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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1997 0-7674
FIRST FINANCIAL BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-0944023
(State of Incorporation) (I.R.S. Employer
Identification No.)
400 Pine Street, Abilene, Texas 79601
(Address of Executive Offices) (Zip Code)
Registrant's Telephone Number (915) 627-7155
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $10.00 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $293,907,744 as of March 4, 1998.
The number of shares of common stock outstanding at March 4, 1998, was
8,656,425.
Documents Incorporated by Reference
Portions of the Notice to Shareholders for the April 28, 1998, Annual
Meeting are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
Item Page
PART I
1. Business.................................................1
2. Properties..............................................13
3. Legal Proceedings.......................................13
4. Submission of Matters to a Vote of Security Holders.....13
PART II
5. Market for Registrant's Common Stock and Related
Security Holder Matters................................13
6. Selected Financial Data.................................14
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................15
8. Financial Statements and Supplementary Data.............25
9. Changes in and Disagreements with Accountants
and Financial Disclosure...............................49
PART III
10. Directors and Executive Officers of the Registrant......49
11. Executive Officer Compensation..........................49
12. Security Ownership of Certain Beneficial
Owners and Management..................................49
PART IV
13. Certain Relationships and Related Transactions..........50
14. Exhibits, Financial Statement Schedules
and Reports on Form 8K.................................50
Signatures
PART I
Item 1.Business
A. Organization and General Development of Business
First Financial Bankshares, Inc. (the "Registrant", "Bankshares",
or "Company"), is a Texas corporation duly registered as a multibank holding
company under the Bank Holding Company Act of 1956, as amended. Bankshares was
formed in 1956 at the direction of the Board of Directors of the Farmers and
Merchants National Bank of Abilene (a national bank organized in Abilene, Texas,
in 1889, changing its name to First National Bank of Abilene in 1957). The
corporation's initial name was F & M Operating Company (F & M), and it was
originally authorized to and did issue ten shares of stock having a par value of
$100.00 each. The ten shares were issued to three officers of the Bank under a
trust agreement by which the three trustees would hold the F & M stock for the
ratable benefit of the shareholders of First National Bank of Abilene. The
original purposes in organizing the corporation were to provide a separate
entity to own, operate and maintain parking lots, parking garages, buildings and
real estate, and to buy, sell and lease personal property such as bank notes and
automobiles.
In 1968, F & M purchased 200,000 shares of newly authorized and
issued stock of Bank of Commerce, Abilene, Texas ("BOC"). The purchase was made
after the State Banking Commission of Texas required that additional capital be
injected into BOC. In the resulting increased capitalization of BOC, the
authorized and outstanding shares of BOC common stock were increased from
300,000 to 700,000, with the 400,000 new shares being offered at $2.00 per
share. In addition, F & M acquired by proxy assignments the power to vote an
additional 66,000 shares of BOC stock. These proxies expired January 1, 1975.
The First National Bank Employees' Profit Sharing Trust originally purchased
28,177 shares of BOC stock.
In November 1971, the Board of Directors of First Abilene
authorized the reorganization of F & M into a multibank holding company and the
commencement of proceedings to effect a merger which would permit First Abilene
to be wholly-owned by the holding company. The merger was submitted for review
and approval by federal regulatory authorities in April 1972.
B. Reorganization, Mergers, and Acquisitions
F & M's reorganization was accomplished in September 1972. Its name
was changed to First Abilene Bankshares, Inc., and it was recapitalized by
reducing the par value of its stock to $10.00 per share and increasing the
authorized shares to 500,000. The merger was approved in January 1973, and
became effective in April of that same year. As a result, the shareholders of
First Abilene became shareholders in Bankshares, and Bankshares became the owner
of all of the outstanding shares of First Abilene (except for the qualifying
shares owned by directors).
In 1974, Bankshares acquired the remaining outstanding common stock
of BOC (except for six shares amounting to approximately .01%) by an offer
registered under the Securities Act of 1933 (the "1933 Act") to exchange one
share of Bankshares' common stock for each 13-1/3 outstanding shares of BOC
common stock. The exchange was effected on May 1, 1974. In late 1987, Bankshares
purchased the remaining six shares of BOC stock, paying $82.00 in cash for each
share.
Effective April 1, 1974, Bankshares acquired all the outstanding
capital stock of Hereford through an offer (also registered under the 1933 Act)
to exchange one share of Bankshares' common stock and $175 cash for each
outstanding share of Hereford.
Effective September 4, 1981, Bankshares acquired all the
outstanding capital stock of First Sweetwater through an offer (registered under
the 1933 Act) to exchange one share of Bankshares' common stock for each
outstanding share of First Sweetwater stock.
Effective June 8, 1982, Bankshares acquired all of the outstanding
capital stock of Eastland through an offer (registered under the 1933 Act) to
exchange 3-1/2 shares of Bankshares' common stock for each outstanding share of
Eastland stock.
Effective July 31, 1987, American National Bank of Abilene
("American National") was merged with and into First Abilene. Following approval
of the merger by the Board of Directors and Shareholders of each bank, all of
the issued and outstanding common stock of American National were tendered for
exchange and First Abilene paid $11.50 for each of American National's 200,000
shares of common stock. The premises formerly occupied by American National,
both its main banking offices and drive-in banking facility, are now being
operated by First Abilene as a branch bank.
Effective January 1, 1989, BOC was merged with and into First
Abilene and its state charter surrendered to the State of Texas for
cancellation. First Abilene received all of the assets of BOC and assumed all of
its liabilities. The banking offices and drive-in facility of BOC are now being
operated as a branch banking facility of First Abilene.
In January of 1990, Bankshares' Board of Directors authorized a
state franchise tax savings program designed to substantially reduce the amount
of corporate franchise taxes paid by Bankshares. Pursuant to that program, a
second bank holding company was formed in the State of Delaware, First Abilene
Bankshares of Delaware, Inc. (the "Delaware BHC"). With the approval of the
Federal Reserve Board, and effective March 28, 1990, the Delaware BHC became the
owner and holder of all of the outstanding shares of Bankshares' subsidiary
banks and, in turn, the Delaware BHC became the sole subsidiary of Bankshares
and is wholly-owned and controlled by Bankshares. The corporate offices of the
Delaware BHC are located in the State of Delaware and, as defined by Texas
franchise tax statutes, the new subsidiary is not considered to be doing
business in the State of Texas.
Effective December 21, 1990, the Delaware BHC, using funds provided
by Bankshares, purchased all of the outstanding stock of First Cleburne for
$4,700,000 in cash.
On December 3, 1992, the Texas Secretary of State issued a
Certificate of Incorporation for First Financial Investments, Inc., which is, or
shall become, a wholly-owned subsidiary of Bankshares and the initial capital of
which shall consist of $100,000 represented by 100,000 shares of common stock to
be issued to Bankshares. First Financial Investments, Inc. ("FFI") was intended
to be a securities brokerage subsidiary and on or about December 8, 1992,
Bankshares submitted to the Federal Reserve Board its Application to Engage in
Non-Banking Activity (Form FR Y-4) to engage, de novo, in providing securities
brokerage services pursuant to Section 225.25(b)(15) of FRB Regulation Y and
Section 4(c)(a) of the Bank Holding Company Act of 1956, as amended. At the end
of 1992, Bankshares and FFI were engaged in the process of securing all
approvals, and meeting all other requirements, for FFI to become a broker-dealer
registered with the National Association of Securities Dealers, the Securities
and Exchange Commission and the Texas State Securities Board. At that time it
was anticipated that the activities of FFI would be limited to buying and
selling stocks, bonds and other securities as agent for the account of the
customers of Bankshares' subsidiaries, which securities would include equities,
mutual funds and municipal, corporate, and government bonds, but without
providing investment advice or research services. Securities brokerage services
would be provided on, or adjacent to, the premises and banking offices of
Bankshares' subsidiary banks. It was anticipated at that time that Bankshares,
through FFI, would begin providing securities brokerage services during the
second quarter of 1993. On February 3, 1993, Bankshares received Federal Reserve
approval to engage, de novo, in providing securities brokerage services through
FFI. While it still may at some future date provide securities brokerage
services through FFI, Bankshares has notified the Federal Reserve that its plans
to offer brokerage services through a separate subsidiary have been delayed. At
December 31, 1997, four of Bankshares' subsidiary banks (First Abilene, First
Cleburne, San Angelo National, and Weatherford National) were providing
brokerage services through third party brokerage firms.
Effective February 25, 1993, the Delaware BHC, using funds provided
by Bankshares, acquired all of the outstanding capital stock of Stephenville for
$7,750,000 in cash. The acquisition was effected through a Stock Purchase and
Sale Agreement between Bankshares, Stephenville and two individuals (the
"Principal Shareholders") owning a majority of the Stephenville stock and a cash
tender offer to the remaining shareholders of Stephenville.
Effective September 23, 1993, First Cleburne acquired by purchase
the Cleburne, Texas branch office facility of Bank One, Texas, N.A., and assumed
deposit liabilities of approximately $19 million. The aggregate value of the
land, buildings, loans, and other assets purchased by First Cleburne was
approximately $2 million. The former Bank One facility is now being operated as
a branch office of First Cleburne.
On October 26, 1993, at a Special Shareholders Meeting called for
such purpose, the name of the Registrant was changed to First Financial
Bankshares, Inc. Similarly, the corporate name of the Delaware BHC was changed
to First Financial Bankshares of Delaware, Inc. effective December 7, 1993.
Effective March 10, 1994, pursuant to a certain Stock Exchange
Agreement and Plan of Reorganization dated December 7, 1993, Bankshares acquired
190,622 shares (98.22%) of the issued and outstanding shares of Concho
Bancshares, Inc. ("Concho"), a Texas corporation and bank holding company, which
owned all of the capital stock of San Angelo, a Texas state bank located in the
City of San Angelo, Tom Green County, Texas. San Angelo National owned all of
the issued and outstanding capital stock of SWB Investment Centre, Inc. ("SWB"),
a Texas corporation providing securities brokerage services. The shares of
Concho common stock acquired by Bankshares were contributed by Bankshares to the
capital of the Delaware BHC and effective May 1, 1994, pursuant to the
corporation laws of the States of Delaware and Texas, Concho was merged with and
into the Delaware BHC so that San Angelo National became a subsidiary of the
Delaware BHC. As part of the merger of the Delaware BHC and Concho, minority
shareholders of Concho tendered an additional 2,649 shares of Concho common
stock in exchange for shares of Bankshares' common stock and cash. In connection
with the acquisition of Concho by Bankshares and the subsequent merger of Concho
with and into the Delaware BHC, Bankshares issued 232,080 shares of its common
stock and paid $44,531 in cash in lieu of issuing fractional shares of
Bankshares' common stock.
Effective January 17, 1996, pursuant to a Stock Purchase and Sale
Agreement dated September 7, 1995, Bankshares acquired for $6,394,800 cash all
of the stock of Citizens Equity Corp. ("Citizens Equity"), a Texas corporation
and bank holding company which owned substantially all of the stock of Citizens
National Bank of Weatherford ("Citizens National"), a national bank located in
Weatherford, Texas. Also, effective January 17, 1996, Bankshares acquired for
$1,147,861 cash substantially all of the minority shares of Citizens National.
Simultaneously, Bankshares caused Citizens Equity to redeem all of its preferred
stock so that Bankshares owned 100% of the issued and outstanding shares of the
capital stock of Citizens Equity. Effective March 31, 1996, pursuant to the
corporation laws of the State of Texas, Citizens Equity was merged with and into
Bankshares. Upon completion of the merger the common stock of Citizens National
was contributed by Bankshares to the capital of the Delaware BHC.
Effective January 17, 1996, pursuant to a Stock Exchange Agreement
and Plan of Reorganization dated October 20, 1995, Bankshares acquired 100% of
the issued and outstanding capital stock of Weatherford National Bancshares,
Inc. ("Weatherford Bancshares"), a Texas corporation and bank holding company
which owned all of the capital stock of Parker Bancshares, Inc. ("Parker
Bancshares"), a Delaware corporation which owned all of the stock of Weatherford
National, a national bank located in Weatherford, Texas. In exchange for the
stock of Weatherford Bancshares, Bankshares issued 323,977 shares of common
stock. Effective March 31, 1996, pursuant to the corporation laws of the State
of Texas, Weatherford Bancshares was merged with and into Bankshares. Also
effective March 31, 1996, pursuant to the corporation laws of the states of
Texas and Delaware, Parker Bancshares was merged with and into the Delaware BHC.
Effective April 1, 1996, pursuant to the approval of the OCC,
Citizens National was merged with and into Weatherford National with the
resulting entity operating under the name of Weatherford National Bank.
Following the close of business on September 25, 1997, a new Board
of Directors was elected and thereafter did organize San Angelo National Bank
("San Angelo National") pursuant to authority of the Office of the Comptroller
of Currency. San Angelo National opened for business on Friday, September 26,
1997, as a national association succeeding Southwest Bank of San Angelo
("Southwest Bank") through conversion of its state charter. San Angelo National,
as its predecessor Southwest Bank, continues as a subsidiary bank held by First
Financial Bankshares, Inc. ("First Financial") through its wholly owned
subsidiary, First Financial Bankshares of Delaware, Inc. Effective at the close
of business September 25,1997, San Angelo National acquired certain assets of
Texas Commerce Bank - San Angelo for $16,800,000 in cash, and the assumption of
certain liabilities (primarily deposits which amounted to approximately $155
million).
Effective November 24, 1997, pursuant to a Stock Exchange Agreement
and Plan of Reorganization dated August 18, 1997, Bankshares acquired 100% of
the issued and outstanding capital stock of Southlake Bancshares, Inc.,
("Southlake"), a Texas corporation and bank holding company which owned all of
the stock of Texas National Bank ("Texas National"), a national bank located in
Southlake, Texas. In exchange for Southlake, Bankshares issued 216,442 shares of
common stock. Effective December 31, 1997 pursuant to the corporation laws of
the State of Texas, Southlake was merged with and into Bankshares and Texas
National became a subsidiary of First Financial Bankshares of Delaware, Inc.
C. Mode of Conducting Business
Bankshares operates principally in order to give the affiliated
banks access to additional management and technical resources which help them to
improve or expand their banking services while continuing their local activity
and identity. Each of the affiliated banks operates under the day-to-day
management of its Board of Directors and officers, with substantial authority in
making decisions concerning their own investments, loan policies, interest rates
and service charges. Bankshares provides assistance to the affiliated banks,
especially with respect to decisions concerning major capital expenditures,
employee fringe benefits, including pension plans, group insurance, dividend
policies, appointment of officers and directors of affiliated banks and their
compensation. Internal audit and loan review functions are provided by
Bankshares. Bankshares, through First Abilene, provides advice to and
specialized services for the affiliated banks in such areas as lending,
investments, purchasing, advertising, public relations, and computer services.
Each Bankshares' subsidiary is engaged in the general commercial
banking business consisting of the acceptance of checking, savings and time
deposits, the making of loans, transmitting funds and performing such other
banking services as are usual and customary for commercial banks. At December
31, 1997, First Abilene, First Sweetwater, and Stephenville had active trust
departments. The trust departments offer a complete range of services to
individuals, associations, and corporations. They include the administration of
estates, testamentary trusts, and various types of living trusts and agency
accounts. Other sources of revenue are services for businesses, including
administering pension, profit sharing and other employee benefit plans, acting
as stock transfer agents or stock registrar, and providing paying agent
services. First Abilene, San Angelo National, First Cleburne, and Weatherford
National provide securities brokerage services through various third parties.
D. Competition
Commercial banking in Texas is very competitive and Bankshares,
holding less than 1% of deposits, represents only a minor segment of the
industry. Success is dependent upon being able to compete in the areas of
interest rates paid or charged and scope of services offered and prices charged
therefor. Subsidiary banks of Bankshares compete in their respective service
areas with highly competitive banks, savings and loan associations, small loan
companies, credit unions, and brokerage firms, all of which are engaged in
providing financial products and services.
Bankshares' business is not dependent upon any single customer or
upon any few customers, the loss of any one of which would have a materially
adverse effect upon the business of Bankshares. Customers of Bankshares and its
subsidiaries include its officers and directors, as well as other entities with
which they are affiliated. It is the policy of Bankshares and its subsidiaries
to make loans to officers and directors, and entities with which they are
affiliated, in the ordinary course of business. When such loans are made, they
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. Loans to directors, officers and their affiliates are also
subject to certain restrictions under federal and state banking laws.
E. Employees
Bankshares and its subsidiaries employed approximately 695
full-time employees at March 1, 1998. Management believes that its employee
relations have been and will continue to be good.
F. Supervision and Regulation
Bankshares is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "Act"), as amended, and it is registered as
such with the Federal Reserve Board. Under the Act, Bankshares is subject to the
reporting requirements of, and to supervision and examination by, the Federal
Reserve Board and Bankshares is required to file with the Federal Reserve Board
an Annual Report and to provide such additional information as the Federal
Reserve Board may require. The Federal Reserve Board may also make examinations
of Bankshares and its subsidiaries or "affiliates."
Under the Act, bank holding companies may not (with certain limited
exceptions) directly or indirectly acquire ownership or control of more than
five percent (5%) of any class of voting shares or substantially all of the
assets of any company, including a bank, without the prior written approval of
the Federal Reserve Board. In addition, bank holding companies are generally
prohibited under the Act from engaging in non-banking activities, except certain
activities which the Federal Reserve Board, by regulation, determines to be
closely related to banking, or to managing or controlling banks. Examples of
activities which the Federal Reserve Board has determined to be closely related
to banking, or to managing or controlling banks, include (1) the making or
acquiring of loans or other extensions of credit; (2) servicing of loans; (3)
performing certain trust functions; (4) providing bookkeeping and data
processing services for a bank holding company and its subsidiaries; (5)
providing certain securities brokerage services; and (6) acting or serving as an
investment or financial advisor.
The Act provides that the Federal Reserve Board shall not approve
any acquisition, merger or consolidation the effect of which may be to
substantially lessen competition in the banking industry, which would tend to
create a monopoly in any section of the country, or which in any other manner
would be a restraint of trade, unless the anti-competitive effects of the
proposed combination are clearly outweighed by the convenience and needs of the
community to be served. In approving acquisitions by bank holding companies of
banks and companies engaged in banking-related activities, the Federal Reserve
Board considers, among other factors, the expected benefits to the public
(greater convenience, increased competition, greater efficiency, etc.) against
the risks of possible adverse effects (undue concentration of resources,
decreased or unfair competition, conflicts of interest, unsound banking
practices, etc.).
First Abilene, First Sweetwater, First Cleburne, Eastland, San
Angelo National, Weatherford National and Texas National are all chartered under
the National Bank Act and are subject to supervision and regulation, as well as
regular examination, by the OCC. Hereford and Stephenville were chartered under
the Texas Banking Code (which, effective September 1, 1995, was replaced by the
newly-adopted Texas Banking Act) and are similarly supervised, regulated and
examined by the Banking Commissioner of the State of Texas. Supervision and
regulation of banks by federal and state banking authorities is primarily
intended to protect the interests of depositors, although shareholders are
likewise benefited. Various requirements and restrictions under the laws of the
United States and the State of Texas affect the operations of each subsidiary
bank, including the requirement to maintain reserves against deposits,
restrictions on the nature and amount of loans which may be made and the
interest that may be charged thereon, and restrictions relating to investments
and other activities.
First Abilene, Hereford, First Sweetwater, First Cleburne,
Eastland, Stephenville, San Angelo National, Weatherford National, and Texas
National are members of the FDIC. The Federal Deposit Insurance Act requires
that the FDIC approve any merger or consolidation by or with an insured bank, or
any establishment of branches by an insured bank, and it is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also
required before an insured bank retires any part of its common or preferred
stock, or any capital notes or debentures. Insured banks which are also members
of the Federal Reserve System, however, are regulated with respect to the
foregoing matters by the Federal Reserve System.
All of Bankshares' subsidiary banks must pay assessments to
the FDIC for federal deposit insurance protection under a risk-based assessment
system. FDIC-insured depository institutions that are members of the Bank
Insurance Fund pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher risk classifications (i.e.,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
bank regulators. In addition, the FDIC can impose special assessments to cover
the costs of borrowings from the U. S. Treasury, the Federal Financing Bank and
the Bank Insurance Fund member banks. As of December 31, 1997, the assessment
rate for each of Bankshares' subsidiary banks is at the lowest level risk-based
premium available.
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") requires federal banking agencies to take "prompt corrective
action" in respect to depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well-capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." As a depository institution's capital tier
will depend upon where its capital levels are in relation to various relevant
capital measures, which will include a risk-based capital measure, a leverage
ratio capital measure and certain other factors. Regulations establishing the
specific capital tiers provide that a well-capitalized institution must have a
total risk-based capital ratio of at least ten percent (10%), a Tier 1
risk-based capital ratio of at least six percent (6%), and a Tier 1 leverage
ratio of at least five percent (5%), and not be subject to any specific capital
order or directive. For an institution to be adequately capitalized, it must
have a total risk-based capital ratio of at least eight percent (8%), a Tier 1
risk-based capital ratio of at least four percent (4%), and a leverage ratio of
at least four percent (4%) [in some cases three percent (3%)]. Under current
regulations, Bankshares' subsidiary banks would be considered to be well
capitalized as of December 31, 1997.
FDICIA generally prohibits a depository institution from
making any capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. An "undercapitalized institution" must develop a
capital restoration plan and its parent holding company must guarantee that
bank's compliance with the plan. The liability of the parent holding company
under any such guarantee is limited to the lesser of five percent (5%) of the
bank's assets at the time it became "undercapitalized" or the amount needed to
comply with the plan. Furthermore, in the event of the bankruptcy of the parent
holding company, such guarantee would take priority over the parent's general
unsecured creditors. In addition, FDICIA requires the various regulatory
agencies to prescribe certain non-capital standards for safety and soundness
relating generally to operations and management, asset quality and executive
compensation and permits regulatory action against a financial institution that
does not meet such standards.
Banking agencies have recently adopted final regulations which
mandate that regulators take into consideration concentrations of credit risk
and risks from non-traditional activities, as well as an institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. This evaluation will be made as a part of the institution's regular
safety and soundness examination. Banking agencies also have recently adopted
final regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, these banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
Capital
The Federal Reserve Board has adopted risk-based capital guidelines
for bank holding companies. The minimum guidelines for the ratio of total
capital ("Total Capital") to risk weighted assets (including certain
off-balance-sheet activities, such as standby letters of credit) is eight
percent (8%). At least half of the Total Capital is to be composed of common
shareholders' equity, minority interests in the equity accounts of consolidated
subsidiaries and a limited amount of perpetual preferred stock, less goodwill
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock and a limited amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum
leverage ratio guidelines for bank holding companies. These guidelines provide
for a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average assets
for current quarter, less goodwill) of three percent (3%) for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a minimum Tier 1 Capital leverage ratio of three percent (3%) plus
an additional cushion of 100 to 200 basis points. The Federal Reserve Board has
not advised Bankshares of any specific minimum Tier 1 Capital leverage ratio
applicable to it. The guidelines also provide that bank holding companies
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels
without significant reliance on intangible assets (e.g., goodwill, core deposit
intangibles and purchased mortgage servicing rights). As of December 31, 1997,
the capital ratios for Bankshares were as follows: (1) Tier 1 Capital to
Risk-Weighted Assets Ratio, 14.75%; (2) Total Capital to Risk-Weighted Assets
Ratio, 15.96%; and (3) Tier 1 Capital Leverage Ratio, 8.34%.
In addition to the Federal Reserve Board capital standards,
Texas-chartered banks must also comply with the capital requirements imposed by
the Texas Banking Department. Although neither the Texas Banking Act nor the
regulations promulgated thereunder specify any minimum capital-to-assets ratio
that must be maintained by a Texas-chartered bank, the Texas Banking Department
has a policy that generally requires Texas-chartered banks to maintain a minimum
six percent (6%) ratio of stockholders equity (stated capital, surplus capital,
surplus and undivided profits or retained earnings) to total assets. As of
December 31, 1997, all Texas-chartered banks owned by Bankshares exceeded the
minimum ratio.
Failure to meet capital guidelines may subject an insured bank to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC and a prohibition on the taking of brokered deposits, and bank
regulators continue to indicate their desire to raise capital requirements
applicable to banking organizations beyond their current levels.
Bankshares Support of Subsidiary Banks
Under Federal Reserve Board policy, Bankshares is expected to act
as a source of financial strength to each of its subsidiary banks and to commit
resources to support each of such subsidiaries. This support may be required at
times when, absent such Federal Reserve Board policy, Bankshares would not
otherwise be required to provide it.
Under the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989, in connection with (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to any commonly controlled FDIC-insured depository institution "in
danger of default." "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance.
Under the National Bank Act, if the capital stock of a national
bank is impaired by losses or otherwise, the OCC is authorized to require
payment of the deficiency by assessment upon the bank's shareholders, pro rata,
and to the extent necessary, if any such assessment is not paid by any
shareholder after three (3) months' notice, to sell the stock of such
shareholder to make good the deficiency.
Certain Transactions by Bankshares with its Affiliates
There are also various legal restrictions on the extent to which
Bankshares can borrow or otherwise obtain credit from, or engage in certain
other transactions with, its depository subsidiaries. The "covered transactions"
that an insured depository institution and its subsidiaries are permitted to
engage in with their nondepository affiliates are limited to the following
amounts: (i) in the case of any one such affiliate, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed ten percent (10%) of the capital stock and the surplus of the
insured depository institution; and (ii) in the case of all affiliates, the
aggregate amount of covered transactions of the insured depository institution
and its subsidiaries cannot exceed twenty percent (20%) of the capital stock and
surplus of the insured depository institution. In addition, extensions of credit
that constitute covered transactions must be collateralized in prescribed
amounts. "Covered transactions" are defined by statute to include a loan or
extension of credit to the affiliate, a purchase of securities issued by an
affiliate, a purchase of assets from the affiliate (unless otherwise exempted by
the Federal Reserve Board), the acceptance of securities issued by the affiliate
as collateral for a loan and the issuance of a guarantee, acceptance, or letter
of credit for the benefit of an affiliate. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
Payment of Dividends
Bankshares is a legal entity separate and distinct from its banking
and other subsidiaries. Most of Bankshares' revenues result from dividends paid
to it by its Delaware holding company subsidiary, which receives dividends from
its bank subsidiaries. There are both federal and state statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by Bankshares to its shareholders.
Each state bank subsidiary that is a member of the Federal Reserve
System and each national banking association is required by federal law to
obtain the prior approval of the Federal Reserve Board or the OCC, as the case
may be, for the declaration and payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two (2) years, less any required
transfers to surplus. In addition, a dividend may not be paid in excess of a
bank's cumulative net profits after deducting bad debts in excess of the
allowance for loan losses. Effective September 1, 1995, the Texas Banking Act
eliminated the requirement under the predecessor code that, prior to paying a
dividend, a state bank must transfer to "certified surplus" an amount which is
not less than ten percent (10%) of the net profits of such bank earned since the
last dividend was declared; provided, however, that a transfer was not required
to certified surplus of a sum which would increase the certified surplus to more
than the capital of the bank. At December 31, 1997, under the foregoing dividend
restrictions, Bankshares' subsidiary banks, without obtaining governmental
approvals, could have declared aggregate dividends of approximately $9.7 million
from retained net profits. During 1997, Bankshares' subsidiary banks paid an
aggregate of $16.3 million in dividends.
The payment of dividends by Bankshares and its subsidiaries is also
affected by various regulatory requirements and policies, such as the
requirement to maintain adequate capital above regulatory guidelines. In
addition, if, in the opinion of the applicable regulatory authority, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), such authority may require, after notice and
hearing, that such bank cease and desist from such practice. The Federal Reserve
Board and the OCC have each indicated that paying dividends that deplete a
bank's capital base to an inadequate level would be unsafe and unsound banking
practice. The Federal Reserve Board, the OCC and the FDIC have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
Interstate Banking and Branching Act
Pursuant to the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank
holding company is able to acquire banks in states other than its home state.
Prior to September 29, 1995, interstate acquisitions by bank holding companies
were subject to federal law which provided that no application to acquire shares
of a bank located outside of the state in which the operations of the acquiring
bank holding company were principally conducted would be approved by the Federal
Reserve Board unless such acquisition was specifically authorized by the laws of
the state in which the bank whose shares are to be acquired was located.
The Interstate Banking and Branching Act also authorizes banks to
merge across state lines, therefore creating interstate branches, beginning June
1, 1997. Under such legislation, each state has the opportunity to "opt out" of
this provision, thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate branching within that
state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now
able to open new branches in a state in which it does not already have banking
operations, if the laws of such state permit such de novo branching. Texas has
adopted legislation to "opt out" of the interstate branching provisions (which
Texas law currently expires on September 2, 1999).
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
such proposals or bills being enacted and the impact they might have on
Bankshares and its subsidiaries cannot be determined at this time.
G. Statistical Disclosure
Information related to industry segments and foreign operations
required by Regulation S-K is not applicable. The following tables provide
information required by Guide 3, "Statistical Disclosure by Bank Holding
Companies", that has not been included in Part II, Item 7.
Table 1 - Composition of Loans (000's omitted):
December 31,
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Commercial, financial,
and agricultural $ 281,013 $ 234,625 $ 213,799 $ 177,587 $ 201,432
Real estate -construction 31,494 22,106 19,046 12,901 7,654
Real estate - mortgage 159,305 135,182 117,332 126,840 122,199
Consumer 237,127 180,987 156,752 129,565 105,540
---------- ---------- ---------- ---------- ----------
$ 708,939 $ 572,900 $ 506,929 $ 446,893 $ 436,825
========== ========== ========== ========== ==========
Loan Concentrations
At December 31, 1997, the Company had $80.1 million in loans
outstanding to agriculture which represented 11.3% of total loans.
Table 2 - Maturity Distribution and Interest Sensitivity of Loans at December
31, 1997 (000's omitted):
The following tables summarize maturity and yield information for the
commercial, financial, and agricultural and real estate construction portions of
the loan portfolio as of December 31, 1997:
Over One
Year
One Year Through Over Five
or less Five years Years Total
-------- ---------- --------- --------
Commercial, financial, and agricultural $ 196,376 $ 68,077 $ 16,560 $ 281,013
Real estate - construction 23,535 7,959 - 31,494
-------- ---------- --------- --------
$ 219,911 $ 76,036 $ 16,560 $ 312,507
======== ========== ========= ========
Maturities
After One Year
----------------
Loans with fixed interest rates $ 47,988
Loans with floating or adjustable interest rates 44,608
----------------
$ 92,596
================
Potential Problem Loans
Certain loans classified for regulatory purposes as doubtful,
substandard, or special mention are included in the nonperforming loan table.
Also included in the classified loans are certain other loans which are deemed
to be potential problems. Potential problem loans are those loans which are
currently performing but where known information about trends or uncertainties
or possible credit problems of the borrowers causes management to have serious
doubts as to the ability of such borrowers to comply with present repayment
terms, possibly resulting in the transfer of such loans to nonperforming status.
These loans totaled $919 thousand at December 31, 1997.
Table 3 - Composition of Investment Securities (000's omitted):
Held-to-maturity at amortized cost December 31, 1997 December 31, 1996 December 31, 1995
------------------- ------------------ -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
-------- -------- -------- -------- -------- ---------
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 319,230 $ 320,867 $ 364,232 $ 364,925 $ 370,368 $ 372,555
Obligations of states and political subdivisions 34,456 34,976 25,798 25,825 22,157 22,103
Mortgage-backed securities 47,214 47,309 62,509 61,910 46,563 46,760
Other securities 10,958 11,008 14,085 14,146 12,465 9,615
-------- -------- -------- -------- -------- ---------
Total debt securities $ 411,858 $ 414,160 $ 466,624 $ 466,806 $ 451,553 $ 451,033
======== ======== ======== ======== ======== ========
Available-for-Sale December 31, 1997 December 31, 1996 December 31, 1995
----------------------- ---------------------- -----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- -------- -------- -------- --------
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 134,296 $ 134,491 $ 10,276 $ 10,211 $ 4,945 $ 4,870
Obligations of states and political subdivisions 8,168 8,408 1,300 1,292 - -
Mortgage-backed securities 25,100 25,223 32,092 31,910 16,944 16,963
--------- --------- -------- -------- -------- --------
Total debt securities 167,564 168,122 43,668 43,413 21,889 21,833
Other securities 2,575 2,575 1,752 1,752 7,730 7,730
--------- --------- -------- -------- -------- --------
Total securities $ 170,139 $ 170,697 $ 45,420 $ 45,165 $ 29,619 $ 29,563
========= ========= ======== ======== ======== ========
Table 4 - Maturities and Yields of Investment Securities Held December 31, 1997
(000's omitted):
Maturing
After One but After Five but
Held-to-maturity: Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ---- -------- ---- ------- ---- ------ ---- -------- ----
U.S. Treasury obligations $ 46,745 6.17% $ 25,973 6.11% $ - - % $ - - % $ 72,718 6.15%
Obligations of U.S. Government
corporations and agencies 83,553 6.09 159,499 6.25 3,460 6.99 - - 246,512 6.20
Obligations of states and
political subdivisions 5,748 6.09 17,282 6.72 10,059 7.43 1,367 8.12 34,456 6.88
Other securities 6,581 6.65 4,351 5.97 26 8.03 - - 10,958 6.39
Mortgage-backed securities 8,797 5.73 29,136 6.33 4,986 6.66 4,295 6.68 47,214 6.29
-------- ---- -------- ---- ------- ---- ------ ---- -------- ----
Total $ 151,424 6.12% $ 236,241 6.27% $ 18,531 7.14% $ 5,662 7.03% $ 411,858 6.26%
======== ==== ======== ==== ======= ==== ====== ==== ======== ====
Maturing
After One but After Five but
Available-for Sale: Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ---- -------- ---- ------- ---- ------ ---- -------- ----
U.S. Treasury obligations $ 847 6.01% $ 7,453 6.22% $ - - % $ - - % $ 8,300 6.20%
Obligations of U.S. Government
corporations and agencies 62,042 5.69 46,051 6.21 13,779 6.77 4,319 5.61 126,191 5.99
Obligations of states and
political subdivisions - - - - 616 7.42 7,791 7.97 8,407 7.93
Other securities - - - - - - 2,575 5.78 2,575 5.78
Mortgage-backed securities 365 6.82 13,814 6.44 3,041 7.20 8,004 6.55 25,224 6.57
-------- ---- -------- ---- ------- ---- ------ ---- -------- ----
Total $ 63,254 5.70% $ 67,318 6.26% $ 17,436 6.86% $22,689 6.77% $ 170,697 6.18%
======== ==== ======== ==== ======= ==== ====== ==== ======== ====
Maturing
After One but After Five but
Total Investment Securities: Within One Year Within Five Years Within Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ---- -------- ---- ------- ---- ------ ---- -------- ----
U.S. Treasury obligations $ 47,592 6.17% $ 33,426 6.13% $ - - % $ - - % $ 81,018 6.15%
Obligations of U.S. Government
corporations and agencies 145,595 5.92 205,550 6.24 17,239 6.81 4,319 5.61 372,703 6.13
Obligations of states and
political subdivisions 5,748 6.09 17,282 6.72 10,675 7.43 9,158 8.00 42,863 7.08
Other securities 6,581 6.65 4,351 5.97 26 8.03 2,575 5.78 13,533 6.27
Mortgage-backed securities 9,162 5.77 42,950 6.37 8,027 6.86 12,299 6.60 72,438 6.39
-------- ---- -------- ---- ------- ---- ------ ---- -------- ----
Total $ 214,678 5.99% $ 303,559 6.27% $ 35,967 6.98% $28,351 6.82% $ 582,555 6.24%
======== ==== ======== ==== ======= ==== ====== ==== ======== ====
Table 5 - Analysis of the Allowance for Loan Losses (000's omitted):
1997 1996 1995 1994 1993
--------- ---------- ---------- --------- ----------
Balance at January 1, $ 9,441 $ 9,194 $ 9,206 $ 9,198 $ 8,476
Allowance established from
acquisitions 1,444 800 83 - 712
--------- ---------- ---------- --------- ----------
10,885 9,994 9,289 9,198 9,188
Charge-offs:
Commercial, financial and
agricultural 814 1,126 279 741 1,233
Consumer 2,103 1,420 720 613 555
All other 164 74 20 28 341
--------- ---------- ---------- --------- ----------
Total loans charged off 3,081 2,620 1,019 1,382 2,129
Recoveries:
Commercial, financial and
agricultural 697 361 333 1,899 1,205
Consumer 638 364 319 291 323
All other 35 142 103 82 100
--------- ---------- ---------- --------- ----------
Total recoveries 1,370 867 755 2,272 1,628
--------- ---------- ---------- --------- ----------
Net (recoveries)/charge-offs 1,711 1,753 264 (890) 501
Provision/(credit) for
loan losses 1,114 1,200 169 (882) 511
--------- ---------- ---------- --------- ----------
Balance at December 31, $ 10,288 $ 9,441 $ 9,194 $ 9,206 $ 9,198
========= ========== ========== ========= ==========
Loans at year-end $ 708,939 $ 572,900 $ 506,929 $ 446,892 $ 436,825
Average loans 624,071 545,754 465,495 430,774 415,204
Net charge-offs/(recoveries)/
average loans 0.27% 0.32% 0.06% (0.21)% 0.12%
Allowance for loan losses/
year-end loans 1.45 1.65 1.81 2.06 2.11
Allowance for loan losses/
nonperforming assets 228.37 268.13 444.15 406.45 165.94
Table 6 - Allocation of Allowance for Loan Losses (000's omitted):
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
Commercial, financial and agricultural $ 4,034 $ 3,866 $ 3,878 $ 3,711 $ 4,289
Real estate-construction 452 364 345 252 154
Real estate - mortgage 2,286 2,228 2,128 2,538 2,531
Consumer 3,516 2,983 2,843 2,704 2,224
--------- --------- --------- --------- ---------
$ 10,288 $ 9,441 $ 9,194 $ 9,205 $ 9,198
========= ========= ========= ========= =========
Allocation as Percent of Total Loans
1997 1996 1995 1994 1993
-------- -------- --------- -------- --------
Commercial, financial and agricultural 0.57% 0.68% 0.76% 0.83% 0.98%
Real estate - construction 0.06 0.06 0.07 0.06 0.04
Real estate - mortgage 0.32 0.39 0.42 0.57 0.58
Consumer 0.50 0.52 0.56 0.60 0.51
Item 2. Properties
The principal office of Bankshares is located in the First National
Bank Building at 400 Pine Street in downtown Abilene, Texas. Office space totals
2,295 square feet and is leased from First Abilene which owns the building.
Including detached drive-ins, Bankshares' bank subsidiaries own 28 and lease 4
banking facilities. The leased facilities are branches, two of which are located
in supermarkets. All of the locations are considered quality facilities and well
suited for conducting the business of banking.
Item 3. Legal Proceedings
Other than routine litigation in the normal course of business, there
are no material pending legal proceedings to which Bankshares, the Delaware BHC
or its subsidiary banks or any of their properties are subject, nor are there
any known material legal proceedings involving directors, officers, or
affiliates of Bankshares. Other than regular, routine examinations by state and
federal banking authorities, there are no proceedings pending or known to be
contemplated by any governmental authorities.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of
Bankshares during the fourth quarter of Bankshares' fiscal year ending December
31, 1997.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
As of February 23, 1998, Bankshares had 1,619 shareholders of record.
Except for shares held by First Abilene, First Sweetwater, and Stephenville in
various fiduciary capacities (see Item 12 following), no shareholder or
shareholder group known to Bankshares owns five percent (5%) or more of
Bankshares' issued and outstanding stock. Market price and dividend information
about the stock for the past two years is set forth in the Quarterly Financial
Data disclosure on page 24 under Item 7. Bankshares' common stock trades on the
Nasdaq National Market tier of the Nasdaq Stock Market under the symbol FFIN.
Restrictions on Bankshares' present or future ability to pay dividends have been
discussed under Item 1, above, under the topic "Supervision and Regulation."
Item 6. Selected Financial Data
First Financial Bankshares, Inc.
Selected Consolidated Financial Data
(Dollars in thousands, except per share data)
Year Ended December 31,
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
Summary Income Statement Information:
Interest income $ 95,884 $ 84,176 $ 74,657 $ 64,621 $ 62,995
Interest expense 39,461 33,731 29,448 22,416 21,513
--------- --------- --------- --------- --------
Net interest income 56,423 50,445 45,209 42,205 41,482
Provision (credit) for loan losses 1,114 1,200 168 (882) 511
Noninterest income 18,622 15,842 15,030 12,313 12,940
Noninterest expense 43,802 37,570 34,400 34,635 33,428
--------- --------- --------- --------- --------
Earnings before income taxes 30,129 27,517 25,671 20,765 20,483
Provision for income taxes 10,066 9,395 8,656 6,805 6,615
--------- --------- --------- --------- --------
Net earnings before accounting change (1) 20,063 18,122 17,015 13,960 13,868
Cumulative effect of accounting change (2) - - - - 1,005
--------- --------- --------- --------- --------
Net earnings $ 20,063 $ 18,122 $ 17,015 $ 13,960 $ 14,873
========= ========= ========= ========= ========
Per Share Data (3):
Net earnings per share before cumulative
effect of accounting change $ 2.33 $ 2.17 $ 2.04 $ 1.68 $ 1.67
Net earnings per share 2.33 2.17 2.04 1.68 1.79
Net earnings per share, assuming dilution 2.31 2.15 2.02 1.68 1.79
Cash dividends declared 0.97 0.87 0.78 0.70 0.62
Book value at period-end 17.13 15.62 14.38 13.05 12.17
Earnings performance ratios (4):
Return on average assets 1.47% 1.52% 1.59% 1.33% 1.35%
Return on average equity 14.32 14.65 14.91 13.34 14.22
Summary Balance Sheet Data (Period-end):
Investment securities $ 582,555 $ 511,789 $ 481,117 $ 490,950 $ 482,885
Loans 708,939 572,900 506,929 446,892 436,825
Total assets 1,573,509 1,262,041 1,125,887 1,066,982 1,069,389
Deposits 1,412,724 1,121,881 997,578 950,251 960,389
Total liabilities 1,425,283 1,130,880 1,005,859 958,465 968,660
Total shareholders' equity 148,226 131,161 120,028 108,517 100,729
Asset quality ratios:
Allowance for loan losses/period-end loans 1.45% 1.65% 1.81% 2.06% 2.11%
Nonperforming assets/period-end loans
plus foreclosed assets 0.63 0.61 0.41 0.51 1.26
Net (recoveries)charge offs/average loans 0.27 0.32 0.06 (0.21) 0.12
Capital ratios:
Average shareholders' equity/average assets 10.28% 10.35% 10.66% 9.59% 9.45%
Leverage ratio 8.34 10.40 10.91 9.51 9.28
Tier 1 risk-based capital 14.75 18.90 19.33 16.76 16.90
Total risk-based capital 15.96 20.15 20.57 18.02 18.38
Dividend payout ratio 41.24 40.32 35.63 34.04 32.03
(1) 1995 net earnings includes $1.3 million, or $0.16 per share, in nonrecurring gains from sale of assets.
(2) Adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
(3) Historical amounts adjusted for stock dividends and stock splits.
(4) Calculated on net income before cumulative accounting adjustment in 1993.
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Management's discussion and analysis of the major elements of the Company's
consolidated balance sheets and statements of earnings should be reviewed in
conjunction with the consolidated financial statements, accompanying notes, and
selected financial data presented elsewhere in this report.
On November 24, 1997, through an exchange of 216,000 shares of stock, the
Company acquired Southlake Bancshares, Inc. and its subsidiary, Texas National
Bank. The Southlake Bancshares transaction was accounted for as a
pooling-of-interests. The results of Southlake Bancshares are included in the
consolidated financial statements for 1997; however, prior period financial data
has not been restated due to immateriality. On September 25, 1997, the Company's
subsidiary bank in San Angelo acquired certain assets of Texas Commerce Bank-San
Angelo for $16.8 million in cash and the assumption of certain liabilities
(primarily deposits). These factors should be considered when making comparisons
to prior year operating results and period-end balances.
Performance Summary
Net earnings for 1997 were $20.1 million, an all-time high and an increase of
$2.0 million over the $18.1 million earned in 1996. Net earnings for 1995
amounted to $17.0 million and included $1.3 million in nonrecurring gains.
Increased net interest income resulting from growth in earning assets and higher
noninterest income were the primary factors contributing to the earnings
improvement in both 1997 and 1996.
On a per share basis, 1997 earnings amounted to $2.33 as compared to $2.17 for
1996. In 1995, the Company earned $2.04 per share which included approximately
$0.16 per share resulting from nonrecurring gains. Return on average assets for
1997 was 1.47% as compared to 1.52% for 1996 and 1.59% (1.47% excluding
nonrecurring gains) for 1995. Return on average equity for 1997 was 14.32%
compared to 14.65% for 1996 and 14.91% (13.76% excluding nonrecurring gains) for
1995.
Net Interest Income
Net interest income is the spread between interest income on earning assets,
consisting primarily of loans and securities, and the interest expense on
liabilities used to fund those assets, primarily interest-bearing deposits. In
this discussion, net interest income is presented on a fully tax-equivalent
basis, which permits comparability of data through recognition of tax savings
realized on tax-exempt income. Net interest income on a tax-equivalent basis was
$57.2 million in 1997 as compared to $50.9 million in 1996 and $45.7 million in
1995. These year-to-year net increases represent changes in both the volume of
average earning assets and interest-bearing liabilities and interest rates.
Table 1 allocates the change in net interest income between the amount
attributable to volume and the amount attributable to rate. In the years 1997
and 1996, increased net interest income resulted primarily from higher volumes
of earning assets and deposits.
Table 1 - Changes in Interest Income and Interest Expense (000's omitted):
1997 Compared to 1996 1996 Compared to 1995
Change Attributable to Total Change Attributable to Total
Volume Rate Change Volume Rate Change
------ ------ ------ ------ ------- ------
Short-term investments $ 1,516 $ 30 $ 1,546 $ 136 $ (183) $ (47)
Taxable investment securities 1,139 1,304 2,443 1,400 1,538 2,938
Tax-exempt investment securities (1) 947 (15) 932 283 (111) 172
Loans (1) 7,503 (440) 7,063 7,221 (752) 6,469
------ ------ ------ ------ ------- ------
Interest income 11,105 879 11,984 9,040 492 9,532
------ ------ ------ ------ ------- ------
Interest bearing deposits 4,434 1,216 5,650 3,837 441 4,278
Short-term borrowings 187 (105) 82 1 7 8
Long-term debt (3) - (3) (5) 2 (3)
------ ------ ------ ------ ------- ------
Interest expense 4,618 1,111 5,729 3,833 450 4,283
------ ------ ------ ------ ------- ------
Net interest income $ 6,487 $ (232) $ 6,255 $ 5,207 $ 42 $ 5,249
====== ====== ====== ====== ======= ======
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
Table 2 provides interest income and average yield earned on earning assets and
interest expense and average rate paid on interest-bearing liabilities for the
years 1995 through 1997. Average earning assets for 1997 were up $146 million
over the prior year with approximately $84 million of the growth achieved
through acquisitions. The net interest margin which measures net interest income
as a percentage of average earning assets amounted to 4.62% in 1997 as compared
to 4.66% in 1996 and 4.69% in 1995. Higher deposit rates have been the primary
factors contributing to the decline in the net interest margin in both 1997 and
1996.
Table 2 - Average Balances and Average Yields and Rates (000's omitted):
1997 1996 1995
-------------------------- --------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- ------- ---- ---------- ------- ---- ---------- ------- ----
Assets
Short-term investments $ 65,326 $ 3,555 5.44% $ 37,230 $ 2,009 5.40% $ 34,916 $ 2,056 5.89%
Taxable investment securities 511,613 31,320 6.12 486,546 28,877 5.94 455,817 25,939 5.69
Tax-exempt
investment securities (1) 36,954 2,408 6.52 22,509 1,476 6.56 18,496 1,304 7.05
Loans (1) (2) 624,071 59,347 9.51 545,754 52,284 9.58 465,495 45,815 9.84
---------- ------- ---------- ------- ---------- -------
Total earning assets 1,237,964 96,630 7.81 1,092,039 84,646 7.75 974,724 75,114 7.71
Cash and due from banks 65,503 56,279 53,827
Bank premises and equipment 38,889 34,429 31,458
Other assets 20,761 17,709 19,496
Intangible assets 10,053 5,624 1,112
Allowance for loan losses (9,863) (10,056) (9,186)
---------- ---------- ----------
Total assets $ 1,363,307 $ 1,196,024 $ 1,071,431
========== ========== ==========
Liabilities and
Shareholders' Equity
Interest-bearing deposits $ 960,057 $ 39,339 4.10% $ 848,401 $ 33,689 3.97% $ 750,490 $ 29,411 3.92%
Short-term borrowings 1,742 118 6.77 285 36 12.63 280 28 10.00
Long-term debt 33 3 9.09 70 6 8.57 171 9 5.26
---------- ------- ---------- ------- ---------- -------
Total interest-
bearing liabilities 961,832 39,460 4.10 848,756 33,731 3.97 750,941 29,448 3.92
------- ------- -------
Noninterest-bearing deposits 250,458 213,757 197,412
Other liabilities 10,925 9,775 8,987
---------- ---------- ----------
Total liabilities 1,223,215 1,072,288 957,340
Shareholders' equity 140,092 123,736 114,091
---------- ---------- ----------
Total liabilities and
shareholders' equity $ 1,363,307 $ 1,196,024 $ 1,071,431
========== ========== ==========
Net interest income $ 57,170 $ 50,915 $ 45,666
======= ======= =======
Rate Analysis:
Interest income/earning assets 7.81% 7.75% 7.71%
Interest expense/earning assets 3.19 3.09 3.02
---- ---- ----
Net yield on earning assets 4.62% 4.66% 4.69%
==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
Provision and Allowance for Possible Loan Losses
The allowance for losses is the amount deemed by Management to be adequate to
provide for possible losses on loans that may become uncollectable. Reviews of
general loss experience and the performance of specific credits are conducted in
determining reserve adequacy and required provision expense. The provision for
loan losses amounted to $1.1 million in 1997 as compared to $1.2 million in 1996
and $169 thousand in 1995. Net charge offs during 1997 totaled $1.7 million,
virtually unchanged from the prior year amount. As a percent of average loans,
1997 net charge offs amounted to 0.27% as compared to 0.32% for 1996. A key
indicator of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming assets which amounted to 228.37% at December 31,
1997, as compared to 268.13% at December 31, 1996. Nonperforming assets at
December 31, 1997, totaled $4.5 million as compared to $3.5 million the prior
year-end. As a percent of loans and foreclosed assets, nonperforming assets at
year-end 1997 amounted to 0.63% as compared to 0.61% at the close of 1996.
Management was not aware of any material classified credit not properly
disclosed as nonperforming at December 31, 1997.
Table 3 - Loan Loss Experience and Allowance for Loan Losses (000's omitted):
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
Balance at January 1, $ 9,441 $ 9,194 $ 9,206 $ 9,198 $ 8,476
Allowance established from
acquisitions 1,444 800 83 - 712
--------- ---------- ---------- ---------- ----------
10,885 9,994 9,289 9,198 9,188
Loans charged off 3,081 2,620 1,019 1,382 2,129
Loans recovered 1,370 867 755 2,272 1,628
--------- ---------- ---------- ---------- ----------
Net (recoveries) charge-offs 1,711 1,753 264 (890) 501
Provision (credit) for loan losses 1,114 1,200 169 (882) 511
--------- ---------- ---------- ---------- ----------
Balance at December 31, $ 10,288 $ 9,441 $ 9,194 $ 9,206 $ 9,198
========= ========== ========== ========== ==========
Loans at year-end $ 708,939 $ 572,900 $ 506,929 $ 446,892 $ 436,825
Average loans 624,071 545,754 465,495 430,774 415,204
Net charge offs (recoveries)/
average loans 0.27% 0.32% 0.06% (0.21)% 0.12%
Allowance for loan losses/
year-end loans 1.45 1.65 1.81 2.06 2.11
Allowance for loan losses/
nonperforming assets 228.37 268.13 444.15 406.45 165.94
Table 4 - Nonperforming Assets (000's omitted):
At December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Nonaccrual loans $ 3,463 $ 2,638 $ 1,184 $ 1,305 $ 3,417
Loans past due 90 days or more 106 77 181 100 170
Restructured loans - - - - -
------ ------ ------ ------ ------
Nonperforming loans 3,569 2,715 1,365 1,405 3,587
Foreclosed assets 936 806 705 860 1,956
------ ------ ------ ------ ------
Total nonperforming assets $ 4,505 $ 3,521 $ 2,070 $ 2,265 $ 5,543
====== ====== ====== ====== ======
As a % of loans and
foreclosed assets 0.63% 0.61% 0.41% 0.51% 1.26%
Noninterest Income
Noninterest income for 1997 totaled $18.6 million, an increase of $2.8 million,
or 17.7%, over the prior year. Approximately $735 thousand of the increase came
from 1997 acquisitions. Trust fees were up $436 thousand, or 12.3%, and resulted
from an $85 million, or 14.0% increase in trust assets during 1997. Service fees
on deposit accounts increased $1.9 million, or 23.4%, and reflect growth in the
number of accounts and volume of transactions. ATM fees in 1997 were up $252
thousand and reflect growth in the number of cardholders and volume of
transactions. Table 5 provides detail of other categories of noninterest income.
Total noninterest income for 1996 amounted to $15.8 million as compared to $15.0
million in 1995. As shown in Table 5, trust fees and service fees on deposit
accounts were up $388 thousand and $1.8 million, respectively. Also in 1996,
gains on sale of foreclosed assets decreased $2.0 million and interest on loan
recoveries increased $284 thousand.
Table 5 - Noninterest Income (000's omitted):
Increase Increase
1997 (Decrease) 1996 (Decrease) 1995
------- -------- ------- ------- -------
Trust fees $ 3,988 $ 436 $ 3,552 $ 388 $ 3,164
Service fees on deposit accounts 10,057 1,908 8,149 1,769 6,380
Gain on sale of repossessed assets 39 (86) 125 (1,957) 2,082
Other:
Interest on loan recoveries 99 (215) 314 284 30
Mastercard fees 844 92 752 114 638
Real estate mortgage fees 682 114 568 131 437
Brokerage commissions 263 62 201 (199) 400
Safe deposit rental fees 336 83 253 (18) 271
ATM fees 705 252 453 176 277
Exchange fees 292 (6) 298 31 267
Miscellaneous income 1,317 140 1,177 93 1,084
------- ------- ------- ------- -------
4,538 522 4,016 612 3,404
------- ------- ------- ------- -------
Total Noninterest Income $ 18,622 $ 2,780 $ 15,842 $ 812 $ 15,030
======= ======= ======= ======= =======
Noninterest Expense
Total noninterest expense for 1997 amounted to $43.8 million, an increase of
$6.2 million, or 16.6%, over the prior year. Excluding approximately $2.5
million which resulted from acquisitions, 1997 noninterest expense was up 9.9%.
An important measure in determining effectiveness in managing noninterest
expense 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. Excluding gains on sale of foreclosed assets, the Company's
efficiency ratios were 57.82%, 56.38% and 58.69% in 1997, 1996 and 1995,
respectively.
Salaries and employee benefits for 1997 totaled $22.4 million, up $2.6 million,
or 9.2%, over the prior year. Approximately $1.4 million of the increase related
to 1997 acquisitions. On a combined basis, 1997 net occupancy and equipment
expense was up $992 thousand with depreciation and property taxes being the
significant factors contributing to the increase. Table 6 presents major
categories of other noninterest expense.
Noninterest expense in 1996 amounted to $37.6 million, which was up $3.2
million. Approximately $2.7 million of the increase related to a purchase
acquisition finalized in January of 1996. Occupancy expense in 1996 was up $557
thousand with the increase resulting primarily from acquisitions and the opening
of a new bank building in Stephenville. FDIC expense in 1996 decreased $1.0
million due to the insurance fund reaching its target level.
Table 6 - Noninterest Expense (000's omitted):
Increase Increase
1997 (Decrease) 1996 (Decrease) 1995
------- ------ ------- ------ -------
Salaries $ 17,397 $ 2,075 $ 15,322 $ 1,675 $ 13,647
Payroll taxes 1,314 150 1,164 132 1,032
Profit sharing 1,813 103 1,710 321 1,389
Medical and other benefits 1,925 256 1,669 238 1,431
------- ------ ------- ------ -------
22,449 2,584 19,865 2,366 17,499
Net occupancy expense 3,568 402 3,166 557 2,609
Equipment expense 3,526 591 2,935 393 2,542
Printing, stationary, and supplies 1,080 63 1,017 59 958
FDIC insurance expense 142 125 17 (1,037) 1,054
Other:
Data processing and operations fees 1,039 328 711 6 705
Postage 1,016 119 897 121 776
Advertising 993 116 877 5 872
Correspondent bank service charges 947 80 867 (24) 891
Legal and accounting fees 772 218 554 (45) 599
Credit card fees 720 86 634 180 454
Goodwill amortization 707 306 401 325 76
ATM expense 671 146 525 88 437
Telephone 596 202 394 62 332
Public relations and business development 573 115 458 112 346
Directors' fees 527 121 406 (27) 433
Other professional and service fees 363 91 272 (100) 372
Franchise tax 350 85 265 (46) 311
Dues and subscriptions 316 26 290 21 269
Courier 306 38 268 20 248
Other miscellaneous 3,141 390 2,751 134 2,617
------- ------ ------- ------ -------
13,037 2,467 10,570 832 9,738
------- ------ ------- ------ -------
Total Noninterest Expense $ 43,802 $ 6,232 $ 37,570 $ 3,170 $ 34,400
======= ====== ======= ====== =======
Income Taxes
Income tax expense for 1997 totaled $10.1 million as compared to $9.4 million
for 1996 and $8.7 million for 1995. The Company's effective tax rates on pretax
income were 33.4%, 33.1% and 33.7%, respectively, for the years 1997, 1996 and
1995.
At December 31, 1997 and 1996, the Company had net deferred tax assets of $1.2
million and $1.4 million, respectively. The approximate effects of each type of
difference that gave rise to the Company's deferred tax assets and liabilities
at December 31, 1997 and 1996, are provided in Note 7 to the Consolidated
Financial Statements. The most significant assumption relied upon by management
in concluding that it is more likely than not that the deferred tax assets, net
of the recorded valuation allowance, will be realized in the future is the
recent history of taxable income generated by the Company and the subsidiary
bank to which the net operating loss carryforward relates. On a consolidated
basis, taxable income amounted to approximately $28.8 million, $26.5 million,
and $22.6 million in the years ended December 31, 1997, 1996 and 1995,
respectively.
The use of the net operating loss carryforward is conditioned upon taxable
income generated by the subsidiary bank. The net operating loss carryforward was
acquired in the purchase of the stock of the subsidiary bank, and under
applicable Internal Revenue Service regulations regarding change of control,
their usage is limited to a predetermined amount in each future period. The net
operating loss carryforward approximates $1.4 million at December 31, 1997, with
a usage limitation of $340 thousand per year. The net operating loss
carryforward expires in the years 2001 through 2005. Taxable income generated by
the subsidiary bank before the net operating loss carryforward amounted to
approximately $1.6 million, $1.9 million, and $1.4 million in the years ended
December 31, 1997, 1996 and 1995, respectively.
The valuation allowance was established because full utilization of the net
operating loss carryforward is dependent on future taxable income in years where
the Company is unable to determine that it is more likely than not that taxable
income of the subsidiary bank will be available prior to expiration.
Investment Securities
At December 31, 1997, the investment securities portfolio totaled $582.6 million
as compared to $511.8 million the prior year end. At December 31, 1997,
securities with an amortized cost of $411.9 million were classified as
securities held-to-maturity and securities with a market value of $170.7 million
were classified as securities available-for-sale. The portfolio is comprised
primarily of U. S. Treasury and U.S. Government corporations and agencies
securities with relative short maturities. The Company did not hold any CMOs
that entail higher risks than standard mortgage-backed securities. Total
investment securities at year-end 1997 included structured notes with an
amortized cost of $11.7 million and an approximate market value of $11.6
million. Note 2 to the Consolidated Financial Statements provides detail
disclosures relating to the maturities and estimated fair values of the
investment portfolio at December 31, 1997 and 1996.
Loans
Total loans at December 31, 1997, amounted to $708.9 million, up $136 million,
or 23.7%, from year-end 1996. Internal loan growth amounted to $49 million, or
8.5%, and acquisitions accounted for the remaining $87 million of growth. When
compared to the prior year-end totals, consumer loans and commercial loans show
increases of $56 million and $46 million, respectively. As shown in Table 7
below, the composition, or percent of total loans each classification
represents, was relatively unchanged from year to year. The loan portfolio is
comprised of loans made to businesses, individuals, and farm and ranch
operations located in the primary trade areas served by the Company's subsidiary
banks. Real estate loans represent loans primarily for new home construction and
owner-occupied real estate. The structure of loans in the real estate mortgage
classification generally provides repricing intervals to minimize the interest
rate risk inherent in fixed rate mortgage loans.
Table 7 - Composition of Loans (000's omitted):
December 31, 1997 December 31, 1996
Amount % of Total Amount % of Total
-------- ---------- -------- --------
Commercial, financial, and agricultural $ 281,013 39.64% $ 234,625 40.95%
Real estate - construction 31,494 4.44 22,106 3.86
Real estate - mortgage 159,305 22.47 135,182 23.60
Consumer 237,127 33.45 180,987 31.59
-------- ---------- -------- --------
$ 708,939 100.00% $ 572,900 100.00%
======== ========== ======== ========
Deposits
Deposits held by subsidiary banks represent the Company's primary source of
funding. Substantially all of the deposits are considered core deposits, that
is, deposits that are not subject to material fluctuations from customer
withdrawal related to market rate changes. At December 31, 1997, total deposits
amounted to $1.4 billion, an increase of $291 million, or 25.9%, over the 1996
year-end total. Approximately $200 million of the growth resulted from 1997
acquisitions. Table 8 provides a breakdown of average deposits and rates paid
over the past three years and the remaining maturity of time deposits of $100
thousand or more.
Table 8 - Composition of Deposits and Remaining Maturity of Time
Deposits of $100,000 or more (000's omitted):
1997 1996 1995
------------------- ------------------- -----------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- -------- ----
Noninterest-bearing deposits $ 250,458 - $ 213,757 - $ 197,412 -
Interest-bearing deposits
Interest-bearing checking 194,772 1.95% 187,912 1.98% 179,731 2.14%
Savings and money market accounts 295,195 3.57 232,579 3.29 182,401 2.98
Time deposits under $100,000 337,790 5.26 310,265 5.19 272,062 5.16
Time deposits of $100,000 or more 132,300 5.45 117,645 5.29 116,296 5.24
---------- ---------- --------
Total interest-bearing deposits 960,057 4.10 848,401 3.97 750,490 3.92
---------- ---------- --------
Total deposits $ 1,210,515 $ 1,062,158 $ 947,902
========== ========== ========
Remaining Maturity of Time Deposits of $100,000 or More
December 31, 1997
-----------------
Under three months $ 59,826
Over three through six months 35,553
Over six through twelve months 33,655
Over twelve months 20,453
--------
Total Time Deposits of $100,000 or More $ 149,487
========
Capital
At December 31, 1997, total shareholders' equity was $148.2 million, or 9.42% of
total assets, compared to $131.2 million, or 10.39% of total assets, at December
31, 1996. During 1997, total shareholders' equity averaged $140.1 million, or
10.27% of average assets, compared to the 1996 average of $123.7 million, or
10.34% of average assets.
Banking system regulators measure capital adequacy by means of the risk-based
capital ratio and leverage ratio. The risk-based capital rules provide for the
weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory
capital is then divided by risk-weighted assets to determine the risk-adjusted
capital ratios. The leverage ratio is computed by dividing shareholders' equity
less intangibles by quarter-to-date average assets less intangibles. Regulatory
minimums for risk-based and leverage ratios are 8.00% and 3.00%, respectively.
At December 31, 1997, the Company's total risk-based and leverage ratios were
15.96% and 8.34%, respectively, as compared to a total risk-based ratio of
20.15% and a leverage ratio of 10.40% at the end of 1996. Lower ratios at the
close of 1997 reflect the Company's asset growth and additional goodwill
resulting from the 1997 purchase and assumption transaction.
Interest Rate Risk
Interest rate risk results when the maturity or repricing intervals of
interest-earning assets and interest-bearing liabilities are different. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of selecting the types and terms of interest-earning assets
and interest-bearing liabilities which generate favorable earnings, while
limiting the potential negative effects of changes in market interest rates. The
Company uses no off-balance sheet financial instruments to manage interest rate
risk.
Each subsidiary bank has an asset/liability committee which monitors interest
rate risk and compliance with investment policies. Interest-sensitivity gap and
simulation analysis are among the ways that the subsidiary banks track interest
rate risk. Table 9 sets forth the interest rate sensitivity of the Company's
assets and liabilities as of December 31, 1997, and sets forth the repricing
dates of the Company's interest-earning assets and interest-bearing liabilities
as of that date, as well as the Company's 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, and since such assumptions can be no more than estimates, certain
assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate movements
on the Company's net interest income.
Table 9 - Interest Sensitivity Analysis (000's omitted):
12-31-97
Estimated
1998 1999 2000 2001 2002 Beyond Total Fair Value
-------- -------- -------- -------- -------- -------- ---------- ----------
Loans
Fixed rate loans $ 165,572 $ 68,725 $ 69,436 $ 71,619 $ 71,979 $ 28,768 $ 476,099 $ 477,762
Average interest rate 9.60% 10.02% 10.07% 9.75% 9.67% 9.08% 9.73%
Adjustable rate loans 232,840 - - - - - 232,840 232,840
Average interest rate 9.38 - - - - - 9.38
Investment securities
Fixed rate securities 214,678 98,006 83,182 69,913 52,459 64,317 582,555 584,858
Average interest rate 5.99 6.06 6.27 6.35 6.55 6.93 6.24
Other earning assets
Adjustable rate other 114,885 - - - - - 114,885 114,885
Average interest rate 5.40 - - - - - 5.40 -
-------- -------- -------- -------- -------- -------- ---------- ----------
Total financial assets $ 727,975 $ 166,731 $ 152,618 $ 141,532 $ 124,438 $ 93,085 $ 1,406,379 $ 1,410,345
Average interest rate 7.80% 7.69% 8.00% 8.07% 8.35% 7.59% 7.87%
Deposits
Fixed rate deposits $ 406,789 $ 59,392 $ 23,562 $ 7,141 $ 3,679 $ 49 $ 500,612 $ 501,262
Average interest rate 5.23% 5.79% 6.38% 5.74% 5.74% 5.11% 5.36%
Adjustable rate deposits 600,794 - - - - - 600,794 600,794
Average interest rate 2.92 - - - - - 2.92
Note payable
Floating rate note payable 4,700 - - - - - 4,700 4,700
Average interest rate 6.80 - - - - - 6.80 -
-------- -------- -------- -------- -------- -------- ---------- ----------
Total financial liabilities $1,012,283 $ 59,392 $ 23,562 $ 7,141 $ 3,679 $ 49 $ 1,106,106 $ 1,106,756
Average interest rate 3.86% 5.79% 6.38% 5.74% 5.74% 5.11% 4.04%
Interest sensitivity gap $ (284,308) $ 107,339 $ 129,056 $ 134,391 $ 120,759 $ 93,036 $ 300,273
Cumulative interest
sensitivity gap (284,308) (176,969) (47,913) 86,478 207,237 300,273 300,273
Ratio of interest sensitive
assets to interest
sensitive liabilities 71.91 - - - - -
Cumulative ratio of interest
sensitive assets to
interest sensitive
liabilities 71.91 83.49 95.63 107.84 118.74 127.15
Cumulative interest
sensitivity gap as a
percent of earning assets (20.22)% (12.58)% (3.41)% 6.15% 14.74% 21.35%
In the event market interest rates increase 200 basis points, management
estimates that the Company's net interest income would likely increase 4.8% when
compared to the prior 12-month period. If interest rates decreased 200 basis
points, net interest income would likely decrease 5.3% when compared to the
prior 12-month period. These are good faith estimates assuming all other factors
do not change materially, and, in management's belief, 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, future
results would, in management's belief, be different from the foregoing estimates
and such results could be material.
Liquidity
Liquidity is the ability of the Company to meet cash demands as they arise. Such
needs can develop from loan demand, deposit withdrawals or acquisition
opportunities. Asset liquidity is provided by cash and assets which are readily
marketable or which will mature in the near future. Liquid assets include cash,
Federal funds sold, and short-term investments in time deposits in banks.
Liquidity is also provided by access to funding sources which include core
depositors and correspondent banks that maintain accounts with and sell Federal
funds to subsidiary banks of the Company. Given the strong core deposit base and
relatively low loan deposit ratios maintained at the subsidiary banks,
Management considers the current liquidity position to be adequate.
Parent Company Funding Sources and Dividends
The Company's ability to fund various operating expenses, dividends, and cash
acquisitions is generally dependent on parent company only earnings, cash
reserves and funds derived from its subsidiaries. These funds historically have
been produced by intercompany dividends and management fees that are limited to
reimbursement of actual expenses. It is anticipated that the Company's recurring
cash sources will continue to include dividends and management fees from
subsidiaries. At December 31, 1997, approximately $9.7 million was available for
the payment of intercompany dividends by the subsidiary banks without the prior
approval of regulatory agencies. Also at December 31, 1997, the Company had $5.3
million available under a line of credit with an unaffiliated financial
institution. The Company does not anticipate any significant change in its
policy for cash dividends, which have amounted to 41.2%, 40.3%, and 35.6% of net
earnings, respectively, in 1997, 1996 and 1995.
Year 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Computer programs that
have date-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000, which could result in miscalculations. The Company
has assessed financial and operational systems and developed plans to address
systems modifications. The Company is also communicating with others with which
it conducts business to help identify and resolve the year 2000 issue. The total
cost associated with the required modifications is not expected to be material
to the Company's consolidated results of operations and financial position and
is being expensed as incurred.
QUARTERLY FINANCIAL DATA (Unaudited)
(Dollars in thousands, except per share data)
1997
4th 3rd 2nd 1st
--------- --------- --------- ---------
Summary Income Statement Information:
Interest income $ 26,425 $ 23,789 $ 23,147 $ 22,523
Interest expense 11,336 9,747 9,339 9,039
--------- --------- --------- ---------
Net interest income 15,089 14,042 13,808 13,484
Provision for loan losses 428 252 191 243
--------- --------- --------- ---------
Net interest income after provision for loan losses 14,661 13,790 13,617 13,241
Noninterest income 4,846 4,803 4,566 4,407
Noninterest expense 11,956 10,952 10,594 10,300
--------- --------- --------- ---------
Income before income taxes 7,551 7,641 7,589 7,348
Provision (benefit) for income taxes 2,535 2,530 2,540 2,461
--------- --------- --------- ---------
Net income $ 5,016 $ 5,111 $ 5,049 $ 4,887
========= ========= ========= =========
Per Share Data (1):
Net income per share $ 0.58 $ 0.59 $ 0.59 $ 0.57
Cash dividends declared 0.25 0.25 0.25 0.22
Book value at period-end 17.13 16.79 16.42 16.04
Closing sales price 42.88 45.50 38.75 31.25
Sales price:
High 45.50 45.50 39.50 32.50
Low 38.50 36.00 29.25 30.20
1996
4th 3rd 2nd 1st
--------- --------- --------- ---------
Summary Income Statement Information:
Interest income $ 21,463 $ 21,046 $ 20,687 $ 20,980
Interest expense 8,601 8,429 8,275 8,426
--------- --------- --------- ---------
Net interest income 12,862 12,617 12,412 12,554
Provision for loan losses 237 80 365 518
--------- --------- --------- ---------
Net interest income after provision for loan losses 12,625 12,537 12,047 12,036
Noninterest income 4,034 4,064 4,039 3,705
Noninterest expense 9,631 9,624 9,327 8,988
--------- --------- --------- ---------
Income before income taxes 7,028 6,977 6,759 6,753
Provision (benefit) for income taxes 2,400 2,375 2,311 2,309
--------- --------- --------- ---------
Net income $ 4,628 $ 4,602 $ 4,448 $ 4,444
========= ========= ========= =========
Per Share Data (1):
Net income per share $ 0.55 $ 0.55 $ 0.53 $ 0.53
Cash dividends declared 0.22 0.22 0.22 0.21
Book value at period-end 15.62 15.28 14.96 14.69
Closing sales price 32.00 27.75 29.50 22.75
Sales price:
High 32.13 30.00 30.38 24.00
Low 27.50 20.13 22.75 20.75
(1) Historical amounts adjusted for 25% stock dividend on June 1, 1997.
Item 8. Financial Statements and Supplementary Data
The independent auditors' report, and consolidated financial
statements of Bankshares at December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, are provided on pages 26
through 48. Also included is management's report on responsibility for these
financial statements.
FIRST FINANCIAL BANKSHARES, INC.
MANAGEMENT'S REPORT
ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
Management of First Financial Bankshares, Inc., is responsible for the
preparation, integrity, and fair presentation of its annual financial statements
as of December 31, 1997 and 1996, and for the three years in the period ended
December 31, 1997. The financial statements have been prepared in accordance
with generally accepted accounting principles and, as such, include amounts
based on judgments and estimates made by Management. Management has also
prepared the other information included in this Annual Report and is responsible
for its accuracy and consistency with the financial statements.
The annual financial statements referred to above have been audited by Arthur
Andersen LLP, who have been given unrestricted access to all financial records
and related data, including minutes of all meetings of shareholders and the
Board of Directors. Management believes that all representations made to Arthur
Andersen LLP during the audits were valid and appropriate.
Kenneth T. Murphy Curtis R. Harvey
Chairman of the Board, President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of First Financial
Bankshares, Inc. (a Texas corporation), and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Financial Bankshares,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
January 14, 1998
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
------ --------------- ---------------
CASH AND DUE FROM BANKS $ 88,795,827 $ 71,677,154
FEDERAL FUNDS SOLD 114,485,839 54,306,156
--------------- ---------------
Total cash and cash equivalents 203,281,666 125,983,310
INTEREST-BEARING DEPOSITS IN BANKS 398,671 888,494
INVESTMENT IN SECURITIES:
Securities held-to-maturity (market value of $414,160,027
in 1997 and $466,805,918 in 1996) 411,857,644 466,623,769
Securities available-for-sale, at market value 170,697,516 45,164,802
LOANS 708,938,702 572,900,206
Less- Allowance for loan losses 10,288,200 9,441,466
---------------- ---------------
Net loans 698,650,502 563,458,740
BANK PREMISES AND EQUIPMENT, net 41,501,074 34,454,587
GOODWILL, net 23,054,329 5,585,922
OTHER ASSETS 24,067,522 19,881,425
---------------- ---------------
Total assets $ 1,573,508,924 $ 1,262,041,049
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
NONINTEREST-BEARING DEPOSITS $ 311,318,296 $ 246,571,720
INTEREST-BEARING DEPOSITS 1,101,405,525 875,309,732
---------------- ---------------
Total deposits 1,412,723,821 1,121,881,452
DIVIDENDS PAYABLE 2,162,899 1,881,288
NOTE PAYABLE 4,700,000 -
OTHER LIABILITIES 5,695,741 7,117,463
---------------- ---------------
Total liabilities 1,425,282,461 1,130,880,203
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $10 par value; authorized 10,000,000 shares;
issued and outstanding 8,651,595 and 6,718,886 shares
in 1997 and 1996, respectively 86,515,950 67,188,860
Capital surplus 36,350,673 36,874,707
Retained earnings 24,996,973 27,363,902
Unrealized gain (loss) on investment in securities
available-for-sale, net 362,867 (266,623)
---------------- ---------------
Total shareholders' equity 148,226,463 131,160,846
---------------- ---------------
Total liabilities and shareholders' equity $ 1,573,508,924 $ 1,262,041,049
================ ===============
The accompanying notes are an integral part of these
consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
----------- ----------- -----------
INTEREST INCOME:
Interest and fees on loans $ 59,308,993 $ 52,283,782 $ 45,814,586
Interest on investment in securities-
Taxable 31,320,395 28,877,437 25,939,349
Exempt from federal income tax 1,699,442 1,005,713 847,319
Interest on federal funds sold and interest-bearing
deposits in banks 3,555,635 2,009,414 2,056,232
----------- ----------- -----------
95,884,465 84,176,346 74,657,486
----------- ----------- -----------
INTEREST EXPENSE:
Interest on time deposits 39,339,601 33,689,145 29,410,762
Other 121,249 42,206 37,363
----------- ----------- -----------
39,460,850 33,731,351 29,448,125
----------- ----------- -----------
Net interest income 56,423,615 50,444,995 45,209,361
PROVISION FOR LOAN LOSSES 1,114,000 1,200,000 168,500
----------- ----------- -----------
Net interest income after provision for
loan losses 55,309,615 49,244,995 45,040,861
----------- ----------- -----------
NONINTEREST INCOME:
Trust department income 3,988,309 3,552,331 3,164,482
Service fees on deposit accounts 10,056,506 8,149,244 6,380,471
Gain on sale of foreclosed assets 38,723 125,314 2,082,383
Other 4,538,419 4,015,168 3,402,931
----------- ----------- -----------
18,621,957 15,842,057 15,030,267
----------- ----------- -----------
NONINTEREST EXPENSE:
Salaries and employee benefits 22,449,465 19,865,394 17,498,591
Net occupancy expense 3,567,506 3,165,503 2,609,140
Equipment expense 3,526,464 2,935,525 2,541,790
Printing, stationery, and supplies 1,079,651 1,016,531 958,340
FDIC assessments 141,557 16,504 1,053,504
Other expenses 13,037,358 10,570,266 9,738,433
----------- ----------- -----------
43,802,001 37,569,723 34,399,798
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 30,129,571 27,517,329 25,671,330
INCOME TAX EXPENSE 10,066,466 9,395,078 8,655,717
----------- ----------- -----------
NET EARNINGS $ 20,063,105 $ 18,122,251 $ 17,015,613
=========== =========== ===========
NET EARNINGS PER SHARE $ 2.33 $ 2.17 $ 2.04
=========== =========== ===========
NET EARNINGS PER SHARE,
ASSUMING DILUTION $ 2.31 $ 2.15 $ 2.02
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Unrealized
Gain (Loss)
On Investment
in Securities
Common Stock Capital Retained Available-For
Shares Amount Surplus Earnings Sale, Net
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1994 5,321,191 $ 53,211,910 $ 36,863,701 $ 18,964,400 $ (739,628)
Net earnings - - - 17,015,613 -
Stock issuances 18,002 180,020 6,903 - -
Cash dividends declared,
$0.78 per share - - - (6,062,575) -
Change in unrealized gain (loss) on
investment in securities available-
for-sale, net - - - - 587,467
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1995 5,339,193 53,391,930 36,870,604 29,917,438 (152,161)
Net earnings - - - 18,122,251 -
Stock issuances 42,791 427,910 4,103 - -
Cash dividends declared,
$0.87 per share - - - (7,306,767) -
Stock split, effected in the form
of a dividend 1,336,902 13,369,020 - (13,369,020) -
Change in unrealized gain
(loss) on investment in
securities available-for-sale, net - - - - (114,462)
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 6,718,886 67,188,860 36,874,707 27,363,902 (266,623)
Adjustments for pooling of interests 216,442 2,164,420 (521,224) 2,658,712 (4,283)
---------- ----------- ----------- ----------- -----------
BALANCE, January 1, 1997 6,935,328 69,353,280 36,353,483 30,022,614 (270,906)
Net earnings - - - 20,063,105 -
Stock issuances 34,873 348,730 (2,810) - -
Cash dividends declared,
$0.97 per share - - - (8,274,806) -
Stock split, effected in the
form of a dividend 1,681,394 16,813,940 - (16,813,940) -
Change in unrealized gain
(loss) on investment in
securities available-for-sale, net - - - - 633,773
---------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1997 8,651,595 $ 86,515,950 $ 36,350,673 $ 24,996,973 $ 362,867
========== =========== =========== =========== ===========
The accompanying notes are an integral part of these
consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 20,063,105 $ 18,122,251 $ 17,015,613
Adjustments to reconcile net earnings to net cash
provided by operating activities-
Depreciation and amortization 4,622,748 3,656,912 3,011,510
Provision for loan losses 1,114,000 1,200,000 168,500
Premium amortization, net of discount accretion 998,159 2,377,741 2,506,343
Loss on sale of securities - - 57,094
Gain on sale of foreclosed assets (38,723) (125,314) (2,082,383)
Deferred federal income tax (benefit) expense (109,602) 263,153 322,363
(Increase) decrease in other assets (1,960,333) 655,735 (1,539,477)
(Decrease) increase in other liabilities (3,360,738) (52,942) 714,888
------------ ------------ -----------
Total adjustments 1,265,511 7,975,285 3,158,838
------------ ------------ -----------
Net cash provided by operating activities 21,328,616 26,097,536 20,174,451
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest-bearing deposits in banks 589,823 1,183,531 (291,025)
Cash and cash equivalents received through purchase of
assets and liabilities, net of cash paid 70,702,534 - -
Acquisitions, net of cash and cash equivalents received 10,436,740 (4,554,417) (1,539,560)
Proceeds from sales of securities available-for-sale 10,325,207 498,500 5,483,872
Proceeds from maturities of securities available-for-sale 120,969,599 2,145,980 6,243,610
Proceeds from maturities of securities held-to-maturity 226,259,277 178,627,778 178,425,110
Purchase of securities available-for-sale (260,197,764) (23,521,786) (9,378,654)
Purchase of securities held-to-maturity (157,904,201) (146,296,061) (159,327,570)
Net increase in loans (47,945,272) (30,849,630) (55,244,359)
Capital expenditures (4,743,305) (3,708,326) (3,511,472)
Proceeds from sale of other assets 405,476 743,942 2,446,948
------------ ------------ -----------
Net cash used in investing activities (31,101,886) (25,730,489) (36,693,100)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in noninterest-bearing deposits 11,356,497 13,629,435 7,889,216
Net increase in interest-bearing deposits 77,272,404 26,478,846 21,234,709
Net increase (decrease) in other short-term borrowings 6,090,000 (487,938) (1,096,631)
Proceeds of stock issuances 345,920 432,013 186,923
Dividends paid (7,993,195) (6,980,052) (6,123,066)
------------ ------------ -----------
Net cash provided by financing activities 87,071,626 33,072,304 22,091,151
------------ ------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 77,298,356 33,439,351 5,572,502
CASH AND CASH EQUIVALENTS, beginning of year 125,983,310 92,543,959 86,971,457
------------ ------------ -----------
CASH AND CASH EQUIVALENTS, end of year $ 203,281,666 $ 125,983,310 $ 92,543,959
============ ============ ===========
The accompanying notes are an integral part of these
consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) ("Bankshares") is a
multi-bank holding company which owns (through its wholly-owned Delaware
subsidiary) all of the capital stock of nine banks located in Texas as of
December 31, 1997. Those subsidiary banks are First National Bank of Abilene;
Hereford State Bank; First National Bank, Sweetwater; Eastland National Bank;
First National Bank in Cleburne; Stephenville Bank & Trust Co.; San Angelo
National Bank; Weatherford National Bank; and Texas National Bank, Southlake.
Each subsidiary bank's primary source of revenue is providing loans and banking
services to consumers and commercial customers in the market area in which the
subsidiary is located.
A summary of significant accounting policies of First Financial Bankshares, Inc.
and subsidiaries (the "Company") applied in the preparation of the accompanying
consolidated financial statements follows. The accounting principles followed by
the Company and the methods of applying them are in conformity with both
generally accepted accounting principles and prevailing practices of the banking
industry.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly owned. All significant
intercompany accounts and transactions have been eliminated.
Investment In Securities
Management classifies debt and equity securities as held-to-maturity,
available-for-sale, or trading based on their intent. Securities classified as
held-to-maturity are recorded at cost, adjusted for amortization of premiums and
accretion of discounts, which are recognized as adjustments to interest income
using the interest method. Securities classified as available-for-sale are
recorded at fair value, with unrealized gains and losses, net of deferred taxes,
excluded from earnings and reported in a separate component of shareholders'
equity. Securities classified as trading are recorded at fair value, with
unrealized gains and losses included in earnings. The Company had no trading
securities at December 31, 1997, 1996, or 1995.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned income
and an allowance for loan losses. Unearned income on installment loans is
recognized in income over the terms of the loans in decreasing amounts using a
method which approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amounts outstanding. The allowance for loan losses is established
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when management believes the
collectability 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 has adopted a policy which requires measurement of an impaired
collateral dependent loan based on the fair value of the collateral. Other loan
impairments will be measured based on the present value of expected future cash
flows or the loan's observable market price. At December 31, 1997 and 1996, all
significant impaired loans have been determined to be collateral dependent and
have been measured utilizing the fair value of the collateral.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed principally on a
straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the life of the respective lease or
the estimated useful lives of the improvements, whichever is shorter.
Excess of Cost Over Fair Value of Tangible Assets Acquired (Goodwill)
Goodwill, relating to acquisitions of certain subsidiary banks, is being
amortized by the straight-line method over periods of 15 and 40 years.
Accounting Standard to be Adopted
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) was issued. This statement establishes
standards for reporting and display of comprehensive income and its components
in financial statements for fiscal years beginning after December 15, 1997.
Comprehensive income is the total of net income and all other nonowner changes
in equity. The only component of comprehensive income the Company currently
would be required to report is unrealized holding gains or losses on
available-for-sale securities. The Company plans to adopt SFAS 130 during the
first quarter of 1998.
Per Share Data
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128) was issued. Under SFAS 128, net earnings per share ("EPS")
are computed by dividing net earnings by the weighted average number of shares
of common stock outstanding during the period. SFAS 128 replaces fully diluted
EPS, which the Company was not previously required to report, with EPS, assuming
dilution ("dilutive EPS"). 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
Company adopted SFAS 128 effective December 31, 1997. All prior period EPS data
have been restated. The effect of this accounting change on previously reported
EPS data is not significant. The following table reconciles the computation of
net EPS to dilutive EPS:
Net Per Share
Earnings Shares Amount
----------- ---------- ---------
For the year ended December 31, 1997:
Net earnings per share $ 20,063,105 8,630,727 $ 2.33
=========
Effect of stock options - 60,308
----------- ----------
Net earnings per share, assuming dilution $ 20,063,105 8,691,035 $ 2.31
=========== ========== =========
For the year ended December 31, 1996:
Net earnings per share $ 18,122,251 8,366,021 $ 2.17
=========
Effect of stock options - 82,329
----------- ----------
Net earnings per share, assuming dilution $ 18,122,251 8,448,350 $ 2.15
=========== ========== =========
For the year ended December 31, 1995:
Net earnings per share $ 17,015,613 8,329,694 $ 2.04
=========
Effect of stock options - 105,249
----------- ----------
Net earnings per share, assuming dilution $ 17,015,613 8,434,943 $ 2.02
=========== ========== =========
Earnings and dividends per share have been retroactively adjusted for the effect
of stock dividends and splits.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
presentation.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold.
Accounting for Income Taxes
The Company's current provision for income taxes is generally based on income
before taxes adjusted for permanent differences between financial reporting and
taxable income. Deferred income taxes are provided for temporary differences
between financial reporting and taxable income.
2. CASH AND INVESTMENT IN SECURITIES:
Certain subsidiary banks are required to maintain reserve balances with the
Federal Reserve Bank. During 1997 and 1996, such average balances totaled
approximately $14,170,000 and $12,573,000, respectively.
The amortized cost, estimated market values, and gross unrealized gains and
losses of the Company's investment in securities as of December 31, 1997 and
1996, are as follows:
December 31, 1997
-----------------
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 $ 319,229,372 $ 2,044,473 $ (407,004) $ 320,866,841
Obligations of states and
political subdivisions 34,456,155 525,072 (5,326) 34,975,901
Mortgage-backed securities 47,213,996 254,000 (158,867) 47,309,129
Other securities 10,958,121 54,108 (4,073) 11,008,156
------------ ---------- --------- ------------
Total investment in debt
securities held-to-maturity $ 411,857,644 $ 2,877,653 $ (575,270) $ 414,160,027
============ ========== ========= ============
December 31, 1997
-----------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
Securities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 134,296,093 $ 468,787 $ (273,395) $ 134,491,485
Obligations of states and
political subdivisions 8,168,069 242,438 (2,716) 8,407,791
Mortgage-backed securities 25,100,283 181,682 (58,522) 25,223,443
------------ ---------- --------- ------------
Total investment in debt
securities available-for-sale 167,564,445 892,907 (334,633) 168,122,719
Other securities 2,574,805 - (8) 2,574,797
------------ ---------- --------- ------------
Total investment in securities
available-for-sale $ 170,139,250 $ 892,907 $ (334,641) $ 170,697,516
============ ========== ========= ============
December 31, 1996
-----------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
Securities held-to-maturity:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 364,232,131 $ 1,855,238 $ (1,162,105) $ 364,925,264
Obligations of states and
political subdivisions 25,797,738 153,308 (126,129) 25,824,917
Mortgage-backed securities 62,509,135 142,377 (741,763) 61,909,749
Corporate bonds 10,017,838 71,177 (15,545) 10,073,470
Other securities 4,066,927 8,655 (3,064) 4,072,518
------------ ---------- ----------- ------------
Total investment in debt
securities held-to-maturity $ 466,623,769 $ 2,230,755 $ (2,048,606) $ 466,805,918
============ ========== =========== ===========
December 31, 1996
-----------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Basis Holding Gains Holding Losses Fair Value
------------ ---------- --------- ------------
Securities available for sale:
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 10,276,372 $ - $ (65,401) $ 10,210,971
Obligations of states and
political divisions 1,299,998 - (7,989) 1,292,009
Mortgage-backed securities 32,091,403 156,958 (338,839) 31,909,522
------------ ---------- ----------- ------------
Total investment in debt
securities available-for-sale 43,667,773 156,958 (412,229) 43,412,502
Other securities 1,752,300 - - 1,752,300
------------ ---------- ----------- ------------
Total investment in securities
available-for-sale $ 45,420,073 $ 156,958 $ (412,229) $ 45,164,802
============ ========== =========== ============
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, 1997, were computed by using scheduled amortization of balances and
historical prepayment rates. At December 31, 1997 and 1996, the Company did not
hold any CMOs that entail higher risks than standard mortgage backed securities.
Total investment in debt securities at December 31, 1997 and 1996, included
structured notes with an amortized cost basis of $11,726,000 and $16,539,000,
respectively, and an estimated fair value of $11,555,000 and $16,185,000,
respectively.
The amortized cost and estimated fair value of debt securities held-to-maturity
at December 31, 1997, by contractual and expected maturity, are shown below.
Amortized Estimated
Cost Fair Value
------------ ------------
Due within one year $ 151,424,431 $ 152,385,406
Due after one year through five years 236,240,829 236,984,252
Due after five years through ten years 18,530,342 19,068,423
Due after ten years 5,662,042 5,721,945
------------ ------------
Total debt securities held-to-maturity $ 411,857,644 $ 414,160,026
============ ============
The amortized cost and estimated fair value of debt securities
available-for-sale at December 31, 1997, by contractual and expected maturity,
are shown below.
Amortized Estimated
Cost Fair Value
------------ ------------
Due within one year $ 63,386,416 $ 63,253,676
Due after one year through five years 67,060,597 67,318,668
Due after five years through ten years 17,306,853 17,436,884
Due after ten years 19,810,579 20,113,491
------------ ------------
Total debt securities available-for-sale $ 167,564,445 $ 168,122,719
============ ============
Securities, carried at approximately $149,921,000 and $135,814,000 at December
31, 1997 and 1996, respectively, were pledged as collateral for public or trust
fund deposits and for other purposes required or permitted by law.
During 1997 and 1996, sales from investments in securities that were classified
as available-for-sale totaled $10,325,207 and $498,500, respectively. There were
no gross realized gains or losses from the 1997 and 1996 sales. Specific
identification 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,
1997 1996
------------ ------------
Commercial, financial, and agricultural $ 281,013,252 $ 234,625,234
Real estate - construction 31,494,051 22,106,338
Real estate - mortgage 159,304,837 135,181,766
Consumer 244,980,304 188,250,260
------------ ------------
716,792,444 580,163,598
Unearned income (7,853,742) (7,263,392)
------------ ------------
Total loans $ 708,938,702 $ 572,900,206
============ ============
The Company's recorded investment in impaired loans and the related valuation
allowance are as follows:
December 31, 1997 December 31, 1996
------------------------ -----------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
Impaired loans-
Valuation allowance required $ 4,246,190 $ 1,214,773 $ 3,022,191 $ 956,810
No valuation allowance required - - - -
---------- ---------- ---------- --------
Total at end of year $ 4,246,190 $ 1,214,773 $ 3,022,191 $ 956,810
========== ========== ========== ========
The average recorded investment in impaired loans for the years ended December
31, 1997 and 1996, was approximately $3,634,000 and $2,418,000, respectively.
The Company had approximately $4,505,000 and $3,521,000 in nonperforming assets
at December 31, 1997 and 1996, respectively, of which approximately $3,463,000
and $2,638,000 represented recorded investments in impaired loans.
Interest payments received on impaired loans are recorded as interest income
unless collections of the remaining recorded investment is doubtful, at which
time payments received are recorded as reductions of principal. The Company
recognized interest income on impaired loans of $230,000 and $366,000 during the
years ended December 31, 1997 and 1996, respectively, of which $63,000 and
$133,000 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, 1997 and 1996, respectively, such
income would have approximated $409,000 and $759,000.
The allowance for loan losses as of December 31, 1997 and 1996, is presented
below. Management has evaluated the adequacy of the allowance for loan losses by
estimating the probable losses in various categories of the loan portfolio which
are identified below:
1997 1996
----------- ----------
Allowance for loan losses provided for-
Loans specifically evaluated as impaired $ 1,214,773 $ 956,810
Unidentified impaired loans 9,073,427 8,484,656
----------- ----------
Total allowance for loan losses $ 10,288,200 $ 9,441,466
=========== ==========
The allowance for loan losses is maintained at a level considered adequate to
provide for estimated probable incurred losses resulting from loans. The
allowance is reviewed periodically, and as losses are incurred and the amounts
become estimable, they are charged to operations in the periods that they become
known.
Changes in the allowance for loan losses are summarized as follows:
December 31,
1997 1996 1995
----------- ----------- ----------
Balance at beginning of year $ 9,441,466 $ 9,193,571 $ 9,205,683
Add:
Allowance of acquired banks 1,443,685 800,432 82,700
Provision for loan losses 1,114,000 1,200,000 168,500
Loan recoveries 1,369,823 867,396 755,555
Deduct:
Loan charge-offs (3,080,774) (2,619,933) (1,018,867)
----------- ---------- ----------
Balance at end of year $ 10,288,200 $ 9,441,466 $ 9,193,571
=========== ========== ==========
4. BANK PREMISES AND EQUIPMENT:
The following is a summary of bank premises and equipment:
December 31,
1997 1996
----------- ------------
Land $ 7,525,778 $ 5,221,529
Buildings 40,951,509 36,256,539
Furniture and equipment 24,776,101 20,252,742
Leasehold improvements 5,618,689 5,954,699
----------- ------------
78,872,077 67,685,509
Accumulated depreciation and amortization (37,371,003) (33,230,922)
----------- -----------
$ 41,501,074 $ 34,454,587
=========== ===========
5. TIME DEPOSITS:
Time deposits of $100,000 or more totaled approximately $149,487,000 and
$116,908,000 at December 31, 1997 and 1996, respectively. Interest expense on
these deposits was approximately $7,213,000, $6,222,000, and $6,097,000 during
1997, 1996, and 1995, respectively.
6. NOTE PAYABLE:
The Company has a line of credit with a non-affiliated bank under which it may
borrow up to $10,000,000. The line of credit is unsecured and matures on June
30, 1998. The Company paid no fee to secure the unused line of credit and
accordingly has not estimated a fair value of the unused portion of the line of
credit at December 31, 1997 or 1996. In September 1997, the Company borrowed
$6,200,000 under the line of credit at the London Interbank Offered Rate plus
1.0% (6.8% at December 31, 1997). Interest is payable quarterly beginning
December 31, 1997, with principal due in twenty quarterly installments beginning
September 30, 1998.
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,
1997 1996 1995
----------- ---------- ----------
Current federal income tax $ 10,176,068 $ 9,131,925 $ 8,333,354
Deferred federal income tax (109,602) 263,153 322,363
----------- ---------- ----------
Income tax expense $ 10,066,466 $ 9,395,078 $ 8,655,717
=========== ========== ==========
The provision for income tax expense (benefit), as a percentage of pretax
earnings, differs from the statutory federal income tax rate as follows:
As a Percent of Pretax Earnings
1997 1996 1995
------ ------ ------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Reductions in tax rate resulting from
interest income exempt from
federal income tax (2.0)% (1.4)% (1.2)%
Other 0.4% (0.5)% (0.1)%
------ ------ ------
Effective income tax rate 33.4% 33.1% 33.7%
====== ====== ======
The approximate effects of each type of difference that gave rise to the
Company's deferred tax assets and liabilities at December 31, 1997 and 1996, are
as follows:
1997 1996
---------- ----------
Deferred Tax Assets-
Tax basis of loans in excess of financial statement basis $ 2,876,081 $ 2,844,622
Nondeductible write-downs and adjustments to other
real estate owned and repossessed assets 82,330 147,425
Benefits of a subsidiary bank net operating loss
carryforward 487,116 605,720
Recognized for financial reporting purposes but not
for tax purposes-
Deferred compensation 431,273 274,275
Net unrealized loss on investment in securities
available-for-sale - 143,566
Other deferred tax assets 412,901 440,775
Total deferred tax assets $ 4,289,701 $ 4,456,383
========== ==========
1997 1996
---------- ----------
Deferred Tax Liabilities-
Financial statement basis of fixed assets in excess of
tax basis $ 1,850,623 $ 1,973,700
Recognized for financial reporting purposes but not
for tax purposes-
Accretion on investments 316,976 279,791
Pension plan contribution 528,526 459,231
Net unrealized gain on investment in securities
available-for-sale 195,387 -
Other deferred tax liabilities 127,888 183,654
Total deferred tax liabilities 3,019,400 2,896,376
Valuation allowance (76,877) (137,232)
---------- ----------
Net deferred tax asset $ 1,193,424 $ 1,422,775
========== ==========
At December 31, 1997, the First National Bank in Cleburne ("Cleburne"), a
subsidiary bank, had a net operating loss carryforward for federal income tax
purposes of approximately $1,392,000. In its consolidated return, subject to
certain yearly limitations, the Company can utilize Cleburne's pre-acquisition
net operating loss carryforward to offset future consolidated taxable income
only to the extent Cleburne has future taxable income. If not used, the net
operating loss carryforward expires as follows: $467,000 in 2001, $560,000 in
2002, and $365,000 in 2005.
The valuation allowance was established to recognize the uncertainty of
realization of the benefit related to Cleburne's net operating loss
carryforward. The following summarizes the changes in the allowance account:
1997 1996
--------- --------
Valuation allowance at beginning of period $ 137,232 $ 255,837
Reduction in valuation allowance based on
current period utilization of net operating
loss carryforward (60,355) (118,605)
--------- --------
Valuation allowance at end of period $ 76,877 $ 137,232
========= ========
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 recorded book balances. The
estimation methodologies used, the estimated fair values, and recorded book
balances at December 31, 1997 and 1996, were as follows:
Financial instruments actively traded in a secondary market have
been valued using quoted available market prices.
Estimated Recorded
Fair Book
Value Balance
1997 1996 1997 1996
------------- ------------ ------------- -------------
Cash and due from banks $ 88,795,827 $ 71,677,154 $ 88,795,827 $ 71,677,154
Federal funds sold 114,485,839 54,306,156 114,485,839 54,306,156
Interest-bearing deposits in banks 398,671 888,494 398,671 888,494
Investment in securities 584,857,543 511,970,720 582,555,160 511,788,571
Financial instruments with stated maturities have been valued using
a present value discounted cash flow with a discount rate
approximating current market for similar assets and liabilities.
Financial instrument assets with variable rates and financial
instrument liabilities with no stated maturities have an estimated
fair value equal to both the amount payable on demand and the
recorded book balance.
Estimated Recorded
Fair Book
Value Balance
1997 1996 1997 1996
------------ ------------ ------------ ------------
Deposits with stated maturities $ 501,262,156 $ 413,846,056 $ 500,612,359 $ 413,516,096
Deposits with no stated maturities 912,111,462 708,365,356 912,111,462 708,365,356
Net loans 700,314,184 566,403,655 698,650,502 563,458,740
Note payable 4,700,000 - 4,700,000 -
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
The Company's remaining assets and liabilities, which are not considered
financial instruments, have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Company's deposits is required nor has the Company estimated its value. There is
no material difference between the notional amount and the estimated fair value
of off-balance-sheet unfunded loan commitments which total approximately
$164,000,000 and $124,000,000 at December 31, 1997 and 1996, 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, 1997 and 1996, 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 should have no
material adverse effects upon the results of operations or financial condition
of the Company.
The Company is a lessor for portions of its banking premises. Total rental
income for all leases included in net occupancy expense is approximately
$1,341,000, $1,262,000, and $1,268,000 for the years ended December 31, 1997,
1996, and 1995, respectively.
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 balance
sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Contract or
Notional Amount
------------
Financial instruments whose contract amounts
represent credit risk-
Commitments to extend credit $ 164,000,000
Standby letters of credit 7,900,000
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant, and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The average collateral value held on
letters of credit exceeds the contract amount.
11. CONCENTRATION OF CREDIT RISK:
The Company grants commercial, retail, agriculture, and residential loans to
customers primarily in North Central and West Texas. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the local economic sector.
12. PENSION AND PROFIT SHARING PLANS:
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and a percentage of the
employee's qualifying compensation during the final years of employment. The
Company's funding policy is to contribute annually the amount necessary to
satisfy the Internal Revenue Service's funding standards. Contributions are
intended to provide not only for benefits attributed to service to date but also
for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized
in the Company's balance sheet at December 31, 1997 and 1996.
December 31,
1997 1996
----------- -----------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $6,997,453 and $6,075,131
in 1997 and 1996, respectively $ 7,251,193 $ 6,293,910
=========== ===========
Projected benefit obligation for service
rendered to date $ (8,279,256) $(7,292,311)
Plan assets at fair value, primarily
corporate bonds and equity securities 9,583,507 8,302,751
----------- -----------
Plan assets in excess of projected benefit obligation 1,304,251 1,010,440
Unrecognized net gain from past experience
different than that assumed and effects of
changes in assumptions 109,065 566,989
Unrecognized net asset at January 1, 1987,
being recognized over 10.7 years - (131,387)
----------- -----------
Prepaid pension cost included in other assets $ 1,413,316 $ 1,446,042
=========== ===========
Net pension cost for the years ended December 31, 1997, 1996, and 1995, included
the following components:
Year Ended December 31,
1997 1996 1995
----------- -------- --------
Service cost - benefits earned during the period $ 636,371 $ 622,939 $ 449,581
Interest cost on projected benefit obligation 560,262 491,279 443,934
Actual return on plan assets (1,359,401) (786,037) (783,215)
Net amortization and deferral 497,528 (19,937) 48,889
----------- -------- --------
Net periodic pension cost $ 334,760 $ 308,244 $ 159,189
=========== ======== ========
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:
1997 1996 1995
---- ---- ----
Weighted average discount rate 7.5% 7.5% 7.5%
Rate of increase in future compensation levels 7.5% 7.5% 7.5%
Expected long-term rate of return on assets 8.5% 8.5% 7.5%
The Company also provides a profit sharing plan, which covers substantially all
full-time employees. The profit sharing plan is a defined contribution plan and
allows employees to contribute up to 5% of their base annual salary. Employees
are fully vested to the extent of their contributions and become fully vested in
the Company's contributions over a seven-year period.
Costs related to the Company's defined contribution plan totaled $1,813,117,
$1,710,050, and $1,388,621 in 1997, 1996, and 1995, respectively.
13. DIVIDENDS FROM SUBSIDIARIES:
At December 31, 1997, approximately $9,700,000 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,
1997 and 1996, that Bankshares and each of its subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 1997 and 1996, the most recent notification from each
respective subsidiary's primary regulator categorized each of Bankshares'
subsidiaries as well-capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the institutions' category.
Bankshares' and its significant subsidiaries' actual capital amounts and ratios
are presented in the table below:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
------------ --- ------------ --- ------------ ---
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets):
Consolidated $ 135,097,000 16% >$ 67,713,000 >8% N/A N/A
First National Bank of Abilene $ 53,559,000 16% >$ 26,999,000 >8% >$ 33,749,000 >10%
San Angelo National Bank $ 20,746,000 16% >$ 10,651,000 >8% >$ 13,314,000 >10%
Weatherford National Bank $ 15,026,000 18% >$ 6,572,000 >8% >$ 8,214,000 >10%
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 124,809,000 15% >$ 33,856,000 >4% N/A N/A
First National Bank of Abilene $ 49,341,000 15% >$ 13,500,000 >4% >$ 20,249,000 >6%
San Angelo National Bank $ 19,081,000 14% >$ 5,326,000 >4% >$ 7,988,000 >6%
Weatherford National Bank $ 14,221,000 17% >$ 3,286,000 >4% >$ 4,929,000 >6%
Tier I Capital (to Average Assets):
Consolidated $ 124,809,000 8% >$ 44,913,000 >3% N/A N/A
First National Bank of Abilene $ 49,341,000 8% >$ 17,473,000 >3% >$ 29,121,000 >5%
San Angelo National Bank $ 19,081,000 7% >$ 7,871,000 >3% >$ 13,118,000 >5%
Weatherford National Bank $ 14,221,000 9% >$ 4,675,000 >3% >$ 7,791,000 >5%
As of December 31, 1996:
Total Capital (to Risk-Weighted Assets):
Consolidated $ 134,180,000 20% >$53,279,000 >8% N/A N/A
First National Bank of Abilene $ 51,856,000 16% >$25,158,000 >8% >$31,448,000 >10%
Weatherford National Bank $ 14,920,000 20% >$ 6,108,000 >8% >$ 7,635,000 >10%
Tier I Capital (to Risk-Weighted Assets):
Consolidated $ 125,842,000 19% >$26,640,000 >4% N/A N/A
First National Bank of Abilene $ 47,916,000 15% >$12,579,000 >4% >$18,869,000 >6%
Weatherford National Bank $ 13,999,000 18% >$ 3,054,000 >4% >$ 4,581,000 >6%
Tier I Capital (to Average Assets):
Consolidated $ 125,842,000 10% >$36,293,000 >3% N/A N/A
First National Bank of Abilene $ 47,916,000 9% >$15,899,000 >3% >$26,499,000 >5%
Weatherford National Bank $ 13,999,000 9% >$ 4,463,000 >3% >$ 7,439,000 >5%
15. LOANS TO RELATED PARTIES:
An analysis of the changes in loans to officers, directors, principal
shareholders, or associates of such persons for the years ended December 31,
1997 and 1996, (determined as of each respective year-end) follows:
Balance at Balance at
Beginning Additional End
of Period Loans Payments of Period
----------- ----------- ----------- -----------
Year ended December 31, 1997 $ 49,898,511 $ 79,799,332 $ 84,217,597 $ 45,480,246
=========== =========== =========== ===========
Year ended December 31, 1996 $ 37,063,736 $ 73,543,578 $ 68,731,528 $ 41,875,786
=========== =========== =========== ===========
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.
16. 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, 1997, the Company had allocated 294,538 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, 1997, 1996, and 1995, is presented in
the table and narrative below:
1997 1996 1995
--------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
-------- ------ -------- ------ -------- ------
Outstanding, beginning of year 150,736 $ 15.88 210,373 $ 13.68 194,986 $ 10.92
Granted 4,375 31.20 - - 48,360 20.48
Exercised (37,134) 9.31 (56,826) 8.08 (28,129) 6.64
Canceled (4,578) 19.69 (2,811) 17.91 (4,844) 11.56
-------- ------ -------- ------ -------- ------
Outstanding, end of year 113,399 $ 18.47 150,736 $ 15.88 210,373 $ 13.68
======== ====== ======== ====== ======== ======
Exercisable at end of year 40,967 $ 13.76 40,769 $ 9.55 41,910 $ 7.39
======== ====== ======== ====== ======== ======
The options outstanding at December 31, 1997, have exercise prices between $9.31
and $31.20 with a weighted average exercise price of $18.47 and a weighted
average remaining contractual life of 6.6 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, 1997 and 1996, based on estimates
using an accepted options pricing model.
17. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
Condensed Balance Sheets-December 31, 1997 and 1996
ASSETS 1997 1996
------ ------------ ------------
Cash in subsidiary bank $ 1,116,419 $ 795,959
Interest-bearing deposits in banks 3,700,876 -
------------ ------------
Total cash and cash equivalents 4,817,295 795,959
Investment in securities - 18,646,527
Investment in subsidiaries, at equity 149,797,343 113,248,171
Goodwill, net 894,715 771,188
Other assets 590,487 369,782
------------ ------------
Total assets $ 156,099,840 $ 133,831,627
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities $ 7,873,377 $ 2,670,781
Shareholders' equity-
Common stock 86,515,950 67,188,860
Capital surplus 36,350,673 36,874,707
Retained earnings 24,996,973 27,363,902
Unrealized gain (loss) on investment in securities
available-for-sale, net 362,867 (266,623)
------------ ------------
Total shareholders' equity 148,226,463 131,160,846
------------ ------------
Total liabilities and shareholders' equity $ 156,099,840 $ 133,831,627
============ ============
Condensed Statements of Earnings-
For the Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
----------- ----------- -----------
Income-
Cash dividends from subsidiary banks $ 16,350,000 $ 19,000,000 $ 12,890,000
Excess of earnings (dividends) over dividends
(earnings) of subsidiary banks 4,120,476 (357,114) 4,327,523
Other income 1,377,445 975,944 1,290,192
----------- ----------- -----------
21,847,921 19,618,830 18,507,715
----------- ----------- -----------
Expenses-
Salaries and employee benefits 1,220,436 1,118,226 936,527
Other operating expenses 753,649 625,030 631,219
----------- ----------- -----------
1,974,085 1,743,256 1,567,746
----------- ----------- -----------
Earnings before income taxes 19,873,836 17,875,574 16,939,969
Income tax benefit 189,269 246,677 75,644
----------- ----------- -----------
Net earnings $ 20,063,105 $ 18,122,251 $ 17,015,613
=========== =========== ===========
Condensed Statements of Cash Flows-
For the Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
------------ ------------- -------------
Cash flows from operating activities-
Net earnings $ 20,063,105 $ 18,122,251 $ 17,015,613
Adjustments to reconcile net earnings to net
cash provided by operating activities-
Excess of (earnings) dividends over
(dividends) earnings of subsidiary banks (4,120,476) 357,114 (4,327,523)
Depreciation 38,802 42,130 28,922
Discount accretion, net of premium
amortization (730,260) (381,799) (709,081)
Amortization of goodwill 46,135 46,135 46,135
(Increase) decrease in other assets (204,916) 169,028 (240,739)
Increase (decrease) in liabilities 237,525 (138,267) 225,179
------------ ------------- -------------
Net cash provided by operating activities 15,329,915 18,216,592 12,038,506
------------ ------------- -------------
Cash flows from investing activities-
Capital expenditures (54,638) (19,031) (27,863)
Capital contribution to subsidiary (28,000,000) - -
Cash payment for stock in acquisition - (13,097,678) -
Cash acquired in acquisition 316,500 - -
Proceeds from maturities of securities 74,088,129 37,450,000 58,813,961
Purchases of securities (54,711,342) (35,893,703) (64,903,945)
------------ ------------- -------------
Net cash used in investing activities (8,361,351) (11,560,412) (6,117,847)
------------ ------------- -------------
Cash flows from financing activities-
Proceeds of stock issuances 326,790 432,013 186,923
Proceeds from debt 6,200,000 - -
Repayment of debt (1,500,000) - -
Cash dividends paid (7,974,018) (6,980,052) (5,907,078)
------------ ------------- -------------
Net cash used in financing activities (2,947,228) (6,548,039) (5,720,155)
------------ ------------- -------------
Net increase in cash and cash equivalents 4,021,336 108,141 200,504
Cash and cash equivalents at beginning of the year 795,959 687,818 487,314
------------ ------------- -------------
Cash and cash equivalents at end of the year $ 4,817,295 $ 795,959 $ 687,818
============ ============= =============
18. BUSINESS COMBINATIONS:
In November 1997, the Company exchanged approximately 216,000 shares of its
common stock for all the outstanding shares of Southlake Bancshares, Inc.
("Southlake") and its wholly-owned subsidiary, Texas National Bank. The
Southlake shareholders received 0.894 shares of the Company's common stock for
each share of Southlake common stock owned. The consolidated financial
statements of the Company for 1997 give effect to the merger which was accounted
for as a pooling of interests. Due to immateriality, the transaction has been
recorded as an adjustment to beginning shareholders' equity as of January 1,
1997, without restating balance sheets or statements of earnings for years prior
to 1997.
In September 1997, the Company, through a bank subsidiary, acquired certain
assets of Texas Commerce Bank - San Angelo for $16,800,000 in cash, and the
assumption of certain liabilities (primarily deposits). The total purchase price
exceeded the fair market value of net assets acquired by approximately
$18,000,000, which was recorded by the Company as goodwill to be amortized using
a straight-line method over a period of 15 years. The pro forma impact of this
acquisition is not material to the Company's financial statements.
In January 1996, the Company purchased substantially all of the outstanding
stock of Citizens Equity Corporation, Inc. ("Citizens") and its subsidiary,
Citizens National Bank of Weatherford, for approximately $7,500,000 in cash,
along with the assumption of Citizens' debt of approximately $5,600,000 . The
total purchase price exceeded the fair market value of net assets acquired by
approximately $4,900,000, which was recorded by the Company as goodwill to be
amortized using a straight-line method over a period of 15 years. The pro forma
impact of Citizens is not material to the Company's financial statements.
In January 1996, the Company exchanged common stock for all of the outstanding
shares of Weatherford National Bancshares, Inc. ("Weatherford") and its
wholly-owned subsidiary, Weatherford National Bank. The Weatherford shareholders
received 1.5 shares of the Company's common stock for each share of Weatherford
common stock owned. This business combination was accounted for as a pooling of
interests. Accordingly, the accounts of Weatherford have been combined with
those of the Company to reflect the results of these companies on a combined
basis.
19. CASH FLOW INFORMATION:
Supplemental information on cash flows and noncash transactions is as follows:
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
Supplemental cash flow information-
Interest paid $ 38,665,920 $ 33,882,463 $ 28,704,648
Federal income taxes paid 9,840,665 8,933,024 8,732,667
Schedule of noncash investing and financing activities-
Debt assumed in acquisition - 5,555,017 -
Assets acquired through foreclosure 40,585 47,342 472,045
Change in unrealized gain (loss) on investment in
securities available-for-sale 968,446 (176,095) 903,795
Acquisitions-
Assets acquired 85,044,000 98,200,000 -
Liabilities assumed 155,747,000 90,700,000 -
Cash paid for stock - 7,500,000 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Arthur Andersen LLP has served as the Company's independent
accountants since 1990. There have been no disagreements between management of
Bankshares and its current independent accountants relating to accounting
practices and procedures or financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by Item 401 of Regulation S-K will be
contained in the 1998 Notice to Shareholders under the Captions "Election of
Directors" and "Executive Officers" and is hereby incorporated by reference.
Item 11. Executive Officer Compensation
The information required by Item 402 of Regulation S-K will be
contained in the 1998 Notice to Shareholders under the captions "Compensation of
Executive Officers" and "Stock Options" and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a.) Security ownership of certain beneficial owners.
At December 31, 1997, management was not aware of any person
(including any "group" as that term is used in Section 13(d)(3) of the
Securities Exchange Act of 1934) who is the beneficial owner of more than five
percent (5%) of the Company's common stock. However, First National Bank of
Abilene, First National Bank, Sweetwater, and Stephenville Bank & Trust Co. held
of record in various fiduciary capacities an aggregate of 1,590,218 shares of
such stock. Of the total shares held, these subsidiaries of the Company had sole
power to vote 803,816 shares (9.29%), 137,135 shares (1.6%), and 1,757 shares
(-%), respectively. In addition, First National Bank of Abilene shared, with
other persons, the power to vote the remaining 647,510 shares. All the shares
held by each subsidiary bank, which are registered in its name as fiduciary or
in the name of its nominee, are owned by many different accounts, each of which
is governed by a separate instrument that sets forth the powers of the fiduciary
with regard to the securities held in such accounts.
b.) Security ownership of management
Set forth in the following table is certain information as of March 4,
1998, as to the number of shares of Common Stock beneficially owned by each
Director of the Company, by each nominee for election as a director, by the
Company's executive officers, and by the officers and directors of the Company
as a group.
Number of Shares
Beneficially Percent
Name Owned of Class
- -------------------- --------- -----
Joseph E. Canon 6,558 0.1%
Mac A. Coalson 93,082 1.1
David Copeland 2,838 -
F. Scott Dueser 67,685 0.8
Patrick N. Gerald 31,610 0.4
Kade L. Matthews 57,827 0.7
Raymond McDaniel, Jr. 36,115 0.4
Bynum Miers 21,020 0.2
Kenneth T. Murphy 101,872 1.2
Dian Graves Owen 21,678 0.3
James M. Parker 320,098 3.7
Jack D. Ramsey, M.D. 68,581 0.8
Craig Smith 44,135 0.5
F. L. Stephens 1,000 -
H. T. Wilson 68,234 0.8
Walter F. Worthington 172,434 2.0
Curtis R. Harvey 5,154 -
Tommy J. Barrow 408 -
--------- ----
All Officers and Directors as a group 1,120,329 12.9%
c.) Changes in control
There have been no events to the Registrant's knowledge which have or
will result in a change of control of the Registrant.
PART IV
Item 13. Certain Relationships and Related Transactions
Certain of Registrant's officers and directors are customers of one
or more of Registrant's subsidiary banks, as are corporations and other business
entities with which directors of Bankshares are affiliated as directors,
officers or principals. All loans to directors and officers of Bankshares, or to
persons and firms with which they are or may be affiliated, were and are made in
the ordinary course of business and on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other persons and did not, and do not, involve more than the
normal risk of collectability or present other unfavorable features. None of the
transactions involving Bankshares' subsidiaries and Bankshares' officers and
directors, or other businesses with which they may be affiliated, have been
classified or disclosed as nonaccrual, past due, restructured or potential
problems.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The consolidated financial statements of the Registrant filed with
this report are included on pages 26 through 48. There were no financial
statement schedules filed as a part of this report. Such information, to the
extent applicable, has been made a part of the consolidated financial statements
or included elsewhere in this report.
The Registrant's Articles of Incorporation and Bylaws and
material contracts have been filed with the Securities and Exchange Commission
in "Exhibits to Form S-15" under Registration No. 2-73141.
Copies of the following documents were filed with the Form 10-K
Annual Report for the fiscal year ended December 31, 1984.
1. Joint Venture Agreement between First National Bank of Abilene and
Crow-Griffin #1.
2. Lease Agreement between First National Bank of Abilene and Crow/First
Joint Venture.
3. Deferred Compensation Agreement between Bankshares and Walter F.
Johnson.
The following documents were filed with the Form 10-K Annual Report for the
fiscal year ended December 31, 1988.
1. Articles of Amendment to the Articles of Incorporation adopted at the
1988 Annual Meeting of Shareholders.
2. Restated Bylaws adopted by the Board of Directors on January 24, 1989.
The following documents were filed with the Form 10-K Annual Report for the
fiscal year ended December 31, 1992.
1. Amendment to Registrant's Bylaws effective January 28, 1992, relative to
emeritus directors.
2. Deferred Compensation Agreement between Bankshares and Kenneth T.
Murphy.
The following document was filed with the Form 10-K Annual Report for the
fiscal year ended December 31, 1994.
1. Amendment to Registrant's Bylaws effective April 26, 1994.
The following document was filed with the Form 10-K Annual Report for the
fiscal year ended December 31, 1995.
1. Revised Deferred Compensation Agreement between Bankshares and Kenneth
T. Murphy.
The following documents were filed with the Form 10-K Annual Report for the
fiscal year ended December 31, 1996.
1. Executive Recognition Plan
2. Executive Recognition Agreement
Listed below are the exhibits filed with this report.
1. Subsidiaries of Registrant
SUBSIDIARIES OF REGISTRANT
Place of Percentage of Voting
Name of Subsidiary Organization Securities Owned
- ------------------ ------------ --------------------
First Financial Bankshares of Delaware 100%
Delaware, Inc
First Financial Investments, Inc. Texas 100%
First National Bank of Abilene Texas 100%*
Abilene, Texas
Hereford State Bank Texas 100%*
Hereford, Texas
First National Bank, Sweetwater Texas 100%*
Sweetwater, Texas
Eastland National Bank Texas 100%*
Eastland, Texas
First National Bank in Cleburne Texas 100%*
Cleburne, Texas
Stephenville Bank & Trust Co. Texas 100%*
Stephenville, Texas
San Angelo National Bank Texas 100%*
San Angelo, Texas
Weatherford National Bank Texas 100%*
Weatherford, Texas
Texas National Bank Texas 100%*
Southlake, Texas
* By First Financial Bankshares of
Delaware, Inc.
All subsidiaries (other than First Financial Investments, Inc. which, as of
December 31, 1997, had not yet been formally organized) are included in the
consolidated financial statements.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
(Registrant)
By:/S/ KENNETH T. MURPHY By:/S/ CURTIS R. HARVEY
KENNETH T. MURPHY, Chairman CURTIS R. HARVEY, Executive
of the Board, President, Vice President, Chief Financial
Chief Executive Officer and Director Officer, Controller and Chief
Accounting Officer
Date: March 12 , 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ----------------------- Director March , 1998
Joseph E. Canon
/S/ MAC A. COALSON Director March 12 , 1998
- ----------------------- ----
Mac A. Coalson
/S/ F. SCOTT DUESER Director March 17 , 1998
- ----------------------- ----
F. Scott Dueser
/S/ PATRICK N. GERALD Director March 17 , 1998
- ----------------------- ----
Patrick N. Gerald
- ----------------------- Director March , 1998
Robert E. Hitt
/S/ RAYMOND A. MCDANIEL, JR. Director March 17 , 1998
- ---------------------------- ----
Raymond A. McDaniel, Jr.
/S/ BYNUM MIERS Director March 17 , 1998
- ----------------------- ----
Bynum Miers
- ----------------------- Director March , 1998
Dian Graves Owen
/S/ JAMES M. PARKER Director March 17 , 1998
- ----------------------- ----
James M. Parker
/S/ JACK D. RAMSEY, M.D. Director March 17 , 1998
- ------------------------ ----
Jack D. Ramsey, M.D.
/S/ CRAIG SMITH Director March 17 , 1998
- ----------------------- ----
Craig Smith
/S/ H. T. WILSON Director March 11 , 1998
- ----------------------- ----
H.T. Wilson
/S/ WALTER F. WORTHINGTON Director March 12 , 1998
- ------------------------- ----
Walter F. Worthington