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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 0-7674
First Financial Bankshares, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Texas 75-0944023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
400 Pine Street
Abilene, Texas 79601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (915) 627-7155
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of Exchange on Which Registered
-------------- ------------------------------------
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 1, 2000, the aggregate market value of voting stock held by
non-affiliates was $232,108,200.
As of March 1,2000,there were 9,974,306 shares of Common Stock outstanding.
Documents Incorporated by Reference
The Proxy Statement for the 2000 Annual Meeting is incorporated into Part
III of this Form 10-K by reference.
TABLE OF CONTENTS
Page
----
FORWARD-LOOKING STATEMENTS.....................................................1
PART I
ITEM 1. BUSINESS........................................................1
ITEM 2. PROPERTIES.....................................................10
ITEM 3. LEGAL PROCEEDINGS..............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................11
ITEM 6. SELECTED FINANCIAL DATA........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..........23
ITEM 11. EXECUTIVE COMPENSATION......................................23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K....................................................23
SIGNATURES
-i-
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
and similar expressions, as they relate to us or our management, identify
forward-looking statements. These forward-looking statements are based on
information currently available to our management. Actual results could differ
materially from those contemplated by the forward-looking statements as a result
of certain factors, including but not limited to general economic conditions,
actions taken by the Federal Reserve Board, legislative and regulatory actions
and reforms, competition and other factors described in "PART II, Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements reflect the current views of our management with
respect to future events and are subject to these and other risks, uncertainties
and assumptions relating to our operations, results of operations, growth
strategy and liquidity. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
General
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First Financial Bankshares, Inc., a Texas corporation, is a multi-bank
holding company registered under the Bank Holding Company Act of 1956, or BHCA.
As such, we are supervised by the Board of Governors of the Federal Reserve
System, or Federal Reserve Board. We were formed in 1956 under the original name
F & M Operating Company. By virtue of a series of reorganizations, mergers, and
acquisitions since 1956, we now own, through our wholly-owned Delaware
subsidiary, First Financial Bankshares of Delaware, Inc., nine banks organized
and located in Texas. These nine banks are First National Bank of Abilene,
Abilene, Texas; Hereford State Bank, Hereford, Texas; First National Bank,
Sweetwater, Texas; Eastland National Bank, Eastland, Texas; The First National
Bank in Cleburne, Cleburne, Texas; Stephenville Bank and Trust Co.,
Stephenville, Texas; San Angelo National Bank, San Angelo, Texas; Weatherford
National Bank, Weatherford, Texas; and Texas National Bank, Southlake, Texas.
Our service centers are located primarily in North Central and West Texas.
Considering the branches and locations of all our subsidiary banks, as of
December 31, 1999, we had 25 financial centers across Texas, with seven
locations in Abilene, two locations in Cleburne, two locations in Stephenville,
two locations in San Angelo, three locations in Weatherford, and one location
each in Hereford, Sweetwater, Eastland, Southlake, Aledo, Alvarado, Burleson,
Trophy Club, and Roby.
First Financial Bankshares, Inc.
- --------------------------------
We provide management and technical resources and policy direction to our
subsidiary banks, which enables them to improve or expand their banking services
while continuing their local activity and identity. Each of our subsidiary banks
operates under the day-to-day management of its own board of directors and
officers, with substantial authority in making decisions concerning their own
investments, loan policies, interest rates, and service charges. We provide
resources and policy direction in, among other things, the following areas:
o asset and liability management;
o accounting, budgeting, planning and insurance;
o capitalization; and
o regulatory compliance.
In particular, we assist our subsidiary banks with, among other things,
decisions concerning major capital expenditures, employee fringe benefits,
including pension plans and group insurance, dividend policies, and appointment
of officers and directors and their compensation. We also perform, through
corporate staff groups or by outsourcing to third parties, internal audits and
loan reviews of our subsidiary banks. Through First National Bank of Abilene, we
provide advice and specialized services for our banks related to lending,
investing, purchasing, advertising, public relations, and computer services.
1
Services Offered by Our Subsidiary Banks
- ----------------------------------------
Each of our subsidiary banks is a separate entity that operates under the
day-to-day management of its own board of directors and officers. Each of our
subsidiary banks provides general commercial banking services, which include
accepting and holding checking, savings and time deposits, making loans,
automated teller machines, drive-in and night deposit services, safe deposit
facilities, transmitting funds, and performing other customary commercial
banking services. Our subsidiary banks also administer pension plans, profit
sharing plans and other employee benefit plans, act as stock transfer agents or
stock registrars for corporations, and provide paying agent services. First
National Bank of Abilene, First National Bank, Sweetwater, Stephenville Bank and
Trust Co. and San Angelo National Bank have active trust departments. The trust
departments offer a complete range of services to individuals, associations, and
corporations. These services include administering estates, testamentary trusts,
various types of living trusts, and agency accounts. In addition, First National
Bank of Abilene, First National Bank in Cleburne, and San Angelo National Bank
provide securities brokerage services through arrangements with various third
parties.
Competition
- -----------
Commercial banking in Texas is highly competitive, and because we hold less
than 1% of deposits, we represent only a minor segment of the industry. To
succeed in this industry, our management believes that our banks must have the
capability to compete in the areas of (1) interest rates paid or charged; (2)
scope of services offered; and (3) prices charged for such services. Our
subsidiary banks compete in their respective service areas against highly
competitive banks, savings and loan associations, small loan companies, credit
unions, and brokerage firms, all of which are engaged in providing financial
products and services and some of which are larger than our subsidiary banks in
terms of capital, resources and personnel.
Our business does not depend on any single customer or any few customers,
the loss of any one of which would have a materially adverse effect upon our
business. Our customers include our officers and directors, as well as other
entities with which we are affiliated. With our subsidiary banks we may make
loans to officers and directors, and entities with which we are affiliated, in
the ordinary course of business. We make these loans on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. Loans to directors, officers and
their affiliates are also subject to certain restrictions under federal and
state banking laws.
Employees
- ---------
With our subsidiary banks we employed approximately 720 full-time
equivalent employees at March 1, 2000. Our management believes that our employee
relations have been and will continue to be good.
Supervision and Regulation
- --------------------------
Both federal and state laws extensively regulate bank holding companies and
banks. These laws (and the regulations promulgated thereunder) are primarily
intended to protect depositors and the deposit insurance fund of the Federal
Deposit Insurance Corporation, or FDIC, although shareholders are also
benefited. The following information describes particular laws and regulatory
provisions relating to bank holding companies and banks. This discussion is
qualified in its entirety by reference to the particular laws and regulatory
provisions. A change in any of these laws or regulations may have a material
effect on our business and the business of our subsidiary banks.
Bank Holding Companies
Because we are a bank holding company, we are subject to regulation under
the BHCA and its examination and reporting requirements. The BHCA provides that
bank holding companies may not:
(1) engage in any activities other than banking, managing and controlling
banks, furnishing services to a bank that it owns and controls, or engaging in
certain activities closely related to banking. Examples of activities that the
Federal Reserve Board has determined to be closely related to banking, or to
managing or controlling banks, include:
o the making or acquiring of loans or other extensions of credit;
2
o servicing of loans;
o performing certain trust functions;
o acting or serving as an investment or financial advisor;
o providing certain securities brokerage services as agent for
customers; and
o providing bookkeeping and data processing services for a bank
holding company and its subsidiaries; or
(2) (subject to certain limited exceptions) directly or indirectly acquire
the ownership or control of more than five percent of any class of voting shares
or assets of any company, including a bank, without the prior written approval
of the Federal Reserve Board.
The BHCA provides that the Federal Reserve Board cannot approve any
acquisition, merger or consolidation that may
o substantially lessen competition in the banking industry,
o create a monopoly in any section of the country, or
o be a restraint of trade.
However, the Federal Reserve Board may approve such a transaction if the
convenience and needs of the community clearly outweigh any anti-competitive
effects. Specifically, the Federal Reserve Board would consider, among other
factors, the expected benefits to the public (greater convenience, increased
competition, greater efficiency, etc.) against the risks of possible adverse
effects (undue concentration of resources, decreased or unfair competition,
conflicts of interest, unsound banking practices, etc.). Also, see
"--Supervision and Regulation--Capital" for discussion of capital requirements
of bank holding companies and "--Our Support of Our Subsidiary Banks" for
discussion of support requirements of bank holding companies.
Banks
Federal and state laws and regulations that govern banks have the effect
of, among other things, regulating the scope of business, investments, cash
reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking
associations under the National Bank Act are subject to regulation and
examination by the Office of the Comptroller of the Currency, or OCC. The OCC
supervises, regulates and regularly examines the First National Bank of Abilene,
First National Bank, Sweetwater, The First National Bank in Cleburne, Eastland
National Bank, San Angelo National Bank, Weatherford National Bank and Texas
National Bank. The OCC's supervision and regulation of banks is primarily
intended to protect the interests of depositors. The National Bank Act
o requires each national banking association to maintain reserves
against deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
State Banks. Banks that are organized as state banks under Texas law are
subject to regulation and examination by the Banking Commissioner of the State
of Texas. The Commissioner regulates and supervises, and the Texas Banking
Department regularly examines, Hereford State Bank and Stephenville Bank and
Trust Co. The Commissioner's supervision and regulation of banks is primarily
designed to protect the interests of depositors. Texas law
o requires each state bank to maintain reserves against deposits,
o restricts the nature and amount of loans that may be made and the
interest that may be charged, and
o restricts investments and other activities.
3
See "--Supervision and Regulation--Payment of Dividends" for discussion of
restrictions on a bank's ability to pay dividends and "--Supervision and
Regulation--Capital" for a discussion of capital requirements of our subsidiary
banks.
Deposit Insurance
Each of our subsidiary banks is a member of the FDIC. The FDIC provides
deposit insurance protection that covers all deposit accounts in FDIC-insured
depository institutions and that generally does not exceed $100,000 per
depositor. Our subsidiary banks must pay assessments to the FDIC under a
risk-based assessment system for federal deposit insurance protection.
FDIC-insured depository institutions that are members of the Bank Insurance Fund
pay insurance premiums at rates based on their risk classification. Institutions
assigned to higher risk classifications (i.e., institutions that pose a greater
risk of loss to their respective deposit insurance funds) pay assessments at
higher rates than institutions that pose a lower risk. An institution's risk
classification is assigned based on its capital levels and the level of
supervisory concern the institution poses to bank regulators. In addition, the
FDIC can impose special assessments to cover the costs of borrowings from the
U.S. Treasury, the Federal Financing Bank and the Bank Insurance Fund member
banks. As of December 31, 1999, the assessment rate for each of our subsidiary
banks is at the lowest level risk-based premium available.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989, or FIRREA, an FDIC-insured depository institution can be held liable for
any losses incurred by the FDIC in connection with (1) the "default" of one of
its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one
of its FDIC-insured subsidiaries "in danger of default." "Default" is defined
generally as the appointment of a conservator or receiver, and "in danger of
default" is defined generally as the existence of certain conditions indicating
that a default is likely to occur in the absence of regulatory assistance.
The Federal Deposit Insurance Act, or FDIA requires that the FDIC review
(1) any merger or consolidation by or with an insured bank, or (2) any
establishment of branches by an insured bank. The FDIC is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also
required before an insured bank retires any part of its common or preferred
stock, or any capital notes or debentures. Insured banks that are also members
of the Federal Reserve System, however, are regulated with respect to the
foregoing matters by the Federal Reserve System.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other
subsidiaries. We receive most of our revenue from dividends paid to us by our
Delaware holding company subsidiary. Similarly, the Delaware holding company
subsidiary receives dividends from our bank subsidiaries. Described below are
some of the laws and regulations that apply when either we or our subsidiary
banks pay dividends.
Each state bank that is a member of the Federal Reserve System and each
national banking association is required by federal law to obtain the prior
approval of the Federal Reserve Board and the OCC, respectively, to declare and
pay dividends if the total of all dividends declared in any calendar year would
exceed the total of (1) such bank's net profits (as defined and interpreted by
regulation) for that year plus (2) its retained net profits (as defined and
interpreted by regulation) for the preceding two calendar years, less any
required transfers to surplus. In addition, these banks may only pay dividends
to the extent that retained net profits (including the portion transferred to
surplus) exceed bad debts (as defined by regulation).
Our subsidiary banks paid aggregate dividends of approximately $20.6
million in 1999 and approximately $15.5 million in 1998. Under the dividend
restrictions discussed above, as of December 31, 1999, our subsidiary banks,
without obtaining governmental approvals, could have declared in the aggregate
additional dividends of approximately $18.6 million from retained net profits.
To pay dividends, we and our subsidiary banks must maintain adequate
capital above regulatory guidelines. In addition, if the applicable regulatory
authority believes that a bank under its jurisdiction is engaged in or is about
to engage in an unsafe or unsound practice (which, depending on the financial
condition of the bank, could include the payment of dividends), the authority
may require, after notice and hearing, that such bank cease and desist from the
unsafe practice. The Federal Reserve Board and the OCC have each indicated that
paying dividends that deplete a bank's capital base to an inadequate level would
be an unsafe and unsound banking practice. The Federal Reserve Board, the OCC
and the FDIC have issued policy statements that recommend that bank holding
companies and insured banks should generally only pay dividends out of current
operating earnings.
4
Affiliate Transactions
The Federal Reserve Act and the FDIA restrict the extent to which we can
borrow or otherwise obtain credit from, or engage in certain other transactions
with, our depository subsidiaries. These laws regulate "covered transactions"
between insured depository institutions and their subsidiaries, on the one hand,
and their nondepository affiliates, on the other hand. "Covered transactions"
include a loan or extension of credit to a nondepository affiliate, a purchase
of securities issued by such an affiliate, a purchase of assets from such an
affiliate (unless otherwise exempted by the Federal Reserve Board), an
acceptance of securities issued by such an affiliate as collateral for a loan,
and an issuance of a guarantee, acceptance, or letter of credit for the benefit
of such an affiliate. The "covered transactions" that an insured depository
institution and its subsidiaries are permitted to engage in with their
nondepository affiliates are limited to the following amounts: (1) in the case
of any one such affiliate, the aggregate amount of "covered transactions" cannot
exceed ten percent of the capital stock and the surplus of the insured
depository institution; and (2) in the case of all affiliates, the aggregate
amount of "covered transactions" cannot exceed twenty percent of the capital
stock and surplus of the insured depository institution. In addition, extensions
of credit that constitute "covered transactions" must be collateralized in
prescribed amounts. Further, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
Capital
Bank Holding Companies. The Federal Reserve Board has adopted risk-based
capital guidelines for bank holding companies. The ratio of total capital to
risk weighted assets (including certain off-balance-sheet activities, such as
standby letters of credit) must be a minimum of eight percent. At least half of
the total capital is to be composed of common shareholders' equity, minority
interests in the equity accounts of consolidated subsidiaries and a limited
amount of perpetual preferred stock, less goodwill, which is collectively
referred to as Tier 1 Capital. The remainder of total capital may consist of
subordinated debt, other preferred stock and a limited amount of loan loss
reserves.
In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. Bank holding companies that meet
certain specified criteria, including having the highest regulatory rating, must
maintain a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average
assets for the current quarter, less goodwill) of three percent. Bank holding
companies that do not have the highest regulatory rating will generally be
required to maintain a higher Tier 1 Capital leverage ratio of three percent
plus an additional cushion of 100 to 200 basis points. The Federal Reserve Board
has not advised us of any specific minimum leverage ratio applicable to it. The
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions.
Such strong capital positions must be kept substantially above the minimum
supervisory levels without significant reliance on intangible assets (e.g.,
goodwill, core deposit intangibles and purchased mortgage servicing rights). As
of December 31, 1999, the capital ratios were as follows: (1) Tier 1 Capital to
Risk-Weighted Assets Ratio, 17.19%; (2) Total Capital to Risk-Weighted Assets
Ratio, 18.13%; and (3) Tier 1 Capital Leverage Ratio, 9.62%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991,
or FDICIA established five capital tiers with respect to depository
institutions: "well-capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." A
depository institution's capital tier will depend upon where its capital levels
are in relation to various relevant capital measures, including (1) risk-based
capital measures, (2) a leverage ratio capital measure and (3) certain other
factors. Regulations establishing the specific capital tiers provide that a
"well-capitalized" institution will have a total risk-based capital ratio of ten
percent or greater, a Tier 1 risk-based capital ratio of six percent or greater,
and a Tier 1 leverage ratio of five percent or greater, and not be subject to
any written regulatory enforcement agreement, order, capital directive or prompt
corrective action derivative. For an institution to be "adequately capitalized,"
it will have a total risk-based capital ratio of eight percent or greater, a
Tier 1 risk-based capital ratio of four percent or greater, and a Tier 1
leverage ratio of four percent or greater (in some cases three percent). For an
institution to be "undercapitalized," it will have a total risk-based capital
ratio that is less than eight percent, a Tier 1 risk-based capital ratio less
than four percent or a Tier 1 leverage ratio less than four percent (or a
leverage ratio less than three percent if the institution is rated composite 1
in its most recent report of examination, subject to appropriate federal banking
agency guidelines). For an institution to be "significantly undercapitalized,"
it will have a total risk-based capital ratio less than six percent, a Tier 1
risk-based capital ratio less than three percent, or a Tier 1 leverage ratio
less than three percent. For an institution to be "critically undercapitalized,"
it will have a ratio of tangible equity to total assets equal to or less than
two percent. FDICIA requires federal banking agencies to take "prompt corrective
action" against depository institutions that do not meet minimum capital
requirements. Under current regulations, we were "well capitalized" as of
December 31, 1999.
5
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
"undercapitalized." An "undercapitalized" institution must develop a capital
restoration plan and its parent holding company must guarantee that
institution's compliance with such plan. The liability of the parent holding
company under any such guarantee is limited to the lesser of five percent of the
institution's assets at the time it became "undercapitalized" or the amount
needed to bring the institution into compliance with all capital standards.
Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over the parent's general unsecured creditors. If
a depository institution fails to submit an acceptable capital restoration plan,
it shall be treated as if it is significantly undercapitalized. "Significantly
undercapitalized" depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become "adequately capitalized," requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks. "Critically
undercapitalized" institutions are subject to the appointment of a receiver or
conservator. Finally, FDICIA requires the various regulatory agencies to set
forth certain standards that do not relate to capital. Such standards relate to
the safety and soundness of operations and management and to asset quality and
executive compensation, and permit regulatory action against a financial
institution that does not meet such standards.
If an insured bank fails to meet its capital guidelines, it may be subject
to a variety of other enforcement remedies, including a prohibition on the
taking of brokered deposits and the termination of deposit insurance by the
FDIC. Bank regulators continue to indicate their desire to raise capital
requirements beyond their current levels.
In addition to FDICIA capital standards, Texas-chartered banks must also
comply with the capital requirements imposed by the Texas Banking Department.
Neither the Texas Finance Code nor its regulations specify any minimum
capital-to-assets ratio that must be maintained by a Texas-chartered bank.
Instead, the Texas Banking Department determines the appropriate ratio on a bank
by bank basis, considering factors such as the nature of a bank's business, its
total revenue, and the bank's total assets. As of December 31, 1999, all of our
Texas-chartered banks exceeded the minimum ratios applied to them.
Our Support of Our Subsidiary Banks
Under Federal Reserve Board policy, we are expected to commit resources to
support each of our subsidiary banks. This support may be required at times
when, absent such Federal Reserve Board policy, we would not otherwise be
required to provide it. In addition, any loans we make to our subsidiary banks
would be subordinate in right of payment to deposits and to other indebtedness
of our banks. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and be subject to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is
impaired by losses or otherwise, the OCC is authorized to require the bank's
shareholders to pay the deficiency on a pro-rata basis. If any shareholder
refuses to pay the pro-rata assessment after three months notice, then the
bank's board of directors must sell an appropriate amount of the shareholder's
stock at a public auction to make up the deficiency. To the extent necessary, if
a deficiency in capital still exist and the bank refuses to go into liquidation,
then a receiver may be appointed to wind up the bank's affairs.
Interstate Banking and Branching Act
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, or Riegle-Neal Act, a bank holding company is able to acquire banks in
states other than its home state. Prior to September 29, 1995, federal law
provided that the Federal Reserve Board could only approve interstate
acquisitions by bank holding companies that were specifically authorized by the
laws of the state in which the bank whose shares were to be acquired was
located.
The Riegle-Neal Act also authorized banks to merge across state lines,
thereby creating interstate branches, beginning June 1, 1997. Under this act,
each state had 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 this act, a bank is now able to open new branches
in a state in which it does not already have banking operations, if the laws of
such state permit it to do so. Although Texas had adopted legislation to "opt
out" of the interstate branching provisions, recent judicial decisions and Texas
legislation have superseded this "opt-out" legislation. Accordingly, both the
OCC and the Texas Banking Department are presently accepting applications for
interstate merger and branching transactions.
6
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA subjects a bank to
regulatory assessment to determine if the institution meets the credit needs of
its entire community, including low- and moderate-income neighborhoods served by
the bank, and to take that determination into account in its evaluation of any
application made by such bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition of shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. Our subsidiary banks have taken significant actions to comply
with the CRA, and each has received at least a "satisfactory" commendation in
its most recent review by federal regulators with respect to its compliance with
the CRA. Both the United States Congress and the banking regulatory authorities
have proposed substantial changes to the CRA and fair lending laws, rules and
regulations, and there can be no certainty as to the effect, if any, that any
such changes would have on our subsidiary banks.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act, which mostly takes effect on March 12, 2000,
dismantles many Depression-era restrictions against affiliation between banking,
securities and insurance firms. The act eliminates many of these barriers by
providing for a new "financial holding company" that can engage through a bank
subsidiary or other non-bank affiliates in a virtually unlimited range of
financial activities, so long as certain prudential safeguards are observed.
Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, securities firms
and insurance companies will find it easier to acquire or affiliate with each
other and cross-sell financial products.
Our management believes that the Gramm-Leach-Bliley Act will increase
competition in the market for financial services and products. Insurance
companies and securities firms, which before the passage of the act were limited
in their ability to acquire deposit-taking institutions, will find it easier to
acquire or charter banks. Conversely, banks, which before the passage of the act
were limited in their ability to underwrite securities and insurance products,
will find it easier to engage in those activities. The act also requires
additional safeguards for maintaining confidentiality of consumer financial
information. We will continue to analyze the effect of the act on our operations
and our competition after it takes effect.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, that affect the national supply of credit.
The Federal Reserve Board regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial
institution deposits, and restricting certain borrowings by financial
institutions and their subsidiaries. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banks in
the past and are expected to continue to do so in the future.
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on us and our
subsidiary banks cannot be determined at this time.
7
Statistical Disclosure
- ----------------------
The following tables provide information required by the Exchange Act
Industry Guide 3, "Statistical Disclosure by Bank Holding Companies" that has
not been included in "PART II, Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Composition of Loans (in thousands):
December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Commercial, financial and agricultural.. $ 297,966 $ 278,647 $ 286,630 $ 240,271 $ 219,792
Real estate - construction.............. 43,039 36,721 34,100 22,887 20,206
Real estate - mortgage.................. 208,895 198,447 177,658 152,350 131,801
Consumer................................ 247,375 265,729 245,068 189,307 164,231
----------- ----------- ----------- ----------- -----------
$ 797,275 $ 779,544 $ 743,456 $ 604,815 $ 536,030
=========== =========== =========== =========== ===========
Loan Concentrations
Other than the classifications shown above, we had no loans outstanding at
December 31, 1999 that represented more than 10% of total loans.
Maturity Distribution and Interest Sensitivity of Loans at December 31,
1999 (in thousands):
The following tables summarize maturity and yield information for the
commercial, financial, and agricultural and real estate construction portion of
the loan portfolio as of December 31, 1999:
After One
Year
One Year Through After Five
or less Five years Years Total
----------- ------------ ----------- -----------
Commercial, financial, and agricultural... $ 174,545 $ 85,571 $ 37,850 $ 297,966
Real estate-- construction................ 34,407 8,632 -- 43,039
----------- ------------ ----------- -----------
$ 208,952 $ 94,203 $ 37,850 $ 341,005
=========== ============ =========== ===========
Maturities
After One Year
-----------
Loans with fixed interest rates.......................... $ 71,202
Loans with floating or adjustable interest rates......... 60,851
-----------
$ 132,053
===========
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 that are deemed to be potential
problems. Potential problem loans are those loans that are currently performing
but where known information about trends or uncertainties or possible credit
problems of the borrowers causes management to have serious doubts as to the
ability of such borrowers to comply with present repayment terms, possibly
resulting in the transfer of such loans to nonperforming status. These potential
problem loans totaled $390 thousand as of December 31, 1999.
8
Composition of Investment Securities (in thousands):
December 31, 1999 December 31, 1998 December 31, 1997
---------------------- --------------------- ----------------------
Amortized Est. Fair Amortized Est. Fair Amortized Est. Fair
Cost Value Cost Value Cost Value
--------- ----------- -------- ----------- -------- -----------
Held-to-maturity at amortized cost
- ----------------------------------
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 283,736 $ 277,681 $293,400 $ 297,080 $330,674 $ 332,389
Obligations of states and political subdivisions 86,908 85,779 66,764 67,731 34,456 34,796
Mortgage-backed securities 46,083 45,393 44,634 44,894 59,809 59,995
Other securities 5,636 5,554 9,505 9,547 10,958 11,189
--------- ----------- -------- ----------- -------- -----------
Total $ 422,363 $ 414,407 $414,303 $ 419,252 $435,897 $ 438,369
========= =========== ======== =========== ======== ===========
Available-for-sale
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 105,290 $ 102,792 $104,256 $ 105,368 $141,531 $ 141,784
Obligations of states and political subdivisions 50,408 48,200 33,255 33,863 8,168 8,408
Mortgage-backed securities 41,940 41,158 42,579 42,795 27,036 27,164
Other securities 42,513 41,705 29,143 29,562 2,767 2,766
--------- ----------- -------- ----------- -------- -----------
Total $ 240,151 $ 233,855 $209,233 $ 211,588 $179,502 $ 180,122
========= =========== ======== =========== ======== ===========
Analysis of the Allowance for Loan Losses (in thousands, except percentages):
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------
Balance at January 1,........................ $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
Allowance established from
purchase acquisition...................... -- -- 1,444 800 83
---------- ---------- ---------- ---------- ---------
8,988 10,632 11,241 10,450 9,852
Charge-offs:
Commercial, financial and agricultural.... 1,038 1,267 836 1,214 442
Consumer.................................. 2,747 2,786 2,127 1,476 730
All other................................. 36 106 164 74 20
---------- ---------- ---------- ---------- ---------
Total loans charged off...................... 3,821 4,159 3,127 2,764 1,192
Recoveries:
Commercial, financial and agricultural.... 632 532 726 389 393
Consumer.................................. 936 811 643 380 325
All other................................. 172 32 35 142 103
---------- ---------- ---------- ---------- ---------
Total recoveries............................. 1,740 1,375 1,404 911 821
---------- ---------- ---------- ---------- ---------
Net charge-offs.............................. 2,081 2,784 1,723 1,853 371
Provision for loan losses.................... 2,031 1,140 1,114 1,200 169
---------- ---------- ---------- ---------- ---------
Balance at December 31,...................... $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
========== ========== ========== ========== =========
Loans at year-end............................ $ 797,275 $ 779,544 $ 743,456 $ 604,815 $ 536,030
Average loans................................ 779,283 770,183 657,325 575,658 493,831
Net charge-offs/average loans................ 0.27% 0.36% 0.26% 0.32% 0.08%
Average for loan losses/year-end loans....... 1.12 1.15 1.43 1.62 1.80
Allowance for loan losses/nonperforming
loans..................................... 615.56 322.84 255.58 288.57 451.36
9
Allocation of Allowance for Loan Losses (in thousands):
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
--------- --------- --------- --------- --------
Commercial, financial and agricultural..... $ 3,340 $ 3,212 $ 4,099 $ 3,892 $ 3,957
Real estate - construction................. 483 423 488 370 364
Real estate - mortgage..................... 2,342 2,288 2,541 2,468 2,373
Consumer................................... 2,773 3,064 3,504 3,067 2,956
--------- --------- --------- --------- --------
Total................................. $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
========= ========= ========= ========= ========
Percent of Total Loans:
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
Commercial, financial and agricultural.... 37.37% 35.74% 38.55% 39.73% 41.00%
Real estate - construction................ 5.40 4.71 4.59 3.78 3.77
Real estate - mortgage.................... 26.20 25.46 23.90 25.19 24.59
Consumer.................................. 31.03 34.09 32.96 31.30 30.64
Available Information
- ---------------------
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You may read and copy
any document we file at the Securities and Exchange Commission's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Securities and Exchange Commission at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public
at the Securities and Exchange Commission's web site at http://www.sec.gov. No
information from this web page is incorporated by reference herein.
ITEM 2. PROPERTIES
Our principal office is located in the First National Bank Building at 400
Pine Street in downtown Abilene, Texas. We lease approximately 2,300 square feet
from First National Bank of Abilene, which owns the building, pursuant to a
lease agreement that expires December 31, 2004. Our subsidiary banks
collectively own 25 banking facilities, some of which are detached drive-ins,
and lease four banking facilities. During 1999, we:
o made permanent improvements to an existing banking facility,
o constructed a new banking facility to replace a smaller,
leased one,
o sold an existing banking facility that was located near a facility
acquired by us in 1998,
o sold a banking facility acquired in 1998 that was located near an
existing banking facility, and
o leased a new banking facility as a grocery store branch.
These facility projects were funded with cash from operations and will not
be material to our future consolidated results of operations. Our management
considers all of our existing locations to be quality facilities and well-suited
for conducting the business of banking. We believe that our existing facilities
are adequate to meet our and our subsidiary banks' requirements for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
With our subsidiary banks we are parties to a number of lawsuits arising in
the ordinary course of its banking business. However, there are no material
pending legal proceedings to which we, our subsidiary banks or our other direct
and indirect subsidiaries, or any of their properties, are subject. Other than
regular, routine examinations by state and federal banking authorities, there
are no proceedings pending or known to be contemplated by any governmental
authorities.
10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock, par value $10.00 per share, is traded on the The Nasdaq
Stock Market under the trading symbol FFIN. See "Item 8--Financial Statements
and Supplementary Data--Quarterly Financial Data" for the high, low and closing
sales prices as reported by the Nasdaq National Market for our common stock for
the periods indicated. As of March 17, 2000, we had 1,706 shareholders of
record.
See "Item 8--Financial Statements and Supplementary Data--Quarterly
Financial Data" for the frequency and amount of cash dividends paid by us. Also,
see "PART I--Item 1--Business--Regulation and Supervision" for restrictions on
our present or future ability to pay dividends.
11
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1999, 1998,
1997, 1996 and 1995, and for the five years ended December 31, 1999, have been
derived from the audited consolidated financial statements. The selected
financial data should be read in conjunction with "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements. The results of operations presented below
are not necessarily indicative of the results of operations that may be achieved
in the future. The amounts related to shares of our common stock have been
adjusted to give effect to all stock dividends and stock splits.
Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ---------- ---------- ----------- -----------
(in thousands, except per share data)
Summary Income Statement Information:
Interest income $ 110,013 $ 111,868 $ 101,474 $ 89,164 $ 79,165
Interest expense 43,338 46,292 41,735 35,699 31,252
----------- ---------- ---------- ----------- -----------
Net interest income 66,675 65,576 59,739 53,465 47,913
Provision for loan losses 2,031 1,140 1,114 1,200 168
Noninterest income 24,484 22,351 19,486 16,491 15,686
Noninterest expense 51,934 52,422 46,522 39,829 36,460
----------- ---------- ---------- ----------- -----------
Earnings before income taxes 37,194 34,365 31,589 28,927 26,971
Provision for income taxes 11,504 11,111 10,563 9,884 9,106
----------- ---------- ---------- ----------- -----------
Net earnings (1) $ 25,690 $ 23,254 $ 21,026 $ 19,043 $ 17,865
=========== ========== ========== =========== ===========
Per Share Data:
Net earnings per share $ 2.58 $ 2.34 $ 2.12 $ 1.98 $ 1.87
Net earnings per share,assuming dilution 2.57 2.33 2.11 1.97 1.84
Cash dividends declared 1.125 1.00 0.88 0.79 0.71
Book value at period-end 17.91 17.03 15.56 14.20 13.06
Earnings performance ratios:
Return on average assets 1.53% 1.44% 1.46% 1.51% 1.46%
Return on average equity 14.84 14.51 14.37 14.72 13.91
Summary Balance Sheet Data (Period-end):
Investment securities $ 656,218 $ 625,891 $ 616,018 $ 541,451 $ 508,769
Loans 797,275 779,544 743,456 604,815 536,030
Total assets 1,723,369 1,686,647 1,657,044 1,332,645 1,190,769
Deposits 1,524,704 1,504,856 1,488,709 1,185,440 1,055,961
Total liabilities 1,544,706 1,517,198 1,502,583 1,196,236 1,066,392
Total shareholders' equity 178,663 169,449 154,461 136,409 124,377
Asset quality ratios:
Allowance for loan losses/period-end loans 1.12% 1.15% 1.43% 1.62% 1.80%
Nonperforming assets/period-end
loans plus foreclosed assets 0.26 0.41 0.68 0.69 0.53
Net charge offs/average loans 0.27 0.36 0.26 0.32 0.08
Capital ratios:
Leverage ratio (2) 9.62% 9.02% 8.28% 10.27% 10.65%
Tier 1 risk-based capital (3) 17.19 16.03 14.76 18.73 19.20
Total risk-based capital (4) 18.13 17.01 15.95 19.95 20.42
Dividend payout ratio 43.64 41.66 41.24 40.32 35.63
- --------------------------------
(1) Net earnings for the year ended December 31, 1995, includes $1.3 million, or
$0.14 per share, in nonrecurring gains from sale of assets.
(2) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
by fourth quarter average assets less intangible assets.
(3) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
risk-adjusted assets.
(4) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
plus allowance for loan losses to the extent allowed under regulatory
guidelines by risk-adjusted assets.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis of the major elements of our
consolidated balance sheets as of December 31, 1999 and 1998, and statements of
earnings for the years 1997 through 1999 should be reviewed in conjunction with
our consolidated financial statements, accompanying notes, and selected
financial data presented elsewhere in this Form 10-K. All amounts and prices
related to our common stock have been adjusted to give effect to all stock
splits and stock dividends.
Results of Operations
Performance Summary. Net earnings for 1999 were $25.7 million, an increase
of $2.4 million, or 10.3%, over net earnings for 1998 of $23.3 million. Net
earnings for 1997 were $21.0 million. The increase in net earnings for 1999 was
primarily attributable to an increase in net interest income resulting primarily
from the growth in average earning assets and an increase in noninterest income
resulting primarily from an increase in service fees on deposit accounts. The
increase in net earnings for 1998 was primarily attributable to an increase in
net interest income resulting primarily from the growth in average earning
assets and an increase in noninterest income resulting primarily from increases
in service fees on deposit accounts and trust fees.
On a per share basis, net earnings were $2.58 for 1999 as compared to $2.34
for 1998 and $2.12 for 1997. When calculated on a cash basis which excludes the
after tax effect of goodwill amortization, our earnings per share amounted to
$2.70 for 1999, $2.46 for 1998, and $2.19 for 1997. Return on average assets was
1.53% for 1999 as compared to 1.44% for 1998 and 1.46% for 1997. Return on
average equity was 14.84% for 1999 as compared to 14.51% for 1998 and 14.37% for
1997.
Net Interest Income. Net interest income is the difference between interest
income on earning assets and the interest expense on liabilities incurred to
fund those assets. Our earning assets consist primarily of loans and securities.
Our liabilities to fund those assets consist primarily of interest-bearing
deposits. Net interest income was $69.0 million in 1999 as compared to $67.0
million in 1998 and $60.5 million in 1997. These increases were primarily due to
growth in the volume of earning assets. Average earning assets were $1.519
billion in 1999, as compared to $1.470 billion in 1998, which was $162.0
million, or 12.4%, higher than 1997. The 1999 increase is attributable to higher
average investment securities, primarily tax-exempt securities which increased
$49.0 million. The 1998 increase is due primarily to an acquisition which
accounted for approximately $112.0 million of such increase. Table 1 allocates
the increases in tax-equivalent net interest income for 1999 and 1998 between
the amount of increase attributable to volume and rate.
Table 1 -- Changes in Interest Income and Interest Expense (in thousands):
1999 Compared to 1998 1998 Compared to 1997
----------------------------------- -----------------------------------
Change Attributable to Total Change Attributable to Total
---------------------- ----------------------
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- --------
Short-term investments............... $ 274 $ (341) $ (67) $ 822 $ (98) $ 724
Taxable investment securities........ (429) (932) (1,361) 238 (203) 35
Tax-exempt investment securities (1). 2,773 (157) 2,616 1,962 56 2,018
Loans (1)............................ 838 (2,992) (2,154) 10,756 (2,438) 8,318
--------- --------- --------- --------- --------- --------
Interest income................... 3,456 (4,422) (966) 13,778 (2,683) 11,095
--------- --------- --------- --------- --------- --------
Interest-bearing deposits............ 1,338 (4,352) (3,014) 4,967 (447) 4,520
Short-term borrowings................ 154 (95) 59 41 (1) 40
Long-term debt....................... - - - (3) -- (3)
--------- --------- --------- --------- --------- --------
Interest expense.................. 1,492 (4,447) (2,955) 5,005 (448) 4,557
--------- --------- --------- --------- --------- --------
Net interest income............... $ 1,964 $ 25 $ 1,989 $ 8,773 $ (2,235) $ 6,538
========= ========= ========= ========= ========= ========
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
The net interest margin, which measures tax-equivalent net interest income
as a percentage of average earning assets, amounted to 4.54% in 1999 which was
down slightly from 4.56% reported in 1998. In 1997, the net interest margin
amounted to 4.62%. Our rates on earning assets and interest-bearing liabilities
are influenced by national market trends and competitive pressures in local
markets. As market rates moved up during 1999, our spread between rates earned
on earning assets and the rates paid on interest-bearing liabilities improved
which allowed the net interest margin to recover some of the decline experienced
during 1998. In 1998, when national market interest rates declined, our yield on
earning assets decreased more than the rate on interest-bearing liabilities,
which resulted in a lower net interest margin as compared to 1997.
13
Table 2 -- Average Balances and Average Yields and Rates (in thousands,
except percentages):
1999 1998 1997
-------------------------- -------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ---- ---------- ------- ---- ---------- -------- ----
Assets
Short-term investments $ 90,383 $ 4,476 4.95% $ 85,247 $ 4,543 5.33% $ 70,136 $ 3,819 5.45%
Taxable investment
securities 540,402 32,022 5.93 547,438 33,383 6.10 543,561 33,348 6.14
Tax-exempt
investment securities(1) 109,079 7,042 6.46 67,068 4,426 6.60 36,954 2,408 6.52
Loans (1)(2) 779,283 68,809 8.83 770,183 70,963 9.21 657,325 62,645 9.53
---------- -------- ---------- ------- ---------- --------
Total earning assets 1,519,147 112,349 7.40 1,469,936 113,315 7.71 1,307,976 102,220 7.82
Cash and due from banks 80,689 72,608 69,185
Bank premises and
equipment 41,285 43,524 41,264
Other assets 27,478 21,720 21,564
Goodwill, net 21,056 22,466 10,315
Allowance for loan losses (9,016) (9,912) (10,211)
---------- ---------- ----------
Total assets $1,680,639 $1,620,342 $1,440,093
========== ========== ==========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits $1,171,892 $ 43,120 3.68% $1,138,858 $46,134 4.05% $1,017,412 $ 41,614 4.09%
Short-term borrowings 4,607 217 4.71 2,338 158 6.76 1,742 118 6.77
Long-term debt -- -- -- -- 33 3 8.58
---------- -------- ---------- ------- ---------- --------
Total interest-
bearing liabilities 1,176,499 43,337 3.68 1,141,196 46,292 4.06 1,019,187 41,735 4.09
-------- ------- --------
Noninterest-bearing
deposits 318,399 306,743 262,554
Other liabilities 12,599 12,108 12,028
---------- ---------- ----------
Total liabilities 1,507,497 1,460,047 1,293,769
Shareholders' equity 173,142 160,295 146,324
---------- ---------- ----------
Total liabilities and
Shareholders' equity $1,680,639 $1,620,342 $1,440,093
========== ========== ==========
Net interest income $ 69,012 $67,023 $ 60,485
======== ======= ========
Rate Analysis:
Interest income/earning assets 7.40% 7.71% 7.82%
Interest expense/earning assets 2.85 3.15 3.20
---- ---- ----
Net yield on earning assets 4.54% 4.56% 4.62%
==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
Noninterest Income. Noninterest income for 1999 was $24.5 million, an
increase of $2.1 million, or 9.5%, as compared to 1998. This increase was
primarily a result of (i) an increase in trust fees of $349 thousand due
primarily to growth in trust assets; (ii) an increase in service fees on deposit
accounts of $1.5 million which reflects growth in the number of accounts and the
volume of transactions processed; and (iii) an increase in ATM fees of $207
thousand which resulted from an increase in the number of cardholders and the
volume of transactions processed.
Noninterest income for 1998 was $22.4 million, an increase of $2.9 million,
or 14.7%, as compared to 1997. This increase was primarily a result of (i) an
increase in trust fees of $761 thousand due primarily to an acquisition which
earned $600 thousand in gross fees during 1998; (ii) an increase in service fees
on deposit accounts of $1.2 million, which reflects growth in the number of
accounts and the volume of transactions processed; and (iii) an increase in real
estate mortgage fees of $555 thousand, or 69.1%, which resulted from a
significant increase in the volume of loan originations and loan refinancings
processed and placed in the secondary market. Table 3 provides comparisons for
other categories of noninterest income.
14
Table 3 -- Noninterest Income (in thousands):
Increase Increase
1999 (Decrease) 1998 (Decrease) 1997
----------- ----------- ----------- ----------- -----------
Trust fees.............................. $ 5,098 $ 349 $ 4,749 $ 761 $ 3,988
Service fees on deposit accounts........ 13,322 1,484 11,838 1,187 10,651
Real estate mortgage fees............... 1,291 (67) 1,358 555 803
Net securities gains (losses)........... -- (42) 42 42 --
Other:
ATM fees............................. 1,241 207 1,034 295 739
Mastercard fees...................... 809 (63) 872 3 869
Miscellaneous income................. 997 167 830 (45) 875
Safe deposit rental fees............. 392 1 391 40 351
Exchange fees........................ 256 (125) 381 29 352
Credit life fees..................... 284 34 250 (95) 345
(Loss) Gain on sale of repossessed
assets............................ (15) (250) 235 196 39
Brokerage commissions................ 254 41 213 (50) 263
Gain on sale of premises and
equipment.......................... 258 248 10 4 6
Interest on loan recoveries.......... 297 149 148 (57) 205
----------- ----------- ----------- ----------- -----------
Total other........................ 4,773 409 4,364 320 4,044
----------- ----------- ----------- ----------- -----------
Total Noninterest Income............. $ 24,484 $ 2,133 $ 22,351 $ 2,865 $ 19,486
=========== =========== =========== =========== ===========
Noninterest Expense. Total noninterest expense for 1999 was $51.9 million,
a decrease of $489 thousand as compared to 1998. An important measure in
determining whether a banking company effectively managed noninterest expenses
is the efficiency ratio, which is calculated by dividing noninterest expense by
the sum of net interest income on a tax-equivalent basis and noninterest income.
Our efficiency ratios were 55.55% for 1999, 58.65% for 1998, and 58.17% for
1997.
Salaries and employee benefits totaled $26.9 million, an increase of only
$266 thousand as compared to 1998. Net occupancy and equipment expense in
aggregate for 1999 decreased by $339 thousand and resulted primarily from lower
depreciation and utilities expense. On a combined basis, accounting and legal
fees for 1999 decreased $174 thousand as compared to 1998 and resulted primarily
from a reduction in merger and acquisition expenses. Other miscellaneous expense
totaled $3.7 million for 1999, a decrease of $315 thousand as compared to 1998.
Approximately $160 thousand of the decrease resulted from lower expenses related
to preparation for Year 2000.
Salaries and employee benefits for 1998 totaled $26.7 million, an increase
of $2.9 million, or 12.2%, as compared to 1997. Approximately $1.3 million of
this increase related to an acquisition. Net occupancy and equipment expense in
the aggregate for 1998 increased by $800 thousand as compared to 1997.
Approximately $300 thousand of this increase for 1998 related to facilities and
equipment added through an acquisition. Goodwill amortization, a noncash
expense, was $1.6 million for 1998, an increase of $907 thousand as compared to
1997, and also resulted primarily from an acquisition. Audit and accounting fees
for 1998 increased by $277 thousand and resulted primarily from our outsourcing
of internal audit during 1998 which was offset by a greater amount through
decreases in other noninterest expenses, primarily salaries and travel.
15
Table 4 -- Noninterest Expense (in thousands):
Increase Increase
1999 (Decrease) 1998 (Decrease) 1997
----------- ----------- ----------- ----------- -----------
Salaries................................ $ 20,885 $ 153 $ 20,732 $ 2,189 $ 18,543
Medical and other benefits.............. 2,388 34 2,354 348 2,006
Profit sharing.......................... 2,111 84 2,027 203 1,824
Payroll taxes........................... 1,561 (5) 1,566 167 1,399
----------- ----------- ----------- ----------- -----------
Total salaries and employee
benefits........................... 26,945 266 26,679 2,907 23,772
Net occupancy expense .................. 3,819 (366) 4,185 387 3,798
Equipment expense....................... 4,118 27 4,091 413 3,678
Goodwill amortization................... 1,641 (14) 1,655 907 748
Other:
Data processing and operation fees... 1,175 26 1,149 (164) 1,313
Postage.............................. 1,103 (38) 1,141 51 1,090
Printing, stationery and supplies.... 1,178 76 1,102 (63) 1,165
Advertising.......................... 1,041 (52) 1,093 (5) 1,098
Correspondent bank service charges... 1,243 151 1,092 104 988
ATM expense.......................... 960 137 823 110 713
Credit card fees..................... 744 (9) 753 15 738
Telephone............................ 670 (51) 721 78 643
Public relations and business
development........................ 602 6 596 57 539
Directors' fees...................... 461 (49) 510 (70) 580
Audit and accounting fees............ 622 (38) 660 277 383
Legal fees........................... 361 (136) 497 97 400
Other professional and service fees.. 426 (36) 462 99 363
Regulatory exam fees................. 385 (25) 410 47 363
Franchise tax........................ 357 (47) 404 40 364
Software amortization................ 386 (2) 388 141 247
Other miscellaneous.................. 3,696 (315) 4,011 472 3,539
----------- ----------- ----------- ----------- -----------
Total other........................ 15,410 (402) 15,812 1,286 14,526
----------- ----------- ----------- ----------- -----------
Total Noninterest Expense............... $ 51,933 $ (489) $ 52,422 $ 5,900 $ 46,522
=========== =========== =========== =========== ===========
Income Taxes. Income tax expense was $11.5 million for 1999 as compared to
$11.1 million for 1998 and $10.6 million for 1997. Our effective tax rates on
pretax income were 30.9%, 32.3% and 33.4%, respectively, for the years 1999,
1998 and 1997. The decreases for 1999 and 1998 were due to higher levels of
nontaxable interest income resulting from increased volumes of tax-exempt
securities.
Balance Sheet Review
Loans. The loan portfolio is comprised of loans made to businesses,
individuals, and farm and ranch operations located in the primary trade areas
served by our subsidiary banks. Real estate loans represent loans primarily for
new home construction and owner-occupied real estate. The structure of loans in
the real estate mortgage classification generally provides repricing intervals
to minimize the interest rate risk inherent in fixed rate mortgage loans. As of
December 31, 1999, total loans were $797.3 million, an increase of $17.8 million
as compared to December 31, 1998. Commercial loans and real estate loans as of
December 31, 1999, increased $19.3 million and $16.7 million, respectively, as
compared to December 31, 1998. Consumer loans as of December 31, 1999, were
$247.3 million, a decrease of $18.3 million as compared to December 31, 1998.
The decrease in consumer loans for 1999 resulted primarily from a $15.5 million
reduction in the volume of indirect automobile loans. Loans averaged $779.3
million during 1999, an increase of $9.1 million over the prior year average.
16
Table 5 -- Composition of Loans (in thousands, except percentages):
December 31, 1999 December 31, 1998
--------------------- ---------------------
Amount % of Total Amount % of Total
---------- -------- ---------- -------
Commercial, financial and agricultural........................ $ 297,966 37.37% $ 278,647 35.74%
Real estate - construction.................................... 43,039 5.40 36,721 4.71
Real estate - mortgage........................................ 208,895 26.20 198,447 25.46
Consumer...................................................... 247,375 31.03 265,729 34.09
---------- -------- ---------- -------
$ 797,275 100.00% $ 779,544 100.00%
========== ======== ========== =======
Asset Quality. Loan portfolios of each of our subsidiary banks are subject
to periodic reviews by our centralized independent loan review group as well as
periodic examinations by State and Federal bank regulatory agencies. Loans are
placed on nonaccrual status when, in the judgment of management, the
collectibility of principal or interest under the original terms becomes
doubtful. Nonperforming assets, which consist of nonperforming loans and
foreclosed assets, were $2.1 million at December 31, 1999, as compared to $3.2
million at December 31, 1998. As a percent of loans and foreclosed assets,
nonperforming assets were 0.26% at December 31, 1999, as compared to 0.41% at
December 31, 1998. Management was not aware of any material classified credit
not properly disclosed as nonperforming at December 31, 1999.
Table 6 -- Nonperforming Assets (in thousands, except percentages):
At December 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Nonaccrual loans........................ $ 1,389 $ 2,717 $ 3,668 $ 2,906 $ 1,589
Loans past due 90 days or more.......... 63 67 134 116 181
Restructured loans...................... -- -- 358 373 368
----------- ----------- ----------- ----------- -----------
Nonperforming loans................ 1,452 2,784 4,160 3,395 2,138
Foreclosed assets....................... 637 385 936 806 708
----------- ----------- ----------- ----------- -----------
Total nonperforming assets......... $ 2,089 $ 3,169 $ 5,096 $ 4,201 $ 2,846
=========== =========== =========== =========== ===========
As a % of loans and
foreclosed assets.................. 0.26% 0.41% 0.68% 0.69% 0.53%
Provision and Allowance for Loan Losses. The allowance for loan losses is
the amount deemed by management as of a specific date to be adequate to provide
for possible losses on loans that may become uncollectible. Management
determines the allowance and the required provision expense by reviewing general
loss experiences and the performances of specific credits. The provision for
loan losses was $2.0 million for 1999 as compared to $1.1 million for 1998 and
1997. As a percent of average loans, net loan charge-offs were 0.27% during 1999
as compared to 0.36% during 1998. The lower net charge-off ratio for 1999
resulted primarily from a $428 thousand reduction in agricultural related net
loan losses. The allowance for loan losses as a percent of loans was 1.12% as of
December 31, 1999, as compared to 1.15% as of December 31, 1998. Management
anticipates that the ratio of allowance for loan losses to loans will remain
above 1% in future periods. A key indicator of the adequacy of the allowance for
loan losses is the ratio of the allowance to nonperforming loans, which consist
of nonaccrual loans, loans past due 90 days, and restructured loans. As of
December 31, 1999, the ratio was 615.56% as compared to 322.84% at December 31,
1998.
17
Table 7 -- Loan Loss Experience and Allowance for Loan Losses (in
thousands, except percentages):
1999 1998 1997 1996 1995
--------- --------- -------- -------- ---------
Balance at January 1,............................... $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
Allowance established from purchase acquisition..... -- -- 1,444 800 83
--------- --------- -------- -------- ---------
8,988 10,632 11,241 10,450 9,852
Loans charged off................................... 3,821 4,159 3,127 2,764 1,192
Loans recovered..................................... 1,740 1,375 1,404 911 821
--------- --------- -------- -------- ---------
Net charge-offs..................................... 2,081 2,784 1,723 1,853 371
Provision for loan losses........................... 2,031 1,140 1,114 1,200 169
--------- --------- -------- -------- ---------
Balance at December 31,............................. $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
========= ========= ======== ======== =========
Loans at year-end................................... $ 797,275 $ 779,544 $743,456 $604,815 $ 536,030
Average loans....................................... 779,283 770,183 657,325 575,658 493,831
Net charge offs/average loans....................... 0.27% 0.36% 0.26% 0.32% 0.08%
Allowance for loan losses/year-end loans............ 1.12 1.15 1.43 1.62 1.80
Allowance for loan losses/nonperforming assets...... 615.55 322.84 255.58 288.57 451.36
Investment Securities. Investment securities totaled $656.2 million as of
December 31, 1999, as compared to $625.9 million at December 31, 1998. At
December 31, 1999, securities with an amortized cost of $422.4 million were
classified as securities held-to-maturity and securities with a market value of
$233.8 million were classified as securities available-for-sale. As compared to
December 31, 1998, the portfolio at December 31, 1999, reflected (i) a decrease
of $12.3 million in U.S. Treasury and U.S. Government corporations and agencies
securities; (ii) an increase of $34.5 million in tax-exempt obligations of
states and political subdivisions; and (iii) an $8.1 million increase in other
securities, primarily corporate bonds. The overall portfolio yield of 6.15% at
the end of 1999 was up slightly from prior year-end yield of 6.14%. We did not
hold any collateralized mortgage obligations that entail higher risks than
standard mortgage-backed securities. As of December 31, 1999, total investment
securities included structured notes with an amortized cost of $7.0 million and
an approximate market value of $6.9 million. See Note 2 to the Consolidated
Financial Statements for additional disclosures relating to the maturities and
fair values of the investment portfolio at December 31, 1999 and 1998.
Table 8 -- Maturities and Yields of Investment Securities Held December 31,
1999 (in thousands, except percentages):
Maturing
----------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
----------------- ----------------- --------------- --------------- ----------------
Held-to-Maturity: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- -------- ---- --------- ---- -------- ---- -------- ---- -------- ----
U.S. Treasury obligations $ 7,506 6.20% $ 5,567 5.51% $ -- --% $ -- --% $ 13,073 5.91%
Obligations of U.S.
Government corporations
and agencies.......... 54,884 5.98 204,077 5.70 11,702 6.59 -- -- 270,667 5.80
Obligations of states and
political subdivisions 8,708 6.25 57,067 6.39 15,365 7.09 5,768 7.81 86,908 6.60
Other securities......... 505 5.89 4,637 5.36 494 6.87 -- -- 5,632 5.54
Mortgage-backed securities 5,938 5.53 18,918 6.00 11,249 6.50 9,978 6.77 46,083 6.23
-------- ---- --------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 77,541 6.00% $ 290,266 5.85% $ 38,810 6.77% $ 15,746 7.15% $422,363 6.01%
======== ==== ========= ==== ======== ==== ======== ==== ======== ====
Maturing
----------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
----------------- ----------------- --------------- --------------- ----------------
Available-for-Sale: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------ -------- ---- --------- ---- -------- ---- -------- ---- -------- ----
U.S. Treasury obligations $ 501 6.38% $ 4,294 6.05% $ -- --% $ -- --% $ 4,795 6.08%
Obligations of U.S.
Government corporations
and agencies.......... 10,259 5.84 55,027 6.14 32,711 6.46 -- -- 97,997 6.21
Obligations of states and
political subdivisions 202 6.31 7,533 6.44 3,083 7.09 37,382 7.58 48,200 7.37
Other securities......... 1,000 5.89 37,568 6.15 -- -- 3,137 6.00 41,705 6.13
Mortgage-backed securities 1,875 6.48 22,566 5.93 13,617 6.25 3,100 6.92 41,158 6.10
-------- ---- --------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 13,837 5.96% $ 126,988 6.12% $ 49,411 6.44% $ 43,619 7.42% $233,855 6.42%
======== ==== ========= ==== ======== ==== ======== ==== ======== ====
18
Maturing
----------------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
----------------- ----------------- --------------- --------------- ----------------
Total Investment
Securities: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- -------- ---- --------- ---- -------- ---- -------- ---- -------- ----
U.S. Treasury obligations $ 8,007 6.21% $ 9,861 5.75% $ -- --% $ -- --% $ 17,868 5.95%
Obligations of U.S.
Government corporations
and agencies.......... 65,147 5.96 259,104 5.79 44,413 6.49 -- -- 368,664 5.91
Obligations of states and
political subdivisions 8,910 6.25 64,600 6.40 18,448 7.09 43,150 7.61 135,108 6.87
Other securities......... 1,501 5.89 42,205 6.06 494 6.87 3,137 6.00 47,337 6.06
Mortgage-backed securities 7,813 5.76 41,484 5.96 24,866 6.37 13,078 6.81 87,241 6.18
-------- ---- --------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 91,378 5.99% $ 417,254 5.93% $ 88,221 6.58% $ 59,365 7.35% $656,218 6.15%
======== ==== ========= ==== ======== ==== ======== ==== ======== ====
Deposits. Deposits held by subsidiary banks represent our primary source of
funding. Total deposits were $1.525 billion as of December 31, 1999, as compared
to $1.505 billion as of December 31, 1998. Total deposits averaged $1.490
billion during 1999 as compared to $1.456 billion for 1998 which was $165.6
million higher than the average for 1997. An acquisition accounted for
approximately $114.0 million of the 1998 increase. Table 9 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 9 -- Composition of Average Deposits and Remaining Maturity of Time
Deposits of $100,000 or More (in thousands, except percentages):
1999 1998 1997
------------------- ------------------- ------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- ---------- ----
Noninterest-bearing deposits........ $ 318,399 -- $ 306,743 -- $ 262,554 --
Interest-bearing deposits
Interest-bearing checking........ 248,516 1.43% 240,159 2.01% 212,845 2.04%
Savings and money market accounts 379,075 3.42 351,319 3.23 306,503 3.65
Time deposits under $100,000..... 378,528 4.88 390,791 5.23 359,960 5.25
Time deposits of $100,000 or more 165,773 4.91 156,589 5.56 138,104 5.22
---------- ---- ---------- ---- ---------- ----
Total interest-bearing deposits.. 1,171,892 3.68% 1,138,858 4.05% 1,017,412 4.09%
---------- ---------- ----------
Total average deposits.............. $1,490,291 $1,445,601 $1,279,966
========== ========== ==========
December 31, 1999
-----------------
Three months or less........................................ $ 64,966
Over three through six months............................... 36,413
Over six through twelve months.............................. 43,045
Over twelve months.......................................... 12,913
----------
Total time deposits of $100,000 or more................ $ 157,337
==========
Capital. Total shareholders' equity was $178.7 million, or 10.37% of total
assets, at December 31, 1999, as compared to $169.4 million, or 10.05% of total
assets, at December 31, 1998. During 1999, total shareholders' equity averaged
$173.1 million, or 10.30% of average assets, as compared to $160.3 million, or
9.89% of average assets, during 1998.
Banking regulators measure capital adequacy by means of the risk-based
capital ratio and leverage ratio. The risk-based capital rules provide for the
weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory
capital is then divided by risk-weighted assets to determine the risk-adjusted
capital ratios. The leverage ratio is computed by dividing shareholders' equity
less intangible assets by quarter-to-date average assets less intangible assets.
Regulatory minimums for risk-based and leverage ratios are 8.00% and 3.00%,
respectively. As of December 31, 1999, our total risk-based and leverage ratios
were 18.13% and 9.62%, respectively, as compared to total risk-based and
leverage ratios of 17.01% and 9.02% as of December 31, 1998. In 1999, we
experienced a higher rate of growth in tangible equity capital (11.3%) than
assets (2.2%), which resulted in higher capital ratios as of December 31, 1999,
as compared to December 31, 1998.
Interest Rate Risk. Interest rate risk results when the maturity or
repricing intervals of interest-earning assets and interest-bearing liabilities
are different. Our exposure to interest rate risk is managed primarily through
our strategy of selecting the types and terms of interest-earning assets and
interest-bearing liabilities that generate favorable earnings while limiting the
potential negative effects of changes in market interest rates. We use no
off-balance-sheet financial instruments to manage interest rate risk.
19
Each of our subsidiary banks has an asset/liability committee that monitors
interest rate risk and compliance with investment policies. Each subsidiary bank
tracks interest rate risk by, among other things, interest-sensitivity gap and
simulation analysis. Table 10 sets forth the interest rate sensitivity of our
consolidated assets and liabilities as of December 31, 1999, and sets forth the
repricing dates of our consolidated interest-earning assets and interest-bearing
liabilities as of that date, as well as our projected consolidated interest rate
sensitivity gap percentages for the periods presented. The table is based upon
assumptions as to when assets and liabilities will reprice in a changing
interest rate environment. These assumptions are estimates made by management.
Assets and liabilities indicated as maturing or otherwise repricing within a
stated period may, in fact, mature or reprice at different times and at
different volumes than those estimated. Also, the renewal or repricing of
certain assets and liabilities can be discretionary and subject to competitive
and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate movements
on our consolidated net interest income.
Table 10 -- Interest Sensitivity Analysis (in thousands, except
percentages):
December 31,
1999
Estimated
2000 2001 2002 2003 2004 Beyond Total Fair Value
---------- -------- -------- -------- -------- -------- ---------- ----------
Loans
Fixed rate loans $ 109,149 $ 53,045 $ 72,183 $ 81,256 $ 71,691 $ 51,608 $ 438,932 $ 436,632
Average interest rate 8.91% 9.61% 9.50% 8.66% 8.63 8.40% 8.94%
Adjustable rate loans 358,343 -- -- -- -- -- 358,343 358,343
Average interest rate 8.60 -- -- -- -- -- 8.60
Investment securities
Fixed rate securities 85,996 100,812 123,983 112,360 79,266 135,405 637,822 629,866
Average interest rate 6.01 5.90 5.89 5.79 6.20 7.00 6.17
Adjustable rate
securities 18,396 -- -- -- -- -- 18,396
18,396
Average interest rate 5.35 -- -- -- -- -- 5.35
Other earning assets
Adjustable rate other 68,745 -- -- -- -- -- 68,745 68,745
Average interest rate 5.07 -- -- -- -- -- 5.07
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
assets $ 640,629 $153,857 $196,166 $193,616 $150,957 $187,013 $1,522,238 $1,511,982
Average interest rate 7.28% 7.18% 7.22% 7.00% 7.36% 7.39% 7.25%
Deposits
Fixed rate deposits $ 439,579 $ 39,449 $ 13,541 $ 8,110 $ 4,083 $ 15 $ 504,777 $ 504,058
Average interest rate 4.95% 5.16% 5.45% 5.36% 5.37% 4.50% 4.99%
Adjustable rate deposits 679,414 -- -- -- -- -- 679,414 679,414
Average interest rate 2.89 -- -- -- -- -- 2.89
Other interest-bearing
liabilities
Adjustable rate other 9,748 -- -- -- -- -- 9,748 9,748
Average interest rate 4.39 -- -- -- -- -- 4.39
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
liabilities $1,128,741 $ 39,449 $ 13,541 $ 8,110 $ 4,083 $ 15 $1,193,939 $1,193,939
Average interest rate 3.70% 5.16% 5.45% 5.36% 5.37% 4.50% 3.79%
Interest sensitivity gap $ (488,112) $114,408 $182,625 $185,506 $146,874 $186,998 $ 328,299 $ 318,762
Cumulative interest
sensitivity
gap (488,112) (373,704) (191,079) (5,573) 141,301 328,299
Ratio of interest
sensitive assets
to interest sensitive
liabilities 56.76 -- -- -- -- --
Cumulative ratio of
interest sensitive
assets to interest
sensitive liabilities 56.76 68.01 83.83 99.53 111.84 127.50
Cumulative interest
sensitivity gap as a
percent of earning assets (32.06)% (24.55)% (12.55)% (0.37)% 9.28% 21.57%
As of December 31, 1998, our 1999 interest-sensitivity gap was ($393.9)
million and its 1999 ratio of interest sensitive assets to interest sensitive
liabilities was 63.95%.
Management estimates that, as of December 31, 1999 and December 31, 1998,
an upward shift of interest rates by 200 basis points would result in an
increase of projected net interest income of 1.4% and 4.2%, respectively, and a
downward shift of interest rates by 200 basis points would result in a reduction
in projected net interest income of 4.0% and 6.1%, respectively. These are good
faith estimates and assume that the composition of our interest sensitive assets
and liabilities existing at each year-end will remain constant over the relevant
twelve month measurement period and that changes in market interest rates are
instantaneous and sustained across the yield curve regardless of duration of
pricing characteristics of specific assets or liabilities. Also, this analysis
does not contemplate any actions that we might undertake in response to changes
in market interest rates. In management's belief, these estimates are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. Management believes that
it is unlikely that such changes would occur in a short time period. As
interest-bearing assets and liabilities reprice at different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, our
future results would, in management's belief, be different from the foregoing
estimates, and such results could be material.
20
Liquidity. Liquidity is our ability to meet cash demands as they arise.
Such needs can develop from loan demand, deposit withdrawals or acquisition
opportunities. Asset liquidity is provided by cash and assets, which are readily
marketable or which will mature in the near future. Liquid assets include cash,
Federal funds sold, and short-term investments in time deposits in banks.
Liquidity is also provided by access to funding sources, which include core
depositors and correspondent banks that maintain accounts with and sell Federal
funds to our subsidiary banks. Given the strong core deposit base and relatively
low loan deposit ratios maintained at the subsidiary banks, management considers
the current liquidity position to be adequate to meet short-term liquidity
needs.
Parent Company Funding. Our ability to fund various operating expenses,
dividends, and cash acquisitions is generally dependent soley on our own
earnings (without giving effect to our subsidiaries), cash reserves and funds
derived from our subsidiary banks. These funds historically have been produced
by intercompany dividends and management fees that are limited to reimbursement
of actual expenses. We anticipate that our recurring cash sources will continue
to include dividends and management fees from our subsidiary banks. At December
31, 1999, approximately $18.6 million was available for the payment of
intercompany dividends by the subsidiary banks without the prior approval of
regulatory agencies. Also at December 31, 1999, we had $25.0 million available
under a line of credit with an unaffiliated financial institution.
Dividends. Our long-term dividend policy is to pay cash dividends to our
shareholders of between 40% and 45% of its net earnings while maintaining
adequate capital to support growth. The dividend payout ratios have amounted to
43.6%, 41.7% and 41.2% of net earnings, respectively, in 1999, 1998 and 1997.
Given the current strong capital position and projected earnings and asset
growth rates, we do not anticipate any change in our current dividend policy.
Year 2000
We have not experienced any significant information technology, or IT,
system problems or disruptions in our normal business operations relating to the
Year 2000. The cost of testing, communication programs, and other related items
were in line with prior estimates and have been recorded as noninterest expense.
In 1999, we decided to install servers and an internal PC network at our lead
bank, which increased the cost for system upgrades related to Year 2000 to
approximately $1.5 million as compared to an original cost estimate of $1.0
million. The cost of system upgrades, which was funded with cash from
operations, has been capitalized and is being amortized over future periods.
Contingency plans developed in preparation for Year 2000 remain in place
should problems develop in the future. Our plans are not comprehensive and do
not address all Year 2000 contingencies, including contingencies for Year 2000
noncompliance by our embedded technology or the systems of governmental
agencies, significant customers or significant vendors. Also, there can be no
assurance that our contingency plans will prevent us from suffering a material
adverse effect on operations, financial condition or results of operations if
any embedded technology or any systems of a governmental agency, a significant
customer or significant vendor prove not to be Year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our management considers interest rate risk to be a significant market risk
for us. See "Item 7--Management's Discussion and Analysis of Financial Condition
and Results of Operations" for disclosure regarding this market risk.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements appear beginning on page F-1.
Quarterly Results of Operations
The following tables set forth certain unaudited historical quarterly
financial data for each of the eight consecutive quarters in fiscal 1999 and
1998. This information is derived from unaudited consolidated financial
statements that include, in our opinion, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation when read in
conjunction with our consolidated financial statements and notes thereto
included elsewhere in this Form 10-K. The amounts related to our common stock
have been adjusted to give effect to all stock dividends and stock splits.
1999
------------------------------------------------
4th 3rd 2nd 1st
--------- --------- --------- --------
Summary Income Statement Information:
Interest income $ 28,152 $ 27,692 $ 27,139 $ 27,029
Interest expense 11,123 10,833 10,635 10,746
--------- --------- --------- --------
Net interest income 17,029 16,859 16,504