SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-7674
First Financial Bankshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Texas 75-0944023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 Pine Street
Abilene, Texas 79601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (915) 627-7155
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of February 1, 2002, the aggregate market value of voting stock held by
non-affiliates was $339,668,650.
As of February 1, 2002, there were 12,336,954 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Certain information called for by Part III is incorporated by reference to
the Proxy Statement for the 2002 Annual Meeting of our shareholders which will
be filed with the Securities and Exchange Commission not later than 120 days
after December 31, 2001.
TABLE OF CONTENTS
Page
FORWARD-LOOKING STATEMENTS..................................................1
PART I
ITEM 1. BUSINESS................................................1
ITEM 2. PROPERTIES.............................................10
ITEM 3. LEGAL PROCEEDINGS......................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................11
ITEM 6. SELECTED FINANCIAL DATA................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...............13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....26
ITEM 11. EXECUTIVE COMPENSATION.................................26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K...............................26
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
and similar expressions, as they relate to us or our management, identify
forward-looking statements. These forward-looking statements are based on
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including but not limited to general economic conditions,
actions taken by the Federal Reserve Board, legislative and regulatory actions
and reforms, competition from other financial institutions and financial holding
companies, fluctuation in interest rates, changes in the demand for loans,
fluctuations in value of collateral and loan reserves and other factors
described in "PART II, Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations." Such statements reflect the
current views of our management with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
General
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First Financial Bankshares, Inc., a Texas corporation, is a financial
holding company registered under the Bank Holding Company Act of 1956, or BHCA.
As such, we are supervised by the Board of Governors of the Federal Reserve
System, or Federal Reserve Board, as well as several other state and federal
regulators. We were formed as a bank holding company in 1956 under the original
name F & M Operating Company, but our banking operations date back to 1890, when
Farmers and Merchants National Bank opened for business in Abilene, Texas. By
virtue of a series of reorganizations, mergers, and acquisitions since 1956, we
now own, through our wholly-owned Delaware subsidiary, First Financial
Bankshares of Delaware, Inc., ten banks organized and located in Texas. These
ten banks are:
o First National Bank of Abilene, Abilene, Texas;
o Hereford State Bank, Hereford, Texas;
o First National Bank, Sweetwater, Texas;
o Eastland National Bank, Eastland, Texas;
o First Financial Bank, National Association, Cleburne, Texas;
o Stephenville Bank and Trust Co., Stephenville, Texas;
o San Angelo National Bank, San Angelo, Texas;
o Weatherford National Bank, Weatherford, Texas;
o First Financial Bank, National Association, Southlake, Texas
(formerly Texas National Bank, Southlake); and
o City National Bank, Mineral Wells, Texas.
As described in more detail below, we elected to be treated as a financial
holding company in September 2001.
Our service centers are located primarily in North Central and West Texas.
Considering the branches and locations of all our subsidiary banks, as of
December 31, 2001, we had 27 financial centers across Texas, with seven
locations in Abilene, two locations in Cleburne, two locations in Stephenville,
two locations in San Angelo, three locations in Weatherford, and one location
each in Mineral Wells, Hereford, Sweetwater, Eastland, Southlake, Aledo,
Alvarado, Burleson, Keller, Trophy Club, and Roby.
Information on our revenues, profits and losses and total assets appears in
the discussion of our Results of Operations contained in Item 7 hereof.
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First Financial Bankshares, Inc.
We provide management and technical resources and policy direction to our
subsidiary banks, which enables them to improve or expand their banking services
while continuing their local activity and identity. Each of our subsidiary banks
operates under the day-to-day management of its own board of directors and
officers, with substantial authority in making decisions concerning their own
investments, loan policies, interest rates, and service charges. We provide
resources and policy direction in, among other things, the following areas:
o asset and liability management;
o accounting, budgeting, planning and insurance;
o capitalization; and
o regulatory compliance.
In particular, we assist our subsidiary banks with, among other things,
decisions concerning major capital expenditures, employee fringe benefits,
including pension plans and group insurance, dividend policies, and appointment
of officers and directors and their compensation. We also perform, through
corporate staff groups or by outsourcing to third parties, internal audits and
loan reviews of our subsidiary banks. Through First National Bank of Abilene, we
provide advice and specialized services for our banks related to lending,
investing, purchasing, advertising, public relations, and computer services.
Services Offered by Our Subsidiary Banks
Each of our subsidiary banks is a separate legal entity that operates under
the day-to-day management of its own board of directors and officers. Each of
our subsidiary banks provides general commercial banking services, which include
accepting and holding checking, savings and time deposits, making loans,
automated teller machines, drive-in and night deposit services, safe deposit
facilities, transmitting funds, and performing other customary commercial
banking services. Certain of our subsidiary banks also administer pension plans,
profit sharing plans and other employee benefit plans. First National Bank of
Abilene, First National Bank, Sweetwater, Stephenville Bank and Trust Co. and
San Angelo National Bank have active trust departments. The trust departments
offer a complete range of services to individuals, associations, and
corporations. These services include administering estates, testamentary trusts,
various types of living trusts, and agency accounts. In addition, First National
Bank of Abilene, First Financial Bank, Cleburne, and San Angelo National Bank
provide securities brokerage services through arrangements with various third
parties.
Competition
Commercial banking in Texas is highly competitive, and because we hold less
than 1% of the state's deposits, we represent only a minor segment of the
industry. To succeed in this industry, our management believes that our banks
must have the capability to compete in the areas of (1) interest rates paid or
charged; (2) scope of services offered; and (3) prices charged for such
services. Our subsidiary banks compete in their respective service areas against
highly competitive banks, savings and loan associations, small loan companies,
credit unions, mortgage companies, and brokerage firms, all of which are engaged
in providing financial products and services and some of which are larger than
our subsidiary banks in terms of capital, resources and personnel.
Our business does not depend on any single customer or any few customers,
the loss of any one of which would have a materially adverse effect upon our
business. Although we have a broad base of customers that are not related to us,
our customers also occasionally include our officers and directors, as well as
other entities with which we are affiliated. With our subsidiary banks we may
make loans to officers and directors, and entities with which we are affiliated,
in the ordinary course of business. We make these loans on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons. Loans to directors,
officers and their affiliates are also subject to numerous restrictions under
federal and state banking laws.
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Employees
With our subsidiary banks we employed approximately 740 full-time
equivalent employees at February 1, 2002. Our management believes that our
employee relations have been and will continue to be good.
Supervision and Regulation
Both federal and state laws extensively regulate bank holding companies,
financial holding companies and banks. These laws (and the regulations
promulgated thereunder) are primarily intended to protect depositors and the
deposit insurance fund of the Federal Deposit Insurance Corporation, or FDIC,
although shareholders are also benefited. The following information describes
particular laws and regulatory provisions relating to financial holding
companies and banks. This discussion is qualified in its entirety by reference
to the particular laws and regulatory provisions. A change in any of these laws
or regulations may have a material effect on our business and the business of
our subsidiary banks.
Bank Holding Companies and Financial Holding Companies
Traditionally, the activities of bank holding companies were limited to the
business of banking and activities closely related or incidental to banking.
Bank holding companies were generally prohibited from acquiring control of any
company which was not a bank and from engaging in any business other than the
business of banking or managing and controlling banks. The Gramm-Leach-Bliley
Act, which took effect on March 12, 2000, dismantled many Depression-era
restrictions against affiliation between banking, securities and insurance firms
by permitting bank holding companies to engage in a broader range of financial
activities, so long as prudential safeguards are observed. Specifically, bank
holding companies may elect to become "financial holding companies" that may
affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature or incidental to a financial activity.
Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, securities firms
and insurance companies find it easier to acquire or affiliate with each other
and cross-sell financial products. The act permits a single financial services
organization to offer a more complete array of financial products and services
than historically was permitted.
The enactment of the Gramm-Leach-Bliley Act was a pivotal point in the
history of the financial services industry. Under the new legislation, the
Federal Reserve Board serves as the primary "umbrella" regulator of financial
holding companies with supervisory authority over each parent company and
limited authority over its subsidiaries. The primary regulator of each
subsidiary of a financial holding company will depend on the type of activity
conducted by the subsidiary. For example, broker-dealer subsidiaries will be
regulated largely by securities regulators and insurance subsidiaries will be
regulated largely by insurance authorities.
A bank holding company may become a financial holding company under the
Gramm-Leach-Bliley Act only if each of its subsidiary banks is well capitalized,
is well managed and has at least a satisfactory rating under the Community
Reinvestment Act. A bank holding company that falls out of compliance with such
requirement may be required to cease engaging in certain activities. Any bank
holding company that does not elect to become a financial holding company
remains subject to the current restrictions of the Bank Holding Company Act.
A financial holding company is essentially a bank holding company with
significantly expanded powers. Under the Gramm-Leach-Bliley Act, among the
activities that will be deemed "financial in nature" for financial holding
companies are, in addition to traditional lending activities, securities
underwriting, dealing in or making a market in securities, sponsoring mutual
funds and investment companies, insurance underwriting and agency activities,
activities which the Federal Reserve Board determines to be closely related to
banking, and certain merchant banking activities. The Federal Reserve Board has
proposed permitting a number of additional financial activities, but we cannot
predict whether any of these additional proposals will be adopted or the form
any final rule will take.
Effective September 21, 2001, we elected to become a financial holding
company. As a financial holding company, we have very broad discretion to
affiliate with securities firms and insurance companies, make merchant banking
investments, and engage in other activities that the Federal Reserve Board has
deemed financial in nature. Depending on the types of financial activities that
we may engage in the future, under Gramm-Leach-Bliley's fractional regulation
principles, we may become subject to supervision by additional government
agencies.
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The election to be treated as a financial holding company increases our
ability to offer financial products and services that historically we were
either unable to provide or were only able to provide on a limited basis. As a
result, we will face increased competition in the markets for any new financial
products and services that we may offer. Likewise, although there have been
relatively few mergers between banks and securities firms or banks and insurance
firms since the enactment of the Gramm-Leach-Bliley Act, in the future an
increased amount of consolidation among these firms could result in a growing
number of large financial institutions that could compete aggressively with us.
The Federal Reserve Board and the Secretary of the Treasury have
promulgated regulations governing the scope of permissible merchant banking
investments, which are those made under Section 4(k)(4)(H) of the Bank Holding
Company Act. These regulations authorize a financial holding company, directly
or indirectly as principal or on behalf of one or more persons, to acquire or
control any amount of shares, assets or ownership interests of a company or
other entity that is engaged in any activity not otherwise authorized for the
financial holding company under Section 4 of the Bank Holding Company Act. Under
the regulation, the types of ownership that may be acquired include shares,
assets or ownership interests of a company or other entity including debt or
equity securities, warrants, options, partnership interests, trust certificates
or other instruments representing an ownership interest in a company or entity
whether voting or nonvoting. The merchant banking investments may be made by the
financial holding company or any of its subsidiaries, other than a depository
institution or subsidiary of a depository institution. Before acquiring or
controlling a merchant banking investment, a financial holding company must
either be or have a securities affiliate registered under the Securities
Exchange Act of 1934 or a qualified insurance affiliate. The regulation places
restrictions on the ability of a financial holding company to become involved in
the routine management or operation of any of its portfolio companies. The
regulation also provides that a financial holding company may own or control
shares, assets and ownership interests under the merchant banking provisions
only for such period of time as to enable the sale or disposition on a
reasonable basis consistent with the financial viability of the financial
holding company's merchant banking investment activities. The regulation
additionally includes special provisions governing the investment by a financial
holding company in private equity funds.
The Federal Reserve Board and other federal regulators have adopted rules
that become effective April 1, 2002 that will establish special minimum
regulatory capital requirements for equity investments in non-financial
companies. Our current regulatory capital requirements are described in more
detail below. The proposed rules apply symmetrically to equity investments of
banks and bank holding companies and apply a series of marginal capital charges
on covered equity investments that increase with the level of a banking
organization's overall exposure to equity investments relative to the
organization's Tier 1 Capital. Covered equity investments will be subject to a
series of marginal Tier 1 capital charges, with the size of the charge
increasing as the organization's level of concentration in equity investments
increases. The highest marginal charge specified in the final rules requires a
25 percent deduction from Tier 1 capital for covered investments that aggregate
more than 25 percent of an organization's Tier 1 capital. Equity investments
through small business investment companies will be exempt from the new charges
to the extent such investments, in the aggregate, do not exceed 15 percent of
the banking organization's Tier 1 capital. The new charges would not apply to
individual investments made by banking organizations prior to March 13, 2000.
Grandfathered investments made by state banks under section 24(f) of the Federal
Deposit Insurance Act also are exempted from coverage.
The regulators also reiterated their intent to apply heightened supervision
to banking organizations as their level of concentration in equity investments
increases.
Mergers and Acquisitions
The BHCA provides that the Federal Reserve Board cannot approve any
acquisition, merger or consolidation that may
o substantially lessen competition in the banking industry,
o create a monopoly in any section of the country, or
o be a restraint of trade.
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However, the Federal Reserve Board may approve such a transaction if the
convenience and needs of the community clearly outweigh any anti-competitive
effects. Specifically, the Federal Reserve Board would consider, among other
factors, the expected benefits to the public (greater convenience, increased
competition, greater efficiency, etc.) against the risks of possible adverse
effects (undue concentration of resources, decreased or unfair competition,
conflicts of interest, unsound banking practices, etc.).
Banks
Federal and state laws and regulations that govern banks have the effect
of, among other things, regulating the scope of business, investments, cash
reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking
associations under the National Bank Act are subject to regulation and
examination by the Office of the Comptroller of the Currency, or OCC. The OCC
supervises, regulates and regularly examines the First National Bank of Abilene,
First National Bank, Sweetwater, First Financial Bank, National Association,
Cleburne, Eastland National Bank, San Angelo National Bank, Weatherford National
Bank and First Financial Bank, National Association, Southlake and City National
Bank, Mineral Wells. The OCC's supervision and regulation of banks is primarily
intended to protect the interests of depositors. The National Bank Act
o requires each national banking association to maintain reserves against
deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
State Banks. Banks that are organized as state banks under Texas law are
subject to regulation and examination by the Banking Commissioner of the State
of Texas. The Commissioner regulates and supervises, and the Texas Banking
Department regularly examines, Hereford State Bank and Stephenville Bank and
Trust Co. The Commissioner's supervision and regulation of banks is primarily
designed to protect the interests of depositors. Texas law
o requires each state bank to maintain reserves against deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
Deposit Insurance
Each of our subsidiary banks is a member of the FDIC. The FDIC provides
deposit insurance protection that covers all deposit accounts in FDIC-insured
depository institutions and generally does not exceed $100,000 per depositor.
Our subsidiary banks must pay assessments to the FDIC under a risk-based
assessment system for federal deposit insurance protection. FDIC-insured
depository institutions that are members of the Bank Insurance Fund pay
insurance premiums at rates based on their risk classification. Institutions
assigned to higher risk classifications (i.e., institutions that pose a greater
risk of loss to their respective deposit insurance funds) pay assessments at
higher rates than institutions that pose a lower risk. An institution's risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to bank regulators. In addition, the
FDIC can impose special assessments to cover the costs of borrowings from the
U.S. Treasury, the Federal Financing Bank and the Bank Insurance Fund member
banks. As of December 31, 2001, the assessment rate for each of our subsidiary
banks is at the lowest level risk-based premium available.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, or FIRREA, an FDIC-insured depository institution can be held liable for
any losses incurred by the FDIC in connection with (1) the "default" of one of
its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one
of its FDIC-insured subsidiaries "in danger of default." "Default" is defined
generally as the appointment of a conservator or receiver, and "in danger of
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default" is defined generally as the existence of certain conditions indicating
that a default is likely to occur in the absence of regulatory assistance.
The Federal Deposit Insurance Act, or FDIA requires that the FDIC review
(1) any merger or consolidation by or with an insured bank, or (2) any
establishment of branches by an insured bank. The FDIC is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also
required before an insured bank retires any part of its common or preferred
stock, or any capital notes or debentures. Insured banks that are also members
of the Federal Reserve System, however, are regulated with respect to the
foregoing matters by the Federal Reserve System.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other
subsidiaries. We receive most of our revenue from dividends paid to us by our
Delaware holding company subsidiary. Similarly, the Delaware holding company
subsidiary receives dividends from our bank subsidiaries. Described below are
some of the laws and regulations that apply when either we or our subsidiary
banks pay dividends.
Each state bank that is a member of the Federal Reserve System and each
national banking association is required by federal law to obtain the prior
approval of the Federal Reserve Board and the OCC, respectively, to declare and
pay dividends if the total of all dividends declared in any calendar year would
exceed the total of (1) such bank's net profits (as defined and interpreted by
regulation) for that year plus (2) its retained net profits (as defined and
interpreted by regulation) for the preceding two calendar years, less any
required transfers to surplus. In addition, these banks may only pay dividends
to the extent that retained net profits (including the portion transferred to
surplus) exceed bad debts (as defined by regulation).
Our subsidiary banks paid aggregate dividends of approximately $25.5
million in 2001 and approximately $21.0 million in 2000. Under the dividend
restrictions discussed above, as of December 31, 2001, our subsidiary banks,
without obtaining governmental approvals, could have declared in the aggregate
additional dividends of approximately $18.3 million from retained net profits.
To pay dividends, we and our subsidiary banks must maintain adequate
capital above regulatory guidelines. In addition, if the applicable regulatory
authority believes that a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), the authority
may require, after notice and hearing, that such bank cease and desist from the
unsafe practice. The Federal Reserve Board and the OCC have each indicated that
paying dividends that deplete a bank's capital base to an inadequate level would
be an unsafe and unsound banking practice. The Federal Reserve Board, the OCC
and the FDIC have issued policy statements that recommend that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.
Affiliate Transactions
The Federal Reserve Act and the FDIA restrict the extent to which we can
borrow or otherwise obtain credit from, or engage in certain other transactions
with, our depository subsidiaries. These laws regulate "covered transactions"
between insured depository institutions and their subsidiaries, on the one hand,
and their nondepository affiliates, on the other hand. "Covered transactions"
include a loan or extension of credit to a nondepository affiliate, a purchase
of securities issued by such an affiliate, a purchase of assets from such an
affiliate (unless otherwise exempted by the Federal Reserve Board), an
acceptance of securities issued by such an affiliate as collateral for a loan,
and an issuance of a guarantee, acceptance, or letter of credit for the benefit
of such an affiliate. The "covered transactions" that an insured depository
institution and its subsidiaries are permitted to engage in with their
nondepository affiliates are limited to the following amounts: (1) in the case
of any one such affiliate, the aggregate amount of "covered transactions" cannot
exceed ten percent of the capital stock and the surplus of the insured
depository institution; and (2) in the case of all affiliates, the aggregate
amount of "covered transactions" cannot exceed twenty percent of the capital
stock and surplus of the insured depository institution. In addition, extensions
of credit that constitute "covered transactions" must be collateralized in
prescribed amounts. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Finally, when we and our subsidiary banks conduct transactions internally among
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us, we are required to do so at arm's length. The Federal Reserve Board has
proposed new regulations concerning covered transactions that attempt to clarify
and expand the foregoing limitations. If they are adopted, we will be subject to
additional limitations on these kinds of transactions.
Capital
Bank Holding Companies and Financial Holding Companies. The Federal Reserve
Board has adopted risk-based capital guidelines for bank holding companies and
financial holding companies. The ratio of total capital to risk weighted assets
(including certain off-balance-sheet activities, such as standby letters of
credit) must be a minimum of eight percent. At least half of the total capital
is to be composed of common shareholders' equity, minority interests in the
equity accounts of consolidated subsidiaries and a limited amount of perpetual
preferred stock, less goodwill, which is collectively referred to as Tier 1
Capital. The remainder of total capital may consist of subordinated debt, other
preferred stock and a limited amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies and financial holding companies.
Bank holding companies and financial holding companies that meet certain
specified criteria, including having the highest regulatory rating, must
maintain a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average
assets for the current quarter, less goodwill) of three percent. Bank holding
companies and financial holding companies that do not have the highest
regulatory rating will generally be required to maintain a higher Tier 1 Capital
leverage ratio of three percent plus an additional cushion of 100 to 200 basis
points. The Federal Reserve Board has not advised us of any specific minimum
leverage ratio applicable to us. The guidelines also provide that bank holding
companies and financial holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions. Such strong
capital positions must be kept substantially above the minimum supervisory
levels without significant reliance on intangible assets (e.g., goodwill, core
deposit intangibles and purchased mortgage servicing rights). As of December 31,
2001, our capital ratios were as follows: (1) Tier 1 Capital to Risk-Weighted
Assets Ratio, 17.10%; (2) Total Capital to Risk-Weighted Assets Ratio, 18.08%;
and (3) Tier 1 Capital Leverage Ratio, 9.92%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991,
or FDICIA established five capital tiers with respect to depository
institutions: "well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution's capital tier will depend upon where its capital levels
are in relation to various relevant capital measures, including (1) risk-based
capital measures, (2) a leverage ratio capital measure and (3) certain other
factors. Regulations establishing the specific capital tiers provide that a
"well-capitalized" institution will have a total risk-based capital ratio of ten
percent or greater, a Tier 1 risk-based capital ratio of six percent or greater,
and a Tier 1 leverage ratio of five percent or greater, and not be subject to
any written regulatory enforcement agreement, order, capital directive or prompt
corrective action derivative. For an institution to be "adequately capitalized,"
it will have a total risk-based capital ratio of eight percent or greater, a
Tier 1 risk-based capital ratio of four percent or greater, and a Tier 1
leverage ratio of four percent or greater (in some cases three percent). For an
institution to be "undercapitalized," it will have a total risk-based capital
ratio that is less than eight percent, a Tier 1 risk-based capital ratio less
than four percent or a Tier 1 leverage ratio less than four percent (or a
leverage ratio less than three percent if the institution is rated composite 1
in its most recent report of examination, subject to appropriate federal banking
agency guidelines). For an institution to be "significantly undercapitalized,"
it will have a total risk-based capital ratio less than six percent, a Tier 1
risk-based capital ratio less than three percent, or a Tier 1 leverage ratio
less than three percent. For an institution to be "critically undercapitalized,"
it will have a ratio of tangible equity to total assets equal to or less than
two percent. FDICIA requires federal banking agencies to take "prompt corrective
action" against depository institutions that do not meet minimum capital
requirements. Under current regulations, we were "well capitalized" as of
December 31, 2001.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
"undercapitalized." An "undercapitalized" institution must develop a capital
restoration plan and its parent holding company must guarantee that
institution's compliance with such plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of five percent of the
institution's assets at the time it became "undercapitalized" or the amount
needed to bring the institution into compliance with all capital standards.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors. If
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a depository institution fails to submit an acceptable capital restoration plan,
it shall be treated as if it is significantly undercapitalized. "Significantly
undercapitalized" depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become "adequately capitalized," requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. "Critically
undercapitalized" institutions are subject to the appointment of a receiver or
conservator. Finally, FDICIA requires the various regulatory agencies to set
forth certain standards that do not relate to capital. Such standards relate to
the safety and soundness of operations and management and to asset quality and
executive compensation, and permit regulatory action against a financial
institution that does not meet such standards.
If an insured bank fails to meet its capital guidelines, it may be subject
to a variety of other enforcement remedies, including a prohibition on the
taking of brokered deposits and the termination of deposit insurance by the
FDIC. Bank regulators continue to indicate their desire to raise capital
requirements beyond their current levels.
In addition to FDICIA capital standards, Texas-chartered banks must also
comply with the capital requirements imposed by the Texas Banking Department.
Neither the Texas Finance Code nor its regulations specify any minimum
capital-to-assets ratio that must be maintained by a Texas-chartered bank.
Instead, the Texas Banking Department determines the appropriate ratio on a bank
by bank basis, considering factors such as the nature of a bank's business, its
total revenue, and the bank's total assets. As of December 31, 2001, all of our
Texas-chartered banks exceeded the minimum ratios applied to them.
Our Support of Our Subsidiary Banks
Under Federal Reserve Board policy, we are expected to commit resources to
act as a source of strength to support each of our subsidiary banks. This
support may be required at times when, absent such Federal Reserve Board policy,
we would not otherwise be required to provide it. In addition, any loans we make
to our subsidiary banks would be subordinate in right of payment to deposits and
to other indebtedness of our banks. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and be subject to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require the bank's
shareholders to pay the deficiency on a pro-rata basis. If any shareholder
refuses to pay the pro-rata assessment after three months notice, then the
bank's board of directors must sell an appropriate amount of the shareholder's
stock at a public auction to make up the deficiency. To the extent necessary, if
a deficiency in capital still exist and the bank refuses to go into liquidation,
then a receiver may be appointed to wind up the bank's affairs. Additionally,
under the Federal Deposit Insurance Act, in the event of a loss suffered or
anticipated by the FDIC (either as a result of the default of a banking
subsidiary or related to FDIC assistance provided to a subsidiary in danger of
default) our other banking subsidiaries may be assessed for the FDIC's loss.
Interstate Banking and Branching Act
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, or Riegle-Neal Act, a bank holding company or financial holding company
is able to acquire banks in states other than its home state. The Riegle-Neal
Act also authorized banks to merge across state lines, thereby creating
interstate branches, beginning June 1, 1997. Furthermore, pursuant to this act,
a bank is now able to open new branches in a state in which it does not already
have banking operations, if the laws of such state permit it to do so.
Accordingly, both the OCC and the Texas Banking Department are presently
accepting applications for interstate merger and branching transactions, subject
to certain limitations on ages of the banks to be acquired and the total amount
of deposits within the state a bank or financial holding company may control.
Since our primary service area is Texas, these developments are not expected to
have any material impact on our growth strategy. We may, however, face increased
competition from out-of-state banks that branch or make acquisitions in our
primary markets.
8
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA subjects a bank to
regulatory assessment to determine if the institution meets the credit needs of
its entire community, including low- and moderate-income neighborhoods served by
the bank, and to take that determination into account in its evaluation of any
application made by such bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition of shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. Our subsidiary banks have taken significant actions to comply
with the CRA, and each has received at least a "satisfactory" commendation in
its most recent review by federal regulators with respect to its compliance with
the CRA. Both the United States Congress and the banking regulatory authorities
have proposed substantial changes to the CRA and fair lending laws, rules and
regulations, and there can be no certainty as to the effect, if any, that any
such changes would have on our subsidiary banks.
Reporting Suspicious Activity
Under the Bank Secrecy Act, IRS rules and other regulations, we are
required to monitor and report unusual or suspicious account activity as well as
transactions involving the transfer or withdrawal of amounts in excess of
prescribed limits. Due to the tragic events of September 11, 2001, Congress and
the bank regulators have focused their attention on banks' monitoring and
reporting of suspicious activities. Additionally, Congress and the bank
regulators have proposed, adopted or passed a number of new laws and regulations
that may increase our reporting responsibilities. We continue to monitor these
developments as part of our efforts to comply with applicable law.
Consumer Laws and Regulations
We are also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the following
list is not exhaustive, these laws and regulations include the Truth in Lending
Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing
Act, among others. These laws and regulations mandate various disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. These and
other laws also limit finance charges or other fees or charges earned in our
activities. We must comply with the applicable provisions of these consumer
protection laws and regulations as part of our ongoing customer relations.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements
emphasizing the importance of technology risk management and supervision in
evaluating the safety and soundness of depository institutions. Banks are
contracting increasingly with outside vendors to provide data processing and
core banking functions. The use of technology-related products, services,
delivery channels and processes expose a bank to various risks, particularly
operational, privacy, security, strategic, reputation and compliance risk. Banks
are generally expected to successfully manage technology-related risks with all
other risks to ensure that a bank's risk management is integrated and
comprehensive, primarily through identifying, measuring, monitoring and
controlling risks associated with the use of technology.
Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking
agencies are required to establish appropriate standards for financial
institutions regarding the implementation of safeguards to ensure the security
and confidentiality of customer records and information, protection against any
anticipated threats or hazards to the security or integrity of such records and
protection against unauthorized access to or use of such records or information
in a way that could result in substantial harm or inconvenience to a customer.
The agencies have in fact adopted final rules, and among other matters, the
rules require each bank to implement a comprehensive written information
security program that includes administrative, technical and physical safeguards
relating to customer information.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide
its customers with a notice of privacy policies and practices. Section 502
prohibits a financial institution from disclosing nonpublic personal information
9
about a consumer to nonaffiliated third parties unless the institution satisfies
various notice and opt-out requirements and the customer has not elected to opt
out of the disclosure. Under Section 504, the agencies are authorized to issue
regulations as necessary to implement notice requirements and restrictions on a
financial institution's ability to disclose nonpublic personal information about
consumers to nonaffiliated third parties. Under the final rule the regulators
adopted, all banks must develop initial and annual privacy notices which
describe in general terms the bank's information sharing practices. Banks that
share nonpublic personal information about customers with nonaffiliated third
parties must also provide customers with an opt-out notice and a reasonable
period of time for the customer to opt out of any such disclosure (with certain
exceptions). Limitations are placed on the extent to which a bank can disclose
an account number or access code for credit card, deposit, or transaction
accounts to any nonaffiliated third party for use in marketing.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, that affect the national supply of credit.
The Federal Reserve Board regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial
institution deposits, and restricting certain borrowings by financial
institutions and their subsidiaries. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banks in
the past and are expected to continue to do so in the future.
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The Gramm-Leach-Bliley Act has especially
created an increased level of rule-making and debate on the structure of the
United States banking system. The likelihood and timing of any proposals or
bills being enacted and the impact they might have on us and our subsidiary
banks cannot be determined at this time.
Enforcement Powers of Federal Banking Agencies
The Federal Reserve and other state and federal banking agencies and
regulators have broad enforcement powers, including the power to terminate
deposit insurance, impose substantial fees and other civil and criminal
penalties and appoint a conservator or receiver. Our failure to comply with
applicable laws, regulations and other regulatory pronouncements could subject
us, as well as our officers and directors, to administrative sanctions and
potentially substantial civil penalties.
Available Information
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the Securities and Exchange Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public
at the Securities and Exchange Commission's web site at http://www.sec.gov. No
information from this web page is incorporated by reference herein.
ITEM 2. PROPERTIES
Our principal office is located in the First National Bank Building at 400
Pine Street in downtown Abilene, Texas. We lease two spaces in a building owned
by First National Bank of Abilene. The lease for approximately 2,300 square feet
of space expires December 31, 2004. The lease for approximately 1,100 square
feet of space expires May 31, 2006. Our subsidiary banks collectively own 28
banking facilities, some of which are detached drive-ins, and they also lease
five banking facilities. Our management considers all of our existing locations
to be quality facilities and well-suited for conducting the business of banking.
We believe that our existing facilities are adequate to meet our requirements
and our subsidiary banks' requirements for the foreseeable future.
10
ITEM 3. LEGAL PROCEEDINGS
With our subsidiary banks we are parties to a number of lawsuits arising in
the ordinary course of our banking business. However, there are no material
pending legal proceedings to which we, our subsidiary banks or our other direct
and indirect subsidiaries, or any of their properties, are subject. Other than
regular, routine examinations by state and federal banking authorities, there
are no proceedings pending or known to be contemplated by any governmental
authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock, par value $10.00 per share, is traded on the Nasdaq Stock
Market under the trading symbol FFIN. See "Item 8--Financial Statements and
Supplementary Data--Quarterly Financial Data" for the high, low and closing
sales prices as reported by the Nasdaq Stock Market for our common stock for the
periods indicated. As of February 1, 2002, we had 1,635 shareholders of record.
See "Item 8--Financial Statements and Supplementary Data--Quarterly
Financial Data" for the frequency and amount of cash dividends paid by us. Also,
see "Item 7--Parent Company Funding" for restrictions on our present or future
ability to pay dividends, particularly those restrictions arising under federal
and state banking laws.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years ended
December 31, 2001, 2000, 1999, 1998, and 1997 , have been derived from our
audited consolidated financial statements. The selected financial data should be
read in conjunction with "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements. The results of operations presented below are not necessarily
indicative of the results of operations that may be achieved in the future. The
amounts related to shares of our common stock have been adjusted to give effect
to all stock dividends and stock splits. This discussion incorporated
information required to be disclosed by the Securities and Exchange Commissions'
Industry Guide 3, "Statistical Disclosure by Bank Holding Companies."
Year Ended December 31,
--------------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Summary Income Statement Information:
Interest income $ 116,473 $ 117,950 $ 110,013 $ 111,868 $ 101,474
Interest expense 44,834 48,829 43,338 46,292 41,735
---------- ---------- ---------- ---------- ----------
Net interest income 71,639 69,121 66,675 65,576 59,739
Provision for loan losses 1,964 2,398 2,031 1,140 1,114
Noninterest income 27,579 25,947 24,484 22,351 19,486
Noninterest expense 55,072 51,692 51,934 52,422 46,522
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 42,182 40,978 37,194 34,365 31,589
Income tax expense 12,827 12,662 11,504 11,111 10,563
---------- ---------- ---------- ---------- ----------
Net earnings $ 29,355 $ 28,316 $ 25,690 $ 23,254 $ 21,026
========== ========== ========== ========== ==========
Per Share Data:
Net earnings per share $ 2.38 $ 2.28 $ 2.06 $ 1.87 $ 1.70
Net earnings per share, assuming dilution 2.37 2.27 2.05 1.86 1.69
Cash dividends declared 1.16 1.03 .90 .80 0.71
Book value at period-end 17.32 15.92 14.33 13.62 12.46
Earnings performance ratios:
Return on average assets 1.62% 1.67% 1.53% 1.44% 1.46%
Return on average equity 14.35 15.39 14.84 14.51 14.37
Summary Balance Sheet Data (Period-end):
Investment in securities $ 721,694 $ 654,253 $ 656,218 $ 625,891 $ 616,018
Loans 940,131 859,271 797,275 779,544 743,456
Total assets 1,929,694 1,753,814 1,723,369 1,686,647 1,657,044
Deposits 1,685,163 1,519,874 1,524,704 1,504,856 1,488,709
Total liabilities 1,716,040 1,557,693 1,544,706 1,517,198 1,502,583
Total shareholders' equity 213,654 196,121 178,663 169,449 154,461
Asset quality ratios:
Allowance for loan losses/period-end loans 1.13% 1.15% 1.12% 1.15% 1.43%
Nonperforming assets/period-end loans plus
foreclosed assets 0.51 0.48 0.26 0.41 0.68
Net charge offs/average loans 0.18 0.18 0.27 0.36 0.26
Capital ratios:
Average shareholders' equity/average assets 11.29% 10.86% 10.30% 9.89% 10.16%
Leverage ratio (1) 9.92 10.40 9.62 9.02 8.28
Tier 1 risk-based capital (2) 17.10 17.75 17.19 16.03 14.76
Total risk-based capital (3) 18.08 18.74 18.13 17.01 15.95
Dividend payout ratio 48.94 45.23 43.64 41.66 41.24
- ---------------------------------------------------------------------------------------------------------------------
(1) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
fourth quarter average assets less intangible assets.
(2) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
risk-adjusted assets.
(3) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
plus allowance for loan losses to the extent allowed under regulatory
guidelines by risk-adjusted assets.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of the major elements of our
consolidated balance sheets as of December 31, 2001 and 2000, and statements of
earnings for the years 1999 through 2001 should be reviewed in conjunction with
our consolidated financial statements, accompanying notes, and selected
financial data presented elsewhere in this Form 10-K. All amounts and prices
related to our common stock have been adjusted to give effect to all stock
splits and stock dividends.
On July 3, 2001, we acquired City Bancshares, Inc. and its subsidiary City
National Bank, Mineral Wells, Texas for $16.5 million in cash. The results of
City National Bank are included in our consolidated financial statements
beginning July 1, 2001 and may to some extent affect the comparisons to prior
period amounts.
Results of Operations
Performance Summary. Net earnings for 2001 were $29.4 million, an increase
of $1.1 million, or 3.7%, over net earnings for 2000 of $28.3 million. Net
earnings for 1999 were $25.7 million. The increase in net earnings for 2001 was
primarily attributable to an increase in net interest income resulting primarily
from the growth in average earning assets and an increase in noninterest income
resulting primarily from increases in service fees on deposit accounts and real
estate mortgage fees. The increase in net earnings for 2000 was primarily
attributable to an increase in net interest income resulting primarily from the
growth in average earning assets and an increase in noninterest income resulting
primarily from an increase in service fees on deposit accounts and gain on
securities transactions.
On a per share basis, net earnings were $2.38 for 2001 as compared to $2.28
for 2000 and $2.06 for 1999. Return on average assets was 1.62% for 2001 as
compared to 1.67% for 2000 and 1.53% for 1999. Return on average equity was
14.35 for 2001 as compared to 15.39% for 2000 and 14.84% for 1999.
Net Interest Income. Net interest income is the difference between interest
income on earning assets and the interest expense on liabilities incurred to
fund those assets. Our earning assets consist primarily of loans and securities.
Our liabilities to fund those assets consist primarily of interest-bearing
deposits. Tax-equivalent net interest income was $74.8 million in 2001 as
compared to $71.9 million in 2000 and $69.0 million in 1999. These increases
were primarily due to growth in the volume of earning assets. Average earning
assets were $1.653 billion in 2001, as compared to $1.538 billion in 2000, which
were $18.6 million higher than 1999. The 2001 increase is attributable to higher
average Federal funds sold which increased $25.9 million, and higher average
loans, which increased $80.0 million. The 2000 increase was due primarily to an
increase in average tax-exempt investment securities, which were up $16.0
million and higher average loans, which were up $38.3 million. Table 1 allocates
the increases in tax-equivalent net interest income for 2001 and 2000 between
the amount of increase attributable to volume and rate.
13
Table 1 -- Changes in Interest Income and Interest Expense (in thousands):
2001 Compared to 2000 2000 Compared to 1999
--------------------------------------- -----------------------------------
Change Attributable to Change Attributable to
------------------------- Total ---------------------- Total
Volume Rate Change Volume Rate Change
---------- ----------- ----------- --------- --------- ---------
Short-term investments.......... $ 1,789 $ (1,726) $ 63 $ (1,974) $ 646 $ (1,328)
Taxable investment securities... (233) (1,154) (1,387) 246 1,289 1,535
Tax-exempt investment securities(1) 707 106 813 1,032 315 1,347
Loans (1)....................... 7,404 (7,993) (589) 3,384 3,459 6,843
---------- ----------- ----------- --------- --------- ---------
Interest income............. 9,667 (10,767) (1,100) 2,688 5,709 8,397
Interest-bearing deposits....... 2,688 (6,455) (3,767) (394) 5,012 4,618
Short-term borrowings........... 481 (709) (228) 613 261 874
---------- ----------- ----------- --------- --------- ---------
Interest expense............ 3,169 (7,164) (3,995) 219 5,273 5,492
---------- ----------- ----------- --------- --------- ---------
Net interest income......... $ 6,498 $ (3,603) $ 2,895 $ 2,469 $ 436 $ 2,905
========== =========== ========== ========= ========= =========
- ---------------
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
The net interest margin, which measures tax-equivalent net interest income
as a percentage of average earning assets is illustrated below in Table 2 for
the years 1999 through 2001. During 2001 as the prime rate declined from 9.50%
to 4.75%, our earning assets re-priced in advance of interest bearing deposits
which resulted in a decrease in the net interest margin to 4.52% from 4.68% for
2000. In 2000, the net interest margin amounted to 4.68% as compared to 4.54%
for 1999. The improved net interest margin in 2000 resulted primarily from an
increase in average loans which were funded through a reduction in lower
yielding Federal funds sold.
Table 2 -- Average Balances and Average Yields and Rates (in thousands,
except percentages):
2001 2000 1999
-------------------------- --------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- --------- ---- ---------- --------- ---- ---------- --------- ----
Assets
Short-term investments..... $ 76,424 $ 3,211 4.04% $ 50,538 $ 3,148 6.23% $ 90,38 $ 4,476 4.95%
Taxable investment securities 540,771 32,170 5.95 544,546 33,557 6.16 540,402 32,022 5.93
Tax-exempt investment
securities (1)............ 135,620 9,202 6.79 125,072 8,389 6.71 109,079 7,042 6.46
Loans (1)(2)............... 897,616 75,063 8.36 817,603 75,652 9.25 779,28 68,809 8.83
--------- --------- ---------- --------- ---------- ---------
Total earning assets...... 1,653,431 119,646 7.24 1,537,759 120,746 7.85 1,519,147 112,349 7.40
Cash and due from banks.... 80,032 77,727 80,689
Bank premises and equipment 40,903 40,400 41,285
Other assets............... 17,693 28,212 27,478
Goodwill, net.............. 29,178 19,335 21,056
Allowance for loan losses.. (10,107) (9,420) (9,016)
---------- ---------- ----------
Total assets.............. $1,811,130 $1,694,013 $1,680,639
========== ========== ==========
Liabilities and Shareholders'
Equity
Interest-bearing deposits.. $1,226,560 $ 43,971 3.58% $1,161,175 $ 47,738 4.11% $1,171,892 $ 43,120 3.68%
Short-term borrowings...... 25,392 863 3.40 17,621 1,091 6.19 4,607 217 4.71
---------- --------- ---------- --------- ---------- ---------
Total interest-bearing
liabilities.............. 1,251,952 44,834 3.58 1,178,796 48,829 4.14 1,176,499 43,337 3.68
--------- --------- ---------
Noninterest-bearing deposits 339,800 317,659 318,399
Other liabilities.......... 14,861 13,529 12,299
---------- ---------- ----------
Total liabilities......... 1,606,613 1,509,984 1,507,497
Shareholders' equity......... 204,517 184,029 173,142
---------- ---------- ----------
Total liabilities and
shareholders' equity...... $1,811,130 $1,694,013 $1,680,639
========== ========== ==========
Net interest income.......... $ 74,812 $ 71,917 $ 69,012
========= ========= =========
Rate Analysis:
Interest income/earning
assets.................... 7.24% 7.85% 7.40%
Interest expense/earning
assets.................... 2.71 3.18 2.85
---- ---- ----
Net yield on earning assets 4.52% 4.68% 4.54%
==== ==== ====
- ---------------
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
Noninterest Income. Noninterest income for 2001 was $27.6 million, an
increase of $1.6 million, or 6.3%, as compared to 2000. The increase is
primarily a result of (i) an increase in trust fees of $397 thousand due
primarily to growth in trust assets; (ii) an increase in service on deposit
accounts of $669 thousand which reflects growth in number of accounts and
transactions processed; (iii) an increase in real estate mortgage fees of $588
which reflects the increase in mortgage originations and refinancing
transactions generated by lower mortgage rates in 2001.
14
Noninterest income for 2000 was $25.9 million, an increase of $1.5 million,
or 6.0%, as compared to 1999. This increase was primarily a result of (i) an
increase in trust fees of $396 thousand due primarily to growth in trust assets;
(ii) an increase in service fees on deposit accounts of $752 thousand which
reflects growth in both the number of accounts and transactions; and (iii) an
increase in net gain on securities transactions. Table 3 provides comparisons
for other categories of noninterest income.
Table 3 -- Noninterest Income (in thousands):
Increase Increase
2001 (Decrease) 2000 (Decrease) 1999
---------- ---------- ---------- ---------- ----------
Trust fees................................... $ 5,891 $ 397 $ 5,494 $ 396 $ 5,098
Service fees on deposit accounts............. 14,743 669 14,074 752 13,322
Real estate mortgage fees.................... 1,610 588 1,022 (269) 1,291
Net securities gains (losses)................ 68 (462) 530 530 -
ATM fees..................................... 1,941 387 1,554 313 1,241
Other:
Mastercard fees............................ 954 124 830 21 809
Miscellaneous income....................... 803 (110) 913 148 765
Safe deposit rental fees................... 394 (1) 395 3 392
Exchange fees.............................. 185 (39) 224 (32) 256
Credit life fees........................... 216 (21) 237 (47) 284
Data processing fees....................... 261 113 148 (69) 217
Brokerage commissions...................... 294 42 252 (2) 254
Gain on sale of bank premises and equipment 1 (3) 4 (254) 258
Interest on loan recoveries................ 218 (52) 270 (27) 297
---------- ---------- ---------- ---------- ----------
Total other............................. 3,326 53 3,273 (259) 3,532
---------- ---------- ---------- ---------- ----------
Total Noninterest Income................... $ 27,579 $ 1,632 $ 25,947 $ 1,463 $ 24,484
========== ========== ========== ========== ==========
Noninterest Expense. Total noninterest expense for 2001 was $55.1 million,
an increase of $3.4 million, or 6.5%, as compared to 2000. The acquisition of
City Bancshares completed July 3, 2001 accounted for $1.2 million of the
increase when compared to the prior year. Noninterest expense for 2000 amounted
to $51.7 million, a decrease of $241 thousand as compared to 1999. An important
measure in determining whether a banking company effectively managed noninterest
expenses is the efficiency ratio, which is calculated by dividing noninterest
expense by the sum of net interest income on a tax-equivalent basis and
noninterest income. Our efficiency ratios were 53.82% for 2001, 53.11% for 2000,
and 55.55% for 1999.
Salaries and employee benefits totaled $28.7 million, an increase of $1.6
million, or 5.9%, as compared to 2000. The expense associated with employees
added through acquisition accounted for $642 thousand of the increase. Net
occupancy and equipment expense in aggregate for 2001 increased $710 thousand
and resulted primarily from higher utilities and repairs and maintenance
expense. Other professional and service fees increased $302 thousand and
resulted primarily from; (i) executive search fees; (ii) leasehold improvement
design fees; and (iii) fees related to technology systems conversions for the
acquisition of City Bancshares. Printing, stationery, and supplies expense for
2001 increased $202 thousand as compared to 2000 and reflects expense related to
the printing of additional customer disclosures and supplies related to
implementation of check imaging at a number of our subsidiary banks.
Salaries and employee benefits for 2000 totaled $27.1 million, an increase
of $132 thousand as compared to 1999. Net occupancy and equipment expense in the
aggregate for 2000 decreased by $193 thousand and resulted primarily from lower
depreciation. Printing, stationery, and supplies expense for 2000 decreased $296
thousand and resulted primarily from the initial benefit of our implementation
of a company-wide procurement program provided through an outside vendor. Credit
card fees for 2000 decreased $140 thousand and resulted primarily from the
termination of our cardholder credit card product at First National Bank of
Abilene.
15
Table 4 -- Noninterest Expense (in thousands):
Increase Increase
2001 (Decrease) 2000 (Decrease) 1999
---------- ---------- ---------- ---------- ----------
Salaries..................................... $ 22,380 $ 1,417 $ 20,963 $ 78 $ 20,885
Medical and other benefits................... 2,741 77 2,664 276 2,388
Profit sharing............................... 1,858 (16) 1,874 (237) 2,111
Payroll taxes................................ 1,706 130 1,576 15 1,561
---------- ---------- ---------- ---------- ----------
Total salaries and employee benefits....... 28,685 1,608 27,077 132 26,945
Net occupancy expense........................ 3,996 433 3,563 (256) 3,819
Equipment expense............................ 4,458 277 4,181 63 4,118
Goodwill amortization........................ 1,641 - 1,641 - 1,641
Other:
Data processing and operation fees......... 1,116 (147) 1,263 88 1,175
Postage.................................... 1,174 128 1,046 (57) 1,103
Printing, stationery and supplies.......... 1,084 202 882 (296) 1,178
Advertising................................ 1,105 51 1,054 13 1,041
Correspondent bank service charges......... 1,329 67 1,262 19 1,243
ATM expense................................ 1,095 145 950 (10) 960
Credit card fees........................... 669 65 604 (140) 744
Telephone.................................. 878 124 754 84 670
Public relations and business development.. 715 12 703 101 602
Directors' fees............................ 486 33 453 (8) 461
Audit and accounting fees.................. 746 80 666 44 622
Legal fees................................. 333 54 279 (82) 361
Other professional and service fees........ 833 302 531 105 426
Regulatory exam fees....................... 443 19 424 39 385
Franchise tax.............................. 236 (25) 261 (96) 357
Courier expense............................ 549 101 448 64 384
Other miscellaneous........................ 3,501 (149) 3,650 (48) 3,698
---------- ----------- ---------- ---------- ----------
Total other............................. 16,292 1,062 15,230 (180) 15,410
---------- ---------- ---------- ---------- ----------
Total Noninterest Expense.................... $ 55,072 $ 3,380 $ 51,692 $ (241) $ 51,933
========== ========== ========== ========== ==========
Income Taxes. Income tax expense was $12.8 million for 2001 as compared to
$12.7 million for 2000 and $11.5 million for 1999. Our effective tax rates on
pretax income were 30.4%, 30.9% and 30.9%, respectively, for the years 2001,
2000 and 1999.
Balance Sheet Review
Loans. The loan portfolio is comprised of loans made to businesses,
individuals, and farm and ranch operations located in the primary trade areas
served by our subsidiary banks. Real estate loans represent loans primarily for
new home construction and owner-occupied real estate. The structure of loans in
the real estate mortgage classification generally provides repricing intervals
to minimize the interest rate risk inherent in long-term fixed rate mortgage
loans. As of December 31, 2001, total loans were $940.1 million, an increase of
$80.8 million, or 9.4%, as compared to December 31, 2000. The 2001 acquisition
accounted for $48.8 million of the growth in total loans when compared to
year-end 2000 total loans. As compared to year-end 2000, real estate loans and
commercial loans increased $66.0 million and $17.0 million, respectively. The
modest decrease in consumer loans during 2001 reflects our continued reduction
in the volume of indirect automobile loans. Loans averaged $897.6 million during
2001, an increase of $80.3 million over the prior year average.
16
Table 5 -- Composition of Loans (in thousands):
December 31,
---------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- --------
Commercial, financial and agricultural..... $ 312,053 $ 295,032 $ 297,966 $ 278,647 $286,630
Real estate-- construction................. 47,173 40,610 43,039 36,721 34,100
Real estate-- mortgage..................... 350,382 290,920 208,895 198,447 177,658
Consumer................................... 230,523 232,709 247,375 265,729 245,068
--------- --------- --------- --------- --------
$ 940,131 $ 859,271 $ 797,275 $ 779,544 $743,456
========= ========= ========= ========= ========
Table 6 -- Maturity Distribution and Interest Sensitivity of Loans at
December 31, 2001 (in thousands):
The following tables summarize maturity and yield information for the
commercial, financial, and agricultural and real estate construction portion of
the loan portfolio as of December 31, 2001:
After One
Year
One Year Through After Five
or less Five Years Years Total
------------- ------------- ----------- -----------
Commercial, financial, and agricultural $ 214,056 $ 78,671 $ 19,326 $ 312,053
Real estate-- construction........... 37,957 9,216 - 47,173
------------- ------------- ----------- -----------
$ 252,013 $ 87,887 $ 19,326 $ 359,226
============= ============= =========== ===========
Maturities
After One Year
-----------
Loans with fixed interest rates.................... $ 57,200
Loans with floating or adjustable interest rates... 50,013
-----------
$ 107,213
Asset Quality. Loan portfolios of each of our subsidiary banks are subject
to periodic reviews by our centralized independent loan review group as well as
periodic examinations by state and federal bank regulatory agencies. Loans are
placed on nonaccrual status when, in the judgment of management, the
collectibility of principal or interest under the original terms becomes
doubtful. Nonperforming assets, which consist of nonperforming loans and
foreclosed assets, were $4.8 million at December 31, 2001, as compared to $4.1
million at December 31, 2000 and $2.1 million at December 31, 1999. As a percent
of loans and foreclosed assets, nonperforming assets were 0.51% at December 31,
2001, as compared to 0.48% at December 31, 2000 and 0.26% at December 31, 1999.
Management considers the level of nonperforming assets to be manageable and is
not aware of any material classified credit not properly disclosed as
nonperforming at December 31, 2001.
Table 7 -- Nonperforming Assets (in thousands, except percentages):
At December 31,
-----------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- --------- ---------- ---------
Nonaccrual loans............................. $ 3,727 $ 3,512 $ 1,389 $ 2,717 $ 3,668
Loans still accruing and past
due 90 days or more..................... 66 34 63 67 134
Restructured loans........................... - - - - 358
---------- ---------- --------- ---------- ---------
Nonperforming loans..................... 3,793 3,546 1,452 2,784 4,160
Foreclosed assets............................ 1,031 546 637 385 936
---------- ---------- --------- ---------- ---------
Total nonperforming assets.............. $ 4,824 $ 4,092 $ 2,089 $ 3,169 $ 5,096
========== ========== ========= ========== =========
As a % of loans and foreclosed assets........ 0.51% 0.48% 0.26% .41% 0.68%
17
Provision and Allowance for Loan Losses. The allowance for loan losses is
the amount deemed by management as of a specific date to be adequate to provide
for possible losses on loans that may become uncollectible. Management
determines the allowance and the required provision expense by reviewing general
loss experiences and the performances of specific credits. The provision for
loan losses was $1.9 million for 2001 as compared to $2.4 million for 2000 and
$2.0 million for 1999. As a percent of average loans, net loan charge-offs were
0.18% during 2001, 0.18% during 2000 and 0.27% during 1999. The allowance for
loan losses as a percent of loans was 1.13% as of December 31, 2001, as compared
to 1.15% as of December 31, 2000. Management anticipates that the ratio of
allowance for loan losses to loans will remain above 1% in future periods. A key
indicator of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans, which consist of nonaccrual loans, loans past
due 90 days, and restructured loans. This ratio for the past five years is
disclosed in the following Table 8. Table 9 provides an allocation of the
allowance for loan losses based on loan type and the percent of total loans that
each major loan type represents. Other than the loan types presented in Table 9,
we had no loans outstanding at December 31, 2001that represented more than 10%
of total loans.
Although we believe that we use the best information available to make loan
loss allowance determinations, future adjustments could be necessary if
circumstances or economic conditions differ substantially from the assumptions
used in making our initial determinations. A downturn in the economy and
employment could result in increased levels of non-performing assets and
charge-offs, increased loan loss provisions and reductions in income.
Additionally, as an integral part of their examination process, bank regulatory
agencies periodically review our allowance for loan losses. The banking agencies
could require the recognition of additions to the loan loss allowance based on
their judgement of information available to them at the time of their
examination.
Table 8 -- Loan Loss Experience and Allowance for Loan Losses (in
thousands, except percentages):
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Balance at January 1,................................. $ 9,888 $ 8,938 $ 8,988 $ 10,632 $ 9,797
Allowance established from purchase acquisitions...... 407 - - - 1,444
--------- --------- --------- --------- ---------
10,295 8,938 8,988 10,632 11,241
Charge-offs:
Commercial, financial and agricultural.............. 1,094 950 1,038 1,267 836
Consumer............................................ 1,498 1,998 2,747 2,786 2,127
All other........................................... 33 45 36 106 164
--------- --------- --------- --------- ---------
Total loans charged off............................... 2,625 2,993 3,821 4,159 3,127
Recoveries:
Commercial, financial and agricultural.............. 269 391 632 532 726
Consumer............................................ 688 855 936 811 643
All other........................................... 11 299 172 32 35
--------- --------- --------- --------- ---------
Total recoveries...................................... 968 1,545 1,740 1,375 1,404
--------- --------- --------- --------- ---------
Net charge-offs....................................... 1,657 1,448 2,081 2,784 1,723
Provision for loan losses............................. 1,964 2,398 2,031 1,140 1,114
--------- --------- --------- --------- ---------
Balance at December 31,............................... $ 10,602 $ 9,888 $ 8,938 $ 8,988 $ 10,632
========= ========= ========= ========= =========
Loans at year-end..................................... $ 940,131 $ 859,271 $ 797,275 $ 779,544 $ 743,456
Average loans......................................... 897,616 817,603 779,283 770,183 657,325
Net charge-offs/average loans......................... 0.18% 0.18% 0.27% 0.36% 0.26%
Allowance for loan losses/year-end loans.............. 1.13 1.15 1.12 1.15 1.43
Allowance for loan losses/nonperforming loans......... 279.51 278.85 615.55 322.84 255.58
18
Table 9 -- Allocation of Allowance for Loan Losses (in thousands):
2001 2000 1999 1998 1997
--------- --------- ---------- ---------- ---------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
--------- --------- ---------- ---------- ---------
Commercial, financial and agricultural........ $ 4,966 $ 3,394 $ 3,340 $ 3,213 $ 4,099
Real estate-- construction.................... 415 468 483 423 488
Real estate-- mortgage........................ 2,710 3,348 2,342 2,288 2,541
Consumer...................................... 2,511 2,678 2,773 3,064 3,504
--------- --------- ---------- ---------- ---------
Total..................................... $ 10,602 $ 9,888 $ 8,938 $ 8,988 $ 10,632
========= ========= ========== ========== =========
Percent of Total Loans:
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Commercial, financial and agricultural................ 33.19% 34.33% 37.37% 35.74% 38.55%
Real estate-- construction............................ 5.02 4.73 5.40 4.71 4.59
Real estate-- mortgage................................ 37.27 33.86 26.20 25.46 23.90
Consumer.............................................. 24.52 27.08 31.03 34.09 32.96
Certain loans classified for regulatory purposes as doubtful, substandard,
or special mention are included in the nonperforming loan table. Also included
in the classified loans are certain other loans that are deemed to be potential
problems. Potential problem loans are those loans that are currently performing
but where known information about trends or uncertainties or possible credit
problems of the borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with present repayment terms, possibly
resulting in the transfer of such loans to nonperforming status. These potential
problem loans totaled $1.2 million as of December 31, 2001.
Investment Securities. Investment securities totaled $721.7 million as of
December 31, 2001, as compared to $654.3 million at December 31, 2000 and $656.2
million at December 31, 1999. At December 31, 2001, securities with an amortized
cost of $290.7 million were classified as securities held-to-maturity and
securities with a market value of $431.0 million were classified as securities
available-for-sale. As compared to December 31, 2000, the portfolio at December
31, 2001, reflected (i) a decrease of $97.8 million in U.S. Treasury and U.S.
Government corporations and agencies securities; (ii) an increase of $16.8
million in tax-exempt obligations of states and political subdivisions; (iii) a
$6.6 million increase in other securities, primarily corporate bonds; and (iv) a
$141.8 million increase in mortgage-backed securities. As compared to December
31, 1999, the portfolio at December 31, 2000 reflected (i) a decrease of $33.8
million in U.S. Treasury and U.S. Government corporations and agency securities;
(ii) an increase of $6.9 million in tax-exempt obligations of states and
political subdivisions; (iii) an $8.1 million increase in other securities,
primarily corporate bonds; and (iv) a $16.9 million increase in mortgage-backed
securities. The overall portfolio yield of 6.06% at the end of 2001 was down
from the prior year-end yield of 6.40%. The overall portfolio yield of 6.40% at
the end of 2000 was up from the prior end yield of 6.15%. We did not hold any
collateralized mortgage obligations that entail higher risks than standard
mortgage-backed securities or structured notes. See Note 2 to the Consolidated
Financial Statements for additional disclosures relating to the maturities and
fair values of the investment portfolio at December 31, 2001 and 2000.
19
Table 10 -- Maturities and Yields of Investment Securities Held December 31,
2001 (in thousands, except percentages):
Maturing
------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- --------------
Held-to-Maturity: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- ------- ---- -------- ---- ------- ---- ------- ---- -------- ----
U.S. Treasury obligations.. $ 1,004 5.36% $ 1,005 5.39% - -% $ - -% $ 2,009 5.38%
Obligations of U.S.
Government corporations
and agencies.......... 55,352 5.72 109,613 5.60 - - - - 164,965 5.64
Obligations of states and
political subdivisions.. 19,671 6.21 34,666 6.51 14,115 7.84 7,507 7.73 75,959 6.80
Other securities........... 4 - 498 6.18 - - - - 502 6.13
Mortgage-backed securities. 2,813 6.20 36,621 6.79 4,098 6.42 3,708 7.28 47,240 6.76
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $78,844 5.86% $182,403 5.99% $18,213 7.52% $11,215 7.58% $290,675 6.12%
======= ==== ======== ==== ======= ==== ======= ==== ======== ====
Maturing
------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- --------------
Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ ------- ---- -------- ---- ------- ---- ------- ---- -------- ----
U.S. Treasury obligations.. $ 1,018 6.40% $ - -% $ - -% $ - -% $ 1,018 6.40%
Obligations of U.S.
Government corporations
and agencies.......... 14,506 6.03 74,399 5.12 - - - - 88,905 5.27
Obligations of states and
political subdivisions.. 1,580 6.18 11,938 6.82 29,585 7.75 39,748 7.07 82,851 7.26
Other securities........... 12,035 5.99 46,618 6.32 - - 2,876 5.97 61,529 6.24
Mortgage-backed securities. 18,836 5.83 143,684 5.77 23,049 5.72 11,147 5.61 196,716 5.76
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $47,975 5.95% $276,639 5.73% $52,634 6.86% $53,771 6.70% $431,019 6.02%
======= ==== ======== ==== ======= ==== ======= ==== ======== ====
Maturing
------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- --------------
Total Investment Securities: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- --------------------------- -------- ---- -------- ---- ------- ---- ------- ---- -------- ----
U.S. Treasury obligations.. $ 2,022 5.88% $ 1,005 5.39% $ - -% $ - -% $ 3,027 5.72%
Obligations of U.S.
Government corporations
and agencies.......... 69,858 5.79 184,012 5.40 - - - - 253,870 5.51
Obligations of states and
political subdivisions.. 21,251 6.21 46,604 6.59 43,700 7.78 47,255 7.17 158,810 7.04
Other securities........... 12,039 5.99 47,116 6.32 - - 2,876 5.97 62,031 6.24
Mortgage-backed securities. 21,649 5.87 180,305 5.98 27,147 5.83 14,855 6.02 243,956 5.96
-------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $126,819 5.89% $459,042 5.84% $70,847 7.03% $64,986 6.86% $721,694 6.06%
======== ==== ======== ==== ======= ==== ======= ==== ======== ====
Deposits. Deposits held by subsidiary banks represent our primary source of
funding. Total deposits were $1.685 billion as of December 31, 2001, as compared
to $1.519 billion as of December 31, 2000 and $1.520 billion as of December 31,
1999. The 2001 acquisition accounted for $82 million of the total $166 million
increase in total deposits at December 31, 2001 as compared to December 31,
2000. The modest decrease in deposits at December 31, 2000 as compared the prior
year-end amount resulted primarily from the movement of approximately $16.5
million of deposits into repurchase agreements. Table 11 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.
20
Table 11 -- Composition of Average Deposits and Remaining Maturity of Time
Deposits of $100,000 or More (in thousands, except percentages):
2001 2000 1999
---------------------- ----------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- --------- ----
Noninterest-bearing deposits.... $ 339,800 - $ 317,659 - $ 318,399 -
Interest-bearing deposits
Interest-bearing checking.... 279,585 1.43% 252,281 1.59% 248,516 1.43%
Savings and money market
accounts................... 366,412 2.58 374,396 3.93 379,075 3.42
Time deposits under $100,000. 384,576 5.30 370,093 5.29 378,528 4.88
Time deposits of $100,000 or
more....................... 195,987 5.19 164,405 5.74 165,773 4.91
---------- ---- ---------- ---- --------- ----
Total interest-bearing deposits 1,226,560 3.58% 1,161,175 4.11% 1,171,892 3.68%
---------- ---------- ---------
Total average deposits.......... $1,566,360 $1,478,834 $1,490,291
========== ========== ==========
December 31, 2001
-----------------
Three months or less............................... $ 82,987
Over three through six months...................... 47,547
Over six through twelve months..................... 52,373
Over twelve months................................. 13,998
-----------
Total time deposits of $100,000 or more.......... $ 196,905
===========
Capital Resources
Total shareholders' equity was $213.7 million, or 11.07% of total assets,
at December 31, 2001, as compared to $196.1 million, or 11.18% of total assets,
at December 31, 2000. During 2001, total shareholders' equity averaged $204.5
million, or 11.29% of average assets, as compared to $184.0 million, or 10.86%
of average assets, during 2000. Under our stock buy back program we purchased
9,900 shares at an average cost per share of $31.82 (12,375 shares at $25.45 per
share after adjustment for the 25% stock dividend issued on June 1, 2001).
Banking regulators measure capital adequacy by means of the risk-based
capital ratio and leverage ratio. The risk-based capital rules provide for the
weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory
capital is then divided by risk-weighted assets to determine the risk-adjusted
capital ratios. The leverage ratio is computed by dividing shareholders' equity
less intangible assets by quarter-to-date average assets less intangible assets.
Regulatory minimums for risk-based and leverage ratios are 8.00% and 3.00%,
respectively. As of December 31, 2001, our total risk-based and leverage ratios
were 18.08% and 9.92%, respectively, as compared to total risk-based and
leverage ratios of 18.74% and 10.40% as of December 31, 2000. By all
measurements our capital ratios remain above regulatory minimums and industry
averages.
Interest Rate Risk. Interest rate risk results when the maturity or
repricing intervals of interest-earning assets and interest-bearing liabilities
are different. Our exposure to interest rate risk is managed primarily through
our strategy of selecting the types and terms of interest-earning assets and
interest-bearing liabilities that generate favorable earnings while limiting the
potential negative effects of changes in market interest rates. We use no
off-balance-sheet financial instruments to manage interest rate risk.
Each of our subsidiary banks has an asset/liability committee that monitors
interest rate risk and compliance with investment policies. Each subsidiary bank
tracks interest rate risk by, among other things, interest-sensitivity gap and
simulation analysis. Table 12 sets forth the interest rate sensitivity of our
consolidated assets and liabilities as of December 31, 2001, and sets forth the
repricing dates of our consolidated interest-earning assets and interest-bearing
liabilities as of that date, as well as our projected consolidated interest rate
sensitivity gap percentages for the periods presented. The table is based upon
assumptions as to when assets and liabilities will reprice in a changing
interest rate environment. These assumptions are estimates made by management.
Assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
21
necessarily indicate the actual future impact of general interest rate movements
on our consolidated net interest income.
Table 12 -- Interest Sensitivity Analysis (in thousands, except
percentages):
December 31,
2001
Estimated
2002 2003 2004 2005 2006 Beyond Total Fair Value
---------- -------- -------- -------- -------- -------- ---------- ----------
Loans
Fixed rate loans.... $ 95,741 $ 65,630 $ 90,499 $ 80,085 $ 77,649 $ 91,987 $ 501,591 $ 507,639
Average interest rate 7.95% 9.15% 8.56% 8.34% 7.92% 8.24% 8.33%
Adjustable rate loans 438,540 -- -- -- -- -- 438,540 438,540
Average interest rate 5.81 -- -- -- -- -- 5.81
Investment securities
Fixed rate securities 122,449 127,476 146,803 117,894 64,993 134,773 714,387 732,278
Average interest rate 5.88 5.95 5.76 5.89 5.75 6.95 6.06
Adjustable rate
securities............ 7,306 -- -- -- -- -- 7,306 7,306
Average interest rate 5.27 -- -- -- -- -- 5.27
Other earning assets
Adjustable rate other 74,350 -- -- -- -- -- 74,350 74,350
Average interest rate 1.88 -- -- -- -- -- 1.88
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
assets................ $ 738,386 $193,106 $237,302 $197,979 $142,642 $226,760 $1,736,174 $1,760,113
Average interest rate 5.47% 7.03% 6.83% 6.88% 6.93% 7.47% 6.37%
Deposits
Fixed rate deposits. $ 516,673 $ 39,786 $ 8,515 $ 8,793 $ 1,302 $ -- $ 575,069 $ 580,468
Average interest rate 3.98% 4.80% 5.12% 6.19% 4.81% -- 4.09%
Adjustable rate
deposits.............. 720,687 -- -- -- -- -- 720,687 720,687
Average interest rate 1.22 -- -- -- -- -- 1.22
Other interest-bearing
liabilities
Adjustable rate other 19,848 -- -- -- -- -- 19,848 19,848
Average interest rate 1.34 -- -- -- -- -- 1.34
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
liabilities......... $1,257,208 $ 39,786 $ 8,515 $ 8,793 $ 1,302 $ -- $1,315,604 $1,321,003
Average interest rate 2.36% 4.80% 5.12% 6.19% 4.81% -- 2.48%
Interest sensitivity gap $ (518,822) $153,320 $228,787 $189,186 $141,340 $226,760 $ 420,571 $ 439,110
Cumulative interest
sensitivity gap..... (518,822) (365,502) (136,715) 52,471 193,811 420,571
Ratio of interest
sensitive assets to
interest sensitive
liabilities......... 58.73 -- -- -- -- --
Cumulative ratio of
interest sensitive
assets to interest
sensitive liabilities 58.73 71.82 89.53 103.99 114.73 131.97
Cumulative interest
sensitivity gap as a
percent of earning
assets.............. (29.88)% (21.05)% (7.87)% 3.02% 11.16% 24.22%
As of December 31, 2000, our 2001 interest-sensitivity gap was ($431.6)
million and its 2001 ratio of interest sensitive assets to interest sensitive
liabilities was 61.80%.
Management estimates that, as of December 31, 2001, an upward shift of
interest rates by 150 basis points would result in a 3.3% increase in projected
net interest income over the next twelve months, and a downward shift of
interest rates by 150 basis points would result in a 7.1% reduction in projected
net interest income over the next twelve months. These are good faith estimates
and assume that the composition of our interest sensitive assets and liabilities
existing at each year-end will remain constant over the relevant twelve month
measurement period and that changes in market interest rates are instantaneous
and sustained across the yield curve regardless of duration of pricing
characteristics of specific assets or liabilities. Also, this analysis does not
contemplate any actions that we might undertake in response to changes in market
interest rates. In management's belief, these estimates are not necessarily
indicative of what actually could occur in the event of immediate interest rate
increases or decreases of this magnitude. Management believes that it is
unlikely that such changes would occur in a short time period. As
interest-bearing assets and liabilities reprice at different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, our
future results would, in management's belief, be different from the foregoing
estimates, and such results could be material.
22
Liquidity
Liquidity is our ability to meet cash demands as they arise. Such needs can
develop from loan demand, deposit withdrawals or acquisition opportunities.
Potential obligations resulting from the issuance of standby letters of credit
and commitments to fund future borrowings to its loan customers are other
factors affecting our liquidity needs. Many of these obligations and commitments
are expected to expire without being drawn upon; therefore the total commitment
amounts do not necessarily represents future cash requirements affecting our
liquidity position. The potential need for liquidity arising from these types of
financial instruments is represented by the contractual notional amount of the
instrument, as detailed in Table 13. Asset liquidity is provided by cash and
assets, which are readily marketable or which will mature in the near future.
Liquid assets include cash, federal funds sold, and short-term investments in
time deposits in banks. Liquidity is also provided by access to funding sources,
which include core depositors and correspondent banks that maintain accounts
with and sell federal funds to our subsidiary banks. Other sources of funds
include our ability to sell securities under agreement to repurchase, which
amounted to $19.8 million at December 31, 2001, and an unfunded $25.0 million
line of credit established with a nonaffiliated bank which matures on June 30,
2002. We believe the line of credit will be renewed upon maturity. Given the
strong core deposit base and relatively low loan deposit ratios maintained at
the subsidiary banks, management considers the current liquidity position to be
adequate to meet short- and long-term liquidity needs.
Table 13 -- Commercial Commitments (in thousands):
Total Amounts Less than 1 4 - 5 Over 5
Committed year 1 - 3 years years years
------------ ------------- ----------- --------- ----------
Commitments to extend credit.......... $ 153,892 $ 140,478 $ 11,282 $ 1,553 $ 579
Standby letters of credit............. 5,373 4,200 1,168 5 -
------------ ------------- ----------- --------- ----------
Total Commercial Commitments.......... $ 159,265 $ 144,678 $ 12,450 $ 1,558 $ 579
============ ============= =========== ========= ==========
The Company has no other off-balance sheet arrangements or transactions
with unconsolidated, special purpose entities that would expose the Company to
liability that is not reflected on the face of the financial statements.
Parent Company Funding. Our ability to fund various operating expenses,
dividends, and cash acquisitions is generally dependent solely on our own
earnings (without giving effect to our subsidiaries), cash reserves and funds
derived from our subsidiary banks. These funds historically have been produced
by intercompany dividends and management fees that are limited to reimbursement
of actual expenses. We anticipate that our recurring cash sources will continue
to include dividends and management fees from our subsidiary banks. At December
31, 2001, approximately $18.3 million was available for the payment of
intercompany dividends by the subsidiary banks without the prior approval of
regulatory agencies. Also at December 31, 2001, we had $25.0 million available
under a line of credit with an unaffiliated financial institution.
Dividends. Our long-term dividend policy is to pay cash dividends to our
shareholders of between 40% and 50% of net earnings while maintaining adequate
capital to support growth. The dividend payout ratios have amounted to 48.9%,
45.2% and 43.6% of net earnings, respectively, in 2001, 2000 and 1999. Given the
current strong capital position and projected earnings and asset growth rates,
we do not anticipate any change in our current dividend policy.
Each state bank that is a member of the Federal Reserve System and each
national banking association is required by federal law to obtain the prior
approval of the Federal Reserve Board and the OCC, respectively, to declare and
pay dividends if the total of all dividends declared in any calendar year would
exceed the total of (1) such bank's net profits (as defined and interpreted by
regulation) for that year plus (2) its retained net profits (as defined and
interpreted by regulation) for the preceding two calendar years, less any
required transfers to surplus. In addition, these banks may only pay dividends
to the extent that retained net profits (including the portion transferred to
surplus) exceed bad debts (as defined by regulation).
Our subsidiary banks paid aggregate dividends of approximately $25.5
million in 2001 and approximately $21.0 million in 2000. Under the dividend
restrictions discussed above, as of December 31, 2001, our subsidiary banks,
23
without obtaining governmental approvals, could have declared in the aggregate
additional dividends of approximately $18.3 million from retained net profits.
To pay dividends, we and our subsidiary banks must maintain adequate
capital above regulatory guidelines. In addition, if the applicable regulatory
authority believes that a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), the authority
may require, after notice and hearing, that such bank cease and desist from the
unsafe practice. The Federal Reserve Board and the OCC have each indicated that
paying dividends that deplete a bank's capital base to an inadequate level would
be an unsafe and unsound banking practice. The Federal Reserve Board, the OCC
and the FDIC have issued policy statements that recommend that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our management considers interest rate risk to be a significant market risk
for us. See "Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations--Balance Sheet Review--Interest Rate Risk" for
disclosure regarding this market risk.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements begin on page F-1.
Quarterly Results of Operations (in thousands, except per share and common stock
data):
The following tables set forth certain unaudited historical quarterly
financial data for each of the eight consecutive quarters in fiscal 2001 and
2000. This information is derived from unaudited consolidated financial
statements that include, in our opinion, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation when read in
conjunction with our consolidated financial statements and notes thereto
included elsewhere in this Form 10-K. The amounts related to our common stock
have been adjusted to give effect to all stock dividends and stock splits.
2001
---------------------------------------------------
4th 3rd 2nd 1st
---------- --------- ---------- ---------
Summary Income Statement Information:
Interest income $ 27,814 $ 29,500 $ 29,213 $ 29,946
Interest expense 9,071 10,958 11,779 13,026
---------- --------- ---------- ---------
Net interest income 18,743 18,542 17,434 16,920
Provision for loan losses 562 539 497 366
---------- --------- ---------- ---------
Net interest income after provision for loan losses 18,181 18,003 16,937 16,554
Noninterest income 6,972 6,847 7,046 6,646
Net gain on securities transactions - - 14 54
Noninterest expense 14,364 14,047 13,507 13,154
---------- --------- ---------- ---------
Earnings before income taxes 10,789 10,803 10,490 10,100
Income tax expense 3,258 3,270 3,203 3,096
---------- --------- ---------- ---------
Net earnings $ 7,531 $ 7,533 $ 7,287 $ 7,004
========== ========= ========== =========
Per Share Data:
Net earnings per share $ 0.61 $ 0.61 $ 0.59 $ 0.57
Net earnings per share, assuming dilution 0.61 0.61 0.59 0.56
Cash dividends declared 0.30 0.30 0.30 0.264
Book value at period-end 17.32 17.31 16.77 16.40
Common stock sales price:
High $ 31.88 $ 32.91 $ 31.44 $ 27.15
Low 27.20 27.00 25.00 23.40
Close 30.10 29.03 31.00 26.60
2000
---------------------------------------------------
4th 3rd 2nd 1st
---------- --------- ---------- ---------
Summary Income Statement Information:
Interest income $ 30,675 $ 29,848 $ 29,168 $ 28,260
Interest expense 13,312 12,494 11,738 11,285
---------- --------- ---------- ---------
Net interest income 17,363 17,354 17,430 16,975
Provision for loan losses 812 426 419 741
---------- --------- ---------- ---------
Net interest income after provision for loan losses 16,551 16,928 17,011 16,234
Noninterest income 6,239 6,450 6,262 6,466
Net gain on securities transactions 530 - - -
Noninterest expense 12,900 12,929 12,924 12,940
---------- --------- ---------- ---------
Earnings before income taxes 10,240 10,449 10,394 9,760
Income tax expense 3,191 3,237 3,220 3,014
---------- --------- ---------- ---------
Net earnings $ 7,229 $ 7,212 $ 7,129 $ 6,746
========== ========= ========== =========
Per Share Data:
Net earnings per share $ 0.58 $ 0.58 $ 0.57 $ 0.55
Net earnings per share, assuming dilution 0.58 0.57 0.57 0.55
Cash dividends declared 0.264 0.264 0.264 0.240
Book value at period-end 15.92 15.34 14.93 14.63
Common stock sales price:
High $ 25.70 $ 26.10 $ 23.40 $ 24.80
Low 22.80 21.40 19.15 19.80
Close 25.15 25.65 22.00 21.00
25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Arthur Andersen LLP has served as our independent accountants since 1990.
There have been no disagreements between our management and our current
independent accountants relating to accounting practices and procedures or
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from our proxy statement for our 2002 annual meeting of shareholders or our 2002
proxy statement, under the captions "Proposal 1 -- Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from our 2002 proxy statement under the caption "Management."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from our 2002 proxy statement under the captions "Proposal 1 -- Election of
Directors" and "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from our 2002 proxy statement under the caption "Interest in Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants
Management's Report on Responsibility for the Financial
Statements
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Earnings for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999
Notes to the Consolidated Financial Statements
(2) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are
not required, are not applicable or have been included in our
consolidated financial statements.
26
(3) Exhibits
The information required by this Item 14(a)(3) is set forth in
the Exhibit Index immediately following our financial
statements. The exhibits listed herein will be furnished upon
written request to Curtis R. Harvey, Executive Vice President
and Chief Financial Officer, First Financial Bankshares, Inc.,
400 Pine Street, Abilene, Texas 79601, and payment of a
reasonable fee that will be limited to our reasonable expense
in furnishing such exhibits.
B. Reports on Form 8-K.
We did not file any reports on Form 8-K for the last quarter of the
period covered by this report.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date: March xx , 2002 By: /S/ F. SCOTT DUESER
-- -----------------------------------------------
F. SCOTT DUESER
President, Chief Executive Officer and Director
The undersigned directors and officers of First Financial Bankshares, Inc.
hereby constitute and appoint Curtis R. Harvey, with full power to act and with
full power of substitution and resubstitution, our true and lawful
attorney-in-fact with full power to execute in our name and behalf in the
capacities indicated below any and all amendments to this report and to file the
same, with all exhibits thereto and other documents in connection therewith with
the Securities and Exchange Commission and hereby ratify and confirm all that
such attorney-in-fact or his substitute shall lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/S/ KENNETH T. MURPHY Chairman of the Board and Director March 19, 2002
- ----------------------------------------------- --
Kenneth T. Murphy
/S/ CURTIS R. HARVEY Executive Vice President, Chief March 19, 2002
- ----------------------------------------------- Financial Officer, Controller and --
Curtis R. Harvey Chief Accounting Officer
/S/ F. SCOTT DUESER President, Chief Executive Officer March 19, 2002
- ----------------------------------------------- and Director --
F. Scott Dueser
/S/ JOSEPH E. CANON Director March 19, 2002
- ----------------------------------------------- --
Joseph E. Canon
/S/ MAC A. COALSON Director March 19, 2002
- ----------------------------------------------- --
Mac A. Coalson
/S/ DAVID COPELAND Director March 19, 2002
- ----------------------------------------------- --
David Copeland
Name Title Date
---- ----- ----
Director March __, 2002
- -----------------------------------------------
Derrell E. Johnson
Director March __, 2002
- -----------------------------------------------
Kade L. Matthews
/S/ RAYMOND A. MCDANIEL, JR. Director March 19, 2002
- ----------------------------------------------- --
Raymond A. McDaniel, Jr.
/S/ BYNUM MIERS Director March 19, 2002
- ----------------------------------------------- --
Bynum Miers
/S/ JAMES M. PARKER Director March 19, 2002
- ----------------------------------------------- --
James M. Parker
/S/ JACK D. RAMSEY Director March 19, 2002
- ----------------------------------------------- --
Jack D. Ramsey
Director March __, 2002
- -----------------------------------------------
Craig Smith
/S/ DIAN GRAVES STAI Director March 19, 2002
- ----------------------------------------------- --
Dian Graves Stai
Director March __, 2002
- -----------------------------------------------
F. L. Stephens
Director March __, 2002
- -----------------------------------------------
Walter F. Worthington
EXHIBIT INDEX
Item 601
Regulation S-K
Exhibit Reference
Number Exhibits
------ --------
2.1 -- Stock Exchange Agreement and Plan of Reorganization, dated as of September 4, 1998,
between First Financial Bankshares, Inc. and Cleburne State Bank (incorporated by
reference from Exhibit 2.1 of the Registrant's Form S-4, filed on October 2, 1998
(Reg. No. 333-65235)).
2.2 -- Amendment No. 1 to Stock Exchange Agreement and Plan of Reorganization, dated as of
October 30, 1998, between First Financial Bankshares, Inc. and Cleburne State Bank
(incorporated by reference from Exhibit 2.2 of the Registrant's Amendment No. 1 to
Form S-4, filed on November 3, 1998 (Reg. No. 333-65235)).
2.3 -- Stock Exchange Agreement and Plan of Reorganization, dated as of August 18, 1997,
between First Financial Bankshares, Inc., Southlake Bancshares, Inc. and Texas
National Bank (incorporated by reference from Exhibit 2.1 of the Registrant's Form
S-4, filed on October 1, 1997 (Reg. No. 333-36919)).
2.4 -- Purchase and Assumption Agreement, dated May 27, 1997, by and between Southwest
Bank of San Angelo and Texas Commerce Bank-- San Angelo, National Association
(incorporated by reference from Exhibit 2.2 of the Registrant's Form S-4, filed on
October 1, 1997 (Reg. No. 333-36919)).
3.1 -- Articles of Incorporation, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 1 of the Registrant's Amendment No. 2 to
Form 8-A filed on Form 8-A/A No. 2 on November 21, 1995).
3.2 -- Amended and Restated Bylaws, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 2 of the Registrant's Amendment No. 1 to
Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994).
4.1 -- Specimen certificate of First Financial Common Stock (incorporated by reference
from Exhibit 3 of the Registrant's Amendment No. 1 to Form 8-A filed on Form 8-A/A
No. 1 on January 7, 1994).
10.1 -- Deferred Compensation Agreement, dated October 28, 1992, between the Registrant and
Kenneth T. Murphy (incorporated by reference from Exhibit 4 of the Registrant's
Form 10-K Annual Report for the fiscal year ended December 31, 1992).
10.2 -- Revised Deferred Compensation Agreement, dated December 28, 1995, between the
Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit 2 of the
Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1995).
10.3 -- Executive Recognition Plan (incorporated by reference from Exhibit 2 of the
Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1996).
10.4 -- Form of Executive Recognition Agreement (incorporated by reference from Exhibit 3
of the Registrant's Form 10-K Annual Report for the fiscal year ended December 31,
1996).
10.5 -- 1992 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.5 of
the Registrant's Form 10-K Annual Report for the fiscal year ended December 31,
1998).
Item 601
Regulation S-K
Exhibit Reference
Number Exhibits
------ --------
*21.1 -- Subsidiaries of the Registrant.
24.1 -- Power of Attorney (included on signature page of this Form 10-K).
-------------
*Filed herewith
SUBSIDIARIES OF REGISTRANT
Percentage of Voting
Name of Subsidiary Place of Organization Securities Owned
------------------ --------------------- ----------------
First Financial Bankshares of Delaware, Inc. Delaware 100%
First Financial Investments, Inc. Texas 100%
First National Bank of Abilene* Texas 100%**
Abilene, Texas
Hereford State Bank Texas 100%**
Hereford, Texas
First National Bank, Sweetwater* Texas 100%**
Sweetwater, Texas
Eastland National Bank* Texas 100%**
Eastland, Texas
First Financial Bank, National Association* Texas 100%**
Cleburne, Texas
Stephenville Bank & Trust Co. Texas 100%**
Stephenville, Texas
San Angelo National Bank* Texas 100%**
San Angelo, Texas
Weatherford National Bank* Texas 100%**
Weatherford, Texas
First Financial Bank, National Association* Texas 100%**
Southlake, Texas
City National Bank* Texas 100%**
Mineral Wells, Texas
*Federal charter.
**By First Financial Bankshares of Delaware, Inc.
All subsidiaries (other than First Financial Investments, Inc. which, as of
December 31, 2001, had not yet begun operations) are included in the
consolidated financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of First Financial
Bankshares, Inc. (a Texas corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of earnings, comprehensive
earnings, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Financial Bankshares,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
Dallas, Texas,
January 11, 2002
F-1
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The Management of First Financial Bankshares, Inc. and subsidiaries is
responsible for the preparation, integrity, and fair presentation of its annual
financial statements as of December 31, 2001 and 2000, and for each of the three
years in the period ended December 31, 2001. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States and, as such, include amounts based on judgments and estimates
made by Management. Management has also prepared the other information included
in this Annual Report and is responsible for its accuracy and consistency with
the financial statements.
The annual financial statements referred to above have been audited by Arthur
Andersen LLP, who have been given unrestricted access to all financial records
and related data, including minutes of all meetings of shareholders and the
Board of Directors. Management believes that all representations made to Arthur
Andersen LLP during the audits were valid and appropriate.
F. Scott Dueser Curtis R. Harvey
President and Chief Executive Officer Executive Vice President
and Chief Financial Officer
F-2
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000
-------------------------------------------------------
ASSETS 2001 2000
------ -------------- --------------
CASH AND DUE FROM BANKS $ 112,150,214 $ 100,300,424
FEDERAL FUNDS SOLD 72,975,000 62,230,288
-------------- --------------
Total cash and cash equivalents 185,125,214 162,530,712
INTEREST-BEARING DEPOSITS IN BANKS 1,374,285 104,338
INVESTMENT IN SECURITIES:
Securities held-to-maturity (market value of $298,569,794 in
2001 and $393,590,628 in 2000) 290,674,490 391,918,076
Securities available-for-sale, at market value 431,019,205 262,334,642
-------------- --------------
Total investment in securities 721,693,695 654,252,718
LOANS 940,130,975 859,270,728
Less- Allowance for loan losses 10,602,419 9,887,646
-------------- --------------
Net loans 929,528,556 849,383,082
BANK PREMISES AND EQUIPMENT, net 42,012,431 40,090,733
GOODWILL, net 23,765,896 18,515,304
OTHER ASSETS 26,194,053 28,937,327
-------------- --------------
Total assets $1,929,694,130 $1,753,814,214
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
NONINTEREST-BEARING DEPOSITS $ 389,406,666 $ 336,276,933
INTEREST-BEARING DEPOSITS 1,295,755,932 1,183,596,767
-------------- --------------
Total deposits 1,685,162,598 1,519,873,700
DIVIDENDS PAYABLE 3,699,976 3,256,540
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE 19,847,067 26,164,359
OTHER LIABILITIES 7,330,476 8,398,727
-------------- --------------
Total liabilities 1,716,040,117 1,557,693,326
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 20,000,000 shares;
12,333,252 shares issued and outstanding at December 31, 2001;
9,983,002 shares issued and 9,856,902 shares outstanding at
December 31, 2000 123,332,520 99,830,020
Capital surplus 57,824,061 60,592,310
Retained earnings 28,375,353 38,003,195
Treasury stock, at cost (126,100 shares at December 31, 2000) - (3,925,069)
Unrealized gain on investment in securities available-for-sale, net 4,122,079 1,620,432
-------------- --------------
Total shareholders' equity 213,654,013 196,120,888
-------------- --------------
Total liabilities and shareholders' equity $1,929,694,130 $1,753,814,214
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
-----------------------------------------------------
2001 2000 1999
-------------- ------------- -------------
INTEREST INCOME:
Interest and fees on loans $ 74,811,682 $ 75,474,661 $ 68,706,710
Interest on investment in securities-
Taxable 32,169,874 33,556,796 32,022,205
Exempt from federal income tax 6,279,973 5,770,861 4,807,845
Interest on federal funds sold and interest-bearing
deposits in banks 3,211,316 3,148,277 4,475,866
-------------- ------------- -------------
Total interest income 116,472,845 117,950,595 110,012,626
-------------- ------------- -------------
INTEREST EXPENSE:
Interest on deposits 43,970,532 47,737,862 43,120,569
Other 863,480 1,091,180 216,988
-------------- ------------- -------------
Total interest expense 44,834,012 48,829,042 43,337,557
-------------- ------------- -------------
Net interest income 71,638,833 69,121,553 66,675,069
PROVISION FOR LOAN LOSSES 1,964,050 2,397,750 2,030,833
-------------- ------------- -------------
Net interest income after provision for
loan losses 69,674,783 66,723,803 64,644,236
-------------- ------------- -------------
NONINTEREST INCOME:
Trust department income 5,890,600 5,494,246 5,097,606
Service fees on deposit accounts 14,743,217 14,073,514 13,321,553
ATM fees 1,941,508 1,554,437 1,241,039
Real estate mortgage fees 1,609,518 1,021,590 1,291,282
Net gain on securities transactions 67,789 530,097 -
Other 3,325,858 3,273,445 3,532,022
-------------- ------------- -------------
Total noninterest income 27,578,490 25,947,329 24,483,502
-------------- ------------- -------------
NONINTEREST EXPENSE:
Salaries and employee benefits 28,685,294 27,077,436 26,945,492
Net occupancy expense 3,995,597 3,563,289 3,819,129
Equipment expense 4,457,909 4,180,782 4,118,272
Goodwill amortization 1,641,367 1,641,367 1,641,407
Other expenses 16,291,530 15,229,614 15,409,051
-------------- ------------- -------------
Total noninterest expense 55,071,697 51,692,488 51,933,351
-------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES 42,181,576 40,978,644 37,194,387
INCOME TAX EXPENSE 12,827,071 12,662,597 11,503,846
-------------- ------------- -------------
NET EARNINGS $ 29,354,505 $ 28,316,047 $ 25,690,541
============== ============= =============
NET EARNINGS PER SHARE (BASIC) $ 2.38 $ 2.28 $ 2.06
============== ============= =============
NET EARNINGS PER SHARE, ASSUMING DILUTION $ 2.37 $ 2.27 $ 2.05
============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
-----------------------------------------------------
2001 2000 1999
------------ ------------ ------------
NET EARNINGS $ 29,354,505 $ 28,316,047 $ 25,690,541
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized gain (loss) on investment in securities
available-for-sale, before tax 3,952,978 9,319,576 (8,653,045)
Reclassification adjustment for realized gains on
investment in securities included in net earnings, before tax (67,789) (530,097) -
------------ ------------ ------------
Total other items of comprehensive earnings 3,885,189 8,789,479 (8,653,045)
Income tax expense related to other items of
comprehensive earnings 1,383,542 3,076,320 (3,028,566)
------------ ------------ ------------
COMPREHENSIVE EARNINGS $ 31,856,152 $ 34,029,206 $ 20,066,062
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
-----------------------------------------------------
Unrealized Gain
(Loss) on
Investment
Common Stock Treasury in Securities Total
------------------------ Capital Retained Stock, Available- Shareholders'
Shares Amount Surplus Earnings at cost For-Sale, Net Equity
---------- ------------ ----------- ----------- --------------- ---------- ------------
BALANCE, December 31, 1998 9,952,683 $ 99,526,830 $60,375,373 $ 8,015,303 $ - $1,531,752 $169,449,258
Net earnings - - - 25,690,541 - - 25,690,541
Cash dividends declared,
$.90 per share - - - (11,210,585) - - (11,210,585)
Stock issuances 21,623 216,230 141,978 - - - 358,208
Change in unrealized gain (loss)
on investment in securities
available-for-sale, net - - - - - (5,624,479) (5,624,479)
---------- ------------ ----------- ----------- --------------- ----------- ------------
BALANCE, December 31, 1999 9,974,306 $ 99,743,060 $60,517,351 $22,495,259 $ - $(4,092,727) $178,662,943
Net earnings - - - 28,316,047 - - 28,316,047
Cash dividends declared,
$1.03 per share - - - (12,808,111) - - (12,808,111)
Acquisition of treasury stock - - - - (3,925,069) - (3,925,069)
Stock issuances 8,696 86,960 74,959 - - - 161,919
Change in unrealized gain (loss)
on investment in securities
available-for-sale, net - - - - - 5,713,159 5,713,159
---------- ------------ ----------- ----------- --------------- ----------- ------------
BALANCE, December 31, 2000 9,983,002 $ 99,830,020 $60,592,310 $38,003,195 $ (3,925,069)$ 1,620,432 $196,120,888
Net earnings - - - 29,354,505 - - 29,354,505
Stock split-up, effected in the
form of a 25% stock dividend 2,461,770 24,617,700 - (24,617,700) - - -
Cash dividends declared,
$1.16 per share - - - (14,364,647) - - (14,364,647)
Acquisition of treasury stock - - - - (315,050) - (315,050)
Retirement of treasury stock (136,000) (1,360,000) (2,880,119) - 4,240,119 - -
Stock issuances 24,480 244,800 111,870 - - - 356,670
Change in unrealized gain (loss)
on investment in securities
available-for-sale, net - - - - - 2,501,647 2,501,647
---------- ------------ ----------- ----------- --------------- ----------- ------------
BALANCE, December 31, 2001 12,333,252 $123,332,520 $57,824,061 $28,375,353 $ - $ 4,122,079 $213,654,013)
========== ============ =========== =========== =============== ==+======== ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
-----------------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 29,354,505 $ 28,316,047 $ 25,690,541
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization 5,679,082 5,502,224 6,015,481
Provision for loan losses 1,964,050 2,397,750 2,030,833
Premium amortization, net of discount accretion 1,662,108 1,359,124 2,819,747
Gain on sale of assets (52,815) (540,304) (242,786)
Deferred federal income tax benefit (188,982) (304,240) (189,462)
Decrease (increase) in other assets 3,565,172 (2,567,832) (755,821)
(Decrease) increase in other liabilities (1,778,326) 1,026,945 (1,826,348)
------------- ------------- -------------
Total adjustments 10,850,289 6,873,667 7,851,644
------------- ------------- -------------
Net cash provided by operating activities 40,204,794 35,189,714 33,542,185
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing deposits in banks (1,269,947) (100,258) 199,831
Payment for stock of City Bancshares, Inc., net of cash acquired (6,848,231) - -
Activity in available-for-sale securities-
Sales 57,925,815 530,097 -
Maturities 660,484,725 21,660,247 41,136,148
Purchases (854,748,980) (41,804,532) (73,621,717)
Activity in held-to-maturity securities-
Maturities 176,972,321 87,167,939 114,528,929
Purchases (76,102,656) (57,628,266) (123,843,038)
Net increase in loans (31,639,533) (63,728,244) (20,100,242)
Capital expenditures (5,151,260) (2,507,214) (4,136,657)
Proceeds from sale of other assets 200,461 392,305 1,453,017
------------- ------------- -------------
Net cash used in investing activities (80,177,285) (56,017,926) (64,383,729)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits 41,179,967 (4,236,804) 5,794,605
Net increase (decrease) in interest-bearing deposits 41,583,909 (593,942) 14,054,001
Net (decrease) increase in securities sold under
agreements to repurchase (6,317,292) 16,526,625 9,250,776
Net decrease in other short-term borrowings - - (20,000)
Common stock transactions:
Acquisition of treasury stock (315,050) (3,925,069) -
Proceeds of stock issuances 356,670 161,919 358,208
Dividends paid (13,921,211) (12,543,863) (10,954,982)
------------- ------------- -------------
Net cash provided by (used in) financing activities 62,566,993 (4,611,134) 18,482,608
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,594,502 (25,439,346) (12,358,936)
CASH AND CASH EQUIVALENTS, beginning of year 162,530,712 187,970,058 200,328,994
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 185,125,214 $ 162,530,712 $ 187,970,058
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 2001, 2000, AND 1999
---------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Nature of Operations
- --------------------
First Financial Bankshares, Inc. (a Texas corporation) ("Bankshares") is a
financial holding company which owns (through its wholly-owned Delaware
subsidiary) all of the capital stock of ten banks located in Texas as of
December 31, 2001. Those subsidiary banks are First National Bank of Abilene;
Hereford State Bank; First National Bank, Sweetwater; Eastland National Bank;
First Financial Bank, National Association, Cleburne; Stephenville Bank & Trust
Co.; San Angelo National Bank; Weatherford National Bank; First Financial Bank,
National Association, Southlake and City National Bank, Mineral Wells. Each
subsidiary bank's primary source of revenue is providing loans and banking
services to consumers and commercial customers in the market area in which the
subsidiary is located.
A summary of significant accounting policies of Bankshares and subsidiaries
(collectively, the "Company") applied in the preparation of the accompanying
consolidated financial statements follow. The accounting principles followed by
the Company and the methods of applying them are in conformity with both
accounting principles generally accepted in the United States and prevailing
practices of the banking industry.
Use of Estimates in Preparation of Financial Statements
- -------------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates
that are particularly susceptible to significant change in the near term relate
to the determination of the allowance for loan losses, the valuations of
foreclosed real estate, deferred income tax assets, and financial instruments.
Consolidation
- -------------
The accompanying consolidated financial statements include the accounts of
Bankshares and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated.
Investment in Securities
- ------------------------
Management classifies debt and equity securities as held-to-maturity,
available-for-sale, or trading based on its intent. Debt securities that
management has the positive intent and ability to hold to maturity are
classified as held-to-maturity and recorded at cost, adjusted for amortization
of premiums and accretion of discounts, which are recognized as adjustments to
interest income using the interest method. Securities not classified as
held-to-maturity or trading are classified as available-for-sale and recorded at
estimated fair value, with unrealized gains and losses, net of deferred taxes,
excluded from earnings and reported in a separate component of shareholders'
F-8
equity and comprehensive earnings. Securities classified as trading are recorded
at estimated fair value, with unrealized gains and losses included in earnings.
The Company had no trading securities at December 31, 2001, 2000, or 1999.
Loans and Allowance for Loan Losses
- -----------------------------------
Loans are stated at the amount of unpaid principal, reduced by unearned income
and an allowance for loan losses. Unearned income on installment loans is
recognized in income over the terms of the loans in decreasing amounts using a
method which approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amounts outstanding. The Company expenses its net loan origination
costs, a method which does not materially differ from deferring and amortizing
such amounts as an adjustment to yield. The allowance for loan losses is
established through a provision for loan losses charged to expense. Loans are
charged against the allowance for loan losses when management believes the
collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectable based upon
management's review and evaluation of the loan portfolio. The allowance for loan
losses is increased by charges to income and decreased by charge-offs (net of
recoveries). Management's periodic evaluation of the adequacy of the allowance
is based on general economic conditions, the financial condition of the
borrower, the value and liquidity of collateral, delinquency, prior loan loss
experience, and the results of periodic reviews of the portfolio. Accrual of
interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts that the borrower's
financial condition is such that collection of interest is doubtful.
The Company's policy requires measurement of an impaired collateral dependent
loan based on the fair value of the collateral. Other loan impairments are
measured based on the present value of expected future cash flows or the loan's
observable market price. At December 31, 2001 and 2000, all significant impaired
loans have been determined to be collateral dependent and have been measured
utilizing the estimated 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.
Business Combinations, Goodwill and Other Intangible Assets
- -----------------------------------------------------------
Goodwill, relating to acquisitions of certain subsidiary banks, was amortized by
the straight-line method over periods of 15 and 40 years during the years ended
December 31, 2001, 2000 and 1999.
In June 2001, Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued.
SFAS No. 141 requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and
the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful
lives be amortized and that goodwill and intangible assets with indefinite lives
not be amortized, but rather be tested at least annually for impairment. SFAS
F-9
No. 142, is effective January 1, 2002 for calendar year companies, however, any
acquired goodwill or intangible assets recorded in transactions closed
subsequent to June 30, 2001 were subject immediately to the nonamortization and
amortization provisions of SFAS No. 142.
As required under SFAS No. 142, the Company will discontinue the amortization of
goodwill with a net carrying value of $16,873,937 at January 1, 2002 and annual
amortization of $1,641,367 that resulted from business combinations prior to the
adoption of SFAS No. 141. Goodwill related to the acquisition of City
Bancshares, Inc. (see Note 17) on July 1, 2001, amounting to $6,891,959 has not
been amortized. However, the Company continues to evaluate the additional
effect, if any, that adoption of SFAS No. 142 will have on the Company's
consolidated financial statements.
Other identifiable intangible assets recorded by the Company represent the
future benefit associated with the acquisition of the core deposits of City
Bankshares, Inc. and is being amortized over seven years utilizing a method that
approximates the expected attrition of the deposits.
Securities Sold Under Agreements To Repurchase
- ----------------------------------------------
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
the cash received in connection with the transaction. The Company may be
required to provide additional collateral based on the estimated fair value of
the underlying securities.
Segment Reporting
- -----------------
The Company has determined that it operates one line of business (community
banking) located in a single geographic area (Texas).
Recent Accounting Standard
- --------------------------
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), was issued.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that all derivatives be
recognized as either assets or liabilities in the statement of financial
position and that those instruments be measured at fair value. The Company
adopted SFAS No. 133 on January 1, 2001. The statement did not have a
significant impact on its financial position or results of operation.
Statements of Cash Flows
- ------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold.
Accounting for Income Taxes
- ---------------------------
The Company's provision for income taxes is 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.
F-10
Stock Repurchase
- ----------------
On July 25, 2000, the Company approved a stock repurchase plan, authorizing the
repurchase of up to 500,000 shares of the Company's common stock. During the
years ended December 31, 2001 and 2000, the Company repurchased 9,900 and
126,100 shares, respectively. The treasury shares were purchased for $4,240,119,
which represents an average purchase price of $24.94 per share, as retroactively
adjusted for the effect of stock dividends and splits.
Per Share Data
- --------------
Net earnings per share ("EPS") are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the period.
The Company calculates dilutive EPS assuming all outstanding options to purchase
common stock have been exercised at the beginning of the year (or the time of
issuance, if later.) The dilutive effect of the outstanding options is reflected
by application of the treasury stock method, whereby the proceeds from the
exercised options are assumed to be used to purchase common stock at the average
market price during the period. The following table reconciles the computation
of basic EPS to dilutive EPS:
Weighted
Net Average Per Share
Earnings Shares Amount
----------- ---------- ---------
For the year ended December 31, 2001:
Net earnings per share, basic $29,354,505 12,318,346 $ 2.38
=========
Effect of stock options - 45,323
----------- ----------
Net earnings per share, assuming dilution $29,354,505 12,363,669 $ 2.37
=========== ========== =========
For the year ended December 31, 2000:
Net earnings per share, basic $28,316,047 12,426,344 $ 2.28
=========
Effect of stock options - 28,355
----------- ----------
Net earnings per share, assuming dilution $28,316,047 12,454,699 $ 2.27
=========== ========== =========
For the year ended December 31, 1999:
Net earnings per share, basic $25,690,541 12,451,644 $ 2.06
=========
Effect of stock options - 55,668
----------- ----------
Net earnings per share, assuming dilution $25,690,541 12,507,312 $ 2.05
=========== ========== =========
Earnings and dividends per share have been retroactively adjusted for the effect
of stock dividends and splits.
2. CASH AND INVESTMENT IN SECURITIES:
----------------------------------
Certain subsidiary banks are required to maintain reserve balances with the
Federal Reserve Bank. During 2001 and 2000, such average balances totaled
approximately $9,017,000 and $7,785,000, respectively. The amortized cost,
estimated fair values, and gross unrealized gains and losses of the Company's
investment in securities as of December 31, 2001 and 2000, are as follows:
F-11
December 31, 2001
------------------------------------------------------------------
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 $172,879,974 $5,039,045 $ (47,536) $177,871,483
Obligations of state and
political subdivisions 75,959,059 1,670,635 (134,439) 77,495,255
Corporate bonds 498,483 13,867 - 512,350
Mortgage-backed securities 41,332,974 1,354,710 (978) 42,686,706
Other 4,000 - - 4,000
------------ ---------- ----------- ------------
Total investment in debt
securities held-to-maturity $290,674,490 $8,078,257 $ (182,953) $298,569,794
============ ========== ============ ============
Securities available-for-sale-
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies $ 93,150,557 $2,025,482 $ (257,163) $ 94,918,876
Obligations of state and
political subdivisions 82,545,879 1,140,522 (835,320) 82,851,081
Corporate bonds 56,553,112 2,000,708 (31,141) 58,522,679
Mortgage-backed securities 189,421,296 2,982,733 (684,161) 191,719,868
------------ ---------- ----------- ------------
Total investment in debt
securities
available-for-sale 421,670,844 8,149,445 (1,807,785) 428,012,504
Other securities 3,006,701 - - 3,006,701
------------ ---------- ----------- ------------
Total investment in securities
available-for-sale $424,677,545 $8,149,445 $(1,807,785) $431,019,205
============ ========== =========== ============
F-12
December 31, 2000
--------------------------------------------------------------------
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 $251,418,096 $1,412,905 $(909,401) $251,921,600
Obligations of state and
political subdivisions 82,343,742 984,801 (261,897) 83,066,646
Corporate bonds 4,615,347 - (18,320) 4,597,027
Mortgage-backed securities 53,540,891 639,820 (175,356) 54,005,355
------------ ---------- ----------- ------------
Total investment in debt
securities held-to-maturity $391,918,076 $3,037,526 $(1,364,974) $393,590,628
============ ========== =========== ============
Securities available-for-sale-
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies $102,872,287 $722,740 $(273,607) $103,321,420
Obligations of state and
political subdivisions 58,543,775 1,252,285 (185,798) 59,610,262
Corporate bonds 47,325,730 478,314 (89,070) 47,714,974
Mortgage-backed securities 47,962,976 698,433 (110,324) 48,551,085
------------ ---------- ----------- ------------
Total investment in debt
securities
available-for-sale 256,704,768 3,151,772 (658,799) 259,197,741
Other securities 3,136,901 - - 3,136,901
------------ ---------- ----------- ------------
Total investment in securities
available-for-sale $259,841,669 $3,151,772 $ (658,799) $262,334,642
============ ========== =========== ============
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, 2001, were computed by using scheduled amortization of balances and
historical prepayment rates. At December 31, 2001 and 2000, the Company did not
hold any CMOs that entail higher risks than standard mortgage-backed securities.
Total investment in debt securities at December 31, 1999 included structured
notes with an amortized cost basis of $7,006,000 and an estimated fair value of
$6,942,000.
F-13
The amortized cost and estimated fair value of debt securities at December 31,
2001, by contractual and expected maturity, are shown below.
Held-to-Maturity Available-for-Sale
---------------- ----------------------
Amortized Estimated Amortized Estimated
Cost Basis Fair Value Cost Basis Fair Value
------------ ------------ ------------ ------------
Due within one year $ 75,600,627 $ 76,685,480 $ 48,273,414 $ 49,201,704
Due after one year through five years 183,059,102 189,289,246 277,441,843 283,074,985
Due after five years through ten years 16,709,027 17,061,016 36,957,130 37,073,675
Due after ten years 15,305,734 15,534,052 58,998,457 58,662,140
------------ ------------ ------------ ------------
Total debt securities $290,674,490 $298,569,794 $421,670,844 $428,012,504
============ ============ ============ ============
Securities, carried at approximately $243,316,000 and $237,295,000 at December
31, 2001 and 2000, respectively, were pledged as collateral for public or trust
fund deposits and for other purposes required or permitted by law.
During 2001 and 2000, sales of investments in securities that were classified as
available-for-sale totaled $57,925,815 and $530,097 respectively. Gross realized
gains from the 2001 and 2000 sales were $67,789 and $530,097, respectively.
There were no sales of investment securities in the year ended December 31,
1999. The specific identification method was used to determine cost in computing
the realized gains and losses.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
------------------------------------
Major classifications of loans are as follows:
December 31,
------------------------------
2001 2000
------------ ------------
Commercial, financial, and agricultural $312,053,042 $295,032,865
Real estate - construction 47,173,297 40,609,783
Real estate - mortgage 350,381,887 290,920,045
Consumer 230,616,297 233,219,033
------------ ------------
940,224,523 859,781,726
Unearned income (93,548) (510,998)
------------ ------------
Total loans $940,130,975 $859,270,728
============ ============
The Company's recorded investment in impaired loans and the related valuation
allowance are as follows:
December 31, 2001 December 31, 2000
------------------------ -------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ----------
Impaired loans-
Valuation allowance required $3,817,683 $ 926,636 $3,727,631 $1,090,472
========== ========= ========== ==========
F-14
The average recorded investment in impaired loans for the years ended December
31, 2001 and 2000, was approximately $3,773,000 and $2,640,000, respectively.
The Company had approximately $4,824,000 and $4,092,000 in nonperforming assets
at December 31, 2001 and 2000, respectively, of which approximately $3,657,000
and $3,539,000 represented recorded investments in impaired loans. No additional
funds are committed to be advanced in connection with impaired loans.
Interest payments received on impaired loans are recorded as interest income
unless collections of the remaining recorded investment is doubtful, at which
time payments received are recorded as reductions of principal. The Company
recognized interest income on impaired loans of approximately $136,000,
$213,000, and $63,000 during the years ended December 31, 2001, 2000, and 1999,
respectively, of which approximately $9,000, $16,000 and $23,000 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, 2001, 2000, and 1999, respectively, such income would have
approximated $399,000, $449,000 and $249,000.
The allowance for loan losses as of December 31, 2001 and 2000, is presented
below. Management has evaluated the adequacy of the allowance for loan losses by
estimating the losses in various categories of the loan portfolio which are
identified below:
2001 2000
----------- ----------
Allowance for loan losses provided for-
Loans specifically evaluated as impaired $ 926,636 $1,090,472
Remaining portfolio 9,675,783 8,797,174
----------- ----------
Total allowance for loan losses $10,602,419 $9,887,646
=========== ==========
Changes in the allowance for loan losses are summarized as follows:
December 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- ------------
Balance at beginning of year $ 9,887,646 $ 8,937,542 $ 8,988,320
Add-
Provision for loan losses 1,964,050 2,397,750 2,030,833
Loan recoveries 968,535 1,545,080 1,739,641
Allowance established at acquisition 407,129 - -
Deduct-
Loan charge-offs (2,624,941) (2,992,726) (3,821,252)
----------- ----------- ------------
Balance at end of year $10,602,419 $ 9,887,646 $ 8,937,542
=========== =========== ============
An analysis of the changes in loans to officers, directors, principal
shareholders, or associates of such persons for the years ended December 31,
2001 and 2000 (determined as of each respective year-end) follows:
F-15
Balance at Balance at
Beginning Additional End
of Period Loans Payments of Period
----------- ----------- ----------- -----------
Year ended December 31, 2001 $35,575,573 $51,556,164 $42,970,581 $44,161,156
=========== =========== =========== ===========
Year ended December 31, 2000 $35,575,469 $49,751,374 $56,167,254 $29,159,589
=========== =========== =========== ===========
In the opinion of management, those loans are on substantially the same terms,
including interest rates and collateral requirements, as those prevailing at the
time for comparable transactions with unaffiliated persons.
4. BANK PREMISES AND EQUIPMENT:
----------------------------
The following is a summary of bank premises and equipment:
December 31,
-----------------------------
2001 2000
------------ -----------
Land $ 7,104,761 $ 7,104,761
Buildings 48,736,744 46,057,304
Furniture and equipment 25,864,098 22,861,037
Leasehold improvements 4,579,197 5,003,794
------------ -----------
86,284,800 81,026,896
Less- Accumulated depreciation and amortization (44,272,369) (40,936,163)
------------ -----------
$42,012,431 $40,090,733
=========== ===========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
amounted to $3,755,878, $3,700,474 and $3,932,695, respectively, and is included
in the captions net occupancy expense and equipment expense in the accompanying
consolidated statements of earnings.
5. TIME DEPOSITS:
--------------
Time deposits of $100,000 or more totaled approximately $196,905,000 and
$165,494,000 at December 31, 2001 and 2000, respectively. Interest expense on
these deposits was approximately $10,163,000, $10,022,000 and $8,146,000 during
2001, 2000, and 1999, respectively.
At December 31, 2001, the scheduled maturities of time deposits were, as
follows:
2002 $516,673,000
2003 39,786,000
2004 8,515,000
2005 8,793,000
2006 1,302,000
------------
$575,069,000
============
F-16
6. NOTE PAYABLE:
-------------
Bankshares has a line of credit with a nonaffiliated bank under which it could
borrow up to $25,000,000. The line of credit is unsecured and matures on June
30, 2002. Bankshares paid no fee to secure the unused line of credit and,
accordingly, did not estimate a fair value of the unused line of credit at
December 31, 2001 and 2000. The line of credit carries an interest rate of
London Interbank Offering Rate plus 1.0%.
7. INCOME TAXES:
-------------
The Company files a consolidated federal income tax return. Income tax expense
(benefit) is comprised of the following:
Year Ended December 31,
-----------------------------------------------
2001 2000 1999
----------- ----------- -----------
Current federal income tax $13,016,053 $12,966,837 $11,693,308
Deferred federal income tax benefit (188,982) (304,240) (189,462)
----------- ----------- -----------
Income tax expense $12,827,071 $12,662,597 $11,503,846
=========== =========== ===========
Income tax expense, as a percentage of pretax earnings, differs from the
statutory federal income tax rate as follows:
As a Percent of Pretax Earnings
-------------------------------------------------
2001 2000 1999
--------------- ---------------- ---------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Reductions in tax rate resulting from
interest income exempt from
federal income tax (5.2)% (4.9)% (4.5)%
Other 0.6 % 0.8% 0.4%
---- ---- ----
Effective income tax rate 30.4% 30.9% 30.9%
==== ==== ====
The approximate effects of each type of difference that gave rise to the
Company's deferred tax assets and liabilities at December 31, 2001 and 2000, are
as follows:
2001 2000
---------- ----------
Deferred tax assets-
Tax basis of loans in excess of financial statement basis $3,766,408 $3,382,025
Benefits of a subsidiary bank net operating loss
carryforward 12,698 131,302
Recognized for financial reporting purposes but not
for tax purposes-
Deferred compensation 590,462 500,260
Write-downs and adjustments to other
real estate owned and repossessed assets 112,000 81,052
Other deferred tax assets 245,750 285,346
---------- ----------
Total deferred tax assets $4,727,318 $4,379,985
---------- ----------
F-17
Deferred tax liabilities-
Financial statement basis of fixed assets in excess of
tax basis $1,334,565 $1,503,329
Recognized for financial reporting purposes but not
for tax purposes-
Accretion on investments 385,191 322,689
Pension plan contribution 610,869 571,685
Net unrealized gain on investment in securities
available-for-sale 2,219,581 872,540
Other deferred tax liabilities 225,429 -
---------- ----------
Total deferred tax liabilities 4,775,635 3,270,243
---------- ----------
Net deferred tax (liability) asset $ (48,317) $1,109,742
========== ==========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The Company is required to disclose the estimated fair value of its financial
instrument assets and liabilities. For the Company, as for most financial
institutions, over 90% of its assets and liabilities are considered financial
instruments as defined by generally accepted accounting principles. Many of the
Company's financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction.
Estimated fair values have been determined by the Company using the best
available data, as generally provided in the Company's regulatory reports, and
an estimation methodology suitable for each category of financial instruments.
For those loans and deposits with floating interest rates, it is presumed that
estimated fair values generally approximate the carrying value. The estimation
methodologies used, the estimated fair values, and carrying values at December
31, 2001 and 2000, were as follows:
o Financial instruments actively traded in a secondary market have
been valued using quoted available market prices.
2001 2000
----------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------ ------------
Cash and due from banks $112,150,214 $112,150,214 $100,300,424 $100,300,424
Federal funds sold 72,975,000 72,975,000 62,230,288 62,230,288
Interest-bearing deposits in banks 1,374,285 1,374,285 104,338 104,338
Investment in securities 721,693,695 729,588,999 654,252,718 655,925,270
Securities sold under agreements
to repurchase 19,847,067 19,847,067 26,164,359 26,164,359
o Financial instruments with stated maturities have been valued using
a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities.
Financial instrument assets with variable rates and financial
instrument liabilities with no stated maturities have an estimated
fair value equal to both the amount payable on demand and the
carrying value.
F-18
2001 2000
------------------------------ ------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------- ------------- ------------ ------------
Deposits with stated maturities $575,069,375 $580,467,556 $529,570,242 $529,310,009
Deposits with no stated
maturities 1,110,093,223 1,110,093,223 990,303,458 990,303,458
Net loans 929,528,556 938,431,998 849,383,082 843,096,227
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
The Company's remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Company's deposits is required nor has the Company estimated its value. There is
no material difference between the carrying value and the estimated fair value
of the company's contractual off-balance-sheet unfunded loan commitments which
total approximately $153,750,000 and $85,000,000 at December 31, 2001 and 2000,
respectively, and are generally priced at market at the time of funding. Letters
of credit discussed in Note 10 have an estimated fair value based on fees
currently charged for similar agreements. At December 31, 2001 and 2000, fees
related to the unexpired term of the letters of credit are not significant.
Reasonable comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates which
must be made given the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
9. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company is engaged in legal actions arising from the normal course of
business. In management's opinion, the Company has adequate legal defenses with
respect to these actions, and the resolution of these matters will have no
material adverse effects upon the results of operations or financial condition
of the Company.
The Company leases a portion of its bank premises and equipment under operating
leases and is a lessor for portions of its banking premises. Total rental income
for all leases included in net occupancy expense is approximately $1,432,000,
$1,387,000 and $1,336,000, for the years ended December 31, 2001, 2000, and
1999, respectively. At December 31, 2001, approximate future minimum lease
commitments, net of lease receivables, are not significant.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
--------------------------------------------------
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
F-19
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-
Unfunded lines of credit $116,134,000
Commitments to extend credit 37,758,000
Standby letters of credit 5,373,000
Unfunded lines of credit and 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. These 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.
The Company has no other off-balance sheet arrangements or transactions with
unconsolidated, special purpose entities that would expose the Company to
liability that is not reflected on the face of the financial statements.
11. CONCENTRATION OF CREDIT RISK:
-----------------------------
The Company grants commercial, retail, agriculture, and residential loans to
customers primarily in North Central and West Texas. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the local economic sector.
12. PENSION AND PROFIT SHARING PLANS:
---------------------------------
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and a percentage of the
employee's qualifying compensation during the final years of employment. The
Company's funding policy is to contribute annually the amount necessary to
satisfy the Internal Revenue Service's funding standards. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
The following table provides a reconciliation of the plan's benefit obligations
and fair value of plan assets over the two-year period ended December 31, 2001,
and a statement of the funded status as of December 31, 2001 and 2000:
F-20
2001 2000
----------- -----------
Reconciliation of benefit obligations-
Benefit obligation at January 1 $11,885,661 $10,793,838
Service cost - benefits earned during the period 847,620 845,372
Interest cost on projected benefit obligation 970,710 816,583
Actuarialloss 1,117,567 565
Benefits paid (637,976) (570,697)
----------- -----------
Benefit obligation at December 31 14,183,582 11,885,661
----------- -----------
Reconciliation of fair value of plan assets-
Fair value of plan assets at January 1 12,864,027 11,695,263
Actual return on plan assets (337,724) 1,018,391
Employer contributions 742,923 721,070
Benefits paid (637,976) (570,697)
----------- -----------
Fair value of plan assets at December 31 12,631,250 12,864,027
----------- -----------
Funded status-
Funded status at December 31 (1,552,332) 978,366
Unrecognized loss from past experience different than
that assumed and effects of changes in assumptions 3,268,617 659,593
Unrecognized prior-service cost 211,935 229,896
----------- -----------
Net amount recognized (prepaid pension cost included
in other assets) $ 1,928,220 $ 1,867,855
=========== ===========
Net periodic pension cost for the years ended December 31, 2001, 2000, and 1999,
included the following components:
Year Ended December 31,
----------------------------------------------
2001 2000 1999
---------- ---------- ---------
Service cost - benefits earned during the period $ 847,620 $ 845,372 $ 874,008
Interest cost on projected benefit obligation 970,710 816,583 725,205
Expected return on plan assets (1,153,733) (1,058,787) (993,649)
Amortization of prior-service cost 17,961 17,961 17,961
Amortization of unrecognized net loss - - 32,887
---------- ---------- ---------
Net periodic pension cost $ 682,558 $ 621,129 $ 656,412
========== ========== =========
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:
2001 2000 1999
---- ---- ----
Weighted average discount rate 6.9% 7.5% 7.5%
Rate of increase in future compensation levels 4% 4% 4%
Expected long-term rate of return on assets 8.5% 8.5% 8.5%
As of December 31, 2001 and 2000, the fair value of the plan's assets included
Company stock valued at approximately $297,000 and $310,000, respectively.
F-21
The Company also provides a profit sharing plan, which covers substantially all
full-time employees. The profit sharing plan is a defined contribution plan and
allows employees to contribute up to 5% of their base annual salary. Employees
are fully vested to the extent of their contributions and become fully vested in
the Company's contributions over a seven-year period. Costs related to the
Company's defined contribution plan totaled $1,858,000, $1,874,000 and
$2,111,000 in 2001, 2000 and 1999, respectively, and are included in salaries
and employee benefits in the accompanying consolidated statements of earnings.
13. DIVIDENDS FROM SUBSIDIARIES:
----------------------------
At December 31, 2001, approximately $18,300,000 was available for the
declaration of dividends by the Company's subsidiary banks without the prior
approval of regulatory agencies.
14. REGULATORY MATTERS:
-------------------
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, each of Bankshares'
subsidiaries must meet specific capital guidelines that involve quantitative
measures of the subsidiaries' assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The subsidiaries'
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and each of its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined), to average assets (as defined). Management believes as of December 31,
2001 and 2000, that Bankshares and each of its subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 2001 and 2000, 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.
F-22
There are no conditions or events since that notification that management
believes have changed the institutions' categories. Bankshares' and its
significant subsidiaries' actual capital amounts and ratios are presented in the
table below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
---------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------- --- -------------- ----- -------------- ------
As of December 31, 2001:
Total Capital (to Risk-Weighted Assets):
Consolidated $ 195,422,000 18% =>$ 86,380,000 => 8% N/A N/A
First National Bank of Abilene $ 65,676,000 17% =>$ 31,594,000 => 8% =>$ 39,492,000 => 10%
San Angelo National Bank $ 27,945,000 20% =>$ 10,925,000 => 8% =>$ 13,656,000 => 10%
Weatherford National Bank $ 18,931,000 18% =>$ 8,624,000 => 8% =>$ 10,780,000 => 10%
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 184,820,000 17% =>$ 43,190,000 => 4% N/A N/A
First National Bank of Abilene $ 61,895,000 16% =>$ 2,627,000 => 4% =>$ 23,695,000 => 6%
San Angelo National Bank $ 26,672,000 20% =>$ 1,118,000 => 4% =>$ 8,194,000 => 6%
Weatherford National Bank $ 18,019,000 17% =>$ 757,000 => 4% =>$ 6,468,000 => 6%
Tier I Capital (to Average Assets):
Consolidated $ 184,820,000 10% =>$ 56,060,000 => 3% N/A N/A
First National Bank of Abilene $ 61,895,000 9% =>$ 19,728,000 => 3% =>$ 32,880,000 => 5%
San Angelo National Bank $ 26,672,000 9% =>$ 8,800,000 => 3% =>$ 14,667,000 => 5%
Weatherford National Bank $ 18,019,000 9% =>$ 5,788,000 => 3% =>$ 9,647,000 => 5%
As of December 31, 2000:
Total Capital (to Risk-Weighted Assets):
Consolidated $ 185,873,000 19% =>$ 79,330,000 => 8% N/A N/A
First National Bank of Abilene $ 63,909,000 17% =>$ 30,153,000 => 8% =>$ 37,691,000 => 10%
San Angelo National Bank $ 26,635,000 20% =>$ 10,866,000 => 8% =>$ 13,583,000 => 10%
Weatherford National Bank $ 17,488,000 17% =>$ 8,245,000 => 8% =>$ 10,306,000 => 10%
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 175,985,000 18% =>$ 39,665,000 => 4% N/A N/A
First National Bank of Abilene $ 60,329,000 16% =>$ 15,076,000 => 4% =>$ 22,614,000 => 6%
San Angelo National Bank $ 25,430,000 19% =>$ 5,433,000 => 4% =>$ 8,150,000 => 6%
Weatherford National Bank $ 16,548,000 16% =>$ 4,122,000 => 4% =>$ 6,184,000 => 6%
Tier I Capital (to Average Assets):
Consolidated $ 175,985,000 10% =>$ 50,752,000 => 3% N/A N/A
First National Bank of Abilene $ 60,329,000 9% =>$ 19,392,000 => 3% =>$ 32,320,000 => 5%
San Angelo National Bank $ 25,430,000 10% =>$ 7,603,000 => 3% =>$ 12,671,000 => 5%
Weatherford National Bank $ 16,548,000 9% =>$ 5,255,000 => 3% =>$ 8,759,000 => 5%
F-23
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, 2001, the Company had allocated 351,986 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, 2001, 2000, and 1999, is presented in
the table and narrative below:
2001 2000 1999
------------------- ------------------- -------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------- ------ ------- ------ ------- ------
Outstanding, beginning of year 174,959 $20.51 137,354 $20.18 169,931 $13.43
Granted 3,700 29.82 60,597 20.80 - -
Exercised (24,480) 14.14 (10,809) 14.90 (26,878) 13.26
Canceled (4,122) 24.95 (12,183) 24.02 (5,699) 18.03
------- ------ ------- ------ ------- ------
Outstanding, end of year 150,057 $21.60 174,959 $20.51 137,354 $20.18
======= ====== ======= ====== ======= ======
Exercisable at end of year 66,210 $18.94 70,872 $16.37 60,648 $13.54
======= ====== ======= ====== ======= ======
Weighted average fair value of
options granted at date of issue $29.82 $20.40 $ -
====== ====== ======
The options outstanding at December 31, 2001, have exercise prices between $6.76
and $29.82 with a weighted average exercise price of $21.60 and a weighted
average remaining contractual life of 6 years. Stock options have been adjusted
retroactively for the effects of stock dividends and splits.
The Company accounts for this plan under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," under which no compensation cost
has been recognized for options granted. Had compensation cost for the plan been
determined consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net earnings and
earnings per share would have been reduced by insignificant amounts on a pro
forma basis for the years ended December 31, 2001, 2000 and 1999.The fair value
of the options granted in 2001 and 2000 was estimated using an accepted options
pricing model with the following weighted-average assumptions: risk-free
interest rate of 5.23% and 6.33%, respectively; expected dividend yield of 3.89%
and 5.18%, respectively; expected life of 6.0 and 6.0 years, respectively; and
expected volatility of 26.49% and 28.31%, respectively.
F-24
16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
-------------------------------------------------
Condensed Balance Sheets-December 31, 2001 and 2000
ASSETS 2001 2000
------ ------------ ------------
Cash in subsidiary bank $ 579,686 $ 314,866
Interest-bearing deposits in banks 13,796,338 8,997,055
------------ ------------
Total cash and cash equivalents 14,376,024 9,311,921
Investment in securities - 9,995,333
Investment in subsidiaries, at equity 202,758,981 179,174,238
Goodwill, net 723,375 778,951
Other assets 932,986 1,367,971
------------ ------------
Total assets $218,791,366 $200,628,414
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Total liabilities $ 5,137,353 $ 4,507,526
Shareholders' equity-
Common stock 123,332,520 99,830,020
Capital surplus 57,824,061 60,592,310
Retained earnings 28,375,353 38,003,195
Treasury stock, at cost - (3,925,069)
Unrealized gain on investment in securities
available-for-sale, net 4,122,079 1,620,432
------------ ------------
Total shareholders' equity 213,654,013 196,120,888
------------ ------------
Total liabilities and shareholders' equity $218,791,366 $200,628,414
============ ============
Condensed Statements of Earnings-
For the Years Ended December 31, 2001, 2000, and 1999
-----------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Income-
Cash dividends from subsidiary banks $25,500,000 $21,000,000 $21,729,622
Excess of earnings over dividends of
subsidiary banks 4,582,993 7,383,516 5,798,751
Gain on sale of investment in securities
available-for-sale - 530,097 -
Other income 1,092,375 1,325,613 816,430
----------- ----------- -----------
31,175,368 30,239,226 28,344,803
----------- ----------- -----------
Expenses-
Salaries and employee benefits 1,160,903 1,067,664 1,041,660
Other operating expenses 1,015,184 1,288,508 2,415,987
----------- ----------- -----------
2,176,087 2,356,172 3,457,647
----------- ----------- -----------
Earnings before income taxes 28,999,281 27,883,054 24,887,156
Income tax benefit 355,224 432,993 803,385
----------- ----------- -----------
Net earnings $29,354,505 $28,316,047 $25,690,541
=========== =========== ===========
F-25
Condensed Statements of Cash Flows-
For the Years Ended December 31, 2001, 2000, and 1999
-----------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities-
Net earnings $29,354,505 $28,316,047 $25,690,541
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Excess of earnings over
dividends of subsidiary banks (4,582,993) (7,383,516) (5,798,751)
Depreciation 32,658 26,222 28,566
Discount accretion, net of premium
amortization (4,667) (12,133) -
Amortization of goodwill 55,576 55,576 55,576
Gain on sale of securities - (530,097) -
Decrease (increase) in other assets 559,515 (178,092) (296,818)
Increase (decrease) in liabilities 186,391 448,225 (352,053)
----------- ----------- -----------
Net cash provided by operating
activities 25,600,985 20,742,232 19,327,061
----------- ----------- -----------
Cash flows from investing activities-
Capital expenditures (157,291) (2,266) 4,663
Activity in available-for-sale securities-
Sales - 530,097 -
Maturities 10,000,000 - -
Purchases - (9,983,200) -
Cash payment for stock in acquisition (16,500,000) - -
----------- ----------- -----------
Net cash (used in) provided by
investing activities (6,657,291) (9,455,369) 4,663
----------- ----------- -----------
Cash flows from financing activities-
Proceeds of stock issuances 356,670 161,919 358,208
Acquisition of treasury stock (315,050) (3,925,069) -
Cash dividends paid (13,921,211) (12,543,863) (10,954,982)
----------- ----------- -----------
Net cash used in financing activities (13,879,591) (16,307,013) (10,596,774)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 5,064,103 (5,020,150) 8,734,950
Cash and cash equivalents, beginning of year 9,311,921 14,332,071 5,597,121
----------- ----------- -----------
Cash and cash equivalents, end of year $14,376,024 $ 9,311,921 $14,332,071
=========== =========== ===========
F-26
17. BUSINESS COMBINATION:
---------------------
In July 2001, the Company purchased all of the outstanding stock of City
National Bancshares, Inc. ("City") and its subsidiary, City National Bank for
$16,500,000 in cash. The total purchase price exceeded the estimated fair market
value of net assets acquired by approximately $7,800,000, of which approximately
$950,000 was assigned to an identifiable intangible asset with the balance
recorded by the Company as goodwill. The identifiable intangible asset
represents the future benefit associated with the acquisition of the core
deposits of City and is being amortized over seven years utilizing a method that
approximates the expected attrition of the deposits.
The primary purpose of the acquisition was to expand the Company's market share
in areas with close proximity to Dallas/Ft. Worth, Texas. Factors that
contributed to a purchase price resulting in goodwill include City's
historically stable record of earnings, capable management and its geographic
location, which complements the Company's existing service locations. Subsequent
to the acquisition, the Company liquidated the stock of City and City National
Bank is operating as a subsidiary of the Company. The results of operations of
City National Bank are included in the consolidated earnings of the Company
commencing July 1, 2001.
The following is a condensed consolidated balance sheet disclosing the
preliminary estimated fair value amounts assigned to the major asset and
liability captions at the acquisition date.
ASSETS
Cash and cash equivalents $ 9,651,769
Investment in securities 29,717,834
Loans, net 51,061,735
Goodwill 6,891,959
Identifiable intangible asset 946,073
Other assets 1,465,727
-------------
Total assets $ 99,735,097
=============
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest-bearing deposits $ 11,949,766
Interest-bearing deposits 70,575,256
Other liabilities 710,075
Shareholders' equity 16,500,000
-------------
Total liabilities and shareholder's equity $ 99,735,097
=============
Goodwill recorded in the acquisition of City will be accounted for in
accordance with SFAS No. 142. Accordingly, goodwill will not be amortized,
rather it will be tested for impairment annually. The goodwill and identifiable
intangible asset recorded are not expected to be deductible for federal income
tax purposes. Management believes the proforma impact of City is not material to
the Company's financial statements.
F-27
Cash flow information relative to the acquisition of City is, as follows:
Fair value of assets acquired $ 99,735,097
Cash paid for the capital stock of City 16,500,000
--------------
Liabilities assumed $ 83,235,097
==============
18. CASH FLOW INFORMATION:
----------------------
Supplemental information on cash flows and noncash transactions is as follows:
Year Ended December 31,
---------------------------------------------
2001 2000 1999
----------- ----------- -----------
Supplemental cash flow information-
Interest paid $46,243,602 $48,123,200 $43,625,728
Federal income taxes paid 13,227,101 13,227,192 11,750,380
Schedule of noncash investing and financing activities-
Assets acquired through foreclosure 628,797 285,195 417,800
Retirement of treasury stock 4,240,119 - -
F-28