annual report 2002
2002 ANNUAL REPORT
2 Corporate Profile
3 Financial Highlights
4 Letter to Shareholders
6 Shareholder Values
12 Selected Financial Data
13 Trust Services
14 Subsidiary Bank Reports
Financial Summaries
Senior Officers and Directors
Market Share
25 Form 10-K
Inside Back Cover Corporate Information
At First Financial Bankshares, we are not a complicated
company. Our value is easy to calculate because our
numbers are easy to follow. The same holds true for
our values. We believe in doing business the right
way – from our boardrooms to our mailrooms. Maybe
it’s our West Texas roots, but we still appreciate the days
when a handshake was binding. The relationships we
have developed with our customers bear this out.
More and more, in communities across Texas, we’re the
banks people turn to for financial services. The result
has been strong, consistent, above-sector perform-
ance for our shareholders. How do values drive value?
Let us explain.
First Financial Bankshares, Inc. is a financial holding company
headquartered in Abilene, Texas, with consolidated assets of $2.0 billion
as of December 31, 2002. The corporation has 10 affiliate banks,
which provide services from 28 full-service locations in the Central, West
and High Plains regions of Texas. The common stock of First Financial
Bankshares, Inc. is held by more than 3,500 shareholders and is listed
on The NASDAQ Stock Market® under the symbol FFIN.
“Our 10 affiliate banks provide
services from 28 full-service
locations in the Central, West and
High Plains regions of Texas.”
2
IN THOUSANDS EXCEPT PER SHARE DATA
2002
2001
CHANGE
For the Year
Net Income
Basic Earnings per Share
Dividends Declared
Dividends per Share
Averages for the Year
Assets
Securities
Loans
Deposits
Shareholders’ Equity
At Year-End
Assets
Securities
Loans
Deposits
Shareholders’ Equity
Book Value per Share
Trust Assets
Key Ratios
Return on Average Assets
Return on Average Equity
Equity/Assets at Year-End
Efficiency
$
33,953
$
29,355
2.75
16,680
1.35
1,907,999
748,654
942,101
1,644,170
224,355
1,993,183
772,256
964,040
1,711,562
238,768
19.31
986,224
1.78%
15.13
11.98
51.96
2.38
14,365
1.16
1,811,130
676,391
897,616
1,566,360
204,517
1,929,694
721,694
940,131
1,685,163
213,654
17.32
958,952
1.62%
14.35
11.07
53.82
15.7%
15.5
16.1
16.4
5.3
10.7
5.0
5.0
9.7
3.3
0.1
2.5
1.6
11.8
11.5
2.8
3
“We promise that our dedication
to you will not waver as we
continue to focus on the
importance of value and values.”
Dear Shareholders: The theme of this year’s annual report
Consolidated assets at year-end 2002 totaled $1.993 bil-
is Value and Values. We firmly believe that values do drive
lion, up 3.3% from $1.930 billion in 2001. Loans increased
value. We want to provide value to our shareholders through
modestly, by 2.5%, to $964.0 million. The book value of
ownership of our stock, and value to our customers through
our trust assets increased by 2.8%, reaching $986.2 mil-
banking products and services. We do this by adhering to
lion at December 31, 2002. Deposits grew by 1.6%, to
the principles that have guided this organization since the
$1.712 billion.
establishment of First National Bank of Abilene in 1890. In
particular, we are committed to doing business profes-
sionally and ethically and to making sure our financial
information is presented fairly.
First Financial’s balance sheet at year-end was again
marked by strong asset quality and capital strength.
Classified loans (those at risk to some degree) increased
to 3.7% of total loans from 2.7% a year earlier. However,
Last year, shareholders saw the value of their stock rise as
total nonperforming assets decreased to .44% of total
we achieved higher earnings for the 16th year in a row. Net
loans from .51% at the end of 2001; by comparison, the
income reached $34.0 million, a gain of 15.7% from 2001’s
peer group average was .75%. Shareholders’ equity grew
$29.4 million. Basic earnings per share totaled $2.75, up
to $238.8 million at the end of 2002, yielding an equity-to-
from $2.38 in 2001. Over the past 10 years, earnings have
assets ratio of 11.98%.
grown at a compounded annual rate of 11.9%. The primary
factors contributing to 2002’s higher earnings were an
increase in average earning assets and an improved net
interest margin (the percentage difference between inter-
est earned and interest paid). Also contributing was the
elimination of goodwill amortization under a change in
generally accepted accounting principles; this change
produced an increase of $.10 in basic earnings per share.
Based on our earnings performance and strong capital posi-
tion, in April 2002 the Board of Directors approved a 16.7%
increase in the quarterly cash dividend, to $.35 per share
from $.30 per share. The total cash dividend for 2002 was
$1.35 per share. The market price of our common stock at
year-end was $38.00 per share, up 26.2% from $30.10 at
the end of 2001. The combination of share price appreci-
ation and dividend paid produced a total return to
Key profitability ratios also improved in 2002. Our return on
shareholders of 31% for 2002.
average assets increased to 1.78% from 1.62% in 2001.
This result was well above the average of 1.19% achieved
by our peer group (bank holding companies of similar
size). Return on average equity improved to 15.13% from
14.35% in 2001. Our operating efficiency ratio (the share
of revenues consumed by operating expenses) improved
to 51.96% in 2002 from 53.82% in 2001. Again, our ratio
compared favorably to our peer group’s average of 59.17%.
On January 2, 2002, First Financial Bank, N. A., Southlake,
opened a new branch in Keller. We are encouraged by the
growth of this branch, and are looking for additional oppor-
tunities in the same northeast Tarrant County area. On
October 15, 2002, First National Bank, Sweetwater,
acquired the Trent branch of State National Bank of West
Texas. This branch, with total assets of $6.5 million, is a
4
good addition to the Sweetwater bank, and we are pleased
In 2003, we will continue to pursue opportunities to grow
to have a location in the Trent community.
and enhance shareholder value. We plan to actively seek
We are honored that Johnny Trotter, President and Chief
Executive Officer of Livestock Investors, Ltd., has accepted
nomination for election as a new director of the Company
at our annual shareholder meeting in April 2003. He is
presently a director of the Hereford State Bank and a
prominent business, community and cattle industry leader.
Craig Smith, President and Chief Executive Officer of
Hereford State Bank, retired at the end of 2002, after 31
years of service to the bank. Craig also served as a direc-
tor on our Company board. Mike Mauldin, a well-known
Texas Panhandle banker with over 23 years of banking
experience, has been elected President and Chief Executive
strategic acquisitions; look for additional branch locations
in higher-growth areas to expand our existing banks; and
increase our mortgage and brokerage operations. We cur-
rently are in the process of forming a trust company that
will consolidate our present trust operations, provide
greater expertise to our clients and allow us to expand trust
services to additional markets.
This year’s annual report features a few of the many peo-
ple that we work for every day – our shareholders and
customers. As we grow the Company, we promise that our
dedication to you will not waver, and that we will continue
to focus on the importance of value and values.
Officer of the Hereford State Bank to succeed Craig.
Thank you for your investment in and support for First
Financial Bankshares.
F. Scott Dueser
President and Chief Executive Officer
After 12 years of service, Curtis Harvey, Executive Vice
President and Chief Financial Officer, will be leaving the
Company on March 31, 2003, to manage his new business
interest in Fort Worth. J. Bruce Hildebrand has been
elected to succeed Curtis. Bruce, a CPA, was a financial
services audit partner at KPMG LLP, where he worked for
24 years. He is well-qualified for the Executive Vice
President/Chief Financial Officer position due to his expe-
rience with publicly held companies and financial
institutions. The Board has also elected Gary L. Webb as
Executive Vice President/Operations. Gary has over 15
years of experience in the banking and consulting indus-
tries, and will be managing our technology, operations,
training and product development. Over the next several
years, we plan to make additional investments in technol-
ogy in order to expand our services and gain operating
efficiencies for the Company.
We thank Craig and Curtis for their outstanding service and
dedication to the Company, and we welcome the newest
members of our management team. We are very honored
to have these experienced professionals join the
Company. We also are pleased that Kenneth T. Murphy
will continue as Chairman of the Board and in that role will
focus on acquisitions. With this experienced management
team, which includes our 10 bank presidents, we are
poised for growth and continued strong results. We
greatly appreciate both their efforts and those of our
directors and employees.
5
First Financial Bankshares customers and shareholders also know a thing
or two about Value and Values – and we learn from them every day. We’re
proud to share in their success. Here are just a few of their stories.
George Marti believes in doing things. Good things.
Born to humble roots on his parents’ farm in 1920, Marti has accomplished much, including found-
ing three radio stations (and investing in 10 more) and developing a remote pickup device that
became standard equipment in 80 percent of all radio stations worldwide. He still has part own-
ership of KCLE in Cleburne, Texas (the town where he was once mayor for 12 years).
Marti’s dedication to his hometown is part of the reason why he bought Cleburne State Bank in
1992. His business skills (and success in the broadcasting industry) gave him the resources to
turn the bank into yet another winning venture. Five years later, he sold it to First Financial, which
merged it with their existing First Financial Bank, Cleburne.
The proceeds from the sale helped Marti complete the funding for his proudest achievement: the
Marti Foundation, which he created in the 1970s to help send students from Johnson County to
college. “We help over 100 students a year … most are the first from their family ever to attend
college,” says Marti. “I know what education did for me, so it’s a great thing to help these young
people.” Marti says that when he dies, the Foundation will live on, $20 million strong.
Marti still serves on the board of First Financial Bank, Cleburne. “First Financial’s merger of the
banks was positive for the community. They have a good customer base. They are friendly, help-
ful and creative. They are growing, and the branches in Alvarado and Burleson are both doing well.
Those are all good things.”
“They are friendly, helpful
and creative.
Those are all
good things.”
6
George Marti
Founder
Marti Enterprises
Cleburne, Texas
S.L. Garrison knows how to grow things.
In fact, two of his businesses specialize in growth.
As founder/partner of Bar-G Feedyard and the
Garrison and Townsend Inc. hybrid seed com-
pany, Garrison has a keen perspective on what it
takes to build successful companies. His other
interests include Backyard Adventures, a fast-ris-
ing maker of high-quality playground equipment.
“I've been a customer of Hereford State Bank
since 1966, when we were first starting out,” says
Garrison. “As our company grew, the bank was
always willing to grow with us to meet our loan
needs. Of course, we tried to be good customers
and pay them back!
“I've owned First Financial Bankshares stock since
the early ’80s ... they are a strong company.
They’ve paid good dividends, the value has grown,
and their strategy of acquiring solid banks has
been good for shareholders.
“When they acquire a bank, they keep a local
board of directors for that bank – that’s important
for strong support of the community. They
are leaders who help grow the communities
they serve.
“As with all businesses, it’s people that make the
difference, and First Financial Bankshares’ empha-
sis on making sure they have quality, informed
people from top to bottom is obvious. They under-
stand business, and they are active and involved
in community affairs. No matter what the need,
they always step in to help.”
S.L. Garrison
Founder/Partner
Bar-G Feedyard
Garrison and Townsend Inc.
Hereford, Texas
“As with all businesses,
it’s people that make
the difference.”.
7
Leigh Taliaferro, M.D.
General Surgeon
Abilene, Texas
Leigh Taliaferro, M.D., values consistency.
The Abilene native started his practice 17 years ago
and has developed a flourishing business as a
general surgeon. He estimates that 90 percent of
his practice is for abdominal surgery. With such a
busy practice, he finds comfort in having a reliable
banking partner. “I have almost every type of busi-
ness, trust and personal account with First National
Bank of Abilene,” says Dr. Taliaferro.
“First National is immersed in this city – everywhere
you go, they are involved with helping people with
their business. It’s because of the people who
work there – they are leaders … generous people
who make their mark on the bank and on the
community. While they may be the biggest bank
in town, they sure don’t act like it. It’s like bank-
ing with friends.”
Dr. Taliaferro has invested in First Financial
Bankshares for more than a decade. “My stock has
done nothing but go up in value. They are solid,
sound businesspeople. I sleep well at night know-
ing that my investments are in good hands.”
“While they may be the biggest
bank in town, they sure
don’t act like it.
It’s like banking
with friends.”
8
“They stuck
with me and were
always team players.”
Bob Housley appreciates loyalty.
His company, Housley Communications, is a thriv-
ing business with a staff of 225 and contracting
relationships with over 700 firms. The company
provides engineering and implementation of
advanced telecommunications systems. “We pro-
vide everything a company needs to go from zero
to 100 percent.”
Success hasn’t necessarily been easy. “We had
some difficult times when we were starting out in
the ’80s,” says Housley. “San Angelo National
Bank worked very diligently to help me get where
I am today. They stuck with me and were always
team players.”
Housley is a demanding customer – a trait to
which he credits much of his success. “I am very
customer service-oriented. It’s how I built my busi-
ness. I appreciate that I can get that same type of
dedication from San Angelo National Bank, and I
see it reflected throughout the First Financial
Bankshares organization.”
Housley the shareholder is no less demanding, but
he’s had good reason to be pleased with his
returns from First Financial Bankshares. “First
Financial’s expansion strategy is excellent – they
do their research and find banks with good oppor-
tunity. Their operations are sound, and their growth
is well-managed. I believe they are one of the
best mid-size banking organizations around.”
Bob Housley
President
Housley Communications
San Angelo, Texas
9
Terry Wilkinson has vision. Show him an empty tract of land, and
the wheels start turning.
Wilkinson’s various enterprises have created some of the most prof-
itable developments in Southlake, Texas, a once-sleepy town
whose name has become synonymous with upscale living and com-
merce in the Dallas-Fort Worth Metroplex.
“I’ve been in business on my own since the early ’90s, and a cus-
tomer of First Financial Bank in Southlake for about six years,” says
Wilkinson. He works with the bank to finance numerous projects,
such as residential developments, office buildings and large-scale
shopping centers. “Naturally, I work with several banks, but I con-
sider First Financial the easiest to work with.”
Wilkinson believes the bank’s local perspective gives it better
vision for what can succeed in the community. That translates into
better performance. “I prefer dealing with banks where things
don’t have to be sent off to people you’ve never met for a decision.
With First Financial, they’ve gotten to know me, and they under-
stand my business.
“First Financial doesn’t seem like a bank that’s owned by an out-
of-town company. That’s why they’re my preferred lender.”
“First Financial doesn’t seem like
a bank that’s owned by an out-of-
town company.”
Terry Wilkinson
Commercial/Residential Developer
Southlake, Texas
10
Trust is important to Maggy Morford.
Known all over Abilene for her devotion to good
causes, Morford is one of the community’s most
benevolent trustees – a generous contributor of
money, time and hard work. Her style of leadership
is to be active, get things done and set a positive
example for the city she loves.
Morford does business with First National Bank of
Abilene, in part because she appreciates the
example they set, too. “My husband was in the cat-
tle business. He depended upon loans from First
National,” says Morford. “After he died, I knew that
I did not want to stay in the cattle business, so I
sold it. That gave me money to invest.”
Morford chose to work with First National Bank of
Abilene’s Trust Department. “I created a family
limited partnership. During a time when there was
a lot of hysteria in the markets, they were con-
servative. They kept an even keel and have done
well despite the difficult market.
“They are a good bunch of folks, and they make
it a point to serve the community by joining boards
and lending a hand where help is needed. They are
very careful in the people they hire. They nurture
them and bring them along, and they don’t hesi-
tate to recruit from other areas when necessary.
They keep the interests of the shareholders and
customers close to heart.
“With First Financial Bankshares, you know the
people that you work with, and they are friends.
People that you trust.”
Maggy Morford
Civic Leader
Investor
Abilene, Texas
“You know the people you work
with, and they are friends. People
that you trust.”
11
IN THOUSANDS EXCEPT PER SHARE DATA
Year-End
Total Assets(1)
Shareholders’
Equity(1)
Net
Income(1)
Basic
Earnings
per Share(2)
Cash
Dividends
per Share(2)
Stock
Dividends
and Splits
Year-End
Book Value
per Share(2)
Year-End
Market Value
per Share(2)
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
Ten-Year
Compound
Growth Rate
$1,993,183
$238,768
$33,953
$2.75
$1.35
–
$19.31
$38.00
1,929,694
213,654
29,355
1,753,814
196,121
28,316
1,723,369
178,663
25,690
1,686,647
169,449
23,254
1,573,509
148,226
20,063
1,262,041
131,161
18,122
1,062,325
114,917
16,355
1,001,906
103,908
13,112
924,630
90,443
11,978
2.38
2.28
2.06
1.87
1.70
1.58
1.52
1.22
1.31
1.16
1.03
0.90
0.80
0.70
0.63
0.56
0.51
0.45
5/4 split
–
–
10% dividend
5/4 split
5/4 split
–
5/4 split
10% dividend
17.32
15.92
14.33
13.62
12.46
11.36
10.66
9.67
8.99
30.10
25.15
24.60
28.00
31.18
23.27
15.59
12.44
15.46
9.03%
11.36%
11.94%
9.60%
14.45%
–
9.02%
11.15%
(1) As originally reported at the close of each year and prior to restatements for pooling-of-interests.
(2) Adjusted for stock dividends and splits.
“The value of our stock rose as we
achieved higher earnings for the
16th year in a row.”
12
Curtis R. Harvey
Executive Vice President
and Chief Financial Officer
Assets managed by the Trust Departments at First National
Bank of Abilene, San Angelo National Bank, Stephenville
Bank & Trust Co. and First National Bank, Sweetwater,
increased $27.3 million during the past year to a
December 31, 2002 book value of $986.2 million. However,
due to depressed stock market values and volumes, trust
department revenue declined in 2002. Trust combined
revenues for the year were down slightly from $5.89 mil-
lion in 2001 to $5.83 million for 2002. In 2003, we anticipate
a return to improved income growth.
The performance of the stock market the past three years
has been a challenge that our trust investment profes-
sionals have managed well. Not since 1939-1941 have
we seen the S&P 500 drop 35% in a three-year period. Our
portfolio managers outperformed their indices in Large
Cap stocks by 83 basis points and Fixed Income securi-
ties by 168 basis points. This performance bodes well for
the present and future of our client accounts.
During 2002, we saw a successful conversion of
Stephenville Bank & Trust to the SEI Corporation account-
ing system. In March 2003, we will be converting First
National Bank, Sweetwater, to this system as well. This will
provide all First Financial Bankshares trust clients with the
strength and advantages of a uniform accounting system.
Other operational systems have been examined and con-
$1000
sistent practices and procedures have been implemented.
To further enhance our risk management assessments in
2003, we will be introducing an Operational Peer Review
Team similar to the successful peer review teams used in
the Personal Trust areas of our four locations.
J. Bruce Hildebrand
Executive Vice President
$900
$800
$700
$600
$500
$400
$300
$200
$100
$0
Robert S. Patterson
First National Bank
of Abilene
David Byrd
San Angelo
National Bank
Perry Elliott
Stephenville Bank
& Trust Co.
Janis McDowell
First National Bank,
Sweetwater
Plans for the formation of a First Financial Bankshares
trust company are moving forward with regulatory approval
anticipated in late Spring or early Summer. This will permit
your Company to provide quality, locally delivered trust
services to additional markets.
With skilled trust professionals offering a complete range
of financial products and services, the future of our trust
departments look bright. Through dedication to individu-
alized portfolio design and personalized service, our trust
departments stand ready to meet the needs of our pres-
ent and future clients.
Robert S. Patterson
Senior Vice President, Trust Services
TRUST ASSETS in millions
TRUST FEES in millions
6
8
9
$
9
5
9
$
1
1
9
$
5
4
8
$
4
7
7
$
9
8
.
5
$
3
8
.
5
$
0
5
.
5
$
0
1
.
5
$
5
7
.
4
$
$6
$5
$4
$3
$2
$1
$0
98
99
00
01
02
98
99
00
01
02
13
First National Bank of Abilene
Main Office
400 Pine Street
Abilene, Texas 79601
Chartered 1890
Branches
4400 Buffalo Gap Road
Abilene, Texas 79606
4350 Southwest Drive
Abilene, Texas 79606
920 N. Willis
Abilene, Texas 79603
3300 S. 14th Street
Abilene, Texas 79605
1010 N. Judge Ely Blvd.
Abilene, Texas 79601
701 Pine Street
Abilene, Texas 79601
1345 Barrow Street
Abilene, Texas 79605
Senior Officers
F. Scott Dueser
Chairman of the Board
Chuck A. Cowell
President and Chief Executive Officer
Ron Fogle
Executive Vice President, Commercial Loans
Robert S. Patterson
Executive Vice President and
Senior Trust Officer
John Prince
Executive Vice President, Personal Loans
Mario A. Luppino
Executive Vice President, Marketing and Retail
Gary Tucker, CDP
Executive Vice President and
Chief Information Officer
Leo Dennis
Executive Vice President, Chief Financial
Officer and Cashier
Directors
Chuck A. Cowell
President and Chief Executive Officer
J. Michael Alexander
President, James M. Alexander & Co.
Tucker S. Bridwell
President and Chief Executive Officer,
Mansefeldt Investments, Inc.
Joseph E. Canon
Executive Director, Dodge Jones Foundation
David Copeland
President, Shelton Family Foundation
Joe Crawford
President, Abilene Aero, Inc.
F. Scott Dueser
First Financial Bankshares, Inc.
Charles Ezzell
Investments
Allan D. Frizzell
Executive Vice President,
Enrich Oil Corporation
Raymond A. McDaniel, Jr.
Investments
Bynum Miers
Rancher
William D. Minter
Vice President, CameraMouse
Stanley Morris, Jr.
Investments
Kenneth T. Murphy
First Financial Bankshares, Inc.
James Parker
President, Parker Properties, Inc.
Jack D. Ramsey, M.D.
Physician
Dian Graves Stai
Investments
Michael C. Waters, F.A.C.H.E.
President, Hendrick Health System
Advisory
Bob J. Surovik
McMahon, Surovik, Suttle, Buhrmann,
Hicks and Gill, P.C.
Steve Suttle
McMahon, Surovik, Suttle, Buhrmann,
Hicks and Gill, P.C.
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Trust Assets
Return on Average Assets
Return on Average Equity
Chuck A. Cowell
President and
Chief Executive Officer
$705,468
353,564
624,262
68,670
14,277
740,745
2.12%
21.05
Taylor County Deposit Market Share
Abilene
14
$670,959
344,341
598,310
63,276
13,051
722,504
1.98%
20.19
46%
First Financial Bank,
National Association, Cleburne
Main Office
403 N. Main
Cleburne, Texas 76033
Chartered 1927
Branches
200 N. Ridgeway
Cleburne, Texas 76033
1900 S.W. Wilshire
Burleson, Texas 76028
201 E. Highway 67
Alvarado, Texas 76009
Senior Officers
Ronald E. Schneider
Chairman of the Board, President and
Chief Executive Officer
Perry Ginn
Executive Vice President
Homer S. Pittman, Jr.
Senior Vice President and Cashier
Craig Beskow
Senior Vice President
Derek Schmidt
Senior Vice President
Directors
Ronald E. Schneider
Chairman of the Board, President and
Chief Executive Officer
Albert A. Archer
Chairman of the Board, Walls Industries, Inc.
Gary Bennett
Bennett Printing & Office Supply
Robert T. Childress
Investments
F. Scott Dueser
First Financial Bankshares, Inc.
Jim Easdon
Investments
Curtis R. Harvey
First Financial Bankshares, Inc.
Hollis E. (Gene) Joslin
Investments
Brent D. Magers
Chief Executive Officer and Administrator,
Walls Regional Hospital
George Marti
Marti Enterprises
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Return on Average Assets
Return on Average Equity
$205,591
106,755
182,715
20,364
3,451
1.72%
17.66
$209,159
108,607
189,597
18,040
3,120
1.62%
17.08
Ronald E. Schneider
Chairman of the Board, President and
Chief Executive Officer
Johnson County Deposit Market Share
22%
Cleburne
15
Eastland National Bank
Office
201 E. Main
Eastland, Texas 76448
Chartered 1934
Senior Officers
Tommy J. Barrow
Chairman of the Board, President and
Chief Executive Officer
Clint S. Ferguson
Executive Vice President
Jim Davidson
Senior Vice President and Cashier
Directors
Tommy J. Barrow
Chairman of the Board, President and
Chief Executive Officer
F. Scott Dueser
First Financial Bankshares, Inc.
Clint S. Ferguson
Executive Vice President
Curtis R. Harvey
First Financial Bankshares, Inc.
Jim Keffer
President, EBAA Iron Sales, Inc.
Mike T. Perry
President, Kinnaird, Rossander & Perry
Agency, Inc.
Dale Squiers, R.Ph.
Owner, Eastland Drug Company
Tommy Warford
Turner, Seaberry and Warford, Attorneys
M.D. White, Jr.
President and Owner, Ace Hardware Store
Eastland/Cisco
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Return on Average Assets
Return on Average Equity
$59,090
31,931
50,109
6,113
1,016
1.70%
16.90
Tommy J. Barrow
Chairman of the Board, President and
Chief Executive Officer
$57,412
29,904
51,577
5,737
894
1.58%
15.91
Eastland County Deposit Market Share
28%
Eastland
16
Hereford State Bank
Office
212 E. Third Street
Hereford, Texas 79045
Chartered 1947
Senior Officers
Craig Smith
Chairman of the Board
Mike Mauldin
President and Chief Executive Officer
Terry Bromlow
Executive Vice President
Steve Gilbert
Senior Vice President and Cashier
Jeff Brown
Senior Vice President
Directors
Craig Smith
Chairman of the Board
Joe Artho
Retired General Manager, Hereford Grain Corp.
Terry Bromlow
Executive Vice President
F. Scott Dueser
First Financial Bankshares, Inc.
Terry Langehennig
Cowsert, Line and Langehennig, Attorneys
Steve Lewis, D.V.M.
Manager and Senior Partner,
Hereford Veterinary Clinic
Mike Mauldin
President and Chief Executive Officer
Garth Merrick
President and Chief Executive Officer,
Merrick Petfoods, Inc.
Allen Parson
Restaurateur and Investments
Jerry Stevens
Vice President and General Manager,
Stevens 5-Star Car and Truck Center
Johnny Trotter
Ranching, Farming and Cattle Feeding
Roger Williams
Farming
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Return on Average Assets
Return on Average Equity
Mike Mauldin
President and
Chief Executive Officer
$80,976
38,383
71,926
8,529
1,205
1.48%
14.41
$84,246
46,261
70,546
8,120
1,277
1.57%
15.64
Deaf Smith County Deposit Market Share
48%
Hereford
17
City National Bank, Mineral Wells
Office
1800 E. Hubbard
Mineral Wells, Texas 76068
Chartered 1925
Senior Officers
Ken A. Williamson
Chairman of the Board, President and
Chief Executive Officer
Brad Seay
Executive Vice President, Lending
Eddie Gregory
Vice President
Kay Hudspeth
Cashier
Mike Mearse
Vice President
Directors
Ken A. Williamson
Chairman of the Board, President and
Chief Executive Officer
F. Scott Dueser
First Financial Bankshares, Inc.
Terry L. Murphy
President and Chief Executive Officer,
Murphy and Murphy, Inc.
Don O’Neal
Don O’Neal Distributing Company, Inc.,
O’Neal Enterprises, Inc.
David Ramsey, M.D.
Family Practice Center
Brad Seay
Executive Vice President
Jimmy Seay
Investments and Ranching
Walter Joe Thomas, D.D.S.
Dentist
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Return on Average Assets
Return on Average Equity
$93,969
51,224
84,043
9,538
1,659
1.79%
18.02
Ken A. Williamson
Chairman of the Board, President and
Chief Executive Officer
$91,252
48,838
82,339
8,433
574
1.25%
13.22
Palo Pinto County Deposit Market Share
Mineral Wells
18
26%
San Angelo National Bank
Main Office
301 W. Beauregard
San Angelo, Texas 76903
Chartered 1997
Branch
3471 Knickerbocker
San Angelo, Texas 76904
Senior Officers
Michael L. Boyd
President and Chief Executive Officer
David Byrd
Executive Vice President and Trust Officer
Robert Pate
Executive Vice President
Katherine Reeves
Executive Vice President and Cashier
Directors
Dal DeWees
Chairman of the Board
George Alexander
Partner, Alexander Construction Company
Michael L. Boyd
President and Chief Executive Officer
W. Dan Cravy, M.D.
Physician
David B. Drake
Investment Advisor
F. Scott Dueser
First Financial Bankshares, Inc.
Doug Eakman
Owner, Pecos Street Pharmacy
Joe Henderson
President, Porter Henderson Implement
Company, Inc.
Robert D. Housley
President and Owner,
Housley Communications
Jim Johnson
Shannon, Porter, Johnson, Pfluger,
Davis & Joynton, LLP
David F. Lupton
President, Angelo Glass & Mirror
Company, Inc.
Kenneth T. Murphy
First Financial Bankshares, Inc.
Bill Pfluger
Rancher
Richard W. Salmon
Investments
John E. Schwartz, Sr.
Farmer/Rancher
F.L. (Steve) Stephens
Retired Chairman and Chief Executive Officer,
Town & Country Food Stores, Inc.
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Trust Assets
Return on Average Assets
Return on Average Equity
Michael L. Boyd
President and
Chief Executive Officer
$303,124
115,450
251,931
30,634
4,917
144,047
1.70%
16.48
$299,808
110,685
257,212
27,986
4,167
129,471
1.46%
15.13
Tom Green County Deposit Market Share
24%
San Angelo
19
First Financial Bank,
National Association, Southlake
Main Office
3205 E. Highway 114
Southlake, Texas 76092
Chartered 1985
Branches
95 Trophy Club Drive
Trophy Club, Texas 76262
891 E. Keller Parkway
Suite 100
Keller, Texas 76248
Senior Officers
Perry D. Elliott
Chairman of the Board
Mark L. Jones
President and Chief Executive Officer
F. Mills Shallene
Senior Vice President
J. Sean Shope
Senior Vice President
Michele P. Stevens
Senior Vice President and Cashier
Directors
Perry D. Elliott
Chairman of the Board
James E. Burger
Burger Construction
Jack Dortch
Jack Dortch Insurance Agency
F. Scott Dueser
First Financial Bankshares, Inc.
Derrell Johnson
President, American Council of Engineering
Companies Life Health Trust
Mark L. Jones
President and Chief Executive Officer
K. Wayne Lee
President, DDFW Properties
Robert S. Mundlin
Owner, Lifetime Benefits Insurance
Jim Ridenour
President, Sunbelt Station Service
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Return on Average Assets
Return on Average Equity
Mark L. Jones
President and Chief
Executive Officer
$67,750
45,132
61,532
6,295
412
0.62%
6.74
Cities of Southlake, Keller and Roanoke
Deposit Market Share
Southlake
20
$65,554
42,366
59,672
5,845
652
1.07%
10.97
9%
Stephenville Bank & Trust Co.
Main Office
2201 W. South Loop
Stephenville, Texas 76401
Chartered 1923
Branches
1875 Lingleville Road
Stephenville, Texas 76401
199 N. Columbia
Stephenville, Texas 76401
Senior Officers
Ron Butler
President and Chief Executive Officer
Perry D. Elliott
Vice Chairman
Ken Luker
Executive Vice President
Monty Bedwell
Senior Vice President
Dereece Howell
Senior Vice President and Cashier
Terry McCoy
Senior Vice President
Robert Reeves
Senior Vice President
Directors
James C. Terrell, Jr., M.D.
Chairman of the Board
Perry D. Elliott
Vice Chairman
Ron Butler
President and Chief Executive Officer
William L. Corbin
Investments
F. Scott Dueser
First Financial Bankshares, Inc.
Charles P. Gillespie, Jr.
Engineer
Curtis R. Harvey
First Financial Bankshares, Inc.
William H. Oxford
Attorney
Bill Parham
Parham & Parham, CPAs
Jerry Parham
Investments
Jack Parks
Farmer
Ronald E. Schneider
First Financial Bank, Cleburne
Frank Terrell, M.D.
Ophthalmologist
John Terrill
Attorney
Advisory
W.L. Nix
Investments
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Trust Assets
Return on Average Assets
Return on Average Equity
Ron Butler
President and Chief
Executive Officer
$138,260
75,454
125,226
12,755
2,313
36,578
1.75%
19.06
$130,186
71,367
118,903
10,954
2,151
40,859
1.79%
19.88
Erath County Deposit Market Share
31%
Stephenville
21
First National Bank, Sweetwater
Main Office
201 Elm Street
Sweetwater, Texas 79556
Chartered 1948
Branches
123 N. Concho
Roby, Texas 79543
117 N. Main
Trent, Texas 79561
Senior Officers
J.V. Martin
Chairman of the Board, President and
Chief Executive Officer
Kirby Andrews
Senior Vice President, Lending
Rodney Foster
Senior Vice President, Lending
Janis McDowell
Senior Vice President, Trust Officer
Donnie Ruppert
Senior Vice President and Controller
Directors
J.V. Martin
Chairman of the Board, President and
Chief Executive Officer
Glenn D. Bennett
Bennett & Associates
Louis Brooks, Jr.
Ranching, Brooks-Maberry, Inc.
Bill W. Burns
President, Bill Burns Oil Co., Inc.
Ronnie Cox
Owner, Cox Jewelry
F. Scott Dueser
First Financial Bankshares, Inc.
Cecil J. King
Retired President, Citizens State Bank, Roby
Thomas L. Rees, Sr.
Rees and Rees, Attorneys
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Trust Assets
Return on Average Assets
Return on Average Equity
$112,079
49,487
100,306
11,114
2,078
64,854
1.99%
19.15
J.V. Martin
Chairman of the Board, President and
Chief Executive Officer
Nolan and Fisher Counties
Deposit Market Share
Sweetwater
22
$104,968
46,666
90,100
10,204
1,605
66,118
1.53%
15.82
38%
Weatherford National Bank
Main Office
101 N. Main Street
Weatherford, Texas 76086
Chartered 1984
Branches
101 College Park Drive
Weatherford, Texas 76086
1214 N. Main Street
Weatherford, Texas 76086
505 Farm Road 1187
Aledo, Texas 76008
Senior Officers
Doyle Lee
Chairman of the Board, President and
Chief Executive Officer
Bob Bradberry
Executive Vice President
Jay Gibbs
Executive Vice President
Paul Baker
Senior Vice President
Jean Bryan
Senior Vice President
Larry Mangrem
Senior Vice President and Cashier
Louis Sneed
Senior Vice President
Directors
Doyle Lee
Chairman of the Board, President and
Chief Executive Officer
Stephen G. Brogdon, D.D.S.
General and Cosmetic Dentistry
Mac A. Coalson
Real Estate and Ranching
F. Scott Dueser
First Financial Bankshares, Inc.
Bob Kingsley
Host and Producer, American Country
Countdown
Dave Lang
President, Dralco, Inc.
Kenneth T. Murphy
First Financial Bankshares, Inc.
IN THOUSANDS
December 31, 2002
December 31, 2001
Assets
Loans
Deposits
Equity
Net Income
Return on Average Assets
Return on Average Equity
$211,235
96,660
189,630
20,526
3,862
1.97%
19.43
$201,768
91,096
182,696
18,595
3,721
1.99%
20.83
Doyle Lee
Chairman of the Board, President and
Chief Executive Officer
Parker County Deposit Market Share
26%
Weatherford
23
“We will continue to pursue
opportunities to grow and
enhance shareholder value.
We plan to actively seek strategic
acquisitions; look for additional
branch locations in higher-
growth areas to expand our
existing banks; and increase
our mortgage and
.brokerage operations.”
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)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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
(State or Other Jurisdiction of
Incorporation or Organization)
400 Pine Street
Abilene, Texas
(Address of Principal Executive Offices)
Registrant’s telephone number, including area code:
75-0944023
(I.R.S. Employer
Identification No.)
79601
(Zip Code)
(915) 627-7155
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
None
Name of Exchange on Which Registered
N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
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.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes
No
As of June 30, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, the
aggregate market value of voting stock held by non-affiliates was $458,357,747.
As of February 25, 2003, there were 12,364,642 shares of Common Stock outstanding.
Certain information called for by Part III is incorporated by reference to the Proxy Statement for the 2003
Annual Meeting of our shareholders, which will be filed with the Securities and Exchange Commission not later
than 120 days after December 31, 2002.
Documents Incorporated by Reference
TABLE OF CONTENTS
Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS .............................................1
PART I
ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
ITEM 15.
Business ...................................................................................................................................................1
Properties ...............................................................................................................................................11
Legal Proceedings .................................................................................................................................11
Submission of Matters to a Vote of Security Holders .........................................................................11
Market for Registrant’s Common Equity and Related Stockholder Matters ......................................12
Selected Financial Data.........................................................................................................................14
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................................................................................15
Quantitative and Qualitative Disclosures about Market Risk..............................................................28
Financial Statements and Supplementary Data....................................................................................29
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .......................................................................................................................................30
Directors and Executive Officers of the Registrant .............................................................................30
Executive Compensation.......................................................................................................................30
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters .......................................................................................................................30
Certain Relationships and Related Transactions..................................................................................30
Controls and Procedures .......................................................................................................................31
Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................................................31
SIGNATURES.....................................................................................................................................................................33
CERTIFICATIONS.............................................................................................................................................................35
i
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-K,
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project,” and similar expressions,
as they relate to us or our management, identify forward-looking statements. These forward-looking statements are
based on information currently available to our management. Actual results could differ materially from those
contemplated by the forward-looking statements as a result of certain factors, including but not limited to:
•
•
•
•
•
•
•
•
•
general economic conditions;
legislative and regulatory actions and reforms;
competition from other financial institutions and financial holding companies;
the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of
the Federal Reserve Board;
changes in the demand for loans;
fluctuations in value of collateral and loan reserves;
inflation, interest rate, market and monetary fluctuations;
changes in consumer spending, borrowing and savings habits;
acquisitions and integration of acquired businesses; and
• other factors described in “PART II, Item 7 — Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Such statements reflect the current views of our management with respect to future events and are subject to these
and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and
liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this paragraph.
PART I
ITEM 1.
BUSINESS
General
First Financial Bankshares, Inc., a Texas corporation, is a financial holding company registered under the Bank
Holding Company Act of 1956, or BHCA. As such, we are supervised by the Board of Governors of the Federal
Reserve System, or Federal Reserve Board, as well as several other state and federal regulators. We were formed as
a bank holding company in 1956 under the original name F & M Operating Company, but our banking operations
date back to 1890, when Farmers and Merchants National Bank opened for business in Abilene, Texas. By virtue of
a series of reorganizations, mergers, and acquisitions since 1956, we now own, through our wholly-owned Delaware
subsidiary, First Financial Bankshares of Delaware, Inc., ten banks organized and located in Texas. These ten banks
are:
• First National Bank of Abilene, Abilene, Texas;
• Hereford State Bank, Hereford, Texas;
• First National Bank, Sweetwater, Texas;
1
• Eastland National Bank, Eastland, Texas;
• First Financial Bank, National Association, Cleburne, Texas;
• Stephenville Bank and Trust Co., Stephenville, Texas;
• San Angelo National Bank, San Angelo, Texas;
• Weatherford National Bank, Weatherford, Texas;
• First Financial Bank, National Association, Southlake, Texas; and
• City National Bank, Mineral Wells, Texas.
As described in more detail below, we elected to be treated as a financial holding company in September 2001.
Our service centers are located primarily in North Central and West Texas. Considering the branches and
locations of all our subsidiary banks, as of December 31, 2002, we had 28 financial centers across Texas, with seven
locations in Abilene, two locations in Cleburne, two locations in Stephenville, two locations in San Angelo, three
locations in Weatherford, and one location each in Mineral Wells, Hereford, Sweetwater, Eastland, Southlake,
Aledo, Alvarado, Burleson, Keller, Trophy Club, Roby, and Trent.
Information on our revenues, profits and losses and total assets appears in the discussion of our Results of
Operations contained in Item 7 hereof.
First Financial Bankshares, Inc.
We provide management and technical resources and policy direction to our subsidiary banks, which enables
them to improve or expand their banking services while continuing their local activity and identity. Each of our
subsidiary banks operates under the day-to-day management of its own board of directors and officers, with
substantial authority in making decisions concerning their own investments, loan policies, interest rates, and service
charges. We provide resources and policy direction in, among other things, the following areas:
•
•
•
•
asset and liability management;
accounting, budgeting, planning and insurance;
capitalization; and
regulatory compliance.
In particular, we assist our subsidiary banks with, among other things, decisions concerning major capital
expenditures, employee fringe benefits, including pension plans and group insurance, dividend policies, and
appointment of officers and directors and their compensation. We also perform, through corporate staff groups or
by outsourcing to third parties, internal audits and loan reviews of our subsidiary banks. Through First National
Bank of Abilene, we provide advice and specialized services for our banks related to lending, investing, purchasing,
advertising, public relations, and computer services.
While we have no specific acquisition agreements in place or commitments to expand our branch network, we
periodically evaluate various potential financial institution acquisition opportunities and also periodically evaluate
potential locations for new branch offices. We anticipate that funding for any acquisitions or expansions would be
provided from our existing cash balances, available dividends from subsidiary banks, utilization of available lines of
credit and future debt or equity offerings.
Services Offered by Our Subsidiary Banks
Each of our subsidiary banks is a separate legal entity that operates under the day-to-day management of its own
board of directors and officers. Each of our subsidiary banks provides general commercial banking services, which
include accepting and holding checking, savings and time deposits, making loans, automated teller machines, drive-
in and night deposit services, safe deposit facilities, transmitting funds, and performing other customary commercial
banking services. Certain of our subsidiary banks also administer pension plans, profit sharing plans and other
employee benefit plans. 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
2
range of services to individuals, associations, and corporations. These services include administering estates,
testamentary trusts, various types of living trusts, and agency accounts. In addition, First National Bank of Abilene,
First Financial Bank, Cleburne, San Angelo National Bank and First Financial Bank, National Association,
Southlake, Texas provide securities brokerage services through arrangements with various third parties.
We have filed an application with the office of the Comptroller of the Currency to form a limited purpose
national bank under which we will consolidate the management of our current trust departments. The new entity
will operate as a subsidiary of our subsidiary holding company, First Financial Bankshares of Delaware, Inc. We
believe that with this structure we can more effectively manage our current trust operations and provide trust
services to customers of our banks that do not currently have trust departments. We anticipate that the new trust
company will begin operations in the latter part of 2003.
Competition
Commercial banking in Texas is highly competitive, and because we hold less than 1% of the state’s deposits,
we represent only a minor segment of the industry. To succeed in this industry, our management believes that our
banks must have the capability to compete in the areas of (1) interest rates paid or charged; (2) scope of services
offered; and (3) prices charged for such services. Our subsidiary banks compete in their respective service areas
against highly competitive banks, thrifts, savings and loan associations, small loan companies, credit unions,
mortgage companies, and brokerage firms, all of which are engaged in providing financial products and services and
some of which are larger than our subsidiary banks in terms of capital, resources and personnel.
Our business does not depend on any single customer or any few customers, the loss of any one of which would
have a materially adverse effect upon our business. Although we have a broad base of customers that are not related
to us, our customers also occasionally include our officers and directors, as well as other entities with which we are
affiliated. With our subsidiary banks we may make loans to officers and directors, and entities with which we are
affiliated, in the ordinary course of business. We make these loans on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. Loans to
directors, officers and their affiliates are also subject to numerous restrictions under federal and state banking laws
which we describe in greater detail below.
Employees
With our subsidiary banks we employed approximately 750 full-time equivalent employees at February 1, 2003.
Our management believes that our employee relations have been and will continue to be good.
Supervision and Regulation
Both federal and state laws extensively regulate bank holding companies, financial holding companies and
banks. These laws (and the regulations promulgated thereunder) are primarily intended to protect depositors and the
deposit insurance fund of the Federal Deposit Insurance Corporation, or FDIC, although shareholders may also
benefit. The following information describes particular laws and regulatory provisions relating to financial holding
companies and banks. This discussion is qualified in its entirety by reference to the particular laws and regulatory
provisions. A change in any of these laws or regulations may have a material effect on our business and the
business of our subsidiary banks.
Bank Holding Companies and Financial Holding Companies
Traditionally, the activities of bank holding companies were limited to the business of banking and activities
closely related or incidental to banking. Bank holding companies were generally prohibited from acquiring control
of any company which was not a bank and from engaging in any business other than the business of banking or
managing and controlling banks. The Gramm-Leach-Bliley Act, which took effect on March 12, 2000, dismantled
many Depression-era restrictions against affiliation between banking, securities and insurance firms by permitting
bank holding companies to engage in a broader range of financial activities, so long as certain safeguards are
observed. Specifically, bank holding companies may elect to become “financial holding companies” that may
affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or
3
incidental to a financial activity. Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, securities firms
and insurance companies find it easier to acquire or affiliate with each other and cross-sell financial products. The
act permits a single financial services organization to offer a more complete array of financial products and services
than historically was permitted.
A financial holding company is essentially a bank holding company with significantly expanded powers. Under
the Gramm-Leach-Bliley Act, among the activities that will be deemed “financial in nature” for financial holding
companies are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in
securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities,
activities which the Federal Reserve Board determines to be closely related to banking, and certain merchant
banking activities. The Federal Reserve Board has proposed permitting a number of additional financial activities,
but we cannot predict whether any of these additional proposals will be adopted or the form any final rule will take.
We elected to become a financial holding company in September 2001. As a financial holding company, we
have very broad discretion to affiliate with securities firms and insurance companies, make merchant banking
investments, and engage in other activities that the Federal Reserve Board has deemed financial in nature. In order
to continue as a financial holding company, we must continue to be well-capitalized, well-managed and maintain
compliance with the Community Reinvestment Act. Depending on the types of financial activities that we may
engage in in the future, under Gramm-Leach-Bliley’s fractional regulation principles, we may become subject to
supervision by additional government agencies. The election to be treated as a financial holding company increases
our ability to offer financial products and services that historically we were either unable to provide or were only
able to provide on a limited basis. As a result, we will face increased competition in the markets for any new
financial products and services that we may offer. Likewise, an increased amount of consolidation among banks and
securities firms or banks and insurance firms could result in a growing number of large financial institutions that
could compete aggressively with us.
Mergers and Acquisitions
We generally must obtain approval from the banking regulators before we can acquire other financial
institutions. We must not engage in certain acquisitions if we are undercapitalized. Furthermore, the BHCA
provides that the Federal Reserve Board cannot approve any acquisition, merger or consolidation that may
substantially lessen competition in the banking industry, create a monopoly in any section of the country, or 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.).
Banks
Federal and state laws and regulations that govern banks have the effect of, among other things, regulating the
scope of business, investments, cash reserves, the purpose and nature of loans, the maximum interest rate chargeable
on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations. Banks that are organized as national banking associations under the National
Bank Act are subject to regulation and examination by the Office of the Comptroller of the Currency, or OCC. The
OCC supervises, regulates and regularly examines the First National Bank of Abilene, First National Bank,
Sweetwater, First Financial Bank, National Association, Cleburne, Eastland National Bank, San Angelo National
Bank, Weatherford National Bank, First Financial Bank, National Association, Southlake and City National Bank,
Mineral Wells. The OCC’s supervision and regulation of banks is primarily intended to protect the interests of
depositors. The National Bank Act:
•
•
•
requires each national banking association to maintain reserves against deposits,
restricts the nature and amount of loans that may be made and the interest that may be charged, and
restricts investments and other activities.
4
State Banks. Banks that are organized as state banks under Texas law are subject to regulation and examination
by the Banking Commissioner of the State of Texas. The Commissioner regulates and supervises, and the Texas
Banking Department regularly examines, Hereford State Bank and Stephenville Bank and Trust Co. The
Commissioner’s supervision and regulation of banks is primarily designed to protect the interests of depositors.
Texas law
•
•
•
requires each state bank to maintain reserves against deposits,
restricts the nature and amount of loans that may be made and the interest that may be charged, and
restricts investments and other activities.
Because our Texas-chartered banks are members of the FDIC, they are also subject to regulation at the federal
level by the FDIC, and are subject to most of the federal laws described below.
Deposit Insurance
Each of our subsidiary banks is a member of the FDIC. The FDIC provides deposit insurance protection that
covers all deposit accounts in FDIC-insured depository institutions and generally does not exceed $100,000 per
depositor. Our subsidiary banks must pay assessments to the FDIC under a risk-based assessment system for federal
deposit insurance protection. FDIC-insured depository institutions that are members of the Bank Insurance Fund pay
insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (i.e.,
institutions that pose a greater risk of loss to their respective deposit insurance funds) pay assessments at higher rates
than institutions that pose a lower risk. An institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to bank regulators. In addition, the FDIC can impose special
assessments to cover the costs of borrowings from the U.S. Treasury, the Federal Financing Bank and the Bank
Insurance Fund member banks. As of December 31, 2002, the assessment rate for each of our subsidiary banks is at
the lowest level risk-based premium available.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA, an FDIC-
insured depository institution can be held liable for any losses incurred by the FDIC in connection with (1) the
“default” of one of its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one of its FDIC-
insured subsidiaries “in danger of default.” “Default” is defined generally as the appointment of a conservator or
receiver, and “in danger of default” is defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance.
The Federal Deposit Insurance Act, or FDIA requires that the FDIC review (1) any merger or consolidation by
or with an insured bank, or (2) any establishment of branches by an insured bank. The FDIC is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also required before an insured bank retires
any part of its common or preferred stock, or any capital notes or debentures. Insured banks that are also members of
the Federal Reserve System, however, are regulated with respect to the foregoing matters by the Federal Reserve
System.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other subsidiaries. We receive most of our
revenue from dividends paid to us by our Delaware holding company subsidiary. Similarly, the Delaware holding
company subsidiary receives dividends from our bank subsidiaries. Described below are some of the laws and
regulations that apply when either we or our subsidiary banks pay dividends.
Each state bank that is a member of the Federal Reserve System and each national banking association is
required by federal law to obtain the prior approval of the Federal Reserve Board and the OCC, respectively, to
declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1)
such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as
defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. In
addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred
to surplus) exceed bad debts (as defined by regulation).
5
Our subsidiary banks paid aggregate dividends of approximately $26.6 million in 2002 and approximately $25.5
million in 2001. Under the dividend restrictions discussed above, as of December 31, 2002, our subsidiary banks,
without obtaining governmental approvals, could have declared in the aggregate additional dividends of
approximately $20.7 million from retained net profits.
To pay dividends, we and our subsidiary banks must maintain adequate capital above regulatory guidelines. In
addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the
payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the
unsafe practice. The Federal Reserve Board and the OCC have each indicated that paying dividends that deplete a
bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve
Board, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and
insured banks should generally only pay dividends to the extent that net income is sufficient to cover both cash
dividends and rate of earnings retention consistent with capital needs, asset quality and overall financial condition.
No undercapitalized institution may pay a dividend.
Affiliate Transactions
The Federal Reserve Act, the FDIA and the rules adopted under these statutes restrict the extent to which we
can borrow or otherwise obtain credit from, or engage in certain other transactions with, our depository subsidiaries.
These laws regulate “covered transactions” between insured depository institutions and their subsidiaries, on the one
hand, and their nondepository affiliates, on the other hand. “Covered transactions” include a loan or extension of
credit to a nondepository affiliate, a purchase of securities issued by such an affiliate, a purchase of assets from such
an affiliate (unless otherwise exempted by the Federal Reserve Board), an acceptance of securities issued by such an
affiliate as collateral for a loan, and an issuance of a guarantee, acceptance, or letter of credit for the benefit of such
an affiliate. The “covered transactions” that an insured depository institution and its subsidiaries are permitted to
engage in with their nondepository affiliates are limited to the following amounts: (1) in the case of any one such
affiliate, the aggregate amount of “covered transactions” cannot exceed ten percent of the capital stock and the
surplus of the insured depository institution; and (2) in the case of all affiliates, the aggregate amount of “covered
transactions” cannot exceed twenty percent of the capital stock and surplus of the insured depository institution. In
addition, extensions of credit that constitute “covered transactions” must be collateralized in prescribed amounts.
Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing of services. Finally, when we and
our subsidiary banks conduct transactions internally among us, we are required to do so at arm’s length.
Loans to Directors, Executive Officers and Principal Shareholders
The authority of our subsidiary banks to extend credit to our directors, executive officers and principal
shareholders, including their immediate family members and corporations and other entities that they control, is
subject to substantial restrictions and requirements under Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O promulgated thereunder. These statutes and regulations impose specific limits on the amount of loans
our subsidiary banks may make to directors and other insiders, and specified approval procedures must be followed
in making loans that exceed certain amounts. In addition, all loans our subsidiary banks make to directors and other
insiders must satisfy the following requirements:
• The loans must be made on substantially the same terms, including interest rates and collateral, as
prevailing at the time for comparable transactions with persons not affiliated with us or the subsidiary
banks;
• The subsidiary banks must follow credit underwriting procedures at least as stringent as those applicable to
comparable transactions with persons who are not affiliated with us or the subsidiary banks; and
• The loans must not involve a greater than normal risk of repayment or other unfavorable features.
6
Furthermore, each subsidiary bank must periodically report all loans made to directors and other insiders to the
bank regulators, and these loans are closely scrutinized by the regulators for compliance with Sections 22(g) and
22(h) of the Federal Reserve Ace and Regulation O.
Capital
Bank Holding Companies and Financial Holding Companies. The Federal Reserve Board has adopted risk-
based capital guidelines for bank holding companies and financial holding companies. The ratio of total capital to
risk weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) must be a
minimum of eight percent. At least half of the total capital is to be composed of common shareholders’ equity,
minority interests in the equity accounts of consolidated subsidiaries and a limited amount of perpetual preferred
stock, less goodwill, which is collectively referred to as Tier 1 Capital. The remainder of total capital may consist of
subordinated debt, other preferred stock and a limited amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for bank holding
companies and financial holding companies. Bank holding companies and financial holding companies that meet
certain specified criteria, including having the highest regulatory rating, must maintain a minimum Tier 1 Capital
leverage ratio (Tier 1 Capital to average assets for the current quarter, less goodwill) of three percent. Bank holding
companies and financial holding companies that do not have the highest regulatory rating will generally be required
to maintain a higher Tier 1 Capital leverage ratio of three percent plus an additional cushion of 100 to 200 basis
points. The Federal Reserve Board has not advised us of any specific minimum leverage ratio applicable to us. The
guidelines also provide that bank holding companies and financial 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, 2002, our capital
ratios were as follows: (1) Tier 1 Capital to Risk-Weighted Assets Ratio, 18.50%; (2) Total Capital to Risk-
Weighted Assets Ratio, 19.52%; and (3) Tier 1 Capital Leverage Ratio, 10.51%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA established five
capital tiers with respect to depository institutions: “well-capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized,” and “critically undercapitalized.” A depository institution’s capital tier will depend
upon where its capital levels are in relation to various relevant capital measures, including (1) risk-based capital
measures, (2) a leverage ratio capital measure and (3) certain other factors. Regulations establishing the specific
capital tiers provide that a “well-capitalized” institution will have a total risk-based capital ratio of ten percent or
greater, a Tier 1 risk-based capital ratio of six percent or greater, and a Tier 1 leverage ratio of five percent or
greater, and not be subject to any written regulatory enforcement agreement, order, capital directive or prompt
corrective action derivative. For an institution to be “adequately capitalized,” it will have a total risk-based capital
ratio of eight percent or greater, a Tier 1 risk-based capital ratio of four percent or greater, and a Tier 1 leverage ratio
of four percent or greater (in some cases three percent). For an institution to be “undercapitalized,” it will have a
total risk-based capital ratio that is less than eight percent, a Tier 1 risk-based capital ratio less than four percent or a
Tier 1 leverage ratio less than four percent (or a leverage ratio less than three percent if the institution is rated
composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines). For
an institution to be “significantly undercapitalized,” it will have a total risk-based capital ratio less than six percent,
a Tier 1 risk-based capital ratio less than three percent, or a Tier 1 leverage ratio less than three percent. For an
institution to be “critically undercapitalized,” it will have a ratio of tangible equity to total assets equal to or less than
two percent. FDICIA requires federal banking agencies to take “prompt corrective action” against depository
institutions that do not meet minimum capital requirements. Under current regulations, we were “well capitalized”
as of December 31, 2002.
FDICIA generally prohibits a depository institution from making any capital distribution (including payment of
a dividend) or paying any management fee to its holding company if the depository institution would thereafter be
“undercapitalized.” An “undercapitalized” institution must develop a capital restoration plan and its parent holding
company must guarantee that institution’s compliance with such plan. The liability of the parent holding company
under any such guarantee is limited to the lesser of five percent of the institution’s assets at the time it became
“undercapitalized” or the amount needed to bring the institution into compliance with all capital standards.
Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over
7
the parent’s general unsecured creditors. If a depository institution fails to submit an acceptable capital restoration
plan, it shall be treated as if it is significantly undercapitalized. “Significantly undercapitalized” depository
institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting
stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits
from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or
conservator. Finally, FDICIA requires the various regulatory agencies to set forth certain standards that do not relate
to capital. Such standards relate to the safety and soundness of operations and management and to asset quality and
executive compensation, and permit regulatory action against a financial institution that does not meet such
standards.
If an insured bank fails to meet its capital guidelines, it may be subject to a variety of other enforcement
remedies, including a prohibition on the taking of brokered deposits and the termination of deposit insurance by the
FDIC. Bank regulators continue to indicate their desire to raise capital requirements beyond their current levels.
In addition to FDICIA capital standards, Texas-chartered banks must also comply with the capital requirements
imposed by the Texas Banking Department. Neither the Texas Finance Code nor its regulations specify any
minimum capital-to-assets ratio that must be maintained by a Texas-chartered bank. Instead, the Texas Banking
Department determines the appropriate ratio on a bank by bank basis, considering factors such as the nature of a
bank’s business, its total revenue, and the bank’s total assets. As of December 31, 2002, all of our Texas-chartered
banks exceeded the minimum ratios applied to them.
Our Support of Our Subsidiary Banks
Under Federal Reserve Board policy, we are expected to commit resources to act as a source of strength to
support each of our subsidiary banks. This support may be required at times when, absent such Federal Reserve
Board policy, we would not otherwise be required to provide it. In addition, any loans we make to our subsidiary
banks would be subordinate in right of payment to deposits and to other indebtedness of our banks. In the event of a
bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory
agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and be subject to a
priority of payment.
Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the OCC
is authorized to require the bank’s shareholders to pay the deficiency on a pro-rata basis. If any shareholder refuses
to pay the pro-rata assessment after three months notice, then the bank’s board of directors must sell an appropriate
amount of the shareholder’s stock at a public auction to make up the deficiency. To the extent necessary, if a
deficiency in capital still exists and the bank refuses to go into liquidation, then a receiver may be appointed to wind
up the bank’s affairs. Additionally, under the Federal Deposit Insurance Act, in the event of a loss suffered or
anticipated by the FDIC (either as a result of the default of a banking subsidiary or related to FDIC assistance
provided to a subsidiary in danger of default) our other banking subsidiaries may be assessed for the FDIC’s loss.
Interstate Banking and Branching Act
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or Riegle-Neal Act, a
bank holding company or financial holding company is able to acquire banks in states other than its home state. The
Riegle-Neal Act also authorized banks to merge across state lines, thereby creating interstate branches, beginning
June 1, 1997. Furthermore, under 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. Accordingly, both the OCC and the
Texas Banking Department accept applications for interstate merger and branching transactions, subject to certain
limitations on ages of the banks to be acquired and the total amount of deposits within the state a bank or financial
holding company may control. Since our primary service area is Texas, we do not expect that the ability to operate
in other states will have any material impact on our growth strategy. We may, however, face increased competition
from out-of-state banks that branch or make acquisitions in our primary markets in Texas.
8
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA subjects a bank to regulatory assessment to determine if
the institution meets the credit needs of its entire community, including low- and moderate-income neighborhoods
served by the bank, and to take that determination into account in its evaluation of any application made by such
bank for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an
office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The
regulatory authority prepares a written evaluation of an institution’s record of meeting the credit needs of its entire
community and assigns a rating. We believe our subsidiary banks have taken significant actions to comply with the
CRA, and each has received at least a “satisfactory” commendation in its most recent review by federal regulators
with respect to its compliance with the CRA.
Monitoring and Reporting Suspicious Activity
Under the Bank Secrecy Act, IRS rules and other regulations, we are required to monitor and report unusual or
suspicious account activity as well as transactions involving the transfer or withdrawal of amounts in excess of
prescribed limits. In the wake of the tragic events of September 11th, on October 26, 2001, the President signed the
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism,
or USA PATRIOT Act, of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions
against specified financial transactions and account relationships as well as enhanced due diligence and “know your
customer” standards in their dealings with foreign financial institutions and foreign customers. For example, the
enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable
steps to:
•
•
•
•
to conduct enhanced scrutiny of account relationships to guard against money laundering and report any
suspicious transaction;
to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into,
each account as needed to guard against money laundering and report any suspicious transactions;
to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of
the foreign bank, and the nature and extent of the ownership interest of each such owner; and
to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the
identity of those foreign banks and related due diligence information.
Under the USA PATRIOT Act, financial institutions are also required to establish anti-money laundering
programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:
•
•
•
•
the development of internal policies, procedures, and controls;
the designation of a compliance officer;
an ongoing employee training program; and
an independent audit function to test the programs.
In addition, the USA PATRIOT Act also requires the Secretary of the Treasury to adopt rules addressing a
number of related issues, including increasing the cooperation and information sharing between financial
institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in,
or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any
financial institution complying with these rules will not be deemed to violate the privacy provisions of the Gramm-
Leach-Bliley Act that are discussed below. Finally, under the regulations of the Office of Foreign Asset Control, we
are required to monitor and block transactions with certain “specially designated nationals” who OFAC has
determined pose a risk to U.S. national security.
9
Consumer Laws and Regulations
We are also subject to certain consumer laws and regulations that are designed to protect consumers in
transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in
Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the
Equal Credit Opportunity Act, and the Fair Housing Act, among others. These laws and regulations among other
things prohibit discrimination on the basis of race, gender or other designated characteristics and mandate various
disclosure requirements and regulate the manner in which financial institutions must deal with customers when
taking deposits or making loans to such customers. These and other laws also limit finance charges or other fees or
charges earned in our activities. We must comply with the applicable provisions of these consumer protection laws
and regulations as part of our ongoing customer relations.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements emphasizing the importance of
technology risk management and supervision in evaluating the safety and soundness of depository institutions with
respect to banks that contract with outside vendors to provide data processing and core banking functions. The use
of technology-related products, services, delivery channels and processes expose a bank to various risks, particularly
operational, privacy, security, strategic, reputation and compliance risk. Banks are generally expected to prudently
manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring,
monitoring and controlling risks associated with the use of technology.
Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate
standards for financial institutions regarding the implementation of safeguards to ensure the security and
confidentiality of customer records and information, protection against any anticipated threats or hazards to the
security or integrity of such records and protection against unauthorized access to or use of such records or
information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the
rules require each bank to implement a comprehensive written information security program that includes
administrative, technical and physical safeguards relating to customer information.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with a notice of
privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal
information about a consumer to nonaffiliated third parties unless the institution satisfies various notice and opt-out
requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are
authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial
institution’s ability to disclose nonpublic personal information about consumers to nonaffiliated third parties.
Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe
in general terms the bank’s information sharing practices. Banks that share nonpublic personal information about
customers with nonaffiliated third parties must also provide customers with an opt-out notice and a reasonable
period of time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on
the extent to which a bank can disclose an account number or access code for credit card, deposit, or transaction
accounts to any nonaffiliated third party for use in marketing.
Monetary Policy
Banks are affected by the credit policies of other monetary authorities, including the Federal Reserve Board,
that affect the national supply of credit. The Federal Reserve Board regulates the supply of credit in order to
influence general economic conditions, primarily through open market operations in United States government
obligations, varying the discount rate on financial institution borrowings, varying reserve requirements against
financial institution deposits, and restricting certain borrowings by financial institutions and their subsidiaries. The
monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banks in the
past and are expected to continue to do so in the future.
10
Pending and Proposed Legislation
New regulations and statutes are regularly proposed containing wide-ranging proposals for altering the
structures, regulations and competitive relationships of financial institutions operating in the United States. We
cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our
business may be affected by any new regulation or statute.
Enforcement Powers of Federal Banking Agencies
The Federal Reserve and other state and federal banking agencies and regulators have broad enforcement
powers, including the power to terminate deposit insurance, issue cease-and-desist orders, impose substantial fees
and other civil and criminal penalties and appoint a conservator or receiver. Our failure to comply with applicable
laws, regulations and other regulatory pronouncements could subject us, as well as our officers and directors, to
administrative sanctions and potentially substantial civil penalties.
Available Information
We file annual, quarterly and special reports, proxy statements and other information with the Securities and
Exchange Commission. You may read and copy any document we file at the Securities and Exchange
Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
Securities and Exchange Commission at 1-800-SEC-0330 for further information on the public reference room. Our
SEC filings are also available to the public at the Securities and Exchange Commission’s web site at
http://www.sec.gov. No information from this web page is incorporated by reference herein. Our web site is
http://www.ffin.com. You may also obtain copies of our annual, quarterly and special reports, proxy statements and
certain other information filed with the SEC, as well as amendments thereto, free of charge from our web site.
These documents are posted to our web site as soon as reasonably practicable after we have filed them with the SEC.
ITEM 2.
PROPERTIES
Our principal office is located in the First National Bank Building at 400 Pine Street in downtown Abilene,
Texas. We lease two spaces in a building owned by First National Bank of Abilene. The lease for approximately
2,300 square feet of space expires December 31, 2004. The lease for approximately 1,100 square feet of space
expires May 31, 2006. Our subsidiary banks collectively own 22 banking facilities, some of which are detached
drive-ins, and they also lease six banking facilities. Our management considers all of our existing locations to be
well-suited for conducting the business of banking. We believe that our existing facilities are adequate to meet our
requirements and our subsidiary banks’ requirements for the foreseeable future.
ITEM 3.
LEGAL PROCEEDINGS
From time to time we and our subsidiary banks are parties to lawsuits arising in the ordinary course of our
banking business. However, there are no material pending legal proceedings to which we, our subsidiary banks or
our other direct and indirect subsidiaries, or any of their properties, are currently subject. Other than regular, routine
examinations by state and federal banking authorities, there are no proceedings pending or known to be
contemplated by any governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of our fiscal year ended
December 31, 2002.
11
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Our common stock, par value $10.00 per share, is traded on the Nasdaq Stock Market under the trading symbol
FFIN. See “Item 8—Financial Statements and Supplementary Data—Quarterly Financial Data” for the high, low
and closing sales prices as reported by the Nasdaq Stock Market for our common stock for the periods indicated.
Holders
As of February 13, 2003, we had 1,604 shareholders of record.
Dividends
See “Item 8—Financial Statements and Supplementary Data—Quarterly Results of Operations” for the
frequency and amount of cash dividends paid by us. Also, see “Item 1 – Business – Supervision and Regulation –
Payment of Dividends” and “Item 7 – Management’s Discussion and Analysis of the Financial Condition and
Results of Operations – Liquidity – Dividends” for restrictions on our present or future ability to pay dividends,
particularly those restrictions arising under federal and state banking laws.
12
Recent Sales of Unregistered Securities
During the year ended December 31, 2002, the following sales of unregistered shares of common stock were
made to employees in connection with their exercise of stock options:
Date
01-25-02
02-04-02
02-22-02
02-27-02
02-27-02
04-11-02
04-15-02
04-19-02
05-20-02
05-21-02
06-05-02
06-05-02
06-05-02
06-06-02
06-06-02
06-07-02
06-11-02
06-13-02
06-28-02
07-02-02
07-16-02
08-26-02
08-26-02
09-11-02
09-12-02
11-05-02
12-05-02
12-06-02
12-06-02
12-12-02
12-16-02
12-20-02
12-20-02
Totals
Number of
Common Shares
Price Per Share
Aggregate Sales
Price
3,702
4,830
2,147
1,073
220
309
75
110
400
1,073
353
150
1,514
2,343
860
450
673
247
330
330
1,341
330
2,414
75
309
257
350
200
1,815
50
2,344
75
200
30,949
$
14.90
14.90
14.90
14.90
29.27
29.27
20.80
29.27
14.90
14.90
14.90
20.80
29.27
20.80
14.90
14.90
14.90
29.27
29.27
29.27
14.90
29.27
14.90
20.80
29.27
14.90
14.90
14.90
29.27
14.90
20.80
20.80
29.27
$
55,159.80
71,967.00
31,990.30
15,987.70
6,439.40
9,044.43
1,560.00
3,219.70
5,960.00
15,987.70
5,259.70
3,120.00
44,314.78
48,734.40
12,814.00
6,705.00
10,027.70
7,229.69
9,659.10
9,659.10
19,980.90
9,659.10
35,968.60
1,560.00
9,044.43
3,829.30
5,215.00
2,980.00
53,125.05
745.00
48,755.20
1,560.00
5,854.00
$ 18.52
$ 573,116.08
Each of the foregoing sales were made in reliance upon the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended.
13
ITEM 6.
SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the years ended December 31, 2002, 2001, 2000,
1999, and 1998, have been derived from our audited consolidated financial statements. The selected financial data
should be read in conjunction with “Item 7—Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements. The results of operations presented below are not
necessarily indicative of the results of operations that may be achieved in the future. The amounts related to shares
of our common stock have been adjusted to give effect to all stock dividends and stock splits. Management’s
Discussion and Analysis of Financial Condition and Results of Operations incorporated information required to be
disclosed by the Securities and Exchange Commissions’ Industry Guide 3, “Statistical Disclosure by Bank Holding
Companies.”
Summary Income Statement Information:
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Per Share Data:
Net earnings per share, basic
Net earnings per share, assuming dilution
Cash dividends declared
Book value at period-end
Earnings performance ratios:
Return on average assets
Return on average equity
Summary Balance Sheet Data (Period-end):
Investment securities
Loans
Total assets
Deposits
Total liabilities
Total shareholders’ equity
Asset quality ratios:
2002
$ 104,862
24,380
80,482
2,370
29,553
59,082
48,583
14,630
$ 33,953
$
2.75
2.74
1.35
19.31
Year Ended December 31,
2000
(dollars in thousands, except per share data)
1999
2001
$ 116,473
44,834
71,639
1,964
27,579
55,072
42,182
12,827
$ 29,355
$
2.38
2.37
1.16
17.32
$ 117,951
48,829
69,122
2,398
25,947
51,692
40,979
12,663
$ 28,316
$
2.28
2.27
1.03
15.92
$ 110,013
43,338
66,675
2,031
24,484
51,934
37,194
11,504
$ 25,690
$
2.06
2.05
.90
14.33
1.78%
15.13
1.62%
14.35
1.67%
15.39
1.53%
14.84
1998
$ 111,868
46,292
65,576
1,140
22,351
52,422
34,365
11,111
$ 23,254
$
1.87
1.86
.80
13.62
1.44%
14.51
$ 772,256
964,040
1,993,183
1,711,562
1,754,415
238,768
$ 721,694
940,131
1,929,694
1,685,163
1,716,040
213,654
$ 654,253
859,271
1,753,814
1,519,874
1,557,693
196,121
$ 656,218
797,275
1,723,369
1,524,704
1,544,706
178,663
$ 625,891
779,544
1,686,647
1,504,856
1,517,198
169,449
Allowance for loan losses/period-end loans
Nonperforming assets/period-end loans plus
foreclosed assets
Net charge offs/average loans
Capital ratios:
Average shareholders’ equity/average assets
Leverage ratio (1)
Tier 1 risk-based capital (2)
Total risk-based capital (3)
Dividend payout ratio
1.16%
1.13%
1.15%
1.12%
1.15%
0.44
0.19
11.76%
10.51
18.50
19.52
49.13
0.51
0.18
11.29%
9.92
17.10
18.08
48.94
0.48
0.18
10.86%
10.40
17.75
18.74
45.23
0.26
0.27
10.30%
9.62
17.19
18.13
43.64
0.41
0.36
9.89%
9.02
16.03
17.01
41.66
(1) Calculated by dividing, at period-end, shareholders’ equity (before unrealized gain/loss on securities available-for-sale) less
intangible assets by fourth quarter average assets less intangible assets.
(2) Calculated by dividing, at period-end, shareholders’ equity (before unrealized gain/loss on securities available-for-sale) less
intangible assets by risk-adjusted assets.
(3) Calculated by dividing, at period-end, shareholders’ equity (before unrealized gain/loss on securities available for sale) less
intangible assets plus allowance for loan losses to the extent allowed under regulatory guidelines by risk-adjusted assets.
14
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
Management’s discussion and analysis of the major elements of our consolidated balance sheets as of December
31, 2002 and 2001, and consolidated statements of earnings for the years 2000 through 2002 should be reviewed in
conjunction with our consolidated financial statements, accompanying notes, and selected financial data presented
elsewhere in this Form 10-K. All amounts, prices and per share data related to our common stock have been
adjusted to give effect to all stock splits and stock dividends.
On July 3, 2001, we acquired City Bancshares, Inc. and its subsidiary City National Bank, Mineral Wells, Texas
for $16.5 million in cash. The results of City National Bank are included in our consolidated financial statements
beginning July 1, 2001 and may to some extent affect the comparisons to the prior period amounts and 2002
operating results which include a full year of City National Bank’s operations.
Critical Accounting Policies
The preparation of the Company’s consolidated financial statements is based on the selection of certain
accounting policies, based on generally accepted accounting principles and customary practices in the banking
industry. These policies, in certain areas, require management to make significant estimates and assumptions. The
following discussion addresses the Company’s allowance for loan loss and its provision for loan losses which is
deemed by management to be its most critical accounting policy. We have other key accounting policies and
continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe that
these other policies either do not generally require us to make estimates and judgments that are difficult or
subjective, or it is less likely that they would have a material impact on our reported results for a given period.
A policy is deemed critical if (i) the accounting estimate required the Company to make assumptions about
matters that are highly uncertain at the time the accounting estimate was made; and (ii) different estimates that
reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably
likely to occur from period to period, would have a material impact on the financial statements.
The allowance for loan losses is an amount that management believes will be adequate to absorb inherent
estimated losses on existing loans in which collectibility is unlikely based upon management’s review and
evaluation of the loan portfolio, including letters of credit, lines of credit and unused commitments to provide
financing. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of
recoveries).
Management’s periodic evaluation of the adequacy of the allowance is based on general economic conditions,
the financial condition of the borrower, the value and liquidity of collateral, delinquency, prior loan loss experience,
and the results of periodic reviews of the portfolio by our loan review department and regulatory examiners. A
consistent, well documented loan review methodology has been developed that includes allowances assigned to
specific loans and nonspecific allowances that are based on the factors noted in the prior sentence. Our independent
loan review department is responsible for performing this evaluation for all of our subsidiary banks to ensure
consistent methodology.
Although we believe that we use the best information available to make loan loss allowance determinations,
future adjustments could be necessary if circumstances or economic conditions differ substantially from the
assumptions used in making our initial determinations. A downturn in the economy and employment could result in
increased levels of non-performing assets and charge-offs, increased loan loss provisions and reductions in income.
Additionally, as an integral part of their examination process, bank regulatory agencies periodically review our
allowance for loan losses. The banking agencies could require the recognition of additions to the loan loss allowance
based on their judgment of information available to them at the time of their examination.
Accrual of interest is discontinued on a loan when management believes, after considering economic and
business conditions and collection efforts, that the borrower’s financial condition is such that collection of interest is
doubtful.
15
The Company’s policy requires measurement of the allowance for an impaired collateral dependent loan based
on the fair value of the collateral. Other loan impairments are measured based on the present value of expected
future cash flows or the loan’s observable market price.
Results of Operations
Performance Summary. Net earnings for 2002 were $34.0 million, an increase of $4.6 million, or 15.7%, over
net earnings for 2001 of $29.4 million. Net earnings for 2000 were $28.3 million. The increase in net earnings for
2002 over 2001 was primarily attributable to an increase in net interest income resulting primarily from growth in
average earning assets and an improved net interest margin. The increase in net earnings for 2001 over 2000 was
primarily attributable to an increase in net interest income resulting primarily from the growth in average earning
assets and an increase in noninterest income resulting primarily from increases in service fees on deposit accounts
and real estate mortgage fees.
On a basic net earnings per share basis, net earnings were $2.75 for 2002 as compared to $2.38 for 2001 and
$2.28 for 2000. Return on average assets was 1.78% for 2002 as compared to 1.62% for 2001 and 1.67% for 2000.
Return on average equity was 15.13% for 2002 as compared to 14.35% for 2001 and 15.39% for 2000.
Affecting our 2002 net earnings and basic and diluted earnings per share is the implementation of Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141") and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and
addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside
of a business combination and the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment.
SFAS No. 142 was effective January 1, 2002 for calendar year companies; however, acquired goodwill and
intangible assets recorded in the acquisition of City Bancshares, Inc. closed subsequent to June 30, 2001 were
subject immediately to its provisions.
On January 1, 2002, goodwill amounting to $23,765,896 was not subject to further amortization as a result of
SFAS No. 142. The Company conducted its initial impairment test in 2002, with no reduction of recorded goodwill
resulting from the test. A reconciliation adjusting comparative net earnings and earnings per share for the years
ended December 31, 2001 and 2000, to show the effect of no longer amortizing the Company’s goodwill, follows:
Reported net earnings
Add back: goodwill amortization
Goodwill amortization, before income tax
Income tax benefit
Adjusted net earnings
Basic earnings per share:
Reported net earnings
Goodwill amortization, net of income tax benefit
Adjusted net earnings
Earnings per share, assuming dilution:
Reported net earnings
Goodwill amortization, net of income tax benefit
Adjusted net earnings
2001
2000
$ 29,354,505
$ 28,316,047
1,641,367
1,641,367
(420,000)
(420,000)
$ 30,575,872 $ 29,537,414
$ 2.38
.10
$ 2.48
$ 2.28
.10
$ 2.38
$ 2.37
.10
$ 2.47
$ 2.27
.10
$ 2.37
Net Interest Income. Net interest income is the difference between interest income on earning assets and
interest expense on liabilities incurred to fund those assets. Our earning assets consist primarily of loans and
investment securities. Our liabilities to fund those assets consist primarily of noninterest-bearing and interest-
bearing deposits. Tax-equivalent net interest income was $84.2 million in 2002 as compared to $74.8 million in
16
2001 and $71.9 million in 2000. These increases were primarily due to growth in the volume of earning assets, and
for 2002, an improved net interest margin. Average earning assets were $1.748 billion in 2002, as compared to
$1.653 billion in 2001 and $1.538 billion in 2000. The 2002 increase in average earning assets is attributable to
higher average investment securities we held, which increased $72.3 million, and higher average loans we made,
which increased $44.5 million. These increases were partially offset by a $22.4 million decrease in the 2002
average of short-term investments, which consist of primarily Federal funds sold. The 2001 increase in average
earning assets was due primarily to an increase in average short-term investments, which increased $28.9 million,
and higher average loans, which increased $80.0 million. Table 1 allocates the increases in tax-equivalent net
interest income for 2002 and 2001 between the amount of increase attributable to volume and rate.
Table 1 — Changes in Interest Income and Interest Expense (in thousands):
2002 Compared to 2001
2001 Compared to 2000
Change Attributable to
Rate
Volume
Total
Change
Change Attributable to
Volume
Rate
Total
Change
Short-term investments ............................
Taxable investment securities..................
Tax-exempt investment securities (1) .....
Loans (1)...................................................
Interest income ..................................
Interest-bearing deposits ..........................
Short-term borrowings .............................
Interest expense .................................
Net interest income ...........................
$
(905)
3,394
1,032
3,720
7,241
1,169
(26)
1,143
$ 6,098
$
(1,359)
(3,300)
241
(13,911)
(18,329)
(21,052)
(545)
(21,597)
$ 3,268
$
(2,264)
94
1,273
(10,191)
(11,088)
(19,883)
(571)
(20,454)
$ 9,366
$
1,799
(233)
707
7,404
9,678
2,688
481
3,169
$ 6,508
$
(1,736)
(1,154)
106
(7,993)
(10,778)
(6,455)
(709)
(7,164)
$ (3,613)
$
63
(1,387)
813
(589)
(1,100)
(3,767)
(228)
(3,995)
$ 2,895
_______________
(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, is illustrated below in Table 2 for the years 2000 through 2002. As the prime rate declined from 9.50% to
4.75% in 2001, our earning assets re-priced in advance of interest bearing deposits, which resulted in a lower net
interest margin. As we re-priced our interest bearing deposits in 2002, the net interest margin improved to 4.82% as
compared to 4.52% for 2001.
17
Table 2 — Average Balances and Average Yields and Rates (in thousands, except percentages):
Assets
Short-term investments ...........................
Taxable investment securities.................
Tax-exempt investment securities (1) ....
Loans (1)(2) .............................................
Total earning assets ..............................
Cash and due from banks........................
Bank premises and equipment................
Other assets..............................................
Goodwill, net ...........................................
Allowance for loan losses.......................
Total assets............................................
Liabilities and Shareholders’ Equity
Interest-bearing deposits .........................
Short-term borrowings ............................
Total interest-bearing liabilities...........
Noninterest-bearing deposits ..................
Other liabilities........................................
Total liabilities......................................
Shareholders’ equity ..................................
Total liabilities and shareholders’
equity.....................................................
Net interest income ....................................
Rate Analysis:
Interest income/earning assets................
Interest expense/earning assets...............
Net yield on earning assets...................
Average
Balance
$ 57,030
597,830
150,824
942,101
1,747,785
81,016
41,195
24,458
24,644
(11,099)
$1,907,999
$1,259,158
24,628
1,283,786
385,012
14,846
1,683,644
224,355
$1,907,999
2002
Income/
Expense
Yield/
Rate
Average
Balance
2001
Income/
Expense
Yield/
Rate
Average
Balance
$ 947
32,264
10,475
64,872
108,558
1.66%
5.40
6.95
6.89
6.21
$ 24,088
292
24,380
1.91%
1.19
1.90
$ 3,211
32,170
9,202
75,063
119,646
4.04%
5.95
6.79
8.36
7.24
$ 43,971
863
44,834
3.58%
3.40
3.58
$ 79,424
540,771
135,620
897,616
1,653,431
80,032
40,903
17,693
29,178
(10,107)
$1,811,130
$1,226,560
25,392
1,251,952
339,800
14,861
1,606,613
204,517
$1,811,130
$ 50,538
544,546
125,072
817,603
1,537,759
77,727
40,400
28,212
19,335
(9,420)
$1,694,013
$1,161,175
17,621
1,178,796
317,659
13,529
1,509,984
184,029
$1,694,013
2000
Income/
Expense
$ 3,148
33,557
8,389
75,652
120,746
Yield/
Rate
6.23%
6.16
6.71
9.25
7.85
$ 47,738
1,091
48,829
4.11%
6.19
4.14
$ 84,178
$ 74,812
$ 71,917
6.21%
1.39
4.82%
7.24%
2.71
4.52%
7.85%
3.18
4.68%
_______________
(1) Computed on a tax-equivalent basis assuming a marginal tax rate of 35%.
(2) Nonaccrual loans are included in loans.
Noninterest Income. Noninterest income for 2002 was $29.6 million, an increase of $2.0 million, or 7.2%, as
compared to 2001. The increase resulted primarily from (i) an increase in service fees on deposit accounts of $692
thousand which reflects growth in number of accounts and transactions processed; (ii) an increase in real estate
mortgage fees of $248 thousand which reflects a continued high volume of mortgage originations and refinancing
transactions generated by low mortgage rates; (iii) an increase of $429 thousand in ATM transaction fees which
reflects the Company’s focus to increase the cardholder base and the usage of check cards; and (iv) $735 thousand in
check printing fees that, in periods prior to 2002, were recorded as a reduction in printing and supplies expense. The
change in classification for check printing fees was made in response to a change in bank regulatory financial
reporting guidelines.
Noninterest income for 2001 was $27.6 million, an increase of $1.6 million, or 6.3%, as compared to 2000.
This increase was primarily a result of; (i) an increase in trust fees of $397 thousand; (ii) an increase in service fees
on deposit accounts of $669 thousand; and (iii) an increase of $588 thousand in real estate mortgage fees. Table 3
provides comparisons for other categories of noninterest income.
18
Table 3 — Noninterest Income (in thousands):
2002
Increase
(Decrease)
2001
Increase
(Decrease)
2000
5,836
Trust fees ...................................................................
15,435
Service fees on deposit accounts ..............................
1,858
Real estate mortgage fees..........................................
Net securities gains (losses)......................................
16
ATM fees………………………………………… 2,370
Other:
$
Mastercard fees......................................................
Check printing fees................................................
Miscellaneous income ...........................................
Safe deposit rental fees..........................................
Exchange fees ........................................................
Credit life fees .......................................................
Data processing fees..............................................
Brokerage commissions………………………..
Interest on loan recoveries ....................................
Total other..........................................................
Total Noninterest Income......................................
980
735
708
403
196
200
245
340
230
4,037
$ 29,552
$
(55)
692
248
(52)
429
$
5,891
14,743
1,610
68
1,941
$
397
669
588
(462)
387
$
5,494
14,074
1,022
530
1,554
26
735
(95)
9
11
(16)
(16)
46
12
712
$ 1,974
954
-
803
394
185
216
261
294
218
3,325
$ 27,578
124
-
(114)
(1)
(39)
(21)
113
42
(52)
52
$ 1,631
830
-
917
395
224
237
148
252
270
3,273
$ 25,947
Noninterest Expense. Total noninterest expense for 2002 was $59.1 million, an increase of $4.0 million, or
7.3%, as compared to 2001. Noninterest expense for 2001 amounted to $55.1 million, an increase of $3.4 million or
6.3% as compared to 2000. An important measure in determining whether a banking company effectively managed
noninterest expenses is the efficiency ratio, which is calculated by dividing noninterest expense by the sum of net
interest income on a tax-equivalent basis and noninterest income. Our efficiency ratio for 2002 was 51.96% which
represented improvement when compared to 53.82% for 2001, and 53.11% for 2000.
Salaries and employee benefits for 2002 totaled $32.0 million, an increase of $3.3 million, or 11.5%, as
compared to 2001. Salaries for 2002 were up $1.6 million with the increase attributable to normal pay increases, a
higher number of full time equivalent employees, and higher performance incentive payments. Profit sharing and
pension expenses for 2002 increased $823 thousand and $549 thousand, respectively, as compared to the prior year.
The higher profit sharing expense related to the Company’s 2002 increase in net earnings. In 2002, the Company
lowered the expected long-term rate of return on pension plan assets from 8.5% to 6.5%; this change is the primary
factor contributing to higher pension expense in the current year as compared to the prior year. Net occupancy
expense for 2002 was virtually unchanged from the prior year and equipment expense was up $343 thousand over
the 2001 amount. The higher equipment expense resulted primarily from higher depreciation and higher repairs and
maintenance expense as compared to 2001. Intangible asset amortization for 2002 decreased $1.5 million and
resulted primarily from the change in accounting principle that became effective January 1, 2002 and which
eliminated the amortization of goodwill. Printing, stationery and supplies expense for 2002 increased $391 thousand
over the prior year amount. The increase for 2002 was due to $735 thousand in check printing fees being included
in noninterest income for 2002 versus a reduction in printing expense in prior years. ATM expense for 2002 was
$266 thousand higher than the 2001 amount and reflects increased customer usage in 2002.
Salaries and employee benefits for 2001 totaled $28.7 million, an increase of $1.6 million as compared to 2000.
The increase resulted primarily from normal salary increases and the addition of employees from our acquisition
finalized in July 2001. Net occupancy and equipment expense in the aggregate for 2001 increased by $710 thousand
and resulted primarily from higher utilities and repair and maintenance expense. Other professional fees for 2001
increased $302 thousand as compared to the prior year. The increase resulted primarily from; (i) executive search
fees; (ii) leasehold improvement design fees; and (iii) technology systems conversions. Printing, stationery, and
supplies expense for 2001 increased $202 thousand as compared to 2000 and reflects expense related to the printing
of additional customer disclosures and supplies related to implementation of check imaging at a number of our
subsidiary banks.
19
Table 4 — Noninterest Expense (in thousands):
Salaries.......................................................................
Medical and other benefits........................................
Profit sharing .............................................................
Pension.......................................................................
Payroll taxes ..............................................................
Total salaries and employee benefits....................
2002
$
23,984
2,297
2,681
1,173
1,858
31,993
Increase
(Decrease)
$
1,604
180
823
549
152
3,308
2001
$
22,380
2,117
1,858
624
1,706
28,685
Increase
(Decrease)
$
1,417
133
(16)
(56)
130
1,608
Net occupancy expense.............................................
Equipment expense ...................................................
Intangible amortization .............................................
3,909
4,801
135
(87)
343
(1,506)
3,996
4,458
1,641
433
277
-
Other:
Data processing and operation fees ......................
Postage ...................................................................
Printing, stationery and supplies...........................
Advertising ............................................................
Correspondent bank service charges ....................
ATM expense ........................................................
Credit card fees......................................................
Telephone...............................................................
Public relations and business development ..........
Directors’ fees........................................................
Audit and accounting fees.....................................
Legal fees...............................................................
Other professional and service fees ......................
Regulatory exam fees ............................................
Travel .....................................................................
Courier expense .....................................................
Operational and other losses .................................
Other miscellaneous expense................................
Total other..........................................................
Total Noninterest Expense........................................
1,078
1,094
1,475
1,169
1,491
1,361
696
870
758
516
785
383
796
526
311
676
743
3,516
18,244
$ 59,082
(38)
(80)
391
64
162
266
27
(8)
43
30
39
50
(37)
83
7
127
203
623
1,952
$ 4,010
1,116
1,174
1,084
1,105
1,329
1,095
669
878
715
486
746
333
833
443
304
549
540
2,893
16,292
$ 55,072
(147)
128
202
51
67
145
65
124
12
33
80
54
302
19
54
101
(205)
(23)
1,062
$ 3,380
2000
$
20,963
1,984
1,874
680
1,576
27,077
3,563
4,181
1,641
1,263
1,046
882
1,054
1,262
950
604
754
703
453
666
279
531
424
250
448
745
2,916
15,230
$ 51,692
Income Taxes. Income tax expense was $14.6 million for 2002 as compared to $12.8 million for 2001 and
$12.7 million for 2000. Our effective tax rates on pretax income were 30.1%, 30.4% and 30.9%, respectively, for
the years 2002, 2001 and 2000.
Balance Sheet Review
Loans. The loan portfolio is comprised of loans made to businesses, individuals, and farm and ranch operations
located in the primary trade areas served by our subsidiary banks. Real estate loans represent loans primarily for
new home construction and owner-occupied real estate. The structure of loans in the real estate mortgage
classification generally provides repricing intervals to minimize the interest rate risk inherent in long-term fixed rate
mortgage loans. As of December 31, 2002, total loans were $964.0 million, an increase of $23.9 million, as
compared to December 31, 2001. As compared to year-end 2001, real estate loans increased $28.6 million and
consumer loans decreased $4.4 million. Commercial, financial and agricultural loans as of year-end 2002 were
virtually unchanged from one year ago. Loans averaged $942.1 million during 2002, an increase of $44.5 million
over the prior year average.
20
Table 5 — Composition of Loans (in thousands):
2002
2001
December 31,
2000
1999
1998
Commercial, financial and agricultural................
Real estate — construction ...................................
Real estate — mortgage........................................
Consumer, net of unearned income......................
$ 311,743
50,911
375,256
226,130
$ 964,040
$ 312,053
47,173
350,382
230,523
$ 940,131
$ 295,032
40,610
290,920
232,709
$ 859,271
$ 297,966
43,039
208,895
247,375
$ 797,275
$ 278,647
36,721
198,447
265,729
$ 779,544
Table 6 — Maturity Distribution and Interest Sensitivity of Loans at December 31, 2002 (in thousands):
The following tables summarize maturity and yield information for the commercial, financial, and agricultural
and the real estate-construction portion of the loan portfolio as of December 31, 2002:
Commercial, financial, and agricultural.....
Real estate — construction .........................
One Year
or less
$
216,797
35,292
$ 252,089
Loans with fixed interest rates ............................................
Loans with floating or adjustable interest rates..................
After One
Year
Through
Five Years
$
76,860
15,619
$ 92,479
Maturities
After One Year
$
55,354
55,211
$ 110,565
After Five
Years
$
18,086
-
$ 18,086
Total
$
311,743
50,911
$ 362,654
Asset Quality. Loan portfolios of each of our subsidiary banks are subject to periodic reviews by our
centralized independent loan review group as well as periodic examinations by state and federal bank regulatory
agencies. Loans are placed on nonaccrual status when, in the judgment of management, the collectibility of
principal or interest under the original terms becomes doubtful. Nonperforming assets, which consist of
nonperforming loans and foreclosed assets, were $4.3 million at December 31, 2002, as compared to $4.8 million at
December 31, 2001 and $4.1 million at December 31, 2000. As a percent of loans and foreclosed assets,
nonperforming assets were 0.44% at December 31, 2002, as compared to 0.51% at December 31, 2001 and 0.48% at
December 31, 2000. Management considers the level of nonperforming assets to be manageable and is not aware of
any material classified credit not properly disclosed as nonperforming at December 31, 2002.
Table 7 — Nonperforming Assets (in thousands, except percentages):
2002
2001
At December 31,
2000
1999
1998
Nonaccrual loans .......................................................
Loans still accruing and past due 90 days or more ..
Restructured loans.....................................................
Nonperforming loans ........................................
Foreclosed assets .......................................................
Total nonperforming assets...............................
As a % of loans and foreclosed assets......................
$
3,716
14
-
3,730
536
$ 4,266
0.44%
$
3,727
66
-
3,793
1,031
$ 4,824
0.51%
$
3,512
34
-
3,546
546
$ 4,092
0.48%
$
1,389
63
-
1,452
637
$ 2,089
0.26%
$
2,717
67
-
2,784
385
$ 3,169
0.41%
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 losses on loans that are deemed uncollectible. Management
determines the allowance and the required provision expense by reviewing general loss experiences and the
performances of specific credits. The provision for loan losses was $2.4 million for 2002 as compared to $2.0
million for 2001 and $2.4 million for 2000. As a percent of average loans, net loan charge-offs were 0.19% during
2002, and 0.18% during 2001 and 2000. The allowance for loan losses as a percent of loans was 1.16% as of
21
December 31, 2002, as compared to 1.13% as of December 31, 2001. A key indicator of the adequacy of the
allowance for loan losses is the ratio of the allowance to nonperforming loans, which consist of nonaccrual loans,
loans past due 90 days, and restructured loans. This ratio for the past five years is disclosed in Table 8. Table 9
provides an allocation of the allowance for loan losses based on loan type and the percent of total loans that each
major loan type represents. Other than the loan types presented in Table 9, we had no loan concentration at
December 31, 2002 that represented more than 10% of total loans.
Although we believe that we use the best information available to make loan loss allowance determinations,
future adjustments could be necessary if circumstances or economic conditions differ substantially from the
assumptions used in making our initial determinations. A downturn in the economy and employment could result in
increased levels of non-performing assets and charge-offs, increased loan loss provisions and reductions in income.
Additionally, as an integral part of their examination process, bank regulatory agencies periodically review our
allowance for loan losses. The banking agencies could require the recognition of additions to the loan loss allowance
based on their judgment of information available to them at the time of their examination.
Table 8 — Loan Loss Experience and Allowance for Loan Losses (in thousands, except percentages):
2002
2001
2000
1999
1998
Balance at January 1,..........................................................
Allowance established from purchase acquisitions ..........
$ 10,602
-
10,602
Charge-offs:
Commercial, financial and agricultural .........................
Consumer ........................................................................
All other ..........................................................................
Total loans charged off ......................................................
1,116
1,471
-
2,587
Recoveries:
Commercial, financial and agricultural .........................
Consumer ........................................................................
All other ..........................................................................
Total recoveries ..................................................................
288
535
11
834
Net charge-offs ...................................................................
Provision for loan losses ....................................................
Balance at December 31, ...................................................
1,753
2,370
$ 11,219
$
9,888
407
10,295
1,094
1,498
33
2,625
269
688
11
968
1,657
1,964
$ 10,602
$
8,938
-
8,938
950
1,998
45
2,993
391
855
299
1,545
1,448
2,398
$ 9,888
$
8,988
-
8,988
1,038
2,747
36
3,821
632
936
172
1,740
2,081
2,031
$ 8,938
$ 10,632
-
10,632
1,267
2,786
106
4,159
532
811
32
1,375
2,784
1,140
$ 8,988
Loans at year-end ...............................................................
Average loans .....................................................................
$964,040
942,101
$940,131
897,616
$ 859,271
817,603
$ 797,275
779,283
$ 779,544
770,183
Net charge-offs/average loans ...........................................
Allowance for loan losses/year-end loans.........................
Allowance for loan losses/nonperforming loans...............
0.19%
1.16
300.78
0.18%
1.13
279.51
0.18%
1.15
278.85
0.27%
1.12
615.55
0.36%
1.15
322.84
Table 9 — Allocation of Allowance for Loan Losses (in thousands):
Commercial, financial and agricultural.......................
Real estate — construction ..........................................
Real estate — mortgage ...............................................
Consumer......................................................................
Total ........................................................................
2002
Allocation
Amount
3,628
$
592
4,368
2,631
$ 11,219
2001
Allocation
Amount
4,966
$
415
2,710
2,511
$ 10,602
$
2000
Allocation
Amount
3,394
468
3,348
2,678
$ 9,888
1999
Allocation
Amount
$
3,340
483
2,342
2,773
$ 8,938
1998
Allocation
Amount
$
3,213
423
2,288
3,064
$ 8,988
22
Percent of Total Loans:
Commercial, financial and agricultural.....................................
Real estate — construction ........................................................
Real estate — mortgage .............................................................
Consumer, net of unearned income ...........................................
2002
32.34%
5.28
38.93
23.45
2001
33.19%
5.02
37.27
24.52
2000
34.33%
4.73
33.86
27.08
1999
37.37%
5.40
26.20
31.03
1998
35.74%
4.71
25.46
34.09
Certain loans classified for regulatory purposes as doubtful, substandard, or special mention are included in the
nonperforming asset table. Also included in 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 $12.0 million as of December 31, 2002.
Investment Securities. Investment securities totaled $772.3 million as of December 31, 2002, as compared to
$721.7 million at December 31, 2001 and $654.3 million at December 31, 2000. At December 31, 2002, securities
with an amortized cost of $200.4 million were classified as securities held-to-maturity and securities with a market
value of $571.8 million were classified as securities available-for-sale. As compared to December 31, 2001, the
portfolio at December 31, 2002, reflected (i) an increase of $14.8 million in U.S. Treasury; (ii) an increase of $12.8
million in tax-exempt obligations of states and political subdivisions; (iii) a $4.2 million decrease in corporate bonds
and other securities; and (iv) a $27.2 million increase in mortgage-backed securities. As compared to December 31,
2000, the portfolio at December 31, 2001 reflected (i) a decrease of $86.9 million in U.S. Treasury and U.S.
Government corporations and agency securities; (ii) an increase of $16.8 million in tax-exempt obligations of states
and political subdivisions; (iii) an $6.6 million increase in other securities, primarily corporate bonds; and (iv) a
$130.9 million increase in mortgage-backed securities. The overall portfolio yield of 5.62% at the end of 2002 was
down from the prior year-end yield of 6.06% due to lower average interest rates. We did not hold collateralized
mortgage obligations that entail higher risks than other mortgage-backed securities without complex payment
features nor did we hold any structured notes. See Note 2 to the Consolidated Financial Statements for additional
disclosures relating to the maturities and fair values of the investment portfolio at December 31, 2002 and 2001.
Table 10 — Composition of Investment Securities (dollars in thousands):
2002
At December 31,
2001
2000
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$ 110,939
$ 117,808
$ 172,880
$ 177,872
$ 251,418
$ 251,922
60,836
499
64,050
540
75,959
498
77,495
512
82,344
4,615
83,067
4,597
Held-to-Maturity:
U.S. Treasury securities
and obligations of U.S.
Government
corporations and
agencies.............................
Obligations of states and
political subdivisions.........
Corporate bonds ....................
Mortgage-backed
securities ...........................
28,176
Other securities...................... -
200,450
29,464
-
211,862
41,333
4
290,674
42,687
4
298,570
53,541
-
391,918
54,005
-
393,591
23
Available-for-Sale:
U.S. Treasury securities
and obligations of U.S.
Government
corporations and
agencies.............................
Obligations of states and
political subdivisions.........
Corporate bonds ....................
Mortgage-backed
securities ...........................
Other securities......................
2002
At December 31,
2001
2000
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$ 164,090
$ 171,619
$ 93,151
$ 94,919
$ 102,872
$ 103,321
104,800
49,234
228,490
5,453
552,067
110,741
51,812
232,106
5,529
571,807
82,546
56,553
189,421
3,007
424,678
82,851
58,522
191,720
3,007
431,019
58,544
47,326
47,963
3,137
259,842
59,610
47,715
48,551
3,137
262,334
$ 752,517
$ 783,669
$ 715,352
$ 729,589
$ 651,760
$ 655,925
Table 11 — Maturities and Yields of Investment Securities Held at December 31, 2002 (in thousands,
except percentages):
One Year
or Less
After One Year
Through
Five Years
Maturing
After Five Years
Through
Ten Years
After
Ten Years
Total
Amount
$ 1,002
Yield
5.38%
Amount
$ -
Yield
-%
Amount
$ -
Yield
-%
Amount
$ -
Yield
-%
Amount
$ 1,002
Yield
5.38%
Held-to-Maturity:
U.S. Treasury obligations ....................
Obligations of U.S.
Government corporations and
agencies......................................
31,627
5.33
78,310
5.70
-
-
-
-
109,937
5.59
Obligations of states and political
subdivisions ....................................
Corporate bonds and other securities..
Mortgage-backed securities.................
Total ................................................
18,476
-
4,855
$55,960
6.12
-
6.91
5.73%
19,953
499
22,290
$121,052
6.57
6.17
6.72
6.01%
8,275
-
1,031
$9,306
7.44
-
5.44
7.22%
14,132
-
-
$14,132
7.76
-
-
7.76%
60,836
499
28,176
$200,450
6.83
6.17
6.71
6.12%
One Year
or Less
After One Year
Through
Five Years
Maturing
After Five Years
Through
Ten Years
After
Ten Years
Total
Amount
$ -
Yield
Amount
- % $ 1,005
Yield
1.89%
Amount
$ -
Yield
-%
Amount
$ -
Yield
-%
Amount
$ 1,005
Yield
1.89%
Available-for-Sale:
U.S. Treasury obligations ....................
Obligations of U.S.
Government corporations and
agencies......................................
12,418
5.12
158,196
4.32
-
-
-
-
170,614
4.38
Obligations of states and political
subdivisions ....................................
Corporate bonds and other securities..
Mortgage-backed securities.................
Total ................................................
4,211
12,586
17,910
$47,125
6.38
5.94
5.49
5.59%
8,133
40,647
182,752
$390,733
5.71
6.01
5.40
5.02%
34,469
-
31,444
$65,913
7.26
-
4.93
6.06%
63,928
4,108
-
$68,036
7.24
6.00
-
7.17%
110,741
57,341
232,106
$571,807
7.10
5.99
5.34
5.44%
24
One Year
or Less
After One Year
Through
Five Years
Maturing
After Five Years
Through
Ten Years
After
Ten Years
Total
Amount
$ 1,002
Yield
5.38%
Amount
$ 1,005
Yield
1.89%
Amount
$ -
Yield
-%
Amount
$ -
Yield
-%
Amount
$ 2,007
Yield
3.63%
Total Investment Securities:
U.S. Treasury obligations ....................
Obligations of U.S.
Government corporations and
agencies......................................
44,045
5.27
236,506
4.78
-
-
-
-
280,551
4.85
Obligations of states and political
subdivisions ....................................
Corporate bonds and other securities..
Mortgage-backed securities.................
Total ................................................
22,687
12,586
22,765
$103,085
6.17
5.94
5.79
5.67%
28,086
41,146
205,042
$511,785
6.32
6.01
5.54
5.26%
42,744
-
32,475
$75,219
7.30
-
4.95
6.20%
78,060
4,108
-
$82,168
7.33
6.00
-
7.27%
171,577
57,840
260,282
$772,257
7.00
5.99
5.48
5.62%
Deposits. Deposits held by subsidiary banks represent our primary source of funding. Total deposits were
$1.712 billion as of December 31, 2002, as compared to $1.685 billion as of December 31, 2001 and $1.520 billion
as of December 31, 2000. Table 12 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 12 — Composition of Average Deposits and Remaining Maturity of Time Deposits of $100,000 or
More (in thousands, except percentages):
2002
2001
2000
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Noninterest-bearing deposits ...................
Interest-bearing deposits
Interest-bearing checking....................
Savings and money market accounts..
Time deposits under $100,000............
Time deposits of $100,000 or more....
Total interest-bearing deposits............
Total average deposits..............................
$
385,012
-
$
339,800
-
$
317,659
-
315,688
389,337
371,970
182,163
1,259,158
$ 1,644,170
0.71%
1.18
3.11
3.13
1.91%
279,585
366,412
384,576
195,987
1,226,560
$ 1,566,360
1.43%
2.58
5.30
5.19
3.58%
252,281
374,396
370,093
164,405
1,161,175
$ 1,478,834
1.59%
3.93
5.29
5.74
4.11%
Three months or less............................................................
Over three through six months ............................................
Over six through twelve months .........................................
Over twelve months.............................................................
Total time deposits of $100,000 or more ........................
$
75,477
39,710
57,785
22,782
$ 195,754
December 31, 2002
Capital Resources
Total shareholders’ equity was $238.8 million, or 11.98% of total assets, at December 31, 2002, as compared to
$213.6 million, or 11.07% of total assets, at December 31, 2001. During 2002, total shareholders’ equity averaged
$224.4 million, or 11.76% of average assets, as compared to $204.5 million, or 11.29% of average assets, during
2001.
Banking regulators measure capital adequacy by means of the risk-based capital ratio and leverage ratio. The
risk-based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies
according to prescribed risk categories ranging from 0% to 100%. Regulatory capital is then divided by risk-
weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing
shareholders’ equity less intangible assets by quarter-to-date average assets less intangible assets. Regulatory
minimums for risk-based and leverage ratios are 8.00% and 3.00%, respectively. As of December 31, 2002, our
total risk-based and leverage ratios were 19.52% and 10.51%, respectively, as compared to total risk-based and
leverage ratios of 18.08% and 9.92% as of December 31, 2001. We believe by all measurements our capital ratios
remain above regulatory minimums.
Interest Rate Risk. Interest rate risk results when the maturity or repricing intervals of interest-earning assets
and interest-bearing liabilities are different. Our exposure to interest rate risk is managed primarily through our
strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities that generate
25
favorable earnings while limiting the potential negative effects of changes in market interest rates. We use no off-
balance-sheet financial instruments to manage interest rate risk.
Each of our subsidiary banks has an asset/liability committee that monitors interest rate risk and compliance
with investment policies. Each subsidiary bank tracks interest rate risk by, among other things, interest-sensitivity
gap and simulation analysis. Table 13 sets forth the interest rate sensitivity of our consolidated assets and liabilities
as of December 31, 2002, and sets forth the repricing dates of our consolidated interest-earning assets and interest-
bearing liabilities as of that date, as well as our projected consolidated interest rate sensitivity gap percentages for
the periods presented. The table is based upon assumptions as to when assets and liabilities will reprice in a
changing interest rate environment. These assumptions are estimates made by management. Assets and liabilities
indicated as maturing or otherwise repricing within a stated period may, in fact, mature or reprice at different times
and at different volumes than those estimated. Also, the renewal or repricing of certain assets and liabilities can be
discretionary and subject to competitive and other pressures. Therefore, the following table does not and cannot
necessarily indicate the actual future impact of general interest rate movements on our consolidated net interest
income.
Table 13 — Interest Sensitivity Analysis (in thousands, except percentages):
Loans
Fixed rate loans .......................
Average interest rate.............
Adjustable rate loans...............
Average interest rate.............
Investment securities
Fixed rate securities ................
Average interest rate.............
Adjustable rate securities........
Average interest rate.............
Other earning assets
Adjustable rate other ...............
Average interest rate.............
Total interest sensitive assets ....
Average interest rate.............
Deposits
Fixed rate deposits...................
Average interest rate.............
Adjustable rate deposits ..........
Average interest rate.............
Other interest-bearing
liabilities
Adjustable rate other ...............
Average interest rate.............
Total interest sensitive
$
95,936
7.00%
451,626
4.87
102,770
5.65
4,255
4.81
72,325
1.23
726,912
4.76%
$
466,285
2.41%
750,041
0.79
26,709
0.67
2002
2003
2004
2005
2006
Beyond
Total
$
65,864
8.42%
5,725
—
163,451
5.62
—
—
$
82,400
8.02%
3,552
—
$
79,104
7.23%
10,087
—
$
70,057
7.17%
9,898
—
$
89,516
7.80%
275
—
$ 482,877
7.58%
481,163
4.57
185,336
5.22
—
—
149,146
4.86
—
—
9,990
5.61
—
—
157,308
6.75
—
—
December 31,
2002
Estimated
Fair Value
$
492,042
481,163
779,414
4,255
72,325
768,001
5.61
4,255
4.81
72,325
1.23
—
—
$ 235,040
6.43%
—
—
$ 271,288
6.08%
—
—
$ 238,337
5.68%
—
—
89,945
6.98%
$
—
—
$ 247,099
7.13%
$1,808,621
5.73%
$ 1,828,364
42,008
3.31%
2,421
—
—
—
12,232
5.28%
—
—
—
—
2,223
4.40%
—
—
—
—
10,879
4.25%
—
—
—
—
—
—
—
—
—
—
—
—
533,627
2.59%
752,462
0.79
26,709
0.67
1,312,798
1.52%
537,171
752,462
26,709
1,316,342
liabilities ..................................
Average interest rate.............
1,243,035
1.39%
44,429
3.13%
12,232
5.28%
2,223
4.40%
10,879
4.25%
Interest sensitivity gap ...............
Cumulative interest sensitivity
gap............................................
Ratio of interest sensitive
assets to interest sensitive
liabilities ..................................
Cumulative ratio of interest
sensitive assets to interest
sensitive liabilities...................
Cumulative interest sensitivity
gap as a percent of earning
assets ........................................
$ (516,123)
$ 190,611
$ 259,056
$ 236,114
$
79,066
$ 247,099
$ 495,823
$
512,022
(516,123)
(325,512)
(66,456)
169,658
248,724
495,823
58.48%
58.48%
74.72%
94.89%
113.03%
118.95%
137.77%
(28.54)%
(18.00)%
(3.67)%
9.38%
13.75%
27.41%
As of December 31, 2001, our 2002 interest-sensitivity gap was ($518.8) million and our 2002 ratio of interest
sensitive assets to interest sensitive liabilities was 58.73%.
Management estimates that, as of December 31, 2002, an upward shift of interest rates by 150 basis points
would result in a 4.5% increase in projected net interest income over the next twelve months, and a downward shift
of interest rates by 150 basis points would result in a 7.1% reduction in projected net interest income over the next
twelve months. These are good faith estimates and assume that the composition of our interest sensitive assets and
26
liabilities existing at each year-end will remain constant over the relevant twelve month measurement period and
that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of
pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that we
might undertake in response to changes in market interest rates. In management’s belief, these estimates are not
necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of
this magnitude. Management believes that it is unlikely that such changes would occur in a short time period. As
interest-bearing assets and liabilities reprice at different time frames and proportions to market interest rate
movements, various assumptions must be made based on historical relationships of these variables in reaching any
conclusion. Since these correlations are based on competitive and market conditions, our future results would, in
management’s belief, be different from the foregoing estimates, and such differences could be material.
Liquidity
Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit
withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of
credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity
needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the
total commitment amounts do not necessarily represents future cash requirements affecting our liquidity position.
The potential need for liquidity arising from these types of financial instruments is represented by the contractual
notional amount of the instrument, as detailed in Table 14. Asset liquidity is provided by cash and assets, which are
readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-
term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which include
core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary banks.
Other sources of funds include our ability to sell securities under agreement to repurchase, which amounted to $26.7
million at December 31, 2002, and an unfunded $25.0 million line of credit established with a nonaffiliated bank
which matures on June 30, 2003. We believe the line of credit will be renewed upon maturity. Given the strong
core deposit base and relatively low loan to deposit ratios maintained at the subsidiary banks, management considers
the current liquidity position to be adequate to meet short- and long-term liquidity needs.
In addition, we anticipate that any future acquisition of financial institutions and expansion of branch locations
could also place a demand on our cash resources. Available cash at our parent company which totaled $23.1 million
at December 31, 2002, available dividends from subsidiary banks which totaled $20.7 million at December 31,
2002, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of
funding for these potential acquisitions or expansions.
Table 14 — Commercial Commitments As of December 31, 2002 (in thousands):
Total Amounts
Committed
Less than 1
year
1 - 3 years
4 - 5 years
Over 5
years
Commitments to extend credit ....................
Standby letters of credit...............................
Total Commercial Commitments ...............
185,895
$
6,068
$ 191,963
$ 176,758
5,253
$ 182,011
$ 4,779
806
$ 5,585
2,491
$
9
$ 2,500
$ 1,867
-
$ 1,867
The Company has no other off-balance sheet arrangements or transactions with unconsolidated, special purpose
entities that would expose the Company to liability that is not reflected on the face of the financial statements.
Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash acquisitions is
generally dependent solely on our own earnings (without giving effect to our subsidiaries), cash reserves and funds
derived from our subsidiary banks. These funds historically have been produced by intercompany dividends and
management fees that are limited to reimbursement of actual expenses. We anticipate that our recurring cash
sources will continue to include dividends and management fees from our subsidiary banks. At December 31, 2002,
approximately $20.7 million was available for the payment of intercompany dividends by the subsidiary banks
without the prior approval of regulatory agencies. Our subsidiary banks paid aggregate dividends of $26.6 million
in 2002 and $25.5 million in 2001. Also at December 31, 2002, we had $25.0 million available under a line of credit
with an unaffiliated financial institution.
Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of between 40% and
50% of net earnings while maintaining adequate capital to support growth. The cash dividend payout ratios have
27
amounted to 49.1%, 48.9% and 45.2% of net earnings, respectively, in 2002, 2001 and 2000. Given our current
strong capital position and projected earnings and asset growth rates, we do not anticipate any change in our current
dividend policy.
Each state bank that is a member of the Federal Reserve System and each national banking association is
required by federal law to obtain the prior approval of the Federal Reserve Board and the OCC, respectively, to
declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1)
such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as
defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. In
addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred
to surplus) exceed bad debts (as defined by regulation).
To pay dividends, we and our subsidiary banks must maintain adequate capital above regulatory guidelines. In
addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in or is about to
engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the
payment of dividends), the authority may require, after notice and hearing, that such bank cease and desist from the
unsafe practice. The Federal Reserve Board and the OCC have each indicated that paying dividends that deplete a
bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve
Board, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and
insured banks should generally only pay dividends out of current operating earnings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our management considers interest rate risk to be a significant market risk for us. See “Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review—Interest Rate
Risk” for disclosure regarding this market risk.
28
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements begin on page F-1.
Quarterly Results of Operations (in thousands, except per share and common stock data):
The following tables set forth certain unaudited historical quarterly financial data for each of the eight
consecutive quarters in fiscal 2002 and 2001. This information is derived from unaudited consolidated financial
statements that include, in our opinion, all adjustments (consisting of normal recurring adjustments) necessary for a
fair presentation when read in conjunction with our consolidated financial statements and notes thereto included
elsewhere in this Form 10-K.
Summary Income Statement Information:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Net gain (loss) on securities transactions
Noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Per Share Data:
Net earnings per share, basic
Net earnings per share, assuming dilution
Cash dividends declared
Book value at period-end
Common stock sales price: (1)
High
Low
Close
Summary Income Statement Information:
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest income
Net gain on securities transactions
Noninterest expense
Earnings before income taxes
Income tax expense
Net earnings
Per Share Data:
Net earnings per share, basic
Net earnings per share, assuming dilution
Cash dividends declared
Book value at period-end
Common stock sales price: (1)
High
Low
Close
4th
3rd
2nd
1st
2002
$
25,687
5,244
20,443
809
19,634
7,858
-
15,247
12,245
3,694
$ 8,551
$
$
0.69
0.69
0.35
19.31
42.00
34.65
38.00
$ 26,316
5,818
20,498
652
19,846
7,527
(3)
14,902
12,468
3,768
$ 8,700
$
$
0.70
0.70
0.35
19.25
41.73
34.85
36.44
$
26,414
6,246
20,168
510
19,658
7,177
19
14,677
12,177
3,655
$ 8,522
$
$
0.69
0.69
0.35
18.43
43.00
33.00
41.84
$ 26,445
7,072
19,373
399
18,974
6,975
-
14,256
11,693
3,513
$ 8,180
$
$
0.66
0.66
0.30
17.60
34.30
29.30
33.21
4th
3rd
2nd
1st
2001
$
27,814
9,071
18,743
562
18,181
6,972
-
14,364
10,789
3,258
$ 7,531
$
$
0.61
0.61
0.30
17.32
31.88
27.20
30.10
$ 29,500
10,958
18,542
539
18,003
6,847
-
14,047
10,803
3,270
$ 7,533
$
$
0.61
0.61
0.30
17.31
32.91
27.00
29.03
$
29,213
11,779
17,434
497
16,937
7,046
14
13,507
10,490
3,203
$ 7,287
$
$
0.59
0.59
0.30
16.77
31.44
25.00
31.00
$ 29,946
13,026
16,920
366
16,554
6,646
54
13,154
10,100
3,096
$ 7,004
$
0.57
0.56
0.264
16.40
$
27.15
23.40
26.60
(1) These quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not
necessarily represent actual transactions.
29
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 25, 2002, we determined not to renew the engagement of our independent accountants, Arthur
Andersen LLP. Arthur Andersen had served as our independent auditors since 1990. The decision not to renew the
engagement of Arthur Andersen was made by the executive committee of our board of directors following the
recommendation of our audit committee. Arthur Andersen’s report on our 2001 financial statements was filed with
the Securities and Exchange Commission on March 20, 2002 in conjunction with the filing of our Annual Report on
Form 10-K for the year ended December 31, 2001.
During the two fiscal years ended December 31, 2001, and through the subsequent interim period through
March 25, 2002, there were no disagreements between Arthur Andersen and us on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to Arthur Andersen’s satisfaction would have caused them to make reference to the subject matter of the
disagreement in connection with their reports.
None of the reportable events defined under Item 304(a)(1)(v) of Regulation S-K occurred within our two fiscal
years ended December 31, 2001 and through the subsequent interim period through March 25, 2002. The audit
reports of Arthur Andersen on our consolidated financial statements as of and for the fiscal years ended December
31, 2001 and 2000 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope, or accounting principles. We provided Arthur Andersen with a copy of the foregoing
disclosure, and a copy of its letter stating its agreement with these statements was filed as an exhibit to our Form
8-K dated March 25, 2002.
The executive committee of our board of directors, upon the recommendation of our audit committee, elected to
appoint Ernst & Young LLP as our independent auditors, effective May 16, 2002. During our two fiscal years ended
December 31, 2001, and through the subsequent interim periods through May 16, 2002, we did not consult with
Ernst & Young regarding any of the matters or events set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference from our proxy statement for our 2003
annual meeting of shareholders or our 2003 proxy statement, under the captions “Proposal 1 — Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance.”
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our 2003 proxy statement under
the caption “Management.”
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is hereby incorporated by reference from our 2003 proxy statement under
the captions “Proposal 1 — Election of Directors” and “Security Ownership of Certain Beneficial Owners and
Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference from our 2003 proxy statement under
the caption “Interest in Certain Transactions.”
30
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, we carried out an evaluation, under the supervision and
with the participation of our management, including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities
Exchange Act Rule 15d-15. Our management, including the principal executive officer and principal financial
officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed
in achieving its stated goals under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur
and not be detected. Our principal executive officer and principal financial officer have concluded, based on our
evaluation of our disclosure controls and procedures, that our disclosure controls and procedures under Rule 13a-
14(c) and Rule 15d-14(c) of the Securities Exchange Act of 1934 are effective.
Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could
significantly affect these internal controls.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A.
The following documents are filed as part of this report:
(1)
Financial Statements
Report of Independent Auditors
Report of Independent Public Accountants
Management’s Report on Responsibility for the Financial Statements
Consolidated Balance Sheets as of December 31, 2002 and 2001
Consolidated Statements of Earnings for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2002,
2001 and 2000
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2002, 2001
and 2000
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
Notes to the Consolidated Financial Statements
(2)
Financial Statement Schedules
These schedules have been omitted because they are not required, are not applicable or have been
included in our consolidated financial statements.
(3)
Exhibits
The information required by this Item 15(a)(3) is set forth in the Exhibit Index immediately
following our financial statements. The exhibits listed herein will be furnished upon written
request to J. Bruce Hildebrand, Executive Vice President, First Financial Bankshares, Inc., 400
Pine Street, Abilene, Texas 79601, and payment of a reasonable fee that will be limited to our
reasonable expense in furnishing such exhibits.
31
B.
Reports on Form 8-K.
On October 1, 2002, we filed a Form 8-K announcing the hiring of J. Bruce Hildebrand as our next chief
financial officer replacing Curtis R. Harvey during the first quarter of 2003. No financial statements were
reported as part of this Form 8-K.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date: March 10, 2003
By: /s/ F. SCOTT DUESER
F. SCOTT DUESER
President, Chief Executive Officer and Director
The undersigned directors and officers of First Financial Bankshares, Inc. hereby constitute and appoint Curtis
R. Harvey, with full power to act and with full power of substitution and resubstitution, our true and lawful attorney-
in-fact with full power to execute in our name and behalf in the capacities indicated below any and all amendments
to this report and to file the same, with all exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission and hereby ratify and confirm all that such attorney-in-fact or his substitute
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ KENNETH T. MURPHY
Kenneth T. Murphy
Chairman of the Board and Director
March 10, 2003
/s/ F. SCOTT DUESER
F. Scott Dueser
President, Chief Executive Officer
and Director
(Principal Executive Officer)
March 10, 2003
/s/ CURTIS R. HARVEY
Curtis R. Harvey
/s/ JOSEPH E. CANON
Joseph E. Canon
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
March 10, 2003
Director
March 18, 2003
/s/ MAC A. COALSON
Mac A. Coalson
Director
March 25, 2003
/s/ DAVID COPELAND
David Copeland
Director
March 18, 2003
33
Name
Title
Date
/s/ DERRELL E. JOHNSON
Derrell E. Johnson
Director
March 13, 2003
/s/ KADE L. MATTHEWS
Kade L. Matthews
Director
March 25, 2003
/s/ RAYMOND A. MCDANIEL, JR.
Raymond A. McDaniel, Jr.
Director
March 18, 2003
/s/ BYNUM MIERS
Bynum Miers
Director
March 18, 2003
/s/ JAMES M. PARKER
James M. Parker
Director
March 18, 2003
/s/ JACK D. RAMSEY
Jack D. Ramsey
Director
March 18, 2003
Craig Smith
Director
March __, 2003
/s/ DIAN GRAVES STAI
Dian Graves Stai
Director
March 18, 2003
/s/ F. L. STEPHENS
F. L. Stephens
Director
March 25, 2003
34
I, F. Scott Dueser, certify that:
CERTIFICATIONS
1.
I have reviewed this annual report on Form 10-K of First Financial Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
a. Designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the “Evaluation Date”); and
c.
Presented in this annual report our conclusions about the effectiveness of this disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies in the design or operation of internal controls which could adversely affect
the registrant’s ability to record, process, summarize and report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 10, 2003
By:
/s/ F. SCOTT DUESER
F. Scott Dueser
President, Chief Executive Officer and Director
35
I, Curtis R. Harvey, certify that:
1.
I have reviewed this annual report on Form 10-K of First Financial Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have;
a. Designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the “Evaluation Date”); and
c.
Presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the
registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies in the design or operation of internal controls which could adversely affect
the registrant’s ability to record, process, summarize and report financial data and have identified for the
registrant’s auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether there were
significant changes in internal controls or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 10, 2003
By:
/s/ Curtis R. Harvey
Curtis R. Harvey
Executive Vice President and Chief Financial Officer
36
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.
We have audited the accompanying consolidated balance sheet of First Financial Bankshares, Inc. (a Texas
corporation) and subsidiaries as of December 31, 2002, and the related consolidated statements of earnings,
comprehensive earnings, shareholders’ equity, and cash flows for the year then ended. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit. The consolidated financial statements of First Financial Bankshares, Inc. and
subsidiaries as of December 31, 2001 and for each of the two years then ended, were audited by other auditors who
have ceased operations and whose report dated January 11, 2002, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of First Financial Bankshares, Inc. and subsidiaries at December 31, 2002, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with accounting principles generally accepted
in the United States.
As discussed above, the financial statements of First Financial Bankshares, Inc. as of December 31, 2001 and the
two years then ended were audited by other auditors who have ceased operations. As described in Note 1, these
financial statements have been revised to include the transitional disclosures required by Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001 and 2000
included (a) agreeing the previously reported net income to the previously issued financial statements and the
adjustments to reported net income representing amortization expense including related tax effects recognized in
those periods related to goodwill to the Company’s underlying records obtained from management, and (b) testing
the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related
earnings per share amounts. In our opinion, the disclosures for 2001 and 2000 are appropriate. However, we were
not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of the Company
other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of
assurance on the 2001 and 2000 financial statements taken as a whole.
Dallas, Texas
January 14, 2003
Ernst & Young LLP
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of First Financial Bankshares, Inc. (a Texas
corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of
earnings, comprehensive earnings, shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position
of First Financial Bankshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Dallas, Texas,
January 11, 2002
NOTE:
THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP WHICH CEASED OPERATIONS. THIS REPORT
ADDRESSES CERTAIN FINANCIAL STATEMENTS FOR PERIODS
THAT ARE NOT OTHERWISE REQUIRED TO BE INCLUDED IN THIS
FORM 10-K.
F-2
MANAGEMENT’S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The Management of First Financial Bankshares, Inc. and subsidiaries is responsible for the preparation, integrity,
and fair presentation of its annual consolidated financial statements as of December 31, 2002 and 2001, and for each
of the three years in the period ended December 31, 2002. The financial statements have been prepared in
accordance with accounting principles generally accepted in the United States and, as such, include amounts based
on judgments and estimates made by Management. Management has also prepared the other information included
in this Annual Report and is responsible for its accuracy and consistency with the consolidated financial statements.
The annual consolidated financial statements as of and for the year ended December 31, 2002 have been audited by
Ernst & Young LLP, who have been given unrestricted access to all financial records and related data, including
minutes of all meetings of shareholders and the Board of Directors. Management believes that all representations
made to Ernst & Young LLP during the audit were valid and appropriate.
The annual consolidated financial statements as of December 31, 2001, and for the years ended December 31, 2001
and 2000, were audited by Arthur Andersen LLP, who were given unrestricted access to all financial records and
related data, including minutes of all meetings of shareholders and the Board of Directors. Management believes
that all representations made to Arthur Andersen LLP during the audits were valid and appropriate. Arthur
Andersen LLP subsequently ceased operations.
F. Scott Dueser
President and Chief Executive Officer
Curtis R. Harvey
Executive Vice President
and Chief Financial Officer
F-3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
ASSETS
CASH AND DUE FROM BANKS
FEDERAL FUNDS SOLD
Total cash and cash equivalents
INTEREST-BEARING DEPOSITS IN BANKS
INVESTMENT SECURITIES:
Securities held-to-maturity (fair value of $211,862,151 in
2002 and $298,569,794 in 2001)
Securities available-for-sale, at fair value
Total investment securities
LOANS
Less- allowance for loan losses
Net loans
BANK PREMISES AND EQUIPMENT, net
INTANGIBLE ASSETS
OTHER ASSETS
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
NONINTEREST-BEARING DEPOSITS
INTEREST-BEARING DEPOSITS
Total deposits
DIVIDENDS PAYABLE
2002
2001
$ 108,436,645
$ 112,150,214
70,000,000
72,975,000
178,436,645
185,125,214
2,324,425
1,374,285
200,449,784
571,806,629
290,674,490
431,019,205
772,256,413
721,693,695
964,039,773
11,218,729
940,130,975
10,602,419
952,821,044
929,528,556
40,605,401
42,012,431
24,870,788
24,711,969
21,868,220
25,247,980
$1,993,182,936
$1,929,694,130
$ 425,473,353
$ 389,406,666
1,286,088,863
1,295,755,932
1,711,562,216
1,685,162,598
4,327,374
3,699,976
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
26,708,994
19,847,067
OTHER LIABILITIES
Total liabilities
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common stock, $10 par value; authorized 20,000,000 shares;
12,364,201 and 12,333,252 issued and outstanding at
December 31, 2002 and 2001, respectively
Capital surplus
Retained earnings
Accumulated other comprehensive earnings
Total shareholders’ equity
11,816,707
7,330,476
1,754,415,291
1,716,040,117
123,642,010
58,087,687
45,647,522
11,390,426
123,332,520
57,824,061
28,375,353
4,122,079
238,767,645
213,654,013
Total liabilities and shareholders’ equity
$1,993,182,936
$1,929,694,130
The accompanying notes are an integral part of these consolidated financial statements.
F-4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
December 31, 2002, 2001 and 2000
INTEREST INCOME:
Interest and fees on loans
Interest on investment securities:
Taxable
Exempt from federal income tax
Interest on federal funds sold and interest-bearing
deposits in banks
2002
2001
2000
$ 64,609,189
$ 74,881,682 $ 75,474,661
32,263,763
7,042,102
32,169,874
6,279,973
33,556,796
5,770,861
946,861
3,211,316
3,148,277
Total interest income
104,861,915
116,472,845
117,950,595
INTEREST EXPENSE:
Interest on deposits
Other
Total interest expense
Net interest income
24,087,911
291,793
43,970,532
863,480
47,737,862
1,091,180
24,379,704
44,834,012
48,829,042
80,482,211
71,638,833
69,121,553
PROVISION FOR LOAN LOSSES
2,369,634
1,964,050
2,397,750
Net interest income after provision for loan losses
78,112,577
69,674,783
66,723,803
NONINTEREST INCOME:
Trust department income
Service fees on deposit accounts
ATM fees
Real estate mortgage fees
Net gain on securities transactions
Other
5,835,909
15,435,137
2,370,313
1,858,378
16,373
4,036,366
5,890,600 5,494,246
14,073,514
1,554,437
1,021,590
530,097
3,273,445
14,743,217
1,941,508
1,609,518
67,789
3,325,858
Total noninterest income
29,552,476
27,578,490
25,947,329
NONINTEREST EXPENSE:
Salaries and employee benefits
Net occupancy expense
Equipment expense
Printing, stationary and supplies
Correspondent bank service charges
Amortization of intangible assets
Other expenses
31,992,733
3,908,856
4,800,768
1,474,683
1,491,132
135,156
15,278,722
28,685,294
3,995,597
4,457,909
1,084,134
1,329,134
1,641,367
13,878,262
27,077,436
3,563,289
4,180,782
882,470
1,261,811
1,641,367
13,085,333
Total noninterest expense
59,082,050
55,071,697
51,692,488
EARNINGS BEFORE INCOME TAXES
48,583,003
42,181,576
40,978,644
INCOME TAX EXPENSE
NET EARNINGS
14,630,453
12,827,071
12,662,597
$ 33,952,550
$ 29,354,505
$28,316,047
NET EARNINGS PER SHARE, BASIC
$ 2.75
$ 2.38
$ 2.28
NET EARNINGS PER SHARE, ASSUMING DILUTION
$ 2.74
$ 2.37
$ 2.27
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
December 31, 2002, 2001 and 2000
NET EARNINGS
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized gain on investment securities
available-for-sale, before income tax
Reclassification adjustment for realized gains on investment
securities included in net earnings, before income tax
Minimum liability pension adjustment, before income tax
2002
2001
2000
$ 33,952,550
$ 29,354,505
$ 28,316,047
13,414,265
3,916,477
9,319,576
(16,373)
(2,215,820)
(67,789)
-
(530,097)
-
Total other items of comprehensive earnings
11,182,072
3,848,688
8,789,479
Income tax expense related to other items of
comprehensive earnings
(3,913,725)
(1,347,041)
(3,076,320)
COMPREHENSIVE EARNINGS
$ 41,220,897
$ 31,856,152
$ 34,029,206
The accompanying notes are an integral part of these consolidated financial statements.
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FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
December 31, 2002, 2001 and 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization
Provision for loan losses
Premium amortization, net of discount accretion
Loss (gain) on sale of assets
Deferred federal income tax expense (benefit)
(Increase) decrease in other assets
Increase (decrease) in other liabilities
2002
2002
2001
2001
2000
$ 33,952,550
$ 29,354,505
$ 28,316,047
4,125,655
2,369,634
2,077,358
42,890
350,415
(1,508,089)
2,695,533
5,679,082
1,964,050
1,662,108
(52,815)
(188,982)
3,565,172
(1,778,326)
5,502,224
2,397,750
1,359,124
(540,304)
(304,240)
(2,567,832)
1,026,945
Total adjustments
10,153,396
10,850,289
6,873,667
Net cash provided by operating activities
44,105,946
40,204,794
35,189,714
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in interest-bearing deposits in banks
Payment for stock of City Bancshares, Inc., net of cash acquired
Activity in available-for-sale securities:
Sales
Maturities
Purchases
Activity in held-to-maturity securities:
Maturities
Purchases
Net increase in loans
Purchases of bank premises and equipment
Proceeds from sale of other assets
(950,140)
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(1,269,947)
(6,848,231)
(100,258)
-
30,077,478
814,880,024
(972,026,050)
57,925,815
660,484,725
(854,748,980)
530,097
21,660,247
(41,804,532)
90,203,464
(2,360,727)
(26,012,420)
(2,913,886)
526,065
176,972,321
(76,102,656)
(31,639,533)
(5,151,260)
200,461
87,167,939
(57,628,266)
(63,728,244)
(2,507,214)
392,305
Net cash used in investing activities
(68,576,192)
(80,177,285)
(56,017,926)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in noninterest-bearing deposits
Net (decrease) increase in interest-bearing deposits
Net increase (decrease) in securities sold under agreements to repurchase
Common stock transactions:
Acquisition of treasury stock
Proceeds of stock issuances
Dividends paid
36,066,687
(9,667,069)
6,861,927
41,179,967
41,583,909
(6,317,292)
(4,236,804)
(593,942)
16,526,625
-
573,116
(16,052,983)
(315,050)
356,670
(13,921,211)
(3,925,069)
161,919
(12,543,863)
Net cash provided by (used in) financing activities
17,781,678
62,566,993
(4,611,134)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(6,688,569)
22,594,502
(25,439,346)
CASH AND CASH EQUIVALENTS, beginning of year
185,125,214 162,530,712
187,970,058
CASH AND CASH EQUIVALENTS, end of year
$ 178,436,645 $ 185,125,214
$ 162,530,712
The accompanying notes are an integral part of these consolidated financial statements.
F-8
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) (“Bankshares”) is a financial holding company which owns
(through its wholly-owned Delaware subsidiary) all of the capital stock of ten banks located in Texas as of
December 31, 2002. Those subsidiary banks are First National Bank of Abilene; Hereford State Bank; First
National Bank, Sweetwater; Eastland National Bank; First Financial Bank, National Association, Cleburne;
Stephenville Bank & Trust Co.; San Angelo National Bank; Weatherford National Bank; First Financial Bank,
National Association, Southlake and City National Bank, Mineral Wells. Each subsidiary bank’s primary source of
revenue is providing loans and banking services to consumers and commercial customers in the market area in
which the subsidiary is located.
A summary of significant accounting policies of Bankshares and subsidiaries (collectively, the “Company”) applied
in the preparation of the accompanying consolidated financial statements follows. The accounting principles
followed by the Company and the methods of applying them are in conformity with both accounting principles
generally accepted in the United States of America and prevailing practices of the banking industry.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuations of foreclosed real estate, deferred income tax assets,
and the fair value of financial instruments.
Consolidation
The accompanying consolidated financial statements include the accounts of Bankshares and its subsidiaries, all of
which are wholly-owned. All significant intercompany accounts and transactions have been eliminated.
Investment Securities
Management classifies debt and equity securities as held-to-maturity, available-for-sale, or trading based on its
intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as held-
to-maturity and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income using the interest method. Securities not classified as held-to-maturity
or trading are classified as available-for-sale and recorded at estimated fair value, with unrealized gains and losses,
net of deferred income taxes, excluded from earnings and reported in a separate component of shareholders’ equity.
Securities classified as trading are recorded at estimated fair value, with unrealized gains and losses included in
earnings. The Company had no trading securities at December 31, 2002, 2001, or 2000.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses.
Unearned income on installment loans is recognized in income over the terms of the loans in decreasing amounts
using a method which approximates the interest method. Interest on other loans is calculated by using the simple
interest method on daily balances of the principal amounts outstanding. The Company expenses its net loan
origination costs, a method which does not materially differ from deferring and amortizing such amounts as an
adjustment to yield. The allowance for loan losses is established through a provision for loan losses charged to
F-9
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
expense. Loans are charged against the allowance for loan losses when management believes the collectibility of
the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb estimated inherent losses on
existing loans that are deemed uncollectible based upon management’s review and evaluation of the loan portfolio.
The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).
Management’s periodic evaluation of the adequacy of the allowance is based on general economic conditions, the
financial condition of the borrower, the value and liquidity of collateral, delinquency, prior loan loss experience, and
the results of periodic reviews of the portfolio. Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection efforts, that the borrower’s financial
condition is such that collection of interest is doubtful.
The Company’s policy requires measurement of the allowance for an impaired collateral dependent loan based on
the fair value of the collateral. Other loan impairments are measured based on the present value of expected future
cash flows or the loan’s observable market price. At December 31, 2002 and 2001, all significant impaired loans
have been determined to be collateral dependent and the allowance for loss has been measured utilizing the
estimated fair value of the collateral.
Other Real Estate
Other real estate is foreclosed property held pending disposition and is valued at the lower of its fair value or the
recorded investment in the related loan. At foreclosure, if the fair value, less estimated costs to sell, of the real estate
acquired is less than the Company’s recorded investment in the related loan, a write-down is recognized through a
charge to the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to income.
Operating expenses of such properties, net of related income, and gains and losses on their disposition are included
in noninterest expense.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and
amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the life of the respective lease or the estimated useful lives of the
improvements, whichever is shorter.
Business Combinations, Goodwill and Other Intangible Assets
Goodwill, relating to acquisitions of certain subsidiary banks, was amortized by the straight-line method over
periods of 15 and 40 years during the years ended December 31, 2001 and 2000.
In June 2001, Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142") were issued. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted
for under the purchase method and addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite
useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be
tested at least annually for impairment. SFAS No. 142 was effective January 1, 2002 for calendar year companies;
however, acquired goodwill or intangible assets recorded in our acquisition of City Bancshares, Inc. closed
subsequent to June 30, 2001 were subject immediately to its provisions.
F-10
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
On January 1, 2002, goodwill amounting to $23,765,896 was not subject to further amortization as a result of SFAS
No. 142. The Company conducted its initial impairment test in 2002, with no reduction of recorded goodwill
resulting from the test. A reconciliation adjusting comparative net earnings and earnings per share for the years
ended December 31, 2001 and 2000, to show the effect of no longer amortizing the Company’s goodwill, follows:
Reported net earnings
Add back: goodwill amortization
Goodwill amortization, before income tax
Income tax benefit
Adjusted net earnings
Basic earnings per share:
Reported net earnings
Goodwill amortization, net of income tax benefit
Adjusted net earnings
Earnings per share, assuming dilution:
Reported net earnings
Goodwill amortization, net of income tax benefit
Adjusted net earnings
2001
2000
$ 29,354,505
$ 28,316,047
1,641,367
1,641,367
(420,000)
(420,000)
$ 30,575,872 $ 29,537,414
$ 2.38
.10
$ 2.48
$ 2.28
.10
$ 2.38
$ 2.37
.10
$ 2.47
$ 2.27
.10
$ 2.37
Goodwill arising from acquisitions of assets and liabilities, rather than acquisitions of stock, amounting to
$13,000,000, is deductible for federal income tax purposes.
Other identifiable intangible assets recorded by the Company represent the future benefit associated with the
acquisition of the core deposits of City Bancshares, Inc. (Note 17) and is being amortized over seven years utilizing
a method that approximates the expected attrition of the deposits.
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within
one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the
amount of the cash received in connection with the transaction. The Company may be required to provide additional
collateral based on the estimated fair value of the underlying securities.
Segment Reporting
The Company has determined that it operates one line of business (community banking) located in a single
geographic area (Texas).
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and
federal funds sold.
Accounting for Income Taxes
The Company’s provision for income taxes is based on income before income taxes adjusted for permanent
differences between financial reporting and taxable income. Deferred tax assets and liabilities are determined using
the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based
on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets
and liabilities and gives current recognition to changes in tax rates and laws.
F-11
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair
value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value
method prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB
25, because the exercise price of the Company’s employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. Had compensation cost for the plan been
determined consistent with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation,” the Company’s net earnings and earnings per share would have been reduced by insignificant
amounts on a pro forma basis for the years ended December 31, 2002, 2001 and 2000. Note 15 provides additional
information on the Company’s stock option plan.
Stock Repurchase
On July 25, 2000, the Company approved a stock repurchase plan, authorizing the repurchase of up to 740,690
shares of the Company’s common stock. During the years ended December 31, 2001 and 2000, the Company
repurchased 9,900 and 126,100 shares, respectively. The treasury shares were purchased for $4,240,119, which
represented an average purchase price of $31.18 per share. The treasury shares were retired in 2001.
Per Share Data
Net earnings per share (“EPS”) are computed by dividing net earnings by the weighted average number of shares of
common stock outstanding during the period. The Company calculates dilutive EPS assuming all outstanding
options to purchase common stock have been exercised at the beginning of the year (or the time of issuance, if later.)
The dilutive effect of the outstanding options is reflected by application of the treasury stock method, whereby the
proceeds from the exercised options are assumed to be used to purchase common stock at the average market price
during the period. The following table reconciles the computation of basic EPS to dilutive EPS:
For the year ended December 31, 2002:
Net earnings per share, basic
Effect of stock options
Net earnings per share, assuming dilution
For the year ended December 31, 2001:
Net earnings per share, basic
Effect of stock options
Net earnings per share, assuming dilution
For the year ended December 31, 2000:
Net earnings per share, basic
Effect of stock options
Net earnings per share, assuming dilution
Reclassifications
Net
Earnings
Weighted
Average
Shares
Per Share
Amount
$33,952,550
-
$33,952,550
12,359,966
47,523
12,409,489
$29,354,505
-
$29,354,505
12,318,346
45,323
12,363,669
$28,316,047
-
$28,316,047
12,426,344
28,355
12,454,699
$ 2.75
$ 2.74
$ 2.38
$ 2.37
$ 2.28
$ 2.27
Certain 2001 and 2000 amounts have been reclassified to conform to the 2002 presentation.
F-12
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
2. CASH AND INVESTMENT SECURITIES:
The amortized cost, estimated fair values, and gross unrealized gains and losses of the Company’s investment
securities as of December 31, 2002 and 2001, are as follows:
Securities held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of state and
political subdivisions
December 31, 2002
Amortized
Cost Basis
Gross
Unrealized
Holding Gains
Gross
Unrealized
Holding Losses
Estimated
Fair Value
$110,939,173
$ 6,868,716
$ -
$117,807,889
60,835,676
3,214,571
-
64,050,247
Corporate bonds
498,936
41,064
-
540,000
Mortgage-backed securities
28,175,999
1,288,594
(578)
29,464,015
Total debt securities
held-to-maturity
$200,449,784
$11,412,945
$ (578)
$211,862,151
Securities available-for-sale:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of state and
political subdivisions
$164,090,045
$ 7,545,917
$ (16,670)
$171,619,292
104,800,319
5,952,505
(12,189)
110,740,635
Corporate bonds
49,234,116
2,577,468
-
51,811,584
Mortgage-backed securities
228,489,406
4,066,253
(449,560)
232,106,099
Total debt securities
available-for-sale
546,613,886
20,142,143
(478,419)
566,277,610
Other securities
5,453,100
75,919
-
5,529,019
Total securities available-for-sale
$552,066,986
$20,218,062
$(478,419)
$571,806,629
F-13
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Securities held-to-maturity:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of state and
political subdivisions
December 31, 2001
Amortized
Cost Basis
Gross
Unrealized
Holding Gains
Gross
Unrealized
Holding Losses
Estimated
Fair Value
$172,879,974
$5,039,045
$ (47,536)
$177,871,483
75,959,059
1,670,635
(134,439)
77,495,255
Corporate bonds
498,483
13,867
-
512,350
Mortgage-backed securities
41,332,974
1,354,710
(978)
42,686,706
Other securities
4,000
-
-
4,000
Total debt securities
held-to-maturity
Securities available-for-sale:
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies
Obligations of state and
political subdivisions
$290,674,490
$8,078,257
$ (182,953)
$298,569,794
$93,150,557
$2,025,482
$(257,163)
$94,918,876
82,545,879
1,140,522
(835,320)
82,851,081
Corporate bonds
56,553,112
2,000,708
(31,141)
58,522,679
Mortgage-backed securities
189,421,296
2,982,733
(684,161)
191,719,868
Total debt securities
available-for-sale
421,670,844
8,149,445
(1,807,785)
428,012,504
Other securities
3,006,701
-
-
3,006,701
Total securities available-for-sale
$424,677,545
$8,149,445
$(1,807,785)
$431,019,205
The Company invests in mortgage-backed securities that have expected maturities that differ from their contractual
maturities. These differences arise because borrowers may have the right to call or prepay obligations with or
without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset
backed securities. The expected maturities of these securities at December 31, 2002 and 2001, were computed by
using scheduled amortization of balances and historical prepayment rates. At December 31, 2002 and 2001, the
Company did not hold any CMOs that entail higher risks than standard mortgage-backed securities.
F-14
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The amortized cost and estimated fair value of debt securities at December 31, 2002, by contractual and expected
maturity, are shown below.
Held-to-Maturity
Available-for-Sale
Amortized
Cost Basis
Estimated
Fair Value
Amortized
Cost Basis
Estimated
Fair Value
Due within one year
Due after one year through five years
Due after five years through ten years
Due after ten years
$ 55,959,878
121,052,000
9,305,724
14,132,182
$ 57,124,507
129,421,284
10,071,540
15,244,820
$ 46,281,321
377,002,918
63,803,688
59,525,959
$ 47,124,793
390,627,675
65,913,832
62,611,310
Total debt securities
$200,449,784
$211,862,151
$546,613,886
$566,277,610
Securities, carried at approximately $239,971,000 and $243,316,000 at December 31, 2002 and 2001, respectively,
were pledged as collateral for public or trust fund deposits and for other purposes required or permitted by law.
During 2002 and 2001, sales of investment securities that were classified as available-for-sale totaled $30,077,478
and $57,925,815, respectively. Gross realized gains and losses from sales in 2002 were $23,773 and $7,400,
respectively. Gross realized gains and losses from 2001 sales were $104,779 and $36,990, respectively. Gross
realized gains from 2000 sales were $530,097. The specific identification method was used to determine cost in
computing the realized gains and losses.
Certain subsidiary banks are required to maintain reserve balances with the Federal Reserve Bank. During 2002 and
2001, such average balances totaled approximately $12,776,000 and $9,017,000, respectively.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
Major classifications of loans are as follows:
Commercial, financial, and agricultural
Real estate - construction
Real estate - mortgage
Consumer
Unearned income
Total loans
December 31,
2002
2001
$311,743,212
50,911,156
375,255,678
226,140,626
$312,053,042
47,173,297
350,381,887
230,616,297
964,050,672
(10,899)
940,224,523
(93,548)
$964,039,773
$940,130,975
The Company’s recorded investment in impaired loans and the related valuation allowance are as follows:
December 31, 2002
Valuation
Recorded
Allowance
Investment
December 31, 2001
Recorded
Investment
Valuation
Allowance
$3,734,261
$ 752,385
$3,817,683
$ 926,636
F-15
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The average recorded investment in impaired loans for the years ended December 31, 2002 and 2001, was
approximately $3,776,000 and $3,773,000, respectively. The Company had approximately $4,266,000 and
$4,824,000 in nonperforming assets at December 31, 2002 and 2001, respectively. No additional funds are
committed to be advanced in connection with impaired loans.
Interest payments received on impaired loans are recorded as interest income unless collections of the remaining
recorded investment are doubtful, at which time payments received are recorded as reductions of principal. The
Company recognized interest income on impaired loans of approximately $111,000, $136,000 and $213,000 during
the years ended December 31, 2002, 2001, and 2000, respectively, of which approximately $2,000, $9,000 and
$16,000 represented cash interest payments received and recorded as interest income. If interest on impaired loans
had been recognized on a full accrual basis during the years ended December 31, 2002, 2001, and 2000,
respectively, such income would have approximated $317,000, $399,000 and $449,000.
The allowance for loan losses as of December 31, 2002 and 2001, is presented below. Management has evaluated
the adequacy of the allowance for loan losses by estimating the losses in various categories of the loan portfolio
which are identified below:
Allowance for loan losses provided for:
Loans specifically evaluated as impaired
Remaining portfolio
Total allowance for loan losses
Changes in the allowance for loan losses are summarized as follows:
2002
2001
$ 752,385
10,466,344
$ 926,636
9,675,783
$11,218,729
$10,602,419
Balance at beginning of year
Add:
December 31,
2000
2001
2002
$10,602,419
$ 9,887,646
$ 8,937,542
Provision for loan losses
Loan recoveries
Allowance established at acquisition
2,369,634
834,150
-
1,964,050
968,535
407,129
2,397,750
1,545,080
-
Deduct:
Loan charge-offs
(2,587,474)
(2,624,941)
(2,992,726)
Balance at end of year
$11,218,729
$10,602,419
$ 9,887,646
An analysis of the changes in loans to officers, directors, principal shareholders, or associates of such persons for the
years ended December 31, 2002 and 2001 (determined as of each respective year-end) follows:
Beginning
Balance
Additional
Loans
Payments
Ending
Balance
Year ended December 31, 2002
$44,426,313
$27,349,995
$44,235,855
$27,540,453
Year ended December 31, 2001
$35,575,573
$51,556,164
$42,970,581
$44,161,156
In the opinion of management, those loans are on substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with unaffiliated persons.
F-16
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
4. BANK PREMISES AND EQUIPMENT:
The following is a summary of bank premises and equipment:
Useful Life
Land
Buildings
Furniture and equipment
Leasehold improvements
–
20 to 40 years
3 to 10 years
Lesser of lease term or 5 to 15 years
December 31,
2001
2002
$ 7,362,814
50,560,723
26,347,819
4,385,288
$ 7,104,759
49,885,954
27,249,965
4,105,350
88,656,644
88,346,028
Less- accumulated depreciation and amortization
(48,051,243)
(46,333,597)
$40,605,401
$42,012,431
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 amounted to $4,284,473, $3,755,878,
and $3,700,474, respectively and is included in the captions net occupancy expense and equipment expense in the
accompanying consolidated statements of earnings.
The Company is lessor for portions of its banking premises. Total rental income for all leases included in net
occupancy expense is approximately $1,578,000, $1,432,000 and $1,387,000, for the years ended December 31,
2002, 2001, and 2000, respectively.
5. TIME DEPOSITS
Time deposits of $100,000 or more totaled approximately $195,754,000 and $196,905,000 at December 31, 2002
and 2001, respectively. Interest expense on these deposits was approximately $11,559,000, $10,163,000, and
$10,022,000 during 2002, 2001, and 2000, respectively.
At December 31, 2002, the scheduled maturities of time deposits were, as follows:
Year ending December 31,
2003
2004
2005
2006
2007
6. LINE OF CREDIT
$466,285,411
42,007,875
12,232,334
2,222,764
10,878,020
$533,626,404
The Company has a line of credit with a nonaffiliated bank under which it could borrow up to $25,000,000. The
line of credit is unsecured and matures on June 30, 2003. Bankshares paid no fee to secure the unused line of credit
and, accordingly, did not estimate a fair value of the unused line of credit at December 31, 2002 and 2001. The line
of credit carries an interest rate of the London Interbank Offering Rate plus 1.0%. There was no outstanding balance
under the line of credit as of December 31, 2002 and 2001.
F-17
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
7.
INCOME TAXES:
The Company files a consolidated federal income tax return. Income tax expense (benefit) is comprised of the
following:
Year Ended December 31,
2000
2001
2002
Current federal income tax
Deferred federal income tax expense (benefit)
$14,280,038
350,415
$13,016,053
(188,982)
$12,966,837
(304,240)
Income tax expense
$14,630,453
$12,827,071
$12,662,597
Income tax expense, as a percentage of pretax earnings, differs from the statutory federal income tax rate as follows:
Statutory federal income tax rate
Reductions in tax rate resulting from
interest income exempt from
federal income tax
Other
Effective income tax rate
As a Percent of Pretax Earnings
2000
2001
2002
35.0 %
35.0 %
35.0 %
(5.6)%
0.7 %
(5.2)%
0.6 %
30.1 %
30.4 %
(4.9)%
0.8 %
30.9 %
F-18
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The approximate effects of each type of difference that gave rise to the Company’s deferred tax assets and liabilities
at December 31, 2002 and 2001, are as follows:
Deferred tax assets-
Tax basis of loans in excess of financial statement basis
Minimum liability in defined benefit plan
Recognized for financial reporting purposes but not
for tax purposes-
Deferred compensation
Write-downs and adjustments to other
real estate owned and repossessed assets
Other deferred tax assets
2002
2001
$ 3,940,576
775,537
$3,766,408
-
686,098
590,462
133,000
343,527
112,000
258,448
Total deferred tax assets
5,878,738
4,727,318
Deferred tax liabilities-
Financial statement basis of fixed assets in excess of
tax basis
Intangible asset amortization deductible for tax purposes,
but not for financial reporting purposes
Recognized for financial reporting purposes but not
for tax purposes:
Accretion on investment securities
Pension plan contributions
Net unrealized gain on investment securities
available-for-sale
Other deferred tax liabilities
1,442,962
1,334,565
832,527
-
437,660
497,869
385,191
610,869
6,908,875
71,334
2,219,581
225,429
Total deferred tax liabilities
10,191,227
4,775,635
Net deferred tax liability
$(4,312,489)
$ (48,317)
8. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company is required to disclose the estimated fair value of its financial instrument assets and liabilities. For the
Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial
instruments as defined. Many of the Company’s financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange transaction.
Estimated fair values have been determined by the Company using the best available data, as generally provided in
the Company’s regulatory reports, and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates, it is presumed that estimated fair values
generally approximate the carrying value.
F-19
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The estimated fair values, and carrying values at December 31, 2002 and 2001, were as follows:
2002
2001
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
$108,436,645
70,000,000
2,324,425
772,256,413
952,821,044
15,360,833
541,031,072
$108,436,645
70,000,000
2,324,425
783,668,780
964,782,729
15,360,833
544,575,352
$112,150,214
72,975,000
1,374,285
721,693,695
929,528,556
17,636,608
575,069,375
$112,150,214
72,975,000
1,374,285
729,588,999
938,431,998
17,636,608
580,467,556
Cash and due from banks
Federal funds sold
Interest-bearing deposits in banks
Investment securities
Net loans
Accrued interest receivable
Deposits with stated maturities
Deposits with no stated
maturities
1,170,531,144
1,170,531,144
1,110,093,223
1,110,093,223
Securities sold under agreements
to repurchase
Accrued interest payable
26,708,994
2,150,309
26,708,994
2,150,309
19,847,067
3,475,555
19,847,067
3,475,555
Financial instruments actively traded in a secondary market have been valued using quoted available market prices.
Financial instruments with stated maturities have been valued using a present value discounted cash flow with a
discount rate approximating current market for similar assets and liabilities. Financial instrument assets with
variable rates and financial instrument liabilities with no stated maturities have an estimated fair value equal to both
the amount payable on demand and the carrying value. Changes in assumptions or estimation methodologies may
have a material effect on these estimated fair values.
The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been
valued differently than customary with historical cost accounting.
There is no material difference between the carrying value and the estimated fair value of the Company’s contractual
off-balance-sheet unfunded lines of credit, loan commitments and letters of credit which are generally priced at
market at the time of funding.
Reasonable comparability between financial institutions may not be likely due to the wide range of permitted
valuation techniques and numerous estimates which must be made given the absence of active secondary markets
for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater
degree of subjectivity to these estimated fair values.
9. COMMITMENTS AND CONTINGENCIES:
The Company is engaged in legal actions arising from the normal course of business. In management’s opinion, the
Company has adequate legal defenses with respect to these actions, and the resolution of these matters will have no
material adverse effects upon the results of operations or financial condition of the Company.
The Company leases a portion of its bank premises and equipment under operating leases. At December 31, 2002,
future minimum lease commitments are not significant.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments include unfunded lines of credit, commitments to
F-20
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument
for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of these instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts
represent credit risk:
Unfunded lines of credit
Commitments to extend credit
Standby letters of credit
Contract or
Notional Amount at
December 31, 2002
$123,803,128
62,092,132
6,067,787
Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. These commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit
evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property,
plant, and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a
customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The average collateral value held on letters of credit exceeds the contract
amount.
The Company has no other off-balance sheet arrangements or transactions that would expose the Company to
liability that is not reflected on the face of the financial statements.
11. CONCENTRATION OF CREDIT RISK:
The Company grants commercial, retail, agriculture, and residential loans to customers primarily in North Central
and West Texas. Although the Company has a diversified loan portfolio, a substantial portion of its debtors’ ability
to honor their contracts is dependent upon this local economic sector.
12. PENSION AND PROFIT SHARING PLANS:
The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based
on years of service and a percentage of the employee’s qualifying compensation during the final years of
employment. The Company’s funding policy is to contribute annually the amount necessary to satisfy the Internal
Revenue Service’s funding standards. Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future.
F-21
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The following table provides a reconciliation of the plan’s benefit obligations and fair value of plan assets for the
years ended December 31, 2002 and 2001, and a statement of the funded status as of December 31, 2002 and 2001:
Reconciliation of benefit obligations:
Benefit obligation at January 1
Service cost – benefits earned during the period
Interest cost on projected benefit obligation
Actuarial loss
Benefits paid
2002 2001
$ 14,183,582
994,630
983,977
45,731
(667,523)
$ 11,885,661
847,620
970,710
1,117,567
(637,976)
Benefit obligation at December 31
15,540,397
14,183,582
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1
Actual return on plan assets
Employer contributions
Benefits paid
12,631,250
(1,031,005)
726,989
(667,523)
12,864,027
(337,724)
742,923
(637,976)
Fair value of plan assets at December 31
11,659,711
12,631,250
Funded status
$ (3,880,686)
$ (1,552,332)
Reconciliation of funded status to accrued
pension (liability) asset:
Funded status at December 31
Unrecognized loss from past experience different than
that assumed and effects of changes in assumptions
Additional minimum liability recorded
Unrecognized prior-service cost
Other
Accrued pension (liability) asset
$ (3,880,686)
$ (1,552,332)
5,109,193
(2,409,795)
193,975
(36,644)
3,268,617
-
211,935
-
$ (1,023,957)
$ 1,928,220
The Company recorded an additional minimum liability in the year ended December 31, 2002 to reflect the
underfunded status of the plan. The accrued pension liability at December 31, 2002 represents the difference
between the fair value of plan assets and the accumulated benefit obligation. The accumulated benefit obligation is
the actuarial present value of benefits attributed by the pension benefit formula to employee service rendered prior to
that date and based on current and past compensation levels. The accumulated benefit obligation differs from the
projected benefit obligation in that it assumes no increase in future compensation. The following table details the
financial statement captions affected by recording the minimum liability:
Prepaid pension asset before adjustment
Intangible asset recorded (included in other assets)
Minimum liability adjustment
Accrued pension (liability) asset
2002 2001
$ 1,385,838
(193,975)
(2,215,820)
$1,928,220
-
-
$(1,023,957)
$1,928,220
F-22
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Net periodic pension cost for the years ended December 31, 2002, 2001, and 2000, included:
Service cost - benefits earned during the period
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of unrecognized net loss
Amortization of prior-service cost
Other
Year Ended December 31,
2000
2001
2002
$ 994,630
983,977
(880,562)
116,722
17,960
(59,405)
$ 847,620
970,710
(1,153,733)
-
17,961
(58,954)
$ 845,372
816,583
(1,058,787)
-
17,961
58,779
Net periodic pension cost
$1,173,322
$ 623,604
$ 679,908
The following table sets forth the rates used in the actuarial calculations of the present value of benefit obligations
and the rate of return on plan assets:
Weighted average discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets
2002
6.9%
4%
6.5%
2001
6.9%
4%
8.5%
2000
7.5%
4%
8.5%
As of December 31, 2002 and 2001, the fair value of the plan’s assets included Company common stock valued at
approximately $468,000 and $297,000, respectively.
The Company also provides a profit sharing plan, which covers substantially all full-time employees. The profit
sharing plan is a defined contribution plan and allows employees to contribute up to 5% of their base annual salary.
Employees are fully vested to the extent of their contributions and become fully vested in the Company’s
contributions over a seven-year vesting period. Costs related to the Company’s defined contribution plan totaled
approximately $2,681,000, $1,858,000 and $1,874,000 in 2002, 2001 and 2000, respectively, and are included in
salaries and employee benefits in the accompanying consolidated statements of earnings. As of December 31, 2002
and 2001, the fair value of the plan’s assets included Company common stock valued at approximately $14,323,000
and $10,881,000, respectively.
13. DIVIDENDS FROM SUBSIDIARIES:
At December 31, 2002, approximately $20,728,000 was available for the declaration of dividends by the Company’s
subsidiary banks without the prior approval of regulatory agencies.
14. REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary,
actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each of Bankshares’
subsidiaries must meet specific capital guidelines that involve quantitative measures of the subsidiaries’ assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The subsidiaries’
capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
F-23
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Quantitative measures established by regulation to ensure capital adequacy require Bankshares and each of its
subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined), to average assets
(as defined). Management believes as of December 31, 2002 and 2001, that Bankshares and each of its subsidiaries
meet all capital adequacy requirements to which they are subject.
As of December 31, 2002 and 2001, the most recent notification from each respective subsidiaries’ primary
regulator categorized each of Bankshares’ subsidiaries as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the subsidiaries must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table.
There are no conditions or events since that notification that management believes have changed the institutions’
categories. Bankshares’ and its significant subsidiaries’ actual capital amounts and ratios are presented in the table
below:
Actual
Ratio
Amount
For Capital
Adequacy Purposes:
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
Ratio
Amount
As of December 31, 2002:
Total Capital (to Risk-Weighted Assets):
Consolidated
First National Bank of Abilene
San Angelo National Bank
Weatherford National Bank
$213,725,000
$ 68,874,000
$ 16,039,000
$ 19,758,000
Tier I Capital (to Risk-Weighted Assets):
Consolidated
First National Bank of Abilene
San Angelo National Bank
Weatherford National Bank
$202,507,000
$ 64,971,000
$ 14,703,000
$ 18,757,000
Tier I Capital (to Average Assets):
Consolidated
First National Bank of Abilene
San Angelo National Bank
Weatherford National Bank
$202,507,000
$ 64,971,000
$ 14,703,000
$ 18,757,000
20% ≥$ 87,579,000
17% ≥$ 32,153,000
12% ≥$ 10,816,000
18% ≥$ 8,802,000
≥ 8%
N/A
N/A
≥ 8% ≥$ 40,191,000 ≥ 10%
≥ 8% ≥$ 13,520,000 ≥ 10%
≥ 8% ≥$ 11,002,000 ≥ 10%
18% ≥$ 43,790,000
16% ≥$ 16,077,000
11% ≥$ 5,408,000
17% ≥$ 4,401,000
≥ 4%
N/A
N/A
≥ 4% ≥$ 24,115,000 ≥ 6%
≥ 4% ≥$ 8,112,000 ≥ 6%
≥ 4% ≥$ 6,601,000 ≥ 6%
11% ≥$ 57,856,000
9% ≥$ 20,626,000
5% ≥$ 8,410,000
10% ≥$ 5,884,000
≥ 3%
N/A
N/A
≥ 3% ≥$ 34,377,000 ≥ 5%
≥ 3% ≥$ 14,016,000 ≥ 5%
≥ 3% ≥$ 9,807,000 ≥ 5%
F-24
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Actual
Ratio
Amount
For Capital
Adequacy Purposes:
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions:
Ratio
Amount
As of December 31, 2001:
Total Capital (to Risk-Weighted Assets):
Consolidated
First National Bank of Abilene
San Angelo National Bank
Weatherford National Bank
$195,422,000
$ 65,676,000
$ 27,945,000
$ 18,931,000
Tier I Capital (to Risk-Weighted Assets):
Consolidated
First National Bank of Abilene
San Angelo National Bank
Weatherford National Bank
$184,820,000
$ 61,895,000
$ 26,672,000
$ 18,019,000
Tier I Capital (to Average Assets):
Consolidated
First National Bank of Abilene
San Angelo National Bank
Weatherford National Bank
$184,820,000
$ 61,895,000
$ 26,672,000
$ 18,019,000
15. STOCK OPTION PLAN:
18% ≥$ 86,380,000
17% ≥$ 31,594,000
20% ≥$ 10,925,000
18% ≥$ 8,624,000
≥ 8%
N/A
N/A
≥ 8% ≥$ 39,492,000 ≥ 10%
≥ 8% ≥$ 13,656,000 ≥ 10%
≥ 8% ≥$ 10,780,000 ≥ 10%
17% ≥$ 43,190,000
16% ≥$ 15,797,000
20% ≥$ 4,312,000
17% ≥$ 5,462,000
≥ 4%
N/A
N/A
≥ 4% ≥$ 23,695,000 ≥ 6%
≥ 4% ≥$ 8,194,000 ≥ 6%
≥ 4% ≥$ 6,468,000 ≥ 6%
10% ≥$ 56,060,000
9% ≥$ 19,728,000
9% ≥$ 8,800,000
9% ≥$ 5,788,000
≥ 3%
N/A
N/A
≥ 3% ≥$ 32,880,000 ≥ 5%
≥ 3% ≥$ 14,667,000 ≥ 5%
≥ 3% ≥$ 9,647,000 ≥ 5%
The Company has an incentive stock plan to provide for the granting of options to senior management of the
Company at prices not less than market at the date of grant. At December 31, 2002, the Company had allocated
740,690 shares of stock for issuance under the plan. The plan provides that options granted are exercisable after two
years from date of grant at a rate of 20% each year cumulatively during the 10-year term of the option. An analysis
of stock option activity for the years ended December 31, 2002, 2001, and 2000, is presented in the table and
narrative below:
2002
Wtd. Avg.
Ex. Price
Shares
2001 2000
Wtd. Avg.
Ex. Price
Wtd. Avg.
Ex. Price
Shares
Shares
Outstanding, beginning of year
Granted
Exercised
Canceled
150,057
2,000
(30,949)
(6,828)
$21.60
30.50
18.52
23.48
174,959
3,700
(24,480)
(4,122)
$20.51
29.82
14.57
24.95
137,354
60,597
(10,809)
(12,183)
$20.18
20.80
14.98
24.02
Outstanding, end of year
114,280
$22.47
150,057
$21.60
174,959
$20.51
Exercisable at end of year
57,825
$21.15
66,210
$18.94
70,872
$16.37
Weighted average fair value of
options granted at date of issue
$6.06
$6.13
$4.44
F-25
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
The options outstanding at December 31, 2002, have exercise prices between $14.90 and $30.50 with a weighted
average remaining contractual life of 5 years. Stock options have been adjusted retroactively for the effects of stock
dividends and splits.
The Company accounts for this plan under APB 25 under which no compensation cost has been recognized for
options granted. The fair value of the options granted in 2002, 2001 and 2000, was estimated using the Black-
Scholes options pricing model with the following weighted-average assumptions: risk-free interest rate of 4.75%,
5.23% and 6.33% respectively; expected dividend yield of 4.43%, 3.89% and 5.18% respectively; expected life of
6.0, 6.0 and 6.0 years, respectively; and expected volatility of 26.9%, 26.5% and 28.3%, respectively.
F-26
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
16. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
Condensed Balance Sheets-December 31, 2002 and 2001
ASSETS
Cash in subsidiary bank
Interest-bearing deposits in subsidiary banks
Total cash and cash equivalents
Investment in subsidiaries, at equity
Intangible assets
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Total liabilities
Shareholders’ equity:
Common stock
Capital surplus
Retained earnings
Accumulated other comprehensive earnings
Total shareholders’ equity
2002
2001
$ 903,319
22,212,064
$ 579,686
13,796,338
23,115,383
14,376,024
219,947,550
917,350
950,708
202,758,981
723,375
932,986
$244,930,991
$218,791,366
$ 6,163,346
$ 5,137,353
123,642,010
58,087,687
45,647,522
11,390,426
123,332,520
57,824,061
28,375,353
4,122,079
238,767,645
213,654,013
Total liabilities and shareholders’ equity
$244,930,991
$218,791,366
Condensed Statements of Earnings-
For the Years Ended December 31, 2002, 2001, and 2000
Income:
Cash dividends from subsidiary banks
Excess of earnings over dividends of
subsidiary banks
Gain on sale of investment securities
available-for-sale
Other income
Expenses:
Salaries and employee benefits
Other operating expenses
2002
2001
2000
$ 26,550,000
$ 25,500,000
$ 21,000,000
8,479,939
4,582,993
7,383,516
-
944,911
-
1,092,375
530,097
1,325,613
35,974,850
31,175,368
30,239,226
1,451,136
1,142,832
1,160,903
1,015,184
1,067,664
1,288,508
2,593,968
2,176,087
2,356,172
Earnings before income taxes
33,380,882
28,999,281
27,883,054
Income tax benefit
Net earnings
571,668
355,224
432,993
$33,952,550
$29,354,505
$28,316,047
F-27
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
Condensed Statements of Cash Flows-
For the Years Ended December 31, 2002, 2001, and 2000
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Excess of earnings over
dividends of subsidiary banks
Depreciation
Discount accretion, net of premium amortization
Amortization of excess of cost over fair value
of assets acquired
Gain on sale of securities
(Increase) decrease in other assets
(Decrease) increase in liabilities
2002
2001
2000
$33,952,550
$29,354,505
$28,316,047
(8,479,939)
54,219
-
-
-
(215,435)
(1,041,688)
(4,582,993)
32,658
(4,667)
55,576
-
559,515
186,391
(7,383,516)
26,222
(12,133)
55,576
(530,097)
(178,092)
448,225
Net cash provided by operating activities
24,269,707
25,600,985
20,742,232
Cash flows from investing activities:
Purchases of bank premises and equipment
Activity in available-for-sale securities:
Sales
Maturities
Purchases
Cash payment for stock acquisition
(50,481)
(157,291)
(2,266)
-
-
-
-
-
10,000,000
-
(16,500,000)
530,097
-
(9,983,200)
-
Net cash used in investing activities
(50,481)
(6,657,291)
(9,455,369)
Cash flows from financing activities:
Proceeds of stock issuances
Acquisition of treasury stock
Cash dividends paid
573,116
-
(16,052,983)
356,670
(315,050)
(13,921,211)
161,919
(3,925,069)
(12,543,863)
Net cash used in financing activities
(15,479,867)
(13,879,591)
(16,307,013)
Net increase (decrease) in cash and cash equivalents
8,739,359
5,064,103
(5,020,150)
Cash and cash equivalents, beginning of year
14,376,024
9,311,921
14,332,071
Cash and cash equivalents, end of year
$23,115,383
$14,376,024
$ 9,311,921
F-28
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
17. BUSINESS COMBINATION:
In July 2001, the Company purchased all of the outstanding stock of City Bancshares, Inc. (“City”) and its
subsidiary, City National Bank for $16,500,000 in cash. The total purchase price exceeded the estimated fair market
value of net assets acquired by approximately $7,800,000, of which approximately $950,000 was assigned to an
identifiable intangible asset with the balance recorded by the Company as goodwill. The identifiable intangible
asset represents the future benefit associated with the acquisition of the core deposits of City and is being amortized
over seven years utilizing a method that approximates the expected attrition of the deposits.
The primary purpose of the acquisition was to expand the Company’s market share in areas with close proximity to
Dallas/Ft. Worth, Texas. Factors that contributed to a purchase price resulting in goodwill include City’s
historically stable record of earnings, capable management and its geographic location, which complements the
Company’s existing service locations. Subsequent to the acquisition, the Company liquidated the stock of City and
City National Bank is operating as a subsidiary of the Company. The results of operations of City National Bank are
included in the consolidated earnings of the Company commencing July 1, 2001.
The following is a condensed consolidated balance sheet disclosing the preliminary estimated fair value amounts
assigned to the major asset and liability captions at the acquisition date.
ASSETS
Cash and cash equivalents
Investment securities
Loans, net
Goodwill
Identifiable intangible asset
Other assets
Total assets
LIABILITIES AND SHAREHOLDER’S EQUITY
Noninterest-bearing deposits
Interest-bearing deposits
Other liabilities
Shareholders' equity
Total liabilities and shareholder’s equity
$ 9,651,769
29,717,834
51,061,735
6,891,959
946,073
1,465,727
$ 99,735,097
$ 11,949,766
70,575,256
710,075
16,500,000
$ 99,735,097
Goodwill recorded in the acquisition of City has been accounted for in accordance with SFAS No. 142.
Accordingly, goodwill has not been amortized, rather it has been tested for impairment. The goodwill and
identifiable intangible asset recorded are not deductible for federal income tax purposes. The proforma impact of
City is insignificant to the Company's financial statements.
Cash flow information relative to the acquisition of City is, as follows:
Fair value of assets acquired
Cash paid for the capital stock of City
Liabilities assumed
$ 99,735,097
16,500,000
$ 83,235,097
F-29
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2002, 2001 and 2000
18. CASH FLOW INFORMATION:
Supplemental information on cash flows and noncash transactions is as follows:
Supplemental cash flow information:
Interest paid
Federal income taxes paid
Year Ended December 31,
2000
2001
2002
$25,704,950
14,682,343
$46,243,602
13,227,101
$48,123,200
13,227,192
Schedule of noncash investing and financing activities:
Assets acquired through foreclosure
Retirement of treasury stock
553,840
-
628,797
4,240,119
285,195
-
F-30
Officers
Kenneth T. Murphy
Chairman of the Board
F. Scott Dueser
President and Chief
Executive Officer
Curtis R. Harvey
Executive Vice President and
Chief Financial Officer
J. Bruce Hildebrand
Executive Vice President
Robert S. Patterson
Senior Vice President,
Trust Services
Gary S. Gragg
Senior Vice President
William A. Rowe
Vice President,
Investment Securities
Sandy Lester
Secretary-Treasurer
June D. Wideman
Administrative Officer
Directors
Kenneth T. Murphy
Chairman of the Board
Joseph E. Canon
Executive Director,
Dodge Jones Foundation
Mac A. Coalson
Real Estate and Ranching
David Copeland
President,
Shelton Family Foundation
F. Scott Dueser
President and Chief
Executive Officer
Derrell Johnson
President, American Council
of Engineering Companies
Life Health Trust
Kade Matthews
Ranching and Investments
Raymond A. McDaniel, Jr.
Investments
Bynum Miers
Ranching
James Parker
President,
Parker Properties, Inc.
Jack D. Ramsey, M.D.
Physician
Craig Smith
Chairman,
Hereford State Bank
Dian Graves Stai
Investments
F.L. (Steve) Stephens
Retired Chairman and Chief
Executive Officer, Town &
Country Food Stores, Inc.
Annual Meeting
Tuesday, April 22, 2003
Abilene Civic Center
1100 N. Sixth Street
Abilene, Texas 79601
Corporate Offices
400 Pine Street
Abilene, Texas 79601
325.627.7155
ffin@abilene.com
http://www.ffin.com
Corporate Mailing
Address
P.O. Box 701
Abilene, Texas 79604
Common Stock Listing
The NASDAQ Stock
Market®
Symbol: FFIN
For Financial Information,
Contact:
J. Bruce Hildebrand
Executive Vice President
325.627.7167
Transfer Agent
The Bank of New York
1.866.828.8173
Address Shareholder Inquiries to:
Shareholder Relations Dept.
P.O. Box 11258
Church Street Station
New York, NY 10286
E-mail Address:
shareowner-svcs@
bankofny.com
The Bank of New York
Stock Transfer Website:
http://www.stockbny.com
Send Certificates for Transfer and
Address Changes to:
Receive and Deliver Dept.
P.O. Box 11002
Church Street Station
New York, NY 10286
Independent Public
Auditors
Ernst & Young LLP
QUARTER
HIGH
LOW
CLOSE
DIVIDENDS
2
0
0
2
Fourth
Third
Second
First
1
0
0
2
Fourth
Third
Second
First
$42.00
$34.65
$38.00
41.73
43.00
34.30
34.85
33.00
29.30
36.44
41.84
33.21
$31.88
$27.20
$30.10
32.91
31.44
27.15
27.00
25.00
23.40
29.03
31.00
26.60
$0.350
0.350
0.350
0.300
$0.300
0.300
0.300
0.264
400 Pine Street, Abilene, Texas 79601
www.ffin.com