-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S2lcvTdPD7vghJDM3mFclSjcyQ2B6gXVkEVEzXAEu8nh92qjp9unbLoVNah+NPov w1W+mwabcIsjkCar/vULyw== 0000036029-96-000003.txt : 19960401 0000036029-96-000003.hdr.sgml : 19960401 ACCESSION NUMBER: 0000036029-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL BANKSHARES INC CENTRAL INDEX KEY: 0000036029 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 750944023 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-07674 FILM NUMBER: 96540965 BUSINESS ADDRESS: STREET 1: 400 PINE STREET THIRD FL STREET 2: P O BOX 701 CITY: ABILENE STATE: TX ZIP: 79601-0701 BUSINESS PHONE: 9156757155 10-K 1 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, 1995 0-7674 FIRST FINANCIAL BANKSHARES, INC. (Exact Name of Registrant as Specified in its Charter) Texas 75-0944023 (State of Incorporation) (I.R.S. Employer Identification No.) 400 Pine Street, Abilene, Texas 79601 (Address of Executive Offices) (Zip Code) Registrant's Telephone Number (915) 675-7155 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Par Value $10.00 Per Share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . The aggregate market value of voting stock held by nonaffiliates of the registrant was $156,057,811 as of March 6, 1996. The number of shares of common stock outstanding at March 6, 1996 was 5,340,791. Documents Incorporated by Reference List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated. None PAGE TABLE OF CONTENTS Item Page PART I 1. Business 1 2. Properties 12 3. Legal Proceedings 13 4. Submission of Matters to a Vote of Security Holders 14 PART II 5. Market for Registrant's Common Stock and Related Security Holder Matters 14 6. Selected Financial Data 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16 8. Financial Statements and Supplementary Data 25 9. Changes in and Disagreements with Accountants and Financial Disclosure 46 PART III 10. Directors and Executive Officers of the Registrant 46 11. Director and Officer Compensation 48 12. Security Ownership of Certain Beneficial Owners and Management 53 13. Certain Relationships and Related Transactions 54 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8K 54 Signatures PAGE 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 multi-bank holding company under the Bank Holding Company Act of 1956, as amended. On December 31, 1995 Bankshares owned (through its wholly-owned Delaware subsidiary) all of the capital stock of seven banks located in Texas: First National Bank of Abilene, Abilene, Texas ("First Abilene"); Hereford State Bank, Hereford, Texas ("Hereford"); First National Bank Sweetwater, Texas ("First Sweetwater"); Eastland National Bank, Eastland, Texas ("Eastland"); First National Bank in Cleburne, Cleburne, Texas ("First Cleburne"); Stephenville Bank & Trust Co., Stephenville, Texas ("Stephenville"); and Southwest Bank of San Angelo, San Angelo, Texas ("San Angelo"). Bankshares was formed in 1956 at the direction of the Board of Directors of the Farmers and Merchants National Bank of Abilene (a national bank organized in Abilene, Texas, in 1889, changing its name to First National Bank of Abilene in 1957). The corporation's initial name was F & M Operating Company (F & M), and it was originally authorized to and did issue ten shares of stock having a par value of $100.00 each. The ten shares were issued to three officers of the Bank under a trust agreement by which the three trustees would hold the F & M stock for the ratable benefit of the shareholders of First National Bank of Abilene. The original purposes in organizing the corporation were to provide a separate entity to own, operate and maintain parking lots, parking garages, buildings and real estate, and to buy, sell and lease personal property such as bank notes and automobiles. In 1968, F & M purchased 200,000 shares of newly authorized and issued stock of Bank of Commerce, Abilene, Texas ("BOC"). The purchase was made after the State Banking Commission of Texas required that new capital funds be injected into BOC. In the resulting increased capitalization of BOC, the authorized and outstanding shares of BOC common stock were increased from 300,000 to 700,000, with the 400,000 new shares being offered at $2.00 per share. In addition, F & M acquired by proxy assignments the power to vote an additional 66,000 shares of BOC stock. These proxies expired January 1, 1975. The First National Bank Employees' Profit Sharing Trust originally purchased 28,177 shares of BOC stock. In November 1971, the Board of Directors of First Abilene authorized the reorganization of F & M into a multi-bank holding company and the commencement of proceedings to effect a merger which would permit First Abilene to be wholly owned by the holding company. The merger was submitted for review and approval by federal regulatory authorities in April 1972. B. Reorganization, Mergers, and Acquisitions F & M's reorganization was accomplished in September 1972. Its name was changed to First Abilene Bankshares, Inc., and it was recapitalized by reducing the par value of its stock to $10.00 per share and increasing the authorized shares to 500,000. The merger was approved in January 1973, and became effective in April of that same year. As a result, the shareholders of First Abilene became shareholders in Bankshares, and Bankshares became the owner of all of the outstanding shares of First Abilene (except for the qualifying shares owned by directors). In 1974, Bankshares acquired the remaining outstanding common stock of BOC (except for six shares amounting to approximately .01%) by an offer (registered under the Securities Act of 1933) to exchange one share of Bankshares' common stock for each 13-1/3 outstanding shares of BOC common stock. The exchange was effected on May 1, 1974. In late 1987, Bankshares purchased the remaining six shares of BOC stock, paying $82.00 in cash for each share. Effective April 1, 1974, Bankshares acquired all the outstanding capital stock of Hereford through an offer (also registered under the Securities Act of 1933) to exchange one share of Bankshares' common stock and $175 cash for each outstanding share of Hereford. Effective September 4, 1981, Bankshares acquired all the outstanding capital stock of First Sweetwater through an offer (registered under the 1933 Act) to exchange one share of Bankshares' common stock for each outstanding share of First Sweetwater stock. PAGE Effective June 8, 1982, Bankshares acquired all of the outstanding capital stock of Eastland through an offer (registered under the 1933 Act) to exchange 3-1/2 shares of Bankshares' common stock for each outstanding share of Eastland stock. Effective July 31, 1987, American National Bank of Abilene ("American National") was merged with and into First Abilene. Following approval of the merger by the Board of Directors and Shareholders of each bank, all of the issued and outstanding common stock of American National were tendered for exchange and First Abilene paid $11.50 for each of American National's 200,000 shares of common stock. The merger was approved by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the United States Department of Justice. The premises formerly occupied by American National, both its main banking offices and drive-in banking facility, are now being operated by First Abilene as a branch bank. On July 21, 1988, Hereford acquired 11,576 shares of First Tule Bancorp, Inc. in Tulia, Texas ("First Tule"), a registered bank holding company, the principal asset of which is all, or substantially all, of the capital stock of The First National Bank, Tulia, Texas ("FNB Tulia"). Although the Bank Holding Company Act of 1956, as amended, generally requires approval of the Federal Reserve Board prior to acquiring more than 5% of the outstanding capital stock of any bank or bank holding company, the acquisition by Hereford of the First Tule stock was effected under an exemption for acquisitions of voting securities in satisfaction of debt previously contracted. The shares of First Tule were transferred to Hereford in partial satisfaction of indebtedness owed to Hereford by three individuals and secured, in part, by such shares of stock in First Tule. Since the date it acquired the stock, Hereford attempted to sell or otherwise dispose of the stock, but was unable to do so because of pending litigation against FNB Tulia. Full disclosure of the acquisition by Hereford of the First Tule stock was made to federal and state banking authorities and continued holding of the stock was approved by bank regulatory authorities while Hereford attempted to sell such stock. However, under the Bank Holding Company Act (and Regulation Y adopted by the Federal Reserve Board pursuant to the Act), Hereford was required to dispose of the First Tule stock within five (5) years after having acquired the same, but had not been able to do so. While Hereford was in technical violation of the Act and Regulation Y, such circumstance existed with the knowledge and apparent acquiescence of federal and state banking authorities and neither Registrant nor Hereford had any reason to believe that any adverse action would be taken against Hereford or Registrant by reason of Hereford's continued ownership of the shares of First Tule so long as Hereford, in good faith, continued its efforts to liquidate or dispose of such shares. Neither First Tule nor FNB Tulia was deemed or considered to be a subsidiary of the Registrant. By reason of the settlement or other disposition of the remaining lawsuits against FNB Tulia, as well as the efforts of the remaining shareholders of First Tule to find a purchaser for their shares or those of FNB Tulia, First Tule consummated in June 1995, a Merger and Plan of Reorganization Agreement with Norwest Corporation which resulted in the shares of First Tule held by Hereford being exchanged for $1,652,741 cash. Effective January 1, 1989, BOC was merged with and into First Abilene and its state charter surrendered to the State of Texas for cancellation. First Abilene received all of the assets of BOC and assumed all of its liabilities. The banking offices and drive-in facility of BOC are now being operated as a branch banking facility of First Abilene. The merger and branch banking action was undertaken to achieve greater efficiency from the combined operation of First Abilene and BOC and to provide improved convenience for each bank's customers. In January of 1990, Bankshares' Board of Directors authorized a state franchise tax savings program designed to substantially reduce the amount of corporate franchise taxes paid by Bankshares. Pursuant to that program, a second bank holding company was formed in the State of Delaware, First Abilene Bankshares of Delaware, Inc. (the "Delaware BHC"). With the approval of the Federal Reserve Board, and effective March 28, 1990, the Delaware BHC became the owner and holder of all of the outstanding shares of Bankshares' subsidiary banks and, in turn, the Delaware BHC became the sole subsidiary of Bankshares and is wholly-owned and controlled by Bankshares. The corporate offices of the Delaware BHC are located in the State of Delaware and, as defined by Texas franchise tax statutes, the new subsidiary is not considered to be doing business in the State of Texas. Effective December 21, 1990, the Delaware BHC, using funds provided by Bankshares, purchased all of the outstanding stock of First Cleburne for $4,700,000 in cash. 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. PAGE 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 that certain Stock Exchange Agreement and Plan of Reorganization dated December 7, 1993, Bankshares acquired 190,622 shares (98.22%) of the issued and outstanding shares of Concho Bancshares, Inc. ("Concho"), a Texas corporation and bank holding company, which owned all of the capital stock of San Angelo, a Texas state bank located in the City of San Angelo, Tom Green County, Texas. San Angelo owned all of the issued and outstanding capital stock of SWB Investment Centre, Inc. ("SWB"), a Texas corporation providing securities brokerage services. The shares of Concho common stock acquired by Bankshares were contributed by Bankshares to the capital of the Delaware BHC and effective May 1, 1994, pursuant to the corporation laws of the States of Delaware and Texas, Concho was merged with and into the Delaware BHC so that San Angelo became a subsidiary of the Delaware BHC. As part of the merger of the Delaware BHC and Concho, minority shareholders of Concho tendered an additional 2,649 shares of Concho common stock in exchange for shares of Bankshares' common stock and cash. In connection with the acquisition of Concho by Bankshares and the subsequent merger of Concho with and into the Delaware BHC, Bankshares issued 232,080 shares of its common stock and paid $44,531 in cash in lieu of issuing fractional shares of Bankshares' common stock. 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 is still the intent of Bankshares to 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, 1995, two of Bankshares' subsidiary banks (First Abilene and San Angelo) were providing brokerage services through The Stephens Company, a national brokerage firm headquartered in Little Rock, Arkansas, and its affiliated company, Link Investment Services, Inc. On September 7, 1995, First Financial entered into a Stock Purchase and Sale Agreement with (1) Citizens Equity Corp. ("Citizens Equity"), a Texas corporation and bank holding company, (2) Citizens Equity's subsidiary, The Citizens National Bank of Weatherford ("Citizens National"), a national bank located in Weatherford, Texas, and (3) various persons (the "Principal Shareholders") owning, in the aggregate, more than two-thirds (2/3) of the issued and outstanding shares of the common stock of Citizens Equity ("Citizens Equity Stock"). Pursuant to the Stock Purchase and Sale Agreement, the Principal Shareholders agreed to sell to Bankshares all of their shares of Citizens Equity Stock for $60.00 per share, subject to certain price adjustments stated in the Agreement. Bankshares also made a cash tender offer to the remaining shareholders of Citizens Equity to acquire their shares of Citizens Equity Stock at the same price per share ($60.00). Consummation of the transaction was conditioned upon tender of 100% of the issued and outstanding shares of Citizens Equity Stock, the acquisition by Citizens Equity of all (or substantially all) of the remaining shares of Citizens National common stock not owned by Citizens Equity, and the redemption by Citizens Equity of all 311 shares of its issued and outstanding preferred stock. The transaction was consummated on January 17, 1996, and Bankshares acquired all of the Citizens Equity Stock for $6,394,800 in cash. Simultaneously, Bankshares caused Citizens Equity to redeem all of its preferred stock so that Bankshares now owns 100% of the issued and outstanding shares of the capital stock of Citizens Equity. PAGE On October 20, 1995, Bankshares entered into a Stock Exchange Agreement and Plan of Reorganization ("Exchange Agreement") with (1) Weatherford National Bancshares, Inc. ("Weatherford Bancshares"), a Texas corporation and bank holding company, (2) Weatherford National Bancshares' subsidiary bank holding company, Parker Bancshares, Inc. ("Parker Bancshares"), a Delaware corporation, and (3) Parker Bancshares' subsidiary, Weatherford National Bank ("Weatherford National"), a national bank located in Weatherford, Parker County, Texas. Pursuant to the Exchange Agreement, Bankshares made a tender offer (registered under the 1933 Act) to acquire all (but not less than 90%) of the outstanding capital (common) stock of Weatherford National Bancshares ("Weatherford Bancshares Stock"). Subject to certain conditions precedent stated in the Exchange Agreement, Bankshares offered to exchange 1.5 shares of its common stock for each share of Weatherford National Bancshares Stock; provided, that no fractional shares of Bankshares stock would be issued and cash would be paid in lieu of fractional shares on the basis of Bankshares stock having a market value of $33.34 per share. On January 15, 1996, the Escrow Agent named in the Exchange Agreement had received more than 90% of the outstanding Weatherford National Bancshares Stock for exchange and consummation of the stock exchange was commenced on January 17, 1996. Bankshares has now acquired all outstanding shares of Weatherford National Bancshares Stock and, in exchange, Bankshares issued 323,977 shares of its common stock (and paid $166.70 in lieu of fractional shares) in exchange for the Weatherford National Bancshares Stock. It is the intent of Bankshares to merge both Citizens Equity and Weatherford National Bancshares with and into Bankshares, to merge Parker Bancshares with and into the Delaware BHC, and to merge Citizens National with and into Weatherford National. The holding company mergers will be accomplished in accordance with applicable state laws and do not require approval of the Federal Reserve Board, the OCC or other regulatory authorities. The merger of Citizens National into Weatherford National does require approval of the OCC and on February 12, 1996, an Application to Merge Citizens National with and into Weatherford National was filed with the OCC. It is anticipated that each of the holding company mergers, as well as the merger of Citizens National into Weatherford National, will be completed early in the second quarter of 1996. C. Mode of Conducting Business Bankshares operates principally in order to give the affiliated banks access to additional management and technical resources which help them to improve or expand their banking services while continuing their local activity and identity. Each of the affiliated banks operates under the day-to-day management of its Board of Directors and officers, with substantial authority in making decisions concerning their own investments, loan policies, interest rates and service charges. Bankshares provides assistance to the affiliated banks, especially with respect to decisions concerning major capital expenditures, employee fringe benefits, including pension plans, group insurance, dividend policies, appointment of officers and directors of affiliated banks and their compensation. The internal audit and loan review functions are centralized at Bankshares. Each of these corporate staff groups perform on-site operational audits and loan reviews of the subsidiary banks. Bankshares, through First Abilene, provides advice to and specialized services for the affiliated banks in such areas as lending, investments, purchasing, advertising, public relations, and computer services. Each Bankshares' subsidiary is engaged in the general commercial banking business consisting of the acceptance of checking, savings and time deposits, the making of loans, transmitting funds and performing such other banking services as are usual and customary for commercial banks. First Abilene, Hereford, First Sweetwater, and Stephenville have active trust departments. The trust departments offer a complete range of services to individuals, associations, and corporations. They include the administration of estates, testamentary trusts, and various types of living trusts and agency accounts. Other sources of revenue are services for businesses, including administering pension, profit sharing and other employee benefit plans, acting as stock transfer agents or stock registrar, and providing paying agent services. First Abilene and San Angelo provide securities brokerage services through an arrangement with Link Investment Services, Inc. D. Competition Commercial banking in Texas is very competitive and Bankshares, holding less than 1% of deposits, represents only a minor segment of the industry. Success is dependent upon being able to compete in the areas of interest rates paid or charged and scope of services offered and prices charged therefor. Subsidiary banks of Bankshares compete in their respective service areas with highly competitive banks, savings and loan associations, small loan companies, credit unions, and brokerage firms, all of which are engaged in providing financial products and services. PAGE 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 589 full-time employees at March 1, 1996. 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 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, Citizens National and Weatherford National are all chartered under the National Bank Act and are subject to supervision and regulation, as well as regular examination, by the Office of the Comptroller of the Currency of the United States ("OCC"). Hereford, Stephenville and San Angelo were all chartered under the Texas Banking Code (which, effective September 1, 1995, has been 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. PAGE First Abilene, Hereford, First Sweetwater, First Cleburne, Eastland, Stephenville, San Angelo, Citizens National and Weatherford National are members of the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Act requires that the Federal Deposit Insurance Corporation ("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, 1995, 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 1992 ("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, 1995. 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. PAGE 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 First Financial 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, 1995, the capital ratios for Bankshares were as follows: (1) Tier 1 Capital to Risk-Weighted Assets Ratio, 20.25%; (2) Total Capital to Risk-Weighted Assets Ratio, 21.51%; and (3) Tier 1 Capital Leverage Ratio, 10.94%. 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 6% ratio of stockholders equity (stated capital, surplus capital, surplus and undivided profits or retained earnings) to total assets. As of December 31, 1995, 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 beheld 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. PAGE 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 it 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 of the Office of the Comptroller of the Currency (the "OCC"), as the case may be, for the declaration and payment of dividends if the total of all dividends declared by the board of directors of such bank in any year will exceed the total of (i) such bank's net profits (as defined and interpreted by regulation) for that year plus (ii) the retained net profits (as defined and interpreted by regulation) for the preceding two (2) years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation). Effective September 1, 1995, the newly-adopted 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. In 1995, under the foregoing dividend restrictions, Bankshares' subsidiary banks, without obtaining governmental approvals, could have declared aggregate dividends of approximately $16.1 million from retained net profits. During 1995 Bankshares' subsidiary banks paid an aggregate of $8.7 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. PAGE 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. In 1995, several bills were introduced in Congress that would have the effect of broadening the securities underwriting powers of bank holding companies and possibly permitting bank holding companies to engage in nonfinancial activities. 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:
December 31, 1995 1994 1993 1992 1991 Comm- ercial, finan- cial, and agri- cultural $204,038,678 $173,410,963 $198,561,759 $190,785,608 $178,698,515 Real estate- construction 16,730,451 11,244,692 6,777,796 5,159,484 3,446,053 Real estate- mortgage 108,464,767 115,172,072 113,697,844 95,903,542 100,014,995 Consumer 151,980,465 125,732,896 101,205,604 82,637,708 67,973,955 $481,214,361 $425,560,623 $420,243,003 $374,486,342 $350,133,518
Loan Concentrations At December 31, 1995, the Company had $70,124,712 million in loans outstanding to agricultural which represented 14.57% of total loans. Table 2 - Maturity Distribution and Interest Sensitivity of Loans at December 31, 1995:
Over One Year One Year or Through Over Five less Five years Years Total Commercial, financial, and agri- cultural $157,417,168 $41,072,766 $5,548,744 $204,038,678 Real estate - construction 11,841,690 4,888,761 - 16,730,451 $169,258,858 $45,961,527 $5,548,744 $220,769,129
Maturities After One Year Loans with fixed interest rates $ 12,926,822 Loans with floating or adjustable interest rates 38,583,449 $ 51,510,271
PAGE 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 concerns 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 $1,481,918 at December 31, 1995. Table 3 - Composition of Investment Securities
Held -to- Maturity December 31, 1995 1994 1993 U.S. Treasury obligations and obligations of U.S. government corporations and agencies $ 358,287,502 $ 392,359,163 $ 391,622,606 Obligations of states and political subdivisions 20,104,257 17,396,179 17,484,965 Mortgage-backed securities 36,598,419 25,457,118 44,716,714 Total debt securities 414,990,178 435,212,460 453,824,285 Other securities 12,464,920 - 2,355,251 $ 427,455,098 $ 435,212,460 $ 456,179,536 Available -for- Sale December 31, 1995 1994 U.S. Treasury obligations and obligations of U.S. government corporations and agencies $ 3,917,500 $ 14,098,806 Mortgage-backed securities 14,661,230 11,691,860 Total debt securities 18,578,730 25,790,666 Other securities 7,670,000 2,241,266 $ 26,248,730 $ 28,031,932
Table 4 - Maturities and Yields of Investment Securities Held December 31, 1995 (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 and obligations of U.S. government corporations and agencies $110,111 5.17% $241,883 5.98% $5,516 6.43% $ 778 5.70% $358,288 5.74% Obligations of states and political subdivisions 2,767 6.56 8,996 6.29 7,064 6.97 1,277 7.96 20,104 6.67 Mortgage- backed securities 2,703 7.49 22,688 6.09 62 6.48 11,145 6.39 36,598 6.29 Other securities 501 7.14 11,964 5.95 12,465 6.00 Total $116,082 5.27% $285,531 6.00% $12,642 6.73% $13,200 6.50% $427,455 5.84% Maturing Available-for-Sale: After one but After five but 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 and obligations of U.S. government corporations and agencies $ 1,025 4.90% $ 1,646 5.65% $ 1,247 6.32% $ % $3,918 5.25% Obligations of states and political subdivisions Mortgage- backed securities 7,198 5.76 4,119 7.03 3,344 6.12 14,661 6.03 Other securities 7,670 5.98 7,670 5.98 Total $ 1,025 4.90% $ 8,844 5.92% $ 5,366 7.02% $ 11,014 6.42% $26,249 6.05%
PAGE Table 5 - Analysis of the Allowance for Loan Losses
1995 1994 1993 1992 1991 Balance at January 1, $9,024,424 $9,013,387 $8,298,738 $7,708,488 $7,811,813 Allowance established from purchase acquisi- tion 82,700 - 712,222 - - 9,107,124 9,013,387 9,010,960 7,708,488 7,811,813 Charge offs: Commercial, financial and agri- cultural 225,189 740,047 1,232,129 1,170,284 1,820,860 Consumer 719,845 605,240 552,482 689,349 539,218 All other 19,698 27,790 340,537 167,487 365,645 Total loans charged off 964,732 1,373,077 2,125,148 2,027,120 2,725,723 Recoveries: Commercial, financial and agri- cultural 323,213 1,899,465 1,200,055 1,247,851 1,175,795 Consumer 319,053 288,084 318,885 170,636 179,605 All other 102,496 81,565 100,625 53,813 26,998 Total recoveries 744,762 2,269,114 1,619,565 1,472,300 1,382,398 Net (recoveries) /charge-offs 219,967 (896,037) 505,583 554,820 1,343,540 Provision/ (credit) for loan losses 55,500 (885,000) 508,010 1,145,070 1,240,000 Balance at Decem- ber 31, $8,942,654 $9,024,424 $9,013,387 $8,298,738 $7,708,488 Loans at year-end $481,214,361$425,560,623$420,243,003$374,486,342$350,133,518 Average loans 441,643,498 411,884,911 399,806,116 362,413,567349,060,202 Net charge -offs/ (recov- eries)/ average loans 0.05% (0.22)% 0.13% 0.15% 0.38% Allowance for loan losses/ year-end loans 1.86 2.12 2.14 2.22 2.20 Allowance for loan losses/ nonper- forming assets 449.14 414.81 164.13 142.05 9.24
Table 6 - Allocation of Allowance for Loan Losses
1995 1994 1993 1992 1991 Allocation Allocation Allocation Allocation Allocation Amount Amount Amount Amount Amount Real estate- construction $ 312,993 $ 238,245 $ 145,116 $ 114,523 $ 75,541 Real estate- mortgage 2,012,097 2,442,009 2,439,023 2,125,307 2,201,483 Commercial, financial and agricultural 3,791,685 3,677,453 4,258,825 4,227,377 3,935,289 Consumer 2,825,879 2,666,717 2,170,424 1,831,531 1,496,176 $8,942,654 $9,024,424 $9,013,387 $8,298,738 $7,708,488 Allocation as Percent of Total Loans 1995 1994 1993 1992 1991 Real estate- construction 3.5% 2.6% 1.6% 1.4% 0.1% Real estate- mortgage 22.5 27.1 27.1 25.6 28.6 Commercial, financial and agricultural 42.4 40.8 47.3 50.9 51.0 Consumer 31.6 29.6 24.1 22.1 19.4
PAGE Item 2. Properties A. First Financial Bankshares/First National Bank of Abilene The principal offices of Bankshares and First Abilene are located in the First National Bank Building at 400 Pine Street in downtown Abilene, Texas. First Abilene occupies all of the first four floors and utilizes some office space on the fifth and sixth floors. The remaining office space of this 170,842 square foot facility is available for lease to tenants. The First National Bank Building is connected to the First National West Building, a six-story facility owned by First Abilene which contains 52,800 square feet of lease space most of which is rented to business and professional tenants. First Abilene began occupying the First National Bank Building in June of 1984 and, at the same time, a new four-level drive-in parking garage was completed immediately south across the street from the new bank building, which is connected to the bank building by an over-the-street, enclosed pedestrian bridge. The total cost of the project was $14,000,000. Until January 1, 1989, both the new First National Bank Building and the connected parking garage were owned by a joint venture between First Abilene and the Trammell Crow Company. Effective January 1, 1989, First Abilene purchased the interest of Trammell Crow Company and is now the sole owner of the First National Bank Building and the connecting parking garage. A note payable to Aetna Life Insurance Company in the amount of $ 7,000,000 which was previously secured by this property was paid in full during 1991. First Abilene also owns a five-story office building known as the First National/Ely Building, which is located directly south across the street from the First National West Buildingand connected to the First National West Building by an underground pedestrian tunnel. The First National/Ely Building contains approximately 34,000 square feet of space and is leased to business and professional tenants. The premises also includes a ground level parking lot with spaces for 22 cars which are leased to tenants and others. Both the First National/Ely Building and the parking lot are situated on land leased by First Abilene. The lease provides an option to purchase the underlying property for $360,000. First Abilene owns and operates a 17-lane drive-in banking facility which was completed in 1981 and which is also located on Pine Street, two blocks north of First Abilene's main banking facilities. In 1987, First Abilene completed construction of a branch banking facility located at the northwest corner of North Judge Ely Boulevard and East North Tenth Street in Abilene. The cost of the site was $412,383 and the construction cost for the building and improvements was $ 554,318. The new branch banking facility includes a one-story office building containing 2,960 square feet and six lane drive-in facility. As a result of the merger between First Abilene and American National, First Abilene acquired title to the drive-in banking facility owned by American National on Buffalo Gap Road in the southwest part of Abilene, Texas. The drive-in facility is located on 2.23 acres of land adjoining a five-story office building in which American National leased office space for its banking operations. Following its merger with American National, First Abilene entered into a 10-year lease covering 11,009 square feet of office space on the ground floor of the building adjacent to the drive-in facility, which office space includes all, or substantially all, of the space formerly leased and occupied by American National for its primary banking facility. In addition to the original 10-year term of the lease, the lease provides three renewal options on the leased premises, each option being for a renewal term of five years. As a result of the merger between First Abilene and BOC, First Abilene acquired title to the banking facility at the corner of South 14th and Willis Streets in Abilene, Texas, occupying the first floor and renting 27,000 square feet of office space to tenants. The building was completed in 1966 and is of steel reinforced concrete and masonry construction. In 1976, a 12-lane drive-in facility located adjacent to the main banking facility was completed and in 1982, an addition to the teller service area for the drive-in facility was constructed at an estimated cost of $200,000. In December 1984, BOC purchased property (approximately 1.85 acres) located on Southwest Drive in Abilene, Texas, for future construction of a full-service banking facility. The cost of such property was $344,937. As a result of the mergers of American National and BOC with First Abilene and the operation of the banking facilities of American National and BOC as branch banks of First Abilene, it is unlikely that First Abilene, which acquired all of BOC's assets in the merger, will proceed with construction of banking facilities at the property on Southwest Drive and the property is presently listed for sale. PAGE B. Hereford State Bank Hereford owns its main banking house located at 212 North Sampson Street, Hereford, Texas. The building was completed in 1977, contains 16,000 square feet (not including drive-in facilities) and is of concrete block-brick face construction. A brick constructed drive-in complex is connected to the bank by a walk-through tunnel. C. First National Bank, Sweetwater, Texas First Sweetwater owns its main banking house located at 201 Elm Street in The City of Sweetwater, Texas. The building was completed in 1974, contains 20,000 square feet, and is constructed of steel-reinforced concrete and marble. In 1994 First Sweetwater relocated its drive-in facility to a drive-in across the street from the main banking facility that had been at one time a drive-in for another financial institution. First Sweetwater acquired the property, made improvements, and now operates 13 drive-in lanes at the facility. D. Eastland National Bank Eastland owns its banking facilities located at 201 East Main Street in Eastland, Texas. The building was completed in 1980, contains 13,000 square feet, and is of steel and stucco construction. Eastland also maintains a drive-in facility located on the same premises as its main banking facility. E. The First National Bank in Cleburne First Cleburne owns its banking facilities located at 403 North Main Street in Cleburne, Texas. The building was completed in 1978, contains 18,000 square feet, and is of steel and brick masonry construction. First Cleburne also maintains a drive-in facility located on the same premises as its main banking facility. On September 23, 1994, First Cleburne acquired the Cleburne branch of Bank One Texas, N.A. The building is of brick masonry construction, contains 4,400 square feet, and includes a drive-in teller window. Now operating as a branch of First Cleburne, the facility is located approximately 3 miles west of the main office. F. Stephenville Bank & Trust Co. Stephenville owns its banking facility which is located at 298 West Washington in Stephenville, Texas. The building is a brick masonry structure with approximately 10,000 square feet. Stephenville owns and operates a drive-in facility that is located across the street from its main banking facility, and a branch facility consisting of 1,000 square feet located on the west side of the city. At a cost of approximately $1.8 million, construction of a new 18,000 square foot bank building and drive-in facility will be completed in early 1996. The facility is located at 2201 South Loop which is approximately 1.5 miles west of downtown Stephenville. The vacated downtown building will be sold. G. Southwest Bank of San Angelo San Angelo owns its banking facility which is located at 3471 Knickerbocker Road in San Angelo, Texas. The five-story building, including the office tower, has approximately 29,250 thousand square feet and is of steel and stucco construction. Approximately 11,800 square feet of the office tower is available for lease. The bank also owns and operates a drive-in banking facility on the same premises as its main banking offices. Item 3. Legal Proceedings Other than routine litigation in the normal course of business, there are no material pending legal proceedings to which Bankshares, the Delaware BHC or its subsidiary banks or any of their properties are subject, nor are there any known material legal proceedings involving directors, officers, or affiliates of Bankshares. Other than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities except the following: As a result of a routine examination of San Angelo by the Federal Deposit Insurance Corporation (FDIC), San Angelo entered into a Memorandum of Understanding (the "Memorandum") with the FDIC in December of 1994, which required San Angelo to develop, adopt and implement written policies, training programs, formal internal controls, and management review procedures with respect to consumer credit transactions, consumer real estate loans and compliance with the requirements of the Bank Secrecy Act. The Memorandum required that all corrective action prescribed in the Memorandum, including implementation of the policies, programs, controls and procedures described therein, be accomplished within 60 days. The Company believes that San Angelo has complied in full with the requirements of the Memorandum, that all corrective action has been taken, and that San Angelo has adopted and implemented all necessary written policies, training programs, formal internal controls and management review procedures. Moreover, the Company does not believe that any of the deficiencies or problems cited in the FDIC examination had any adverse effect upon, nor that any of the policies, programs, controls or procedures adopted in response to the Memorandum will place any restrictions upon, the financial operations of the Company or San Angelo. 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, 1995. PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters As of February 16, 1996, there were 1,523 holders of Bankshares' stock reflected on its records. Except for shares held by First Abilene, First Sweetwater, and Stephenville in various fiduciary capacities (see Item 12 following), no shareholder or shareholder group known to Bankshares owns five percent (5%) or more of Bankshares' issued and outstanding stock. Market, price and dividend information about the stock for the past three years is set forth on page 30 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." PAGE Item 6. Selected Financial Data
First Financial Bankshares, Inc. Selected Consolidated Financial Data (Dollars in thousands, except per share data) December 31, 1995 1994 1993 1992 1991 Summary Income StatementInformation: Interest income $ 70,555 $ 61,416 $ 59,850 $ 61,441 $ 68,127 Interest expense 27,655 21,264 20,333 24,202 35,912 Net interest income 42,900 40,152 39,517 37,239 32,215 Provision (credit) for loan losses 56 (885) 508 1,145 1,240 Noninterest income 14,276 11,593 11,696 9,768 9,232 Noninterest expense 32,402 33,092 31,875 28,935 27,307 Income before income taxes 24,718 19,538 18,830 16,927 12,900 Provision for income taxes 8,363 6,426 6,105 5,189 3,824 Net income before cumulative effect of accounting change 16,355 13,112 12,725 11,738 9,076 Cumulative effect of accounting change (1) - - 1,024 - - Net income $ 16,355 $ 13,112 $ 13,749 $11,738 $ 9,076 Per Share Data (2): Net income per share before cumulative effect of accounting change $ 3.26 $ 2.62 $ 2.56 $ 2.37 $ 1.85 Net income per share 3.26 2.62 2.77 2.37 1.85 Cash dividends declared 1.21 1.10 0.96 0.76 0.66 Book value at period-end 22.91 20.79 19.45 17.60 15.96 Earnings performance ratios (3): Return on average assets 1.62% 1.31% 1.30% 1.32% 1.06% Return on average equity 14.99 13.07 13.56 13.96 11.55 Summary Balance Sheet Data (Period-end): Investment securities $453,704 $463,244 $456,180 $404,440 $384,919 Loans, net of allowance for loan losses 472,271 416,536 411,230 366,188 342,619 Total assets 1,062,335 1,012,613 1,017,983 928,338 915,308 Deposits 939,642 900,930 913,350 831,542 824,837 Total liabilities 947,418 908,705 921,273 841,199 836,693 Total shareholders' equity 114,917 103,908 96,710 87,139 78,615 Asset quality ratios: Allowance for loan losses/ period-end loans 1.86% 2.12% 2.14% 2.22% 2.20% Nonperforming assets/ period-end loans plus foreclosed assets 0.41 0.51 1.30 1.55 2.44 Net (recoveries)charge- offs/average loans 0.05 (0.22) 0.13 0.15 0.38 Capital ratios: Average shareholders' equity/average assets 10.78% 10.01% 9.59% 9.45% 9.18% Leverage ratio (4) 10.94 10.26 9.51 9.28 8.48 Tier I risk-based capital (5) 20.25 20.09 16.76 16.90 15.38 Total risk-based capital (6) 21.51 21.34 18.02 18.38 16.86 Dividend payout ratio 37.07 41.66 34.04 32.03 34.81 (1) Adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". (2) Historical amounts adjusted for stock dividends and stock splits. (3) Calculated on net income before cumulative accounting adjustment. (4) Shareholders' equity (before unrealized loss on securities available-for-sale) less intangibles/fourth quarter average assets less intangibles. (5) Shareholders' equity (before unrealized loss on securities available-for-sale) less intangibles/risked-adjusted assets. (6) Shareholders' equity (before unrealized loss on securities available-for-sale) less intangibles plus allowance for loan losses to the extent allowed under regulatory guidelines/risk-adjusted assets.
PAGE Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Management's discussion and analysis of the major elements of the Company's consolidated balance sheets and statements of income should be read in conjunction with the consolidated financial statements, accompanying notes, and selected financial data presented elsewhere in this report. PERFORMANCE SUMMARY Net income for 1995 was $16.3 million, an increase of $3.2 million, or 24.4% over the amount earned in 1994. The 1995 increase was attributable to increased net interest income, increased noninterest income including significant nonrecurring gains from sale of certain assets, and reduced noninterest expenses centered primarily in lower FDIC insurance assessments. Net income of $13.1 million in 1994 was $400 thousand, or 3.1% greater than the $12.7 million recorded in 1993. This increase was due primarily to reductions to the allowance for loan losses and increased net interest income. On a per share basis, 1995 net income before nonrecurring gains amounted to $3.00 as compared to $2.62 for 1994 and $2.56 for 1993. Nonrecurring gains in 1995 amounted to $ .26 per share. Excluding nonrecurring gains, return on average assets for 1995 was 1.49% as compared to 1.31% for 1994 and 1.30% for 1993. Also, before nonrecurring gains, return on equity for 1995 was 13.79% as compared to 13.07% for 1994 and 13.56% for 1993. Net Interest Income - On a tax-equivalent basis, net interest income in 1995 totaled $43.3 million, an increase of $2.7 million over the 1994 amount, which was $697 thousand higher than 1993. The 1995 increase was primarily attributable to growth in average loans, which were up $29.7 million, or 7.2% from the year before. This factor contributed to an improved net interest yield of 4.71% for 1995 as compared to 4.49% in 1994 and 4.51% in 1993. Growth in average earning assets and higher average volumes of interest-free deposits and equity capital accounted for the 1994 increase over 1993. Table 1 below presents year-to-year changes in net interest income and allocates the changes between the amount attributable to the variances in volumes and rates. Table 2 provides the income and average yield earned on earning assets and the interest expense and average rate paid on interest-bearing liabilities for the years 1993 through 1995. Table 1 - Changes in Interest Income and Interest Expense (000's omitted):
1995 Compared to 1994 1994 Compared to 1993 Change Change Attributable to Total Attributable to Total Volume Rate Change Volume Rate Change Short- term investments $ 73 $ 542 $ 615 $ (616) $ 373 $ (243) Taxable investment securities (751) 1,522 771 1,339 (2,426) (1,087) Tax-exempt investment securities(1) (132) (80) (212) 331 (172) 159 Loans (1) 2,564 5,400 7,964 987 1,812 2,799 Interest income 1,754 7,384 9,138 2,041 (413) 1,628 Interest bearing- deposits 30 6,458 6,488 115 812 927 Short-term borrowings (9) 10 1 9 8 17 Long-term debt (98) - (98) (13) - (13) Interest expense (77) 6,468 6,391 111 820 931 Net interest income $1,831 $ 916 $2,747 $ 1,930 $(1,233) $ 697 (1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
PAGE Table 2 - Average Balances and Average Yields and Rates (000's omitted):
1995 1994 1993 Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate Assets Short-term investments $ 32,286 $ 1,903 5.89% $ 30,570 $ 1,288 4.21% $ 51,192 $ 1,531 2.99% Taxable investment securities 429,957 24,577 5.72 443,953 23,806 5.36 421,292 24,893 5.91 Tax-exempt investment securities (1) 16,344 1,078 6.60 18,207 1,290 7.09 14,080 1,131 8.03 Loans (1) (2) 441,644 43,449 9.84 411,885 35,485 8.62 399,806 32,686 8.18 Total earning assets 920,231 71,007 7.72 904,615 61,869 6.84 886,370 60,241 6.80 Cash and due from banks 51,280 55,849 51,334 Bank premises and equipment 29,714 30,340 28,537 Other assets 18,815 19,162 19,812 Intangible assets 1,112 1,149 853 Allowance for loan losses (9,007) (9,209) (9,120) Total assets $1,012,145 $1,001,906 $ 977,786 Liabilities and Shareholders' Equity Interest- bearing deposits $ 705,833 $ 27,627 3.91% $ 704,825 $ 21,139 3.00% $ 700,830 $ 20,212 2.88% Short-term borrowings 280 22 7.86 458 21 4.59 138 4 2.90 Long-term debt 62 6 9.50 1,095 104 9.50 1,232 117 9.50 Total interest- bearing liabilities 706,175 27,655 3.92 706,378 21,264 3.01 702,200 20,333 2.90 Noninterest- bearing deposits 188,263 187,996 173,180 Other liabilities 8,608 7,219 8,595 Total liabilities 903,046 901,593 883,975 Shareholders' equity 109,099 100,313 93,811 Total liabilities and shareholders' equity $1,012,145 $1,001,906 $ 977,786 Net interest income $ 43,352 $ 40,605 $ 39,908 Rate Analysis: Interest income/ earning assets 7.72% 6.84% 6.80% Interest expense/ earning assets 3.01 2.35 2.29 Net yield on earning assets 4.71% 4.49% 4.51% (1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%. (2) Nonaccrual loans are included in loans.
Provision for Loan Losses - The 1995 provision for loan losses charged against earnings amounted to $56 thousand. In 1994, significant recoveries of loans previously charged off permitted a loan loss provision reversal, which resulted in a $885 thousand credit to earnings. In 1993, a $506 thousand provision was charged against earnings. Net loan charge offs amounted to $220 thousand in 1995, as compared to net recoveries of $896 thousand in 1994, and net charge offs of $505 thousand in 1993. Additional comparative information is provided in the Allowance for Loan Losses section of this discussion. PAGE Noninterest Income - As shown in Table 3, total noninterest income in 1995 amounted to $14.3 million as compared to $11.6 million in 1994. Nonrecurring gains in 1995 from the sale of assets taken in debt settlement arrangements in prior years amounted to $2.1 million and were derived from a $1.7 million gain on First Tule Bancorp common stock at Hereford State Bank, a $321 thousand gain on real estate at First National Bank of Abilene, and a $101 thousand gain on real estate at First National Bank in Cleburne. A $266 thousand, or 9.2%, increase in Trust fees resulted primarily from an increase in trust assets during 1995. Also, a $281 thousand, or 5.1%, increase in deposit service charges was generated from activity in an increased number of checking accounts. Total noninterest income for 1994 was $103 thousand below the 1993 amount. As shown in Table 3, securities losses and interest on loan recoveries in 1994 were the only significant variances from year to year. Table 3 - Noninterest Income (000's omitted):
Increase Increase 1995 (Decrease) 1994 (Decrease) 1993 Trust depart- ment income $ 3,164 $ 266 $ 2,898 $ (48) $ 2,946 Service fees on deposit accounts 5,786 281 5,505 (25) 5,530 Gain on sale of repossessed assets 2,078 2,057 21 (180) 201 Other: Miscellaneous income 1,257 (86) 1,343 164 1,179 Interest on loan recoveries 30 (535) 565 526 39 Mastercard fees 637 36 601 99 502 Securities gains (losses) 21 617 (596) (644) 48 Real estate mortgage fees 437 (5) 442 (24) 466 Brokerage commissions 350 42 308 (5) 313 Safe deposit rental fees 260 (2) 262 2 260 Exchange fees 256 12 244 32 212 Total Other 3,248 79 3,169 150 3,019 $14,276 $2,683 $11,593 $ (103) $11,696
PAGE Noninterest Expense - Total noninterest expense for 1995 amounted to $32.4 million as compared to $33.1 million for 1994. The Company's efficiency ratio (total noninterest expense as a percent of tax-equivalent net interest incomeplus noninterest income) improved to 56.23% in 1995 from 63.49% in 1994 and 61.77% in 1993. Table 4 - Noninterest Expense (000's omitted):
Increase Increase 1995 (Decrease) 1994 (Decrease) 1993 Salaries $ 12,957 $ (88) $ 13,045 $ 729 $ 12,316 Payroll taxes 979 (20) 999 44 955 Profit sharing 1,369 205 1,164 (9) 1,173 Medical and other benefits 1,360 130 1,230 (34) 1,264 16,665 227 16,438 730 15,708 Net occupancy 2,492 (226) 2,718 297 2,421 Equipment expense 2,225 32 2,193 174 2,019 FDIC insurance expense 998 (985) 1,983 42 1,941 Correspondent bank service charges 872 (4) 876 (20) 896 Other: Printing and supplies 853 (45) 898 5 893 Postage and courier 940 148 792 39 753 Advertising 763 121 642 48 594 Outside data processing fees 712 (25) 737 135 602 Legal and accounting fees 592 (193) 785 80 705 Credit card fees 448 53 395 67 328 Directors' fees 388 15 373 (14) 387 Other professional and service fees 362 91 271 (164) 435 Public relations and business development 356 58 298 (66) 364 Miscellaneous expense 3,736 43 3,693 (136) 3,829 Total Other 9,150 266 8,884 (6) 8,890 Total Noninterest Expense $32,402 $ (690) $ 33,092 $ 1,217 $ 31,875
Salaries and benefits for 1995 were $227 thousand, or 1.4%, above the prior year. In salaries and payroll taxes the 1995 decrease reflects slightly fewer full-time equivalent positions and lower overtime expense. Net occupancy expense of $2.5 million in 1995 was $226 thousand below the 1994 amount, which included additional depreciation expense resulting from a change in estimate for the useful life of certain leasehold improvements. Lower utilities and maintenance expense also contributed to the total 1995 reduction in occupancy expense. It is anticipated that Stephenville Bank & Trust Co. will occupy its newly-constructed banking facility in the late first or early second quarter of 1996. The additional occupancy expense will not be material to the consolidated total. FDIC expense in 1995 totaled $998 thousand and was $985 thousand below the prior year. The lower FDIC expense was the major factor in the 1995 reduction in total noninterest expense and resulted from lower assessment rates which, were implemented by the FDIC in mid-year 1995. The $148 thousand increase in postage and courier reflects the postal rate increase and higher expense of transporting items to item processing centers. The cost of promoting a new deposit product contributed to the higher 1995 advertising expense. Legal and accounting fees declined $193 thousand from the 1994 total, which included legal and accounting expenses related to acquisition of Concho Bancshares and legal fees to cover the settlement of claims brought against subsidiary banks. Total noninterest expense of $33.1 million for 1994 was $1.2 million over 1993. The effect of having a full year of operating expenses at Stephenville Bank & Trust Co. versus 10 months in 1993 accounted for approximately $415 thousand of the increase. PAGE Income Taxes - Income tax expense for 1995 totaled $8.3 million as compared to $6.4 million for 1994 and $6.1 million for 1993. The Company's effective tax rates on pretax income were 33.8%, 32.9%, and 32.4%, respectively, for the years 1995, 1994 and 1993. At December 31, 1995 and 1994, the Company had deferred tax assets of $1.7 million and $2.3 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, 1995 and 1994, are provided in Note 6 to Consolidated Financial Statements. The most significant assumption relied upon by management in concluding that it is more likely than not that the deferred tax asset, 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 relate. On a consolidated basis, taxable income amounted to approximately $22.6 million, $18.7 million, and $17.0 million in the years ended December 31, 1995, 1994 and 1993, 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 $2 million at December 31, 1995, with a usage limitation of $340,000 per year. The net operating loss carryforward expires in the years 2001 through 2005. Taxable income generated by the subsidiary bank before the net operating loss carryforward amounted to approximately $1.4 million, $1.0 million and $1.0 million in the years ended December 31, 1995, 1994 and 1993, respectively. The valuation allowance was established because full utilization of the net operating loss carryforward is dependent on future taxable income in years where the Company is unable to determine that it is more likely than not that taxable income of the subsidiary bank will be available prior to expiration. Balance Sheet Review Total assets at December 31, 1995, amounted to $1.06 billion, up from $1.01 billion at the end of 1994. During 1995, total assets averaged $1.01 billion compared to an average of $1.0 billion in 1994. The following sections provide information for the major balance sheet categories. Investment Securities - At December 31, 1995, the investment securities portfolio totaled $453.7 million as compared to $463.2 million the prior year end. At December 31, 1995, securities with an amortized cost of $427.5 million were classified as securities held-to-maturity and securities with a market value of $26.2 million were classified as securities available-for-sale. The portfolio is comprised primarily of U. S. Government and Government corporations and agencies securities with relative short maturities. The Company did not hold any CMOs that entail higher risks than standard mortgage-backed securities. Total investment securities at year-end 1995 included structured notes with an amortized cost of $16.5 million and an approximate market value of $16.1 million. Note 2 to the consolidated financial statements provides detail disclosures relating to the maturities and fair values of the investment portfolio at December 31, 1995 and 1994. Loans - Total loans at December 31, 1995, amounted to $481.2 million and were $55.6 million, or 13.1%, above the prior year-end totals. Commercial, financial, and agricultural loans were up $30.6 million and consumer loans were up $26.2 million. Real estate related loans were virtually unchanged from the December 31, 1994 totals. Real estate mortgage loans represent loans secured by 1-4 family residences in the Company's primary markets and loans to local business and farm operations in those markets. The loans generally provide for repricing intervals that protect the Company from the rate risk inherent in long-term fixed rate mortgage loans. Table 5 below provides the composition of loans at December 31, 1995 and 1994. PAGE Table 5 - Composition of Loans (000's omitted):
December 31, 1995 December 31, 1994 Amount % Of Total Amount % Of Total Commercial, financial, and agricultural $ 204,039 42.40% $ 173,411 40.75% Consumer 151,980 31.58 125,733 29.55 Real estate - mortgage 108,465 22.54 115,172 27.06 Real estate - construction 16,730 3.48 11,245 2.64 $ 481,214 100.00% $ 425,561 100.00%
Allowance for Loan Losses - An evaluation of the overall quality of the portfolio is performed to determine the necessary level of the allowance for loan losses. The evaluation takes into consideration the classification of loans and the application of loss estimates to those classifications. The Company has an independent loan review function, which periodically reviews the loan quality at each of the subsidiary banks. The subsidiary banks are also subject to periodic examinations by state and federal banking system examiners. Table 6 below provides activity in the allowance for loan loss account for the past five years, and Table 7 presents the year-end balance and composition of nonperforming assets that serves as a key indicator of loan quality. Management was not aware of any material classified credit not properly disclosed as nonperforming at December 31, 1995, and considers the allowance for loan losses to be adequate. As shown in Table 7, nonperforming assets have trended down over the past five years. The unfavorable weather conditions and declining market prices that farm and cattle operations experienced in 1995 may cause classified credits and nonperforming assets to trend upward. Management believes that the level of classified credits and nonperforming assets will remain manageable and will not materially affect future operating results. Table 6 - Loan Loss Experience and Allowance for Loan Losses (000's omitted):
1995 1994 1993 1992 1991 Balance at January 1, $ 9,024 $ 9,013 $ 8,298 $ 7,708 $ 7,812 Allowance established from purchase acquisition 83 - 712 - - 9,107 9,013 9,010 7,708 7,812 Loans charged off 965 1,373 2,125 2,027 2,726 Loans recovered 745 2,269 1,620 1,472 1,382 Net(recoveries)/ charge offs 220 (896) 505 555 1,344 Provision/ (credit) for loan losses 56 (885) 508 1,145 1,240 Balance at December 31, $ 8,943 $ 9,024 $ 9,013 $ 8,298 $ 7,708 Loans at year-end $481,214 $425,561 $420,243 $374,486 $350,134 Average loans 441,643 411,885 399,806 362,414 349,060 Net charge offs/ (recoveries)/ average loans (0.05)% (0.22)% 0.13% 0.15% 0.38% Allowance for loan losses/ year-end loans 1.86 2.12 2.14 2.22 2.20 Allowance for loan losses/ nonperforming assets 449.14 414.81 164.13 142.05 89.24
PAGE Table 7 - Nonperforming Assets (000's omitted):
At December 31, 1995 1994 1993 1992 1991 Nonaccrual loans $ 1,160 $ 1,278 $ 3,417 $ 2,590 $ 4,405 Loans past due 90 days or more 173 84 165 721 528 Restructured loans - - - - - Nonperforming loans 1,333 1,362 3,582 3,311 4,933 Foreclosed assets 658 814 1,910 2,531 3,705 Total nonperforming assets $ 1,991 $ 2,176 $ 5,492 $ 5,842 $ 8,638 As a % of loans and foreclosed properties 0.41% 0.51% 1.30% 1.55% 2.44%
Deposits - Deposits represent the principal source of funding for the Company and totaled $939.6 million at December 31, 1995, as compared to $900.9 million at year-end 1994. During 1995, total deposits averaged $894.1 million as compared to an average of $892.8 million during 1994. Table 8 below provides a breakdown of average deposits and rates paid over the past three years and the remaining maturity of time deposits of $100 thousand or more. Table 8 - Composition of Deposits and Remaining Maturity of Time Deposits of $100,000 or more (000's omitted):
1995 1994 1993 Composition of Deposits Average Average Average Average Average Average (Average): Balance Rate Balance Rate Balance Rate Noninterest- bearing deposits $188,263 - $187,996 - $173,180 - Interest- bearing deposits Interest- bearing checking 168,441 2.11% 178,095 2.01% 166,960 2.19% Savings and money market accounts 171,876 2.99 187,368 2.49 167,095 2.74 Time deposits under $100,000 256,284 5.16 244,327 3.71 261,642 3.51 Time deposits of $100,000 or more 109,232 5.23 95,035 4.01 105,133 2.65 Total interest- bearing deposits 705,833 3.91 704,825 3.00 700,830 2.88 Total deposits $894,096 $892,821 $874,010 Remaining Maturity (Period-end): December 31, 1995 Under three months $ 50,604 Over three through six months 28,043 Over six through twelve months 22,176 Over twelve months 14,702 Total time deposits of $100,000 or more $115,525
Capital - At December 31, 1995, total shareholders' equity was $114.9 million, or 10.81% of total assets, compared to $103.9 million, or 10.26% of total assets, at December 31, 1994. In accordance with Statement of Financial Standards No.115, the Company's unrealized losses, net of tax, on securities available-for-sale are reported as a reduction in shareholders' equity. At December 31, 1995 and 1994, unrealized losses, net of tax, amounted to $169 thousand and $698 thousand, respectively. During 1995, total shareholders' equity averaged $109.1 million, or 10.78% of average assets, compared to the 1994 average of $100.3 million, or 10.01% of average assets. Banking system regulators measure capital adequacy by means of the risk-based capital ratio and leverage ratio. The risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories ranging from 0% to 100%. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders' equity less intangibles by quarter-to-date average assets less intangibles. Regulatory minimums for the risk-based and leverage ratios are 8.00% and 3.00%, respectively. At December 31, 1995, the Company's risk-based ratio and leverage ratio were 21.51% and 10.94%, respectively. PAGE Asset and Liability Management Interest Rate Risk - The Company manages its assets and liabilities to control the exposure of its net interest income and capital to risks associated with interest rate changes to achieve growth in net interest income. Each subsidiary bank has an asset liability committee, which monitors interest rate risk and compliance with investment policies. Interest-sensitivity gap and simulation analysis are among the ways that the subsidiary banks track interest rate risk. From time to time, it may be necessary for a subsidiary bank to reallocate investable funds or make pricing adjustments to better position itself for interest rate movements. As presented in Table 9, the Company's interest-sensitivity gap analysis as of December 31, 1995, reflects a negative cumulative repricing gap in the one year horizon. Consequently, a sudden and large increase in rates or a dramatic narrowing in the spread between asset yields and liability costs would result in an adverse impact on the net interest margin; however, the adverse impact is more moderate if interest rates follow historical trends and increase gradually. The Company uses no off-balance-sheet financial instruments to manage interest rate risk. Table 9 - Interest-Sensitivity Analysis (000's omitted):
Within 3 4-6 7-12 1-5 Over 5 Months Months Months Years Years Total Interest- earning assets: Total loans $216,392 $ 34,916 $ 41,720 $177,362 $ 10,824 $481,214 Invest- ment secur- ities 44,417 31,149 53,517 288,965 35,656 453,704 Short- term invest- ments 27,154 300 198 95 - 27,747 Total inter- est- earning assets 287,963 66,365 95,435 466,422 46,480 962,665 Interest- bearing liabilities: Transaction deposit accounts 292,855 292,855 Time deposits 202,642 86,670 87,226 62,835 1 439,374 Borrowed funds 85 - - - - 85 Total interest- bearing liabil- ities 495,582 86,670 87,226 62,835 1 732,314 Interest- sensitivity gap (207,619)(20,305) 8,209 403,587 46,479 230,351 Cumulative interest- sensitivity gap (207,619)(227,924)(219,715)183,872 230,351 230,351 Ratio of interest- sensitive assets to interest- sensitive liabilities 0.58 0.77 1.09 7.42 - Cumulative ratio of interest- sensitive assets to interest- sensitive liabilities 0.58 0.61 0.67 1.25 2.84 Cumulative interest- sensitivity gap as a percent of total earning assets (21.57)% (23.68)% (22.82)% 19.10% 23.93%
Liquidity - The statements of cash flows, which are included in the Company's consolidated financial statements, present changes in cash and cash equivalents. The subsidiary banks continue to maintain relatively low loan deposit ratios and liquid investment portfolios with short maturities. These factors provide substantial liquidity for loan demand, deposit shifts and other funding requirements. Parent Company Funding Sources and Dividends At December 31, 1995 and 1994, the parent company had cash and cash equivalents of $20.5 million and $13.4 million, respectively. 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, 1995, approximately $12.1 million was available for the payment of intercompany dividends by the subsidiary banks without the prior approval of regulatory agencies. Also at December 31, 1995, the Company had $10 million available under a line of credit with an unaffiliated financial institution. The Company does not anticipate any change in its policy for cash dividends to shareholders, which has yielded payout ratios of 37.1%, 41.7%, and 34.0%, respectively, in 1995, 1994, and 1993. PAGE Quarterly Financial Data (Unaudited) (Dollars in thousands, except per share data)
1995 4th 3rd 2nd 1st Summary Income Statement Information: Interest income $ 18,380 $ 18,084 $ 17,412 $ 16,679 Interest expense 7,380 7,248 6,857 6,170 Net interest income 11,000 10,836 10,555 10,509 Provision for loan losses 25 10 - 20 Net interest income after provision for loan losses 10,975 10,826 10,555 10,489 Noninterest income 3,153 3,048 5,072 3,002 Noninterest expense 8,163 7,790 8,363 8,086 Income before income taxes 5,965 6,084 7,264 5,405 Provision (benefit) for income taxes 2,014 2,058 2,471 1,819 Net income $ 3,951 $ 4,026 $ 4,793 $ 3,586 Per Share Data (1): Net income per share $ 0.79 $ 0.80 $ 0.95 $ 0.72 Cash dividends declared 0.31 0.31 0.31 0.28 Book value at period end 22.91 20.34 20.00 19.79 Market value (period end) bid 32.50 30.00 30.50 26.00 Market value (bid): High 32.50 31.75 30.50 26.00 Low 30.00 29.50 26.00 24.75 1994 4th 3rd 2nd 1st Summary Income Statement Information: Interest income $ 16,046 $ 15,492 $ 15,121 $ 14,756 Interest expense 5,842 5,397 5,106 4,919 Net interest income 10,204 10,095 10,015 9,837 Provision for loan losses (845) (185) 105 40 Net interest income after provision for loan losses 11,049 10,280 9,910 9,797 Noninterest income 2,769 2,997 2,851 2,976 Noninterest expense 8,545 8,228 8,091 8,227 Income before income taxes 5,273 5,049 4,670 4,546 Provision (benefit) for income taxes 1,767 1,697 1,519 1,443 Net income $ 3,506 $ 3,352 $ 3,151 $ 3,103 Per Share Data (1): Net income per share $ 0.70 $ 0.67 $ 0.63 $ 0.62 Cash dividends declared 0.28 0.28 0.28 0.26 Book value at period end 20.79 20.34 20.00 19.79 Market value (period end) bid 25.00 28.50 31.00 31.60 Market value (bid): High 28.50 30.00 32.40 35.60 Low 24.00 28.00 28.80 31.60 (1) Historical amounts adjusted for 25% stock dividend paid June 1, 1994.
PAGE Item 8. Financial Statements and Supplementary Data The independent auditor's report, and consolidated financial statements of Bankshares at December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, are provided on pages 27 through 45. Also included is management's report on responsibility for these financial statements. PAGE FIRST FINANCIAL BANKSHARES, INC. MANAGEMENT'S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The Management of First Financial Bankshares, Inc. is responsible for the preparation, integrity and fair presentation of its annual financial statements as of December 31, 1995 and 1994, and for the three years in the period ended December 31, 1995. 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 has 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, 1995 and 1994, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As explained in Note 1 to the consolidated financial statements, effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes"; and changed its method of accounting for income taxes. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Financial Bankshares, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Arthur Andersen LLP Dallas, Texas, January 10, 1996 PAGE
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1995 AND 1994 ASSETS 1995 1994 CASH AND DUE FROM BANKS $ 58,138,482 $ 60,536,136 FEDERAL FUNDS SOLD 26,360,000 23,100,000 Total cash and cash equivalents 84,498,482 83,636,136 INTEREST-BEARING DEPOSITS IN BANKS 1,387,025 198,000 INVESTMENT IN SECURITIES Securities held-to-maturity (market value of $430,100,959 and $418,895,098 in 1995 and 1994, respectively) 427,455,098 435,212,460 Securities available- for-sale, at market value 26,248,730 28,031,932 LOANS 481,214,361 425,560,623 Less- Allowance for loan losses 8,942,654 9,024,424 Net loans 472,271,707 416,536,199 BANK PREMISES AND EQUIPMENT, net 30,069,579 29,466,438 OTHER ASSETS 20,403,928 19,531,982 Total assets $ 1,062,334,549 $ 1,012,613,147 LIABILITIES AND SHAREHOLDERS' EQUITY NONINTEREST-BEARING DEPOSITS $ 207,412,278 $ 200,912,655 INTEREST-BEARING DEPOSITS 732,229,437 700,016,977 Total deposits 939,641,715 900,929,632 DIVIDENDS PAYABLE 1,554,717 1,399,220 OTHER LIABILITIES 6,221,468 6,376,393 Total liabilities 947,417,900 908,705,245 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock, $l0 par value; authorized 10,000,000 shares; issued and outstanding 5,015,216 and 4,997,214 shares in 1995 and 1994, respectively 50,152,160 49,972,140 Capital surplus 36,870,604 36,863,701 Retained earnings 28,062,779 17,769,812 Unrealized loss on investment in securities available- for-sale, net (168,894) (697,751) Total shareholders' equity 114,916,649 103,907,902 Total liabilities and shareholders' equity $ 1,062,334,549 $ 1,012,613,147 The accompanying notes are an integral part of these consolidated statements.
PAGE FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993 INTEREST INCOME: Interest and fees on loans $ 43,353,853 $ 35,482,131 $ 32,679,806 Interest on invest- ment securities- Taxable 24,576,976 23,805,894 24,892,985 Exempt from federal income tax 721,991 840,225 746,195 Interest on federal funds sold and inter- est-bearing deposits in banks 1,902,622 1,287,557 1,530,914 70,555,442 61,415,807 59,849,900 INTEREST EXPENSE: Interest on time deposits 27,626,325 21,138,660 20,211,447 Other 28,747 125,352 121,559 27,655,072 21,264,012 20,333,006 Net interest income 42,900,370 40,151,795 39,516,894 PROVISION (CREDIT) FOR LOAN LOSSES 55,500 (885,000) 508,010 Net interest income after provision (credit) for loan losses 42,844,870 41,036,795 39,008,884 NONINTEREST INCOME: Trust department income 3,164,482 2,897,657 2,945,840 Service fees on deposit accounts 5,786,169 5,504,997 5,529,706 Gain on sale of foreclosed assets 2,078,168 20,759 201,079 Other 3,246,839 3,170,005 3,019,816 14,275,658 11,593,418 11,696,441 NONINTEREST EXPENSE: Salaries and employee benefits 16,665,476 16,437,665 15,707,789 Net occupancy expense 2,491,655 2,717,634 2,421,020 Equipment expense 2,225,018 2,193,073 2,018,717 FDIC assessments 998,077 1,982,894 1,941,014 Correspondent bank service charges 872,247 876,209 896,368 Other expenses 9,149,883 8,884,033 8,889,880 32,402,356 33,091,508 31,874,788 EARNINGS BEFORE INCOME TAXES 24,718,172 19,538,705 18,830,537 INCOME TAX EXPENSE 8,362,630 6,426,475 6,105,087 NET EARNINGS BEFORE CUMULATIVE ADJUSTMENT FOR CHANGE IN ACCOUNTING FOR INCOME TAXES 16,355,542 13,112,230 12,725,450 CUMULATIVE ADJUSTMENT FOR CHANGE IN ACCOUNTING FOR INCOME TAXES - - 1,023,595 NET EARNINGS $ 16,355,542 $ 13,112,230 $ 13,749,045 EARNINGS PER SHARE BEFORE CUMULATIVE ADJUSTMENT FOR CHANGE IN ACCOUNTING FOR INCOME TAXES $3.26 $2.62 $2.56 NET EARNINGS PER SHARE $3.26 $2.62 $2.77 The accompanying notes are an integral part of these consolidated statements.
PAGE FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
Unrealized Gain (Loss) on Investment in Securities Common Stock Capital Retained Available- Shares Amount Surplus Earnings for Sale,Net BALANCE, December 31, 1992 3,616,865 $36,168,650 $6,575,877 $44,438,885 $ - Net earnings - - - 13,749,045 - Stock issuances 23,386 233,860 48,388 - - Cash dividends declared, $.96 per share - - - (4,490,093) - Cash paid for fractional shares resulting from stock dividend - - - (14,929) - Stock dividend, 10% 338,516 3,385,160 9,324,119 (12,709,279) - BALANCE, December 31, 1993 3,978,767 39,787,670 15,948,384 40,973,629 - Initial unrealized gain recorded on investment in securities available- for-sale, net - - - - 244,069 Net earnings - - - 13,112,230 - Stock issuances 23,695 236,950 25,525 - - Cash dividends declared, $1.10 per share - - - (5,462,207) - Cash paid for fractional shares re- sulting from stock dividend - - - (16,528) - Stock dividend, 25% 994,752 9,947,520 20,889,792(30,837,312) - Change in unrealized gain(loss) on investment in securities available- for-sale, net - - - - (941,820) BALANCE, December 31, 1994 4,997,214 49,972,140 36,863,701 17,769,812 (697,751) Net earnings - - - 16,355,542 - Stock issuances 18,002 180,020 6,903 - - Cash dividends declared, $1.21 per share - - - (6,062,575) - Change in unrealized gain(loss) on investment in securities available- for-sale, net - - - - 528,857 BALANCE, December 31, 1995 5,015,216 50,152,160 36,870,604 28,062,779 (168,894) The accompanying notes are an integral part of these consolidated statements.
PAGE FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 16,355,542 $ 13,112,230 $ 13,749,045 Adjustments to reconcile net earnings to net cash provided by operating activities- Depreciation and amortization 2,730,346 3,318,666 2,510,135 Provision (credit) for loan losses 55,500 (885,000) 508,010 Premium amortization, net of discount accretion 2,575,325 4,960,847 5,524,023 Loss (gain) on sale of securities 57,094 595,997 (47,992) Gain on sale of foreclosed assets (2,078,168) (20,759) (201,179) Deferred federal income tax expense (benefit) 358,344 (109,434) (1,170,687) Decrease (increase) in other assets (1,288,053) (906,556) 2,999,767 Increase (decrease) in other liabilities 585,189 (251,211) (2,818,756) Total adjustments 2,995,577 6,702,550 7,303,321 Net cash provided by operating activities 19,351,119 19,814,780 21,052,366 CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in interest-bearing deposits in banks (201,025) 589,000 194,000 Payment for stock, net of cash and cash equivalents received through acquisition (1,539,560) - - Cash and cash equivalents received through acquisition, net of payment for stock - - 5,511,888 Cash and cash equivalents received through purchase of assets and liabilities, net of cash paid - - 16,876,513 Proceeds from sales of securities available-for-sale 5,483,872 11,649,196 - Proceeds from maturities of securities available-for-sale 36,518 9,155,976 - Proceeds from sales of investment securities - - 8,897,440 Proceeds from maturities of securities held- to-maturity 176,398,807 133,394,203 194,451,829 Purchase of securities available-for-sale (3,799,775) (1,000,000) - Purchase of securities held- to-maturity (157,123,976) (166,593,978)(213,227,198) Net increase in loans (50,756,608) (4,177,658) (21,105,463) Capital expenditures (3,078,140) (2,394,923) (3,643,838) Proceeds from sale of other assets 2,362,552 11,458 2,297,728 Net cash used in investing activities(32,217,335) (19,366,726) (9,747,101) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in noninterest-bearing deposits 5,016,327 6,978,515 8,135,836 Net increase (decrease) in interest- bearing deposits 15,491,521 (19,398,444) (24,538,060) Net decrease in other short-term borrowings (1,059,131) (96,857) (83,177) Proceeds of stock issuances 186,923 262,475 282,248 Dividends paid (5,907,078) (5,278,455) (4,219,974) Net cash provided by (used in) financing activities 13,728,562 (17,532,766) (20,423,127) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 862,346 (17,084,712) (9,117,862) CASH AND CASH EQUIVALENTS, beginning of year 83,636,136 100,720,848 109,838,710 CASH AND CASH EQUIVALENTS, end of year $84,498,482 $ 83,636,136 $ 100,720,848 The accompanying notes are an integral part of these consolidated statements.
PAGE FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994, AND 1993 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Nature of Operations First Financial Bankshares, Inc. (a Texas corporation) is a multi-bank holding company, which owns (through its wholly-owned Delaware subsidiary) all of the capital stock of seven banks located in Texas as of December 31, 1995. 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.; and Southwest Bank of San Angelo. Each subsidiary bank's primary source of revenue is providing loans and banking services to consumers and commercial customers in the market area in which the subsidiary is located. A summary of significant accounting policies of First Financial Bankshares, Inc. and subsidiaries (the "Company") applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both generally accepted accounting principles and prevailing practices of the banking industry. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Consolidation The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated. Investment in Securities In May 1993, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115), was issued. This statement requires management to classify debt and equity securities as held-to-maturity, available-for-sale, or trading based on their intent. Securities classified as held-to-maturity are recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the interest method. Securities classified as available-for-sale are recorded at fair value, with unrealized gains and losses, net of deferred taxes, excluded from earnings and reported in a separate component of shareholders' equity. Securities classified as trading are recorded at fair value, with unrealized gains and losses included in earnings. The Company adopted this statement effective January 1, 1994, and the resulting after-tax adjustment to equity of $244,069 increased investments by $375,491. The Company had no trading securities at December 31, 1995 or 1994. Prior to January 1, 1994, the Company accounted for its investment in securities at amortized cost. 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 that approximates the interest method. Interest on other loans is calculated by using the simple interest method on daily balances of the principal amounts outstanding. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectibility of the principal is unlikely. PAGE The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible based upon management's review and evaluation of the loan portfolio. The allowance for loan losses is increased by charges to income and decreased by charge offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on general economic conditions, the financial condition of the borrower, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. The Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114), and No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (SFAS 118), as of January 1, 1995. The Company had previously measured the allowance for credit losses using methods similar to those prescribed in SFAS 114 and 118. The impact of adopting these statements resulted in no additional allowance for loan losses. These standards require that certain impaired loans be measured based on the present value of expected future cash flows discounted at the loan's original effective interest rate. As a practical expedient, impairment may be measured based on the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. When the measure of the impaired loan is less than that of the recorded investment in the loan, the impairment is recorded through a valuation allowance. On collateral dependent loans, the Company has adopted a policy that requires measurement of an impaired 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, 1995, all significant impaired loans have been determined to be collateral dependent and have been measured utilizing the fair value of the collateral. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the life of the respective lease or the estimated useful lives of the improvements, whichever is shorter. Excess of Cost Over Fair Value of Tangible Assets Acquired (Goodwill) Goodwill, relating to acquisitions of certain subsidiary banks, is being amortized by the straight-line method over periods of 15 and 40 years. Per Share Data Earnings per share are based on the weighted average number of common shares and common share equivalents outstanding in 1995, 1994, and 1993 of 5,015,216; 4,997,214; and 4,973,519, respectively, adjusted retroactively for stock dividends and splits. Common share equivalents represent the dilutive effect of stock options. Additionally, dividends per share have been retroactively adjusted for the effect of stock dividends and splits. Reclassifications Certain 1994 and 1993 amounts have been reclassified to conform to the 1995 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 In February 1992, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was issued. This statement requires an asset and liability approach for financial accounting and reporting for income taxes and supersedes "Accounting for Income Taxes" required by Statement of Financial Accounting Standards No. 96 and APB Opinion No. 11. The Company adopted this statement effective January 1, 1993, with the resulting cumulative adjustment to income increasing other assets by $1,023,595. PAGE Accounting Standard Not Yet Adopted In March 1995, Statement of Financial Accounting Standards No.121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was issued. This statement requires that "long-lived assets and certain indentifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable." This statement applies to fiscal years beginning after December 15, 1995, and is not expected to have a material effect on the accompanying financial statements. 2. CASH AND INVESTMENT SECURITIES: Certain subsidiary banks are required to maintain reserve balances with the Federal Reserve Bank. During 1995 and 1994, such average balances totaled approximately $12,052,000 and $12,226,000, respectively. The amortized cost, estimated market values, and gross unrealized gains and losses of the Company's investment in securities as of December 31, 1995 and 1994, are as follows:
December 31, 1995 Gross Gross Unrealized Unrealized Amortized Holding Holding Estimated Cost Basis Gains Losses Fair Value Securities held -to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies $358,287,502 $3,830,041 $1,507,614) $360,609,929 Obligations of states and political subdivisions 20,104,257 52,034 (166,227) 19,990,064 Mortgage-backed securities 36,598,419 503,931 (217,218) 36,885,132 Corporate bonds 7,746,376 142,613 (8,629) 7,880,360 Foreign secur- ities 4,718,544 30,376 (13,446) 4,735,474 Total investment in debt securities held- to-maturity $427,455,098 $4,558,995$(1,913,134)(430,100,959) Securities available-for- sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 3,995,027 $ 31,975 $ (109,502) $ 3,917,500 Mortgage-backed securities 14,664,563 106,531 (109,864) 14,661,230 Total investment in debt securities available- for-sale 18,659,590 138,506 (219,366) 18,578,730 Other securities 7,670,000 - - 7,670,000 Total investment in securities available-for- sale $ 26,329,590 $ 138,506 $(219,366) $ 26,248,730
PAGE
December 31, 1994 Gross Gross Unrealized Unrealized Amortized Holding Holding Estimated Cost Basis Gains Losses Fair Value Securities held- to-maturity: U.S. Treasury securities and obligations of U.S. government corporations and agencies $392,359,163 $ 5,689 $(14,125,455)$ 378,239,397 Obligations of states and political subdivisions 17,396,179 10,103 (913,911) 16,492,371 Mortgage-backed securities 25,457,118 4,050 (1,297,838) 24,163,330 Total investment in debt securities held- to-maturity $435,212,460 $19,842 $(16,337,204) $418,895,098 Securities available-for- sale: U.S. Treasury securities and obligations of U.S.government corporations and agencies $ 14,531,306 $22,270 $ (454,770) $ 14,098,806 Mortgage-backed securities 12,326,532 38,628 (673,300) 11,691,860 Total investment in debt securities available- for-sale 26,857,838 60,898 (1,128,070) 25,790,666 Other securities 2,243,820 - (2,554) 2,241,266 Total investment in securities available- for-sale $ 29,101,658 $ 60,898$(1,130,624) $ 28,031,932
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, 1995, were computed by using scheduled amortization of balances and historical prepayment rates. At December 31, 1995, the Company did not hold any CMOs that entail higher risks than standard mortgage-backed securities. Total investment in debt securities at December 31, 1995, included structured notes with an amortized cost basis of $16,554,000 and an estimated fair value of $16,060,000. The amortized cost and estimated fair value of debt securities held-to-maturity at December 31, 1995, by contractual and expected maturity, are shown below.
Amortized Estimated Cost Fair Value Due within one year $ 116,082,183 $ 115,228,610 Due after one year through five years 285,530,745 288,950,284 Due after five years through ten years 12,641,945 12,665,051 Due after ten years 13,200,225 13,257,014 Total debt securities held-to-maturity $ 427,455,098 $ 430,100,959
PAGE The amortized cost and estimated fair value of debt securities available-for-sale at December 31, 1995, by contractual and expected maturity, are shown below.
Amortized Estimated Cost Fair Value Due within one year $ 993,025 $ 1,025,000 Due after one year through five years 8,951,048 8,843,773 Due after five years through ten years 5,316,459 5,365,562 Due after ten years 3,399,058 3,344,395 Total debt securities available-for-sale $ 18,659,590 $ 18,578,730
Securities carried at approximately $127,208,000 and $97,859,000 at December 31, 1995 and 1994, respectively, were pledged as collateral for public or trust fund deposits and for other purposes required or permitted by law. During 1995 and 1994, sales from investments in securities that were classified as available for sale totaled $5,483,872 and $11,649,196, respectively. The gross realized gains and losses from those sales were $43,612 and $29,185, respectively, during 1995, and $100,706 and $696,703, respectively, during 1994. Specific identification was used to determine cost in computing the realized gains and losses. 3. LOANS AND ALLOWANCES FOR LOAN LOSSES: Major classifications of loans are as follows:
December 31, 1995 1994 Commercial, financial, and agricultural $ 204,038,678 $ 173,410,963 Real estate - construction 16,730,451 11,244,692 Real estate - mortgage 108,464,767 115,172,072 Consumer 159,091,663 132,781,581 488,325,559 432,609,308 Unearned income (7,111,198) (7,048,685) Total loans $ 481,214,361 $ 425,560,623
As of December 31, 1995, the Company's recorded investment in impaired loans and the related valuation allowance calculated under SFAS 114 are as follows:
Recorded Valuation Investment Allowance Impaired loans- Valuation allowance required $ 1,814,370 $ 567,738 No valuation allowance required - - Total impaired loans $ 1,814,370 $ 567,738
The average recorded investment in impaired loans for the year ended December 31, 1995, was $2,387,565. The Company had approximately $1,991,000 in nonperforming assets at December 31, 1995, of which approximately $1,160,000 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 $333,574 during the year ended December 31, 1995, of which $137,672 represented cash interest payments received and recorded as interest income. If interest on impaired loans had been recognized on a full accrual basis in the year ended December 31, 1995, such income would have approximated $530,000. PAGE The allowance for loan losses as of December 31, 1995, is presented below. Management has evaluated the adequacy of the allowance for loan losses by estimating the probable losses in various categories of the loan portfolio, which are identified below: Allowance for loan losses provided for- Loans specifically evaluated as impaired $ 567,738 Unidentified impaired loans 8,374,916 Total allowance for loan losses $ 8,942,654
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, 1995 1994 1993 Balance at beginning of year $ 9,024,424 $ 9,013,387 $ 8,298,738 Add: Allowance of acquired bank 82,700 - 712,222 Provision for loan losses 55,500 - 508,010 Loan recoveries 744,762 2,269,114 1,619,565 Deduct: Credit for loan losses - (885,000) - Loan charge offs (964,732) (1,373,077) (2,125,148) Balance at end of year $ 8,942,654 $ 9,024,424 $ 9,013,387
4. BANK PREMISES AND EQUIPMENT: The following is a summary of bank premises and equipment:
December 31, 1995 1994 Land $ 4,662,743 $ 4,662,743 Buildings 31,918,625 30,059,405 Furniture and equipment 16,253,608 15,270,683 Leasehold improvements 4,926,525 4,986,812 57,761,501 54,979,643 Accumulated depreciation and amortization (27,691,922) (25,513,205) $30,069,579 $ 29,466,438
5. TIME DEPOSITS: Time deposits of $100,000 or more totaled approximately $115,525,000 and $105,887,000 at December 31, 1995 and 1994, respectively. Interest expense on these deposits was approximately $5,718,000; $3,812,000; and $2,789,000 during 1995, 1994, and 1993, respectively. PAGE 6. INCOME TAXES: The Company files a consolidated federal income tax return. Income tax expense (benefit) is comprised of the following:
Year Ended December 31, 1995 1994 1993 Current federal income tax $ 8,004,286 $ 6,535,909 $ 6,252,179 Deferred federal income tax 358,344 (109,434) (147,092) Income tax expense $ 8,362,630 $ 6,426,475 $ 6,105,087
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 1995 1994 1993 Expected tax expense 35.0% 35.0% 35.0% Reductions in taxes resulting from interest income exempt from federal income tax (1.0) (1.5) (1.5) Other (0.2) (0.6) (1.1) Income tax expense 33.8% 32.9% 32.4%
The approximate effects of each type of difference that gave rise to the Company's deferred tax assets and liabilities at December 31, 1995 and 1994, are as follows:
1995 1994 Deferred Tax Assets- Tax basis of loans in excess of financial statement basis $ 2,914,134 $2,906,731 Nondeductible write-downs and adjustments to other real estate owned and repossessed assets 103,319 246,654 Benefits of a subsidiary bank net operating loss carryforward 724,325 842,929 Recognized for financial reporting purposes but not for tax purposes- Deferred compensation 256,213 222,754 Net unrealized loss on investments in securities available-for-sale 90,942 375,712 Other deferred tax assets 325,301 147,945 Total deferred tax assets 4,414,234 4,742,725 Deferred Tax Liabilities- Financial statement basis of fixed assets in excess of tax basis 1,696,501 1,371,726 Recognized for financial reporting purposes but not for tax purposes- Accretion on investments 202,071 233,571 Pension plan contribution 400,804 305,230 Other deferred tax liabilities 142,904 98,526 Total deferred tax liabilities 2,442,280 2,009,053 Valuation allowance (255,837) (374,441) Net deferred tax asset $ 1,716,117 $2,359,231
PAGE At December 31, 1995, the First National Bank in Cleburne ("Cleburne"), a subsidiary bank, had a net operating loss carryforward for federal income tax purposes of approximately $2,069,000. 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: $1,145,000 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:
1995 1994 Valuation allowance at beginning of period $ 374,441 $ 480,767 Reduction in valuation allowance based on current period utilization of net operating loss carryforward (118,604) (106,326) Valuation allowance at end of period $ 255,837 $ 374,441
7. FAIR VALUE OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS 107), requires the Company to disclose the estimated fair value of its financial instrument assets and liabilities. For the Company, as for most financial institutions, over 90% of its assets and liabilities are considered financial instruments as defined in SFAS 107. Many of the Company's financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. Estimated fair values have been determined by the Company using the best available data, as generally provided in the Company's Regulatory Reports, and an estimation methodology suitable for each category of financial instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values generally approximate the recorded book balances. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 1995 and 1994, 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 1995 1994 1995 1994 Cash and due from banks $ 58,138,482 $ 60,536,136 $ 58,138,482 $ 60,536,136 Federal funds sold 26,360,000 23,100,000 26,360,000 23,100,000 Interest- bearing deposits in banks 1,387,025 198,000 1,387,025 198,000 Investment in securities 456,349,689 446,927,030 453,703,828 463,244,392
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 1995 1994 1995 1994 Deposits with stated maturities $387,971,182 $316,887,645 $386,379,149 $318,214,237 Deposits with no stated maturities 553,262,566 582,715,395 553,262,566 582,715,395 Net loans 474,805,015 415,973,405 472,271,707 416,536,199
PAGE Changes in assumptions or estimation methodologies may have a material effect on these estimated fair values. The Company's remaining assets and liabilities which, are not considered financial instruments, have not been valued differently than has been customary with historical cost accounting. No disclosure of the relationship value of the Company's deposits is required by SFAS 107 nor has the Company estimated its value. There is no material difference between the notional amount and the estimated fair value of off-balance-sheet unfunded loan commitments which, total approximately $122,891,000 and $119,496,000 at December 31, 1995 and 1994, respectively, and are generally priced at market at the time of funding. Letters of credit discussed in Note 9 have an estimated fair value based on fees currently charged for similar agreements. At December 31, 1995 and 1994, fees related to the unexpired term of the letters of credit are not significant. Management is concerned that reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. 8. COMMITMENTS AND CONTINGENCIES: The Company is engaged in legal actions arising from the normal course of business. In management's opinion, the Company has adequate legal defenses with respect to these actions, and the resolution of these matters should have no material adverse effects upon the results of operations or financial condition of the Company. The Company has an unused line of credit with a bank under which it may borrow up to $10,000,000 at the London Interbank Offered Rate plus 1%, adjusted for reserves and deposit insurance expense. The line of credit is unsecured and matures on May 30, 1996. The Company paid no fee to secure the unused line of credit and, accordingly, has not estimated a fair value of the unused line of credit at December 31, 1995 or 1994. The Company leases portions of its banking premises and equipment under operating leases. Total rental expense for these leases was approximately $297,000, $340,000, and $358,000 for the years ended December 31, 1995, 1994, and 1993, respectively. The Company is a lessor for portions of its banking premises. Total rental income for all leases included in net occupancy expense was approximately $1,268,000, $1,265,000, and $1,289,000 for the years ended December 31, 1995, 1994, and 1993, respectively. At December 31, 1995, approximate future minimum lease commitments and lease receivables are summarized as follows:
Lease Lease Commitments Receivables 1996 $ 233,000 $ 713,000 1997 145,000 349,000 1998 4,000 150,000 1999 - 141,000 2000 - 88,000 2001 and thereafter - - Total $ 382,000 $ 1,441,000
9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. PAGE 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 $122,891,000 Standby letters of credit 4,761,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit is 173%. 10. CONCENTRATION OF CREDIT RISK: The Company grants commercial, retail, agricultural, and residential loans to customers primarily in North Central and West Texas. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the local economic sector. 11. PENSION AND PROFIT SHARING PLANS: The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and a percentage of the employee's qualifying compensation during the final years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy the Internal Revenue Service's funding standards. Contributions are intended to provide not only for benefits attributed to service to date but, also for those expected to be earned in the future. PAGE The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheets at December 31, 1995 and 1994.
December 31, 1995 1994 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $5,514,329 and $4,580,213 in 1995 and 1994, respectively $ 5,787,473 $ 4,786,799 Projected benefit obligation for service rendered to date $ (6,645,480) $ (5,347,357) Plan assets at fair value, primarily corporate bonds and equity securities 7,444,923 6,401,823 Plan assets in excess of projected benefit obligation 799,443 1,054,466 Unrecognized net gain from past experience different than that assumed and effects of changes in assumptions 781,708 305,389 Unrecognized net asset at January 1, 1987, being recognized over 10.7 years (273,591) (392,094) Prepaid pension cost included in other assets $ 1,307,560 $ 967,761
Net pension cost (credit) for the years ended December 31, 1995, 1994, and 1993, included the following components:
Year Ended December 31, 1995 1994 1993 Service cost - benefits earned during the period $ 443,934 $ 398,106 $ 358,084 Interest cost on projected benefit obligation 449,581 427,889 369,861 Actual return on plan assets (783,215) 59,728 (282,192) Net amortization and deferral 48,889 (749,369) (398,544) Net periodic pension cost $ 159,189 $ 136,354 $ 47,209
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:
1995 1994 1993 Weighted average discount rate 7.5% 8.5% 8.5% Rate of increase in future compensation levels 7.5 8.5 8.5 Expected long-term rate of return on assets 7.5 8.5 8.5
The Company also provides a profit sharing plan that 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. The Southwest Bank of San Angelo, a subsidiary bank, has a noncontributory profit sharing plan available to all regular employees who have completed six months of service. The plan is a defined contribution plan and contributions are at the discretion of the subsidiary's board of directors. The subsidiary also sponsors a defined contribution pension plan, whereby it matches 100% of employee contributions up to 4% of their compensation and 50% of contributions on the next 2% of compensation. Costs related to the Company's defined contribution plans totaled $1,369,000, $1,164,000, and $1,173,000 in 1995, 1994, and 1993, respectively. PAGE 12. DIVIDENDS FROM SUBSIDIARIES: At December 31, 1995, approximately $12,100,000 was available for the declaration of dividends by the Company's subsidiary banks without the prior approval of regulatory agencies. 13. 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, 1995 and 1994 (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, 1995 $ 28,926,409 $ 89,990,572 $ 91,712,555 $27,204,426 Year ended December 31, 1994 $ 34,963,194 $110,152,085 $107,742,397 $37,372,882
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. 14. STOCK OPTION PLAN: The Company has adopted an incentive stock plan to provide for the granting of options to senior management of the Company at prices not less than market at the date of grant. At December 31, 1995, the Company had reserved 273,589 shares of stock for issuance under the plan. The plan provides that options granted are exercisable after two years from date of grant, at a rate of 20% each year cumulatively during the 10-year term of the option. At December 31, 1995, 26,822 shares were exercisable. An analysis of stock option activity for the years ended December 31, 1995 and 1994, is as follows:
Number Option Price of Shares Per Share Options outstanding at December 31, 1993 150,435 $ 8.62 - 32.00 Canceled (625) 32.00 Exercised (25,019) 8.62 - 14.54 Granted - - Options outstanding at December 31, 1994 124,791 8.62 - 32.00 Canceled (3,100) 14.54 - 32.00 Exercised (18,002) 8.62 - 14.54 Granted 30,950 32.00 Options outstanding at December 31, 1995 134,639 $ 8.62 - 32.00 Stock options have been adjusted retroactively for the effects of stock dividends and splits.
PAGE 15. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
Condensed Balance Sheets-December 31, 1995 and 1994 ASSETS 1995 1994 Cash in subsidiary bank $ 687,235 $ 453,214 Investment securities 19,821,025 13,021,959 Investment in subsidiaries, at equity 95,515,920 91,322,199 Excess of cost over fair value of tangible assets acquired, net 817,323 863,458 Other assets 422,491 213,741 Total assets $ 117,263,994 $ 105,874,571 LIABILITIES AND SHAREHOLDERS' EQUITY Total liabilities $ 2,347,345 $ 1,966,669 Shareholders' equity- Common stock 50,152,160 49,972,140 Capital surplus 36,870,604 36,863,701 Retained earnings 28,062,779 17,769,812 Unrealized loss on investment in securities available-for-sale, net (168,894) (697,751) Total shareholders' equity 114,916,649 103,907,902 Total liabilities and shareholders' equity $ 117,263,994 $ 105,874,571
Condensed Statements of Earnings- For the Years Ended December 31, 1995, 1994, and 1993 1995 1994 1993 Income- Cash dividends from subsidiary banks $12,890,000 $10,265,000 $8,935,000 Excess of earnings over dividends of subsidiary banks 3,664,864 3,332,171 5,376,282 Other income 1,290,192 797,299 550,543 17,845,056 14,394,470 14,861,825 Expenses- Salaries and employee benefits 936,527 888,538 829,148 Franchise taxes 9,787 6,290 5,799 Other operating expenses 619,022 608,758 505,323 1,565,336 1,503,586 1,340,270 Earnings before income taxes 16,279,720 12,890,884 13,521,555 Income tax benefit 75,822 221,346 251,862 Net earnings before cumulative adjustment for change in accounting for income taxes 16,355,542 13,112,230 13,773,417 Cumulative adjustment for change in accounting for income taxes - - (24,372) Net earnings $ 16,355,542 $ 13,112,230 $13,749,045
PAGE
Condensed Statements of Cash Flows- For the Years Ended December 31, 1995, 1994, and 1993 1995 1994 1993 Cash Flows from operating activities- Net earnings $ 16,355,542 $ 13,112,230 $13,749,045 Adjustments to reconcile net earnings to net cash provided by operating activities- Excess of earnings over dividends of subsidiary banks (3,664,864) (3,332,171) (5,376,282) Depreciation 28,922 26,269 21,177 Discount accretion, net of premium amortization (709,081) 115,027 (30,616) Amortization of excess of cost over fair value of assets acquired 46,135 46,135 46,135 Increase in other assets (209,810) (215,136) (117,587) Increase in liabilities 225,179 209,490 461,298 Net cash provided by operating activities 12,072,023 9,961,844 8,753,170 Cash flows from investing activities- Acquisition of Stephenville Bank & Trust Co. - - (7,750,000) Capital expenditures (27,863) (5,265) (71,693) Proceeds from maturity of securities 58,813,961 18,350,000 20,800,000 Purchases of securities (64,903,945) (23,298,035) (17,495,313) Net cash used in investing activities (6,117,847) (4,953,300) (4,517,006) Cash flows from financing activities- Proceeds of stock issuance 186,923 262,475 282,248 Cash dividends paid (5,907,078) (5,278,454) (4,219,974) Net cash used in financing activities (5,720,155) (5,015,979) (3,937,726) Net increase (decrease) in cash and cash equivalents 234,021 (7,435) 298,438 Cash in subsidiary bank at beginning of the year 453,214 460,649 162,211 Cash in subsidiary bank at end of year $ 687,235 $ 453,214 $ 460,649
16. BUSINESS COMBINATIONS: In July 1995, the Company, through a bank subsidiary, acquired Citizens State Bank in Roby,Texas ("Roby"), for $2,125,000 in cash. The fair market value of net assets acquired approximated the purchase price. The impact of Roby is not significant to the Company's financial statements. In March 1994, the Company acquired for approximately 230,000 shares of its common stock substantially all of the outstanding shares of Concho Bancshares, Inc. ("Concho") and its wholly-owned subsidiary, Southwest Bank of San Angelo. The shareholders of Concho received 1.15 shares of the Company's common stock for each share of Concho common stock owned. The accompanying consolidated financial statements of the Company give effect to the merger, which has been accounted for as a pooling-of-interests. Accordingly, the accounts of Concho have been combined with those of the Company to reflect the results of these companies on a combined basis for all periods presented. PAGE 17. CASH FLOW INFORMATION: Supplemental information on cash flows and noncash transactions is as follows:
Year Ended December 31, 1995 1994 1993 Supplemental cash flow information- Interest paid $27,020,740 $ 21,076,643 $ 16,686,798 Federal income taxes paid 8,412,589 6,523,443 6,601,491 Schedule of noncash investing and financing activities- Assets acquired through foreclosure 369,951 271,602 688,518 Change in unrealized loss on investment in securities available- for-sale 813,625 (1,069,727) -
18. SUBSEQUENT EVENTS: In January 1996, the Company completed a business combination to be accounted for as a pooling-of-interests with Weatherford National Bancshares, Inc. ("Weatherford") and its wholly-owned subsidiary, Weatherford National Bank. In connection with the transaction, Weatherford shareholders exchanged substantially all of their common stock at the rate of one share of Weatherford common stock for 1.5 shares of the Company's common stock. The following supplemental information presents the effects of the combination of the Company and Weatherford on the accompanying reported financial position and results of operations as of and for each of the three years ended December 31 (in thousands, except per share data):
(Unaudited) 1995 1994 1993 Total assets $ 1,126,293 $ 1,066,982 $ 1,069,389 Total equity 120,028 108,517 100,729 Net interest income 47,000 42,205 41,442 Net earnings 17,016 13,960 14,833 Earnings per share 3.19 2.62 2.80
In January 1996, the Company also 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 $4,700,000, which is to be recorded by the Company as goodwill. This combination is to be accounted for as a purchase. PAGE 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 a.) Election of Directors A Board of Directors is to be elected at the annual meeting. Each Director elected will hold office until the next annual meeting of the shareholders and until his or her successor shall be elected and qualified. Under the Bylaws of the Company, an individual may not stand for election or reelection as Director upon attainment of 72 years of age unless such individual owns at least 1% of the outstanding shares of the Company and is less than 75 years of age. While Bylaws of the Company fix the number of Directors at a number not less than three nor more than thirty, fourteen nominees are named and proposed by management. The reason that the number of Directors authorized exceeds the number of nominees is to avoid the necessity of amending the Bylaws of the Company each time that it would appear to be to the advantage of the Company to increase the number of its Directors. The proxies accompanying the proxy statement mailed to shareholders cannot be voted by the proxy committee for a greater number of persons than the number of nominees named. Other Directors could be elected after nominations from the floor at the annual meeting, if such nominees each receive a majority vote of the shareholders. Although the management of the Company does not contemplate that any of the nominees will be unable to serve, if such a situation arises prior to the annual meeting, the proxy committee will vote in accordance with its best judgment. During the last full year, four regular quarterly meetings of the Board of Directors were called and held. All directors except Mrs. Owen were able to attend at least 75% of the aggregate of the meetings of the Board of Directors and the meetings held by all committees of the Board on which they served. First Financial Bankshares, Inc. does not have a standing nominating or compensation committee of the Board of Directors. The Company has a standing Executive Committee whose responsibilities include functioning as a compensation committee and a nominating committee with appropriate recommendations to the entire Board. The Executive Committee met seven times during 1995 and, among other items, considered and took action on matters relating to its capacity as compensation and/or nominating committee. In its capacity as nominating committee, the Executive Committee will consider director nominations from security holders. There are no prescribed procedures that the security holder must follow. The Company has a Directors' Audit Committee that has the responsibility of acting on behalf of the Board in receiving and reviewing both internal and external audit reports. During 1995, the Audit Committee met three times. The Company also has an Administrative Committee for the Profit Sharing, Pension and Flexible Spending Account Benefit Plans. Pursuant to the 1992 Incentive Stock Option Plan for Key Employees of First Financial Bankshares, Inc. and its Subsidiaries, the Board of Directors has also appointed a Stock Option Committee composed of five members. PAGE The names and principal occupations of Registrant's Directors/nominees, together with the length of service as a Director are as follows:
Years as Principal Occupation Name Age Office Director (1)During Last Five Years Joseph E. Canon 53 Director - Executive Director, Dodge Jones Foundation Mac A. Coalson 57 Director - Real Estate and Ranching F. Scott Dueser (2) 42 Director 5 President and Chief Executive Officer, First National Bank of Abilene, Abilene, Texas*, since May 18, 1994; President, First National Bank of Abilene, Abilene, Texas*, January 15, 1991, to May 18, 1994; Executive Vice President, First National Bank of Abilene, Abilene, Texas* Patrick N. Gerald 56 Director 15 Chairman and President, First National Bank, Sweetwater, Sweetwater,Texas* Robert E. Hitt 71 Director 23 Investments (2) (3) (4) (5) Raymond A. McDaniel, 62 Director 4 McDaniel & Associates Jr. (3) Bynum Miers (5) 59 Director 4 Ranching and Investments Kenneth T. Murphy (2)58 Chairman, 24 See "Executive Officers" below President and Chief Executive Officer, Director Dian Graves Owen 56 Director 3 Chairman, Owen Healthcare, Inc. James M. Parker 65 Director 23 President, Parker (2) (3) (4) Properties, Inc. O.L. Schuch 70 Director - Investments Craig Smith 53 Director 6 Chairman and President, Hereford State Bank, Hereford, Texas* H.T. Wilson (2) (5) 68 Director 13 Chairman, Eastland National Bank, Eastland, Texas* Walter F. Worthington69 Director - Chairman and President, Weatherford National Bank, Weatherford, Texas* (1) The years indicated are the approximate number of years each person has continuously served as Director of the Company, or, prior thereto, of First National Bank of Abilene, which became a wholly-owned subsidiary of the Company in April 1973, when all the then Directors of First National Bank of Abilene became Directors of the Company. (2) This Director/Nominee is a member of the Executive Committee. (3) This Director/Nominee is a member of the Stock Option Committee. (4) This Director/Nominee is a member of the Administrative Committee of the Company Profit Sharing and Pension Plan. (5) This Director/Nominee is a member of the Directors' Audit Committee.
b.) Executive Officers
Term of Years Served Principal Occupation Name Age Office Office In Such Office During Past 5 Years Kenneth T. Murphy 58 Chairman, 1 year 9 years Chairman, President and President Chief Executive Officer; and Chief Chairman, First National Executive Bank of Abilene, Abilene Officer Abilene, Texas* Curtis R. Harvey 50 Executive 1 year 5 years Executive Vice President Vice Pres- and Chief Financial ident and Officer Chief Fin- ancial Officer Tommy J. Barrow 48 Executive 1 year 1 year Executive Vice President Vice since October 1, 1995; President President, First National Bank of Andrews *The bank shown is a subsidiary of the Company.
c.) Compliance with Section 16(a) of the Exchange Act Based solely upon a review of the forms furnished to the Company, the Company believes that during the 1995 fiscal year no Form 5s were required and all filing requirements applicable to its officers and directors were complied with. Item 11. Director and Officer Compensation a.) Directors who are not officers of the Company receive $800 for each Board meeting attended and $400 for each committee meeting attended. b.) Officer Compensation The following table provides individual compensation information on the Chief Executive Officer and the four most highly compensated officers of the Company and its subsidiaries. SUMMARY COMPENSATION TABLE
Long Term Annual Compensation Compensation Awards Number of Securities All Other Underlying Compensa- Name and Principal Position Year Salary ($) Options(#)(1) tion($)(2) Kenneth T. Murphy, Chairman, President 1995 $ 295,500 3,000 $ 18,143 & CEO-First Financial Bankshares, Inc. 1994 277,000 - 17,605 1993 257,000 3,750 26,516 F. Scott Dueser, President & CEO 1995 173,250 2,000 20,397 First National Bank of Abilene 1994 168,000 - 18,380 1993 151,250 2,500 18,382 Patrick N. Gerald, Chairman and President 1995 137,500 1,000 19,561 & CEO-First National Bank, Sweetwater 1994 137,500 - 8,186 1993 132,000 1,250 14,031 Craig Smith, Chairman and President 1995 132,000 1,000 19,700 & CEO-Hereford State Bank 1994 130,000 - 15,986 1993 124,500 1,250 15,299 Curtis R. Harvey, Executive Vice President 1995 124,000 1,000 14,829 & CFO-First Financial Bankshares, Inc. 1994 121,800 - 14,157 1993 117,000 1,250 13,050 (1) Adjusted for stock splits and stock dividends. (2) The Company's contribution to Profit Sharing Plan.
STOCK OPTIONS At the 1992 Annual Meeting, the "1992 Incentive Stock Option Plan" was approved and adopted. The purposes of the Plan are to attract and retain key employees and to encourage employee performance by providing them with a proprietary interest in the Company through the granting of stock options. The maximum aggregate number of shares of the Company's common stock which may be issued under the Plan is 100,000, subject to adjustment for stock dividends and similar events. The 1992 Plan includes substantially the same features as the expired 1982 Plan and is administered by a Stock Option Committee appointed by the Board of Directors. PAGE The following table contains information concerning options granted during 1995 to the Company's chief executive officer and four other most highly compensated executive officers.
Option Grants in Last Fiscal Year Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Individual Grants Option Term % of Number of Total Securities Options Underlying Granted to Exercise Options Employees or Base Granted in Fiscal Price Expiration Name (#) (1) Year ($/Sh) Date 5% ($) 10% ($) Kenneth T. Murphy 3,000 9.7% $ 32.00 10/17/05 $ 51,822 $ 139,382 F. Scott Dueser 2,000 6.5 32.00 10/17/05 34,548 92,921 Patrick N. Gerald 1,000 3.2 32.00 10/17/05 17,274 46,461 Craig Smith 1,000 3.2 32.00 10/17/05 17,274 46,461 Curtis R. Harvey 1,000 3.2 32.00 10/17/05 17,274 46,461 (1) Granted under incentive stock option plan.
The following table contains information concerning each exercise of stock options during the last fiscal year by each of the persons named below and the fiscal year-end value of unexercised options. Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values
Number of Securities Value of Underlying Unexercised Number of Unexercised In-the-Money Securities Options at FY- Options at Underlying End(#)(1) FY-End($) Shares Acquired Value Exercisable/ Exercisable/ Name on Exercise(#) Realized($) Unexercisable Unexercisable Kenneth T. Murphy 6,173 $ 112,161 3,500 $ 57,330 15,611 91,897 F. Scott Dueser - - 454 9,852 9,078 92,288 Patrick N. Gerald - - 681 14,778 4,993 50,754 Craig Smith 681 14,097 - - 6,025 61,244 Curtis R. Harvey 619 9,724 - - 3,487 22,037
PAGE Pension Plan The Company's Pension Plan requires annual contributions sufficient to provide the pension benefits accruing to employees under the Plan. The annual benefit for a participant in the Pension Plan who retires on his normal retirement date is the Accrued Benefit at December 31, 1988, plus 1.25% of average compensation multiplied by years of service from January 1, 1989. "Average Compensation" is the average compensation during the 10 years immediately preceding the date of determination. Compensation means the total amount paid to an employee during the year including bonuses, commissions, and overtime pay, but excluding reimbursed expenses, director fees, group insurance benefits, and pension and profit sharing contributions. There are provisions in the Plan for early retirement with reduced benefits. There is no vesting of Plan benefits until a participant has 5 or more years of credited service with participating employers. Full (100%)vesting occurs upon the completion of 5 years of credited service or upon reaching age 65 without regard to credited service. The following table illustrates estimated retirement benefits under the Company's Pension Plan for persons in specified remuneration and years of service categories and which benefits are payable annually for life with 10 years certain. The benefits listed in the table are not subject to any deduction for social security or other offset amounts. This illustration does not reflect any benefit which a participant may have accrued at December 31, 1988. PENSION PLAN TABLE
Years of Service Remuneration 15 20 25 30 35 $ 25,000 $ 4,688 $ 6,250 $ 7,813 $ 9,375 $ 10,938 50,000 9,375 12,500 15,625 18,750 21,875 75,000 14,063 18,750 23,438 28,125 32,813 100,000 18,750 25,000 31,250 37,500 43,750 125,000 23,438 31,250 39,063 46,875 54,688 150,000 28,125 37,500 46,875 56,250 65,625
The maximum annual pension benefit payable allowable under current law is $118,800. As of December 31, 1995, Mr. Murphy was credited with 25 years of service under the Company Pension Plan, Mr. Gerald was credited with 20 years of service, Mr. Smith was credited with 26 years of service, Mr. Dueser was credited with 19 years of service, and Mr. Harvey was credited with 5 years of service. The covered compensation of each of these officers and directors during 1995 was $150,000, $137,711, $132,591, $150,000, and $125,746, respectively. In 1992 the Board of Directors approved a deferred compensation agreement between First Financial Bankshares, Inc. and Kenneth T. Murphy, Chairman, President and Chief Executive Officer. The agreement was made in recognition of his contribution to the success of the Company and as an inducement to remain, subject to the discretion of the Board of Directors, in the employ of the Company. The agreement provides that following retirement in December 2002, or such later date as may be mutually agreed upon by the parties, the Company would pay Mr. Murphy, or his beneficiary, the sum of $6,250 per month for a period of 84 months. In 1995 the agreement was revised to provide for the sum of $8,750 per month for a period of 84 months. The increase serves to offset the reduction in Mr. Murphy's pension benefit resulting from a lower covered compensation amount now allowable under Federal tax law. The monthly amount is considered to be an appropriate level of supplemental income to partially offset Mr. Murphy's reduction in personal income following retirement and is based on an analysis of the difference in projected final year compensation and retirement compensation. The agreement also provides for 70% vesting at age 62, 80% vesting at age 63, and 90% vesting at age 64. PAGE COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No person who served as a member of the Executive Committee in its capacity as compensation committee was, during the past fiscal year, an officer or employee of the Company or any of its subsidiaries, or had any relationship requiring disclosure except for Mr. Tom Wilson, who is a former subsidiary bank officer. However, committee members Robert Hitt and James Parker did obtain loans from a subsidiary bank during the past year. In each case, such loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. No executive officer of the Company served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire Board of Directors) of another entity, one of whose executive officers served as a Director of the Company. EXECUTIVE COMMITTEE REPORT ON EXECUTIVE COMPENSATION During the past fiscal year the Company's executive compensation program was administered by the Executive Committee acting in the capacity of compensation committee. The Company's executive compensation program consists of base salary, profit sharing, and incentive stock options. With the exception of the Chief Executive Officer, and Mr. Dueser whose salary is reviewed in February and adjusted March 1, the base salaries for the executive officers named on page 48 are reviewed in December of each year with adjustments made effective January 1. Included among the factors which the Committee considers when approving annual base salaries are: attainment of planned goals and objectives, scope of responsibility (asset size of subsidiary bank and/or degree of influence on the Company's profitability and operations), tenure with the Company, evaluation input from subsidiary bank directors, and relationship of base salary to the base salaries of other members of the executive officer group. The base salary for Mr. Murphy was reviewed in March 1995 with an adjustment made effective April 1, 1995. The increase was based on the following factors: - The Company's financial performance for 1995. - Performance of Chief Executive Officer's duties which relate primarily to leading and managing the Company within the broad guidelines set by the Board of Directors. - Base salary compared to SNL Securities, Inc. compensation survey data for chief executive officers of similar size organizations within the industry. - Subjective evaluations of Mr. Murphy's contribution to the overall success of the Company. Stock options are granted under the Incentive Stock Option Plan upon recommendation of the Stock Option Committee of the Board of Directors. The Executive Committee believes that the Stock Option Plan is an integral part of the executive compensation program which encourages key employees to align their long-range interest with those of shareholders by accomplishing longer-term corporate goals. Robert E. Hitt H.T. Wilson James Parker PAGE The line graph below compares cumulative total shareholder return with a performance indication of the overall stock market, the S&P 500 Stock Index, and a nationally-recognized banking industry index, the Keefe, Bruyette and Woods, Inc. (KBW) 50 Total Return Index,which is comprised of fifty of the nation's top banking companies. The referenced performance graph has been filed separately with the SEC under Form SE because the graphical interface cannot be electronically transferred. PAGE Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security ownership of certain beneficial owners. At December 31, 1995, 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 1,096,595 shares of such stock. Of the total shares held, these subsidiaries of capacities an aggregate of 1,096,595 shares of such stock. Of the total shares held, these subsidiaries of the Company had sole power to vote 527,905 shares (10.5%), 79,260 shares (1.6%), and 1,125 shares (-%), respectively. In addition, First National Bank of Abilene and First National Bank, Sweetwater shared, with other persons, the power to vote the remaining 485,252 shares and 3,052 shares, respectively. All the shares held by each subsidiary bank, which are registered in its name as fiduciary or in the name of its nominee, are owned by many different accounts, each of which is governed by a separate instrument that sets forth the powers of the fiduciary with regard to the securities held in such accounts. b.) Security ownership of management Set forth in the following table is certain information as of March 6, 1996 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 2,542 - Mac A. Coalson 60,213 1.1 F. Scott Dueser 33,894 0.6 Patrick N. Gerald 19,041 0.4 Robert E. Hitt 51,798 0.9 Raymond McDaniel, Jr. 14,696 0.2 Bynum Miers 13,453 0.2 Kenneth T. Murphy 56,251 1.0 Dian Graves Owen 13,595 0.2 James M. Parker 202,655 3.8 O. L. Schuch 15,878 0.3 Craig Smith 25,140 0.5 H. T. Wilson 50,286 0.9 Walter F. Worthington 86,618 1.6 Curtis R. Harvey 1,444 - Tommy J. Barrow 200 - All Officers and Directors as a group 648,323 12.1
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. PAGE PART IV Item 13. Certain Relationships and Related Transactions Certain of Registrant's officers and directors are customers of one or more of Registrant's subsidiary banks, as are corporations and other business entities with which directors of Bankshares are affiliated as directors, officers or principals. All loans to directors and officers of Bankshares, or to persons and firms with which they are or may be affiliated, were and are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not, and do not, involve more than the normal risk of collectibility or present other unfavorable features. None of the transactions involving Bankshares' subsidiaries and Bankshares' officers and directors, or other businesses with which they may be affiliated, have been classified or disclosed as nonaccrual, past due, restructured or potential problems. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K The consolidated financial statements of the Registrant filed with this report are included on pages 27 through 45. There were no financial statement schedules filed as a part of this report. Such information, to the extent applicable, has been made a part of the consolidated financial statements or included elsewhere in this report. An 8-K Current Report was filed during the fourth quarter of 1995 with regard to the Stock Exchange Agreement between Registrant, Weatherford National Bancshares, Parker Bancshares, and Weatherford National Bank. 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, Chairman, President and Chief Executive Officer of the Registrant. 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. Listed below are the exhibits filed with this report: 1. Subsidiaries of Registrant 2. Revised Deferred Compensation Agreement between Bankshares and Kenneth T. Murphy, Chairman, President and Chief Executive Officer of the Registrant. PAGE
SUBSIDIARIES OF REGISTRANT Place of Percentage of Voting Name of Subsidiary Organization Securities Owned First Financial Bankshares of Delaware, Inc. Delaware 100% First Financial Investments, Inc. Texas 100% First National Bank of Abilene Texas 100%* Abilene, Texas Hereford State Bank Texas 100%* Hereford, Texas First National Bank Texas 100%* Sweetwater, Texas Eastland National Bank Texas 100%* Eastland, Texas The First National Bank in Cleburne Texas 100%* Cleburne, Texas Stephenville Bank & Trust Texas 100%* Stephenville, Texas Southwest Bank of San Angelo Texas 100%* San Angelo, Texas * By First Financial Bankshares of Delaware, Inc. All subsidiaries (other than First Financial Investments, Inc. which, as of December 31, 1995, had not yet been formally organized) are included in the consolidated financial statements.
PAGE DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made and restated this 28th day of December, 1995, by and between FIRST FINANCIAL BANKSHARES, INC. (formerly FIRST ABILENE BANKSHARES, INC.), a Texas corporation, with its principal place of business in Abilene, Taylor County, Texas, hereinafter called "Corporation," and KENNETH T. MURPHY, a resident of Abilene, Taylor County, Texas, hereinafter called "Employee." RECITALS: A. On or about October 28, 1992, Corporation and Employee entered into that certain Deferred Compensation Agreement (the "Compensation Agreement") in recognition of the capable and efficient manner in which Employee, as Corporation's Chief Executive Officer, has managed the business of Corporation and as an inducement to Employee to remain in the employ of Corporation (subject, however, to the discretion of the Corporation's Board of Directors) by compensating Employee beyond his regular salary and other benefits for services rendered or to be rendered to Corporation. B. On or about November 28, 1994, Corporation, as a further inducement to Employee to remain in the employ of Corporation, did amend the Compensation Agreement so as to provide assurance to Employee that any change in control of Corporation which may result, directly or indirectly, in termination of Employee's employment by Corporation (or any successor in interest to the Corporation) would not result in loss of, or any reduction in the amount of, the deferred compensation which Employee would otherwise be entitled to receive under the Compensation Agreement. C. Employee has continued to serve as a Director of Corporation and as its Chief Executive Officer at all times since the date of the Compensation Agreement and has fulfilled all of his obligations thereunder as of the date hereof. D. Corporation, being satisfied with the manner in which Employee has continued to perform his duties and carry out his responsibilities as an officer and Director of Corporation, and as a further inducement to Employee to remain in the employ of Corporation, desires to restate the Compensation Agreement, as heretofore amended, and to further amend said Agreement to provide an increase of TWO THOUSAND FIVE HUNDRED DOLLARS ($2,500) per month to be paid to Employee in the event he achieves the condition for full payment under the Compensation Agreement. NOW, THEREFORE, in consideration of the premises and of the provisions hereinafter set forth, the parties agree as follows: 1. Continuation of Employment. At the discretion of the Board of Directors of Corporation, Employee shall continue in the employ of the Corporation until December 31, 2002, or until such later date as may be mutually agreed upon by the parties. 2. Compensation. The Corporation shall pay the Employee such salary as the Board of Directors of Corporation may from time to time determine, together with such amount of deferred compensation payable as provided in provisions hereinafter set forth, unless forfeited by the occurrence of any of the events of forfeiture hereinafter set forth. 3. Deferred Compensation. a. Subject to the provisions of Paragraphs 4 and 5 below, commencing on the 1st day of January, 2003, or the first day of the month following Employee's retirement, whichever occurs later, the Corporation shall pay to the Employee as deferred compensation the sum of EIGHT THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($8,750) per month for a period of 84 months. b. In the event of the death of Employee before all 84 monthly installments are made, the unpaid balance will continue to be paid in installments for the unexpired portion of such 84-month period to his designated beneficiary in the same manner as set forth above. PAGE c. If the Employee's employment is terminated because of death or disability prior to the commencement of the payment of deferred compensation to Employee, the Corporation shall pay to the beneficiary designated by the Employee or to the Employee, as the case may be, on the first day of the month following such termination, EIGHT THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($8,750) for a period of 84 months. For purposes ofthis Agreement, the Employee shall be considered disabled on the date the Board of Directors determines the Employee, because of a physical or mental disability, will be unable to perform the duties of his customary position of employment for an indefinite period which the Board of Directors considers will be of long continued duration. d. If the designated beneficiary shall die before a total of 84 monthly installments are made by the Corporation, the unpaid balance will continue to be paid in installments for the unexpired portion of such 84-month period to the estate of such designated beneficiary. e. The beneficiary referred to in this paragraph may be designated or changed by Employee (without the consent of any prior beneficiary) on the form provided by the Corporation and delivered to the Corporation before his death. If no such beneficiary shall have been designated or if no designated beneficiary shall survive the Employee, the installment payments payable hereunder shall be payable to the Employee's estate. f. During the period of deferred compensation, other employee benefits of the Corporation shall be provided to Employee at the sole election and determination of the Board of Directors of Corporation. 4. Early Commencement of Deferred Compensation. a. No payment of deferred compensation shall be made to Employee if his employment terminates prior to his attaining age 62 for any reason other than death or disability. b. Subject to the provisions of Paragraph 5 below, if Employee's employment terminates prior to his attaining age 65, but after he has attained age 62, for any reason other than death or disability, then commencing on the first day of the month following such termination, the Corporation shall pay deferred compensation in accordance with the provisions of Paragraph 3 above, with the exception that the amount of deferred compensation payable shall be reduced for the term of payout in accordance with the following schedule:
Age of Employee Percentage of Deferred at Termination Compensation Payable of Employment Under Paragraph 3 62 70% 63 80% 64 90%
c. Notwithstanding the provisions of Subparagraphs a. and b. above,but subject to the provisions of Paragraph 5 below, Employee shall, on the first day of the month following termination of employment, be entitled to receive all of the deferred compensation described in Paragraph 3 above in the event (1) that the Corporation shall be merged or consolidated with another corporation or other organization, or (2) that all, or substantially all, of the assets of the Corporation (including, but not limited to, the shares of the Corporation's subsidiary banks) shall be acquired by another corporation or other organization, or (3) that majority ownership or control of the Corporation shall be otherwise transferred to, or acquired by, any one or more persons, firms or corporations as the result of a single transaction or closely-related series of transactions; provided, that there shall be excluded from the transactions or occurrences described in (1)-(3) any merger, consolidation,sale, transfer or other change in ownership or control of the Corporation or its principal assets as a result of any reorganization of the Corporation and its subsidiaries effected by the Corporation itself. 5. Forfeiture of Deferred Compensation. No payment of deferred compensation shall be made to Employee, and all rights under this Agreement shall be forfeited, if his employment shall be terminated by the Corporation as a result of the Employee's action or failure to act which in the opinion of the Board is materially adverse to the best interest of the Corporation. PAGE 6. Rights of Employee and Any Beneficiary. Nothing contained in this Agreement and no action taken pursuant to the provisions of this Agreement shall create or be construed to create a trust of any kind or a fiduciary relationship between the Corporation and the Employee, his designated beneficiary or any other person. Any funds which may be set aside by the Corporation to meet its obligations under this Agreement shall continue for all purposes to be a part of the general funds of the Corporation and no persons other than the Corporation shall by virtue of the provisions of this Agreement have any interest in such funds. To the extent that any person acquires a right to receive payments from the Corporation under this Agreement, such rights shall be no greater than the right of any unsecured general creditor of the Corporation. The Employee and any beneficiary of the Employee shall have no vested, secured or preferred interest in any of the Corporation's assets, but will only have a contractual right to receive payments provided for in this Agreement. The right to receive payments under this Agreement may not be anticipated, commuted, transferred, assigned or otherwise encumbered. The rights of the Employee under this Agreement and/or of any beneficiary of the Employee shall be solely those of an unsecured creditor of the Corporation. 7. Effect of Benefits. The benefits to be provided hereunder are future and contingent, and shall be in addition to Employee's annual salary as determined by the Board of Directors of the Corporation. This Agreement shall not affect the right of Employee to participate in any current or future Corporation retirement plan or in any supplemental compensation arrangement which constitutes a part of the Corporation's regular compensation structure. Any deferred compensation payable under this Agreement shall not be deemed salary or other compensation to the Employee for the purpose of computing benefits to which he may be entitled under any pension plan or other arrangement of the Corporation for the benefit of its employees. 8. No Promise of Future Employment. Nothing contained herein shall be construed as conferring upon the Employee the right to continue in the employ of the Corporation as an officer or in any other capacity. 9. Reorganization. The Corporation agrees that it will not merge or consolidate with any other company or organization, or permit its business activities to be taken over by any other organization unless and until the succeeding or continuing company or other organization shall expressly assume all obligations and liabilities herein set forth. 10. Amendment. This Agreement may be revoked or amended in whole or in part only by a written instrument signed by both of the parties hereto. 11. Interpretation. The Board of Directors of the Corporation shall have full power and authority to interpret, construe and administer this Agreement, and the Board's interpretation and construction thereof, and actions thereunder shall be binding and conclusive to all persons for all purposes. No members of the Board shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Agreement unless attributable to his own willful misconduct or lack of good faith. 12. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Corporation, its successors and assigns, and the Employee, his designated beneficiary, heirs, executors, administrators and legal representatives. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. ATTEST: FIRST FINANCIAL BANKSHARES, INC. By: /S/ SANDY LESTER By: /S/ CURTIS R. HARVEY SANDY LESTER CURTIS R. HARVEY Secretary Executive Vice President "CORPORATION" By:/S/ KENNETH T. MURPHY KENNETH T. MURPHY "EMPLOYEE" PAGE 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, of the Board, President, Executive Vice President Chief Executive Officer and Chief Financial Officer, Director Controller and Chief Accounting Officer Date: March 12 , 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. NAME TITLE DATE /S/ F. SCOTT DUESER Director March 19 , 1996 F. Scott Dueser /S/ PATRICK N. GERALD Director March 6 , 1996 Patrick N. Gerald /S/ ROBERT E. HITT Director March 19 , 1996 Robert E. Hitt Director March , 1996 Joe B. Matthews /S/ RAYMOND A. MCDANIEL, JR. Director March 19 , 1996 Raymond A. McDaniel, Jr. /S/ BYNUM MIERS Director March 19 , 1996 Bynum Miers Director March , 1996 Dian Graves Owen /S/ JAMES M. PARKER Director March 19 , 1996 James M. Parker /S/ O. L. SCHUCH Director March 12 , 1996 O. L. Schuch /S/ CRAIG SMITH Director March 21 , 1996 Craig Smith /S/ H. T. WILSON Director March 19 , 1996 H.T. Wilson EX-27 2
9 1,000 YEAR DEC-31-1995 DEC-31-1995 58,138 1,387 26,360 0 26,249 427,455 430,101 481,214 8,943 1,062,335 939,642 85 7,691 0 0 0 50,152 64,765 1,062,335 43,354 25,299 1,902 70,555 27,626 27,655 42,900 55 44 32,402 24,718 24,718 0 0 16,356 3.26 3.26 4.71 1,160 173 0 1,482 9,024 965 745 8,943 8,943 0 0
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