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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, 2000
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 8, 2001, the aggregate market value of voting stock held by
non-affiliates was $276,635,282.
As of March 8, 2001, there were 9,851,477 shares of Common Stock
outstanding.
Documents Incorporated by Reference
Certain information called for by Part III is incorporated by reference to
the Proxy Statement for the 2001 Annual Meeting of our shareholders which will
be filed with the Securities and Exchange Commission not later than 120 days
after December 31, 2000.
TABLE OF CONTENTS
Page
----
FORWARD-LOOKING STATEMENTS....................................................1
PART I
ITEM 1. BUSINESS..................................................1
ITEM 2. PROPERTIES...............................................12
ITEM 3. LEGAL PROCEEDINGS........................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.....................................13
ITEM 6. SELECTED FINANCIAL DATA..................................14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK....................................................23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......25
ITEM 11. EXECUTIVE COMPENSATION...................................25
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..............................................25
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................25
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 from other financial institutions and financial holding
companies, fluctuation in interest rates, changes in the demand for loans,
fluctuations in value of collateral and loan reserves and other factors
described in "PART II, Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations." Such statements reflect the
current views of our management with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this paragraph.
PART I
ITEM 1. BUSINESS
General
- -------
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, as well as several other state and federal
regulators. We were formed as a bank holding company in 1956 under the original
name F & M Operating Company, but our banking operations date back to 1890, when
Farmers and Merchants National Bank opened for business in Abilene, Texas. By
virtue of a series of reorganizations, mergers, and acquisitions since 1956, we
now own, through our wholly-owned Delaware subsidiary, First Financial
Bankshares of Delaware, Inc., 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; First Financial Bank, National Association, Cleburne,
Texas (formerly named The First National Bank in Cleburne); 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, 2000, 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
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o regulatory compliance.
In particular, we assist our subsidiary banks with, among other things,
decisions concerning major capital expenditures, employee fringe benefits,
including pension plans and group insurance, dividend policies, and appointment
of officers and directors and their compensation. We also perform, through
corporate staff groups or by outsourcing to third parties, internal audits and
loan reviews of our subsidiary banks. Through First National Bank of Abilene, we
provide advice and specialized services for our banks related to lending,
investing, purchasing, advertising, public relations, and computer services.
Services Offered by Our Subsidiary Banks
- ----------------------------------------
Each of our subsidiary banks is a separate legal entity that operates under
the day-to-day management of its own board of directors and officers. Each of
our subsidiary banks provides general commercial banking services, which include
accepting and holding checking, savings and time deposits, making loans,
automated teller machines, drive-in and night deposit services, safe deposit
facilities, transmitting funds, and performing other customary commercial
banking services. 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 Financial Bank and San Angelo National Bank provide
securities brokerage services through arrangements with various third parties.
Competition
- -----------
Commercial banking in Texas is highly competitive, and because we hold less
than 1% of the state's deposits, we represent only a minor segment of the
industry. To succeed in this industry, our management believes that our banks
must have the capability to compete in the areas of (1) interest rates paid or
charged; (2) scope of services offered; and (3) prices charged for such
services. Our subsidiary banks compete in their respective service areas against
highly competitive banks, savings and loan associations, small loan companies,
credit unions, and brokerage firms, all of which are engaged in providing
financial products and services and some of which are larger than our subsidiary
banks in terms of capital, resources and personnel.
Our business does not depend on any single customer or any few customers,
the loss of any one of which would have a materially adverse effect upon our
business. Although we have a broad base of customers that are not related to us,
our customers also occasionally include our officers and directors, as well as
other entities with which we are affiliated. With our subsidiary banks we may
make loans to officers and directors, and entities with which we are affiliated,
in the ordinary course of business. We make these loans on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons. Loans to directors,
officers and their affiliates are also subject to certain restrictions under
federal and state banking laws.
Employees
- ---------
With our subsidiary banks we employed approximately 706 full-time
equivalent employees at March 1, 2001. 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.
2
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;
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.
Gramm-Leach-Bliley Act
Traditionally, the activities of bank holding companies have been limited
to the business of banking and activities closely related or incidental to
banking, as described above. The Gramm-Leach-Bliley Act, which took effect on
March 12, 2000, dismantled many Depression-era restrictions against affiliation
between banking, securities and insurance firms by permitting bank holding
companies to engage in a broader range of financial activities, so long as
certain prudential safeguards are observed. Specifically, bank holding companies
may elect to become "financial holding companies" that may affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature or incidental to a financial activity. Thus, with the
enactment of the Gramm-Leach-Bliley Act, banks, securities firms and insurance
companies find it easier to acquire or affiliate with each other and cross-sell
financial products. The new act permits a single financial services organization
to offer a more complete array of financial products and services than
historically was permitted.
The enactment of the Gramm-Leach-Bliley Act was a pivotal point in the
history of the financial services industry. Under the new legislation, the
Federal Reserve Board serves as the primary "umbrella" regulator of financial
holding companies with supervisory authority over each parent company and
limited authority over its subsidiaries. The primary regulator of each
subsidiary of a financial holding company will depend on the type of activity
conducted by the subsidiary. For example, broker-dealer subsidiaries will be
regulated largely by securities regulators and insurance subsidiaries will be
regulated largely by insurance authorities.
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A bank holding company may become a financial holding company under the new
statute only if each of its subsidiary banks is well capitalized, is well
managed and has at least a satisfactory rating under the Community Reinvestment
Act. A bank holding company that falls out of compliance with such requirement
may be required to cease engaging in certain activities. Any bank holding
company that does not elect to become a financial holding company remains
subject to the current restrictions of the Bank Holding Company Act.
A financial holding company is essentially a bank holding company with
significantly expanded powers. Under the Gramm-Leach-Bliley Act, among the
activities that will be deemed "financial in nature" for financial holding
companies are, in addition to traditional lending activities, securities
underwriting, dealing in or making a market in securities, sponsoring mutual
funds and investment companies, insurance underwriting and agency activities,
activities which the Federal Reserve Board determines to be closely related to
banking, and certain merchant banking activities.
In January 2001, the Federal Reserve Board and the Secretary of the
Treasury promulgated final regulations governing the scope of permissible
merchant banking investments which are those made under Section 4(k)(4)(H) of
the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act, which
authorizes a financial holding company, directly or indirectly as principal or
on behalf of one or more persons, to acquire or control any amount of shares,
assets or ownership interests of a company or other entity that is engaged in
any activity not otherwise authorized for the financial holding company under
Section 4 of the Bank Holding Company Act. Under the regulation, the types of
ownership that may be acquired include shares, assets or ownership interests of
a company or other entity including debt or equity securities, warrants,
options, partnership interests, trust certificates or other instruments
representing an ownership interest in a company or entity whether voting or
nonvoting. The merchant banking investments may be made by the financial holding
company or any of its subsidiaries, other than a depository institution or
subsidiary of a depository institution. Before acquiring or controlling a
merchant banking investment, a financial holding company must either be or have
a securities affiliate registered under the Securities Exchange Act of 1934 or a
qualified insurance affiliate. The regulation places restrictions on the ability
of a financial holding company to become involved in the routine management or
operation of any of its portfolio companies. The regulation also provides that a
financial holding company may own or control shares, assets and ownership
interests pursuant to the merchant banking provisions only for such period of
time as to enable the sale or disposition on a reasonable basis consistent with
the financial viability of the financial holding company's merchant banking
investment activities. Special provisions are also included in the regulation
governing the investment by a financial holding company in private equity funds.
The Federal Reserve Board and Secretary of Treasury have also requested
public comment on the issue of whether to add the activities of real estate
brokerage and real estate management to the list of permissible activities for
financial holding companies and financial subsidiaries of national banks. We
cannot predict whether the proposal will be adopted or the form any final rule
might take.
The Federal Reserve Board, the OCC, and the FDIC have proposed for comment
a rule which would establish special minimum regulatory capital requirements for
equity investments in non-financial companies. The proposed capital treatment
would apply symmetrically to equity investments of banks and bank holding
companies and would apply a series of marginal capital charges on covered equity
investments that increase with the level of a banking organization's overall
exposure to equity investments relative to the organization's Tier 1 Capital.
After withdrawing an earlier proposal, this is the second proposal the agencies
have made of this nature and we cannot predict what final form the regulation
may take.
We have not elected to become a financial holding company. We do not
believe that the Gramm-Leach-Bliley Act will have a material adverse effect on
our operations in this regard in the near term, but we will continue to analyze
the effect of the act on our operations and our competition in the coming years.
Our management believes that the Gramm-Leach-Bliley Act will in the long term
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.
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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. To the extent the Gramm-Leach-Bliley Act
permits banks, securities firms and insurance firms to affiliate, the financial
services industry may therefore experience further consolidation. Although to
date only a very small number of significant mergers between banks and
securities firms or banks and insurance firms have been consummated, in the
future an increased amount of consolidation could result in a growing number of
large financial institutions that could compete aggressively with us by offering
a wider variety of financial services than what we and our subsidiary banks
currently offer or intend to offer in the future.
Banks
Federal and state laws and regulations that govern banks have the effect
of, among other things, regulating the scope of business, investments, cash
reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking
associations under the National Bank Act are subject to regulation and
examination by the Office of the Comptroller of the Currency, or OCC. The OCC
supervises, regulates and regularly examines the First National Bank of Abilene,
First National Bank, Sweetwater, First Financial Bank, National Association,
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.
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 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, 2000, the assessment rate for each of our subsidiary
banks is at the lowest level risk-based premium available.
5
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 $21.0
million in 2000 and approximately $20.6 million in 1999. Under the dividend
restrictions discussed above, as of December 31, 2000, our subsidiary banks,
without obtaining governmental approvals, could have declared in the aggregate
additional dividends of approximately $21.6 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.
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:
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(1) in the case of any one such affiliate, the aggregate amount of "covered
transactions" cannot exceed ten percent of the capital stock and the surplus of
the insured depository institution; and (2) in the case of all affiliates, the
aggregate amount of "covered transactions" cannot exceed twenty percent of the
capital stock and surplus of the insured depository institution. In addition,
extensions of credit that constitute "covered transactions" must be
collateralized in prescribed amounts. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services. Finally, when we and our subsidiary banks conduct transactions
internally among us, we are required to do so at arm's length.
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, 2000, our capital ratios were as follows: (1) Tier 1 Capital to
Risk-Weighted Assets Ratio, 17.75%; (2) Total Capital to Risk-Weighted Assets
Ratio, 18.74%; and (3) Tier 1 Capital Leverage Ratio, 10.40%.
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, 2000.
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.
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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, 2000, 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, subject to certain limitations on
ages of the banks to be acquired and the total amount of deposits within the
state a bank holding company may control. Since our primary service area is
Texas, these developments are not expected to have any material impact on our
growth strategy. We may, however, face increased competition from out-of-state
banks that branch or make acquisitions in our primary markets.
8
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA subjects a bank to
regulatory assessment to determine if the institution meets the credit needs of
its entire community, including low- and moderate-income neighborhoods served by
the bank, and to take that determination into account in its evaluation of any
application made by such bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition of shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. Our subsidiary banks have taken significant actions to comply
with the CRA, and each has received at least a "satisfactory" commendation in
its most recent review by federal regulators with respect to its compliance with
the CRA. Both the United States Congress and the banking regulatory authorities
have proposed substantial changes to the CRA and fair lending laws, rules and
regulations, and there can be no certainty as to the effect, if any, that any
such changes would have on our subsidiary banks.
Consumer Laws And Regulations
We are also subject to certain consumer laws and regulations that are
designed to protect consumers in transactions with banks. While the following
list is not exhaustive, these laws and regulations include the Truth in Lending
Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited
Funds Availability Act, the Equal Credit Opportunity Act, and the Fair Housing
Act, among others. These laws and regulations mandate various disclosure
requirements and regulate the manner in which financial institutions must deal
with customers when taking deposits or making loans to such customers. These and
other laws also limit finance charges or other fees or charges earned in our
activities. We must comply with the applicable provisions of these consumer
protection laws and regulations as part of our ongoing customer relations.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements
emphasizing the importance of technology risk management and supervision in
evaluating the safety and soundness of depository institutions. Banks are
contracting increasingly with outside vendors to provide data processing and
core banking functions. The use of technology-related products, services,
delivery channels and processes expose a bank to various risks, particularly
operational, privacy, security, strategic, reputation and compliance risk. Banks
are generally expected to successfully manage technology-related risks with all
other risks to ensure that a bank's risk management is integrated and
comprehensive, primarily through identifying, measuring, monitoring and
controlling risks associated with the use of technology.
Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking
agencies are required to establish appropriate standards for financial
institutions regarding the implementation of safeguards to ensure the security
and confidentiality of customer records and information, protection against any
anticipated threats or hazards to the security or integrity of such records and
protection against unauthorized access to or use of such records or information
in a way that could result in substantial harm or inconvenience to a customer.
The agencies have published a joint final rule which is effective July 1, 2001.
Among other matters, the rule requires each bank to implement a comprehensive
written information security program that includes administrative, technical and
physical safeguards relating to customer information.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide
its customers with a notice of privacy policies and practices. Section 502
prohibits a financial institution from disclosing nonpublic personal information
about a consumer to nonaffiliated third parties unless the institution satisfies
various notice and opt-out requirements and the customer has not elected to opt
out of the disclosure. Under Section 504, the agencies are authorized to issue
regulations as necessary to implement notice requirements and restrictions on a
financial institution's ability to disclose nonpublic personal information about
consumers to nonaffiliated third parties. In June 2000, the federal banking
agencies issued a final rule, effective November 13, 2000, but compliance with
which is optional until July 1, 2001.
9
Under the rule, all banks must develop initial and annual privacy notices
which describe in general terms the bank's information sharing practices. Banks
that share nonpublic personal information about customers with nonaffiliated
third parties must also provide customers with an opt-out notice and a
reasonable period of time for the customer to opt out of any such disclosure
(with certain exceptions). Limitations are placed on the extent to which a bank
can disclose an account number or access code for credit card, deposit, or
transaction accounts to any nonaffiliated third party for use in marketing.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, that affect the national supply of credit.
The Federal Reserve Board regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial
institution deposits, and restricting certain borrowings by financial
institutions and their subsidiaries. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banks in
the past and are expected to continue to do so in the future.
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The Gramm-Leach-Bliley Act has especially
created an increased level of rule-making and debate on the structure of the
United States banking system. The likelihood and timing of any proposals or
bills being enacted and the impact they might have on us and our subsidiary
banks cannot be determined at this time.
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,
----------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Commercial, financial and agricultural..... $ 295,032 $ 297,966 $ 278,647 $ 286,630 $ 240,271
Real estate-- construction................. 40,610 43,039 36,721 34,100 22,887
Real estate-- mortgage..................... 290,920 208,895 198,447 177,658 152,350
Consumer................................... 232,709 247,375 265,729 245,068 189,307
--------- --------- --------- --------- ---------
$ 859,271 $ 797,275 $ 779,544 $ 743,456 $ 604,815
========= ========= ========= ========= =========
Loan Concentrations
Other than the classifications shown above, we had no loans outstanding at
December 31, 2000 that represented more than 10% of total loans.
Maturity Distribution and Interest Sensitivity of Loans at December 31,
2000 (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, 2000:
10
After One
Year
One Year Through After Five
or less Five Years Years Total
------------- ------------- ----------- -------------
Commercial, financial, and agricultural $ 202,912 $ 80,680 $ 11,440 $ 295,032
Real estate-- construction........... 37,781 2,829 -- 40,610
------------- ------------- ----------- -------------
$ 240,693 $ 83,509 $ 11,440 $ 335,642
============= ============= =========== =============
Maturities
After One Year
-----------
Loans with fixed interest rates.................... $ 62,583
Loans with floating or adjustable interest rates... 32,366
-----------
$ 94,949
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 $2.0 million as of December 31, 2000.
Composition of Investment Securities (in thousands):
December 31, 2000 December 31, 1999 December 31, 1998
------------------------ ------------------------ ----------------------
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... $ 251,418 $ 251,921 $ 283,736 $ 277,681 $ 293,400 $ 297,080
Obligations of states and
political subdivisions...... 82,344 83,067 86,908 85,779 66,764 67,731
Mortgage-backed securities...... 53,541 54,006 46,083 45,393 44,634 44,894
Other securities................ 4,615 4,597 5,636 5,554 9,505 9,547
---------- ---------- ---------- --------- --------- ---------
Total....................... $ 391,918 $ 393,591 $ 422,363 $ 414,407 $ 414,303 $ 419,252
========== ========== ========== ========= ========= =========
Available-for-sale
- ------------------
U.S. Treasury obligations and
obligations of U.S. government
corporations and agencies... $ 102,872 $ 103,322 $ 105,290 $ 102,792 $ 104,256 $ 105,368
Obligations of states and
political subdivisions...... 58,544 59,610 50,408 48,200 33,255 33,863
Mortgage-backed securities...... 47,963 48,551 41,940 41,158 42,579 42,795
Other securities................ 50,463 50,852 42,513 41,705 29,143 29,562
---------- ---------- ---------- --------- --------- ---------
Total....................... $ 259,842 $ 262,335 $ 240,151 $ 233,855 $ 209,233 $ 211,588
========== ========== ========== ========= ========= =========
Analysis of the Allowance for Loan Losses (in thousands, except
percentages):
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Balance at January 1,................................. $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
Allowance established from purchase acquisitions...... -- -- -- 1,444 800
--------- --------- --------- --------- ---------
8,938 8,988 10,632 11,241 10,450
Charge-offs:
Commercial, financial and agricultural.............. 950 1,038 1,267 836 1,214
Consumer............................................ 1,998 2,747 2,786 2,127 1,476
All other........................................... 45 36 106 164 74
--------- --------- --------- --------- ---------
Total loans charged off............................... 2,993 3,821 4,159 3,127 2,764
11
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Recoveries:
Commercial, financial and agricultural.............. 391 632 532 726 389
Consumer............................................ 855 936 811 643 380
All other........................................... 299 172 32 35 142
--------- --------- --------- --------- ---------
Total recoveries...................................... 1,545 1,740 1,375 1,404 911
--------- --------- --------- --------- ---------
Net charge-offs....................................... 1,448 2,081 2,784 1,723 1,853
Provision for loan losses............................. 2,398 2,031 1,140 1,114 1,200
--------- --------- --------- --------- ---------
Balance at December 31,............................... $ 9,888 $ 8,938 $ 8,988 $ 10,632 $ 9,797
========= ========= ========= ========= =========
Loans at year-end..................................... $ 859,271 $ 797,275 $ 779,544 $ 743,456 $ 604,815
Average loans......................................... 817,603 779,283 770,183 657,325 575,658
Net charge-offs/average loans......................... 0.18% 0.27% 0.36% 0.26% 0.32%
Average for loan losses/year-end loans................ 1.15 1.12 1.15 1.43 1.62
Allowance for loan losses/nonperforming loans......... 278.85 615.56 322.84 255.58 288.57
Allocation of Allowance for Loan Losses (in thousands):
2000 1999 1998 1997 1996
--------- --------- ---------- ---------- ---------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
--------- --------- ---------- ---------- ---------
Commercial, financial and agricultural........ $ 3,394 $ 3,340 $ 3,213 $ 4,099 $ 3,892
Real estate-- construction.................... 468 483 423 488 370
Real estate-- mortgage........................ 3,348 2,342 2,288 2,541 2,468
Consumer...................................... 2,678 2,773 3,064 3,504 3,067
--------- --------- ---------- ---------- ---------
Total..................................... $ 9,888 $ 8,938 $ 8,988 $ 10,632 $ 9,797
========= ========= ========== ========== =========
Percent of Total Loans:
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Commercial, financial and agricultural................ 34.33% 37.37% 35.74% 38.55% 39.73%
Real estate-- construction............................ 4.73 5.40 4.71 4.59 3.78
Real estate-- mortgage................................ 33.86 26.20 25.46 23.90 25.19
Consumer.............................................. 27.08 31.03 34.09 32.96 31.30
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, under a lease
agreement that expires December 31, 2004. Our subsidiary banks collectively own
25 banking facilities, some of which are detached drive-ins, and they also lease
four banking facilities. Our management considers all of our existing locations
to be quality facilities and well-suited for conducting the business of banking.
We believe that our existing facilities are adequate to meet our requirements
and our subsidiary banks' requirements for the foreseeable future.
12
ITEM 3. LEGAL PROCEEDINGS
With our subsidiary banks we are parties to a number of lawsuits arising in
the ordinary course of our banking business. However, there are no material
pending legal proceedings to which we, our subsidiary banks or our other direct
and indirect subsidiaries, or any of their properties, are subject. Other than
regular, routine examinations by state and federal banking authorities, there
are no proceedings pending or known to be contemplated by any governmental
authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of our fiscal year ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock, par value $10.00 per share, is traded on the Nasdaq
National 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 16, 2001, we had 1,648 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, particularly those restrictions
arising under federal and state banking laws.
13
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years ended
December 31, 2000, 1999, 1998, 1997 and 1996, have been derived from our audited
consolidated financial statements. The selected financial data should be read in
conjunction with "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements.
The results of operations presented below are not necessarily indicative of the
results of operations that may be achieved in the future. The amounts related to
shares of our common stock have been adjusted to give effect to all stock
dividends and stock splits.
Year Ended December 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Summary Income Statement Information:
Interest income $ 117,950 $ 110,013 $ 111,868 $ 101,474 $ 89,164
Interest expense 48,829 43,338 46,292 41,735 35,699
---------- ---------- ---------- ---------- ----------
Net interest income 69,121 66,675 65,576 59,739 53,465
Provision for loan losses 2,398 2,031 1,140 1,114 1,200
Noninterest income 25,947 24,484 22,351 19,486 16,491
Noninterest expense 51,692 51,934 52,422 46,522 39,829
---------- ---------- ---------- ---------- ----------
Earnings before income taxes 40,978 37,194 34,365 31,589 28,927
Provision for income taxes 12,662 11,504 11,111 10,563 9,884
---------- ---------- ---------- ---------- ----------
Net earnings $ 28,316 $ 25,690 $ 23,254 $ 21,026 $ 19,043
========== ========== ========== ========== ==========
Per Share Data:
Net earnings per share $ 2.85 $ 2.58 $ 2.34 $ 2.12 $ 1.98
Net earnings per share, assuming dilution 2.84 2.57 2.33 2.11 1.97
Cash dividends declared 1.29 1.125 1.00 0.88 0.79
Book value at period-end 19.90 17.91 17.03 15.56 14.20
Earnings performance ratios:
Return on average assets 1.67% 1.53% 1.44% 1.46% 1.51%
Return on average equity 15.39 14.84 14.51 14.37 14.72
Summary Balance Sheet Data (Period-end):
Investment securities $ 654,253 $ 656,218 $ 625,891 $ 616,018 $ 541,451
Loans 859,271 797,275 779,544 743,456 604,815
Total assets 1,753,814 1,723,369 1,686,647 1,657,044 1,332,645
Deposits 1,519,874 1,524,704 1,504,856 1,488,709 1,185,440
Total liabilities 1,557,693 1,544,706 1,517,198 1,502,583 1,196,236
Total shareholders' equity 196,121 178,663 169,449 154,461 136,409
Asset quality ratios:
Allowance for loan losses/period-end loans 1.15% 1.12% 1.15% 1.43% 1.62%
Nonperforming assets/period-end loans plus
foreclosed assets 0.48 0.26 0.41 0.68 0.69
Net charge offs/average loans 0.18 0.27 0.36 0.26 0.32
Capital ratios:
Average shareholders' equity/average assets 10.86% 10.30% 9.89% 10.16% 10.24%
Leverage ratio (1) 10.40 9.62 9.02 8.28 10.27
Tier 1 risk-based capital (2) 17.75 17.19 16.03 14.76 18.73
Total risk-based capital (3) 18.74 18.13 17.01 15.95 19.95
Dividend payout ratio 45.23 43.64 41.66 41.24 40.32
- --------------------------------
(1) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
fourth quarter average assets less intangible assets.
(2) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
risk-adjusted assets.
(3) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
plus allowance for loan losses to the extent allowed under regulatory
guidelines by risk-adjusted assets.
14
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, 2000 and 1999, and statements of
earnings for the years 1998 through 2000 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 2000 were $28.3 million, an increase
of $2.6 million, or 10.2%, over net earnings for 1999 of $25.7 million. Net
earnings for 1998 were $23.3 million. The increase in net earnings for 2000 was
primarily attributable to an increase in net interest income resulting primarily
from the growth in average earning assets and an increase in noninterest income
resulting primarily from increases in service fees on deposit accounts and gain
on securities transactions. 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.
On a per share basis, net earnings were $2.85 for 2000 as compared to $2.58
for 1999 and $2.34 for 1998. When calculated on a cash basis which excludes the
after tax effect of goodwill amortization, our earnings per share amounted to
$2.97 for 2000, $2.70 for 1999, and $2.46 for 1998. Return on average assets was
1.67% for 2000 as compared to 1.53% for 1999 and 1.44% for 1998. Return on
average equity was 15.39% for 2000 as compared to 14.84% for 1999 and 14.52% for
1998.
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 $71.9 million in 2000 as compared to $69.0
million in 1999 and $67.0 million in 1998. These increases were primarily due to
growth in the volume of earning assets. Average earning assets were $1.538
billion in 2000, as compared to $1.519 billion in 1999, which were $49.2 million
higher than 1998. The 2000 increase is attributable to higher average investment
securities, primarily tax-exempt securities, which increased $16.0 million, and
higher average loans which increased $38.3 million. These increases were funded
primarily from a reduction in average Federal funds sold which decreased $39.8
from the prior year average. The 1999 increase was due primarily to an increase
in average tax-exempt investment securities, which were up $49.0 million. Table
1 allocates the increases in tax-equivalent net interest income for 2000 and
1999 between the amount of increase attributable to volume and rate.
Table 1 -- Changes in Interest Income and Interest Expense (in thousands):
2000 Compared to 1999 1999 Compared to 1998
-------------------------------------- -----------------------------------
Change Attributable to Change Attributable to
------------------------ Total ---------------------- Total
Volume Rate Change Volume Rate Change
---------- ---------- ---------- --------- --------- ---------
Short-term investments.......... $ (1,974) $ 646 $ (1,328) $ 274 $ (341) $ (67)
Taxable investment securities... 246 1,289 1,535 (429) (932) (1,361)
Tax-exempt investment securities
(1)......................... 1,032 315 1,347 2,773 (157) 2,616
Loans (1)....................... 3,384 3,459 6,843 838 (2,992) 2,154
---------- ---------- ---------- --------- --------- ---------
Interest income............. 2,688 5,709 8,397 3,456 (4,422) (966)
Interest-bearing deposits....... (394) 5,012 4,618 1,338 (4,352) (3,014)
Short-term borrowings........... 613 261 874 154 (95) 59
---------- ---------- ---------- --------- --------- ---------
Interest expense............ 219 5,273 5,492 1,492 (4,447) (2,955)
---------- ---------- ---------- --------- --------- ---------
Net interest income......... $ 2,469 $ 436 $ 2,905 $ 1,964 $ 25 $ 1,989
========== ========== ========== ========= ========= =========
- ---------------
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
15
The net interest margin, which measures tax-equivalent net interest income
as a percentage of average earning assets is illustrated below in Table 2 for
the years 1998 through 2000. In 2000, the net interest margin amounted to 4.68%,
which was up from 4.54% reported in 1999. In 1998, the net interest margin
amounted to 4.56%. Our improved net interest margin in 2000 resulted primarily
from an increase in average loans which were funded through a reduction in lower
yielding Federal funds sold. Our 4.54% net interest margin in 1999 was slightly
below the prior year but showed improvement toward the end of 1999 as market
rates increased.
Table 2 -- Average Balances and Average Yields and Rates (in thousands,
except percentages):
2000 1999 1998
--------------------------- --------------------------- --------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- --------- ---- ---------- --------- ---- ---------- -------- ----
Assets
Short-term investments..... $ 50,538 $ 3,148 6.23% $ 90,383 $ 4,476 4.95% $ 85,247 $ 4,543 5.33%
Taxable investment securities 544,546 33,557 6.16 540,402 32,022 5.93 547,438 33,383 6.10
Tax-exempt investment
securities (1)............ 125,072 8,389 6.71 109,079 7,042 6.46 67,068 4,426 6.60
Loans (1)(2)............... 817,603 75,652 9.25 779,283 68,809 8.83 770,18 70,963 9.21
---------- --------- ---------- --------- ---------- --------
Total earning assets...... 1,537,759 120,746 7.85 1,519,147 112,349 7.40 1,469,936 113,315 7.71
Cash and due from banks.... 77,727 80,689 72,608
Bank premises and equipment 40,400 41,285 43,524
Other assets............... 28,212 27,478 21,720
Goodwill, net.............. 19,335 21,056 22,466
Allowance for loan losses.. (9,420) (9,016) (9,912)
---------- ---------- ----------
Total assets.............. $1,694,013 $1,680,639 $1,620,342
========== ========== ==========
Liabilities and Shareholders'
Equity
Interest-bearing deposits.. $1,161,175 $ 47,738 4.11% $1,171,892 $ 43,120 3.68% $1,138,858 $ 46,134 4.05%
Short-term borrowings...... 17,621 1,091 6.19 4,607 217 4.71 2,338 158 6.76
---------- --------- ---------- --------- ---------- --------
Total interest-bearing
liabilities............... 1,178,796 48,829 4.14 1,176,499 43,337 3.68 1,141,196 46,292 4.06
Noninterest-bearing deposits 317,659 318,399 306,743
Other liabilities.......... 13,529 12,599 12,108
---------- ---------- ----------
Total liabilities......... 1,509,984 1,507,497 1,460,047
Shareholders' equity......... 184,029 173,142 160,295
---------- ---------- ----------
Total liabilities and
shareholders' equity...... $1,694,013 $1,680,639 $1,620,342
========== ========== ==========
Net interest income.......... $ 71,917 $ 69,012 $ 67,023
========= ========= =========
Rate Analysis:
Interest income/earning
assets..................... 7.85% 7.40% 7.71%
Interest expense/earning
assets..................... 3.18 2.85 3.15
---- ---- ----
Net yield on earning assets 4.68% 4.54% 4.56%
==== ==== ====
- ---------------
(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 2000 was $25.9 million, an
increase of $1.5 million, or 6.0%, as compared to 1999. This increase was
primarily a result of (i) an increase in trust fees of $396 thousand due
primarily to continued growth in trust assets; (ii) an increase in service fees
on deposit accounts of $752 thousand which reflects growth in the number of
accounts and the volume of transactions processed; and (iii) an increase in net
gain on securities transactions.
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. Table 3 provides comparisons for other categories of noninterest
income.
16
Table 3 -- Noninterest Income (in thousands):
Increase Increase
2000 (Decrease) 1999 (Decrease) 1998
---------- ---------- ---------- ---------- ----------
Trust fees................................... $ 5,494 $ 396 $ 5,098 $ 349 $ 4,749
Service fees on deposit accounts............. 14,074 752 13,322 1,484 11,838
Real estate mortgage fees.................... 1,022 (269) 1,291 (67) 1,358
Net securities gains (losses)................ 530 530 -- (42) 42
ATM fees..................................... 1,554 313 1,241 207 1,034
Other:
Mastercard fees............................ 830 21 809 (63) 872
Miscellaneous income....................... 1,059 62 997 167 830
Safe deposit rental fees................... 395 3 392 1 391
Exchange fees.............................. 224 (32) 256 (125) 381
Credit life fees........................... 237 (47) 284 34 250
Gain (loss) on sale of repossessed assets.. 2 17 (15) (250) 235
Brokerage commissions...................... 252 (2) 254 41 213
Gain on sale of premises and equipment..... 4 (254) 258 248 10
Interest on loan recoveries................ 270 (27) 297 149 148
---------- ---------- ---------- ---------- ----------
Total other............................. 3,273 (259) 3,532 202 3,330
---------- ----------- ---------- ---------- ----------
Total Noninterest Income................... $ 25,947 $ 1,463 $ 24,484 $ 2,133 $ 22,351
========== ========== ========== ========== ==========
Noninterest Expense. Total noninterest expense for 2000 was $51.7 million,
a decrease of $241 thousand as compared to 1999. Noninterest expense for 1999
amounted to 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 53.11% for 2000, 55.55% for 1999,
and 58.65% for 1998.
Salaries and employee benefits totaled $27.1 million, an increase of $132
thousand as compared to 1999. Net occupancy and equipment expense in aggregate
for 2000 decreased by $193 thousand and resulted primarily from lower building
depreciation. Printing, stationery, and supplies expense for 2000 decreased $296
thousand as compared to 1999 and resulted primarily from the initial benefit of
our implementation of a companywide procurement program provided through an
outside vendor. Credit card fees for 2000 decreased $140 thousand as compared to
1999 and resulted primarily from the termination of our cardholder credit card
product. Public relations and business development expense increased $101
thousand as compared to 1999 and reflects our increased emphasis on expanding
our customer base. Other professional and service fees increased $105 thousand
as compared to 1999 and resulted primarily from a review of our student loan
processing area by outside professionals.
Salaries and employee benefits for 1999 totaled $26.9 million, an increase
of $266 thousand as compared to 1998. Net occupancy and equipment expense in the
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 this decrease resulted from lower expenses
related to preparation for the Year 2000.
17
Table 4 -- Noninterest Expense (in thousands):
Increase Increase
2000 (Decrease) 1999 (Decrease) 1998
---------- ---------- ---------- ---------- ----------
Salaries..................................... $ 20,963 $ 78 $ 20,885 $ 153 $ 20,732
Medical and other benefits................... 2,664 276 2,388 34 2,354
Profit sharing............................... 1,874 (237) 2,111 84 2,027
Payroll taxes................................ 1,576 15 1,561 (5) 1,566
---------- ---------- ---------- ---------- ----------
Total salaries and employee benefits....... 27,077 132 26,945 266 26,679
Net occupancy expense........................ 3,563 (256) 3,819 (366) 4,185
Equipment expense............................ 4,181 63 4,118 27 4,091
Goodwill amortization........................ 1,641 -- 1,641 (14) 1,655
Other:
Data processing and operation fees......... 1,263 88 1,175 26 1,149
Postage.................................... 1,046 (57) 1,103 (38) 1,141
Printing, stationery and supplies.......... 882 (296) 1,178 76 1,102
Advertising................................ 1,054 13 1,041 (52) 1,093
Correspondent bank service charges......... 1,262 19 1,243 151 1,092
ATM expense................................ 1,000 40 960 137 823
Credit card fees........................... 604 (140) 744 (9) 753
Telephone.................................. 754 84 670 (51) 721
Public relations and business development.. 703 101 602 6 596
Directors' fees............................ 453 (8) 461 (49) 510
Audit and accounting fees.................. 666 44 622 (38) 660
Legal fees................................. 279 (82) 361 (136) 497
Other professional and service fees........ 531 105 426 (36) 462
Regulatory exam fees....................... 424 39 385 (25) 410
Franchise tax.............................. 261 (96) 357 (47) 404
Software amortization...................... 287 (99) 386 (2) 388
Other miscellaneous........................ 3,761 65 3,696 (315) 4,011
---------- ---------- ---------- ---------- ----------
Total other............................. 15,230 (180) 15,410 (402) 15,812
---------- ---------- ---------- ---------- ----------
Total Noninterest Expense.................... $ 51,692 $ (241) $ 51,933 $ (489) $ 52,422
========== ========== ========== ========== ==========
Income Taxes. Income tax expense was $12.7 million for 2000 as compared to
$11.5 million for 1999 and $11.1 million for 1998. Our effective tax rates on
pretax income were 30.9%, 30.9% and 32.3%, respectively, for the years 2000,
1999 and 1998. The decrease for 1999 was 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, 2000, total loans were $859.3 million, an increase of $62.0
million, or 7.8%, as compared to December 31, 1999. As of December 31, 1999,
total loans were $797.2 million, an increase of $17.7 million or 2.3% as
compared to December 31, 1998. Real estate loans as of December 31, 2000,
increased $79.6 million as compared to December 31, 1999. As of December 31,
1999, real estate loans increased $10 million as compared to December 31, 1998.
Commercial loans and consumer loans as of December 31, 2000, decreased $2.9
million and $14.7 million, respectively, as of December 31, 1999. Commercial
loans and consumer loans as of December 31, 1999, increased $6.3 million and
decreased $18.4 million, respectively, as of December 31, 1998. The decrease in
consumer loans for 2000 resulted primarily from a $11.9 million reduction in the
volume of indirect automobile loans and a $3.1 million reduction in credit card
loans. Loans averaged $817.6 million during 2000, an increase of $38.3 million
over the prior year average.
18
Table 5 -- Composition of Loans (in thousands, except percentages):
December 31, 2000 December 31, 1999 December 31, 1998
------------------- -------------------- --------------------
% of % of % of
Amount Total Amount Total Amount Total
-------- ------ -------- ------ -------- ------
Commercial, financial and
agricultural.................... $295,032 34.34% $297,966 37.37% $278,647 35.74%
Real estate-- construction........ 40,610 4.73 43,039 5.40 36,721 4.71
Real estate-- mortgage............ 290,920 33.86 208,895 26.20 198,447 25.46
Consumer.......................... 232,709 27.08 247,375 31.03 265,729 34.09
-------- ------ -------- ------ -------- ------
$859,271 100.00% $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 $4.1 million at December 31, 2000, as compared to $2.1
million at December 31, 1999 and $3.2 million at December 31, 1998. As a percent
of loans and foreclosed assets, nonperforming assets were 0.48% at December 31,
2000, as compared to 0.26% at December 31, 1999 and 0.41% at December 31, 1998.
Management considers the level of nonperforming assets to be manageable and is
not aware of any material classified credit not properly disclosed as
nonperforming at December 31, 2000.
Table 6 -- Nonperforming Assets (in thousands, except percentages):
At December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- --------- ---------- ---------
Nonaccrual loans............................. $ 3,512 $ 1,389 $ 2,717 $ 3,668 $ 2,906
Loans past due 90 days or more............... 34 63 67 134 116
Restructured loans........................... -- -- -- 358 373
---------- ---------- --------- ---------- ---------
Nonperforming loans..................... 3,546 1,452 2,784 4,160 3,395
Foreclosed assets............................ 546 637 385 936 806
---------- ---------- --------- ---------- ---------
Total nonperforming assets.............. $ 4,092 $ 2,089 $ 3,169 $ 5,096 $ 4,201
========== ========== ========= ========== =========
As a % of loans and foreclosed assets........ 0.48% 0.26% 0.41% 0.68% 0.69%
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 $2.4 million for 2000 as compared to $2.0 million for 1999 and
$1.1 million for 1998. As a percent of average loans, net loan charge-offs were
0.18% during 2000, 0.27% during 1999 and 0.36% during 1998. The lower net
charge-off ratio for 2000 resulted primarily from a $749 thousand reduction in
consumer-related loan losses. The allowance for loan losses as a percent of
loans was 1.15% as of December 31, 2000, as compared to 1.12% as of December 31,
1999. Management anticipates that the ratio of allowance for loan losses to
loans will remain above 1% in future periods. A key indicator of the adequacy of
the allowance for loan losses is the ratio of the allowance to nonperforming
loans, which consist of nonaccrual loans, loans past due 90 days, and
restructured loans. This ratio for the past five years is disclosed in the
following Table 7.
19
Table 7 -- Loan Loss Experience and Allowance for Loan Losses (in
thousands, except percentages):
2000 1999 1998 1997 1996
---------- ---------- --------- ---------- ---------
Balance at January 1,........................ $ 8,938 $ 8,988 $ 10,632 $ 9,797 $ 9,650
Allowance established from purchase acquisition -- -- -- 1,444 800
---------- ---------- --------- ---------- ---------
8,938 8,988 10,632 11,241 10,450
Loans charged off............................ 2,993 3,821 4,159 3,127 2,764
Loans recovered.............................. 1,545 1,740 1,375 1,404 911
---------- ---------- --------- ---------- ---------
Net charge-offs.............................. 1,448 2,081 2,784 1,723 1,853
Provision for loan losses.................... 2,398 2,031 1,140 1,114 1,200
---------- ---------- --------- ---------- ---------
Balance at December 31,...................... $ 9,888 $ 8,938 $ 8,988 $ 10,632 $ 9,797
========== ========== ========= ========== =========
Loans at year-end............................ $ 859,271 $ 797,275 $ 779,544 $ 743,456 $ 604,815
Average loans................................ 817,603 779,283 770,183 657,325 575,658
Net charge offs/average loans................ 0.18% 0.27% 0.36% 0.26% 0.32%
Allowance for loan losses/year-end loans..... 1.15 1.12 1.15 1.43 1.62
Allowance for loan losses/nonperforming assets 278.85 615.55 322.84 255.58 288.57
Investment Securities. Investment securities totaled $654.2 million as of
December 31, 2000, as compared to $656.2 million at December 31, 1999. At
December 31, 2000, securities with an amortized cost of $391.9 million were
classified as securities held-to-maturity and securities with a market value of
$262.3 million were classified as securities available-for-sale. As compared to
December 31, 1999, the portfolio at December 31, 2000, reflected (i) a decrease
of $33.8 million in U.S. Treasury and U.S. Government corporations and agencies
securities; (ii) an increase of $6.9 million in tax-exempt obligations of states
and political subdivisions; (iii) an $8.1 million increase in other securities,
primarily corporate bonds; and (iv) a $16.9 million increase in mortgage-backed
securities. The overall portfolio yield of 6.40% at the end of 2000 was up from
the prior year-end yield of 6.15%. We did not hold any collateralized mortgage
obligations that entail higher risks than standard mortgage-backed securities or
structured notes. See Note 2 to the Consolidated Financial Statements for
additional disclosures relating to the maturities and fair values of the
investment portfolio at December 31, 2000 and 1999.
Table 8 -- Maturities and Yields of Investment Securities Held December 31,
2000 (in thousands, except percentages):
Maturing
------------------------------------------------------------------------------------
After One Year After Five Years
One Year Through Through After
or Less Five Years Ten Years Ten Years Total
-------------- -------------- -------------- -------------- --------------
Held-to-Maturity: Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------- ------- ---- -------- ---- ------- ---- ------- ---- -------- ----
U.S. Treasury obligations.. $ 1,509 5.61% $ 4,027 5.46% $ -- --% $ -- --% $ 5,536 5.50%
Obligations of U.S.
Government corporations
and agencies.......... 63,835 5.92 172,122 5.85 6,973 6.97 2,952 7.29 245,882 5.91
Obligations of states and
political subdivisions.. 12,361 6.49 49,539 6.39 10,758 7.24 9,686 8.28 82,344 6.74
Other securities........... 4,615 5.35 -- -- -- -- -- -- 4,615 5.35
Mortgage-backed securities. 3,253 5.36 16,514 6.60 26,129 7.11 7,645 6.89 53,541 6.82
------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $85,573 5.94% $242,202 6.00% $43,860 7.12% $20,283 7.61% $391,918 6.20%
======= ==== ======== ==== ======= ==== ======= ==== ======== ====
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.. $ 3,307 5.94% $ 1,014 6.05% $ -- --% $ -- --% $ 4,321 6.05%
Obligations of U.S.
Government corporations
and agencies.......... 15,666 6.06 52,046 6.23 21,129 6.63 8,148 7.19 96,989 6.37
Obligations of states and
political subdivisions.. 200 6.15 8,716 6.38 6,528 7.36 44,167 7.72 59,611 7.48
Other securities........... 7,402 5.81 40,313 6.46 -- -- 3,137 6.00 50,852 6.34
Mortgage-backed securities. 842 8.16 28,146 6.92 14,134 6.57 7,440 6.92 50,562 6.84
------- ---- -------- ---- ------- ---- -------- ---- -------- ----
Total................... $27,417 6.04% $130,235 6.46% $41,791 6.72% $62,892 7.47% $262,335 6.70%
======= ==== ======== ==== ======= ==== ======= ==== ======== ====
20
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.. $ 4,816 5.84% $ 5,041 5.65% $ -- --% $ -- --% $ 9,857 5.74%
Obligations of U.S.
Government corporations
and agencies.......... 79,501 5.94 224,168 5.94 28,102 6.71 11,100 7.22 342,871 6.04
Obligations of states and
political subdivisions.. 12,561 6.48 58,255 6.39 17,286 7.29 53,853 7.82 141,955 7.05
Other securities........... 12,017 5.64 40,313 6.46 -- -- 3,137 6.00 55,467 6.26
Mortgage-backed securities. 4,095 5.94 44,660 6.80 40,263 6.92 15,085 6.90 104,103 6.83
-------- ---- -------- ---- ------- ---- ------- ---- -------- ----
Total................... $112,990 5.97% $372,437 6.16% $85,651 6.93% $83,175 7.51% $654,253 6.40%
======== ==== ======== ==== ======= ==== ======= ==== ======== ====
Deposits. Deposits held by subsidiary banks represent our primary source of
funding. Total deposits were $1.520 billion as of December 31, 2000, as compared
to $1.525 billion as of December 31, 1999 and $1.505 billion as of December 31,
1998. During 2000, approximately $16.5 million of deposits moved into repurchase
agreements and were retained as a source of funding. 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):
2000 1999 1998
---------------------- ----------------------- --------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- --------- ----
Noninterest-bearing deposits.... $ 317,659 -- $ 318,399 -- $ 306,743 --
Interest-bearing deposits
Interest-bearing checking.... 252,281 1.59% 248,516 1.43% 240,159 2.01%
Savings and money market
accounts................... 374,396 3.93 379,075 3.42 351,319 3.23
Time deposits under $100,000. 370,093 5.29 378,528 4.88 390,791 5.23
Time deposits of $100,000 or
more....................... 164,405 5.74 165,773 4.91 156,589 5.56
---------- ---- ---------- ---- --------- ----
Total interest-bearing deposits 1,161,175 4.11% 1,171,892 3.68% 1,138,858 4.05%
---------- ---------- ---------
Total average deposits.......... $1,478,834 $1,490,291 $1,445,601
========== ========== ==========
December 31, 2000
-----------------
Three months or less............................... $ 53,270
Over three through six months...................... 39,590
Over six through twelve months..................... 51,672
Over twelve months................................. 20,962
-----------
Total time deposits of $100,000 or more.......... $ 165,494
===========
Capital Resources. Total shareholders' equity was $196.1 million, or 11.18%
of total assets, at December 31, 2000, as compared to $178.7 million, or 10.37%
of total assets, at December 31, 1999. During 2000, total shareholders' equity
averaged $184.0 million, or 10.86% of average assets, as compared to $173.1
million, or 10.30% of average assets, during 1999. Effective July 25, 2000, we
implemented a stock buy back program and, through December 31, 2000, purchased
126,100 shares in the open market at an average cost of $31.13 per share.
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, 2000, our total risk-based and leverage ratios
were 18.74% and 10.40%, respectively, as compared to total risk-based and
leverage ratios of 18.13% and 9.62% as of December 31, 1999. In 2000, we
experienced a higher rate of growth in tangible equity capital (6.4%) than
assets (1.8%), which resulted in higher capital ratios as of December 31, 2000,
as compared to December 31, 1999.
21
Interest Rate Risk. Interest rate risk results when the maturity or
repricing intervals of interest-earning assets and interest-bearing liabilities
are different. Our exposure to interest rate risk is managed primarily through
our strategy of selecting the types and terms of interest-earning assets and
interest-bearing liabilities that generate favorable earnings while limiting the
potential negative effects of changes in market interest rates. We use no
off-balance-sheet financial instruments to manage interest rate risk.
Each of our subsidiary banks has an asset/liability committee that monitors
interest rate risk and compliance with investment policies. Each subsidiary bank
tracks interest rate risk by, among other things, interest-sensitivity gap and
simulation analysis. Table 10 sets forth the interest rate sensitivity of our
consolidated assets and liabilities as of December 31, 2000, 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,