41,320,660 $ -
Initial unrealized gain recorded on
investment in securities available-
for-sale, net - - - - 268,977
Net earnings - - - 13,959,787 -
Stock issuances 23,695 236,950 25,525 - -
Cash dividends declared,
$0.88 per share - - - (5,462,207) -
Cash paid for fractional shares
resulting from stock dividend - - - (16,528) -
Stock dividend, 25% 994,752 9,947,520 20,889,792 (30,837,312) -
Change in unrealized gain (loss) on
investment in securities available-
for-sale, net - - - - (1,008,605)
---------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1994 5,321,191 53,211,910 36,863,701 18,964,400 (739,628)
Net earnings - - - 17,015,613 -
Stock issuances 18,002 180,020 6,903 - -
Cash dividends declared,
$0.97 per share - - - (6,062,575) -
Change in unrealized gain
(loss) on investment in
securities available-for-sale, net - - - - 587,467
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 5,339,193 53,391,930 36,870,604 29,917,438 (152,161)
Net earnings - - - 18,122,251 -
Stock issuances 42,791 427,910 4,103 - -
Cash dividends declared,
$1.09 per share - - - (7,306,767) -
Stock split effected in the
form of a dividend 1,336,902 13,369,020 - (13,369,020) -
Change in unrealized gain
(loss) on investment in
securities available-for-sale, net - - - - (114,462)
---------- ----------- ----------- ----------- ------------
BALANCE, December 31, 1996 6,718,886 $ 67,188,860 $ 36,874,707 $ 27,363,902 $ (266,623)
========== =========== =========== =========== ============
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, 1996, 1995, AND 1994
1996 1995 1994
------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 18,122,251 $ 17,015,613 $ 13,959,787
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Depreciation and amortization 3,656,912 3,011,510 3,454,659
Provision (credit) for loan losses 1,200,000 168,500 (882,000)
Premium amortization, net of discount accretion 2,377,741 2,506,343 5,047,818
Loss on sale of securities - 57,094 583,928
Gain on sale of foreclosed assets (125,314) (2,082,383) (20,759)
Deferred federal income tax expense (benefit) 263,153 322,363 (84,745)
Decrease (increase) in other assets 655,735 (1,539,477) (974,869)
Increase (decrease) in other liabilities (52,942) 714,888 (296,420)
------------- ------------ ------------
Total adjustments 7,975,285 3,158,838 6,827,612
------------- ------------ ------------
Net cash provided by operating activities 26,097,536 20,174,451 20,787,399
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in banks 1,183,531 (291,025) 589,000
Payment for stock, net of cash and cash
equivalents received through acquisition (4,554,417) (1,539,560) -
Proceeds from sales of securities available-for-sale 498,500 5,483,872 12,861,888
Proceeds from maturities of securities available-for-sale 2,145,980 6,243,610 9,566,117
Proceeds from maturities of securities held-to-maturity 178,627,778 178,425,110 135,353,353
Purchase of securities available-for-sale (23,521,786) (9,378,654) (3,627,039)
Purchase of securities held-to-maturity (146,296,061) (159,327,570) (168,688,596)
Net increase in loans (30,849,630) (55,244,359) (8,935,043)
Capital expenditures (3,708,326) (3,511,472) (2,581,927)
Proceeds from sale of other assets 743,942 2,446,948 12,158
------------- ------------ ------------
Net cash used in investing activities (25,730,489) (36,693,100) (25,450,089)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits 13,629,435 7,889,216 6,920,404
Net increase (decrease) in interest-bearing deposits 26,478,846 21,234,709 (17,058,776)
Net increase (decrease) in other short-term borrowings (487,938) (1,096,631) 15,643
Proceeds of stock issuances 432,013 186,923 262,475
Dividends paid (6,980,052) (6,123,066) (5,494,443)
------------ ------------ ------------
Net cash provided by (used in) financing activities 33,072,304 22,091,151 (15,354,697)
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 33,439,351 5,572,502 (20,017,387)
CASH AND CASH EQUIVALENTS, beginning of year 92,543,959 86,971,457 106,988,844
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 125,983,310 $ 92,543,959 $ 86,971,457
============ =========== ===========
The accompanying notes are an integral part of these
consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) ("Bankshares") is a
multibank holding company which owns (through its wholly-owned Delaware
subsidiary) all of the capital stock of eight banks located in Texas as of
December 31, 1996. Those subsidiary banks are First National Bank of Abilene;
Hereford State Bank; First National Bank, Sweetwater; Eastland National Bank;
First National Bank in Cleburne; Stephenville Bank & Trust Co.; Southwest Bank
of San Angelo; and Weatherford National Bank. Each subsidiary bank's primary
source of revenue is providing loans and banking services to consumers and
commercial customers in the market area in which the subsidiary is located.
A summary of significant accounting policies of First Financial Bankshares, Inc.
and subsidiaries (the "Company") 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.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
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 In Securities
In May 1993, Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115), 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 are recorded at cost, adjusted for
amortization of premiums and accretion of discounts, which are recognized as
adjustments to interest income using the interest method. Securities classified
as available-for-sale are recorded at fair value, with unrealized gains and
losses, net of deferred taxes, excluded from earnings and reported in a separate
component of shareholders' equity. Securities classified as trading are recorded
at fair value, with unrealized gains and losses included in earnings. The
Company adopted this statement effective January 1, 1994, and the resulting
after tax adjustment to equity of $244,069 increased investments by $375,491.
The Company had no trading securities at December 31, 1996, 1995, or 1994.
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 allowance for loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on general economic conditions, the financial condition of the
borrower, the value and liquidity of collateral, delinquency, prior loan loss
experience, and the results of periodic reviews of the portfolio. Accrual of
interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of interest is doubtful.
The Company has a policy which requires measurement of impaired collateral
dependent loans based on the fair value of the collateral. Other loan
impairments will be measured based on the present value of expected future cash
flows or the loan's observable market price. At December 31, 1996 and 1995, all
significant impaired loans have been determined to be collateral dependent and
have been measured utilizing the fair value of the collateral.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the life of the respective lease or
the estimated useful lives of the improvements, whichever is shorter.
Excess of Cost Over Fair Value of Tangible Assets Acquired (Goodwill)
Goodwill, relating to acquisitions of certain subsidiary banks, is being
amortized by the straight-line method over periods of 15 and 40 years.
Accounting Standard Adopted
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" (SFAS 121) as of January 1, 1996. This statement requires that
long-lived assets and certain identifiable intangibles to be held and used by
the Company be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Adoption of SFAS 121 had no impact on the accompanying financial statements.
Per Share Data
Earnings per share are based on the weighted average number of common shares and
common share equivalents outstanding in 1996, 1995, and 1994 of 6,718,886,
6,673,991, and 6,651,489, 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 1995 and 1994 amounts have been reclassified to conform to the 1996
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.
Accounting for Income Taxes
The Company's current provision for income taxes is generally based on income
before taxes adjusted for permanent differences between financial reporting and
taxable income. Deferred income taxes are provided for temporary differences
between financial reporting and taxable income.
2. CASH AND INVESTMENT SECURITIES:
Certain subsidiary banks are required to maintain reserve balances with the
Federal Reserve Bank. During 1996 and 1995, such average balances totaled
approximately $12,573,000 and $13,314,000, respectively.
The amortized cost, estimated market values, and gross unrealized gains and
losses of the Company's investment in securities as of December 31, 1996 and
1995, are as follows:
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
Securities held-to-maturity:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 364,232,131 $ 1,855,238 $ (1,162,105) $ 364,925,264
Obligations of states and
political subdivisions 25,797,738 153,308 (126,129) 25,824,917
Mortgage-backed securities 62,509,135 142,377 (741,763) 61,909,749
Corporate bonds 10,017,838 71,177 (15,545) 10,073,470
Foreign securities 4,066,927 8,655 (3,064) 4,072,518
------------- ---------- ------------ ------------
Total investment in debt
securities held-to-maturity $ 466,623,769 $ 2,230,755 $ (2,048,606) $ 466,805,918
============ ========== =========== ============
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
Securities available-for-sale:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 10,276,372 $ - $ (65,401) $ 10,210,971
Obligations of states and
political subdivisions 1,299,998 - (7,989) 1,292,009
Mortgage-backed securities 32,091,403 156,958 (338,839) 31,909,522
----------- ---------- ---------- -----------
Total investment in debt
securities available-for-sale 43,667,773 156,958 (412,229) 43,412,502
Other securities 1,752,300 - - 1,752,300
----------- ---------- ---------- -----------
Total investment in securities
available-for-sale $ 45,420,073 $ 156,958 $ (412,229) $ 45,164,802
=========== =========== ========== ===========
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
Securities held-to-maturity:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 370,368,033 $ 3,830,041 $ (1,643,424) $ 372,554,650
Obligations of states and
political subdivisions 22,157,087 112,072 (166,227) 22,102,932
Mortgage-backed securities 46,563,389 522,471 (326,036) 46,759,824
Corporate bonds 7,746,376 142,613 (8,629) 7,880,360
Foreign securities 4,718,544 30,376 (13,446) 4,735,474
------------- --------------- ------------- -------------
Total investment in debt
securities held-to-maturity $ 451,553,429 $ 4,637,573 $ (2,157,762) $ 454,033,240
============= =============== ============= =============
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
Securities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 4,945,203 $ 33,545 $ (109,502) $ 4,869,246
Mortgage-backed securities 16,943,436 131,829 (111,378) 16,963,887
------------- -------------- ------------- -------------
Total investment in debt
securities available-for-sale 21,888,639 165,374 (220,880) 21,833,133
Other securities 7,730,000 - - 7,730,000
------------- -------------- ------------- --------------
Total investment in securities
available-for-sale $ 29,618,639 $ 165,374 $ (220,880) $ 29,563,133
============= ============== ============ =============
The Company invests in securities that have expected maturities that differ from
their contractual maturities. These differences arise because borrowers may have
the right to call or prepay obligations with or without a prepayment penalty.
These securities include collateralized mortgage obligations (CMOs) and
asset-backed securities. The expected maturities of these securities at December
31, 1996 and 1995, were computed by using scheduled amortization of balances and
historical prepayment rates. At December 31, 1996 and 1995, the Company did not
hold any CMOs that entail higher risks than standard mortgage backed securities.
Total investment in debt securities at December 31, 1996 and 1995, included
structured notes with an amortized cost basis of $16,539,000 and $16,554,000,
respectively, and an estimated fair value of $16,185,000 and $16,060,000,
respectively.
The amortized cost and estimated fair value of debt securities held-to-maturity
and available-for-sale at December 31, 1996, by contractual and expected
maturity, are shown below.
Held-to-maturity securities Available-for-sale securities
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Due within one year $ 154,512,662 $ 154,641,656 $ 6,916,916 $ 6,887,892
Due after one year through five years 279,741,093 279,974,307 19,689,282 19,340,519
Due after five years through ten years 23,236,269 23,127,796 13,864,264 14,071,588
Due after ten years 9,133,745 9,062,159 3,197,311 3,112,503
------------- ------------- ------------ ------------
Total debt securities $ 466,623,769 $ 466,805,918 $ 43,667,773 $ 43,412,502
============ ============ =========== ===========
Securities, carried at approximately $135,814,000 and $132,252,000 at December
31, 1996 and 1995, respectively, were pledged as collateral for public or trust
fund deposits and for other purposes required or permitted by law.
During 1996 and 1995, sales from investments in securities that were classified
as available-for-sale totaled $498,500 and $5,483,872, respectively. There were
no gross realized gains or losses from the 1996 sales. During 1995, gross
realized gains and losses were $41,754 and $697,203, respectively. Specific
identification was used to determine cost in computing the realized gains and
losses.
3. LOANS AND ALLOWANCES FOR LOAN LOSSES:
Major classifications of loans are as follows:
December 31,
1996 1995
------------- -------------
Commercial, financial, and agricultural $ 234,625,234 $ 213,797,198
Real estate - construction 22,106,338 19,046,608
Real estate - mortgage 135,181,766 117,332,747
Consumer 188,250,260 164,519,177
------------ ------------
580,163,598 514,695,730
Unearned income (7,263,392) (7,766,568)
------------ ------------
Total loans $ 572,900,206 $ 506,929,162
============ ============
The Company's recorded investment in impaired loans and the related valuation
allowance are as follows:
December 31, 1996 December 31, 1995
------------------------------ -----------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired loans-
Valuation allowance required $ 3,022,191 $ 956,810 $ 1,814,370 $ 567,738
No valuation allowance required - - - -
----------- ----------- ---------- -----------
Total at end of year $ 3,022,191 $ 956,810 $ 1,814,370 $ 567,738
========== =========== ========== ===========
The average recorded investment in impaired loans for the years ended December
31, 1996 and 1995, was approximately $2,937,000 and $2,388,000, respectively.
The Company had approximately $3,521,000 and $2,018,000 in nonperforming assets
at December 31, 1996 and 1995, respectively, of which approximately $2,638,000
and $1,184,000 represented recorded investments in impaired loans.
Interest payments received on impaired loans are recorded as interest income
unless collections of the remaining recorded investment is doubtful, at which
time payments received are recorded as reductions of principal. The Company
recognized interest income on impaired loans of $366,000 and $334,000 during the
years ended December 31, 1996 and 1995, respectively, of which $133,000 and
$138,000 represented cash interest payments received and recorded as interest
income. If interest on impaired loans had been recognized on a full accrual
basis during the years ended December 31, 1996 and 1995, respectively, such
income would have approximated $759,000 and $530,000.
The allowance for loan losses as of December 31, 1996 and 1995, is presented
below. Management has evaluated the adequacy of the allowance for loan losses by
estimating the probable losses in various categories of the loan portfolio which
are identified below:
1996 1995
Allowance for loan losses provided for-
Loans specifically evaluated as impaired $ 956,810 $ 567,738
Unidentified impaired loans 8,484,656 8,625,833
---------- ----------
Total allowance for loan losses $ 9,441,466 $ 9,193,571
========== ==========
The allowance for loan losses is maintained at a level considered adequate to
provide for estimated probable incurred losses resulting from loans. The
allowance is reviewed periodically, and as losses are incurred and the amounts
become estimable, they are charged to operations in the periods that they become
known.
Changes in the allowance for loan losses are summarized as follows:
December 31,
1996 1995 1994
----------- ----------- -----------
Balance at beginning of year $ 9,193,571 $ 9,205,683 $ 9,198,197
Add:
Allowance of acquired bank 800,432 82,700 -
Provision for loan losses 1,200,000 168,500 3,000
Loan recoveries 867,396 755,555 2,272,338
---------- ----------- -----------
Deduct:
Credit for loan losses - - (885,000)
Loan charge offs (2,619,933) (1,018,867) (1,382,852)
---------- ----------- -----------
Balance at end of year $ 9,441,466 $ 9,193,571 $ 9,205,683
========== =========== ===========
4. BANK PREMISES AND EQUIPMENT:
The following is a summary of bank premises and equipment:
December 31,
1996 1995
Land $ 5,221,529 $ 5,233,779
Buildings 36,256,539 32,922,678
Furniture and equipment 20,252,742 17,027,582
Leasehold improvements 5,954,699 4,935,509
------------ ------------
67,685,509 60,119,548
Accumulated depreciation and amortization (33,230,922) (28,342,556)
----------- -----------
$ 34,454,587 $ 31,776,992
=========== ===========
5. TIME DEPOSITS:
Time deposits of $100,000 or more totaled approximately $116,908,000 and
$122,752,000 at December 31, 1996 and 1995, respectively. Interest expense on
these deposits was approximately $6,222,000, $6,097,000, and $3,938,000 during
1996, 1995, and 1994, respectively.
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,
1996 1995 1994
Current federal income tax $ 9,131,925 $ 8,333,354 $ 6,889,563
Deferred federal income tax 263,153 322,363 (84,745)
----------- ---------- -----------
Income tax expense $ 9,395,078 $ 8,655,717 $ 6,804,818
========== ========== ===========
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
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0%
Reductions in tax rate resulting from
interest income exempt from
federal income tax (1.4) (1.2) (1.6)
Other (0.5) (0.1) (0.6)
---- ---- ----
Effective income tax rate 33.1% 33.7% 32.8%
==== ==== ====
The approximate effects of each type of difference that gave rise to the
Company's deferred tax assets and liabilities at December 31, 1996 and 1995, are
as follows:
1996 1995
----------- -----------
Deferred Tax Assets-
Tax basis of loans in excess of financial statement basis $ 2,844,622 $ 2,965,959
Nondeductible write-downs and adjustments to other
real estate owned and repossessed assets 147,425 103,319
Benefits of a subsidiary bank net operating loss
carryforward 605,720 724,325
Recognized for financial reporting purposes but not
for tax purposes-
Deferred compensation 274,275 256,213
Net unrealized loss on investments in securities
available-for-sale 143,566 82,321
Other deferred tax assets 440,775 325,301
----------- -----------
Total deferred tax assets 4,456,383 4,457,438
----------- -----------
Deferred Tax Liabilities-
Financial statement basis of fixed assets in excess of
tax basis 1,973,700 1,686,452
Recognized for financial reporting purposes but not
for tax purposes-
Accretion on investments 279,791 202,071
Pension plan contribution 459,231 400,804
Other deferred tax liabilities 183,654 287,591
----------- -----------
Total deferred tax liabilities 2,896,376 2,576,918
----------- -----------
Valuation allowance (137,232) (255,837)
----------- -----------
Net deferred tax asset $ 1,422,775 $ 1,624,683
=========== ===========
At December 31, 1996, the First National Bank in Cleburne ("Cleburne"), a
subsidiary bank, had a net operating loss carryforward for federal income tax
purposes of approximately $1,731,000. In its consolidated return, subject to
certain yearly limitations, the Company can utilize Cleburne's pre-acquisition
net operating loss carryforward to offset future consolidated taxable income
only to the extent Cleburne has future taxable income. If not used, the net
operating loss carryforward expires as follows: $806,000 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 Cleburne's net operating loss
carryforward. The following summarizes the changes in the allowance account:
1996 1995
---------- ----------
Valuation allowance at beginning of period $ 255,837 $ 374,441
Reduction in valuation allowance based on current
period utilization of net operating loss carryforward (118,605) (118,604)
---------- ----------
Valuation allowance at end of period $ 137,232 $ 255,837
========== ==========
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires the Company to disclose the
estimated fair value of its financial instrument assets and liabilities. For the
Company, as for most financial institutions, over 90% of its assets and
liabilities are considered financial instruments as defined in SFAS 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.
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, 1996 and 1995, were as follows:
oFinancial instruments actively traded in a secondary market have
been valued using quoted available market prices.
Estimated Recorded
Fair Book
Value Balance
----------------------------- ---------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
Cash and due from banks $ 71,677,154 $ 60,858,959 $ 71,677,154 $ 60,858,959
Federal funds sold 54,306,156 31,685,000 54,306,156 31,685,000
Interest-bearing deposits in banks 888,494 1,477,025 888,494 1,477,025
Investment in securities 511,970,720 483,596,373 511,788,571 481,116,562
o Financial instruments with stated maturities have been valued using a present
value discounted cash flow with a discount rate approximating current
market for similar assets and liabilities. Financial instrument assets
with variable rates and financial instrument liabilities with no stated
maturities have an estimated fair value equal to both the amount payable on
demand and the recorded book balance.
Estimated Recorded
Fair Book
Value Balance
------------------------------ ----------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
Deposits with stated maturities $ 413,846,056 $ 412,722,575 $ 413,516,096 $ 411,002,148
Deposits with no stated maturities 708,365,356 586,576,200 708,365,356 586,576,200
Net loans 566,403,655 500,132,789 563,458,740 497,735,591
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 SFAS 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
approximately $124,000,000 and $125,000,000 at December 31, 1996 and 1995,
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, 1996 and 1995, fees
related to the unexpired term of the letters of credit are not significant.
Reasonable comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates which
must be made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
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 $10,000,000 at the London Interbank Offered Rate plus 1%, adjusted for
reserves and deposit insurance expense. The line of credit is unsecured and
matures on May 31, 1997. 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, 1996 or 1995.
The Company leases portions of its banking premises and equipment under
operating leases. Total rental expense for these leases was approximately
$324,000, $297,000, and $340,000 for the years ended December 31, 1996, 1995,
and 1994, 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
$1,262,000, $1,268,000, and $1,265,000 for the years ended December 31, 1996,
1995, and 1994, respectively. At December 31, 1996, approximate future minimum
lease commitments and lease receivables are summarized as follows:
Lease Lease
Commitments Receivables
1997 $ 168,000 $ 581,000
1998 27,000 229,000
1999 23,000 186,000
2000 23,000 128,000
2001 23,000 7,000
2002 and thereafter 6,000 -
----------- -----------
Total $ 270,000 $ 1,131,000
=========== ===========
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 $ 123,565,000
Standby letters of credit 7,063,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The average collateral value held on
letters of credit exceeds the contract amount.
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.
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, 1996 and 1995.
December 31,
1996 1995
------------- -------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $6,075,131 and
$5,514,329 in 1996 and 1995, respectively $ 6,293,910 $ 5,787,473
============ ============
Projected benefit obligation for service
rendered to date $ (7,292,311) $ (6,645,480)
Plan assets at fair value, primarily
corporate bonds and equity securities 8,302,751 7,444,923
------------ ------------
Plan assets in excess of projected benefit obligation 1,010,440 799,443
Unrecognized net gain from past experience
different than that assumed and effects of
changes in assumptions 566,989 781,708
Unrecognized net asset at January 1, 1987,
being recognized over 10.7 years (131,387) (273,591)
------------ ------------
Prepaid pension cost included in other assets $ 1,446,042 $ 1,307,560
============ ============
Net pension cost for the years ended December 31, 1996, 1995, and 1994, included
the following components:
Year Ended December 31,
1996 1995 1994
--------- --------- ---------
Service cost - benefits earned during the period $ 622,939 $ 449,581 $ 398,106
Interest cost on projected benefit obligation 491,279 443,934 427,889
Actual return on plan assets (786,037) (783,215) 59,728
Net amortization and deferral (19,937) 48,889 (749,369)
--------- --------- --------
Net periodic pension cost $ 308,244 $ 159,189 $ 136,354
======== ======== ========
The following table sets forth the rates used in the actuarial calculations of
the present value of benefit obligations and the rate of return on plan assets:
1996 1995 1994
---- ---- ----
Weighted average discount rate 7.5% 7.5% 8.5%
Rate of increase in future compensation levels 7.5 7.5 8.5
Expected long-term rate of return on assets 8.5 7.5 8.5
The Company also provides a profit sharing plan which covers substantially all
full-time employees. The profit sharing plan is a defined contribution plan and
allows employees to contribute up to 5% of their base annual salary. Employees
are fully vested to the extent of their contributions and become fully vested in
the Company's contributions over a seven-year period. Costs related to the
Company's defined contribution plans totaled $1,710,050, $1,388,621, and
$1,180,580 in 1996, 1995, and 1994, respectively.
12. DIVIDENDS FROM SUBSIDIARIES:
At December 31, 1996, approximately $8,600,000 was available for the declaration
of dividends by the Company's subsidiary banks without the prior approval of
regulatory agencies.
13. REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, each of Bankshares'
subsidiaries must meet specific capital guidelines that involve quantitative
measures of the subsidiaries' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The subsidiaries'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and each of its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined), to average assets (as defined). Management believes as of December 31,
1996, that Bankshares and each of its subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996 and 1995, the most recent notification from each
respective subsidiaries' primary regulator categorized each of Bankshares'
subsidiaries as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized,the subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institutions' category.
Bankshares' and its two largest subsidiaries' actual capital amounts and ratios
are presented in the table below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
Total Capital
(to Risk-Weighted Assets):
Consolidated $ 134,180,000 20% >$ 53,279,000 >8% N/A N/A
- -
First National Bank of Abilene $ 51,856,000 16% >$ 25,158,000 >8% >$ 31,448,000 >10%
- - - -
Weatherford National Bank $ 14,920,000 20% >$ 6,108,000 >8% >$ 7,635,000 >10%
- - - -
Tier I Capital
(to Risk-Weighted Assets):
Consolidated $ 125,842,000 19% >$ 26,640,000 >4% N/A N/A
- -
First National Bank of Abilene $ 47,916,000 15% >$ 12,579,000 >4% >$ 18,869,000 > 6%
- - - -
Weatherford National Bank $ 13,999,000 18% >$ 3,054,000 >4% >$ 4,581,000 > 6%
- - - -
Tier I Capital (to Average Assets):
Consolidated $ 125,842,000 10% >$ 36,293,000 >3% N/A N/A
- -
First National Bank of Abilene $ 47,916,000 9% >$ 15,899,000 >3% >$ 26,499,000 > 5%
- - - -
Weatherford National Bank $ 13,999,000 9% >$ 4,463,000 >3% >$ 7,439,000 > 5%
- - - -
As of December 31, 1995:
Total Capital
(to Risk-Weighted Assets):
Consolidated $ 126,800,000 21% >$ 49,315,000 >8% N/A N/A
- -
First National Bank of Abilene $ 51,155,000 18% >$ 23,273,000 >8% >$ 29,091,000 >10%
- - - -
Weatherford National Bank $ 5,345,000 17% >$ 2,480,000 >8% >$ 3,100,000 >10%
- - - -
Tier I Capital
(to Risk-Weighted Assets):
Consolidated $ 119,074,000 19% >$ 24,657,000 >4% N/A N/A
- -
First National Bank of Abilene $ 47,502,000 16% >$ 11,636,000 >4% >$ 17,455,000 > 6%
- - - -
Weatherford National Bank $ 5,094,000 16% >$ 1,240,000 >4% >$ 1,861,000 > 6%
- - - -
Tier I Capital (to Average Assets):
Consolidated $ 119,074,000 11% >$ 33,034,000 >3% N/A N/A
- -
First National Bank of Abilene $ 47,502,000 10% >$ 14,823,000 >3% >$ 24,706,000 > 5%
- - - -
Weatherford National Bank $ 5,094,000 8% >$ 1,858,000 >3% >$ 3,097,000 > 5%
- - - -
14. LOANS TO RELATED PARTIES:
An analysis of the changes in loans to officers, directors, principal
shareholders, or associates of such persons for the years ended December 31,
1996 and 1995 (determined as of each respective year-end), follows:
Balance at Balance at
Beginning Additional End
of Period Loans Payments of Period
Year ended December 31, 1996 $ 37,063,736 $ 73,543,578 $ 68,731,528 $ 41,875,786
=========== =========== =========== ===========
Year ended December 31, 1995 $ 29,418,989 $ 89,990,572 $ 91,814,326 $ 27,595,235
=========== =========== =========== ===========
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.
15. STOCK OPTION PLAN:
The Company has an incentive stock plan to provide for the granting of options
to senior management of the Company at prices not less than market at the date
of grant. At December 31, 1996, the Company had allocated 281,537 shares of
stock for issuance under the plan. The plan provides that options granted are
exercisable after two years from date of grant at a rate of 20% each year
cumulatively during the 10-year term of the option. An analysis of stock option
activity for the years ended December 31, 1996, 1995, and 1994, is presented in
the table and narrative below:
1996 1995 1994
-------------------- ------------------- -------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
Outstanding, beginning of year 168,299 $ 17.10 155,989 $ 13.65 188,044 $ 12.82
Granted - - 38,688 25.60 - -
Exercised (45,461) 10.10 (22,503) 8.30 (31,274) 8.39
Canceled (2,249) 22.39 (3,875) 14.45 (781) 25.60
-------- ------ ------- ------- --------- ------
Outstanding, end of year 120,589 $ 19.85 168,299 $ 17.10 155,989 $ 13.65
======== ====== ======= ======= ======== ======
Exercisable at end of year 32,615 $ 11.94 33,528 $ 9.24 37,955 $ 7.74
======== ====== ======= ======= ======== ======
Weighted average fair value of
options granted at date of issue $ - $ 7.08 $ -
======= ======== =======
The options outstanding at December 31, 1996, have exercise prices between $6.90
and $25.60 with a weighted average exercise price of $19.85 and a weighted
average remaining contractual life of 6.7 years. Stock options have been
adjusted retroactively for the effects of stock dividends and splits.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," under which no compensation cost
has been recognized for options granted. Had compensation cost for the plan been
determined consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced by insignificant amounts on a pro
forma basis for the years ended December 31, 1996 and 1995. The fair value of
the options granted in 1995 was estimated on the date of grant using an accepted
options pricing model with the following weighted-average assumptions: risk-free
interest rate of 5.85%; expected dividend yield of 3.88%; expected life of 6.6
years; and expected volatility of 31.13%.
16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
Condensed Balance Sheets-December 31, 1996 and 1995
ASSETS 1996 1995
------ ---------------- ----------------
Cash in subsidiary bank $ 795,959 $ 687,818
Investment in securities 18,646,527 19,821,025
Investment in subsidiaries, at equity 113,248,171 100,622,066
Excess of cost over fair value of tangible assets acquired, net 771,188 817,323
Other assets 369,782 561,909
--------------- ---------------
Total assets $ 133,831,627 $ 122,510,141
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities $ 2,670,781 $ 2,482,330
Shareholders' equity-
Common stock 67,188,860 53,391,930
Capital surplus 36,874,707 36,870,604
Retained earnings 27,363,902 29,917,438
Unrealized loss on investment in securities
available-for-sale, net (266,623) (152,161)
-------------- --------------
Total shareholders' equity 131,160,846 120,027,811
-------------- --------------
Total liabilities and shareholders' equity $ 133,831,627 $ 122,510,141
============== ==============
Condensed Statements of Earnings-
For the Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
------------ ------------ ------------
Income-
Cash dividends from subsidiary banks $ 19,000,000 $ 12,890,000 $ 10,265,000
Excess of earnings (dividends) over
dividends (earnings) of subsidiary banks (357,114) 4,327,523 4,180,877
Other income 975,944 1,290,192 797,299
------------ ------------ ------------
19,618,830 18,507,715 15,243,176
Expenses-
Salaries and employee benefits 1,118,226 936,527 888,538
Other operating expenses 625,030 631,219 616,198
------------ ------------ ------------
1,743,256 1,567,746 1,504,736
------------ ------------ ------------
Earnings before income taxes 17,875,574 16,939,969 13,738,440
Income tax benefit 246,677 75,644 221,347
------------ ------------ ------------
Net earnings $ 18,122,251 $ 17,015,613 $ 13,959,787
============ ============ ============
Condensed Statements of Cash Flows-
For the Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994
------------ ------------ ------------
Cash Flows from operating activities-
Net earnings $ 18,122,251 $ 17,015,613 $ 13,959,787
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Excess of earnings (dividends) over
dividends (earnings) of subsidiary banks 357,114 (4,327,523) (4,180,877)
Depreciation 42,130 28,922 26,269
Discount accretion, net of premium amortization (381,799) (709,081) 115,027
Amortization of excess of cost over fair value of
assets acquired 46,135 46,135 46,135
Decrease (increase) in other assets 169,028 (240,739) (215,137)
Increase (decrease) in liabilities (138,267) 225,179 209,490
----------- ------------ ------------
Net cash provided by operating activities 18,216,592 12,038,506 9,960,694
----------- ------------ ------------
Cash flows from investing activities-
Capital expenditures (19,031) (27,863) (5,265)
Payment for stock and repayment
of debt assumed in acquisition (13,097,678) - -
Proceeds from maturity of securities 37,450,000 58,813,961 18,350,000
Purchases of securities (35,893,703) (64,903,945) (23,298,035)
----------- ------------ -----------
Net cash used in investing activities (11,560,412) (6,117,847) (4,953,300)
----------- ------------ -----------
Cash flows from financing activities-
Proceeds of stock issuance 432,013 186,923 262,475
Cash dividends paid (6,980,052) (5,907,078) (5,278,454)
----------- ------------ -----------
Net cash used in financing activities (6,548,039) (5,720,155) (5,015,979)
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 108,141 200,504 (8,585)
Cash in subsidiary bank at beginning of the year 687,818 487,314 495,899
----------- ------------ -----------
Cash in subsidiary bank at end of year $ 795,959 $ 687,818 $ 487,314
=========== ============ ===========
17. BUSINESS COMBINATIONS:
In January 1996, the Company exchanged approximately 405,000 shares (adjusted
for subsequent stock split) of its common stock for all of the outstanding
shares of Weatherford National Bancshares, Inc. ("Weatherford") and its
wholly-owned subsidiary, Weatherford National Bank. The Weatherford shareholders
received 1.5 shares of the Company's common stock for each share of Weatherford
common stock owned.
In March 1994, the Company exchanged approximately 359,000 shares (adjusted for
subsequent stock splits) of its common stock for substantially all of the
outstanding shares of Concho Bancshares, Inc. ("Concho") and its wholly-owned
subsidiary, Southwest Bank of San Angelo. The shareholders of Concho received
1.15 shares of the Company's common stock for each share of Concho common stock
owned.
The accompanying consolidated financial statements of the Company give effect to
the business combinations of Weatherford and Concho which have been accounted
for as poolings of interests. Accordingly, the accounts of Weatherford and
Concho have been combined with those of the Company to reflect the results of
these companies on a combined basis for all periods presented.
In January 1996, the Company purchased substantially all of the outstanding
stock of Citizens Equity Corporation, Inc. ("Citizens") and its subsidiary,
Citizens National Bank of Weatherford, for approximately $7,500,000 in cash,
along with the assumption of Citizens' debt of approximately $5,600,000. The
total purchase price exceeded the fair market value of net assets acquired by
approximately $4,900,000, which was recorded by the Company as goodwill to be
amortized using a straight-line method over a period of 15 years. The proforma
impact of Citizens is not material to the Company's financial statements.
In July 1995, the Company, through a bank subsidiary, acquired Citizens State
Bank in Roby, Texas ("Roby"), for $2,125,000 in cash. The fair market value of
net assets acquired approximated the purchase price. The impact of Roby is not
material to the Company's financial statements.
18. CASH FLOW INFORMATION:
Supplemental information on cash flows and noncash transactions is as follows:
Year Ended December 31,
1996 1995 1994
------------ ------------ ------------
Supplemental cash flow information-
Interest paid $ 33,882,463 $ 28,704,648 $ 22,185,893
Federal income taxes paid 8,933,024 8,732,667 7,077,696
Schedule of noncash investing and financing activities-
Debt assumed in acquisition 5,555,017 - -
Assets acquired through foreclosure 47,342 472,045 271,602
Change in unrealized loss on investment in
securities available-for-sale (176,095) 903,795 (1,551,700)
Acquisition:
Assets acquired 98,200,000
Liabilities assumed 90,700,000
Cash paid for stock 7,500,000
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Arthur Andersen LLP has served as the Company's independent
accountants since 1990. There have been no disagreements between management of
Bankshares and its current independent accountants relating to accounting
practices and procedures or financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 401 of Regulation S-K will be
contained in the 1997 Notice to Shareholders under the Captions "Election of
Directors" and "Executive Officers" and is hereby incorporated by reference.
Item 11. Executive Officer Compensation
The information required by Item 402 of Regulation S-K will be
contained in the 1997 Notice to Shareholders under the captions "Compensation of
Executive Officers" and "Stock Options" and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a.) Security ownership of certain beneficial owners.
At December 31, 1996, management was not aware of any person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) who is the beneficial owner of more than five
percent (5%) of the Company's common stock. However, First National Bank of
Abilene, First National Bank, Sweetwater, and Stephenville Bank & Trust Co. held
of record in various fiduciary capacities an aggregate of 1,378,328 shares of
such stock. Of the total shares held, these subsidiaries of the Company had sole
power to vote 716,650 shares (10.7%), 104,455 shares (1.6%), and 1,406 shares
(-%), respectively. In addition, First National Bank of Abilene and First
National Bank, Sweetwater shared, with other persons, the power to vote the
remaining 549,440 shares and 6,377 shares, respectively. All 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 that sets forth the powers of the fiduciary
with regard to the securities held in such accounts.
b.) Security ownership of management
Set forth in the following table is certain information as of
February 11, 1997, 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 executive officers, and by the officers and directors of the
Company as a group.
Number of Shares
Beneficially Percent
Name Owned of Class
- ----------------------- ------------------- ---------
Joseph E. Canon 4,305 0.1%
Mac A. Coalson 75,266 1.1
F. Scott Dueser 49,523 0.7
Patrick N. Gerald 26,454 0.4
Robert E. Hitt 67,222 1.0
Raymond McDaniel, Jr. 25,892 0.4
Bynum Miers 16,816 0.3
Kenneth T. Murphy 78,263 1.2
Dian Graves Owen 17,343 0.3
James M. Parker 253,941 3.8
Jack D. Ramsey, M.D. 50,465 0.8
Craig Smith 36,034 0.5
H. T. Wilson 62,857 0.9
Walter F. Worthington 108,271 1.6
Curtis R. Harvey 3,351 -
Tommy J. Barrow 327 -
------------------- ---------
All Officers and Directors as a group 876,330 13.0%
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 27 through 50. 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.
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 Crow-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.
The following document was filed with the Form 10-K Annual
Report for the fiscal year ended December 31, 1994.
1. Amendment to Registrant's Bylaws effective April 26, 1994.
The following document was filed with the Form 10-K Annual
Report for the fiscal year ended December 31, 1995.
1. Revised Deferred Compensation Agreement between Bankshares and
Kenneth T. Murphy.
Listed below are the exhibits filed with this report.
1. Subsidiaries of Registrant
2. Executive Recognition Plan
3. Executive Recognition Agreement
SUBSIDIARIES OF REGISTRANT
Place of Percentage of Voting
Name of Subsidiary Organization Securities Owned
First Financial Bankshares of Delaware 100%
Delaware, Inc
First Financial Investments, Inc. Texas 100%
First National Bank of Abilene Texas 100%*
Abilene, Texas
Hereford State Bank Texas 100%*
Hereford, Texas
First National Bank, Sweetwater Texas 100%*
Sweetwater, Texas
Eastland National Bank Texas 100%*
Eastland, Texas
First National Bank in Cleburne Texas 100%*
Cleburne, Texas
Stephenville Bank & Trust Co. Texas 100%*
Stephenville, Texas
Southwest Bank of San Angelo Texas 100%*
San Angelo, Texas
Weatherford National Bank Texas 100%*
Weatherford, Texas
* By First Financial Bankshares of
Delaware, Inc.
All subsidiaries (other than First Financial Investments, Inc. which, as
of December 31, 1996, had not yet been formally organized) are included in the
consolidated financial statements.
EXECUTIVE RECOGNITION PLAN
FIRST FINANCIAL BANKSHARES, INC., a Texas corporation, (the "Company")
establishes this Executive Recognition Plan (the "Plan") effective April 23,
1996.
1. PURPOSE
The purpose of the Plan is to enable the Company to provide some
assurance in the form of economic protection to a limited number of key
executive employees of the Company and its subsidiaries who might be most
vulnerable to job loss in the event of a "Change in Control" of the Company.
2. DEFINITIONS
In this Plan the following definitions shall apply:
(a) "Agreement" shall mean an Executive Recognition Agreement generally
in the form of Exhibit "A" attached hereto and incorporated herein by reference.
(b) "Change in Control" shall have the same meaning as defined in
Section 1 of the Agreement.
(c) "Committee" shall mean the Compensation Committee appointed by
the Board of Directors of the Company.
3. ELIGIBILITY
The Committee shall select those key executive employees of the Company
and its subsidiaries who may thereafter be offered an Agreement by the
Committee.
4. ADMINISTRATION
The Committee shall:
(a) construe and interpret the Plan;
(b) decide all questions of eligibility; and
(c) determine the compensation provisions to be offered an
eligible key executive employee under the terms of the
Agreement.
5. BENEFITS
The Committee may offer an eligible key executive employee a benefit
payable under the terms of the Agreement of not less than fifty percent (50%)
nor more than two (2) times the employee's annual base salary payable by the
Company or a subsidiary of the Company during the period immediately preceding
the "Date of Termination" as determined under the provisions of the Agreement
following a Change in Control.
6. FUNDING
The Company shall have no obligation to establish a trust or reserve
fund for the payment of benefits under any Agreement accepted by a key executive
employee of the Company or a subsidiary of the Company.
7. AMENDMENTS
The Company shall have the sole right to alter, amend or terminate this
Plan. Notwithstanding the preceding sentence, no act altering, amending or
terminating this Plan shall affect the terms of any Agreement theretofore
offered to and accepted by a key executive employee of the Company or a
subsidiary of the Company.
8. MISCELLANEOUS
This Plan shall be construed, administered and governed in all respects
under applicable federal law, and to the extent not preempted by federal law,
under the laws of the State of Texas. If any provision of this Plan shall be
held by a court of competent jurisdiction to be invalid or unenforceable, the
remaining provisions hereof shall continue in full effect.
IN WITNESS WHEREOF, this Plan is adopted by execution hereof to be
effective as of the date first above written.
ATTEST: FIRST FINANCIAL BANKSHARES, INC.
______________________________ By:_______________________________________
Name: ____________________________________
Title:____________________________________
"COMPANY"
THE STATE OF TEXAS ss.
ss.
COUNTY OF TAYLOR ss.
This instrument was acknowledged before me on ______________, 19____,
by ___________________________, ___________________________ of FIRST FINANCIAL
BANKSHARES, INC., a Texas corporation, on behalf of said corporation.
------------------------------------------
NOTARY PUBLIC, STATE OF TEXAS
My Commission Expires:___________________
------------------------------------------
Printed/Stamped Name of Notary
EXECUTIVE RECOGNITION AGREEMENT
THIS EXECUTIVE RECOGNITION AGREEMENT (this "Agreement") between FIRST
FINANCIAL BANKSHARES, INC., a Texas corporation (the "Company"), and
_____________________ (the "Employee") is dated effective __________________,
19____ (the "Effective Date").
WITNESSETH:
WHEREAS, the Company considers it essential to the best interests of
its stockholders to foster the continuous employment of key executives of the
Company; and
WHEREAS, the Employee is a key executive of the Company; and
WHEREAS, the parties recognize that, as is the case with many
publicly-held corporations, the possibility of a "Change in Control" (as such
term is defined in Section 1 hereof) may exist and that such possibility, and
the uncertainty and questions which it may raise among management, may result in
the departure or distraction of a key executive at a critical time, and to the
detriment of the Company and its stockholders; and
WHEREAS, the Company recognizes that the Employee, as a key executive,
could suffer financial and professional detriments if a Change in Control of the
Company were to occur; and
WHEREAS, in order to protect the Employee in the event of a Change in
Control of the Company, the Company agrees that the Employee shall receive the
benefits set forth in this Agreement in the event the Employee's employment with
the Company is terminated subsequent to a Change in Control of the Company under
the circumstances described below;
NOW, THEREFORE, the parties hereby agree as follows:
1. Employment in General; Change in Control. This Agreement does not
affect the Employee's employment arrangements with the Company except for the
conditions contained herein pertaining to a Change in Control of the Company.
Absent a Change in Control of the Company, the Employee's continued employment
with the Company shall at all times be subject to the will of the Board of
Directors of the Company. For purposes of this Agreement, a "Change in Control"
of the Company shall be deemed to have occurred at the time (a) a report on
Schedule 13D is filed with the Securities and Exchange Commission pursuant to
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") disclosing that any Person (as hereinafter defined) is the beneficial
owner (as such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly of securities of the Company representing more than fifty percent
(50%) of the combined voting power entitled to vote generally in the election of
directors of the then outstanding securities of the Company; or (b) any Person
shall purchase securities pursuant to a tender offer or exchange offer to
acquire any common stock of the Company (or securities convertible into common
stock) for cash, securities or any other consideration, provided that after
consummation of the offer, the person in question is the beneficial owner (as
such term is defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing more than fifty percent
(50%) of the combined voting power entitled to vote generally in the election of
directors of the then outstanding securities of the Company; or (c) the
stockholders of the Company shall approve a reorganization, merger,
consolidation, recapitalization, exchange offer, purchase of assets or other
transaction, in each case, with respect to which the persons who were the
beneficial owners of the Company immediately prior to such a transaction do not,
immediately after consummation thereof, own more than fifty percent (50%) of the
combined voting power entitled to vote generally in the election of directors of
the reorganized, merged, recapitalized or resulting company's then outstanding
securities; or (d) the stockholders of the Company shall approve a liquidation
or dissolution of the Company; or (e) the Company shall sell or otherwise
transfer (or one or more of its subsidiaries shall sell or otherwise transfer),
in one or more related transactions, assets aggregating fifty percent (50%) or
more of the book value of the assets of the Company and its subsidiaries (taken
as a whole). For purposes of this Agreement, the term "Person" shall mean and
include any individual, corporation, partnership, group, association or other
"person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act,
other than the Company, a wholly-owned subsidiary of the Company or any employee
benefit plan(s) sponsored by the Company or a subsidiary of the Company.
2. Term of Agreement. Unless extended pursuant to the provisions of
this Section 2, the term of this Agreement shall be for the period commencing as
of the Effective Date and continuing thereafter until the earliest to occur of
(a) the Employee's death, Disability (as defined in Subsection 3(i) hereof) or
Retirement (as defined in Subsection 3(ii) hereof), (b) the termination of the
Employee's employment with the Company prior to a Change in Control of the
Company, or (c) the second anniversary of this Agreement. The foregoing
notwithstanding, if a Change in Control of the Company shall have occurred
during the term of this Agreement, this Agreement shall continue in effect for a
period of two (2) years from the date of any such Change in Control of the
Company; and further, if a second Change in Control occurs within a period of
two (2) years from the date of the first Change in Control, this Agreement shall
continue in effect for a period of two (2) years from the date of the second
Change in Control of the Company; and if any benefit accrues and remains unpaid
at the time this Agreement would otherwise have terminated, this Agreement shall
remain in effect until such benefit is paid in full solely for the purpose of
permitting the Employee to enforce the full payment of such benefit.
3. Termination Following Change in Control. If a Change in Control of
the Company occurs, the Employee shall be entitled to the benefits provided in
Subsection 4(iii) hereof upon the subsequent termination of the Employee's
employment during the term of this Agreement, unless such termination is (a)
because of the Employee's death, Disability or Retirement, (b) by the Company
for Cause, or (c) by the Employee other than for Good Reason. The parties hereto
expressly acknowledge and agree that notwithstanding anything contained in this
Agreement to the contrary, the Employee is entitled to any and all benefits due
to the Employee as determined in accordance with the terms of the Company's
benefit plans (without reference to this Agreement), including, without
limitation, all qualified and nonqualified deferred compensation plans, and all
medical, dental, disability, accident and insurance plans, then in effect
whether the Employee is terminated by the Company for Cause or for other than
Cause, by the Employee for Good Reason or for other than Good Reason, because of
the Retirement, Disability or death of the Employee or for any other reason, and
the benefits provided in Subsection 4(iii) hereof shall be determined in
accordance with this Agreement without any impact, impairment, reduction or
other effect on the Employee's rights or benefits under such benefit plan(s).
For purposes of this Agreement the following definitions shall apply:
(i) Disability. Termination by the Company of the Employee's
employment based on "Disability" shall mean termination because of the
Employee's absence from his duties with the Company on a full-time
basis for ninety (90) consecutive days as a result of the Employee's
physical or mental incapacity due to injury or illness, unless within
thirty (30) days after Notice of Termination (as hereinafter defined)
is given to the Employee following such absence the Employee shall have
returned to the full-time performance of his duties.
(ii) Retirement. Termination by the Employee of the Employee's
employment based on "Retirement" shall mean termination on or after the
normal retirement date established under the terms of any qualified
plan or plans of the Company in effect prior to a Change in Control.
(iii) Cause. Termination by the Company of the Employee's
employment for "Cause" shall mean termination upon (A) the willful and
continued failure by the Employee to substantially perform his duties
with the Company (other than any such failure resulting from the
Employee's physical or mental incapacity due to injury or illness)
after written demand for substantial performance is delivered to the
Employee by the Company, which demand specifically identifies the
manner in which the Employee has not substantially performed his
duties, or (B) the willful engaging by the Employee in conduct which is
demonstrably injurious to the Company, monetarily or otherwise. For
purposes of this Subsection (iii), no act, or failure to act, on the
Employee's part shall be deemed "willful" unless done, or omitted to be
done, by the Employee in bad faith and without "reasonable belief" (as
hereinafter defined) that his action or omission was in, or not opposed
to, the best interests of the Company. The phrase "reasonable belief"
shall mean the belief that a reasonable and prudent man would have had
in the same or similar circumstances as to the act or failure to act.
Any act, or failure to act, based upon authority given pursuant to a
resolution duly adopted by the Board or based upon the advice of
counsel for the Company shall be conclusively presumed to be done, or
omitted to be done, by the Employee in good faith, and in the best
interests of the Company. Notwithstanding the foregoing the Employee
shall not be deemed to have been terminated for Cause unless and until
there shall have been delivered to the Employee a copy of a resolution
duly adopted by the affirmative vote of not less than a majority of the
entire membership of the Board at a meeting of the Board called for
such purpose (after reasonable notice to you and an opportunity for
you, together with your counsel, to be heard before the Board), finding
that in the good faith opinion of the Board the Employee was guilty of
the conduct set forth above in (A) or (B) of this Subsection (iii) and
specifying the particulars thereof in detail.
(iv) Good Reason. The Employee shall be entitled to
terminate his employment for Good Reason. Termination by
the Employee of his employment for "Good Reason" shall
mean termination based on:
(A) a determination by the Employee, made in good
faith and based on the Employee's reasonable belief, that
there has been a materially adverse change in his status or
position as an executive officer of the Company as in effect
immediately prior to the Change in Control, including, without
limitation, any material change in the Employee's status or
position as a result of a diminution in the Employee's duties
or responsibilities or the assignment to the Employee of any
duties or responsibilities which are inconsistent with such
status or position(s), or any removal of the Employee from or
any failure to reappoint or reelect the Employee to such
position(s) (except in connection with the termination of the
Employee's employment for Cause, Disability or Retirement or
as a result of the Employee's death or by the Employee other
than for Good Reason). The phrase "reasonable belief" shall
mean the belief that a reasonable and prudent man would have
had in the same or similar circumstances as to the change in
status or position;
(B) a reduction by the Company in the Employee's
annual base salary in effect immediately prior to the Change
in Control;
(C) the relocation of the Employee's principal office
outside of the city or metropolitan area in which the Employee
is residing at the time of any Change in Control of the
Company;
(D) the failure by the Company to continue in effect
any Plan (as hereinafter defined) in which the Employee
participates at the time of the Change in Control of the
Company (or Plans providing the Employee with at least
substantially similar benefits) other than as a result of the
normal expiration of any such Plan in accordance with its
terms as in effect at the time of the Change in Control. For
purposes of this Agreement, "Plan" shall mean any compensation
plan such as an incentive, stock option or restricted stock
plan or any benefit plan, including, without limitation, all
qualified and nonqualified deferred compensation plans; all
medical, dental, disability, accident and life insurance
plans; and any relocation plan or policy or any other material
plan, program or policy of the Company intended to benefit
employees;
(E) the failure by the Company to provide and credit
the Employee with the number of paid vacation days to which
the Employee is then entitled in accordance with the Company's
normal vacation policy as in effect immediately prior to the
Change in Control;
(F) the failure by the Company to obtain from any
Successor (as hereinafter defined) the assent to this
Agreement contemplated by Section 5 hereof; or
(G) any purported termination by the Company of the
Employee's employment which is not effected pursuant to a
Notice of Termination satisfying the requirements of
Subsection (v) below (and, if applicable, Subsection (iii)
above); and for purposes of this Agreement, no such purported
termination shall
be effective.
(v) Notice of Termination. Any purported termination of the
Employee's employment by the Company or by the Employee following a
Change in Control of the Company shall be communicated by written
Notice of Termination to the other party hereto in accordance with
Section 9 hereof. For purposes of this Agreement, a "Notice of
Termination" shall mean a notice which shall indicate the specific
termination provision in this Agreement relied upon and, if the
termination provision is claimed to relieve the Company of its
obligation to pay the benefits provided by this Agreement, the
notice shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for the denial of the payment of the
benefits provided by this Agreement.
(vi) Date of Termination. "Date of Termination" following a
Change in Control shall mean (A) if the Employee's employment is to be
terminated for Disability, thirty (30) days after Notice of Termination
is given (provided that the Employee shall not have returned to the
performance of his duties on a full-time basis during such thirty (30)
day period), (B) if the Employee's employment is to be terminated by
the Company for Cause or by the Employee for Good Reason, the date
specified in the Notice of Termination, or (C) if the Employee's
employment is to be terminated by the Company for any reason other than
Cause, the date specified in the Notice of Termination, which in no
event shall be a date earlier than sixty (60) days after the date on
which a Notice of Termination is given, unless an earlier date has been
expressly agreed to by the Employee in writing.
4. Compensation Upon Termination; Other Agreements.
(i) If the Employee's employment shall be terminated for
Disability following a Change in Control of the Company, the Company
shall pay the Employee's salary through the Date of Termination at the
rate in effect just prior to the time a Notice of Termination is given
plus any benefits or awards under any Plans which pursuant to the terms
of any Plans have been earned or become payable, but which have not
been paid to the Employee. Thereafter, benefits shall be determined in
accordance with the Plans then in effect.
(ii) If the Employee's employment shall be terminated for
Cause following a Change in Control of the Company, the Company shall
pay the Employee's salary through the Date of Termination at the rate
in effect just prior to the time a Notice of Termination is given plus
any benefits or awards (including both the cash and stock components)
which pursuant to the terms of any Plans have been earned or become
payable, but which have not yet been paid to the Employee. Thereupon
the Company shall have no further obligations to the Employee under
this Agreement.
(iii)Subject to Section 7 hereof, if, within twenty-four (24)
months following a Change in Control of the Company, employment by the
Company shall be terminated by the Company other than for Cause, death,
Disability or Retirement, or shall be terminated by the Employee for
Good Reason, then the Company shall pay or provide to the Employee,
without regard to any contrary provisions of any Plan, the following:
(A) ___________ percent (____%) of the Employee's
annual base salary payable by the Company immediately
preceding the Date of Termination;
(B) for a period of two (2) years after the Date of
Termination, continuation of all insured and self-insured
medical, life insurance and disability benefit Plans in which
the Employee participated immediately prior to the Date of
Termination, at no cost to the Employee. In the event that the
Employee's participation in any such Plan is barred, the
Company, at its sole cost and expense, shall arrange to have
issued for the benefit of the Employee and his dependents,
individual policies of insurance providing benefits
substantially similar (on an after tax basis) to those which
the Employee otherwise would have been entitled to receive
under such Plans pursuant to this Subsection (iii) or, if such
insurance is not available at a reasonable cost to the
Company, the Company shall otherwise provide you and your
dependents with equivalent benefits (on an after tax basis);
and
(C) a lump sum payment of Employee's accrued vacation
pay.
(iv)The amount of any payment provided for in this Section 4
shall not be reduced, offset or subject to recovery by the Company by
reason of any compensation earned by the Employee as the result of
employment by another employer after the Date of Termination, or
otherwise.
5. Successors; Binding Agreement.
(i) The Company will seek, by written request at least five
(5) business days prior to the time a Person becomes a Successor (as
hereinafter defined), to have such Person assent to the fulfillment of
the Company's obligations under this Agreement. Failure of such Person
to furnish such assent by the later of (A) three (3) business days
prior to the time such Person becomes a Successor or (B) two (2)
business days after such Person receives a written request to so assent
shall constitute Good Reason for termination by the Employee of his
employment if a Change in Control of the Company occurs or has
occurred. For purposes of this Agreement, "Successor" shall mean any
Person that succeeds to, or has the practical ability to control
(either immediately or with the passage of time), the Company's
business directly, by merger or consolidation, or indirectly, by
purchase of the Company's Voting Securities or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by the Employee's personal or legal representatives,
executors, administrators, heirs, distributees, and legatees. If the
Employee should die while any amount would still be payable to him
hereunder if the Employee had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to the Employee's legatee or other designee or,
if there is no such designee, to the Employee's estate.
(iii)For purposes of this Agreement, the "Company" shall
include any corporation or other entity which is the surviving or
continuing entity in respect of any merger, consolidation or form of
business combination in which the Company ceases to exist.
6. Fees and Expenses. The Company shall reimburse the
Employee for all reasonable legal fees and related expenses, if
any, incurred by the Employee in the successful enforcement of any
right or benefit provided by this Agreement.
7. Taxes.
(i) All payments to be made to the Employee under this
Agreement will be subject to required withholding of federal, state and
local income and employment taxes.
(ii)Notwithstanding anything in the foregoing to the contrary,
if any of the payments provided for in this Agreement, together with
any other payments which the Employee has the right to receive from the
Company or any corporation which is a member of an "affiliated group"
(as defined in Section 1504(a) of the Internal Revenue Code of 1986, as
amended from time to time (the "Code") without regard to Section
1504(b) of the Code) of which the Company is a member, would constitute
a "parachute payment" (as defined in Section 280G(b)(2) of the Code),
the payments pursuant to this Agreement shall be reduced to the largest
amount as will result in no portion of such payments being subject to
the excise tax imposed by Section 4999 of the Code; provided, however,
that the determination as to whether any reduction in the payments
under this Agreement pursuant to this Subsection (ii) is necessary
shall be made by the Employee in good faith, and such determination
shall be conclusive and binding on the Company with respect to its
treatment of the payment for tax reporting purposes and, provided
further that the Employee may determine in his discretion what payment
or payments provided for herein shall be reduced.
8. Survival. The respective obligations of, and benefits
afforded to, the Company and the Employee as provided in Sections 4, 5, 6, 7,
11 and 15 of this Agreement shall survive termination of this Agreement.
9. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or when mailed by United States
registered mail, return receipt requested, postage prepaid to the address set
forth below:
Employee Address: _________________________
=========================
Company Address: _________________________
=========================
provided that all notices to the Company shall be directed to the attention of
an executive officer of the Company other than Employee, with a copy to the
Secretary of the Company, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon receipt.
10. Employment with Subsidiaries. Employment with the Company for
purposes of this Agreement includes employment with any corporation in which the
Company has a direct or indirect ownership interest of fifty percent (50%) or
more of the total combined voting power of all classes of stock in such
corporation.
11. Confidential Information. The Employee shall hold in a fiduciary
capacity for the benefit of the Company all secret or confidential information,
knowledge or data relating to the Company or any of its affiliated companies,
and their respective businesses, which shall have been obtained by the Employee
during the Employee's employment by the Company or any of its affiliated
companies and which shall not be or become public knowledge (other than by acts
by the Employee or his representatives in violation of this Agreement). After
termination of the Employee's employment with the Company, the Employee shall
not, without the prior written consent of the Company, communicate or divulge
any such information, knowledge or data to anyone other than the Company and
those designated by it. In no event shall an asserted violation of the
provisions of this Section 11 constitute a basis for deferring or withholding
any amounts otherwise payable to the Employee under this Agreement.
12. Miscellaneous; Governing Law. No provision of this Agreement may be
amended, waived or discharged following a Change in Control of the Company
unless such amendment, waiver or discharge is agreed to in writing and signed by
all of the parties affected thereby. No waiver by either party at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
to be a waiver of similar or dissimilar provisions or conditions at the same or
at any prior or subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject matter hereof have
been made by either party which are not expressly set forth in this Agreement.
The validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Texas.
13. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Headings. The headings of Sections of this Agreement
are included solely for convenience of reference and shall not control the
meaning or interpretation of any of the provisions of this Agreement.
15. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled by arbitration, conducted by a
panel of three arbitrators in a location selected by the Employee within fifty
(50) miles from the location of his job with the Company, in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrators' award in any court having jurisdiction; provided,
however, that the Employee shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
16. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned have executed this Agreement to be
effective as of the date first written above.
FIRST FINANCIAL BANKSHARES, INC.
By:______________________________
Name: ___________________________
Title:___________________________
"Company"
ACCEPTED AND AGREED TO
THIS ______ DAY OF
_______________, 19____.
By:______________________________
Name:____________________________
"Employee"
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 Director Officer, Controller and Chief
Accounting Officer
Date: March 4, 1997
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
/S/ JOSEPH E. CANON Director March 18, 1997
Joseph E. Canon
/S/ MAC A. COALSON Director March 13, 1997
Mac A. Coalson
/S/ F. SCOTT DUESER Director March 18, 1997
F. Scott Dueser
/S/ PATRICK N. GERALD Director March 20, 1997
Patrick N. Gerald
/S/ ROBERT E. HITT Director March 18, 1997
Robert E. Hitt
/S/ RAYMOND A. MCDANIEL, JR. Director March 12, 1997
Raymond A. McDaniel, Jr.
/S/ BYNUM MIERS Director March 18, 1997
Bynum Miers
Director March , 1997
Dian Graves Owen
/S/ JAMES M. PARKER Director March 18, 1997
James M. Parker
/S/ O. L. SCHUCH Director March 11, 1997
O.L. Schuch
/S/ CRAIG SMITH Director March 20, 1997
Craig Smith
/S/ H. T. WILSON Director March 13, 1997
H.T. Wilson
/S/ WALTER F. WORHTINGTON Director March 13, 1997
Walter F. Worthington