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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1996 0-7674
FIRST FINANCIAL BANKSHARES, INC
(Exact Name of Registrant as Specified in its Charter)
Texas 75-0944023
(State of Incorporation) (I.R.S. Employer
Identification No.)
400 Pine Street, Abilene, Texas 79601
(Address of Executive Offices) (Zip Code)
Registrant's Telephone Number (915) 627-7155
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Par Value $10.00 Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
The aggregate market value of voting stock held by nonaffiliates of the
registrant was $226,488,945 as of February 11, 1997.
The number of shares of common stock outstanding at February 11, 1997,
was 6,721,206.
Documents Incorporated by Reference
Portions of the Notice to Shareholders for the April 22, 1997, Annual
Meeting are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
Item Page
PART I
1. Business.........................................................1
2. Properties......................................................13
3. Legal Proceedings...............................................15
4. Submission of Matters to a Vote of Security Holders.............15
PART II
5. Market for Registrant's Common Stock and Related
Security Holder Matters........................................15
6. Selected Financial Data.........................................16
7. Management's Discussion and Analysis
of Financial Condition and Results of Operations...............17
8. Financial Statements and Supplementary Data.....................27
9. Changes in and Disagreements with
Accountants and Financial Disclosure...........................51
PART III
10. Directors and Executive Officers of the Registrant..............51
11. Executive Officer Compensation..................................51
12. Security Ownership of Certain Beneficial
Owners and Management..........................................51
13. Certain Relationships and Related Transactions..................52
PART IV
14. Exhibits, Financial Statement Schedules
and Reports on Form 8K.........................................52
Signatures
PART I
Item 1.Business
A. Organization and General Development of Business
First Financial Bankshares, Inc. (the "Registrant", "Bankshares",
or "Company"), is a Texas corporation duly registered as a multibank holding
company under the Bank Holding Company Act of 1956, as amended. On December 31,
1996 Bankshares owned (through its wholly-owned Delaware subsidiary) all of the
capital stock of eight banks located in Texas: First National Bank of Abilene,
Abilene, Texas ("First Abilene"); Hereford State Bank, Hereford, Texas
("Hereford"); First National Bank, Sweetwater, Texas ("First Sweetwater");
Eastland National Bank, Eastland, Texas ("Eastland"); First National Bank in
Cleburne, Cleburne, Texas ("First Cleburne"); Stephenville Bank & Trust Co.,
Stephenville, Texas ("Stephenville"); Southwest Bank of San Angelo, San Angelo,
Texas ("San Angelo"); and Weatherford National Bank, Weatherford, Texas
("Weatherford National").
Bankshares was formed in 1956 at the direction of the Board of
Directors of the Farmers and Merchants National Bank of Abilene (a national bank
organized in Abilene, Texas, in 1889, changing its name to First National Bank
of Abilene in 1957). The corporation's initial name was F & M Operating Company
(F & M), and it was originally authorized to and did issue ten shares of stock
having a par value of $100.00 each. The ten shares were issued to three officers
of the Bank under a trust agreement by which the three trustees would hold the F
& M stock for the ratable benefit of the shareholders of First National Bank of
Abilene. The original purposes in organizing the corporation were to provide a
separate entity to own, operate and maintain parking lots, parking garages,
buildings and real estate, and to buy, sell and lease personal property such as
bank notes and automobiles.
In 1968, F & M purchased 200,000 shares of newly authorized and
issued stock of Bank of Commerce, Abilene, Texas ("BOC"). The purchase was made
after the State Banking Commission of Texas required that new capital funds be
injected into BOC. In the resulting increased capitalization of BOC, the
authorized and outstanding shares of BOC common stock were increased from
300,000 to 700,000, with the 400,000 new shares being offered at $2.00 per
share. In addition, F & M acquired by proxy assignments the power to vote an
additional 66,000 shares of BOC stock. These proxies expired January 1, 1975.
The First National Bank Employees' Profit Sharing Trust originally purchased
28,177 shares of BOC stock.
In November 1971, the Board of Directors of First Abilene
authorized the reorganization of F & M into a multibank holding company and the
commencement of proceedings to effect a merger which would permit First Abilene
to be wholly-owned by the holding company. The merger was submitted for review
and approval by federal regulatory authorities in April 1972.
B. Reorganization, Mergers, and Acquisitions
F & M's reorganization was accomplished in September 1972. Its name
was changed to First Abilene Bankshares, Inc., and it was recapitalized by
reducing the par value of its stock to $10.00 per share and increasing the
authorized shares to 500,000. The merger was approved in January 1973, and
became effective in April of that same year. As a result, the shareholders of
First Abilene became shareholders in Bankshares, and Bankshares became the owner
of all of the outstanding shares of First Abilene (except for the qualifying
shares owned by directors).
In 1974, Bankshares acquired the remaining outstanding common stock
of BOC (except for six shares amounting to approximately .01%) by an offer
registered under the Securities Act of 1933 (the "1933 Act") to exchange one
share of Bankshares' common stock for each 13-1/3 outstanding shares of BOC
common stock. The exchange was effected on May 1, 1974. In late 1987, Bankshares
purchased the remaining six shares of BOC stock, paying $82.00 in cash for each
share.
Effective April 1, 1974, Bankshares acquired all the outstanding
capital stock of Hereford through an offer (also registered under the 1933 Act)
to exchange one share of Bankshares' common stock and $175 cash for each
outstanding share of Hereford.
Effective September 4, 1981, Bankshares acquired all the
outstanding capital stock of First Sweetwater through an offer (registered under
the 1933 Act) to exchange one share of Bankshares' common stock for each
outstanding share of First Sweetwater stock.
Effective June 8, 1982, Bankshares acquired all of the outstanding
capital stock of Eastland through an offer (registered under the 1933 Act) to
exchange 3-1/2 shares of Bankshares' common stock for each outstanding share of
Eastland stock.
Effective July 31, 1987, American National Bank of Abilene
("American National") was merged with and into First Abilene. Following approval
of the merger by the Board of Directors and Shareholders of each bank, all of
the issued and outstanding common stock of American National were tendered for
exchange and First Abilene paid $11.50 for each of American National's 200,000
shares of common stock. The merger was approved by the Office of the Comptroller
of the Currency ("OCC"), the Federal Reserve Board, the Federal Deposit
Insurance Corporation ("FDIC") and the United States Department of Justice. The
premises formerly occupied by American National, both its main banking offices
and drive-in banking facility, are now being operated by First Abilene as a
branch bank.
On July 21, 1988, Hereford acquired 11,576 shares of First Tule
Bancorp, Inc. in Tulia, Texas ("First Tule"), a registered bank holding company,
the principal asset of which is all, or substantially all, of the capital stock
of The First National Bank, Tulia, Texas ("FNB Tulia"). Although the Bank
Holding Company Act of 1956, as amended, generally requires approval of the
Federal Reserve Board prior to acquiring more than 5% of the outstanding capital
stock of any bank or bank holding company, the acquisition by Hereford of the
First Tule stock was effected under an exemption for acquisitions of voting
securities in satisfaction of debt previously contracted. The shares of First
Tule were transferred to Hereford in partial satisfaction of indebtedness owed
to Hereford by three individuals and secured, in part, by such shares of stock
in First Tule. Since the date it acquired the stock, Hereford attempted to sell
or otherwise dispose of the stock, but was unable to do so because of pending
litigation against FNB Tulia. Full disclosure of the acquisition by Hereford of
the First Tule stock was made to federal and state banking authorities and
continued holding of the stock was approved by bank regulatory authorities while
Hereford attempted to sell such stock. However, under the Bank Holding Company
Act (and Regulation Y adopted by the Federal Reserve Board pursuant to the Act),
Hereford was required to dispose of the First Tule stock within five (5) years
after having acquired the same, but had not been able to do so. While Hereford
was in technical violation of the Act and Regulation Y, such circumstance
existed with the knowledge and apparent acquiescence of federal and state
banking authorities and neither Registrant nor Hereford had any reason to
believe that any adverse action would be taken against Hereford or Registrant by
reason of Hereford's continued ownership of the shares of First Tule so long as
Hereford, in good faith, continued its efforts to liquidate or dispose of such
shares. Neither First Tule nor FNB Tulia was deemed or considered to be a
subsidiary of the Registrant. By reason of the settlement or other disposition
of the remaining lawsuits against FNB Tulia, as well as the efforts of the
remaining shareholders of First Tule to find a purchaser for their shares or
those of FNB Tulia, First Tule consummated in June 1995, a Merger and Plan of
Reorganization Agreement with Norwest Corporation which resulted in the shares
of First Tule held by Hereford being exchanged for $1,652,741 cash.
Effective January 1, 1989, BOC was merged with and into First
Abilene and its state charter surrendered to the State of Texas for
cancellation. First Abilene received all of the assets of BOC and assumed all of
its liabilities. The banking offices and drive-in facility of BOC are now being
operated as a branch banking facility of First Abilene. The merger and branch
banking action was undertaken to achieve greater efficiency from the combined
operation of First Abilene and BOC and to provide improved convenience for each
bank's customers.
In January of 1990, Bankshares' Board of Directors authorized a
state franchise tax savings program designed to substantially reduce the amount
of corporate franchise taxes paid by Bankshares. Pursuant to that program, a
second bank holding company was formed in the State of Delaware, First Abilene
Bankshares of Delaware, Inc. (the "Delaware BHC"). With the approval of the
Federal Reserve Board, and effective March 28, 1990, the Delaware BHC became the
owner and holder of all of the outstanding shares of Bankshares' subsidiary
banks and, in turn, the Delaware BHC became the sole subsidiary of Bankshares
and is wholly-owned and controlled by Bankshares. The corporate offices of the
Delaware BHC are located in the State of Delaware and, as defined by Texas
franchise tax statutes, the new subsidiary is not considered to be doing
business in the State of Texas.
Effective December 21, 1990, the Delaware BHC, using funds provided
by Bankshares, purchased all of the outstanding stock of First Cleburne for
$4,700,000 in cash.
On December 3, 1992, the Texas Secretary of State issued a
Certificate of Incorporation for First Financial Investments, Inc., which is, or
shall become, a wholly-owned subsidiary of Bankshares and the initial capital of
which shall consist of $100,000 represented by 100,000 shares of common stock to
be issued to Bankshares. First Financial Investments, Inc. ("FFI") was intended
to be a securities brokerage subsidiary and on or about December 8, 1992,
Bankshares submitted to the Federal Reserve Board its Application to Engage in
Non-Banking Activity (Form FR Y-4) to engage, de novo, in providing securities
brokerage services pursuant to Section 225.25(b)(15) of FRB Regulation Y and
Section 4(c)(a) of the Bank Holding Company Act of 1956, as amended. At the end
of 1992, Bankshares and FFI were engaged in the process of securing all
approvals, and meeting all other requirements, for FFI to become a broker-dealer
registered with the National Association of Securities Dealers, the Securities
and Exchange Commission and the Texas State Securities Board. At that time it
was anticipated that the activities of FFI would be limited to buying and
selling stocks, bonds and other securities as agent for the account of the
customers of Bankshares' subsidiaries, which securities would include equities,
mutual funds and municipal, corporate, and government bonds, but without
providing investment advice or research services. Securities brokerage services
would be provided on, or adjacent to, the premises and banking offices of
Bankshares' subsidiary banks. It was anticipated at that time that Bankshares,
through FFI, would begin providing securities brokerage services during the
second quarter of 1993. On February 3, 1993, Bankshares received Federal Reserve
approval to engage, de novo, in providing securities brokerage services through
FFI. While it still may at some future date provide securities brokerage
services through FFI, Bankshares has notified the Federal Reserve that its plans
to offer brokerage services through a separate subsidiary have been delayed. At
December 31, 1996, four of Bankshares' subsidiary banks (First Abilene, First
Cleburne, San Angelo, and Weatherford National) were providing brokerage
services through third party brokerage firms.
Effective February 25, 1993, the Delaware BHC, using funds provided
by Bankshares, acquired all of the outstanding capital stock of Stephenville for
$7,750,000 in cash. The acquisition was effected through a Stock Purchase and
Sale Agreement between Bankshares, Stephenville and two individuals (the
"Principal Shareholders") owning a majority of the Stephenville stock and a cash
tender offer to the remaining shareholders of Stephenville.
Effective September 23, 1993, First Cleburne acquired by purchase
the Cleburne, Texas branch office facility of Bank One, Texas, N.A., and assumed
deposit liabilities of approximately $19 million. The aggregate value of the
land, buildings, loans, and other assets purchased by First Cleburne was
approximately $2 million. The former Bank One facility is now being operated as
a branch office of First Cleburne.
On October 26, 1993, at a Special Shareholders Meeting called for
such purpose, the name of the Registrant was changed to First Financial
Bankshares, Inc. Similarly, the corporate name of the Delaware BHC was changed
to First Financial Bankshares of Delaware, Inc. effective December 7, 1993.
Effective March 10, 1994, pursuant to a certain Stock Exchange
Agreement and Plan of Reorganization dated December 7, 1993, Bankshares acquired
190,622 shares (98.22%) of the issued and outstanding shares of Concho
Bancshares, Inc. ("Concho"), a Texas corporation and bank holding company, which
owned all of the capital stock of San Angelo, a Texas state bank located in the
City of San Angelo, Tom Green County, Texas. San Angelo owned all of the issued
and outstanding capital stock of SWB Investment Centre, Inc. ("SWB"), a Texas
corporation providing securities brokerage services. The shares of Concho common
stock acquired by Bankshares were contributed by Bankshares to the capital of
the Delaware BHC and effective May 1, 1994, pursuant to the corporation laws of
the States of Delaware and Texas, Concho was merged with and into the Delaware
BHC so that San Angelo became a subsidiary of the Delaware BHC. As part of the
merger of the Delaware BHC and Concho, minority shareholders of Concho tendered
an additional 2,649 shares of Concho common stock in exchange for shares of
Bankshares' common stock and cash. In connection with the acquisition of Concho
by Bankshares and the subsequent merger of Concho with and into the Delaware
BHC, Bankshares issued 232,080 shares of its common stock and paid $44,531 in
cash in lieu of issuing fractional shares of Bankshares' common stock.
Effective January 17, 1996, pursuant to a Stock Purchase and Sale
Agreement dated September 7, 1995, Bankshares acquired for $6,394,800 cash all
of the stock of Citizens Equity Corp. ("Citizens Equity"), a Texas corporation
and bank holding company which owned substantially all of the stock of Citizens
National Bank of Weatherford ("Citizens National"), a national bank located in
Weatherford, Texas. Also, effective January 17, 1996, Bankshares acquired for
$1,147,861 cash substantially all of the minority shares of Citizens National.
Simultaneously, Bankshares caused Citizens Equity to redeem all of its preferred
stock so that Bankshares owned 100% of the issued and outstanding shares of the
capital stock of Citizens Equity. Effective March 31, 1996, pursuant to the
corporation laws of the State of Texas, Citizens Equity was merged with and into
Bankshares. Upon completion of the merger the common stock of Citizens National
was contributed by Bankshares to the capital of the Delaware BHC.
Effective January 17, 1996, pursuant to a Stock Exchange Agreement
and Plan of Reorganization dated October 20, 1995, Bankshares acquired 100% of
the issued and outstanding capital stock of Weatherford National Bancshares,
Inc. ("Weatherford Bancshares"), a Texas corporation and bank holding company
which owned all of the capital stock of Parker Bancshares, Inc. ("Parker
Bancshares"), a Delaware corporation which owned all of the stock of Weatherford
National, a national bank located in Weatherford, Texas. In exchange for the
stock of Weatherford Bancshares, Bankshares issued 323,977 shares of common
stock. Effective March 31, 1996, pursuant to the corporation laws of the State
of Texas, Weatherford Bancshares was merged with and into Bankshares. Also
effective March 31, 1996, pursuant to the corporation laws of the states of
Texas and Delaware, Parker Bancshares was merged with and into the Delaware BHC.
Effective April 1, 1996, pursuant to the approval of the OCC,
Citizens National was merged with and into Weatherford National with the
resulting entity operating under the name of Weatherford National Bank.
C. Mode of Conducting Business
Bankshares operates principally in order to give the affiliated
banks access to additional management and technical resources which help them to
improve or expand their banking services while continuing their local activity
and identity. Each of the affiliated banks operates under the day-to-day
management of its Board of Directors and officers, with substantial authority in
making decisions concerning their own investments, loan policies, interest rates
and service charges. Bankshares provides assistance to the affiliated banks,
especially with respect to decisions concerning major capital expenditures,
employee fringe benefits, including pension plans, group insurance, dividend
policies, appointment of officers and directors of affiliated banks and their
compensation. The internal audit and loan review functions are centralized at
Bankshares. Each of these corporate staff groups perform on-site operational
audits and loan reviews of the subsidiary banks. Bankshares, through First
Abilene, provides advice to and specialized services for the affiliated banks in
such areas as lending, investments, purchasing, advertising, public relations,
and computer services.
Each Bankshares' subsidiary is engaged in the general commercial
banking business consisting of the acceptance of checking, savings and time
deposits, the making of loans, transmitting funds and performing such other
banking services as are usual and customary for commercial banks. First Abilene,
First Sweetwater, and Stephenville have active trust departments. The trust
departments offer a complete range of services to individuals, associations, and
corporations. They include the administration of estates, testamentary trusts,
and various types of living trusts and agency accounts. Other sources of revenue
are services for businesses, including administering pension, profit sharing and
other employee benefit plans, acting as stock transfer agents or stock
registrar, and providing paying agent services. First Abilene and San Angelo
provide securities brokerage services through an arrangement with Link
Investment Services, Inc.
D. Competition
Commercial banking in Texas is very competitive and Bankshares,
holding less than 1% of deposits, represents only a minor segment of the
industry. Success is dependent upon being able to compete in the areas of
interest rates paid or charged and scope of services offered and prices charged
therefor. Subsidiary banks of Bankshares compete in their respective service
areas with highly competitive banks, savings and loan associations, small loan
companies, credit unions, and brokerage firms, all of which are engaged in
providing financial products and services.
Bankshares' business is not dependent upon any single customer or
upon any few customers, the loss of any one of which would have a materially
adverse effect upon the business of Bankshares. Customers of Bankshares and its
subsidiaries include its officers and directors, as well as other entities with
which they are affiliated. It is the policy of Bankshares and its subsidiaries
to make loans to officers and directors, and entities with which they are
affiliated, in the ordinary course of business. When such loans are made, they
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. Loans to directors, officers and their affiliates are also
subject to certain restrictions under federal and state banking laws.
E. Employees
Bankshares and its subsidiaries employed approximately 583
full-time employees at February 1, 1997. Management believes that its employee
relations have been and will continue to be good.
F. Supervision and Regulation
Bankshares is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 (the "Act"), as amended, and it is registered as
such with the Federal Reserve Board. Under the Act, Bankshares is subject to the
reporting requirements of, and to supervision and examination by, the Federal
Reserve Board and Bankshares is required to file with the Federal Reserve Board
an Annual Report and to provide such additional information as the Federal
Reserve Board may require. The Federal Reserve Board may also make examinations
of Bankshares and its subsidiaries or "affiliates."
Under the Act, bank holding companies may not (with certain limited
exceptions) directly or indirectly acquire ownership or control of more than
five percent (5%) of any class of voting shares or substantially all of the
assets of any company, including a bank, without the prior written approval of
the Federal Reserve Board. In addition, bank holding companies are generally
prohibited under the Act from engaging in non-banking activities, except certain
activities which the Federal Reserve Board, by regulation, determines to be
closely related to banking, or to managing or controlling banks. Examples of
activities which the Federal Reserve Board has determined to be closely related
to banking, or to managing or controlling banks, include (1) the making or
acquiring of loans or other extensions of credit; (2) servicing of loans; (3)
performing certain trust functions; (4) providing bookkeeping and data
processing services for a bank holding company and its subsidiaries; (5)
providing certain securities brokerage services; and (6) acting or serving as an
investment or financial advisor.
The Act provides that the Federal Reserve Board shall not approve
any acquisition, merger or consolidation the effect of which may be to
substantially lessen competition in the banking industry, which would tend to
create a monopoly in any section of the country, or which in any other manner
would be a restraint of trade, unless the anti-competitive effects of the
proposed combination are clearly outweighed by the convenience and needs of the
community to be served. In approving acquisitions by bank holding companies of
banks and companies engaged in banking-related activities, the Federal Reserve
Board considers, among other factors, the expected benefits to the public
(greater convenience, increased competition, greater efficiency, etc.) against
the risks of possible adverse effects (undue concentration of resources,
decreased or unfair competition, conflicts of interest, unsound banking
practices, etc.).
First Abilene, First Sweetwater, First Cleburne, Eastland and
Weatherford National are all chartered under the National Bank Act and are
subject to supervision and regulation, as well as regular examination, by the
OCC. Hereford, Stephenville and San Angelo were all chartered under the Texas
Banking Code (which, effective September 1, 1995, was replaced by the
newly-adopted Texas Banking Act) and are similarly supervised, regulated and
examined by the Banking Commissioner of the State of Texas. Supervision and
regulation of banks by federal and state banking authorities is primarily
intended to protect the interests of depositors, although shareholders are
likewise benefited. Various requirements and restrictions under the laws of the
United States and the State of Texas affect the operations of each subsidiary
bank, including the requirement to maintain reserves against deposits,
restrictions on the nature and amount of loans which may be made and the
interest that may be charged thereon, and restrictions relating to investments
and other activities.
First Abilene, Hereford, First Sweetwater, First Cleburne,
Eastland, Stephenville, San Angelo and Weatherford National are members of the
FDIC. The Federal Deposit Insurance Act requires that the FDIC approve any
merger or consolidation by or with an insured bank, or any establishment of
branches by an insured bank, and it is also empowered to regulate interest rates
paid by insured banks. Approval of the FDIC is also required before an insured
bank retires any part of its common or preferred stock, or any capital notes or
debentures. Insured banks which are also members of the Federal Reserve System,
however, are regulated with respect to the foregoing matters by the Federal
Reserve System.
All of Bankshares' subsidiary banks must pay assessments to the
FDIC for federal deposit insurance protection under a risk-based assessment
system. FDIC-insured depository institutions that are members of the Bank
Insurance Fund pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher risk classifications (i.e.,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to
bank regulators. In addition, the FDIC can impose special assessments to cover
the costs of borrowings from the U. S. Treasury, the Federal Financing Bank and
the Bank Insurance Fund member banks. As of December 31, 1996, the assessment
rate for each of Bankshares' subsidiary banks is at the lowest level risk-based
premium available.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires federal banking agencies to take "prompt corrective action"
in respect to depository institutions that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well-capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized,"
and "critically undercapitalized." As a depository institution's capital tier
will depend upon where its capital levels are in relation to various relevant
capital measures, which will include a risk-based capital measure, a leverage
ratio capital measure and certain other factors. Regulations establishing the
specific capital tiers provide that a well-capitalized institution must have a
total risk-based capital ratio of at least ten percent (10%), a Tier 1
risk-based capital ratio of at least six percent (6%), and a Tier 1 leverage
ratio of at least five percent (5%), and not be subject to any specific capital
order or directive. For an institution to be adequately capitalized, it must
have a total risk-based capital ratio of at least eight percent (8%), a Tier 1
risk-based capital ratio of at least four percent (4%), and a leverage ratio of
at least four percent (4%) [in some cases three percent (3%)].
Under current regulations, Bankshares' subsidiary banks would be considered to
be well capitalized as of December 31, 1996.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution would thereafter be
undercapitalized. An "undercapitalized institution" must develop a capital
restoration plan and its parent holding company must guarantee that bank's
compliance with the plan. The liability of the parent holding company under any
such guarantee is limited to the lesser of five percent (5%) of the bank's
assets at the time it became "undercapitalized" or the amount needed to comply
with the plan. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parent's general unsecured
creditors. In addition, FDICIA requires the various regulatory agencies to
prescribe certain non-capital standards for safety and soundness relating
generally to operations and management, asset quality and executive compensation
and permits regulatory action against a financial institution that does not meet
such standards.
Banking agencies have recently adopted final regulations which
mandate that regulators take into consideration concentrations of credit risk
and risks from non-traditional activities, as well as an institution's ability
to manage those risks, when determining the adequacy of an institution's
capital. This evaluation will be made as a part of the institution's regular
safety and soundness examination. Banking agencies also have recently adopted
final regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, these banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
Capital
The Federal Reserve Board has adopted risk-based capital guidelines
for bank holding companies. The minimum guidelines for the ratio of total
capital ("Total Capital") to risk weighted assets (including certain
off-balance-sheet activities, such as standby letters of credit) is eight
percent (8%). At least half of the Total Capital is to be composed of common
shareholders' equity, minority interests in the equity accounts of consolidated
subsidiaries and a limited amount of perpetual preferred stock, less goodwill
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock and a limited amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum
leverage ratio guidelines for bank holding companies. These guidelines provide
for a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average assets
for current quarter, less goodwill) of three percent (3%) for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a minimum Tier 1 Capital leverage ratio of three percent (3%) plus
an additional cushion of 100 to 200 basis points. The Federal Reserve Board has
not advised Bankshares of any specific minimum Tier 1 Capital leverage ratio
applicable to it. The guidelines also provide that bank holding companies
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels
without significant reliance on intangible assets (e.g., goodwill, core deposit
intangibles and purchased mortgage servicing rights). As of December 31, 1996,
the capital ratios for Bankshares were as follows: (1) Tier 1 Capital to
Risk-Weighted Assets Ratio, 18.90%; (2) Total Capital to Risk-Weighted Assets
Ratio, 20.15%; and (3) Tier 1 Capital Leverage Ratio, 10.40%.
In addition to the Federal Reserve Board capital standards,
Texas-chartered banks must also comply with the capital requirements imposed by
the Texas Banking Department. Although neither the Texas Banking Act nor the
regulations promulgated thereunder specify any minimum capital-to-assets ratio
that must be maintained by a Texas-chartered bank, the Texas Banking Department
has a policy that
generally requires Texas-chartered banks to maintain a minimum
six percent (6%) ratio of stockholders equity (stated capital, surplus capital,
surplus and undivided profits or retained earnings) to total assets. As of
December 31, 1996, all Texas-chartered banks owned by Bankshares exceeded the
minimum ratio.
Failure to meet capital guidelines may subject an insured bank to a
variety of enforcement remedies, including the termination of deposit insurance
by the FDIC and a prohibition on the taking of brokered deposits, and bank
regulators continue to indicate their desire to raise capital requirements
applicable to banking organizations beyond their current levels.
Bankshares Support of Subsidiary Banks
Under Federal Reserve Board policy, Bankshares is expected to act
as a source of financial strength to each of its subsidiary banks and to commit
resources to support each of such subsidiaries. This support may be required at
times when, absent such Federal Reserve Board policy, Bankshares would not
otherwise be required to provide it.
Under the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989, in connection with (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to any commonly controlled FDIC-insured depository institution "in
danger of default." "Default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance.
Under the National Bank Act, if the capital stock of a national
bank is impaired by losses or otherwise, the OCC is authorized to require
payment of the deficiency by assessment upon the bank's shareholders, pro rata,
and to the extent necessary, if any such assessment is not paid by any
shareholder after three (3) months' notice, to sell the stock of such
shareholder to make good the deficiency.
Certain Transactions by Bankshares with its Affiliates
There are also various legal restrictions on the extent to which
Bankshares can borrow or otherwise obtain credit from, or engage in certain
other transactions with, its depository subsidiaries. The "covered transactions"
that an insured depository institution and its subsidiaries are permitted to
engage in with their nondepository affiliates are limited to the following
amounts: (i) in the case of any one such affiliate, the aggregate amount of
covered transactions of the insured depository institution and its subsidiaries
cannot exceed ten percent (10%) of the capital stock and the surplus of the
insured depository institution; and (ii) in the case of all affiliates, the
aggregate amount of covered transactions of the insured depository institution
and its subsidiaries cannot exceed twenty percent (20%) of the capital stock and
surplus of the insured depository institution. In addition, extensions of credit
that constitute covered transactions must be collateralized in prescribed
amounts. "Covered transactions" are defined by statute to include a loan or
extension of credit to the affiliate, a purchase of securities issued by an
affiliate, a purchase of assets from the affiliate (unless otherwise exempted by
the Federal Reserve Board), the acceptance of securities issued by the affiliate
as collateral for a loan and the issuance of a guarantee, acceptance, or letter
of credit for the benefit of an affiliate. Further, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing
of services.
Payment of Dividends
Bankshares is a legal entity separate and distinct from its banking
and other subsidiaries. Most of Bankshares' revenues result from dividends paid
to it by its Delaware holding company subsidiary, which receives dividends from
its bank subsidiaries. There are both federal and state statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by Bankshares to its shareholders.
Each state bank subsidiary that is a member of the Federal Reserve
System and each national banking association is required by federal law to
obtain the prior approval of the Federal Reserve Board or the OCC, as the case
may be, for the declaration and payment of dividends if the total of all
dividends declared by the board of directors of such bank in any year will
exceed the total of (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) the retained net profits (as defined and
interpreted by regulation) for the preceding two (2) years, less any required
transfers to surplus. In addition, these banks may only pay dividends to the
extent that retained net profits (including the portion transferred to surplus)
exceed bad debts (as defined by regulation). Effective September 1, 1995, the
Texas Banking Act eliminated the requirement under the predecessor code that,
prior to paying a dividend, a state bank must transfer to "certified surplus" an
amount which is not less than ten percent (10%) of the net profits of such bank
earned since the last dividend was declared; provided, however, that a transfer
was not required to certified surplus of a sum which would increase the
certified surplus to more than the capital of the bank. At December 31, 1996,
under the foregoing dividend restrictions, Bankshares' subsidiary banks, without
obtaining governmental approvals, could have declared aggregate dividends of
approximately $8.6 million from retained net profits. During 1996, Bankshares'
subsidiary banks paid an aggregate of $19.0 million in dividends.
The payment of dividends by Bankshares and its subsidiaries is also
affected by various regulatory requirements and policies, such as the
requirement to maintain adequate capital above regulatory guidelines. In
addition, if, in the opinion of the applicable regulatory authority, a bank
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the bank, could
include the payment of dividends), such authority may require, after notice and
hearing, that such bank cease and desist from such practice. The Federal Reserve
Board and the OCC have each indicated that paying dividends that deplete a
bank's capital base to an inadequate level would be unsafe and unsound banking
practice. The Federal Reserve Board, the OCC and the FDIC have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
Interstate Banking and Branching Act
Pursuant to the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), a bank
holding company is able to acquire banks in states other than its home state.
Prior to September 29, 1995, interstate acquisitions by bank holding companies
were subject to federal law which provided that no application to acquire shares
of a bank located outside of the state in which the operations of the acquiring
bank holding company were principally conducted would be approved by the Federal
Reserve Board unless such acquisition was specifically authorized by the laws of
the state in which the bank whose shares are to be acquired was located.
The Interstate Banking and Branching Act also authorizes banks to
merge across state lines, therefore creating interstate branches, beginning June
1, 1997. Under such legislation, each state has the opportunity to "opt out" of
this provision, thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate branching within that
state prior to June 1, 1997. Furthermore, pursuant to such act, a bank is now
able to open new branches in a state in which it does not already have banking
operations, if the laws of such state permit such de novo branching. Texas has
adopted legislation to "opt out" of the interstate branching provisions (which
Texas law currently expires on September 2, 1999).
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in the state legislatures and
before the various bank regulatory agencies. The likelihood and timing of any
such proposals or bills being enacted and the impact they might have on
Bankshares and its subsidiaries cannot be determined at this time.
G. Statistical Disclosure
Information related to industry segments and foreign operations
required by Regulation S-K is not applicable. The following tables provide
information required by Guide 3, "Statistical Disclosure by Bank Holding
Companies", that has not been included in Part II, Item 7.
Table 1 - Composition of Loans (000's omitted):
December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
Commercial, financial,
and agricultural $ 234,625 $ 213,799 $ 177,587 $ 201,432 $ 193,571
Real estate -construction 22,106 19,046 12,901 7,654 3,961
Real estate - mortgage 135,182 117,332 126,840 122,199 106,688
Consumer 180,987 156,752 129,565 105,540 71,913
---------- ---------- ---------- ---------- ----------
$ 572,900 $ 506,929 $ 446,893 $ 436,825 $ 376,133
========== ========== ========== ========== ==========
Loan Concentrations
At December 31, 1996, the Company had $69.6 million in loans
outstanding to agriculture which represented 12.1% of total loans.
Table 2 - Maturity Distribution and Interest Sensitivity of Loans at December
31, 1996 (000's omitted):
Over One
Year
One Year Through Over Five
or less Five years Years Total
Commercial, financial, and agricultural $ 177,055 $ 49,052 $ 8,518 $ 234,625
Real estate - construction 17,164 4,942 - 22,106
---------- ----------- ----------- ----------
$ 194,219 $ 53,994 $ 8,518 $ 256,731
========= ========== ========= =========
Maturities
After One Year
Loans with fixed interest rates $ 34,446
Loans with floating or adjustable interest rates 28,066
----------------
$ 62,512
================
Potential Problem Loans
Certain loans classified for regulatory purposes as doubtful,
substandard, or special mention are included in the nonperforming loan table.
Also included in the classified loans are certain other loans which are deemed
to be potential problems. Potential problem loans are those loans which are
currently performing but where known information about trends or uncertainties
or possible credit problems of the borrowers causes management to have serious
doubts as to the ability of such borrowers to comply with present repayment
terms, possibly resulting in the transfer of such loans to nonperforming status.
These loans totaled $634,048 at December 31, 1996.
Table 3 - Composition of Investment Securities (000's omitted):
Held-to-maturity at amortized cost December 31,
- ---------------------------------- --------------------------------
1996 1995 1994
---------- ---------- --------
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 364,232 $ 370,368 $ 406,087
Obligations of states and political subdivisions 25,798 22,157 19,756
Mortgage-backed securities 62,509 46,563 33,221
--------- --------- ---------
Total debt securities 452,539 439,088 459,064
Other securities 14,085 12,465 -
--------- --------- -----------
$ 466,624 $ 451,553 $ 459,064
======== ======== ========
Available-for-sale at fair value December 31,
- -------------------------------- -------------------------------
1996 1995 1994
--------- --------- ------
U.S. Treasury obligations and obligations of
U.S. government corporations and agencies $ 10,211 $ 4,870 $ 16,920
Obligations of states and political subdivisions 1,292 - -
Mortgage-backed securities 31,910 16,963 12,665
-------- --------- --------
Total debt securities 43,413 21,833 29,585
Other securities 1,752 7,730 2,301
--------- --------- ---------
$ 45,165 $ 29,563 $ 31,886
======== ======== ========
Table 4 - Maturities and Yields of Investment Securities Held December 31, 1996
(000's omitted):
Maturing
Held-to-maturity After one but After five but
at amortized cost Within one year Within five years Within ten years After ten years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasuries $ 42,193 5.50% $ 63,872 6.30% $ - - % $ - - % $106,065 5.98%
U.S. government Agencies 98,629 5.65 155,085 6.11 4,453 6.92 258,167 5.95
States and political subdivisions 3,262 6.04 10,441 6.68 11,012 7.31 1,083 7.92 25,798 6.92
Other 4,250 5.18 9,804 6.42 31 8.02 - - 14,085 6.06
-------------- -------------- ------------- ------------ -------------
148,334 5.60 239,202 6.20 15,496 7.20 1,083 7.92 404,115 6.02
Mortgage-backed securities 6,179 6.30 40,539 6.16 7,740 6.86 8,051 6.00 62,509 6.24
Totals $154,513 5.63% $ 279,741 6.19% $ 23,236 7.09% $ 9,134 6.23% $466,624 6.05%
======== ==== ======== ==== ======= ==== ====== ==== ======= ====
Maturing
After one but After five but
Available-for-sale at fair value Within one year Within five years Within ten years After ten years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
U.S. Treasuries $ 499 6.15% $ - - % $ - - % $ - - % $ 499 6.15%
U.S. government Agencies 5,767 5.70 1,952 6.19 1,646 6.55 347 5.41 9,712 6.23
States and political subdivisions 599 7.42 693 8.08 1,292 7.77
Other - - - - - - 1,752 6.00 1,752 6.00
------------- ------------- ------------- ------------- --------------
6,266 5.73 1,952 6.19 2,245 6.78 2,792 6.44 13,255 6.27
Mortgage-backed securities 622 6.58 17,388 6.27 11,827 6.80 2,073 5.62 31,910 6.54
------------- ------------- ------------- ------------- --------------
Totals $ 6,888 5.81% $ 19,340 6.26% $ 14,072 6.80% $ 4,865 6.09% $ 45,165 6.34%
======= ==== ======= ==== ======= ==== ====== ==== ======= ====
Table 5 - Analysis of the Allowance for Loan Losses (000's omitted):
1996 1995 1994 1993 1992
--------- --------- --------- ---------- -------
Balance at January 1, $ 9,194 $ 9,206 $ 9,198 $ 8,476 $ 7,802
Allowance established from
purchase acquisition 800 83 - 712 -
---------- ----------- ------------ ----------- -----------
9,994 9,289 9,198 9,188 7,802
Charge-offs:
Commercial, financial and
agricultural 1,126 279 741 1,233 1,180
Consumer 1,420 720 613 555 695
All other 74 20 28 341 167
----------- ----------- ----------- ----------- ---------
Total loans charged off 2,620 1,019 1,382 2,129 2,042
Recoveries:
Commercial, financial and
agricultural 361 333 1,899 1,205 1,267
Consumer 364 319 291 323 179
All other 142 103 82 100 54
---------- ---------- ---------- ----------- ----------
Total recoveries 867 755 2,272 1,628 1,500
---------- ---------- --------- ---------- ---------
Net (recoveries)/charge-offs 1,753 264 (890) 501 542
Provision/(credit) for
loan losses 1,200 169 (882) 511 1,216
--------- ---------- --------- ---------- ---------
Balance at December 31, $ 9,441 $ 9,194 $ 9,206 $ 9,198 $ 8,476
========= ========= ========= ========= =========
Loans at year-end $ 572,900 $ 506,929 $ 446,892 $ 436,825 $ 388,486
Average loans 545,754 465,495 430,774 415,204 376,237
Net charge-offs/(recoveries)/
average loans 0.32% 0.06% (0.21)% 0.12% 0.14%
Allowance for loan losses/
year-end loans 1.65 1.81 2.06 2.11 2.18
Allowance for loan losses/
nonperforming assets 268.13 444.15 406.45 165.94 143.56
Table 6 - Allocation of Allowance for Loan Losses (000's omitted):
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
Commercial, financial and agricultural $ 3,866 $ 3,878 $ 3,711 $ 4,289 $ 4,235
Real estate-construction 364 345 252 154 121
Real estate - mortgage 2,228 2,128 2,538 2,531 2,207
Consumer 2,983 2,843 2,704 2,224 1,913
--------- --------- --------- --------- ---------
$ 9,441 $ 9,194 $ 9,205 $ 9,198 $ 8,476
========= ========= ========= ========= =========
Allocation as Percent of Total Loans
1996 1995 1994 1993 1992
--------- --------- --------- --------- --------
Commercial, financial and agricultural 0.67% 0.76% 0.83% 0.98% 1.09%
Real estate - construction 0.06 0.07 0.06 0.04 0.03
Real estate - mortgage 0.39 0.42 0.57 0.58 0.57
Consumer 0.52 0.56 0.61 0.51 0.49
Item 2. Properties
A. First Financial Bankshares/First National Bank of Abilene
The principal offices of Bankshares and First Abilene are located in
the First National Bank Building at 400 Pine Street in downtown Abilene, Texas.
First Abilene occupies all of the first four floors and utilizes some office
space on the fifth and sixth floors. The remaining office space of this 170,842
square foot facility is available for lease to tenants. The First National Bank
Building is connected to the First National West Building, a six-story facility
owned by First Abilene which contains 52,800 square feet of lease space most of
which is rented to business and professional tenants. First Abilene began
occupying the First National Bank Building in June of 1984 and, at the same
time, a new four-level drive-in parking garage was completed immediately south
across the street from the new bank building, which is connected to the bank
building by an over-the-street, enclosed pedestrian bridge. The total cost of
the project was $14,000,000. Until January 1, 1989, both the new First National
Bank Building and the connected parking garage were owned by a joint venture
between First Abilene and the Trammell Crow Company. Effective January 1, 1989,
First Abilene purchased the interest of Trammell Crow Company and is now the
sole owner of the First National Bank Building and the connecting parking
garage. A note payable to Aetna Life Insurance Company in the amount of $
7,000,000, which was previously secured by this property, was paid in full
during 1991.
First Abilene also owns a five-story office building known as the
First National/Ely Building, which is located directly south across the street
from the First National West Building and connected to the First National West
Building by an underground pedestrian tunnel. The First National/Ely Building
contains approximately 34,000 square feet of space and is leased to business and
professional tenants. The premises also includes a ground level parking lot with
22 spaces, which are leased to tenants and others. Both the First National/Ely
Building and the parking lot are situated on land leased by First Abilene. The
lease provides an option to purchase the underlying property for $360,000.
First Abilene owns and operates a 17-lane drive-in banking facility,
which was completed in 1981 and which is also located on Pine Street, two blocks
north of First Abilene's main banking facilities. In 1987, First Abilene
completed construction of a branch banking facility located at the northwest
corner of North Judge Ely Boulevard and East North Tenth Street in Abilene. The
cost of the site was $412,383 and the construction cost for the building and
improvements was $554,318. The branch banking facility includes a one-story
office building and six lane drive-in facility. In 1996, at a cost of $400,000,
the branch facility was expanded to 5,400 square feet.
As a result of the merger between First Abilene and American
National, First Abilene acquired title to the drive-in banking facility owned by
American National on Buffalo Gap Road in the southwest part of Abilene, Texas.
The drive-in facility is located on 2.23 acres of land adjoining a five-story
office building in which American National leased office space for its banking
operations. Following its merger with American National, First Abilene entered
into a 10-year lease covering 11,009 square feet of office space on the ground
floor of the building adjacent to the drive-in facility, which office space
includes all, or substantially all, of the space formerly leased and occupied by
American National for its primary banking facility. In addition to the original
10-year term of the lease, the lease provides three renewal options on the
leased premises, each option being for a renewal term of five years.
As a result of the merger between First Abilene and BOC, First
Abilene acquired title to the banking facility at the corner of South 14th and
Willis Streets in Abilene, Texas, occupying the first floor and renting 27,000
square feet of office space to tenants. The building was completed in 1966 and
is of steel reinforced concrete and masonry construction. In 1976, a 12-lane
drive-in facility located adjacent to the main banking facility was completed
and in 1982, an addition to the teller service area for the drive-in facility
was constructed at a cost of approximately $200,000. In December 1984, BOC
purchased property (approximately 1.85 acres) located on Southwest Drive in
Abilene, Texas, for future construction of a full-service banking facility. The
cost of such property was $344,937. As a result of the mergers of
American National and BOC with First Abilene and the operation of the banking
facilities of American National and BOC as branch banks of First Abilene, it
is unlikely that First Abilene, which acquired all of BOC's assets in the
merger, will proceed with construction of banking facilities at the
property on Southwest Drive and the property is presently listed for sale.
B. Hereford State Bank
Hereford owns its main banking house located at 212 North Sampson
Street, Hereford, Texas. The building was completed in 1977, contains 16,000
square feet (not including drive-in facilities) and is of concrete block-brick
face construction. A drive-in facility of brick construction is connected to the
bank by a walk-through tunnel.
C. First National Bank, Sweetwater, Texas
First Sweetwater owns its main banking house located at 201 Elm
Street in the City of Sweetwater, Texas. The building was completed in 1974,
contains 20,000 square feet, and is constructed of steel-reinforced concrete and
marble. In 1994 First Sweetwater relocated its drive-in facility to a drive-in
across the street from the main banking facility that had been at one time a
drive-in for another financial institution. First Sweetwater acquired the
property, made improvements, and now operates 13 drive-in lanes at the facility.
The drive-in attached to the main banking facility is not currently in use.
D. Eastland National Bank
Eastland owns its banking facilities located at 201 East Main Street
in Eastland, Texas. The building was completed in 1980, contains 13,000 square
feet, and is of steel and stucco construction. Eastland also maintains a
drive-in facility located on the same premises as its main banking facility.
E. The First National Bank in Cleburne
First Cleburne owns its main banking facilities located at 403 North
Main Street in Cleburne, Texas. The building was completed in 1978, contains
18,000 square feet, and is of steel and brick masonry construction. First
Cleburne also maintains a drive-in facility located on the same premises as its
main banking facility. On September 23, 1993, First Cleburne acquired the
Cleburne branch of Bank One Texas, N.A. The building is of brick masonry
construction, contains 4,400 square feet, and includes a drive-in teller window.
Now operating as a branch of First Cleburne, the facility is located
approximately 3 miles west of the main office.
F. Stephenville Bank & Trust Co.
Stephenville owns its banking facility which is located at 2201 South
Loop, in Stephenville, Texas. The building is of steel and brick masonry
structure with approximately 18,000 square feet. At a cost of approximately $1.8
million, construction of the new bank building and drive-in facility was
completed in April 1996. The bank's former premises, a downtown building, was
sold in October 1996.
G. Southwest Bank of San Angelo
San Angelo owns its banking facility located at 3471 Knickerbocker
Road in San Angelo, Texas. The five-story building, including an office tower,
has approximately 29,250 square feet and is of steel and stucco construction.
Approximately 11,800 square feet of the office tower is available for lease and
has a current occupancy rate of approximately 95%. The bank also owns and
operates a drive-in banking facility on the same premises as its main banking
office.
H. Weatherford National Bank
Weatherford National owns three banking facilities located in
Weatherford, Texas and another facility located in nearby Aledo. The main office
is located in a historic downtown Weatherford building which was constructed in
the late 1800's. Weatherford branch locations are of more modern design having
been built in 1984 and 1995. The Aledo location is a temporary modular type
facility. All of the locations have a combined square footage of approximately
30,000 square feet and have drive-in facilities.
Item 3. Legal Proceedings
Other than routine litigation in the normal course of business, there
are no material pending legal proceedings to which Bankshares, the Delaware BHC
or its subsidiary banks or any of their properties are subject, nor are there
any known material legal proceedings involving directors, officers, or
affiliates of Bankshares. Other than regular, routine examinations by state and
federal banking authorities, there are no proceedings pending or known to be
contemplated by any governmental authorities except the following:
As a result of a routine examination of San Angelo by the FDIC, San
Angelo entered into a Memorandum of Understanding (the "Memorandum") with the
FDIC in December 1995, which required San Angelo to develop, adopt and implement
written policies, training programs, formal internal controls, and management
review procedures with respect to consumer credit transactions, consumer real
estate loans and compliance with the requirements of the Bank Secrecy Act. The
Memorandum required that all corrective action prescribed in the Memorandum,
including implementation of the policies, programs, controls and procedures
described therein, be accomplished within 60 days. Following completion of a
routine examination in October 1996, the Memorandum was terminated on December
10, 1996.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of
Bankshares during the fourth quarter of Bankshares' fiscal year ending December
31, 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
As of February 11, 1997, there were 1,544 holders of Bankshares'
stock reflected on its records. Except for shares held by First Abilene, First
Sweetwater, and Stephenville in various fiduciary capacities (see Item 12
following), no shareholder or shareholder group known to Bankshares owns five
percent (5%) or more of Bankshares' issued and outstanding stock. Market price
and dividend information about the stock for the past two years is set forth in
the Quarterly Financial Data disclosure on page 26 under Item 7. Bankshares'
common stock trades on the Nasdaq National Market tier of the Nasdaq Stock
Market under the symbol FFIN. Restrictions on Bankshares' present or future
ability to pay dividends have been discussed under Item 1, above, under the
topic "Supervision and Regulation."
Item 6. Selected Financial Data
First Financial Bankshares, Inc.
Selected Consolidated Financial Data
(Dollars in thousands, except per share data)
Year Ended December 31,
1996 1995(1)(5) 1994(1) 1993(1) 1992(1)
---------- --------- --------- --------- ---------
Summary Income Statement Information:
Interest income $ 84,176 $ 74,657 $ 64,621 $ 62,995 $ 64,718
Interest expense 33,731 29,448 22,416 21,513 25,692
--------- --------- --------- --------- ---------
Net interest income 50,445 45,209 42,205 41,482 39,026
Provision (credit) for loan losses 1,200 169 (882) 511 1,216
Noninterest income 15,842 15,030 12,313 12,940 10,312
Noninterest expense 37,570 34,400 34,635 33,428 30,239
--------- --------- --------- --------- ---------
Income before income taxes 27,517 25,671 20,765 20,483 17,883
Provision (benefit) for income taxes 9,395 8,656 6,805 6,615 5,478
---------- ---------- ---------- ---------- ----------
Net income before accounting change 18,122 17,015 13,960 13,868 12,405
Cumulative effect of accounting change (2) - - - 1,005 -
---------- ---------- ---------- ---------- ----------
Net earnings $ 18,122 $ 17,015 $ 13,960 $ 14,873 $ 12,405
========= ========= ========= ========= ==========
Per Share Data (3):
Net earnings per share before cumulative
effect of accounting change $ 2.70 $ 2.55 $ 2.10 $ 2.09 $ 1.88
Net earnings per share 2.70 2.55 2.10 2.24 1.88
Cash dividends declared 1.09 0.97 0.88 0.77 0.61
Book value at period-end 19.52 17.98 16.31 15.21 13.66
Earnings performance ratios (4):
Return on average assets 1.52% 1.59% 1.33% 1.35% 1.33%
Return on average equity 14.65 14.91 13.34 14.22 14.29
Summary Balance Sheet Data (Period-end):
Investment securities $ 511,789 $ 481,117 $ 490,950 $ 482,885 $ 430,227
Loans 572,900 506,929 446,892 436,825 388,485
Total assets 1,262,041 1,125,887 1,066,982 1,069,389 976,146
Deposits 1,121,881 997,578 950,251 960,389 875,398
Total liabilities 1,130,880 1,005,859 958,465 968,660 886,072
Total shareholders' equity 131,161 120,028 108,517 100,729 90,074
Asset quality ratios:
Allowance for loan losses/period-end loans 1.65% 1.81% 2.06% 2.11% 2.18%
Nonperforming assets/period-end loans
plus foreclosed assets 0.61 0.41 0.51 1.26 1.51
Net (recoveries)charge offs/average loans 0.32 0.06 (0.21) 0.12 0.14
Capital ratios:
Average shareholders' equity/average assets 10.35% 10.66% 9.59% 9.45% 9.18%
Leverage ratio (6) 10.40 10.91 9.51 9.28 8.48
Tier 1 risk-based capital (7) 18.90 19.33 16.76 16.90 15.38
Total risk-based capital (8) 20.15 20.57 18.02 18.38 16.86
Dividend payout ratio 40.32 35.63 34.04 32.03 34.81
(1) Restated to reflect pooling-of-interests.
(2) Adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
(3) Historical amounts adjusted for stock dividends and stock splits.
(4) Calculated on net income before cumulative accounting adjustment in 1993.
(5) 1995 net earnings includes $1.3 million, or $.20 per share, in nonrecurring gains from sale of assets.
(6) Shareholders' equity (before unrealized loss on securities available-for-sale) less intangibles/fourth quarter
average assets less intangibles.
(7) Shareholders' equity (before unrealized loss on securities
available-for-sale) less intangibles/risk-adjusted assets.
(8) Shareholders' equity (before unrealized loss on securities
available-for-sale) less intangibles plus allowance for loan losses to the
extent allowed under regulatory guidelines/risk-adjusted assets.
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
Management's discussion and analysis of the major elements of the Company's
consolidated balance sheets and statements of income should be reviewed in
conjunction with the consolidated financial statements, accompanying notes, and
selected financial data presented elsewhere in this report.
In January 1996, through an exchange of stock, the Company acquired Weatherford
National Bancshares, Inc. and its subsidiary, Weatherford National. The
transaction was accounted for as a pooling-of-interests and accordingly, prior
periods have been restated to include the operations of Weatherford National.
Also in January 1996, the Company purchased for cash Citizens Equity Corporation
and its subsidiary, Citizens National. Financial data prior to 1996 does not
include the operations of Citizens National; therefore, comparability is
affected. This discussion will highlight items materially affected and
considered meaningful to the analysis of the Company's 1996 operating results
and financial condition. In April 1996, Citizens National was merged into
Weatherford National, with the resulting entity continuing to operate under the
name of Weatherford National Bank.
PERFORMANCE SUMMARY
Net earnings for 1996 was $18.1 million as compared to $17.0 million for 1995,
which included $1.3 million in nonrecurring gains. In 1994, net earnings
amounted to $14.0 million. The 1996 increase was primarily attributable to
higher net interest income generated from higher volume of earning assets and
increased service related fees. Increased net interest income, nonrecurring
gains and a lower FDIC assessment were primary factors in the 1995 increase over
1994.
On a per share basis, 1996 net earnings amounted to $2.70 as compared to $2.55
for 1995, which included approximately $ .20 per share resulting from
nonrecurring gains. In 1994 the Company earned $2.10 per share. Return on
average assets for 1996 was 1.52% as compared to 1.59% (1.47% excluding
nonrecurring gains) for 1995 and 1.33% for 1994. Return on equity for 1996 was
14.65% as compared to 14.91% (13.76% excluding nonrecurring gains) for 1995 and
13.34% for 1994.
Net Interest Income
On a taxable-equivalent basis, net interest income in 1996 totaled $50.9
million, an increase of $5.2 million over the 1995 amount, which was $2.9
million higher than 1994. These yearly increases have resulted primarily from a
higher volume of average earning assets and deposits. Table 1 presents
year-to-year changes in net interest income and allocates the changes
attributable to variances in volumes and rates. Table 2 provides the income and
average yield earned on earning assets and the interest expense and average rate
paid on interest bearing liabilities for the years 1994 through 1996. The net
interest margin which measures net interest income as a percentage of average
earning assets amounted to 4.66% in 1996 as compared to 4.69% in 1995 and 4.49%
in 1994. The modest decline in 1996 reflects a decrease in the average rate
earned on loans coupled with a slight increase in the average rate paid on
interest bearing deposits. Growth in average loans, some of which replaced lower
yielding investment securities, was the primary factor contributing to the 1995
increase in net interest income.
Table 1 - Changes in Interest Income and Interest Expense (000's omitted):
1996 Compared to 1995 1995 Compared to 1994
Change Attributable to Total Change Attributable to Total
Volume Rate Change Volume Rate Change
Short-term investments $ 136 $ (183) $ (47) $ 125 $ 585 $ 710
Taxable investment securities 1,400 1,538 2,938 (654) 1,581 927
Tax-exempt investment securities (1) 283 (111) 172 (136) (48) (184)
Loans (1) 7,221 (752) 6,469 3,006 5,516 8,522
------ ------- ------ ------ ------ ------
Interest income 9,040 492 9,532 2,341 7,634 9,975
------ ------- ------ ------ ------ ------
Interest bearing deposits 3,837 441 4,278 239 6,882 7,121
Short-term borrowings 1 7 8 (8) 15 7
Long-term debt (5) 2 (3) (89) (7) (96)
-------- -------- -------- ------- -------- -------
Interest expense 3,833 450 4,283 142 6,890 7,032
------ ------- ------ ------- ------ ------
Net interest income $ 5,207 $ 42 $ 5,249 $ 2,199 $ 744 $ 2,943
====== ======= ====== ====== ======= ======
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
Table 2 - Average Balances and Average Yields and Rates (000's omitted):
1996 1995 1994
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
Assets
Short-term investments $ 37,230 $ 2,009 5.40%$ 34,916 $ 2,056 5.89%$ 31,952 $ 1,346 4.21%
Taxable investment securities 486,546 28,877 5.94 455,817 25,939 5.69 468,051 25,021 5.34
Tax-exempt
investment securities (1) 22,509 1,476 6.56 18,496 1,304 7.05 20,356 1,488 7.31
Loans (1) (2) 545,754 52,284 9.58 465,495 45,815 9.84 430,774 37,293 8.66
----------- -------- ----------- -------- ----------- -------
Total earning assets 1,092,039 84,646 7.75 974,724 75,114 7.71 951,133 65,139 6.85
Cash and due from banks 56,279 53,827 58,503
Bank premises and equipment 34,429 31,458 31,798
Other assets 17,709 19,496 19,734
Intangible assets 5,624 1,112 1,149
Allowance for loan losses (10,056) (9,186) (9,392)
----------- ------------ -----------
Total assets $ 1,196,024 $ 1,071,431 $ 1,052,925
========== ============ ===========
Liabilities and
Shareholders' Equity
Interest-bearing deposits $ 848,401 $ 33,689 3.97%$ 750,490 $ 29,411 3.92%$ 742,544 $ 22,290 3.00%
Short-term borrowings 285 36 12.63 280 28 10.00 458 21 4.59
Long-term debt 70 6 8.57 171 95.26 1,108 105 9.48
------------ -------- ----------- --------- ----------- --------
Total interest-
bearing liabilities 848,756 33,731 3.97 750,941 29,448 3.92 744,110 22,416 3.01
-------- --------- --------
Noninterest-bearing deposits 213,757 197,412 196,495
Other liabilities 9,775 8,987 7,659
------------ ------------ -----------
Total liabilities 1,072,288 957,340 948,264
Shareholders' equity 123,736 114,091 104,661
----------- ------------ -----------
Total liabilities and
shareholders' equity $ 1,196,024 $ 1,071,431 $ 1,052,925
========== =========== ===========
Net interest income $ 50,915 $ 45,666 $ 42,723
======= ======== =======
Rate Analysis:
Interest income/earning assets 7.75% 7.71% 6.85%
Interest expense/earning assets 3.09 3.02 2.36
---- ---- ----
Net yield on earning assets 4.66% 4.69% 4.49%
==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
Provision for Loan Losses
In 1996, the provision for loan losses charged against earnings amounted to $1.2
million as compared to $169 thousand in 1995. The increase is attributed to
provisions at subsidiary banks located in markets where severe drought
conditions during 1995 and the early part of 1996 affected farming and cattle
operations. In 1994, significant recoveries of loans previously charged off
permitted a loan loss provision reversal, which resulted in an $882 thousand
credit to earnings. Additional comparative information is provided in the
Allowance for Loan Loss section of this discussion.
Noninterest Income
Table 3 presents the detail of noninterest income which amounted to $15.8
million in 1996 as compared to $15.0 million in 1995. Trust fees were up $388
thousand, or 12.3%, and resulted from a significant $73 million, or 13.7%
increase in Trust assets during 1996. Service fees on deposit accounts increased
$1.8 million. Approximately $650 thousand of the increase is due to the addition
of Citizens National Bank with the remainder resulting from an increase in the
number of accounts and volume of transactions. For 1996, gains on sale of
foreclosed assets decreased $2.0 million and interest on loan recoveries
increased $284 thousand. Brokerage commissions in 1996 were $199 thousand less
than in 1995. In 1996, the Company changed its arrangement with its third party
brokerage service provider whereby fees were received net of expenses. On a net
income basis, profitability from brokerage services moved from a pretax loss of
$177 thousand in 1995 to a pretax profit of $78 thousand in 1996. ATM fees in
1996 increased $176 thousand and resulted from higher transaction volume as well
as increased fees earned from non-customer transactions.
Total noninterest income in 1995 was $2.7 million above the 1994 amount. As
shown in Table 3, nonrecurring gains from the sale of assets taken in debt
settlement arrangements in prior years amounted to $2.1 million in 1995 and was
the primary factor for the significant increase. Interest on loan recoveries and
securities losses were other significant variances in 1995.
Table 3 - Noninterest Income (000's omitted):
Increase Increase
1996 (Decrease) 1995 (Decrease) 1994
-------- ------------- --------- ------------ ---------
Trust department income $ 3,552 $ 388 $ 3,164 $ 266 $ 2,898
Service fees on deposit accounts 8,149 1,769 6,380 167 6,213
Gain on sale of foreclosed assets 125 (1,957) 2,082 2,061 21
Other:
Miscellaneous income 1,180 140 1,040 1 1,039
Interest on loan recoveries 314 284 30 (535) 565
Mastercard fees 752 114 638 36 602
Securities gains (losses) (3) (47) 44 628 (584)
Real estate mortgage fees 568 131 437 (34) 471
Brokerage commissions 201 (199) 400 46 354
Safe deposit rental fees 253 (18) 271 (1) 272
ATM fees 453 176 277 71 206
Exchange fees 298 31 267 11 256
-------- -------- -------- ------- --------
4,016 612 3,404 223 3,181
-------- -------- -------- ------- --------
$ 15,842 $ 812 $ 15,030 $ 2,717 $ 12,313
======= ======== ======= ====== =======
Noninterest Expense
Noninterest expense for 1996 totaled $37.6 million which was $3.2 million above
the 1995 amount. Approximately $2.7 million of the increase is attributed to the
fact that noninterest expenses for Citizens National Bank are not included in
the 1995 total. An important measure in determining effectiveness in managing
noninterest expenses is efficiency ratio, which is calculated by dividing the
noninterest expense by the sum of net interest income on a tax-equivalent basis
and noninterest income. Excluding gains on sale of foreclosed assets, the
Company's efficiency ratios were 56.38%, 58.69% and 62.96% in 1996, 1995 and
1994, respectively.
Total salaries and benefits for 1996 were $19.9 million as compared to $17.5
million in 1995. When employee costs of Citizens National Bank are included in
the prior year total, comparative salaries and benefits for 1996 increased $934
thousand, or 4.9%. Net occupancy expense in 1996 amounted to $3.2 million and
was $557 thousand above the prior year. The increase is attributed primarily to
the opening of a new bank building in Stephenville and the occupancy expense of
Citizens National Bank, which was not included in the prior year amount. Total
equipment expense in 1996 amounted to $2.9 million as compared to $2.5 million
in 1995, with higher depreciation expense the primary factor for the increase.
FDIC expense in 1996 decreased $1.0 million and represents a full year of lower
assessment rates which were implemented in mid-year 1995. Higher 1996 goodwill
amortization relates to the acquisition of Citizens National Bank, which was
accounted for as a purchase. The increase in credit card expense reflects
expense of processing a higher volume of cardholder and merchant transactions.
Professional and service fees decreased $100 thousand from the 1995 total and
resulted from a change in the arrangement with the third party that provides
brokerage services.
Total noninterest expense of $34.4 million for 1995 was $235 thousand below
1994. As shown in Table 4, the reduction in FDIC expense was the primary factor
in the net decrease. Net occupancy expense in 1995 was $365 thousand below the
1994 amount, which included additional depreciation expense resulting from a
change in the estimate for the useful life of certain leasehold improvements.
Legal and accounting fees in 1995 were $187 thousand below 1994 which included
fees related to the acquisition of Concho Bancshares and its subsidiary,
Southwest Bank of San Angelo.
Table 4 - Noninterest Expense (000's omitted):
Increase Increase
1996 (Decrease) 1995 (Decrease) 1994
-------- ----------- -------- ----------- --------
Salaries $ 15,322 $ 1,676 $ 13,646 $ 20 $ 13,626
Payroll taxes 1,164 132 1,032 (11) 1,043
Profit sharing 1,710 321 1,389 208 1,181
Medical and other benefits 1,669 238 1,431 136 1,295
-------- ------- -------- --------- --------
19,865 2,367 17,498 353 17,145
Net occupancy expense 3,166 557 2,609 (365) 2,974
Equipment expense 2,935 393 2,542 349 2,193
Printing, stationary, and supplies 1,017 59 958 2 956
FDIC insurance expense 17 (1,036) 1,053 (1,031) 2,084
Correspondent bank service charges 867 (24) 891 2 889
Other:
Postage 897 121 776 6 770
Advertising 877 5 872 187 685
Outside data processing fees 711 6 705 (32) 737
Credit card fees 634 180 454 59 395
Legal and accounting fees 554 (45) 599 (187) 786
ATM expense 525 88 437 7 430
Public relations and business development 458 112 346 48 298
Directors' fees 406 (27) 433 20 413
Goodwill amortization 401 325 76 0 76
Telephone 394 62 332 15 317
Regulatory exam fees 349 68 281 (31) 312
Other professional and service fees 272 (100) 372 95 277
Courier 268 20 248 156 92
Franchise tax 265 (46) 311 141 170
Other miscellaneous 2,692 85 2,607 (29) 2,636
-------- -------- -------- -------- --------
Total Other 9,703 854 8,849 455 8,394
-------- ------- -------- ------- --------
Total Noninterest Expense $ 37,570 $ 3,170 $ 34,400 $ (235) $ 34,635
======= ======= ======= ======= =======
Income Taxes
Income tax expense for 1996 totaled $9.4 million as compared to $8.7 million for
1995 and $6.8 million for 1994. The Company's effective tax rates on pretax
income were 33.1%, 33.7%, and 32.8%, respectively, for the years 1996, 1995, and
1994.
At December 31, 1996 and 1995, the Company had net deferred tax assets of $1.4
million and $1.6 million, respectively. The approximate effects of each type of
difference that gave rise to the Company's deferred tax assets and liabilities
at December 31, 1996 and 1995, are provided in Note 6 to Consolidated Financial
Statements. The most significant assumption relied upon by management in
concluding that it is more likely than not that the deferred tax assets, net of
the recorded valuation allowance, will be realized in the future is the recent
history of taxable income generated by the Company and the subsidiary bank to
which the net operating loss carryforward relates. On a consolidated basis,
taxable income amounted to approximately $26.5 million, $22.6 million, and $18.7
million in the years ended December 31, 1996, 1995 and 1994, respectively.
The use of the net operating loss carryforward is conditioned upon taxable
income generated by the subsidiary bank. The net operating loss carryforward was
acquired in the purchase of the stock of the subsidiary bank, and under
applicable Internal Revenue Service regulations regarding change of control,
their usage is limited to a predetermined amount in each future period. The net
operating loss carryforward approximates $1.7 million at December 31, 1996, with
a usage limitation of $340,000 per year. The net operating loss carryforward
expires in the years 2001 through 2005. Taxable income generated by the
subsidiary bank before the net operating loss carryforward amounted to
approximately $1.9 million, $1.4 million, and $1.0 million in the years ended
December 31, 1996, 1995 and 1994, respectively.
The valuation allowance was established because full utilization of the net
operating loss carryforward is dependent on future taxable income in years where
the Company is unable to determine that it is more likely than not that taxable
income of the subsidiary bank will be available prior to expiration.
BALANCE SHEET REVIEW
Total assets at the end of 1996 were $1.262 billion, up $136 million from the
December 31, 1995, total. The addition of Citizens National Bank accounted for
approximately $93 million of the 1996 increase from the prior year. During 1996,
total assets averaged $1.196 billion as compared to $1.071 billion during 1995.
Average assets for Citizens National Bank, which are not included in the 1995
total, amounted to $90 million.
Investment Securities
At December 31, 1996, the investment securities portfolio totaled $511.8 million
as compared to $481.1 million the prior year. At December 31, 1996, securities
with an amortized cost of $466.6 million were classified as securities
held-to-maturity and securities with a market value of $45.2 million were
classified as securities available-for-sale. The portfolio is comprised
primarily of U. S. government and government corporations and agencies
securities with relative short maturities. The Company did not hold any CMOs
that entail higher risks than standard mortgage-backed securities. Total
investment securities at year-end 1996 included structured notes with an
amortized cost of $16.5 million and an approximate market value of $16.2
million. Note 2 to the Consolidated Financial Statements provides detail
disclosures relating to the maturities and fair values of the investment
portfolio at December 31, 1996 and 1995.
Loans
Total loans at December 31, 1996, amounted to $572.9 million, an increase of $66
million, or 13.0%, from year-end 1995. Excluding the effect of the addition of
Citizens National Bank on year to year comparisons, loans increased $30 million,
or 5.5%. Table 5 below provides the composition of the loan
portfolio at December 31, 1996 and 1995. As shown, the composition, or percent
of total loans each classification represents, was relatively unchanged from
year to year. The loan totals reflect loans made to businesses, individuals,
and farm and ranch operations located in the primary markets served by the
Company's subsidiary banks. Loans in the real estate mortgage classification
generally provide for repricing intervals that protect the Company from the rate
risk inherent in long term fixed rate mortgages.
Table 5 - Composition of Loans (000's omitted):
December 31, 1996 December 31, 1995
Amount % of Total Amount % of Total
Commercial, financial, and agricultural $ 234,625 40.95% $ 213,799 42.17%
Real estate - construction 22,106 3.86 19,046 3.76
Real estate - mortgage 135,182 23.60 117,332 23.15
Consumer 180,987 31.59 156,752 30.92
-------- ---------- -------- -----------
$ 572,900 100.00% $ 506,929 100.00%
======== ========== ======== ==========
Allowance for Loan Losses
An evaluation of the overall quality of the portfolio is performed to determine
the necessary level of the allowance for loan losses. The evaluation takes into
consideration the classification of loans and the application of loss estimates
to those classifications. The Company has an independent loan review function,
which periodically reviews the loan quality at each of the subsidiary banks. The
subsidiary banks are also subject to periodic examinations by state and federal
banking system examiners. Table 6 below provides activity in the allowance for
loan loss account for the past five years, and Table 7 presents year-end balance
and composition of nonperforming assets that serves as a key indicator of loan
quality. The unfavorable weather conditions and low market prices that farm and
cattle operations experienced in 1995 and the early part of 1996 were the
primary factors contributing to the 1996 increase in net charge- offs, loan loss
provision and nonperforming assets. When compared to the prior year-end total,
$900 thousand of the increase in nonperforming assets at December 31, 1996,
relates to the acquisition of Citizens National Bank. Management was not aware
of any material classified credit not properly disclosed as nonperforming at
December 31, 1996.
Table 6 - Loan Loss Experience and Allowance for Loan Losses (000's omitted):
1996 1995 1994 1993 1992
--------- --------- --------- ---------- ----------
Balance at January 1, $ 9,194 $ 9,206 $ 9,198 $ 8,476 $ 7,802
Allowance established from
purchase acquisition 800 83 - 712 -
---------- ---------- ----------- ---------- ----------
9,994 9,289 9,198 9,188 7,802
Loans charged off 2,620 1,019 1,382 2,129 2,042
Loans recovered 867 755 2,272 1,628 1,500
---------- ---------- --------- --------- ----------
Net (recoveries)/charge-offs 1,753 264 (890) 501 542
Provision/(credit) for loan losses 1,200 169 (882) 511 1,216
--------- ---------- ---------- ---------- ----------
Balance at December 31, $ 9,441 $ 9,194 $ 9,206 $ 9,198 $ 8,476
========= ========= ========= ========= ==========
Loans at year-end $ 572,900 $ 506,929 $ 446,892 $ 436,825 $ 388,486
Average loans 545,754 465,495 430,774 415,204 376,237
Net charge offs/(recoveries)/
average loans 0.32% 0.06% (0.21)% 0.12% 0.14%
Allowance for loan losses/
year-end loans 1.65 1.81 2.06 2.11 2.18
Allowance for loan losses/
nonperforming assets 268.13 444.15 406.45 165.94 143.56
Table 7 - Nonperforming Assets (000's omitted):
At December 31,
1996 1995 1994 1993 1992
------- --------- -------- -------- -------
Nonaccrual loans $ 2,638 $ 1,184 $ 1,305 $ 3,417 $ 2,590
Loans past due 90 days or more 77 181 100 170 731
Restructured loans - - - - -
------- ------- -------- ------- -------
Nonperforming loans 2,715 1,365 1,405 3,587 3,321
Foreclosed assets 806 705 860 1,956 2,583
------- ------- ------- ------ ------
Total nonperforming assets $ 3,521 $ 2,070 $ 2,265 $ 5,543 $ 5,904
====== ====== ====== ====== ======
As a % of loans and
foreclosed properties 0.61% 0.41% 0.51% 1.26% 1.51%
Deposits
Deposits which represent the Company's primary source of funding totaled $1.122
billion at the end of 1996. When compared to the previous year-end total,
deposits increased $124 million, with approximately $84 million of the increase
attributed to the addition of Citizens National Bank. Table 8 below provides a
breakdown of average deposits and rates paid over the past three years and the
remaining maturity of time deposits of $100 thousand or more.
Table 8 - Composition of Deposits and Remaining Maturity of Time
Deposits of $100,000 or more (000's omitted):
1996 1995 1994
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing deposits $ 213,757 - $ 197,412 - $ 196,495 -
Interest-bearing deposits
Interest-bearing checking 187,912 1.98% 179,731 2.14% 185,807 2.03%
Savings and money market accounts 232,579 3.29 182,401 2.98 198,682 2.51
Time deposits under $100,000 310,265 5.19 272,062 5.16 256,955 3.71
Time deposits of $100,000 or more 117,645 5.29 116,296 5.24 101,100 3.89
-------- ----- -------- ----- -------- -----
Total interest-bearing deposits 848,401 3.97 750,490 3.92 742,544 3.00
-------- -------- --------
Total deposits $ 1,062,158 $ 947,902 $ 939,039
======== ======== ========
Remaining Maturity of Time Deposits of $100,000 or More
December 31, 1996
Under three months $ 45,553
Over three through six months 32,331
Over six through twelve months 28,107
Over twelve months 10,917
---------
$ 116,908
Capital
At December 31, 1996, total shareholders' equity was $131.2 million, or 10.39%
of total assets, compared to $120.0 million, or 10.66% of total assets at
December 31, 1995. In accordance with SFAS 115, the Company's unrealized losses,
net of deferred taxes, on securities available-for-sale are reported as a
reduction in shareholders' equity. At December 31, 1996 and 1995, unrealized
losses, net, amounted to $267 thousand and $152 thousand, respectively. During
1996, total shareholders' equity averaged $123.7 million, or 10.35% of average
assets, compared to the 1995 average of $114.0 million, or 10.66% of average
assets.
Banking system regulators measure capital adequacy by means of the risk-based
capital ratio and leverage ratio. The risk-based capital rules provide for the
weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory
capital is then divided by risk-weighted assets to determine the risk-adjusted
capital ratios. The leverage ratio is computed by dividing shareholders' equity
less intangibles by quarter-to-date average assets less intangibles. Regulatory
minimums for the risk-based and leverage ratios are 8.00% and 3.00%,
respectively. At December 31, 1996, the Company's total risk-based and leverage
ratios were 20.15% and 10.40%, respectively.
ASSET AND LIABILITY MANAGEMENT
Interest Rate Risk
The Company manages its assets and liabilities to control the exposure of its
net interest income and capital to risks associated with interest rate changes
to achieve growth in net interest income. Each subsidiary bank has an asset
liability committee which monitors interest rate risk and compliance with
investment policies. Interest-sensitivity gap and simulation analysis are among
the ways that the subsidiary banks track interest rate risk. From time to time
it may be necessary for a subsidiary bank to reallocate investable funds or make
pricing adjustments to better position itself for interest rate movements. As
presented in Table 9, the Company's interest-sensitivity gap analysis as of
December 31, 1996, reflects a negative cumulative repricing gap in the one-year
horizon. Consequently, a sudden and large increase in rates or a dramatic
narrowing in the spread between asset yields and liability costs would result in
an adverse impact on the net interest margin; however, the adverse impact is
more moderate if interest rates follow historical trends and increase gradually.
The Company uses no off-balance-sheet financial instruments to manage interest
rate risk.
Table 9 - Interest-Sensitivity Analysis (000's omitted):
Within 3 4-6 7-12 1-5 Over 5
Months Months Months Years Years Total
Interest-earning assets:
Total loans $ 246,138 $ 39,016 $ 82,891 $ 188,184 $ 16,671 $ 572,900
Investment securities 59,227 25,137 78,917 297,196 51,312 511,789
Short-term investments 54,410 390 200 195 - 55,195
--------- --------- -------- --------- -------- ---------
Total interest-earning assets 359,775 64,543 162,008 485,575 67,983 1,139,884
Interest-bearing liabilities:
Transaction deposit accounts 334,826 334,826
Time deposits 278,547 108,068 103,369 50,473 27 540,484
Borrowed funds 110 - - 37 - 147
--------- --------- --------- --------- --------- --------
Total interest-bearing liabilities 613,483 108,068 103,369 50,510 27 875,457
--------- --------- --------- --------- --------- --------
Interest-