Annual Report (Form 10-K), fiscal year 1994

Item 1. Business
A. Organization and General Development of Business
First Financial Bankshares, Inc. (the "Registrant" or "Bankshares"), is a Texas corporation duly registered as a multi- bank holding company under the Bank Holding Company Act of 1956, as amended. On December 31, 1994 Bankshares owned (through its wholly-owned Delaware subsidiary) all of the capital stock of seven banks located in Texas: First National Bank of Abilene, Abilene, Texas ("First Abilene"); Hereford State Bank, Hereford, Texas ("Hereford"); First National Bank Sweetwater, Texas ("First Sweetwater"); Eastland National Bank, Eastland, Texas ("Eastland"); First National Bank in Cleburne, Cleburne, Texas ("First Cleburne"); Stephenville Bank & Trust, Stephenville, Texas ("Stephenville"); and Southwest Bank of San Angelo, San Angelo, Texas ("San Angelo").
Bankshares was formed in 1956 at the direction of the Board of Directors of the Farmers and Merchants National Bank of Abilene (a national bank organized in Abilene, Texas, in 1889, changing its name to First National Bank of Abilene in 1957). The corporation's initial name was F & M Operating Company (F & M), and it was originally authorized to and did issue ten shares of stock having a par value of $100.00 each. The ten shares were issued to three officers of the Bank under a trust agreement by which the three trustees would hold the F & M stock for the ratable benefit of the shareholders of First National Bank of Abilene. The original purposes in organizing the corporation were to provide a separate entity to own, operate and maintain parking lots, parking garages, buildings and real estate, and to buy, sell and lease personal property such as bank notes and automobiles.
In 1968, F & M purchased 200,000 shares of newly authorized and issued stock of Bank of Commerce, Abilene, Texas ("BOC"). The purchase was made after the State Banking Commission of Texas required that new capital funds be injected into BOC. In the resulting increased capitalization of BOC, the authorized and outstanding shares of BOC common stock were increased from 300,000 to 700,000, with the 400,000 new shares being offered at $2.00 per share. In addition, F & M acquired by proxy assignments the power to vote an additional 66,000 shares of BOC stock. These proxies expired January 1, 1975. The First National Bank Employees' Profit Sharing Trust originally purchased 28,177 shares of BOC stock.
In November 1971, the Board of Directors of First Abilene authorized the reorganization of F & M into a multi-bank holding company and the commencement of proceedings to effect a merger which would permit First Abilene to be wholly owned by the holding company. The merger was submitted for review and approval by federal regulatory authorities in April 1972.
B. Reorganization, Mergers, and Acquisitions
F & M's reorganization was accomplished in September 1972. Its name was changed to First Abilene Bankshares, Inc., and it was
recapitalized by reducing the par value of its stock to $10.00 per share and increasing the authorized shares to 500,000. The merger was approved in January 1973 and became effective in April of that same year. As a result, the shareholders of First Abilene became shareholders in Bankshares, and Bankshares became the owner of all of the outstanding shares of First Abilene (except for the qualifying shares owned by directors).
In 1974, Bankshares acquired the remaining outstanding common stock of BOC (except for six shares amounting to approximately .01%) by an offer (registered under the Securities Act of 1933) to exchange one share of Bankshares' common stock for each 13-1/3 outstanding shares of BOC common stock. The exchange was effected on May 1, 1974. In late 1987 Bankshares purchased the remaining six shares of BOC stock, paying $82.00 in cash for each share.
Effective April 1, 1974, Bankshares acquired all the outstanding capital stock of Hereford through an offer (also registered under the Securities Act of 1933) to exchange one share of Bankshares' common stock and $175 cash for each outstanding share of Hereford.
Effective September 4, 1981, Bankshares acquired all the outstanding capital stock of First Sweetwater through an offer (registered under the 1933 Act) to exchange one share of Bankshares' common stock for each outstanding share of First Sweetwater stock.
Effective June 8, 1982, Bankshares acquired all of the outstanding capital stock of Eastland through an offer (registered under the 1933 Act) to exchange 3-1/2 shares of Bankshares' common stock for each outstanding share of Eastland stock.
Effective July 31, 1987, American National Bank of Abilene ("American National") was merged with and into First Abilene. Following approval of the merger by the Board of Directors and Shareholders of each bank, all of the issued and outstanding common stock of American National were tendered for exchange and First Abilene paid $11.50 for each of American National's 200,000 shares of common stock. The merger was approved by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation and the United States Department of Justice. The premises formerly occupied by American National, both its main banking offices and drive-in banking facility, are now being operated by First Abilene as a branch bank.
On July 21, 1988, Hereford acquired 11,576 shares of First Tule Bancorp, Inc. in Tulia, Texas ("First Tule"), a registered bank holding company, the principal asset of which is all, or substantially all, of the capital stock of The First National Bank, Tulia, Texas ("FNB Tulia"). Although the Bank Holding Company Act of 1956, as amended, generally requires approval of the Federal Reserve Board prior to acquiring more than 5% of the outstanding capital stock of any bank or bank holding company, the acquisition by Hereford of the First Tule stock was effected under an exemption for acquisitions of voting securities in satisfaction of debt
previously contracted. The shares of First Tule were transferred to Hereford in partial satisfaction of indebtedness owed to Hereford by three individuals and secured, in part, by such shares of stock in First Tule. Since the date it acquired the stock, Hereford has been attempting to sell or otherwise dispose of the stock, but has been unable to do so because of pending litigation against FNB Tulia. Full disclosure of the acquisition by Hereford of the First Tule stock was made to federal and state banking authorities and continued holding of the stock was approved by bank regulatory authorities while Hereford attempted to sell such stock. However, under the Bank Holding Company Act (and Regulation Y adopted by the Federal Reserve Board pursuant to the Act), Hereford was required to dispose of the First Tule stock within five (5) years after having acquired the same, but has not been able to do so. While Hereford is in technical violation of the Act and Regulation Y, such circumstance exists with the knowledge and apparent acquiescence of federal and state banking authorities and neither Registrant nor Hereford has any reason to believe that any adverse action will be taken against Hereford or Registrant by reason of Hereford's continued ownership of the shares of First Tule so long as Hereford, in good faith, continues its efforts to liquidate or dispose of such shares. Neither First Tule nor FNB Tulia is deemed or considered to be a subsidiary of the Registrant. By reason of the recent settlement or other disposition of the remaining lawsuits against FNB Tulia, as well as the efforts of the remaining shareholders of First Tule to find a purchaser for their shares or those of FNB Tulia, First Tule has entered into a Merger and Plan Reorganization Agreement with Norwest Corporation which, if consummated, will result in the shares of First Tule now held by Hereford being exchanged for $1,661,734 cash. Subject to certain conditions precedent contained in the Agreement, it is anticipated that the transaction will be finalized and the shares of First Tule stock transferred by Hereford during the second quarter of 1995.
Effective January 1, 1989, BOC was merged with and into First Abilene and its state charter surrendered to the State of Texas for cancellation. First Abilene received all of the assets of BOC and assumed all of its liabilities. The banking offices and drive-in facility of BOC are now being operated as a branch banking facility of First Abilene. The merger and branch banking action was undertaken to achieve greater efficiency from the combined operation of First Abilene and BOC and to provide improved convenience for each bank's customers.
In January of 1990, Bankshares' Board of Directors authorized a state franchise tax savings program designed to substantially reduce the amount of corporate franchise taxes paid by Bankshares. Pursuant to that program, a second bank holding company was formed in the State of Delaware, First Abilene Bankshares of Delaware, Inc. (the "Delaware BHC"). With the approval of the Federal Reserve Board, and effective March 28, 1990, the Delaware BHC became the owner and holder of all of the outstanding shares of Bankshares' subsidiary banks and, in turn, the Delaware BHC became the sole subsidiary of Bankshares and is wholly-owned and controlled by Bankshares. The corporate offices of the Delaware BHC are located in the State of Delaware and, as defined by Texas franchise tax statutes, the new subsidiary is not
considered to be doing business in the State of Texas.
Effective December 21, 1990, the Delaware BHC, using funds provided by Bankshares, purchased all of the outstanding stock of The First National Bank of Cleburne, in Cleburne, Texas, for $4,700,000 in cash.
Effective February 25, 1993, the Delaware BHC, using funds provided by Bankshares, acquired all the outstanding capital stock of Stephenville Bank & Trust Co., Stephenville, Texas, through an offer (registered under the 1933 Act) to pay $7,750,000 to the Stephenville shareholders for all the Stephenville Bank & Trust's outstanding stock.
Effective September 23, 1993, First Cleburne acquired by purchase the Cleburne, Texas Branch office facility of Bank One, Texas, N.A., and assumed deposit liabilities of approximately $19 million. The aggregate value of the land, buildings, loans and other assets purchased by First Cleburne was approximately $2 million. The former Bank One facility is now being operated as a branch office of First Cleburne.
On October 26, 1993, at a Special Shareholders Meeting called for such purpose, the name of the Registrant was changed to First Financial Bankshares, Inc. Similarly, the corporate name of the Delaware BHC was changed to First Financial Bankshares of Delaware, Inc. effective December 7, 1993.
Effective March 10, 1994, pursuant to that certain Stock Exchange Agreement and Plan of Reorganization dated December 7, 1993, Bankshares acquired 190,622 shares (98.22%) of the issued and outstanding shares of Concho Bancshares, Inc. ("Concho"), a Texas corporation and bank holding company, which owns all of the capital stock of Southwest Bank, a Texas state bank located in the City of San Angelo, Tom Green County, Texas. Southwest Bank owns all of the issued and outstanding capital stock of SWB Investment Centre, Inc. ("SWB"), a Texas corporation providing securities brokerage services. The shares of Concho common stock acquired by Bankshares were contributed by Bankshares to the capital of the Delaware BHC and effective May 1, 1994, pursuant to the corporation laws of the States of Delaware and Texas, Concho was merged with and into the Delaware BHC so that Southwest Bank became a subsidiary of the Delaware BHC. As part of the merger of the Delaware BHC and Concho, minority shareholders of Concho tendered an additional 2,649 shares of Concho common stock in exchange for shares of Bankshares' common stock and cash. In connection with the acquisition of Concho by Bankshares and the subsequent merger of Concho with and into the Delaware BHC, Bankshares issued 232,080 shares of its common stock and paid $44,531 in cash in lieu of issuing fractional shares of Bankshares' common stock.
On December 3, 1992, the Texas Secretary of State issued a Certificate of Incorporation for First Financial Investments, Inc., which is, or shall become, a wholly owned subsidiary of Bankshares and the initial capital of which shall consist of $100,000 represented by 100,000 shares of common stock to be issued to Bankshares. First Financial Investments, Inc. ("FFI") was intended
to be a securities brokerage subsidiary and on or about December 8, 1992, Bankshares submitted to the Federal Reserve Board its Application to Engage in Non-Banking Activity (Form FR Y-4) to engage, de novo, in providing securities brokerage services pursuant to Section 225.25(b)(15) of FRB Regulation Y and Section 4(c)(a) of the Bank Holding Company Act of 1956, as amended. At the end of 1992 Bankshares and FFI were engaged in the process of securing all approvals, and meeting all other requirements, for FFI to become a broker-dealer registered with the National Association of Securities Dealers, the Securities and Exchange Commission and the Texas State Securities Board. At that time it was anticipated that the activities of FFI would be limited to buying and selling stocks, bonds and other securities as agent for the account of the customers of Bankshares' subsidiaries, which securities would include equities, mutual funds and municipal, corporate and government bonds, but without providing investment advice or research services. Securities brokerage services would be provided on, or adjacent to, the premises and banking offices of Bankshares' subsidiary banks. It was anticipated at that time that Bankshares, through FFI, would begin providing securities brokerage services during the second quarter of 1993. On February 3, 1993 Bankshares received Federal Reserve approval to engage, de novo, in providing securities brokerage services through FFI. While it is still the intent of Bankshares to provide securities brokerage services through FFI, Bankshares has notified the Federal Reserve that its plans to offer brokerage services through a separate subsidiary have been delayed. In the meantime, four of Bankshares' subsidiary banks (First Abilene, First Sweetwater, First Cleburne, and Stephenville) are providing brokerage services through a shared- employee arrangement with The Stephens Company, a national brokerage firm headquartered in Little Rock, Arkansas, and its affiliated company, Link Investment Services, Inc. Southwest Bank continues to provide brokerage services for its customers through SWB, its wholly owned subsidiary.
C. Mode of Conducting Business
Bankshares operates principally in order to give the affiliated banks access to additional management and technical resources which help them to improve or expand their banking services while continuing their local activity and autonomy. Each of the affiliated banks operates under the day-to-day management of its Board of Directors and officers, with substantial authority in making decisions concerning their own investments, loan policies, interest rates and service charges. Bankshares provides assistance to the affiliated banks, especially with respect to decisions concerning major capital expenditures, employee fringe benefits, including pension plans, group insurance, dividend policies, appointment of officers and directors of affiliated banks and their compensation. The internal audit and loan review functions are centralized at Bankshares. Each of these corporate staff groups perform on-site operational audits and loan reviews of the subsidiary banks. Bankshares, through First Abilene, provides advice to and specialized services for the affiliated banks in such areas as lending, investments, purchasing, advertising, public relations, and computer services. In addition, through First Abilene, Bankshares coordinates various transactions among the
affiliated banks, including loan participation. Bankshares makes the services of the Trust Department of First Abilene available to customers of the other affiliated banks, as well as investment and computer services. Such specialized services are not ordinarily offered by smaller banks.
Each Bankshares' subsidiary is engaged in the general commercial banking business consisting of the acceptance of checking, savings and time deposits, the making of loans, transmitting funds and performing such other banking services as are usual and customary for commercial banks. While all subsidiary banks, with the exception of Eastland, have trust powers only First Abilene, First Sweetwater, and Stephenville have active trust departments. First Abilene, First Sweetwater, First Cleburne and Stephenville provide securities brokerage services through a shared employee arrangement with Link Investment Services, Inc. and Southwest Bank provides similar services through its subsidiary, SWB Investment Centre, Inc.
The trust departments offer a complete range of services to individuals, associations and corporations. They include the administration of estates, testamentary trusts and various types of living trusts and agency accounts. Other sources of revenue are services for businesses, including administering pension, profit sharing and other employee benefit plans, acting as stock transfer agents or stock registrar, and providing paying agent services.
D. Competition
Commercial banking in Texas is very competitive and Bankshares, holding less than 1% of deposits, represents only a minor segment of the industry. Success is dependent upon being able to compete in the areas of interest rates paid or charged and scope of services offered and prices charged therefore. Subsidiary banks of Bankshares compete in their respective service areas with highly competitive banks, savings and loan associations, small loan companies, credit unions and brokerage firms, all of which are engaged in providing financial products and services.
First Abilene, the largest of Bankshares' subsidiary banks, competes in the City of Abilene with three locally owned banks and the branches of two major regional banks. At December 31, 1994, First Abilene was the largest of this group on the basis of local market share. First Abilene also competes with savings and loan institutions, finance companies, brokerage firms and credit unions located in the City of Abilene. Hereford is the smaller of two banks serving Hereford, Texas and must also compete with larger banks located in larger cities in its general area. First Sweetwater is the only bank located in Sweetwater, Texas, although a smaller bank in another town operates a branch office in Sweetwater. In 1989 First Sweetwater acquired certain assets and assumed the deposit liabilities of Texas Bank and Trust Company, a failed bank which, at the time, was the only other bank located in Sweetwater. Although located within the 16-county area surrounding Abilene, First Sweetwater does not directly compete with banks located in Abilene. Eastland is the largest of five banks in Eastland County, Texas. Although it, too, lies within the
geographic area served by First Abilene, Eastland is not in direct competition with First Abilene. First Cleburne is located in Johnson County and competes with local branches of three area banks, as well as branches of three major regional banks. Stephenville is located in Erath County and competes with local branches of major regional holding companies, a savings and loan association, and a locally owned bank. Southwest Bank is located in Tom Green County and competes with four local banks, branches of four out-of-town banks, and several credit unions and savings and loan institutions.
The Registrant's business is not dependent upon any single customer or upon any few customers, the loss of any one of which would have a materially adverse effect upon the business of Bankshares. Customers of Bankshares and its subsidiaries include its officers and directors, as well as other entities with which they are affiliated. It is the policy of Bankshares and its subsidiaries to make loans to officers and directors, and entities with which they are affiliated in the ordinary course of business. When such loans are made, they are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons.
E. Employees
The Registrant and its subsidiaries employed approximately 515 full-time employees at February 15, 1995. Management believes that its employee relations have been and will continue to be good.
F. Supervision and Regulation
Bankshares is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered as such with the Federal Reserve Board. Bankshares is subject to the reporting requirements of, and supervision and examination by, the Federal Reserve Board under the provisions of the Act. Bankshares is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board may require. The Federal Reserve Board may also make examination of Bankshares and its subsidiaries or "affiliates."
The Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before the holding company may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank which is not majority- owned. (As noted in Section B of this Item 1, however, Hereford State Bank, a subsidiary of the Registrant, has acquired more than 5% of the voting shares of First Tule Bancorp, Inc. under an exemption from the prior approval requirements of the Act and Regulation Y, but is required to divest itself of such shares as soon as reasonably possible.) The Act provides that the Federal Reserve Board shall not approve any acquisition, merger or consolidation which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or attempt to monopolize the business of banking in any part of the United States, or any other proposed acquisition, merger or consolidation, the effect of which may be substantially to lessen
competition or to tend to create a monopoly in any section of the country, or which in any other manner would be a restraint of trade, unless the anticompetitive effects of the proposed combination are clearly the convenience and needs of the community to be served. In approving acquisitions by bank holding companies of banks and companies engaged in banking-related activities, the Federal Reserve Board considers a number of factors, including the expected benefits to the public such as greater convenience, increased competition or gains in efficiency as weighed against the risks of possible adverse effects such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve Board is also empowered to differentiate between new activities and activities commenced through acquisition of a going concern.
Prior to September 29, 1994, the Act prohibited the acquisition by a bank holding company of shares of a bank located outside the home state of such bank holding company unless such acquisition was specifically authorized by statute of the state in which the bank is located. Under the Act [12 U.S.C. 1842(d)], an interstate banking corporation was previously required to establish a separate bank holding company in each state where it intended to acquire a national or state bank unless the laws of a particular state permitted acquisition by out-of-state bank holding companies. However, under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, Public Law 103-328 (the "Interstate Banking Act"), the Federal Reserve Board may now approve applications by a bank holding company to acquire control of, or all (or substantially all) of the assets of, a bank located in a state other than the home state of such bank holding company. The Interstate Banking Act also permits merger transactions between banks with different home states including, under limited circumstances, an interstate merger transaction involving the acquisition of a branch of an insured bank without the acquisition of the bank itself. The Interstate Banking Act also permits national banks to engage in consolidations or mergers with out-of- state banks and permits the Comptroller of the Currency to approve applications by a national bank to establish and operate a de novo branch in a state other than the national bank's home state, if the law of the state where the branch will be located permits all out- of-state banks to establish de novo branches in such state. The Interstate Banking Act will also permit foreign banks, under certain conditions, to establish and operate a federal (or state) branch or agency in any state outside the home state of such foreign bank. Subject to the terms of the Interstate Banking Act, and to regulations to be adopted by the Federal Reserve Board, Comptroller of the Currency and Federal Deposit Insurance Corporation under the Act, it will now be substantially easier for interstate banking corporations and bank holding companies to acquire banks and establish branch facilities throughout the United States, thereby increasing competition between and among banks and bank holding companies, as well as between commercial banks and other financial institutions. Notwithstanding the foregoing description of the Interstate Banking Act, the provisions regarding out-of-state mergers, acquisitions and branch banking will not generally apply to the Company or its subsidiary banks until June 1, 1997, unless the State of Texas enacts a law accelerating the
effective date of the provisions permitting interstate merger transactions. Conversely, the Act also permits the State of Texas, prior to the June 1, 1997 effective date of the Act, to enact a law expressly prohibiting merger transactions involving out-of-state banks and bank holding companies.
With certain limited exceptions, the Act provides that a bank holding company may not engage in any business other than that of banking, managing or controlling banks and other authorized subsidiaries of which it owns or controls 25% or more of the voting shares, and may not own or control more than 5% of the voting shares of any company which is not a bank. Among the exceptions, one provides services to the bank holding company or its subsidiary banks. Another exception permits a bank holding company to acquire shares which are eligible for investment by a national banking association. In addition, the Act permits a bank holding company to acquire shares of any company, the activities of which the Federal Reserve Board, after due notice and opportunity for hearing, has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
The Federal Reserve Board has issued regulations setting forth certain activities regarded as closely related to banking or managing or controlling banks and thus permissible for bank holding companies. Such activities include, among others: (1) the making or acquiring of loans or other extensions of credit; (2) the servicing of loans for any person; (3) the performing of certain trust functions; (4) the making of equity and debt investments in projects or corporations designated primarily to promote community welfare; (5) providing bookkeeping and data processing services for the internal operations of a bank holding company and its subsidiaries, and the storing and processing of other banking, financial or related economic data, such as performing payroll, accounts receivable or payable, or billing services; (6) acting as an insurance agent or broker under certain circumstances and with respect to certain types of insurance; (7) providing certain securities brokerage services; (8) certain leasing of real and personal property; (9) insurance underwriting and insurance activities; (10) underwriting and dealing in government obligations and money market instruments; (11) acting or servicing as an investment or financial advisor; (12) real estate and personal property appraising; (13) consumer financial counseling; and (14) tax planning and preparation. Regulations have also been issued with respect to ownership by bank holding companies of so-called "non-bank banks," i.e., banks which do not accept demand deposits or do not make commercial loans. The Federal Reserve Board has cease-and-desist powers over parent holding companies and nonbanking subsidiaries where their actions would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. Registered bank holding companies are required to divest themselves of all activities not permitted by these regulations.
A subsidiary bank of a bank holding company is subject to certain restrictions imposed by the Federal Reserve Act with regard to (i) loans or extensions of credit to the bank holding company or any of its subsidiaries, (ii) the purchase of or investment in
securities issued by the bank holding company or any of its subsidiaries, (iii) the purchase of other assets from the bank holding company or any of its subsidiaries, and (iv) the acceptance of securities issued by the bank holding company or any of its subsidiaries as collateral for a loan or extension of credit. Further, the Act and the Federal Reserve Board's regulations thereunder prohibit a bank holding company and its subsidiaries from certain tie-in arrangements in connection with any extension of credit or lease or sale of any property or the furnishing of services.
The Texas Banking Code of 1943, as amended, grants to the Banking Commissioner of Texas the authority to disapprove any acquisition (or activity regulated by Section 4 of the Bank Holding Company Act of 1956, as amended, which does not include the acquisition of banks or certain banking activities), by a bank holding company doing business in the State, unless he finds that is can reasonably be expected to produce benefits to the public, such as greater convenience or increased competition, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Prior to 1987 the banking laws of the State of Texas did not permit acquisition by an out-of-state bank holding company of a Texas state bank, a national bank located in Texas or a bank holding company owning or controlling a state or national bank located in Texas. However, by amendments to the Texas Banking Code which became effective January 1, 1987, a bank located in the State of Texas, or a bank holding company owning or controlling a bank located in Texas, may be acquired by an out-of-state bank holding company upon compliance with the provisions of the Banking Code and the Commissioner's regulations.
First Abilene, First Sweetwater, First Cleburne and Eastland are chartered under the National Bank Act and are subject to the supervision and regulation of, and are regularly examined by, the Comptroller of the Currency of the United States. Hereford, Stephenville and San Angelo are chartered under the Texas Banking Code and are similarly supervised, regulated and examined by the Banking Commissioner of the State of Texas. The supervision and regulation of the banks by all of these authorities is primarily intended to protect the interest of depositors, though shareholders are likewise benefited. Various requirements and restrictions under the laws of the United States and the State of Texas affect the operations of each of the banks, including the requirement to maintain reserves against deposits, restrictions on the nature and amount of loans which may be made and the interest that may be charged thereon, and restrictions relating to investments and other activities.
First Abilene, Hereford, First Sweetwater, First Cleburne, Eastland, Stephenville and San Angelo are members of the Federal Deposit Insurance Corporation. The Federal Deposit Insurance Act requires that the Federal Deposit Insurance Corporation approve any merger or consolidation by or with an insured bank or any establishment of branches by an insured bank, and it is also empowered to regulate interest rates paid by insured banks. The approval of the Federal Deposit Insurance Corporation must also be
obtained by an insured bank before it retires any part of its common or preferred stocks or retires any part of its capital notes or debentures. However, an insured bank which is a member of the Federal Reserve System is regulated with respect to the foregoing matters by the Federal Reserve System.
In addition, the Federal Deposit Insurance Act makes applicable to insured banks provisions of the federal banking laws which establish limitations with respect to loans to, extensions of credit to, or purchases of securities from affiliates. Affiliates include any bank holding company of which a bank is a subsidiary and any other subsidiary of a bank holding company of which the bank is a subsidiary. Bankshares and each of its subsidiary banks are affiliates of each other.
First Abilene, First Sweetwater, First Cleburne and Eastland are member banks of the Federal Reserve System. By being a member bank in good standing, each of such banks has available the bank credit facilities of the Federal Reserve Bank of Dallas, and thus may obtain discounts, advancements and accommodations from that Reserve Bank.
As a condition of membership in the Federal Reserve System, First Abilene, First Sweetwater, First Cleburne and Eastland must hold shares of stock in the Federal Reserve Bank of Dallas. First Abilene had paid $990,000, First Sweetwater $150,000, First Cleburne $171,000 and Eastland $105,000, for such stock. Pursuant to law, each bank has paid only one-half of the par value of such shares and is subject in the future to a call for the remaining 50% should it be determined that such a call is in the best interest of the Federal Reserve Bank.
As member banks, First Abilene, First Sweetwater, First Cleburne, and Eastland are subject to the regulations of the Board of Governors of the Federal Reserve System and to the limitations and restrictions imposed upon the Bank by such regulations and by the Federal Reserve Act. Bankshares, Hereford, and Stephenville may be deemed to be "affiliates" within the meaning of such Act, which imposes restrictions on loans by subsidiary banks to Bankshares on investments by those banks in the stock or securities of Bankshares and on the use of such stock or securities as collateral security for loans by those banks to any borrower. Bankshares is also subject to certain restrictions with respect to engaging in the business of issuing, underwriting, public sale and distribution of securities.
The ability of Bankshares to pay dividends is largely dependent upon the amount of dividends declared by the Delaware BHC and its subsidiary banks and any subsequently-acquired affiliated banks. Under the Texas Banking Code of 1943, as amended, before any dividend may be paid to Bankshares by an affiliated state bank, the state bank must transfer to "certified surplus" an amount which is not less than 10% of the net profits of such bank earned since the last dividend was declared; provided, however, that a transfer is not required to certified surplus of a sum which would increase the certified surplus to more than the capital of the bank. Under the Federal Reserve Act, the approval of the Federal Reserve Board
is required if dividends declared by any subsidiary state bank which is a member of the Federal Reserve System in any year should exceed the total of net profits for that year combined with the retained net profits for the preceding two years. Approval of the Comptroller of the Currency, or his designate, is required for any dividend to Bankshares from an affiliated national bank if the total of all dividends, including any proposed dividend, declared by such bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of any preferred stock of such bank. At December 31, 1994, approximately $14,256,000 was available for the declaration of dividends by Bankshares' subsidiary banks without approval of regulatory agencies. All dividends declared by subsidiary banks are paid to the Delaware BHC and dividends must then be declared and paid by the Delaware BHC to Bankshares.
Stockholders of banks (including bank holding companies which own stock in banks) may be compelled by bank regulatory authorities to invest additional capital, in the event their bank's experience either significant operating losses or rapid growth of loans or deposits. In addition, Bankshares may also be required to provide additional capital to the banks which it acquires, as a condition to obtaining the approvals and consents of regulatory authorities in connection with such acquisitions.
The State of Texas has various usury laws that place ceilings on interest rates that can be charged by banks on particular kinds of loans or on loans to particular classes of borrowers. Moreover, the federal government, by statute and regulation, preempted, for certain categories of loans and for designated periods of time, the usury laws of the several states and imposed or, in some cases, removed ceilings on interest rates for particular kinds of loans or on loans to particular classes of borrowers.
Commercial banking is affected not only by general economic conditions but also by the fiscal and monetary policies of the Federal Reserve Board. Changes in the discount rate on member bank borrowings, availability of borrowings at the "discount window," open market operations, the imposition of and changes in reserve requirements against member banks' deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates and the placing of limits on interest rates which member banks may pay on time and savings deposits are some of the instruments of fiscal and monetary policy available to the Federal Reserve Board. These fiscal and monetary policies influence to a significant extent the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings deposits.
Bankshares is unable to predict the nature or the extent of the effects on its business and earnings which fiscal or monetary policies or economic controls may have in the future.
In 1986 the Texas Constitution was amended to permit limited
branch banking in Texas. Although the Constitutional amendment and legislation authorized only limited branch banking, a federal court decision in June of 1988 and a later opinion of the Texas Attorney General held that national banks and state-chartered banks in Texas have State-wide branch banking authority. Moreover, as previously indicated, the Interstate Banking Act has substantially changed regulation of interstate banking activities and expressly permits bank holding companies to acquire banks and other financial institutions located in other states and for national banks (and foreign banks) to establish de novo branch banks in other states.
G. Statistical Disclosure
Information related to industry segments and foreign operations required by Regulation S-K is not applicable. The following tables provide information required by Guide 3, "Statistical Disclosure by Bank Holding Companies", that has not been included in Part II, item 7.
Table 1 - Composition of Loans (000's omitted):
Loan Concentrations
At December 31, 1994, the Company had $62,154,752 million in loans outstanding to agricultural which represented 14.61% of total loans.
Table 2 - Maturity Distribution and Interest Sensitivity of Loans at December 31, 1994:
Table 3 - Nonperforming Assets (000's omitted):
Potential Problem Loans
Certain loans classified for regulatory purposes as doubtful, substandard, or special mention are included in the nonperforming loan table. Also included in the classified loans are certain other loans which are deemed to be potential problems. Potential problem loans are those loans which are currently performing but where known information about trends or uncertainties or possible credit problems of the borrowers causes management to have concerns as to the ability of such borrowers to comply with present repayment terms, possibly resulting in the transfer of such loans to nonperforming status. These loans totaled $840,547 million at December 31, 1994.
Table 4 - Composition of Investment Securities
Table 5 - Maturities and Yields of Investment Securities Held December 31, 1994 (000's omitted):
Table 6 - Analysis of the Allowance for Loan Losses
Table 7 - Allocation of Allowance for Loan Losses
Table 8 - Composition of Deposits (000's omitted):
Table 9 - Remaining Maturity of Time Deposits of $100,000 or More (000's omitted):
Item 2.



Item 2. Properties
A. First Financial Bankshares/First National Bank of Abilene
The principal offices of Bankshares and First Abilene are located in the First National Bank Building at 400 Pine Street in downtown Abilene, Texas. First Abilene occupies the first four floors of the building and the remaining six floors of this 170,842 square foot facility are available for lease to tenants. The First National Bank Building is connected to the First National West Building, a six-story modern facility owned by First Abilene which contains 52,800 square feet of lease space which is rented to business and professional tenants. First Abilene began occupying the First National Bank Building in June of 1984 and, at the same time, a new four-level drive-in parking garage was completed immediately south across the street from the new bank building, which is connected to the bank building by an over-the-street, enclosed pedestrian bridge. The total cost of the project was $14,000,000. Until January 1, 1989, both the new First National Bank Building and the connected parking garage were owned by a joint venture between First Abilene and the Trammell Crow Company. Effective January 1, 1989, First Abilene purchased the interest of Trammell Crow Company and is now the sole owner of the First National Bank building and the connecting parking garage. A note payable to Aetna Life Insurance Company in the amount of $ 7,000,000 which was previously secured by this property was paid in full during 1991.
First Abilene also owns a five-story office building known as the First National/Ely Building, which is located directly south across the street from the First National West Building and connected to the First National West Building by an underground pedestrian tunnel. The First National/Ely Building contains approximately 34,000 square feet of space and is leased to business and professional tenants. The premises also includes a ground level parking lot with spaces for 22 cars which are leased to tenants and others. Both the First National/Ely Building and the parking lot are situated on land leased by First Abilene. The lease has 20 years remaining at this time and provides an option to purchase the underlying property for $360,000.
First Abilene owns and operates a 17-lane drive-in banking facility which was completed in 1981 and which is also located on Pine Street, two blocks north of First Abilene's main banking facilities. In 1987 First Abilene completed construction of a branch banking facility located at the northwest corner of North Judge Ely Boulevard and East North Tenth Street in Abilene. The cost of the site was $412,383 and the construction cost for the building and improvements was $ 554,318. The new branch banking facility includes a one-story office building containing 2,960 square feet and six lane drive-in facility.
As a result of the merger between First Abilene and American National, First Abilene acquired title to the drive-in banking facility owned by American National on Buffalo Gap Road in the southwest part of Abilene, Texas. The drive-in facility is located on 2.23 acres of land adjoining a five-story office building in which American National leased office space for its banking
operations. Following its merger with American National First Abilene entered into a 10-year lease covering 11,009 square feet of office space on the ground floor of the building adjacent to the drive-in facility, which office space includes all, or substantially all, of the space formerly leased and occupied by American National for its primary banking facility. In addition to the original 10-year term of the lease, the lease provides three renewal options on the leased premises, each option being for a renewal term of five years. The drive-in banking facility was constructed to provide for seventeen (17) lanes, but only eight drive-in teller windows and lanes are presently being utilized.
As a result of the merger between First Abilene and BOC, First Abilene acquired title to the banking facility at the corner of South 14th and Willis Streets in Abilene, Texas, occupying the first floor and renting 27,000 square feet of office space to tenants. The building is of steel reinforced concrete and masonry construction with air conditioning throughout. The building was constructed in 1966 and is of modern design. It was purchased from C M & M, a partnership, subject to a mortgage and promissory note payable to Connecticut General Life Insurance Company. BOC did not assume the mortgage note, but the property was conveyed to the Bank by warranty deed dated March 30, 1967, subject to the mortgage. The mortgage note was paid in full in 1992. BOC's facilities are located on six (6) acres of land, all of which is subject to the above-described mortgage. During 1978 BOC conveyed approximately 4-1/2 acres (not included in the above six acres) of its property (considered to be surplus) for fair market value to an individual from Fort Worth, Texas, who developed the property into offices and parking. In 1976 a 12-lane drive-in facility located adjacent to the main banking facility was completed. In 1982 BOC completed construction of an addition to the teller service area for the drive-in facility at an estimated cost of $200,000. In December 1984, BOC purchased property (approximately 1.85 acres) located on Southwest Drive in Abilene, Texas, for future construction of a full-service banking facility. The cost of such property was $344,937.02. As a result of the mergers of American National and BOC with First Abilene and the operation of the banking facilities of American National and BOC as branch banks of First Abilene, it is unlikely that First Abilene, which acquired all of BOC's assets in the merger, will proceed with construction of banking facilities at the property on Southwest Drive and the property is presently listed for sale.
B. Hereford State Bank
Hereford owns its main banking house located at 212 North Sampson Street, Hereford, Texas. The building contains 16,000 square feet (not including drive-in facilities) and is of concrete block-brick face construction with air conditioning throughout. This new facility was completed during 1977. The drive-in complex is 12 years old, is of brick construction, and is connected to the bank by a walk-through tunnel.
C. First National Bank, Sweetwater, Texas
First Sweetwater owns its main banking house located at 201 Elm Street in The City of Sweetwater, Texas. The building contains 20,000 square feet and is constructed of steel-reinforced concrete and marble, with air conditioning throughout. The building was constructed in 1974 and is of modern design. First Sweetwater also maintains a drive-in facility located on the same premises as its main banking facility. In December 1987, First Sweetwater completed construction of a basement to its banking facility at a cost of $289,000.
D. Eastland National Bank
Eastland owns its banking facilities located at 201 East Main Street in Eastland, Texas. The building contains 13,000 square
feet and is of steel and stucco construction with air conditioning throughout. It was constructed in 1980 and is of modern design. Eastland also maintains a drive-in facility located on the same premises as its main banking facility.
E. The First National Bank of Cleburne
First Cleburne owns its banking facilities located at 403 North Main Street in Cleburne, Texas. The building contains 18,000 square feet and is of steel and brick masonry construction with air conditioning throughout. It was constructed in 1978 and is of modern design. Cleburne also maintains a drive-in facility located on the same premises as its main banking facility. On September 23, 1994, First Cleburne acquired the Cleburne branch of Bank One Texas, N.A. The building is of brick masonry construction, contains 4,400 square feet and includes a drive-in teller window. Now operating as a branch of First Cleburne, the facility is located approximately 3 miles west of the main office.
F. Stephenville Bank & Trust
Stephenville Bank & Trust owns its banking facility which is located at 298 West Washington in Stephenville, Texas. The building is a brick masonry structure with approximately 10,000 square feet. Stephenville owns and operates a drive-in facility that is located across the street from their main banking facility, and a branch facility consisting of 1,000 square feet located on the west side of the city.
G. Southwest Bank of San Angelo
Southwest Bank owns its banking facility which is located at 3471 Knickerbocker Road in San Angelo, Texas. The five-story building, including the office tower, has approximately 29,250 thousand square feet and is of steel and stucco construction. Approximately 11,800 square feet of the office tower is available for lease. The bank also owns and operates a drive-in banking facility on the same premises as its main banking offices.
Item 3.

Item 3. Legal Proceedings
Other than routine litigation in the normal course of business, there are no material pending legal proceedings to which Bankshares, the Delaware BHC or its subsidiary banks or any of their properties are subject, nor are there any known material legal proceedings involving directors, officers or affiliates of Bankshares. Other than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities except the following:
As a result of a routine examination of Southwest Bank by the Federal Deposit Insurance Corporation, Southwest Bank entered into a Memorandum of Understanding with the FDIC in December of 1994, which required Southwest Bank to develop, adopt and implement written policies, training programs, formal internal controls and management review procedures with respect to consumer credit transactions, consumer real estate loans and compliance with the requirements of the Bank Secrecy Act. The Memorandum required that all corrective action prescribed in the Memorandum, including implementation of the policies, programs, controls and procedures described therein, be accomplished within 60 days. The Company believes that Southwest Bank has complied in full with the requirements of the Memorandum, that all corrective action has been taken, and that Southwest Bank has adopted and implemented all necessary written policies, training programs, formal internal controls and management review procedures. Moreover, the Company does not believe that any of the deficiencies or problems cited in the FDIC examination had any adverse effect upon, nor that any of the policies, programs, controls or procedures adopted in response to the Memorandum will place any restrictions upon, the financial operations of the Company or Southwest Bank.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the security holders of Bankshares during the fourth quarter of Bankshares' fiscal year
ending December 31, 1994.
PART II
Item 5.

Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
As of February 2, 1995, there were 1,412 holders of Bankshares' stock reflected on its records. Except for shares held by First Abilene, First Sweetwater, and Stephenville in various fiduciary capacities (see Item 12 following), no shareholder or shareholder group known to Bankshares owns five percent (5%) or more of Bankshares' issued and outstanding stock. Market, price and dividend information about the stock for the past three years is set forth on page 30 under Item 7. Restrictions on Bankshares' present or future ability to pay dividends have been discussed under Item 1, above, under the topic "Supervision and Regulation."
Item 6.

Item 6. Selected Financial Data
Item 7.

Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
Review of Operating Results
Net income from operations for 1994 was $13.1 million or 3.04% above the $12.7 million in operating earnings for 1993, which was 8.5% above the $11.7 million earned in 1992. Earnings per share were $2.62, $2.56, and $2.37 for 1994, 1993, and 1992, respectively. Return on average assets was 1.31% for 1994, compared to 1.30% in 1993 and 1.32% in 1992. The Company's 1994 return on shareholders' equity was 13.07% compared to 13.56% in 1993 and 13.96% in 1992. Not included in the 1993 amounts, for comparative purposes, was nonrecurring income of $1.0 million, or $ .21 per share, which represented the cumulative effect of the adoption of Financial Accounting Standard No. 109, "Accounting for Income Taxes". During 1994 the Company acquired Concho Bancshares, Inc. and its wholly-owned subsidiary, Southwest Bank of San Angelo, through an exchange of shares. The transaction was treated as a pooling-of-interests for accounting purposes; therefore, the financial statements reflect the results of the acquired entity for the entire year and prior periods have been restated to include the combined balance sheets and income statements. The increased income for 1994 is attributed primarily to increased net tax-equivalent interest income of $697 thousand and $885 thousand in reductions to the allowance for loan losses. These gains were offset to some extent by various expenses related to the installation of new data processing systems and losses resulting from the sale of certain low-yielding securities. Details are provided further in this discussion. The 1993 earnings reflect higher net interest income and noninterest income, a lower loan loss provision, and when compared to 1992, benefit from the addition of Stephenville Bank & Trust Co. which was acquired in a cash purchase in February 1993.
Net Interest Income
For 1994, net interest income on a tax-equivalent basis amounted to $40.6 million, a $697 thousand increase over the 1993 total of $39.9 million. The increase was attributable to a higher average volume of interest earning assets with a slightly higher yield, funded partially by higher average volumes of interest free deposits and equity capital. These factors served to offset a decreased yield on investment securities and a higher rate paid on interest-bearing liabilities, which, on an average basis, were virtually unchanged from the prior year. On a tax-equivalent basis, net interest income of $39.9 million in 1993 increased $2.1 million from 1992 and resulted from growth in average earning assets, a substantial amount of which related to the acquisition of the Stephenville Bank in February 1993. Also during 1993, the net yield on earning assets declined to 4.51% from 4.72% the prior year primarily as the result of the maturity and reinvestment of fixed rate investments during a period of declining interest rates. Table 1 below summarizes the changes in net interest income on a fully tax-equivalent basis by major category of interest-earning assets and interest-bearing liabilities, identifying changes related to volumes and rates. Nonaccrual loans are included in the
loan volumes used to calculate the following analysis of net interest income.
Table 1 - Changes in Interest Income and Interest Expense (000's omitted):
The following table 2 presents average balances, income and expense, and yields and rates for 1994, 1993 and 1992.
Table 2 - Average Balances and Average Yields and Rates (000's omitted)
Provision for Loan Losses
In 1994 the Company had net loan recoveries of $896 thousand which, coupled with continued improvement in credit quality, permitted a credit loan loss provision of $885 thousand. The charges against earnings for loan loss provisions in 1993 and were $508 thousand and $1.1 million, respectively. Net loan charge offs amounted to $506 thousand in 1993 and $555 thousand in 1992. Nonperforming assets amounted to $2.2 million at December 31, 1994, compared to $5.5 million at December 31, 1993. Additional comparative information is provided in the Allowance for Loan Losses section of this discussion.
Noninterest Income
Table 3 - Noninterest Income (000's omitted):
As shown above, total noninterest income in 1994 amounted to $11.6 million compared to $11.7 million in 1993. Trust fees were down modestly due primarily to lower stock and bond market values on which fee income was calculated. The small decrease in service fees on deposit accounts is attributable to higher rates used to calculate earnings credits on corporate accounts and higher average balances on accounts which are subject to service charges, thereby reducing fees for services. Interest collected in 1994 on loans which had been charged off in prior years amounted to $565 thousand as compared to $39 thousand the prior year. Mastercard fees in 1994 increased $99 thousand, or 19.7%, and resulted from higher volumes of merchant activity. Net losses on sale of securities totaled $596 thousand in 1994 and resulted from the sale of $11.6 million in low-yielding securities which have been reinvested at higher rates and will improve the overall portfolio yield in future periods. In 1993 the Company had a net gain of $48 thousand from the sale of a relatively small volume of securities to reduce investment in a particular issue in order to meet regulatory guidelines. Noninterest income totaled $11.7 million in 1993 which was $1.9 million above the 1992 amount. The addition of the Stephenville Bank and a significant increase in real estate mortgage fees were the primary factors contributing to the 1993 increase in total noninterest income.
Noninterest Expense
Table 4 - Noninterest Expense (000's omitted):
Noninterest expense for 1994 amounted to $33.1 million, an increase of $1.2 million, or 3.8% over 1993. The effect of having a full year of operating expenses at the Stephenville Bank versus 10 months in 1993 accounted for approximately $415 thousand of the 1994 increase. Salaries and employee benefits, the largest component of noninterest expense increased $730 thousand, or 4.6%, to $16.4 million in 1994, with essentially all of the increase being in salaries. Adjusting for the effect of the Stephenville Bank referenced above, 1994 salaries and employee benefits on an annualized basis reflect a 3.3% increase. Net occupancy expense of $2.7 million in 1994 was $297 thousand, or 12.3%, above 1993. Approximately $120 thousand of the increase represents additional depreciation expense taken in 1994 resulting from a change in estimate for the useful life of certain leasehold improvements. Depreciation expense for the remodeled data center space, building repairs, and slightly higher utilities expense were other items which contributed to the 1994 increase. Equipment expense for 1994 increased $174 thousand and amounted to $2.2 million. The higher 1994 expense resulted primarily from a $235 thousand increase in equipment depreciation offset by a $75 thousand decrease in maintenance and repairs. During 1994, the Company's lead bank, First National Bank of Abilene, installed new data processing equipment which accounted for the higher depreciation expense. The major components of other noninterest expense are presented
in table 4. The 1994 decrease in professional and service fees resulted from the termination of certain employee benefit and investment advisory services at Southwest Bank of San Angelo. Increased software amortization in 1994 relates to the company-wide installation of updated banking system software. Other miscellaneous consists of outside director fees, travel, communication, insurance, and various other operating expenses. Also, the 1994 total for other miscellaneous includes nonrecurring computer conversion and training expense of $193 thousand, while the 1993 total included $356 thousand for the settlement of legal claims against one of the subsidiary banks.
Noninterest expense for 1993 totaled $31.9 million which was $2.9 million, or 10.2%, above 1992. Excluding the operating expenses at the Stephenville Bank which was purchased in February 1993, total noninterest expenses in 1993 were up $866 thousand, or 3.0%, from the prior year.
Income Taxes
Income tax expense for 1994 amounted to $6.4 million compared to $6.1 million in 1993 and $5.2 million in 1992. The higher tax expense reflected in each succeeding year is attributable to a higher level of income before taxes and an increased effective tax rate due to an increase in the statutory tax rate and declining levels of tax exempt investments. The Company's effective rates on pre-tax income were 32.9%, 32.4%, and 30.7% for the years 1994, 1993 and 1992. Note 6 to the consolidated financial statements provides additional analysis of income tax expense for these years.
Balance Sheet Review
Total assets amounted to $1.01 billion and $1.02 billion at December 31, 1994 and 1993, respectively. During 1994 total assets averaged $1.0 billion compared to an average of $978 million in 1993. The following sections provide information for the major balance sheet categories.
Investment Securities
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 which modified the accounting for investment securities. The statement requires management to classify debt and equity securities as held-to- maturity, available-for-sale, or trading based on their intent. Securities classified as held-to-maturity are recorded at cost, adjusted for amortization of premiums and accretion of discounts. Securities classified as available-for-sale are recorded at fair value, with unrealized gains and losses, net of deferred taxes, excluded from earnings and reported in a separate component of shareholders' equity. Securities classified as trading are recorded at fair value, with unrealized gains and losses included in earnings. As permitted by the statement, the Company adopted this statement effective January 1, 1994, and the resulting cumulative adjustment increased investment securities $375.5 thousand, deferred income taxes payable $131.4 thousand and shareholders' equity $244.1 thousand. Holding investment securities until maturity continues to be the Company's primary investment strategy. However, in accordance with the statement guidelines, investment securities totaling $28.0 million are classified as available-for-sale which provides the Company flexibility in asset and liability management to liquidate prior to maturity certain investments. During 1994 securities amounting to $11.6 million were sold and resulted in a net securities loss of $596 thousand. The Company has no investments classified as trading securities. Excluding the adjustment to fair value for the available-for- sale portfolio, investment securities increased $8.5 million during 1994. The investment portfolio is comprised primarily of U. S.
Government and government corporations and agencies securities with relatively short maturities. Note 2 to the consolidated financial statements provides detail disclosures relating to the maturities and fair values of the investment portfolio at December 31, 1993 and 1994.
Loans
Total loans at December 31, 1994, amounted to $425.6 million compared to $420.2 million at the prior year end. The following table 5 presents the composition of the loan portfolio at these two dates.
Table 5 - Composition of Loans (000's omitted):
Excluding the effect of the maturity in 1994 of commercial paper as shown in the above table, internally-generated loans were up $31.1 million, or 7.9%, from the 1993 year-end amount. Real estate mortgage loans represent loans secured by 1-4 family residences in the Company's primary markets, and loans to local business and farm operations in those markets. These loans generally provide for repricing at intervals that protects the Company from the rate risk inherent in long term fixed rate mortgage loans.
Allowance for Loan Losses
An evaluation of the overall quality of the portfolio is performed to determine the necessary level of the allowance for loan losses. The evaluation takes into consideration the classification of loans and the application of loss estimates to those classifications. The Company has an independent loan review function which periodically reviews the loan quality at each of the subsidiary banks. The subsidiary banks also are subject to periodic examinations by state and federal banking system examiners. As stated earlier in this discussion, continued improvement in credit quality and net loan recoveries in 1994 resulted in a credit loan loss provision for 1994. Table 6 below provides activity in the allowance for loan loss account for the past five years and table 7 presents the year-end balance and composition of nonperforming assets which serves as a key indicator of loan quality.
Table 6 - Loan Loss Experience and Allowance for Loan Losses (000's omitted):
Table 7 - Nonperforming Assets (000's omitted):
Deposits
For the year 1994, total deposits averaged $892.8 million as compared to the 1993 average of $874.0 million, an increase of $18.8 million. Table 8 provides a breakdown of average deposits and rates paid over the past three years. The 1993 increase in total average deposits is attributed primarily to the February cash purchase of the Stephenville Bank and the September 1993 branch purchase by the First National Bank in Cleburne.
Table 8 - Composition of Deposits
Asset and Liability Management
Asset and liability management is the funding and investment strategies necessary to maintain an appropriate balance between interest-sensitive assets and liabilities. It is the policy of the Company that each subsidiary establish policies for balance sheet management. Interest-sensitivity analysis is one of the tools used to monitor interest rate risk resulting from periodic mismatches or "gap" in the maturities of assets and liabilities. The following table 9 presents the Company's interest-sensitivity gap as of December 31, 1994. The Company has a negative cumulative repricing gap in the one-year horizon. Consequently, a sudden and large increase in rates or a dramatic narrowing in the spread between asset yields and liability costs would result in an adverse impact on the net interest margin; however, the adverse impact is more moderate if interest rates follow historical trends and increase gradually. The Company uses no off-balance sheet financial instruments to manage interest rate risk.
Table 9 - Interest-Sensitivity Analysis (000's omitted):
Capital and Liquidity
At December 31, 1994, total shareholders' equity was $103.9 million, an increase of $7.2 million, or 7.4%, from December 31, 1993. Banking system regulators measure capital adequacy by means of the risk-based capital ratio and leverage ratio. The risk-based capital rules provide for the weighting of assets and off-balance- sheet commitments and contingencies according to prescribed risk categories ranging from 0% to 100%. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders' equity less intangibles by quarter-to-date average assets less intangibles. Regulatory minimums for the risk-based and leverage ratios are 8.00% and 3.00%, respectively. At December 31, 1994, the Company's risk-based ratio and leverage ratio were 21.20% and 10.26%, respectively. On April 26, 1994, the Board of Directors approved a 25% stock dividend which was paid June 1, 1994. The Company does not anticipate any changes in the cash dividend policy which has yielded payout ratios of 41.66%, 34.04%, and 32.03%, respectively, in 1994, 1993, and 1992. On October 26, 1994, the Board of Directors approved a Stock Purchase and Cancellation Plan which authorized the Company, subject to market conditions and availability, to purchase up to 200,000 shares of the Company's common stock. There were no shares purchased during 1994. The statements of cash flows which are included in the consolidated financial statements present changes in cash and cash equivalents. The subsidiary banks continue to maintain relatively low loan to deposit ratios and highly liquid investment portfolios with short maturities. These factors, coupled with the parent company's $5.0 million available line of credit, provide adequate liquidity.
Market and Dividends
The following table 10 provides the high and low bid prices and dividends per share for the Company's common stock for the periods indicated. All amounts have been adjusted for the 25% stock dividend on June 1, 1994. The quarterly price range of the Company's stock is the closing bid price and may not necessarily represent actual transactions.
Table 10 - Common Stock Data
Quarterly Financial Data (Unaudited) (Dollars in thousands, except per share data)
Item 8.


Item 8. Financial Statements and Supplementary Data
The independent auditor s report, and consolidated financial statements of Bankshares at December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, are provided on pages 27 through 45. Also included for the year ended December 31, 1994 is management s report on responsibility for the financial statements.
FIRST FINANCIAL BANKSHARES, INC. MANAGEMENT'S REPORT ON RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
The Management of First Financial Bankshares, Inc. is responsible for the preparation, integrity and fair presentation of its annual financial statements as of December 31, 1994, and the year then ended. The financial statements have been prepared in accordance with generally accepted accounting principles 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 financial statements.
The annual financial statements referred to above have been audited by Arthur Andersen 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 Arthur Andersen LLP during the audit were valid and appropriate.
Kenneth T. Murphy Curtis R. Harvey Chairman of the Board, President Executive Vice President and Chief Executive Officer and Chief Financial Officer
ARTHUR ANDERSEN LLP
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, 1994 and 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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 generally accepted auditing standards. 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.
As explained in Note 1 to the consolidated financial statements, effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" and changed its method of accounting for income taxes.
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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles.
Arthur Andersen LLP Dallas, Texas, January 11, 1995
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1994 AND 1993
The accompanying notes are an integral part of these consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
The accompanying notes are an integral part of these consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
The accompanying notes are an integral part of these consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
The accompanying notes are an integral part of these consolidated statements.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993, AND 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A summary of significant accounting policies of First Financial Bankshares, Inc. and subsidiaries (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 generally accepted accounting principles and prevailing practices of the banking industry.
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany accounts and transactions have been eliminated.
Basis of Presentation
Prior period financial statements have been restated to include the accounts of a subsidiary which was acquired during 1994 and accounted for as a pooling-of-interest. Another subsidiary, acquired during 1993 and accounted for as a purchase, is included in the consolidated financial statements from the date of acquisition.
Investment in Securities
In May 1993, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was issued. This statement requires management to classify debt and equity securities as held-to-maturity, available-for-sale, or trading based on their intent. Securities classified as held-to- maturity are 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 classified as available-for-sale are recorded at fair value, with unrealized gains and losses, net of deferred taxes, excluded from earnings and reported in a separate component of shareholders' equity. Securities classified as trading are recorded at fair value, with unrealized gains and losses included in earnings. The Company adopted this statement effective January 1, 1994, resulting in an after-tax adjustment to equity of $244,069 and increasing investments by $375,491. The Company had no trading securities at December 31, 1994 or 1993.
Prior to January 1, 1994, the Company accounted for its investment in securities at amortized cost.
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 allowance for loan losses is established through a provision for loan losses charged to 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 possible losses on existing loans that may become uncollectible based upon management's review and evaluation of the loan portfolio. The factors considered in the evaluation of the loans include 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.
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.
Excess of Cost Over Fair Value of Tangible Assets Acquired (Goodwill)
Goodwill, relating to acquisitions of certain subsidiary banks, is being amortized by the straight-line method over periods of 15 and 40 years.
Per Share Data
Earnings per share are based on the weighted average number of common shares and common share equivalents outstanding in 1994, 1993, and 1992 of 4,997,214, 4,973,519, and 4,950,133, respectively, adjusted retroactively for stock dividends and splits. Common share equivalents represent the dilutive effect of stock options. Additionally, dividends per share have been retroactively adjusted for the effect of stock dividends and splits.
Reclassifications
Certain 1993 and 1992 amounts have been reclassified to conform to the 1994 presentation.
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
In February 1992, Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," was issued. This statement requires an asset and liability approach for financial accounting and reporting for income taxes and supersedes "Accounting for Income Taxes" required by Statement of Financial Accounting Standards No. 96 and APB Opinion No. 11. The Company adopted this statement effective January 1, 1993, with the resulting cumulative adjustment to income increasing other assets by $1,023,595.
Accounting Standards Not Yet Adopted
In May 1993, Statement of Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan," was issued. In October 1994, SFAS 114 was amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures." These statements require that impaired loans, within the scope of the statements, be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or market price or the fair value of the collateral if the loan is collateral dependent. These statements apply to fiscal years beginning after December 15, 1994, and are not expected to have a material effect on the accompanying financial statements.
2. CASH AND INVESTMENT SECURITIES:
Certain subsidiary banks are required to maintain reserve balances with the Federal Reserve Bank. During 1994 and 1993, such average balances totaled approximately $12,226,000 and $14,961,000, respectively.
The amortized cost, estimated market values, and gross unrealized gains and losses of the Company's investment in securities as of December 31, 1994 and 1993, are as follows:
The Company invests in 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 and asset-backed securities. The expected maturities of these securities at December 31, 1994, were computed by using scheduled amortization of balances and historical prepayment rates.
The amortized cost and estimated market value of debt securities held to maturity at December 31, 1994, by contractual and expected maturity, are shown below.
The amortized cost and estimated market value of debt securities available for sale at December 31, 1994, by contractual and expected maturity, are shown below.
Investment securities carried at approximately $97,859,000 and $94,098,000 at December 31, 1994 and 1993, respectively, were pledged as collateral for public or trust fund deposits and for other purposes required or permitted by law.
During 1994, sales from investments in securities that were classified as available-for-sale totaled $11,649,196. The gross
realized gains and losses from those sales were $100,706 and $696,703, respectively. Specific identification was used to determine cost in computing the realized gains and losses.
3. LOANS AND ALLOWANCES FOR LOAN LOSSES:
Major classifications of loans are as follows:
At December 31, 1994 and 1993, the Company was carrying nonaccrual loans of approximately $1,278,000 and $3,417,000, respectively. Had these loans performed according to their original contract terms, the Company would have accrued interest of approximately $130,000 and $430,000 for the years ended December 31, 1994 and 1993, respectively, as compared to amounts actually recognized of approximately $47,000 and $53,000, respectively. In management's opinion, the allowance for loan losses is adequate to absorb any losses which may arise from these and other loans in the portfolio.
Changes in the allowance for loan losses are summarized as follows:
4. BANK PREMISES AND EQUIPMENT:
The following is a summary of bank premises and equipment:
5. TIME DEPOSITS:
Time deposits of $100,000 or more totaled approximately $105,887,000 and $91,109,000 at December 31, 1994 and 1993, respectively. Interest expense on these deposits was approximately $3,812,000, $2,789,000, and $4,119,000 during 1994, 1993, and 1992, respectively.
6. INCOME TAXES:
The Company files a consolidated federal income tax return. Income tax expense (benefit) is comprised of the following:
During 1993, the federal income tax rate for the Company's taxable income greater than $10,000,000 changed from 34 percent to 35 percent. The adjustment to the Company's deferred tax assets and liabilities for this change was insignificant.
The provision for income tax expense (benefit), as a percentage of pretax earnings, differs from the statutory federal income tax rate as follows:
The approximate effects of each type of difference that gave rise to the Company's deferred tax assets and liabilities at December 31, 1994, are as follows:
At December 31, 1994, the First National Bank in Cleburne ("Cleburne"), a subsidiary bank, had a net operating loss carryforward for federal income tax purposes of approximately $2,409,000. In its consolidated return, subject to certain yearly limitations, the Company can utilize Cleburne's preacquisition net operating loss carryforward to offset future consolidated taxable income only to the extent Cleburne has future taxable income. If not used, the net operating loss carryforward expires as follows: $1,484,000 in 2001, $560,000 in 2002, and $365,000 in 2005.
The valuation allowance was established to recognize the uncertainty of realization of the benefit related to Cleburne's net operating loss carryforward. The following summarizes the changes in the allowance account:
7. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires the Company to disclose the estimated fair value of its financial instrument assets and liabilities. For the Company, as for most financial institutions, over 90% of its assets and liabilities are considered financial instruments as defined in Statement No. 107. 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 recorded book balances. The estimation methodologies used, the estimated fair values, and recorded book balances at December 31, 1994 and 1993, were as follows:
- 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 recorded book balance.
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 has been customary with historical cost accounting. No disclosure of the relationship value of the Company's deposits is required by Statement No. 107 nor has the Company estimated its value. There is no material difference between the notional amount and the estimated fair value of off-balance-sheet unfunded loan commitments which total $119,495,930 and $87,522,874 at December 31, 1994 and 1993, respectively, and are generally priced at market at the time of funding. Letters of credit discussed in Note 9 have an estimated fair value based on fees currently charged for similar agreements. At December 31, 1994 and 1993, fees related to the unexpired term of the letters of credit are not significant.
Management is concerned that 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.
8. 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 should have no material adverse effects upon the results of operations or financial condition of the Company.
The Company has an unused line of credit with a bank under which it may borrow up to $5,000,000 at the London Interbank Offered Rate plus 1%, adjusted for reserves and deposit insurance expense. The line of credit is unsecured and matures on August 1, 1995. The Company paid no fee to secure the unused line of credit and accordingly has not estimated a fair value of the unused line of credit at December 31, 1994 or 1993.
The Company leases portions of its banking premises and equipment under operating leases. Total rental expense for these leases was approximately $340,000, $358,000, and $363,000 for the years ended December 31, 1994, 1993, and 1992, respectively.
The Company is a lessor for portions of its banking premises. Total rental income for all leases included in net occupancy expense was approximately $1,306,000, $1,214,000, and $1,219,000 for the years ended December 31, 1994, 1993, and 1992, respectively. At December 31, 1994, approximate future minimum lease commitments and lease receivables are summarized as follows:
9. 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 commitments to 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 balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for 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.
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. 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 is 84%.
10. 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 the local economic sector.
11. 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.
The following table sets forth the plan's funded status and amounts recognized in the Company's balance sheet at December 31, 1994 and 1993.
Net pension cost (credit) for the years ended December 31, 1994, 1993, and 1992, included the following components:
The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligations was 8.5% and 8.5%, respectively. The expected long-term rate of return on assets was 8.5%.
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 period.
The Southwest Bank of San Angelo, a subsidiary bank, has a noncontributory profit sharing plan available to all regular employees who have completed six months of service. The plan is a defined contribution plan and contributions are at the discretion of the subsidiary's board of directors. The subsidiary also sponsors a defined contribution pension plan, whereby it matches 100% of employee contributions up to 4% of their compensation and 50% of contributions on the next 2% of compensation.
Costs related to the Company's defined contribution plans totaled $1,164,000, $1,173,000, and $1,070,000 in 1994, 1993, and 1992, respectively.
12. DIVIDENDS FROM SUBSIDIARIES:
At December 31, 1994, approximately $14,256,000 was available for the declaration of dividends by the Company's subsidiary banks without the prior approval of regulatory agencies.
13. LOANS TO RELATED PARTIES:
The Company had loans to officers, directors, principal shareholders, or associates of such persons totalling approximately $38,000,000 and $35,000,000 at December 31, 1994 and 1993, respectively.
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.
14. STOCK OPTION PLAN:
The Company has adopted 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, 1994, the Company had reserved 300,228 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. At December 31, 1994, 30,364 shares were exercisable. An analysis of stock option activity for the years ended December 31, 1994 and 1993, is as follows:
Stock options have been adjusted retroactively for the effects of stock dividends and splits.
15. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY:
16. BUSINESS COMBINATIONS:
In March 1994, the Company acquired, for approximately 230,000 shares of its common stock, substantially all of the outstanding shares of Concho Bancshares, Inc. ("Concho") and its wholly owned subsidiary, Southwest Bank of San Angelo. The shareholders of Concho received 1.15 shares of the Company's common stock for each share of Concho common stock owned.
The accompanying consolidated financial statements of the Company give effect to the merger which has been accounted for as a pooling-of-interests. Accordingly, the accounts of Concho have been combined with those of the Company to reflect the results of these companies on a combined basis for all periods presented. Certain reclassifications of the historical results of these
companies have been made to conform to the current presentation. There were no intercompany transactions.
The Company consolidated financial data for the three months ended March 31, 1994, (unaudited), and the years ended December 31, and 1992, have been restated as follows:
17. CASH FLOW INFORMATION:
Supplemental information on cash flows and noncash transactions is as follows:
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Arthur Andersen LLP was appointed independent accountants for fiscal years 1990, 1991, 1992, 1993, and 1994. There have been no disagreements between management of Bankshares and its current independent accountants relating to accounting practices and procedures or financial disclosure.
PART III
Item 10.



Item 10. Directors and Executive Officers of the Registrant
a.) Election of Directors
A Board of Directors is to be elected at the annual meeting. Each Director elected will hold office until the next annual meeting of the shareholders and until his or her successor shall be elected and qualified. Under the Bylaws of the Company, an individual may not stand for election or reelection as Director upon attainment of 72 years of age unless such individual owns at least 1% of the outstanding shares of the Company and is less than 75 years of age. While Bylaws of the Company fix the number of Directors at a number not less than three nor more than thirty, thirteen nominees are named and proposed by management. The reason that the number of Directors authorized exceeds the number of nominees is to avoid the necessity of amending the Bylaws of the Company each time that it would appear to be to the advantage of the Company to increase the number of its Directors. The proxies accompanying the proxy statement mailed to shareholders cannot be voted by the proxy committee for a greater number of persons than the number of nominees named. Other Directors could be elected after nominations from the floor at the annual meeting, if such nominees each receive a majority vote of the shareholders. Although the management of the Company does not contemplate that any of the nominees will be unable to serve, if such a situation arises prior to the annual meeting, the proxy committee will vote in accordance with its best judgment.
During the last full year, four regular quarterly meetings of the Board of Directors were called and held. All directors were able to attend at least 75% of the aggregate of the meetings of the Board of Directors and the meetings held by all committees of the Board on which they served. Directors who are not officers of the Company receive $800 for each Board meeting attended.
First Financial Bankshares, Inc. does not have a standing nominating or compensation committee of the Board of Directors. The Company has a standing Executive Committee whose responsibilities include functioning as a compensation committee and a nominating committee with appropriate recommendations to the entire Board. The Executive Committee met eight times during and, among other items, considered and took action on matters relating to its capacity as compensation and/or nominating committee. In its capacity as nominating committee, the Executive Committee will consider director nominations from security holders.
There are no prescribed procedures that the security holder must follow. The Company has a Directors' Audit Committee that has the responsibility of acting on behalf of the Board in receiving and reviewing both internal and external audit reports. During 1994 the Audit Committee met two times. The Company has a Brokerage Services Policy Committee that provides oversight of the brokerage program throughout the Company. The Committee met two times during 1994. The Company also has an Administrative Committee for the Profit Sharing, Pension and Flexible Spending Account Benefit Plans. Pursuant to the 1992 Incentive Stock Option Plan for Key Employees of First Financial Bankshares, Inc. and its Subsidiaries, the Board of Directors has also appointed a Stock Option Committee composed of five members. Directors who are not officers of the Company receive $400 for each committee meeting attended.
The names and principal occupations of Registrant's Directors/nominees, together with the length of service as a Director are as follows:
b.) Executive Officers
c.) Compliance with Section 16(a) of the Exchange Act
Based solely upon a review of the forms furnished to the Company, the Company believes that during the 1994 fiscal year no Form 5s were required and all filing requirements applicable to its officers and directors were complied with.
Item 11.

Item 11. Director and Officer Compensation
a.) Directors who are not officers of the Company receive $800 for each Board meeting attended and $400 for each committee meeting attended.
b.) Officer Compensation
The following table provides individual compensation information on the Chief Executive Officer and the four most highly compensated officers of the Company and its subsidiaries.
The following table contains information concerning each exercise of stock options during the last fiscal year by each of the persons named below and the fiscal year-end value of unexercised options.
Pension Plan
The Company's Pension Plan requires annual contributions sufficient to provide the pension benefits accruing to employees under the Plan. The annual benefit for a participant in the Pension Plan who retires on his normal retirement date is the Accrued Benefit at December 31, 1988, plus 1.25% of average compensation multiplied by years of service from January 1, 1989. "Average Compensation" is the average compensation during the 10 years immediately preceding the date of determination. Compensation means the total amount paid to an employee during the year including bonuses, commissions, and overtime pay, but excluding reimbursed expenses, director fees, group insurance benefits and pension and profit sharing contributions. There are provisions in the Plan for early retirement with reduced benefits. There is no vesting of Plan benefits until a participant has 5 or more years of credited service with participating employers. Full (100%) vesting occurs upon the completion of 5 years of credited service or upon reaching age 65 without regard to credited service.
The following table illustrates estimated retirement benefits under the Company Pension Plan for persons in specified remuneration and years of service categories and which benefits are payable annually for life with 10 years certain. The benefits listed in the table are not subject to any deduction for social security or other offset amounts. This illustration does not reflect any benefit which a participant may have accrued at December 31, 1988.
The maximum annual pension benefit payable allowable under current law is $118,800.
As of December 31, 1994, Mr. Murphy was credited with 24 years of service under the Company Pension Plan, Mr. Gerald was credited with 19 years of service, Mr. Smith was credited with 25 years of service, Mr. Dueser was credited with 18 years of service, and Mr. Harvey was credited with 4 years of service. The covered compensation of each of these officers and directors during 1994 was $150,000, $138,215, $131,819, $150,000, and $121,810, respectively.
In 1992 the Board of Directors approved a deferred compensation agreement between First Financial Bankshares, Inc. and Kenneth T. Murphy, Chairman, President and Chief Executive Officer. The agreement was made in recognition of his contribution to the success of the Company and as an inducement to remain, subject to the discretion of the Board of Directors, in the employ of the Company. The agreement provides that following retirement in December 2002, or such later date as may be mutually agreed upon by the parties, the Company will pay Mr. Murphy, or his beneficiary, the sum of $6,250 per month for a period of 84 months. The monthly amount is considered to be an appropriate level of supplemental income to partially offset Mr. Murphy's reduction in personal income following retirement and is based on an analysis of the difference in projected final year compensation and retirement compensation. The agreement also provides for 70% vesting at age 62, 80% vesting at age 63, and 90% vesting at age 64.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No person who served as a member of the Executive Committee in its capacity as compensation committee was, during the past fiscal year, an officer or employee of the Company or any of its subsidiaries, or had any relationship requiring disclosure except for Mr. Tom Wilson, who is a former subsidiary bank officer. However, committee members Robert Hitt, James Parker, and Dr. Wayne Ramsey, Jr. did obtain loans from a subsidiary bank during the past year. In each case, such loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. No executive officer of the Company served as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the
entire Board of Directors) of another entity, one of whose executive officers served as a Director of the Company.
EXECUTIVE COMMITTEE REPORT ON EXECUTIVE COMPENSATION
During the past fiscal year the Company's executive compensation program was administered by the Executive Committee acting in the capacity of compensation committee. The Company's executive compensation program consists of base salary, profit sharing, and incentive stock options. With the exception of the Chief Executive Officer, the base salaries for the executive officers named on page 48 are reviewed in December of each year with adjustments made effective January 1. Included among the factors which the Committee considers when approving annual base salaries are: attainment of planned goals and objectives, scope of responsibility (asset size of subsidiary bank and/or degree of influence on the Company's profitability and operations), tenure with the Company, evaluation input from subsidiary bank directors, and relationship of base salary to the base salaries of other members of the executive officer group.
The base salary for Mr. Murphy was reviewed in March 1994 with an adjustment made effective April 1, 1994. The increase was based on the following factors:
- The Company's financial performance for 1993 which reflected a 9% increase in net income. - Performance of Chief Executive Officer's duties which relate primarily to leading and managing the Company within the broad guidelines set by the Board of Directors. - Successful negotiation and completion of acquisition transaction. - Base salary compared to Wyatt Data Services compensation survey data for chief executive officers of similar size organizations within the industry. - Subjective evaluations of Mr. Murphy's contribution to the overall success of the Company.
Stock options are granted under the Incentive Stock Option Plan upon recommendation of the Stock Option Committee of the Board of Directors. The Executive Committee believes that the Stock Option Plan is an integral part of the executive compensation program which encourages key employees to align their long-range interest with those of shareholders by accomplishing longer-term corporate goals. There were no options granted during 1994.
The following line graph compares cumulative total shareholder return with a performance indication of the overall stock market, the S&P 500 Stock Index, and a nationally-recognized banking industry index, the Keefe, Bruyette and Woods, Inc. (KBW) 50 Total Return Index, which is comprised of fifty of the nation's top banking companies.
Robert E. Hitt W.V. Ramsey, Jr., M.D. James Parker H.T. Wilson
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security ownership of certain beneficial owners.
At December 31, 1994, management was not aware of any person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is the beneficial owner of more than five percent (5%) of the Company's common stock. However, First National Bank of Abilene, First National Bank, Sweetwater, and Stephenville Bank & Trust Co. held of record in various fiduciary capacities an aggregate of 1,004,908 shares of such stock. Of the total shares held, these subsidiaries of capacities an aggregate of 1,004,908 shares of such stock. Of the total shares held, these subsidiaries of the Company had sole power to vote 486,363 shares (9.7%), 77,777 shares (1.6%), and -0- shares, respectively. In addition, First National Bank of Abilene, First National Bank, Sweetwater, and Stephenville Bank & Trust Co. shared, with other persons, the power to vote the remaining 437,591 shares, 3,052 shares, and 125 shares, respectively. All the shares held by each subsidiary bank, which are registered in its name as fiduciary or in the name of its nominee, are owned by many different accounts, each of which is governed by a separate instrument that sets forth the powers of the fiduciary with regard to the securities held in such accounts.
b.) Security ownership of management
Set forth in the following table is certain information as of December 31, 1994 as to the number of shares of Common Stock beneficially owned by each Director of the Company, by each nominee for election as a director, by the Company's chief executive officer and its four other most highly compensated executive officers, and by the officers and directors of the Company as a group.
c.) Changes in control
There have been no events to the Registrant's knowledge which have or will result in a change of control of the Registrant.
PART IV
Item 13.

Item 13. Certain Relationships and Related Transactions
Certain of Registrant's officers and directors are customers of one or more of Registrant's subsidiary banks, as are corporations and other business entities with which directors of Bankshares are affiliated as directors, officers or principals. All loans to directors and officers of Bankshares, or to persons and firms with which they are or may be affiliated, were and are made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not, and do not, involve more than the normal risk of collectibility or present other unfavorable features. None of the transactions involving Bankshares' subsidiaries and Bankshares' officers and directors, or other businesses with which they may be affiliated, have been classified or disclosed as nonaccrual, past due, restructured or potential problems.
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The consolidated financial statements of the Registrant filed with this report are included on pages 27 through 45. There were no financial statement schedules filed as a part of this report. Such information, to the extent applicable, has been made a part of the consolidated financial statements or included elsewhere in this report.
No 8-K Current Reports were filed during the fourth quarter of 1994.
The Registrant's Articles of Incorporation and Bylaws and material contracts have been filed with the Securities and Exchange Commission in "Exhibits to Form S-15" under Registration No. 2- 73141.
Copies of the following documents were filed with the Form 10-K Annual Report for the fiscal year ended December 31, 1984.
1. Joint Venture Agreement between First National Bank of Abilene and Crow-Griffin #1.
2. Lease Agreement between First National Bank of Abilene and Crow/First Joint Venture.
3. Deferred Compensation Agreement between Bankshares and Walter F. Johnson.
The following documents were filed with the Form 10-K Annual Report for the fiscal year ended December 31, 1988.
1. Articles of Amendment to the Articles of Incorporation adopted at the 1988 Annual Meeting of Shareholders.
2. Restated Bylaws adopted by the Board of Directors on January 24, 1989.
The following documents were filed with the Form 10-K Annual Report for the fiscal year ended December 31, 1992.
1. Amendment to Registrant's Bylaws effective January 28, 1992, relative to emeritus directors.
2. Deferred Compensation Agreement between Bankshares and Kenneth T. Murphy, Chairman of the Board, Chief Executive Officer and President of the Registrant.
Listed below are the exhibits filed with this report:
1. Subsidiaries of Registrant
2. Amendment to Registrant's Bylaws effective April 26, 1994.
All subsidiaries (other than First Financial Investments, Inc. which, as of December 31, 1994 had not yet been formally organized) are included in the consolidated financial statements.
AMENDMENT TO BYLAWS
Upon motion being duly made, seconded and unanimously carried, the following Amendment to the Amended and Restated Bylaws of First Financial Bankshares, Inc. was approved and adopted at the regular meeting of the Board of Directors, at which a quorum was present, held on April 26, 1994:
"Section A
The name of this corporation shall be First Financial Bankshares, Inc."
SIGNED AND CERTIFIED this 26 day of April, 1994.
/S/ CURTIS R. HARVEY
CURTIS R. HARVEY Executive Vice President and Chief Financial Officer
ATTEST:
/S/ SANDY LESTER SANDY LESTER Secretary
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC. (Registrant)
By:/S/ KENNETH T. MURPHY By:/S/ CURTIS R. HARVEY
KENNETH T. MURPHY, Chairman CURTIS R. HARVEY, Executive of the Board, President, Vice President, Chief Financial Chief Executive Officer and Officer, Controller and Chief Director Accounting Officer
Date: March 13 , 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, 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
Director March , 1995 J. Allen Baird
/S/ F. SCOTT DUESER Director March 13 , 1995 F. Scott Dueser
/S/ PATRICK N. GERALD Director March 24 , 1995 Patrick N. Gerald
/S/ ROBERT E. HITT Director March 13 , 1995 Robert E. Hitt
/S/ JOE B. MATTHEWS Director March 23 , 1995 Joe B. Matthews
/S/ RAYMOND A. MCDANIEL, JR.Director March 13 , 1995 Raymond A. McDaniel, Jr.
/S/ BYNUM MIERS Director March 21 , 1995 Bynum Miers
/S/ DIAN GRAVES OWEN Director March 22 , 1995 Dian Graves Owen
/S/ JAMES M. PARKER Director March 21 , 1995 James M. Parker
/S/ W. V. RAMSEY, JR., M. D. Director March 23 , 1995 W.V. Ramsey, Jr., M.D.
/S/ CRAIG SMITH Director March 16 , 1995 Craig Smith
/S/ H. T. WILSON Director March 22 , 1995 H.T. Wilson
/S/ STANLEY P. WILSON Director March 21 , 1995 Stanley P. Wilson