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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, 1998
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
(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
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. [ ]
As of March 5, 1999, the aggregate market value of voting stock held by
non-affiliates was $279,250,016.
As of March 5, 1999, there were 9,953,683 shares of Common Stock
outstanding.
Documents Incorporated by Reference
The Proxy Statement for the 1999 Annual Meeting is incorporated into Part
III of this Form 10-K by reference.
TABLE OF CONTENTS
Page
----
FORWARD-LOOKINGSTATEMENTS......................................................1
PART I
ITEM 1. BUSINESS........................................................1
ITEM 2. PROPERTIES.....................................................10
ITEM 3. LEGAL PROCEEDINGS..............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS........................................................10
ITEM 6. SELECTED FINANCIAL DATA........................................11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................12
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.......................................23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............24
ITEM 11. EXECUTIVE COMPENSATION.........................................24
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.......................................................24
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, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). When used in this Form 10-K, words such as
"anticipate," "believe," "estimate," "expect," "intend," "predict," "project,"
and similar expressions, as they relate to First Financial Bankshares, Inc.
("Bankshares" or the "Company") or its management, identify forward-looking
statements. These forward-looking statements are based on information currently
available to Bankshares' 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 (as defined below), legislative and regulatory
actions and reforms, competition and other factors described in "PART II, Item 7
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations." Such statements reflect the current views of Bankshares' management
with respect to future events and are subject to these and other risks,
uncertainties and assumptions relating to the operations, results of operations,
growth strategy and liquidity of Bankshares. All subsequent written and oral
forward-looking statements attributable to Bankshares or persons acting on its
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 multibank
holding company registered under the Bank Holding Company Act of 1956 (the
"BHCA"). As such, Bankshares is supervised by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Bankshares was formed in
1956 under the original name F & M Operating Company. By virtue of a series of
reorganizations, mergers, and acquisitions since 1956, Bankshares now owns,
through its wholly-owned Delaware subsidiary, First Financial Bankshares of
Delaware, Inc., nine banks organized and located in Texas. These nine banks are
First National Bank of Abilene, Abilene, Texas; Hereford State Bank, Hereford,
Texas; First National Bank, Sweetwater, Texas; Eastland National Bank, Eastland,
Texas; The First National Bank in Cleburne, Cleburne, Texas; Stephenville Bank
and Trust Co., Stephenville, Texas; San Angelo National Bank, San Angelo, Texas;
Weatherford National Bank, Weatherford, Texas; and Texas National Bank,
Southlake, Texas (collectively, the "First Financial Banks").
Bankshares' service centers are located primarily in North Central and West
Texas. Considering the branches and locations of all First Financial Banks, as
of December 31, 1998, Bankshares had 26 financial centers across Texas, with six
locations in Abilene, four 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, Alvarado, Burleson, Trophy
Club, and Roby.
First Financial Bankshares, Inc.
- --------------------------------
Bankshares provides management and technical resources and policy direction
to the First Financial Banks, which enables them to improve or expand their
banking services while continuing their local activity and identity. Each of the
First Financial 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 resources and policy direction in, among other
things, the following areas: (i) asset and liability management; (ii)
accounting, budgeting, planning and insurance; (iii) capitalization; and (iv)
regulatory compliance. In particular, Bankshares assists its 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. Bankshares also
performs, through corporate staff groups or by outsourcing to third parties,
internal audits and loan reviews of its banks. Bankshares, through First
National Bank of Abilene, provides advice to and specialized services for its
banks related to lending, investing, purchasing, advertising, public relations,
and computer services.
Services Offered by the First Financial Banks
- ---------------------------------------------
Each of the First Financial Banks is a separate entity that operates under
the day-to-day management of its own board of directors and officers. Each First
Financial Bank provides general commercial banking services, which include
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accepting and holding checking, savings and time deposits, making loans
(including credit card services), automated teller machines, drive-in and night
deposit services, safe deposit facilities, transmitting funds, and performing
other customary commercial banking services. The First Financial Banks also
administer pension plans, profit sharing plans and other employee benefit plans,
act as stock transfer agents or stock registrars for corporations, and provide
paying agent services. First National Bank of Abilene, First National Bank,
Sweetwater, Stephenville Bank and Trust Co. and San Angelo National Bank have
active trust departments. The trust departments offer a complete range of
services to individuals, associations, and corporations. These services include
administering estates, testamentary trusts, various types of living trusts, and
agency accounts. In addition, First National Bank of Abilene, First National
Bank in Cleburne, and San Angelo National Bank provide securities brokerage
services through arrangements with various third parties.
Recent Developments
- -------------------
In December 1998, pursuant to a Stock Exchange Agreement and Plan of
Reorganization, dated as of September 4, 1998, between Bankshares and Cleburne
State Bank ("Cleburne"), as amended, Bankshares acquired Cleburne by exchanging
411,683 shares of its common stock for 99.3% of the outstanding shares of
Cleburne common stock. Each Cleburne shareholder received 2.1073 shares of
Bankshares common stock for each share of Cleburne common stock owned and cash
in lieu of fractional shares. The total consideration paid by Bankshares for the
Cleburne common stock tendered in exchange for Bankshares' common stock was
$14,823,000, including the cash paid in lieu of fractional shares of Bankshares'
stock. Cleburne operates two full-service locations, one in Cleburne, Texas, and
one in nearby Alvarado, Texas, which locations are within 25 miles of Fort
Worth, Texas, and should be considered part of the Fort Worth banking market.
Cleburne provides a full range of both commercial and consumer banking services,
including loans, checking accounts, savings programs, safe deposit facilities,
access to automated teller machines, and credit card programs. Cleburne does not
offer trust services. As of November 30, 1998, Cleburne had assets totaling
$85,700,000 and shareholders' equity of $7,278,000. On March 5, 1999, Bankshares
merged Cleburne with and into The First National Bank in Cleburne, a subsidiary
bank of Bankshares, in accordance with applicable law.
Competition
- -----------
Commercial banking in Texas is highly competitive, and Bankshares, holding
less than 1% of deposits, represents only a minor segment of the industry. To
succeed in this industry, Management believes that banks must have the
capability to compete in the areas of (i) interest rates paid or charged; (ii)
scope of services offered, and (iii) prices charged for such services. The First
Financial 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 the First Financial
Banks in terms of capital, resources and personnel.
Bankshares' 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 the business of Bankshares. Customers of Bankshares and its banks include
their officers and directors, as well as other entities with which they are
affiliated. Bankshares and its banks may make loans to officers and directors,
and entities with which they are affiliated, in the ordinary course of business.
Bankshares and its banks make such 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
- ---------
Bankshares and its banks employed approximately 730 full-time equivalent
employees at March 1, 1999. Management believes that its 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 (the "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 the business of Bankshares and its banks.
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Bank Holding Companies
Because Bankshares is a bank holding company, it is 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: (i) the making or acquiring of loans or
other extensions of credit; (ii) servicing of loans; (iii) performing certain
trust functions; (iv) acting or serving as an investment or financial advisor;
(v) providing certain securities brokerage services as agent for customers; and
(vi) 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 (5%) 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 shall not approve any
acquisition, merger or consolidation that may (i) substantially lessen
competition in the banking industry, (ii) create a monopoly in any section of
the country, or (iii) 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 "--Bankshares'
Support of the First Financial Banks" for discussion of support requirements of
bank holding companies.
Banks
Federal and state laws and regulations that govern banks have the effect
of, among other things, regulating the scope of business, investments, cash
reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking
associations under the National Bank Act are subject to regulation and
examination by the Office of the Comptroller of the Currency (the "OCC"). The
OCC supervises, regulates and regularly examines the First National Bank of
Abilene, First National Bank, Sweetwater, The First National Bank in Cleburne,
Eastland National Bank, San Angelo National Bank, Weatherford National Bank and
Texas National Bank, all of which were chartered under the National Bank Act.
The OCC's supervision and regulation of banks is primarily intended to protect
the interests of depositors. The National Bank Act (i) requires each national
banking association to maintain reserves against deposits, (ii) restricts the
nature and amount of loans that may be made and the interest that may be
charged, and (iii) restricts investments and other activities.
State Banks. Banks that are organized as state banks under the Texas
Finance Code (formerly the Texas Banking Code) are subject to regulation and
examination by the Banking Commissioner of the State of Texas (the
"Commissioner"). The Commissioner regulates and supervises, and the Texas
Banking Department regularly examines, Hereford State Bank and Stephenville Bank
and Trust Co., which were chartered under the Texas Banking Code. The
Commissioner's supervision and regulation of banks is primarily designed to
protect the interests of depositors. The Texas Finance Code (i) requires each
state bank to maintain reserves against deposits, (ii) restricts the nature and
amount of loans that may be made and the interest that may be charged, and (iii)
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 discussion of capital requirements of banks.
Deposit Insurance
Each First Financial Bank is a member of the FDIC. The FDIC provides
deposit insurance protection that covers all deposit accounts in FDIC-insured
depository institutions and that does not exceed $100,000 per account. The First
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Financial 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,
1998, the assessment rate for each of the First Financial Banks is at the lowest
level risk-based premium available.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (the "FIRREA"), an FDIC-insured depository institution can be held liable
for any losses incurred by the FDIC in connection with (i) the "default" of one
of its FDIC-insured subsidiaries or (ii) 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 (the "FDIA") requires that the FDIC
review (i) any merger or consolidation by or with an insured bank, or (ii) 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
Bankshares is a legal entity separate and distinct from its banking and
other subsidiaries. Bankshares receives most of its revenues from dividends paid
to it by its Delaware holding company subsidiary. Similarly, the Delaware
holding company subsidiary receives dividends from its bank subsidiaries.
Described below are some of the laws and regulations that apply when the
subsidiary banks and Bankshares 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 (i) such bank's net profits (as defined and interpreted by
regulation) for that year plus (ii) 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).
The First Financial Banks paid aggregate dividends of approximately $15.5
million in 1998 and approximately $16.3 million in 1997. Under the dividend
restrictions discussed above, as of December 31, 1998, the First Financial
Banks, without obtaining governmental approvals, could have declared in the
aggregate additional dividends of approximately $13.8 million from retained net
profits.
To pay dividends, Bankshares and its banks also 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), 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 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
Bankshares can borrow or otherwise obtain credit from, or engage in certain
other transactions with, its 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
4
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: (i)
in the case of any one such affiliate, the aggregate amount of "covered
transactions" 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" 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. Further, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services.
Capital
Bank Holding Companies. The Federal Reserve Board has adopted risk-based
capital guidelines for bank holding companies. The ratio of total capital
("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 (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 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 (3%). 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
(3%) plus an additional cushion of 100 to 200 basis points. The Federal Reserve
Board has not advised Bankshares 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, 1998, the capital ratios for
Bankshares were as follows: (1) Tier 1 Capital to Risk-Weighted Assets Ratio,
16.03%; (2) Total Capital to Risk-Weighted Assets Ratio, 17.01%; and (3) Tier 1
Capital Leverage Ratio, 9.02%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991
(the "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 (i) risk-based
capital measures, (ii) a leverage ratio capital measure and (iii) 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 (10%) or greater, a Tier 1 risk-based capital ratio of six percent (6%)
or greater, and a Tier 1 leverage ratio of five percent (5%) 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 (8%) or greater, a Tier 1 risk-based capital ratio of four percent (4%)
or greater, and a Tier 1 leverage ratio of four percent (4%) or greater (in some
cases three percent (3%)). For an institution to be "undercapitalized," it will
have a total risk-based capital ratio that is less than eight percent (8%), a
Tier 1 risk-based capital ratio less than four percent (4%) or a Tier 1 leverage
ratio less than four percent (4%) (or a leverage ratio less than three percent
(3%) 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 (6%), a Tier 1 risk-based capital
ratio less than three percent (3%), or a Tier 1 leverage ratio less than three
percent (3%). 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 (2%). The FDICIA requires federal banking agencies to take "prompt
corrective action" against depository institutions that do not meet minimum
capital requirements. Under current regulations, the First Financial Banks were
"well capitalized" as of December 31, 1998.
The 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 (5%)
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of the institution's assets at the time it became "undercapitalized" or the
amount needed to bring the institution into compliance with all capital
standards. Furthermore, in the event of the bankruptcy of the parent holding
company, such guarantee would take priority over the parent's general unsecured
creditors. If a depository institution fails to submit an acceptable capital
restoration plan, it shall be treated as if it is significantly
undercapitalized. "Significantly undercapitalized" depository institutions may
be subject to a number of requirements and restrictions, including orders to
sell sufficient voting stock to become "adequately capitalized," requirements to
reduce total assets, and cessation of receipt of deposits from correspondent
banks. "Critically undercapitalized" institutions are subject to the appointment
of a receiver or conservator. Finally, the 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 the 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,
1998, all Texas-chartered banks owned by Bankshares exceeded the minimum ratios
applied to them.
Bankshares' Support of the First Financial Banks
Under Federal Reserve Board policy, Bankshares is expected to commit
resources to support each of its subsidiary banks. This support may be required
at times when, absent such Federal Reserve Board policy, Bankshares would not
otherwise be required to provide it. In addition, any loans by Bankshares to its
banks would be subordinate in right of payment to deposits and to certain other
indebtedness of its 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 such 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 (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, 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 Interstate Banking and Branching 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 has
adopted legislation to "opt out" of the interstate branching provisions, which
legislation expires on September 2, 1999, recent judicial decisions have
invalidated this "opt-out" legislation. Both the OCC and the Texas Banking
Department are presently accepting applications for interstate merger and
branching transactions. The Texas Banking Department intends to submit proposed
legislation that would codify the judicial authority for interstate merger and
branching transactions to the Texas legislature during the 1999 legislative
session.
6
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977 (the "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. The First Financial 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 the First Financial Banks.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities,
including the Federal Reserve Board, that affect the national supply of credit.
The Federal Reserve Board regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial
institution deposits, and restricting certain borrowings by financial
institutions and their subsidiaries. The monetary policies of the Federal
Reserve Board have had a significant effect on the operating results of banks in
the past and are expected to continue to do so in the future.
Pending and Proposed Legislation
Proposals to change the laws and regulations governing the banking industry
are frequently introduced in Congress, in the state legislatures and before the
various bank regulatory agencies. The likelihood and timing of any such
proposals or bills being enacted and the impact they might have on Bankshares
and its 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,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Commercial, financial and agricultural.. $ 278,647 $ 286,630 $ 240,271 $ 219,792 $ 183,929
Real estate - construction.............. 36,721 34,100 22,887 20,206 13,615
Real estate - mortgage.................. 198,447 177,658 152,350 131,801 141,227
Consumer................................ 265,729 245,068 189,307 164,231 135,709
----------- ----------- ----------- ----------- -----------
$ 779,544 $ 743,456 $ 604,815 $ 536,030 $ 474,480
=========== =========== =========== =========== ===========
Loan Concentrations
Other than the classifications shown above, Bankshares had no loans
outstanding at December 31, 1998 that represented more than 10% of total loans.
Maturity Distribution and Interest Sensitivity of Loans at December 31,
1998 (in thousands):
The following table summarize maturity and yield information for the
commercial, financial, and agricultural and real estate construction portion of
the loan portfolio as of December 31, 1998:
7
After One
Year
One Year Through After Five
or less Five years Years Total
----------- ------------ ----------- -----------
Commercial, financial, and agricultural... $ 180,693 $ 82,106 $ 15,848 $ 278,647
Real estate-- construction................ 28,387 8,334 -- 36,721
----------- ------------ ----------- -----------
$ 209,080 $ 90,440 $ 15,848 $ 315,368
=========== ============ =========== ===========
Maturities
After One Year
Loans with fixed interest rates.......................... $ 57,854
Loans with floating or adjustable interest rates......... 48,434
------------
$ 106,288
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 $399 thousand as of December 31, 1998.
Composition of Investment Securities (in thousands):
December 31, 1998 December 31, 1997 December 31, 1996
---------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
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............ $ 293,400 $ 297,080 $ 330,674 $332,389 $ 373,072 $373,793
Obligations of states and political
subdivisions......................... 66,764 67,731 34,456 34,796 25,798 25,825
Mortgage-backed securities.............. 44,634 44,894 59,809 59,995 77,089 76,573
Other securities........................ 9,505 9,547 10,958 11,189 14,096 14,146
----------- --------- ----------- -------- ----------- --------
Total.......................... $ 414,303 $ 419,252 $ 435,897 $438,369 $ 490,055 $490,337
=========== ========= =========== ======== =========== ========
Available-for-sale
- ------------------
U.S. Treasury obligations and
obligations of U.S. government
corporations and agencies............ $ 104,256 $ 105,368 $ 141,531 $141,784 $ 16,286 $ 16,249
Obligations of states and political
subdivisions......................... 33,255 33,863 8,168 8,408 1,300 1,292
Mortgage-backed securities.............. 42,579 42,795 27,036 27,164 32,092 31,910
Other securities........................ 29,143 29,562 2,767 2,766 1,752 1,752
----------- --------- ----------- -------- ----------- --------
Total.......................... $ 209,233 $ 211,588 $ 179,502 $180,122 $ 51,430 $ 51,203
=========== ========= =========== ======== =========== ========
8
Analysis of the Allowance for Loan Losses (in thousands, except percentages):
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
Balance at January 1,........................ $ 10,632 $ 9,797 $ 9,650 $ 9,769 $ 10,132
Allowance established from
purchase acquisition...................... -- 1,444 800 83 --
---------- ---------- ---------- ---------- ---------
10,632 11,241 10,450 9,852 10,132
Charge-offs:
Commercial, financial and agricultural.... 1,267 836 1,214 442 1,157
Consumer.................................. 2,786 2,127 1,476 730 627
All other................................. 106 164 74 20 28
---------- ---------- ---------- ---------- ---------
Total loans charged off...................... 4,159 3,127 2,764 1,192 1,812
Recoveries:
Commercial, financial and agricultural.... 532 726 389 393 1,954
Consumer.................................. 811 643 380 325 295
All other................................. 32 35 142 103 82
---------- ---------- ---------- ---------- ---------
Total recoveries............................. 1,375 1,404 911 821 2,331
---------- ---------- ---------- ---------- ---------
Net (recoveries)/charge-offs................. 2,784 1,723 1,853 371 (519)
Provision/(credit) for loan losses........... 1,140 1,114 1,200 169 (882)
---------- ---------- ---------- ---------- ---------
Balance at December 31,...................... $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
========== ========== ========== ========== =========
Loans at year-end............................ $ 779,544 $ 743,456 $ 604,815 $ 536,030 $ 474,480
Average loans................................ 770,183 657,325 575,658 493,831 457,461
Net charge-offs/(recoveries)/average loans... 0.36% 0.26% 0.32% 0.08% (0.11)%
Average for loan losses/year-end loans....... 1.15 1.43 1.62 1.80 2.06
Allowance for loan losses/nonperforming
loans..................................... 322.84 255.58 288.57 451.36 408.57
Allocation of Allowance for Loan Losses (in thousands):
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Allocation Allocation Allocation Allocation Allocation
Amount Amount Amount Amount Amount
----------- ----------- ----------- ----------- -----------
Commercial, financial and agricultural..... $ 3,212 $ 4,099 $ 3,892 $ 3,957 $ 3,786
Real estate - construction................. 423 488 370 364 280
Real estate - mortgage..................... 2,288 2,541 2,468 2,373 2,907
Consumer................................... 3,064 3,504 3,067 2,956 2,795
--------- --------- --------- --------- --------
Total................................. $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,768
========= ========= ========= ========= ========
Percent of Total Loans
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
Commercial, financial and agricultural.... 35.74% 38.55% 39.73% 41.00% 38.76%
Real estate - construction................ 4.71 4.59 3.78 3.77 2.87
Real estate - mortgage.................... 25.46 23.90 25.19 24.59 29.76
Consumer.................................. 34.09 32.96 31.30 30.64 28.61
Available Information
- ---------------------
Bankshares files annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission
(the "SEC"). You may read and copy any document Bankshares files at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room. Bankshares' SEC filings are also available to the public at the SEC's web
site at http://www.sec.gov.
9
ITEM 2. PROPERTIES
The principal office of Bankshares is located in the First National Bank
Building at 400 Pine Street in downtown Abilene, Texas. Bankshares leases
approximately 2,300 square feet from First National Bank of Abilene, which owns
the building, pursuant to a lease agreement that expires December 31, 1999. The
First Financial Banks collectively own 30 banking facilities, some of which are
detached drive-ins, and leases four banking facilities. In 1999, Bankshares
intends to (i) make permanent improvements to an existing banking facility, (ii)
construct a new banking facility to replace a smaller, leased one, (iii) sell an
existing banking facility that is located near a facility acquired by Bankshares
in 1998, (iv) sell a banking facility acquired in 1998 that is located near an
existing banking facility, and (v) lease a new banking facility as a grocery
store branch. Bankshares anticipates that the net cost of these facility
projects will be funded with cash from operations and is not expected to be
material to Bankshares' future consolidated results of operations. Management
considers all of its existing locations to be quality facilities and well suited
for conducting the business of banking. Bankshares believes that its existing
facilities, along with its planned facilities for 1999, are adequate to meet its
and the First Financial Banks' requirements for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Bankshares and its banks are parties to a number of lawsuits arising in the
ordinary course of its banking business. However, there are no material pending
legal proceedings to which Bankshares, the First Financial Banks or Bankshares'
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 the security holders of Bankshares
during the fourth quarter of Bankshares' fiscal year ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Bankshares' 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
Bankshares' common stock for the periods indicated. As of March 5, 1999,
Bankshares had 1,762 shareholders of record.
See "Item 8--Financial Statements and Supplementary Data--Quarterly
Financial Data" for the frequency and amount of cash dividends paid by
Bankshares. Also, see "PART I--Item 1--Business--Regulation and Supervision" for
restrictions on Bankshares' present or future ability to pay dividends.
10
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of Bankshares presented below as of December
31, 1998, 1997, 1996, 1995 and 1994, and for the years ended December 31, 1998,
1997, 1996, 1995 and 1994 have been derived from the audited consolidated
financial statements of Bankshares. 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 Bankshares' 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 Bankshares' common stock have been adjusted to give
effect to all stock dividends and stock splits.
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(in thousands, except per share data)
Summary Income Statement Information:
Interest income $ 111,868 $ 101,474 $ 89,164 $ 79,165 $ 68,545
Interest expense 46,292 41,735 35,699 31,252 23,810
----------- ----------- ----------- ----------- -----------
Net interest income 65,576 59,739 53,465 47,913 44,735
Provision (credit) for loan losses 1,140 1,114 1,200 168 (882)
Noninterest income 22,351 19,486 16,491 15,686 12,913
Noninterest expense 52,422 46,522 39,829 36,460 36,611
----------- ----------- ----------- ----------- -----------
Earnings before income taxes 34,365 31,589 28,927 26,971 21,919
Provision for income taxes 11,111 10,563 9,884 9,106 7,203
----------- ----------- ----------- ----------- -----------
Net earnings (1) $ 23,254 $ 21,026 $ 19,043 $ 17,865 $ 14,716
=========== =========== =========== =========== ===========
Per Share Data:
Net earnings per share $ 2.34 $ 2.12 $ 1.98 $ 1.87 $ 1.54
Net earnings per share,
assuming dilution 2.33 2.11 1.97 1.84 1.54
Cash dividends declared 1.00 0.88 0.79 0.71 0.64
Book value at period-end 17.03 15.56 14.20 13.06 11.83
Earnings performance ratios:
Return on average assets 1.44% 1.46% 1.51% 1.46% 1.32%
Return on average equity 14.51 14.37 14.72 13.91 13.49
Summary Balance Sheet Data (Period-end):
Investment securities $ 625,891 $ 616,018 $ 541,451 $ 508,769 $ 517,457
Loans 779,544 743,456 604,815 536,030 472,411
Total assets 1,686,647 1,657,044 1,332,645 1,190,769 1,129,054
Deposits 1,504,856 1,488,709 1,185,440 1,055,961 1,006,913
Total liabilities 1,517,198 1,502,583 1,196,236 1,066,392 1,015,993
Total shareholders' equity 169,449 154,461 136,409 124,377 113,061
Asset quality ratios:
Allowance for loan losses/
period-end loans 1.15% 1.43% 1.62% 1.80% 2.07%
Nonperforming assets/period-end
loans plus foreclosed assets 0.41 0.68 0.69 0.53 0.72
Net (recoveries) charge offs/
average loans 0.36 0.26 0.32 0.08 (0.11)
Capital ratios:
Leverage ratio (2) 9.02% 8.28% 10.27% 10.65% 10.11%
Tier 1 risk-based capital (3) 16.03 14.76 18.73 19.20 19.95
Total risk-based capital (4) 17.01 15.95 19.95 20.42 21.56
Dividend payout ratio 41.66 41.24 40.32 35.63 34.04
- --------------------------------
(1) Net earnings for the year ended December 31, 1995 includes $1.3
million, or $0.14 per share, in nonrecurring gains from sale of assets.
(2) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
fourth quarter average assets less intangible assets.
(3) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets by
risk-adjusted assets.
(4) Calculated by dividing, at period-end, shareholders' equity (before
unrealized loss on securities available for sale) less intangible assets
plus allowance for loan losses to the extent allowed under regulatory
guidelines by risk-adjusted assets.
11
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 the Company's
consolidated balance sheets as of December 31, 1998 and 1997, and statements of
earnings for the years 1996 through 1998 should be reviewed in conjunction with
the consolidated financial statements, accompanying notes, and selected
financial data of the Company presented elsewhere in this Report. All amounts
and prices related to the Company's common stock have been adjusted to give
effect to all stock splits and stock dividends.
Acquisitions
Acquisition of Cleburne State Bank. On December 16, 1998, the Company
acquired Cleburne State Bank (the "Cleburne Acquisition") by issuing 411,683
shares of the Company's common stock in exchange for 99.3% of the outstanding
shares of common stock of Cleburne State Bank. This transaction was accounted
for as a pooling-of-interests, and accordingly, the Company's consolidated
financial data for prior periods has been restated. On March 5, 1999, Cleburne
State Bank was merged into its affiliate, The First National Bank in Cleburne.
Acquisition of Southlake Bancshares, Inc. On November 24, 1997, the Company
acquired Southlake Bancshares, Inc. and its subsidiary, Texas National Bank,
(the "Southlake Acquisition") by issuing 216,442 shares of the Company's common
stock in exchange for all of the outstanding shares of common stock of Southlake
Bancshares, Inc. This transaction was accounted for as a pooling-of-interests
but due to immateriality, the Company's consolidated financial data prior to
1997 was not restated.
Texas Commerce Bank-San Angelo. On September 25, 1997, the Company, through
a bank subsidiary, acquired certain assets of Texas Commerce Bank-San Angelo
(the "TCB-San Angelo Acquisition") for $16.8 million in cash and the assumption
of certain liabilities (primarily deposits). The transaction was accounted for
as a purchase, and accordingly, the results of operations were consolidated with
those of the Company from the date of acquisition. As a result, in 1997, the
Company recorded only three months of operations associated with these assets
and liabilities, whereas in 1998, the Company recorded twelve months of
operations. Effective January 1, 1998, and in connection with the TCB-San Angelo
Acquisition, all of the outstanding stock of Texas Commerce-San Angelo Trust
Company was transferred to the bank subsidiary. Texas Commerce-San Angelo Trust
Company was subsequently merged into the bank subsidiary which as of December
31, 1998, had trust assets of $95.8 million under management.
Results of Operations
Performance Summary. Net earnings for 1998 were $23.3 million, an increase
of $2.3 million, or 10.6%, over net earnings for 1997 of $21.0 million. Net
earnings for 1996 were $19.0 million. The increase in net earnings for both 1998
and 1997 was primarily attributable to an increase in net interest income
resulting primarily from the growth in average earning assets and an increase in
noninterest income resulting primarily from increases in service fees on deposit
accounts and trust fees.
On a per share basis, net earnings were $2.34 for 1998 as compared to $2.12
for 1997 and $1.98 for 1996. Return on average assets was 1.44% for 1998 as
compared to 1.46% for 1997 and 1.51% for 1996. Return on average equity was
14.51% for 1998 as compared to 14.37% for 1997 and 14.72% for 1996.
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. The Company's earning assets consist primarily of loans and
securities. The Company's liabilities to fund those assets consist primarily of
interest-bearing deposits. Net interest income was $67.0 million in 1998 as
compared to $60.5 million in 1997 and $53.9 million in 1996. These increases
were primarily due to growth in the volume of earning assets. Average earning
assets were $1.470 billion in 1998, an increase of $162.0 million, or 12.4%, as
compared to $1.308 billion in 1997, which was $154.1 million, or 13.3%, higher
than 1996. The 1998 increase is due primarily to the TCB-San Angelo Acquisition
which accounted for approximately $112.0 million of such increase. For 1997, the
TCB-San Angelo and Southlake Acquisitions accounted for approximately $70.0
million of the growth in earning assets. Table 1 allocates the increases in
tax-equivalent net interest income for 1998 and 1997 between the amount of
increase attributable to volume and rate.
12
Table 1 -- Changes in Interest Income and Interest Expense (in thousands):
1998 Compared to 1997 1997 Compared to 1996
----------------------------------- -----------------------------------
Change Attributable to Total Change Attributable to Total
---------------------- ----------------------
Volume Rate Change Volume Rate Change
--------- --------- --------- --------- --------- --------
Short-term investments............... $ 822 $ (98) $ 724 $ 1,633 $ 30 $ 1,663
Taxable investment securities........ 238 (203) 35 1,646 1,044 2,690
Tax-exempt investment securities (1). 1,962 56 2,018 947 (15) 932
Loans (1)............................ 10,756 (2,438) 8,318 7,852 (552) 7,300
--------- --------- --------- --------- --------- --------
Interest income................... 13,778 (2,683) 11,095 12,078 507 12,585
--------- --------- --------- --------- --------- --------
Interest-bearing deposits............ 4,967 (447) 4,520 4,738 1,220 5,958
Short-term borrowings................ 41 (1) 40 (36) 118 82
Long-term debt....................... (3) -- (3) (3) -- (3)
--------- --------- --------- --------- --------- --------
Interest expense.................. 5,005 (448) 4,557 4,699 1,338 6,037
--------- --------- --------- --------- --------- --------
Net interest income............... $ 8,773 $ (2,235) $ 6,538 $ 7,379 $ (831) $ 6,548
========= ========= ========= ========= ========= ========
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
The net interest margin, which measures tax-equivalent net interest income
as a percentage of average earning assets, amounted to 4.56% in 1998 as compared
to 4.62% in 1997 and 4.67% in 1996. The Company's rates on earning assets and
interest-bearing liabilities are influenced by national market trends and
competitive pressures in local markets. During 1998, when national market
interest rates declined, the Company's yield on earning assets decreased more
than the rate on interest-bearing liabilities, which resulted in a lower net
interest margin as compared to 1997. The yield on loans for 1998 dropped 32
basis points as compared to 1997, which was the primary factor contributing to a
lower net interest margin.
Table 2 -- Average Balances and Average Yields and Rates (in thousands,
except percentages):
1998 1997 1996
--------------------------- ----------------------------- ---------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------- -------- ----- ---------- ------- ----- ---------- -------- -----
Assets
Short-term investments.. $ 85,247 $ 4,543 5.33% $ 70,136 $ 3,819 5.45% $ 39,898 $ 2,156 5.40%
Taxable investment
securities............. 547,438 33,383 6.10 543,561 33,348 6.14 515,858 30,658 5.94
Tax-exempt
investment securities(1) 67,068 4,426 6.60 36,954 2,408 6.52 22,509 1,476 6.56
Loans (1)(2)............ 770,183 70,963 9.21 657,325 62,645 9.53 575,658 55,345 9.61
---------- -------- ---------- ------- ---------- --------
Total earning assets.. 1,469,936 113,315 7.71 1,307,976 102,220 7.82 1,153,923 89,635 7.77
Cash and due from banks. 72,608 69,185 59,699
Bank premises and equipment 43,524 41,264 36,155
Other assets............ 21,720 21,564 18,831
Goodwill, net........... 22,466 10,315 5,624
Allowance for loan losses (9,912) (10,211) (10,488)
---------- ---------- ----------
Total assets.......... $1,620,342 $1,440,093 $1,263,744
========== ========== ==========
Liabilities and
Shareholders' Equity
Interest-bearing
deposits $ 1,138,858 $ 46,134 4.05% $1,017,412 $41,614 4.09% $ 898,077 $ 35,656 3.97%
Short-term borrowings... 2,338 158 6.76 1,742 118 6.77 285 36 12.63
Long-term debt.......... -- -- 33 3 8.58 70 6 8.57
---------- -------- ---------- ------- ---------- --------
Total interest-
bearing liabilities... 1,141,196 46,292 4.06 1,019,187 41,735 4.09 898,432 35,698 3.97
-------- ------- --------
Noninterest-bearing
deposits 306,743 262,554 224,896
Other liabilities....... 12,108 12,028 11,059
---------- ---------- ----------
Total liabilities..... 1,460,047 1,293,769 1,134,387
Shareholders' equity....... 160,295 146,324 129,357
---------- ---------- ----------
Total liabilities and
Shareholders' equity.... $1,620,342 $1,440,093 $1,263,744
========== ========== ==========
Net interest income........ $ 67,023 $60,485 $ 53,937
======== ======= ========
Rate Analysis:
Interest income/earning assets 7.71% 7.82% 7.77%
Interest expense/earning assets 3.15 3.20 3.10
---- ---- ----
Net yield on earning assets 4.56% 4.62% 4.67%
==== ==== ====
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
13
Noninterest Income. Noninterest income for 1998 was $22.4 million, an
increase of $2.9 million, or 14.7%, as compared to 1997. This increase was
primarily a result of (i) an increase in trust fees of $761 thousand due
primarily to the January 1998 addition of the Texas Commerce-San Angelo Trust
Company, which earned $600 thousand in gross fees during 1998; (ii) an increase
in service fees on deposit accounts of $1.2 million, which reflects growth in
the number of accounts and the volume of transactions processed; and (iii) an
increase in real estate mortgage fees of $555 thousand, or 69.1%, which resulted
from a significant increase in the volume of loan originations and loan
refinancings processed and placed in the secondary market. Table 3 provides
comparisons for other categories of noninterest income.
Total noninterest income for 1997 was $19.5 million, an increase of $3.0
million, or 18.2%, as compared to 1996. This increase was primarily a result of
(i) an increase in trust fees of $436 thousand due primarily to an increase of
$85.0 million, or 14.0% increase in trust assets during 1997; (ii) an increase
in service fees on deposit accounts of $2.0 million, which reflects growth in
the number of accounts and the volume of transactions processed; and (iii) an
increase in ATM fees of $261 thousand due primarily to an increase in the number
of cardholders and the volume of transactions processed.
Table 3 -- Noninterest Income (in thousands):
Increase Increase
1998 (Decrease) 1997 (Decrease) 1996
----------- ----------- ----------- ----------- -----------
Trust fees.............................. $ 4,749 $ 761 $ 3,988 $ 436 $ 3,552
Service fees on deposit accounts........ 11,838 1,187 10,651 1,976 8,675
Real estate mortgage fees............... 1,358 555 803 235 568
Net securities gains (losses)........... 42 42 -- (15) 15
Other:
ATM fees............................. 1,034 295 739 261 478
Mastercard fees...................... 872 3 869 95 774
Miscellaneous income................. 840 (41) 881 (45) 926
Safe deposit rental fees............. 391 40 351 84 267
Exchange fees........................ 381 29 352 12 340
Credit life fees..................... 250 (95) 345 84 261
Gain on sale of repossessed assets... 235 196 39 (99) 138
Brokerage commissions................ 213 (50) 263 62 201
Interest on loan recoveries.......... 148 (57) 205 (91) 296
----------- ----------- ----------- ----------- -----------
Total other........................ 4,364 320 4,044 363 3,681
----------- ----------- ----------- ----------- -----------
Total Noninterest Income............. $ 22,351 $ 2,865 $ 19,486 $ 2,995 $ 16,491
=========== =========== =========== =========== ===========
Noninterest Expense. Total noninterest expense for 1998 was $52.4 million,
an increase of $5.9 million, or 12.7%, as compared to 1997. 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. The Company's efficiency ratios were 58.65% for 1998, 58.17%
for 1997, and 56.55% for 1996. Management believes that the ratio of 58.65% for
1998 compared favorably to the Federal Reserve Bank peer group ratio of 59.59%.
Salaries and employee benefits for 1998 totaled $26.7 million, an increase
of $2.9 million, or 12.2%, as compared to 1997. The TCB-San Angelo Acquisition
accounted for approximately $1.3 million of this increase. Net occupancy and
equipment expense in the aggregate for 1998 increased by $800 thousand as
compared to 1997. Approximately $300 thousand of this increase for 1998 related
to facilities and equipment added as a result of the TCB-San Angelo Acquisition.
Goodwill amortization, a noncash expense, was $1.6 million for 1998, an increase
of $907 thousand as compared to 1997, and also resulted primarily from the
TCB-San Angelo Acquisition. Audit and accounting fees for 1998 increased by $277
thousand and resulted primarily from the Company's outsourcing of internal audit
during 1998 which was offset by a greater amount through decreases in other
noninterest expenses, primarily salaries and travel. The Company outsourced
internal audit to reduce expense and improve effectiveness of the internal audit
function.
Total noninterest expense for 1997 was $46.5 million, an increase of $6.7
million, or 16.8%, as compared to 1996. Salaries and employee benefits totaled
$23.8 million, an increase of $2.8 million as compared to 1996. The TCB-San
Angelo and Southlake Acquisitions accounted for approximately $1.4 million of
this increase. Net occupancy and equipment expense in the aggregate for 1997
increased by $1.0 million. Approximately $470 thousand of the increase related
14
to such acquisitions, which contributed to higher depreciation, maintenance and
property tax expense when compared to 1996. Goodwill amortization expense
increased by $300 thousand as a result of the TCB-San Angelo Acquisition.
Table 4 -- Noninterest Expense (in thousands):
Increase Increase
1998 (Decrease) 1997 (Decrease) 1996
----------- ----------- ----------- ----------- -----------
Salaries................................ $ 20,732 $ 2,189 $ 18,543 $ 2,304 $ 16,239
Medical and other benefits.............. 2,354 348 2,006 261 1,745
Profit sharing.......................... 2,027 203 1,824 109 1,715
Payroll taxes........................... 1,566 167 1,399 167 1,232
----------- ----------- ----------- ----------- -----------
Total salaries and employee
benefits........................... 26,679 2,907 23,772 2,841 20,931
Net occupancy expense .................. 4,185 387 3,798 395 3,403
Equipment expense....................... 4,091 413 3,678 632 3,046
Goodwill amortization................... 1,655 907 748 300 448
Other:
Data processing and operation fees... 1,149 (164) 1,313 389 924
Postage.............................. 1,141 51 1,090 133 957
Printing, stationery and supplies.... 1,102 (63) 1,165 53 1,112
Advertising.......................... 1,093 (5) 1,098 226 872
Correspondent bank service charges... 1,092 104 988 86 902
ATM expense.......................... 823 110 713 154 559
Credit card fees..................... 753 15 738 88 650
Telephone............................ 721 78 643 219 424
Public relations and business
development........................ 596 57 539 56 483
Directors' fees...................... 510 (70) 580 126 454
Audit and accounting fees............ 660 277 383 77 306
Legal fees........................... 497 97 400 121 279
Other professional and service fees.. 462 99 363 75 288
Regulatory exam fees................. 410 47 363 (103) 466
Franchise tax........................ 404 40 364 85 279
Other miscellaneous.................. 4,399 613 3,786 740 3,046
----------- ----------- ----------- ----------- -----------
Total other........................ 15,812 1,286 14,526 2,525 12,001
----------- ----------- ----------- ----------- -----------
Total Noninterest Expense............... $ 52,422 $ 5,900 $ 46,522 $ 6,693 $ 39,829
=========== =========== =========== =========== ===========
Income Taxes. Income tax expense was $11.1 million for 1998 as compared to
$10.6 million for 1997 and $9.9 million for 1996. The Company's effective tax
rates on pretax income were 32.3%, 33.4% and 34.2%, respectively, for the years
1998, 1997 and 1996. The decreases for 1998 and 1997 were due to higher levels
of nontaxable interest income resulting from increased volumes of tax-exempt
securities.
At December 31, 1998 and 1997, the Company had deferred tax assets of $669
thousand and $1.2 million, respectively. Management believes that it is more
likely than not that the deferred tax assets, net of the recorded valuation
allowance, will be realized in the future because of 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 for
the Company was approximately $32.2 million, $28.8 million, and $26.5 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
The use of the net operating loss carryforward is conditioned upon taxable
income generated by the subsidiary bank which originally incurred operating
losses. 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, its usage is limited to a predetermined
amount in each future period. The net operating loss carryforward approximates
$1.1 million at December 31, 1998, with a usage limitation of $340 thousand per
year. The net operating loss carryforward expires in the years 2001 through
2005. Taxable income generated by the subsidiary bank before the net operating
loss carryforward was approximately $1.9 million, $1.6 million, and $1.9 million
in the years ended December 31, 1998, 1997 and 1996, respectively.
15
The Company established a valuation allowance for the net operating loss
carryforward because full utilization of this carryforward depends on future
taxable income in years when the Company is unable to determine that it is more
likely than not that taxable income of the subsidiary bank will be available.
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 the Company's subsidiary banks. Real estate loans represent loans
primarily for new home construction and owner-occupied real estate. The
structure of loans in the real estate mortgage classification generally provides
repricing intervals to minimize the interest rate risk inherent in fixed rate
mortgage loans. As of December 31, 1998, total loans were $779.5 million, an
increase of $36.1 million, or 4.9%, as compared to December 31, 1997. Real
estate loans and consumer loans as of December 31, 1998, increased $23.4 million
and $20.7 million, respectively, as compared to December 31, 1997. Commercial,
financial and agricultural loans as of December 31, 1998, were $278.6 million, a
decrease of $7.9 million as compared to December 31, 1997. A $7.6 million
reduction in agricultural loans, which was due primarily to unfavorable weather
conditions and lower cattle prices, was a primary factor in this decrease. Loans
averaged $770.2 million during 1998, an increase of $112.8 million.
Approximately $67.8 million of the increase was internally generated and $45.0
million resulted from the TCB-San Angelo Acquisition.
Table 5 -- Composition of Loans (in thousands, except percentages):
December 31, 1998 December 31, 1997
--------------------- ---------------------
Amount % of Total Amount % of Total
---------- -------- ---------- -------
Commercial, financial and agricultural........................ $ 278,647 35.74% $ 286,630 38.55%
Real estate - construction.................................... 36,721 4.71 34,100 4.59
Real estate - mortgage........................................ 198,447 25.46 177,658 23.90
Consumer...................................................... 265,729 34.09 245,068 32.96
---------- -------- ---------- -------
$ 779,544 100.00% $ 743,456 100.00%
========== ======== ========== =======
Asset Quality. Loan portfolios of each of the subsidiary banks are subject
to periodic reviews by the Company's 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 $3.2 million at December 31, 1998, as compared to $5.1
million at December 31, 1997. As a percent of loans and foreclosed assets,
nonperforming assets were 0.41% at December 31, 1998, as compared to 0.68% at
December 31, 1997. Management was not aware of any material classified credit
not properly disclosed as nonperforming at December 31, 1998.
Table 6 -- Nonperforming Assets (in thousands, except percentages):
At December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Nonaccrual loans........................ $ 2,717 $ 3,668 $ 2,906 $ 1,589 $ 1,893
Loans past due 90 days or more.......... 67 134 116 181 101
Restructured loans...................... -- 358 373 368 397
----------- ----------- ----------- ----------- -----------
Nonperforming loans................ 2,784 4,160 3,395 2,138 2,391
Foreclosed assets....................... 385 936 806 708 1,040
----------- ----------- ----------- ----------- -----------
Total nonperforming assets......... $ 3,169 $ 5,096 $ 4,201 $ 2,846 $ 3,431
=========== =========== =========== =========== ===========
As a % of loans and
foreclosed assets.................. 0.41% 0.68% 0.69% 0.53% 0.72%
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 $1.1 million for 1998 and 1997 as compared to $1.2 million for
1996. As a percent of average loans, net loan charge-offs were .36% during 1998
as compared to .26% during 1997. This increase was primarily due to the Company
experiencing increased net loan losses from consumer loans, which to a large
extent related to indirect automobile loans. As a consequence, the Company's
subsidiary banks active in indirect automobile lending took steps to upgrade the
credit quality of the indirect automobile loan portfolios. The allowance for
loan losses as a percent of loans was 1.15% as of December 31, 1998, as compared
16
to 1.43% as of December 31, 1997. Management anticipates that the ratio of
allowance for loan losses to loans will remain above 1% in future periods. A key
indicator of the adequacy of the allowance for loan losses is the ratio of the
allowance to nonperforming loans, which consist of nonaccrual loans, loans past
due 90 days, and restructured loans. As of December 31, 1998, the ratio was
322.84% as compared to 255.58% at December 31, 1997.
Table 7 -- Loan Loss Experience and Allowance for Loan Losses (in
thousands, except percentages):
1998 1997 1996 1995 1994
--------- --------- -------- -------- ---------
Balance at January 1,............................... $ 10,632 $ 9,797 $ 9,650 $ 9,769 $ 10,132
Allowance established from purchase acquisition..... -- 1,444 800 83 --
--------- --------- -------- -------- ---------
10,632 11,241 10,450 9,852 10,132
Loans charged off................................... 4,159 3,127 2,764 1,192 1,812
Loans recovered..................................... 1,375 1,404 911 821 2,331
--------- --------- -------- -------- ---------
Net (recoveries) charge-offs........................ 2,784 1,723 1,853 371 (519)
Provision (credit) for loan losses.................. 1,140 1,114 1,200 169 (882)
--------- --------- -------- -------- ---------
Balance at December 31,............................. $ 8,988 $ 10,632 $ 9,797 $ 9,650 $ 9,769
========= ========= ======== ======== =========
Loans at year-end................................... $ 779,544 $ 743,456 $604,815 $536,030 $ 474,480
Average loans....................................... 770,183 657,325 575,658 493,831 457,461
Net charge offs (recoveries)/average loans.......... 0.36% 0.26% 0.32% 0.08% (0.11)%
Allowance for loan losses/year-end loans............ 1.15 1.43 1.62 1.80 2.06
Allowance for loan losses/nonperforming assets...... 322.84 255.58 288.57 451.36 408.57
Investment Securities. The investment securities portfolio was $625.9
million as of December 31, 1998, as compared to $616.0 million for December 31,
1997. At December 31, 1998, securities with an amortized cost of $414.3 million
were classified as securities held-to-maturity and securities with a market
value of $211.6 million were classified as securities available-for-sale. The
investment securities portfolio as of December 31, 1998, was comprised primarily
of U. S. Treasury and U. S. Government corporations and agencies securities with
relative short maturities and had an average yield of 6.14%. The Company did not
hold any collateralized mortgage obligations that entail higher risks than
standard mortgage-backed securities. As of December 31, 1998, total investment
securities included structured notes with an amortized cost of $7.0 million and
an approximate market value of $6.9 million. See Note 2 to the Consolidated
Financial Statements for additional disclosures relating to the maturities and
fair values of the investment portfolio at December 31, 1998 and 1997.
Table 8 -- Maturities and Yields of Investment Securities Held December 31,
1998 (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 $ 18,327 5.99% $ 9,081 6.25% $ -- --% $ -- --% $ 27,408 6.08%
Obligations of U.S. ......
Government corporations
and agencies .......... 58,679 6.08 197,813 5.91 9,500 6.05 -- -- 265,992 5.95
Obligations of states and
political subdivisions 5,292 6.44 49,117 6.37 11,371 7.16 984 8.14 66,764 6.54
Other securities ......... 4,317 5.97 5,167 5.41 21 8.05 -- -- 9,505 5.67
Mortgage-backed securities 2,904 5.88 22,388 5.97 5,805 5.97 13,537 6.60 44,634 6.15
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total ................. $ 89,519 6.07% $283,566 5.99% $ 26,697 6.51% $ 14,521 6.70% $414,303 6.07%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
17
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 $ 6,289 6.16% $ 3,654 6.39% $ -- --% $ -- --% $ 9,943 6.25%
Obligations of U.S.
Government corporations
and agencies.......... 23,184 6.00 44,982 6.19 25,135 6.15 2,124 5.83 95,425 6.13
Obligations of states and
political subdivisions -- -- 4,191 6.15 1,682 6.78 27,990 7.44 33,863 7.25
Other securities......... -- -- 24,772 5.39 -- -- 4,790 5.82 29,562 5.46
Mortgage-backed securities 822 4.83 14,412 5.91 26,854 6.21 707 7.13 42,795 6.10
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total................. $ 30,295 6.00% $ 92,011 6.08% $ 53,671 6.19% $ 35,611 7.21% $211,588 6.28%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
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 $ 24,616 6.03% $ 12,735 6.29% $ -- --% $ -- --% $ 37,351 6.12%
Obligations of U.S.
Government corporations
and agencies.......... 81,863 6.06 242,795 5.96 34,635 6.12 2,124 5.83 361,417 6.00
Obligations of states and
political subdivisions 5,292 6.44 53,308 6.35 13,053 7.11 28,974 7.47 100,627 6.78
Other securities......... 4,317 5.97 29,939 5.39 21 8.05 4,790 5.82 39,067 5.51
Mortgage-backed securities 3,726 5.65 36,800 5.94 32,659 6.17 14,244 6.62 87,429 6.13
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total................. $119,814 6.05% $375,577 6.01% $ 80,368 6.29% $ 50,132 7.05% $625,891 6.14%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Deposits. Deposits held by subsidiary banks represent the Company's primary
source of funding. Total deposits were $1.505 billion as of December 31, 1998,
as compared to $1.489 billion as of December 31, 1997. Total deposits averaged
$1.456 billion during 1998, an increase of $165.6 million over the average for
1997. The TCB-San Angelo Acquisition accounted for approximately $114.0 million
of the increase. Table 9 provides a breakdown of average deposits and rates paid
over the past three years and the remaining maturity of time deposits of $100
thousand or more.
Table 9 -- Composition of Average Deposits and Remaining Maturity of Time
Deposits of $100,000 or More (in thousands, except percentages):
1998 1997 1996
------------------- ------------------- -------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- ---------- ----
Noninterest-bearing deposits........ $ 306,743 -- $ 262,554 -- $ 224,896 --
Interest-bearing deposits
Interest-bearing checking........ 173,051 2.01% 212,845 2.04% 201,958 2.05%
Savings and money market accounts 418,427 3.23 306,503 3.65 242,415 3.32
Time deposits under $100,000..... 390,791 5.23 359,960 5.25 331,534 5.15
Time deposits of $100,000 or more 156,589 5.56 138,104 5.22 122,170 5.24
---------- ---- ---------- ---- ---------- ----
Total interest-bearing deposits.. 1,138,858 4.05% 1,017,412 4.09% 898,077 3.97%
---------- ---------- ----------
Total average deposits.............. $1,445,601 $1,279,966 $1,122,973
========== ========== ==========
December 31, 1998
-----------------
Three months or less........................................ $ 61,305
Over three through six months............................... 37,093
Over six through twelve months.............................. 47,853
Over twelve months.......................................... 16,521
----------
Total time deposits of $100,000 or more................ $ 162,772
==========
Capital. Total shareholders' equity was $169.4 million, or 10.05% of total
assets, at December 31, 1998, as compared to $154.4 million, or 9.32% of total
assets, at December 31, 1997. During 1998, total shareholders' equity averaged
$160.3 million, or 9.89% of average assets, as compared to $146.3 million, or
10.16% of average assets, during 1997.
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
18
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, 1998, the Company's total
risk-based and leverage ratios were 17.01% and 9.02%, respectively, as compared
to total risk-based and leverage ratios of 15.95% and 8.28% as of December 31,
1997. In 1998, the Company experienced a higher rate of growth in tangible
equity capital (11.2%) than assets (1.9%) and reduced short-term debt by $6.7
million, which resulted in higher capital ratios as of December 31, 1998, as
compared to December 31, 1997.
Interest Rate Risk. Interest rate risk results when the maturity or
repricing intervals of interest-earning assets and interest-bearing liabilities
are different. The Company's exposure to interest rate risk is managed primarily
through the Company's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities that generate favorable
earnings while limiting the potential negative effects of changes in market
interest rates. The Company uses no off-balance-sheet financial instruments to
manage interest rate risk.
Each subsidiary bank has an asset/liability committee 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 the
Company's consolidated assets and liabilities as of December 31, 1998, and sets
forth the repricing dates of the Company's consolidated interest-earning assets
and interest-bearing liabilities as of that date, as well as the Company's
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 the Company's consolidated net interest income.
19
Table 10 -- Interest Sensitivity Analysis (in thousands, except
percentages):
December 31,
1998
Estimated
1999 2000 2001 2002 2003 Beyond Total Fair Value
---------- -------- -------- -------- -------- -------- ---------- ----------
Loans
Fixed rate loans...... $ 191,670 $ 52,061 $ 71,987 $ 81,039 $ 80,301 $ 50,075 $ 527,133 $ 532,633
Average interest rate 9.24% 10.10% 9.84% 9.34% 9.34% 8.54% 9.37%
Adjustable rate loans. 252,411 -- -- -- -- -- 252,411 252,411
Average interest rate 8.49 -- -- -- -- -- 8.49
Investment securities
Fixed rate securities. 114,876 89,249 101,806 97,083 74,742 124,308 602,064 607,185
Average interest rate 6.08 6.13 5.97 6.06 5.87 6.56 6.14
Adjustable rate
securities 23,577 250 -- -- -- -- 23,827 23,655
Average interest rate 5.74 4.30 -- -- -- -- 5.72
Other earning assets
Adjustable rate other. 116,295 -- -- -- -- -- 116,295 116,295
Average interest rate 4.66 -- -- -- -- -- 4.66
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
assets $ 698,829 $141,560 $173,793 $178,122 $155,043 $174,383 $1,521,730 $1,532,179
Average interest rate 6.80% 7.44% 7.47% 7.35% 7.54% 7.05% 7.11%
Deposits
Fixed rate deposits... $ 441,076 $ 51,170 $ 11,436 $ 8,114 $ 7,020 $ 223 $ 519,039 $ 521,803
Average interest rate 5.05% 5.79% 5.48% 5.77% 5.42% 4.40% 5.14%
Adjustable rate deposits 651,098 -- -- -- -- -- 651,098 651,098
Average interest rate 2.68 -- -- -- -- -- 2.68
Other interest-bearing
liabilities
Adjustable rate other. 517 -- -- -- -- -- 517 517
Average interest rate 4.44 -- -- -- -- -- 4.44
---------- -------- -------- -------- -------- -------- ---------- ----------
Total interest sensitive
liabilities $1,092,691 $ 51,170 $ 11,436 $ 8,114 $ 7,020 $ 223 $1,170,654 $1,173,418
Average interest rate 3.64% 5.79% 5.48% 5.77% 5.42% 4.40% 3.78%
Interest sensitivity gap. $ (393,862) $ 90,390 $162,357 $170,008 $148,023 $174,160 $ 351,076 $ 358,761
Cumulative interest
sensitivity gap.......... (393,862) (303,472) (141,115) 28,893 176,916 351,076
Ratio of interest sensitive
assets to interest
sensitive liabilities 63.95 -- -- -- -- --
Cumulative ratio of
interest sensitive assets
to interest sensitive
liabilities............. 63.95 73.47 87.79 102.48 115.12 129.99
Cumulative interest
sensitivity gap as a
percent of earning
assets.................. (25.88)% (19.94)% (9.27)% 1.90% 11.63% 23.07%
As of December 31, 1997, the Company's 1998 interest-sensitivity gap was
$323.8 million and its 1998 ratio of interest sensitive assets to interest
sensitive liabilities was 69.73%.
Management estimates that, as of December 31, 1998 and December 31, 1997,
an upward shift of interest rates by 200 basis points would result in an
increase of projected net interest income of 6.1% and 4.2%, respectively, and a
downward shift of interest rates by 200 basis points would result in a reduction
in projected net interest income of 4.2% and 5.4%, respectively. These are good
faith estimates and assume that the composition of the Company's interest
sensitive assets and liabilities existing at each year-end will remain constant
over the relevant twelve month measurement period and that changes in market
interest rates are instantaneous and sustained across the yield curve regardless
of duration of pricing characteristics of specific assets or liabilities. Also,
this analysis does not contemplate any actions that the Company might undertake
in response to changes in market interest rates. In Management's belief, these
estimates are not necessarily indicative of what actually could occur in the
event of immediate interest rate increases or decreases of this magnitude.
Management believes that it is unlikely that such changes would occur in a short
time period. As interest-bearing assets and liabilities reprice at different
time frames and proportions to market interest rate movements, various
assumptions must be made based on historical relationships of these variables in
reaching any conclusion. Since these correlations are based on competitive and
market conditions, the Company's future results would, in Management's belief,
be different from the foregoing estimates, and such results could be material.
Liquidity. Liquidity is the ability of the Company to meet cash demands as
they arise. Such needs can develop from loan demand, deposit withdrawals or
acquisition opportunities. Asset liquidity is provided by cash and assets, which
are readily marketable or which will mature in the near future. Liquid assets
include cash, Federal funds sold, and short-term investments in time deposits in
banks. Liquidity is also provided by access to funding sources, which include
20
core depositors and correspondent banks that maintain accounts with and sell
Federal funds to subsidiary banks of the Company. Given the strong core deposit
base and relatively low loan deposit ratios maintained at the subsidiary banks,
Management considers the current liquidity position to be adequate to meet
short-term liquidity needs.
Parent Company Funding. The Company's ability to fund various operating
expenses, dividends, and cash acquisitions is generally dependent on
Company-only earnings, cash reserves and funds derived from its subsidiary
banks. These funds historically have been produced by intercompany dividends and
management fees that are limited to reimbursement of actual expenses. The
Compan