DEF 14A
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ffinnotice2003.txt
FIRST FINANCIAL BANKSHARES, INC. 2003 PROXY STMT.
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
First Financial Bankshares, Inc.
(Name of Registrant As Specified in its Charter)
________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)and 0-11.
(1) Title of each class of securities to which transaction
applies:___________
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(4) Date Filed:_________________________________
FIRST FINANCIAL BANKSHARES, INC.
400 Pine Street
Abilene, Texas 79601
915.627.7155
NOTICE OF THE 2003 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 22, 2003
To our shareholders:
We cordially invite you to attend the annual meeting of our shareholders,
which will be held in the Abilene Civic Center, 1100 North 6th Street, Abilene,
Texas, at 10:30 a.m., Central time, on Tuesday, April 22, 2003, for the
following purposes:
(1) To elect 14 directors;
(2) To act on such other business as may properly come before the
annual meeting, or any adjournment thereof. Your board of
directors is not aware of any other business to come before
the meeting.
Only shareholders of record at the close of business on March 14, 2003, are
entitled to notice of and to vote at the annual meeting or any continuation of
the meeting if it is adjourned.
We have included, along with this notice and proxy statement, our 2002
annual report, which describes our activities during 2002 and contains our Form
10-K for the year ended December 31, 2002. The annual report does not form any
part of the material for solicitation of proxies.
We hope that you will be present at the annual meeting and the luncheon to
be held immediately afterward. We respectfully urge you, whether or not you plan
to attend the annual meeting, to sign, date and mail the enclosed proxy card in
the envelope provided in order to eliminate any question of your vote being
counted. You can revoke your proxy in writing at any time before the annual
meeting, so long as your written request is received by our Corporate Secretary
before your proxy is voted. Alternatively, if you submitted a proxy and attend
the annual meeting in person, you may revoke the proxy and vote in person on all
matters submitted at the annual meeting.
By order of the Board of Directors,
KENNETH T. MURPHY, Chairman
March 27, 2003
FIRST FINANCIAL BANKSHARES, INC.
400 Pine Street
Abilene, Texas 79601
915.627.7155
PROXY STATEMENT
2003 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 22, 2003
INTRODUCTION
Your board of directors hereby solicits your proxy for use at the 2003
annual meeting of our shareholders and any continuation of this meeting if it is
adjourned. The annual meeting will be held in the Abilene Civic Center, 1100
North 6th Street, Abilene, Texas, at 10:30 a.m., Central time, on Tuesday, April
22, 2003.
Our principal executive office is located at 400 Pine Street, Abilene,
Texas 79601. Our telephone number is 915.627.7155.
We mailed this proxy statement and the accompanying proxy card on March 27,
2003. The date of this proxy statement is March 27, 2003.
VOTING OF SECURITIES
Record Date
Your board of directors has established the close of business on March 14,
2003, as the record date for determining the shareholders entitled to notice of,
and to vote at, the annual meeting. On the record date, we had 12,367,431 shares
of our common stock outstanding.
Quorum
In order for any business to be conducted at the annual meeting, a quorum
consisting of shareholders having voting rights with respect to a majority of
our outstanding common stock on the record date must be present in person or by
proxy. Shares that are represented at the annual meeting but abstain from voting
on any or all matters and shares that are "broker non-votes" will be counted in
determining whether a quorum is present at our annual meeting. A "broker
non-vote" occurs when a broker or nominee votes on some matters on the proxy
card but not others because he does not have authority to do so.
Required Vote
The affirmative vote of a plurality of the shares cast at the annual
meeting is required to elect a nominee for director. The affirmative vote of a
majority of shares entitled to vote is required to approve any other matter that
may come before the meeting. If you abstain from voting or withhold authority to
vote in the election of a director, your abstention or withholding will have the
effect of a vote against such director because the election requires the
affirmative vote of a majority of the shares entitled to vote. Abstentions will
be included in determining the number of votes cast. Broker non-votes will be
treated as present with respect to each applicable proposal. But, because broker
non-votes are not votes cast for, against, or as expressly abstained, they will
have no effect on the outcome of any proposal.
Shareholder List
A list of shareholders entitled to vote at the annual meeting, which will
show each shareholder's address and the number of shares registered in his or
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her name, will be open to any shareholder to examine for any purpose related to
the annual meeting. Any shareholder may examine this list during ordinary
business hours commencing March 27, 2003, and continuing through the date of the
annual meeting at our principal office, 400 Pine Street, Abilene, Texas 79601.
SOLICITATION AND REVOCABILITY OF PROXIES
Solicitation
We will bear the expense to solicit proxies, which will include
reimbursement of expenses incurred by brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials regarding the annual
meeting to beneficial owners. Our officers and directors may further solicit
proxies from shareholders and other persons by telephone or oral communication.
We will not pay these officers any extra compensation for participating in this
solicitation.
Proxies and Revocation
Each executed and returned proxy card will be voted according to the
directions indicated on that proxy card. If no direction is indicated, the proxy
will be voted according to the board of directors' recommendations, which are
contained in this proxy statement. Your board of directors does not intend to
present, and has no information that others will present, any business at the
annual meeting that requires a vote on any other matter. If any other matter
requiring a vote properly comes before the annual meeting, the proxies will be
voted in the discretion of the proxyholders named on the proxy.
Each shareholder giving a proxy has the power to revoke it at any time
before the shares of our common stock it represents are voted. This revocation
is effective upon receipt, at any time before the annual meeting is called to
order, by our Corporate Secretary of either (i) an instrument revoking the proxy
or (ii) a duly executed proxy bearing a later date than the preceding proxy.
Additionally, a shareholder may change or revoke a previously executed proxy by
voting in person at the annual meeting.
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PROPOSAL 1
ELECTION OF DIRECTORS
General
Your board of directors currently consists of 14 directors. At the annual
meeting, 14 directors are to be elected, each for a term of one year. Under our
bylaws, an individual may not stand for election or reelection as a director
upon attaining 72 years of age, unless he owns at least 1% of the outstanding
shares of our common stock and is less than 75 years of age. While our bylaws
fix the number of directors at a number not less than three nor more than 30,
the board of directors has fixed the number of directors at 14. Although we do
not contemplate that any of the nominees will be unable to serve, if such a
situation arises before the annual meeting, the proxies will be voted to elect
any substitute nominee or nominees designated by your board of directors.
Nominees
The names and principal occupations of the nominees, together with the
length of service as a director and the number of shares of our common stock
beneficially owned by each of them on February 11, 2003, are set forth in the
following table, except as otherwise indicated, the named beneficial owner has
sole voting and investment power with respect to shares held by him or her:
Shares of
Years as Bankshares Percent
Director Principal Occupation Beneficially of Shares
Name Age (1) During Last Five Years Owned Outstanding
---- --- --- ---------------------- ----- -----------
Joseph E. Canon 61 7 Executive Director, 7,137 0.06
Dodge Jones Foundation, a
private charitable foundation
Mac A. Coalson 63 7 Real Estate and Ranching 132,587 1.07
David Copeland 47 5 President, Shelton Family 68,330(2) 0.55
Foundation, a private
charitable foundation
F. Scott Dueser** 50 12 See "Executive Officers" on 113,438(3) 0.92
page 4
Derrell E. Johnson 63 3 President, American Council 23,500 0.19
of Engineering Companies
Life Health Trust
Kade L. Matthews 45 5 Ranching and Investments 108,895 0.88
Raymond A. McDaniel, Jr. 69 11 Investments 53,562 0.43
Bynum Miers 66 11 Ranching 34,262(5) 0.23
Kenneth T. Murphy 65 32 See "Executive Officers" on 164,544 1.33
page 4
James M. Parker** 72 31 President, Parker Properties, 443,395(4) 3.59
Inc.
Jack D. Ramsey, M.D. 72 6 Physician 124,322 1.01
Johnny E. Trotter 52 - Ranching, Farming and Cattle 46,096 0.37
Feeding
Dian Graves Stai 63 10 Investments 43,556 0.35
F. L. Stephens 65 5 Retired Chairman and Chief 27,600 0.22
Executive Officer, Town &
Country Food Stores, Inc.
Shares beneficially owned by all executive officers and directors* 1,477,199 11.95
* See "Security Ownership of Certain Beneficial Owners and Management."
** Mr. Dueser is the son-in-law of Mr. Parker.
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(1) The years indicated are the approximate number of years each person has
continuously served as a director, or, prior thereto, of First National
Bank of Abilene, which became our wholly-owned subsidiary in April 1973,
when all the then directors of First National Bank of Abilene became our
directors.
(2) Includes 61,929 shares that are owned by trusts for which Mr. Copeland
serves as trustee or co-trustee to which he disclaims beneficial
ownership.
(3) Includes 605 shares of our common stock issuable upon exercise of
options presently exercisable or exercisable within 60 days of February
11, 2003. Also includes 22,833 shares owned by his wife of which he
disclaims beneficial ownership.
(4) Includes 160,859 shares of our common stock for which Mr. Parker serves
as trustee.
(5) Includes 5,360 shares of our common stock owned by Mr. Miers' spouse.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS
VOTE "FOR" THE ELECTION OF EACH OF THESE NOMINEES.
Executive Officers
Set forth the following table are our executive officers, and the shares of
our common stock beneficially owned by each of them as of December 31, 2002,
except as otherwise indicated, the named executive officer has sole voting and
investment power with respect to the shares he holds:
Years Shares of
Served Bankshares Percent of
in Such Principal Occupation Beneficially Shares
Name Age Office Office During Past 5 Years Owned Outstanding
---- --- ------ ------ ------------------- ----- -----------
Kenneth T. Murphy 65 Chairman 16 Chairman, First Financial 164,544 1.33
Bankshares, Inc; Chairman,
President and Chief
Executive Officer, First
Financial Bankshares, Inc.
(1986-2000); Chairman,
First National Bank of
Abilene* (1993-2000)
F. Scott Dueser 50 President and President and Chief 111,198 0.90
Chief Executive 2 Executive Officer of
Officer Bankshares; Chairman,
First National Bank of
Abilene*; President and
Chief Executive Officer,
First National Bank of
Abilene* (1991-2001);
Executive Vice President
of Bankshares (1999-2001)
Curtis R. Harvey 57 Executive Vice 12 Executive Vice President 12,742 (1) 0.10
President and Chief and Chief Financial
Financial Officer (2) Officer of Bankshares
J. Bruce Hildebrand 47 Executive Vice - Partner, KPMG LLP 500 -
President (2)
*A bank subsidiary.
(1) Includes 1,255 of our common stock issuable upon exercise of options
presently exercisable or exercisable within 60 days of December 31, 2002.
(2) Mr. Harvey plans to resign as Executive Vice President and Chief Financial
Officer effective March 31, 2003, at which time Mr. Hildebrand will
succeed him as Executive Vice President and Chief Financial Officer.
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MANAGEMENT
Amounts and prices related to shares of our common stock have been adjusted
to give effect to all stock splits and stock dividends.
Executive Compensation
The following table provides individual compensation information on the
chief executive officer and our most highly compensated executive officers
during 2002 whose total annual salary and bonus was in excess of $100,000. J.
Bruce Hildebrand, our Executive Vice President, commenced employment in December
2002 with an annual base salary of $200,000.
Summary Compensation Table
Long Term
Compensation
Awards
Annual ----------------------- All Other
Compensation Securities Compensation
Name and Principal Position Year Salary ($) Bonus ($) Underlying Options(#)(1) ($)(2)
--------------------------- ---- -------------------- ------------------------ ----------
Kenneth T. Murphy, Chairman of the Board
First Financial Bankshares, Inc. 2002 351,635 - - 24,445
2001 332,000 - - 17,729
2000 422,318 5,645 4,688 20,897
F. Scott Dueser, President and Chief 2002 336,000 45,423 - 26,247
Executive Officer 2001 310,000 - - 20,521
First Financial Bankshares, Inc. 2000 252,642 - 3,125 21,981
Curtis R. Harvey, Executive Vice President 2002 174,000 - - 21,268
and Chief Financial Officer 2001 167,000 - - 17,417
First Financial Bankshares, Inc. 2000 158,500 - 1,875 19,412
Craig Smith, Chairman, President
and Chief Executive Officer 2002 159,270 - - 4,778
Hereford State Bank* 2001 158,500 - - 3,381
2000 155,000 - 1,000 4,100
(1) Adjusted for stock splits and stock dividends.
(2) Represents the contributions we made to our profit sharing plan for the
benefit of such officer.
* A bank subsidiary
The following table sets forth certain information concerning options
exercised during the last fiscal year by the named executive officers.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year End (#) at Fiscal Year End ($)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Kenneth T. Murphy 6,201 $89,389 - - - -
F. Scott Dueser 2,675 $35,357 - 4,335 - $64,313
Curtis R. Harvey - - 1,255 2,425 $17,135 $37,052
Craig Smith 618 $ 4,134 - 1,413 - $20,805
(1) Based upon the closing price per share of our common stock of $38.00 on December 31, 2002.
No stock options were issued to any of our named executive officers during the
year ended December 31, 2002.
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Compensation pursuant to Employee Benefit Plans
General
We have both a defined benefit pension plan and a profit sharing plan. An
employee is eligible to become a participant in the pension plan and profit
sharing plan on the January 1 coincident with or immediately following the date
his employment begins. With our subsidiary banks, we adopted a flexible spending
account benefit plan for all employees that became effective in 1988. First
Financial Bank, National Association, Cleburne, adopted these plans effective in
1991. Stephenville Bank & Trust Co. adopted these plans effective in 1993. San
Angelo National Bank adopted the pension and flexible spending account benefit
plan effective in 1994 and profit sharing plan effective in 1995. Weatherford
National Bank adopted these plans effective in 1996. First Financial Bank,
National Association, Southlake adopted all benefit plans effective in 1998.
City National Bank adopted all benefit plans effective in 2001.
Profit Sharing Plan
We, and each of our subsidiary banks that participates in the profit
sharing plan, determine on an annual basis the contribution that it will make to
the profit sharing plan from such employer's operating profits. Contributions
under the profit sharing plan are administered by the administrative committee
for the profit sharing, pension and flexible spending account benefit plans for
the exclusive benefit of plan participants under the provisions of a trust
agreement. Effective January 1, 2002, we added a 401(k) feature to our profit
sharing plan which allows the participants to make pre-tax contributions to the
plan. The plan modification does not include a mandatory Company matching but
does provide a three percent of salary safe harbor contribution by the Company
for qualifying participants. Under the profit sharing plan, contributions by
employees are not required as a condition of participation. Each participating
employer's annual contribution is allocated among the accounts of the active
plan participants employed by such employer, in the ratio that each
participant's compensation bears to the total compensation of all participants
of such employer. Compensation is defined as the total amount paid to an
employee during the year, including bonuses, commissions, overtime pay, and
salary reductions under the flexible spending account benefit plan, but
excluding reimbursed expenses, group insurance benefits and pension and profit
sharing contributions. However, the Internal Revenue Service limits the
compensation amount used to calculate a participant's benefit to a maximum of
$200,000. Additionally, the annual addition amount (which is the aggregate of
employer and employee contributions) that may be allocated to a participant is
limited to $40,000.
The profit sharing plan provides for benefits to vest (become
nonforfeitable) in graduated percentages for the first six years of
participation, with benefits being fully vested after seven years of credited
service except for amounts contributed to an employee's account under the safe
harbor provisions which are immediately fully vested. Generally, an employee's
benefit at normal retirement will be the contributions allocated to his account
while a participant, increased by gains and decreased by losses from investments
of the trust, and increased by any forfeitures allocated to his account. An
employee is always fully vested with respect to any voluntary contributions he
makes, and death or disability of a participant while employed by us or one of
our participating subsidiary banks results in immediate full vesting with
respect to employer contributions. If a participant terminates employment for
any other reason, the total amount of his employee contribution account and the
vested portion of his employer contribution account are distributed to him.
Pension Plan
The pension plan requires annual contributions sufficient to provide the
pension benefits accruing to employees under the pension plan. The annual
benefit for a participant in the pension plan who retires on his normal
retirement date is the accrued benefit (as defined in the pension plan) 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, group insurance benefits and pension and profit sharing contributions.
There are provisions in the pension plan for early retirement with reduced
benefits. There is no vesting of benefits until a participant has five or more
years of credited service or upon reaching age 65 without regard to credited
service.
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The pension plan is subject to the minimum funding requirements of the
Employee Retirement Income Security Act of 1974, or ERISA. Our contributions to
the pension plan, including those of our participating subsidiary banks, have
been $589,238 in 1998; $621,030 in 1999; $754,416 in 2000; $742,923 in 2001; and
$726,989 in 2002.
The following table illustrates estimated retirement benefits under the
pension plan for persons in specified remuneration and years of service
categories, which benefits are payable annually for life (but in no event less
than 10 years). The benefits listed in the table below are not subject to any
deduction for social security or other offset amounts. This table does not
reflect any benefit that a participant may have accrued at December 31, 1988.
PENSION PLAN TABLE
Years of Service
----------------------------------------------------------
Remuneration 15 20 25 30 35
------------
---------- ---------- ---------- ---------- ----------
$ 25,000 $ 4,688 $ 6,250 $ 7,813 $ 9,375 $ 10,938
50,000 9,375 12,500 15,625 18,750 21,875
75,000 14,063 18,750 23,438 28,125 32,813
100,000 18,750 25,000 31,250 37,500 43,750
125,000 23,438 31,250 39,063 46,875 54,688
150,000 28,125 37,500 46,875 56,250 65,625
175,000 32,813 43,750 54,688 65,625 76,563
200,000 37,500 50,000 62,500 75,000 87,500
As of December 31, 2002, under the pension plan, Mr. Murphy was credited
with 32 years of service, Mr. Dueser was credited with 26 years of service, Mr.
Smith was credited with 33 years of service, and Mr. Harvey was credited with 12
years of service. The covered compensation of each of these persons during 2002
was $200,000; $200,000; $159,270; and $174,000, respectively. The maximum
covered compensation is $200,000.
Flexible Spending Account Benefit Plan
With our subsidiary banks, we have a flexible spending account benefit
plan. An employee is eligible to become a participant in this plan on the first
day of the month following completion of two months of service. The flexible
spending account benefit plan allows each participant to redirect a portion of
his/her salary, before taxes, to pay certain medical and/or dependent care
expenses.
Deferred Compensation Agreement
In 1992, your board of directors approved a deferred compensation
agreement, which was amended in 1995, between Mr. Murphy and us. We entered into
this agreement in recognition of Mr. Murphy's contribution to our success and as
an inducement to him to remain, subject to the discretion of your board of
directors, in our employ. This agreement provides that, following his retirement
in December 2002, we will pay him, or his beneficiary, the sum of $8,750 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.
Effective January 1, 2003, Mr. Murphy began receiving monthly payments of $8,750
as provided under the terms of this agreement.
Executive Recognition Plan
In April 1996, our outside directors, who constituted a majority of your
board of directors, unanimously approved an executive recognition plan. This
plan enables us, upon approval of the outside directors of the executive
committee of the board of directors, which functions as the compensation
committee, to offer our key executive officers and those of our subsidiary banks
an executive recognition agreement. Mr. Dueser, Mr. Hildebrand and other senior
officers of the Company and certain of our subsidiary banks have entered into
executive recognition agreements with us. Each executive recognition agreement
provides severance benefits for each executive officer if, within two years
following a change in control (as defined in the executive recognition
agreements), his employment with us or our subsidiary bank is terminated by us
or the subsidiary bank for any reason other than for cause (as defined in the
executive recognition agreements) (except for terminations as a result of the
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officer's death, disability or retirement (as such terms are defined in the
executive recognition agreements)) or by the executive officer for good reason
(as defined in the executive recognition agreements). Such severance benefits
provide that the executive officer will receive a payment equal to a certain
percentage (as set forth in his executive recognition agreement) of his annual
base salary immediately preceding the date of termination and, for two years
following the date of termination, the continuation of all medical, life and
disability benefit plans covering the officer at no cost to the officer. With
respect to Mr. Dueser and Mr. Hildebrand, the percentage of annual base salary
to be received upon a change in control pursuant to his executive recognition
agreement is 200%. The total severance payment for the executive officer cannot,
however, exceed the amount that would cause such payment to be deemed a
"parachute payment" under Section 280G of the Internal Revenue Code.
Each executive recognition agreement has a term of two years. However, if a
change in control occurs during the original term of the executive recognition
agreements, then the executive recognition agreements will continue in effect
for an additional period of two years following the change in control.
Similarly, if a second change in control occurs within two years from the date
of the first change in control, then the executive recognition agreements will
continue in effect for a period of two years from the date of the second change
in control.
Stock Option Plan
At the 2002 annual meeting of shareholders, our 2002 incentive stock option
plan was approved and adopted. The purposes of the stock option plan are to
attract and retain key employees and to encourage employee performance by
providing them with a proprietary interest in us through the granting of stock
options. The maximum aggregate number of shares of our common stock that may be
issued under the 2002 incentive stock option plan is 500,000 subject to
adjustment for stock dividends and similar events. The stock option plan is
administered by our stock option committee. Only incentive stock options (as
defined in the Internal Revenue Code) may be granted under the stock option
plan. Incentive stock options granted under the stock option plan may be
exercised solely by the grantee, or in the case of the grantee's death or
incapacity, by the grantee's executors, administrators, guardians or other legal
representatives and are not assignable or transferable by a grantee. There were
no options granted during 2002 under the 2002 incentive stock option plan.
Our 1992 incentive stock plan expired in 2002 and no additional options may
be granted under this plan. Options totaling 114,280 are exercisable as of
December 31, 2002 under the 1992 incentive stock option plan and will be
exercisable through 2012 under the terms of the plan. There were 2,000 options
granted subsidiary bank officers during 2002 under the 1992 incentive stock
plan.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth certain information, as of December 31,
2002, with respect to all compensation plans previously approved by our security
holders, as well as compensation plans not previously approved by our security
holders.
Number of Securities
Remaining Available
For Future Issuance
Number of Securities Under Equity
To be Issued Upon Weighted Average Compensation Plans
Exercise of Exercise Price of (Excluding Securities
Outstanding Options, Outstanding Options, Reflected in
Warrants and Rights Warrants and Rights Far Left Column)
-------------------- -------------------- ---------------------
Equity compensation plans
approved by security holders 114,280 $22.47 500,000
Equity compensation plans not
approved by security holders - - -
------- -------
Total 114,280 $22.47 500,000
======= =======
Consulting Agreement
Effective January 1, 2003, we entered into a consulting agreement with Mr.
Murphy whereby Mr. Murphy will provide various services to us and our subsidiary
banks with respect to strategic planning and potential acquisitions among other
things. The term of the agreement is one year and compensation payable is
$14,583 per month.
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Meetings of the Board of Directors
Your board of directors has four regularly scheduled meetings each year.
Each of the directors attended at least 75% of the meetings of the board of
directors and the committees of the board of directors on which such director
served.
Committees of the Board of Directors
Your board of directors has four committees. The functions and current
members of each committee are as follows:
Executive Committee. The executive committee acts for your board of
directors between board meetings, except to the extent limited by our bylaws or
Texas law. The current members are Messrs. Coalson, Dueser, McDaniel, Murphy,
Parker and Ramsey. The executive committee also functions as a nominating
committee with appropriate recommendations to the entire board of directors.
Messrs. Coalson, McDaniel and Ramsey also function as our compensation
committee. Mr. Parker ceased participation on compensation matters effective
September 3, 2002. The executive committee met five times during 2002 and, among
other things, considered and took action on matters relating to its capacity as
the compensation and nominating committee. In its capacity as nominating
committee, the executive committee will consider director nominations from
shareholders. There are no prescribed procedures that the shareholder must
follow to nominate a director. We are in the process of reviewing membership
requirements of the executive committee, including its role on nominating and
compensation matters, as it relates to independence issues under the
Sarbanes-Oxley Act of 2002 and proposed listing requirements of The Nasdaq
National Market.
Audit Committee. The audit committee reviews the scope and results of the
annual audit by our independent auditors, and receives and reviews internal and
external audit reports. Its members include Messrs. Coalson, Copeland, McDaniel
and Miers. We believe that each member of the audit committee is independent
under The Nasdaq National Market listing standards. During 2002, the audit
committee met six times.
Administrative Committee for the Profit Sharing, Pension and Flexible
Spending Account Benefit Plans. This committee administers our profit sharing,
pension and flexible spending account benefit plans. Current members include
Messrs. Canon, Matthews, Parker and Stephens. During 2002, the committee met two
times.
Stock Option Committee. The stock option committee oversees our incentive
stock option plan for key employees. Its current members include Mrs. Stai and
Messrs. Johnson, Miers and Ramsey. The stock option committee met one time in
2002.
Director Compensation
Directors who are our executive officers or employees receive no
compensation as such for service as members of either the board of directors or
committees thereof. Directors who are not our officers receive $1,500 for each
board meeting attended. The directors who serve on committees and who are not
our officers receive $1,000 for each committee meeting attended.
Compensation Committee Interlocks and Insider Participation
No person who served as a member of the executive committee in its capacity
as the compensation committee was, during 2002, an officer or employee of us or
any of our subsidiary banks, or had any relationship requiring disclosure in
this proxy statement. However, committee members Messrs. Parker and Coalson
maintained loans from subsidiary banks during 2002. The 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 on an arms-length basis and did not involve more than the normal
risk of collectibility or present other unfavorable features to the subsidiary
bank. None of our executive officers 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) or director of
another entity, one of whose executive officers served as a member of our board
of directors of the Company.
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REPORT OF THE EXECUTIVE COMMITTEE
IN ITS CAPACITY AS THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
During 2002, the executive compensation program was administered by Messrs.
Coalson, McDaniel, Parker (who ceased participation in compensation matters
effective September 3, 2002) and Ramsey, the outside director members of the
executive committee acting in the capacity of the compensation committee. The
executive compensation program consists of a base salary, profit sharing
contributions, and incentive stock options. Mr. Dueser's compensation program
includes a bonus plan which calls for Mr. Dueser to receive a cash bonus payable
on or before each February 1 that equals 10% of the amount by which our net
earnings for the year exceed a 10% increase over the prior year. Mr. Dueser
earned a bonus of $45,423 in 2002 which was paid in January 2003. Effective
January 1, 2001, Mr. Dueser assumed Chief Executive Officer responsibilities and
Mr. Murphy retained the title of Chairman. In setting Mr. Murphy's base salary,
the Compensation Committee considered Mr. Murphy's scope of responsibilities as
Chairman and his planned role in the management succession plan. In setting the
base salary of Mr. Dueser the Compensation Committee considered:
o the scope of the Chief Executive Officer's responsibilities;
o base salary compared to SNL Financial's compensation survey;
o subjective evaluation of Mr. Dueser's contribution to the overall
success of First Financial Bankshares; and
o tenure with First Financial Bankshares.
The annual base salaries for the executive officers and subsidiary bank
presidents and senior officers are adjusted annually by the committee who
considers the following factors when approving annual base salaries:
o attainment of planned goals and objectives;
o scope of responsibility (asset size of subsidiary bank and/or degree
of influence on our profitability and operations);
o tenure with First Financial Bankshares;
o evaluation input from subsidiary bank directors; and
o relationship of base salary to the base salaries of other members of
the executive officer group.
Section 162(m) of the Internal Revenue Code generally limits the annual
corporate tax deduction for compensation paid to the chief executive officer and
the four other most highly compensated executive officers unless the
compensation is performance-based. One condition to qualify compensation as
performance-based is to establish the amount of the award on an objective
formula that precludes any discretion. The compensation committee continues to
review the impact of this tax provision on our incentive plans and has
determined that Section 162(m) is currently inapplicable because no named
executive officer receives compensation in excess of $1 million.
EXECUTIVE COMMITTEE IN ITS CAPACITY AS THE COMPENSATION COMMITTEE
Mac A. Coalson
Raymond A. McDaniel, Jr.
Jack D. Ramsey, M.D.
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REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees our financial reporting process on behalf of
your board of directors. Management has the primary responsibility for the
financial statements and the reporting process including the system of internal
controls. In fulfilling its oversight responsibilities, the Committee, which is
composed of independent directors in compliance with Rule 4200 of the National
Association of Securities Dealers' listing standards, reviewed and discussed the
audited financial statements in the Annual Report with management. The Committee
also discussed with management the quality, not just the acceptability, of the
accounting principles, the reasonableness of significant judgments, and the
clarity of disclosures in the financial statements.
The Committee reviewed with Ernst & Young LLP, our independent auditors for
2002, who were responsible for expressing an opinion on the conformity of those
audited financial statements with generally accepted accounting principles,
their judgments as to the quality, not just the acceptability, of our accounting
principles and such other matters as are required to be discussed with the
Committee under generally accepted auditing standards. In addition, the
Committee has discussed with the independent auditors the auditors' independence
from management and the Company, including the matters required by the Statement
on Auditing Standards No. 61, Communication with Audit Committees, as amended,
and the matters in the written disclosures required by the Independence
Standards Board, and considered the compatibility of non-audit services with the
auditors' independence. The Audit Committee has received the written disclosures
and the letter from our independent auditors required by Independence Standards
Board Standard No. 1 concerning the independence of the independent auditors.
The Committee discussed with our independent auditors the overall scope and
plans for their audit. The Committee meets with the independent auditors, with
and without management present, to discuss the results of their examinations,
their evaluations of our internal controls, and the overall quality of our
financial reporting. The Committee held six meetings during the year ended
December 31, 2002.
The Committee has relied, without independent verification, on management's
representation that the financial statements have been prepared with integrity
and objectivity and in conformity with generally accepted accounting principles.
The Committee's oversight does not provide it with an independent basis to
determine that management has in fact maintained appropriate accounting and
financial reporting principles or policies. Furthermore, the Committee's
considerations and discussions with management and the independent auditors do
not ensure that our Company's financial statements are presented in accordance
with generally accepted accounting principles, that the audit of the Company's
financial statements has been carried out in accordance with generally accepted
auditing standards or that our Company's independent accountants are in fact
independent.
In reliance on the reviews and discussions referred to above, the Audit
Committee recommended to the executive committee of the board of directors that
the audited financial statements be included in the annual report on Form 10-K
for the year ended December 31, 2002, for filing with the Securities and
Exchange Commission. Acting on behalf of the board of directors, the executive
committee approved the Audit Committee's recommendation. Your board of directors
has adopted a charter for the Audit Committee, a copy of which was filed as an
exhibit to our definitive proxy statement filed with the Securities and Exchange
Commission on March 27, 2001. The audit committee and your board of directors is
in the process of reviewing this charter in order to comply with changes
mandated by the Sarbanes-Oxley Act of 2002 and proposed listing requirements of
The Nasdaq National Market.
AUDIT COMMITTEE
Mac A. Coalson
David Copeland
Raymond A. McDaniel, Jr.
Bynum Miers
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PERFORMANCE GRAPH
The following performance graph compares cumulative total shareholder
return for our common stock, the S&P 500 Index, and the SNL Banks Index, which
is a banking index prepared by SNL Financial and is comprised of banks with $1
billion to $5 billion in total assets, for a five-year period (December 31, 1997
to December 31, 2002). The performance graph assumes $100 invested in our common
stock at its closing price on December 31, 1997, and in each of the S&P 500
Index and the SNL Banks Index on the same date. The performance graph also
assumes the reinvestment of all dividends. The dates on the performance graph
represent the last trading day of each year indicated. The amounts noted on the
performance graph have been adjusted to give effect to all stock splits and
stock dividends.
Corporate Performance Chart
[OBJECT OMITTED]
Period Ending
------------------------------------------------------------------
Index 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
---------------------------------------------------------------------------------------------------------------
First Financial Bankshares, Inc. 100.00 92.36 84.08 89.86 111.98 146.62
S&P 500 100.00 128.55 155.60 141.42 124.63 96.95
SNL $1B-$5B Bank Index 100.00 99.77 91.69 104.05 126.42 145.94
-12-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 11, 2003, we were 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 5% of our common stock.
However, as of February 1, 2003, First National Bank of Abilene, First National
Bank, Sweetwater, Stephenville Bank & Trust Co., and San Angelo National Bank
held of record in various fiduciary capacities an aggregate of 2,179,525 shares
of our common stock. Of the total shares held: (i) First National Bank of
Abilene had sole power to vote 1,381,331 shares (11.17%), shared with others the
power to vote 34,675 shares (.28%) and had no authority to vote 561,130 shares
(4.54%); (ii) First National Bank, Sweetwater, had sole power to vote 146,787
shares (1.19%), shared with others the power to vote 1,326 shares (.01%), and no
authority to vote 41,759 (.34%); (iii) Stephenville Bank & Trust Co. had sole
authority to vote 1,250 (.01%) no authority to vote its 1,267 (.01%); and (iv)
San Angelo National Bank had no authority to vote 10,000 shares (.08%). 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. The board of
directors historically has not attempted to, and does not intend to attempt to
in the future, exercise any power to vote such shares. See "Proposal 1--Election
of Directors--Nominees" and "--Executive Officers" for information with respect
to the beneficial ownership of our common stock by each director nominee and
named executive officers as of February 11, 2003. In the aggregate, all director
nominees and executive officers as a group (17 individuals) beneficially owned
1,477,199 shares of our common stock, or 11.95%, as of February 11, 2003.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and officers, and
persons who own more than 10% of our common stock, to file with the Securities
and Exchange Commission initial reports of our common stock ownership and
reports of changes in such ownership. A reporting person must file a Form 3,
Initial Statement of Beneficial Ownership of Securities, within 10 days after
such person becomes a reporting person. A reporting person must file a Form 4,
Statement of Changes of Beneficial Ownership of Securities, within two business
days after such person's beneficial ownership of securities changes, except for
certain changes exempt from the reporting requirements of Form 4. Such exempt
changes include stock options granted under a plan qualifying pursuant to Rule
16b-3 under the Exchange Act. A reporting person must file a Form 5, Annual
Statement of Beneficial Ownership of Securities, within 45 days after the end of
the issuer's fiscal year to report any changes in ownership during such year not
reported on a Form 4, including changes exempt from the reporting requirements
of Form 4.
The Securities and Exchange Commission's rules require our reporting
persons to furnish us with copies of all Section 16(a) reports that they file.
Based solely upon a review of the copies of such reports furnished to us, we
believe that the reporting persons have complied with all applicable Section
16(a) filing requirements for 2002 on a timely basis. Mr. Copeland and Mr. Miers
filed Form 4s during March 2003 to amend previously filed reports.
INDEPENDENT ACCOUNTANTS
General
We retained Ernst & Young LLP to serve as our independent auditors for 2002
effective May 16, 2002. Arthur Andersen LLP served as our independent auditors
for 2001 and 2000. The decision not to renew the engagement of Arthur Andersen
was effective March 25, 2002, and was made by the executive committee of our
board of directors, acting on behalf of the board of directors and following the
recommendation of our audit committee. Our audit committee has recommended that
Ernst & Young be retained for the 2003 audit and our board of directors will
take action on this recommendation at its next meeting.
During the years ended December 31, 2001 and 2000 and the interim period
through March 25, 2002, there were no disagreements between us and Arthur
Andersen on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to Arthur Andersen's satisfaction would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports.
-13-
None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the two most recent fiscal years and the
subsequent interim period through March 15, 2003. The audit reports of Arthur
Andersen on our consolidated financial statements for the years ended December
31, 2001 and 2000, did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles. We provided Arthur Andersen with a copy of the foregoing
disclosure, and a copy of their letter stating their agreement with these
statements was filed as an exhibit to our Form 8-K dated March 25, 2002.
Audit Fees
For the 2002 audit services performed by Ernst & Young LLP, audit fees
totaled $175,000, which included quarterly review services and procedures and
reporting for the FDIC Improvement Act.
All Other Fees
Fees paid to Ernst & Young for other non-audit services during 2002 totaled
$2,375. Our audit committee has determined that these fees did not compromise
Ernst & Young's independence. We paid Ernst & Young no fees for designing or
implementing financial information systems during 2002.
Representatives of Ernst & Young are expected to be present at the annual
meeting. These representatives will be given the opportunity to make a
statement, if they desire to do so, and to respond to appropriate questions.
INTEREST IN CERTAIN TRANSACTIONS
As has been true in the past, some of our officers and directors, members
of their families, and other businesses with which they are affiliated, are or
have been customers of one or more of our subsidiary banks. As customers, they
have entered into transactions in the ordinary course of business with such
banks, including borrowings, all of which were on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions on an arms-length basis and did not involve more than a
normal risk of collectibility or present any other unfavorable features to the
subsidiary banks involved. None of the transactions involving our subsidiary
banks and our 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.
INCORPORATION BY REFERENCE
With respect to any future filings with the Securities and Exchange
Commission into which this proxy statement is incorporated by reference, the
material under the headings "Executive Committee Report on Executive
Compensation," "Report of the Audit Committee" and "Performance Graph" shall not
be incorporated into such future filings.
-14-
FORWARD-LOOKING STATEMENTS
This proxy statement contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. When used in this proxy statement, words such
as "anticipate," "believe," "estimate," "expect," "intend," "predict,"
"project," and similar expressions, as they relate to us or our management,
identify forward-looking statements. These forward-looking statements are based
on information currently available to our management. Actual results could
differ materially from those contemplated by the forward-looking statements as a
result of certain factors, including but not limited to general economic
conditions, actions taken by the Federal Reserve Board, legislative and
regulatory actions and reforms, competition from other financial institutions
and financial holding companies, fluctuation in interest rates, changes in the
demand for loans, fluctuations in value of collateral and loan reserves and
other factors described in "PART II, Item 7- Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our Form 10-K for
the year ended December 31, 2002. Such statements reflect the current views of
our management with respect to future events and are subject to these and other
risks, uncertainties and assumptions relating to our operations, results of
operations, growth strategy and liquidity. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by this paragraph.
SHAREHOLDER PROPOSALS FOR NEXT YEAR'S ANNUAL MEETING
To be considered for inclusion in our proxy statement for the 2004 annual
meeting, shareholder proposals must be received at our principal executive
offices no later than December 1, 2003. Under Rule 14a-4(c)(1) of the Securities
Exchange Act of 1934, if any shareholder proposal intended to be presented at
the 2004 annual meeting without inclusion in our proxy statement for this
meeting is received at our principal executive offices after February 14, 2004,
then a proxy will have the ability to confer discretionary authority to vote on
this proposal.
By Order of the Board of Directors,
KENNETH T. MURPHY, Chairman
March 27, 2003
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