DEF 14A
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proxy2004-14a.txt
FIRST FINANCIAL BANKSHARES, INC.-PROXY STMT.-2004
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
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First Financial Bankshares, Inc.
(Name of Registrant As Specified in its Charter)
------------------------------------------------------------------------
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FIRST FINANCIAL BANKSHARES, INC.
400 Pine Street
Abilene, Texas 79601
325.627.7155
NOTICE OF THE 2004 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 27, 2004
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 27, 2004, for the
following purposes:
(1) To elect 14 directors;
(2) To ratify the appointment by our audit committee of Ernst &
Young LLP as our independent accountants for the year ending
December 31, 2004;
(3) To amend our articles of incorporation to increase the
authorized shares of our common stock from 20,000,000 to
40,000,000;
(4) To act on such other business as may properly come before
the annual meeting or any adjournment thereof.
Only shareholders of record at the close of business on March 15, 2004, 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 2003
annual report, which describes our activities during 2003, and our Form 10-K for
the year ended December 31, 2003. The annual report and Form 10-K do 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 25, 2004
FIRST FINANCIAL BANKSHARES, INC.
400 Pine Street
Abilene, Texas 79601
325.627.7155
PROXY STATEMENT
2004 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 27, 2004
INTRODUCTION
Your board of directors hereby solicits your proxy for use at the 2004
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
27, 2004.
Our principal executive office is located at 400 Pine Street, Abilene,
Texas 79601. Our telephone number is 325.627.7155.
We mailed this proxy statement and the accompanying proxy card on March 25,
2004. The date of this proxy statement is March 25, 2004.
VOTING OF SECURITIES
Record Date
Your board of directors has established the close of business on March 15,
2004, 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 15,486,322 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. You may only vote if you hold your shares directly in your name. If your
shares are held in "street name" by your broker, your broker will send you
instructions on how you can instruct your broker to vote your shares. Your
broker generally cannot vote your shares on non-routine matters without
instructions from you. 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 the
holders of at least two-thirds of our outstanding shares entitled to vote is
required to approve the amendment to our articles of incorporation. The
affirmative vote of a majority of shares entitled to vote is required to approve
the ratification of Ernst & Young LLP as our independent accountants or 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 no effect. However, as to other matters, your abstention
or withholding authority will have the effect of a vote against such matters
because approval is premised on the affirmative vote of at least two-thirds or a
majority (as the case may be) of all shares entitled to vote. Broker non-votes
will have no effect on the outcome of director elections, but will count as
negative votes for all other matters.
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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
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 25, 2004, 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 (1) an instrument revoking the proxy
or (2) 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.
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.
Under Nasdaq rules, a majority of your board of directors must be comprised
of independent directors. The board has determined that each director except
Messrs. Dueser, Murphy and Parker is independent under applicable Nasdaq rules.
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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 1, 2004, 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 8 Executive Director, 8,921 0.06%
Dodge Jones Foundation, a
private charitable foundation
Mac A. Coalson 64 8 Real Estate and Ranching 166,105 1.07%
David Copeland 48 6 President, Shelton Family 85,412 (2) 0.55%
Foundation, a private
charitable foundation
F. Scott Dueser** 50 13 See "Executive Officers" on 161,161 (3)(4) 1.04%
page 6
Derrell E. Johnson 64 4 President, American Council 30,000 0.19%
of Engineering Companies
Life Health Trust
Kade L. Matthews 45 6 Ranching and Investments 142,118 0.92%
Raymond A. McDaniel, Jr. 70 12 Investments 68,827 (5) 0.44%
Bynum Miers 67 12 Ranching 42,827 (6) 0.28%
Kenneth T. Murphy 66 33 See "Executive Officers" on 237,814 (4) 1.54%
page 6
James M. Parker** 73 32 President, Parker Properties, 548,237 (7) 3.54%
Inc.
Jack D. Ramsey, M.D. 73 7 Physician 155,403 1.00%
Dian Graves Stai 63 11 Investments 54,445 0.35%
F. L. Stephens 65 6 Retired Chairman and Chief 40,750 0.26%
Executive Officer, Town &
Country Food Stores, Inc.
Johnny E. Trotter 52 1 Ranching, Farming and Cattle 58,996 0.38%
Feeding
Shares beneficially owned by all executive officers and directors* 1,813,961 (4) 11.72%
* See "Security Ownership of Certain Beneficial Owners and Management."
** Mr. Dueser is the son-in-law of Mr. Parker.
(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 77,411 shares that are owned by trusts for which Mr. Copeland
serves as trustee or co-trustee to which he disclaims beneficial ownership.
Mr. Copeland is also a director of Harte-Hanks, Inc.
(3) Includes 3,099 shares of our common stock issuable upon exercise of options
presently exercisable or exercisable within 60 days of February 1, 2004.
Also includes 28,541 shares owned by his wife of which he disclaims
beneficial ownership.
(4) Includes shares indirectly owned as of February 1, 2004 through the
employee stock ownership plan portion of the profit sharing plan which each
participant has sole voting powers, as follows: Mr. Murphy - 33,134, Mr.
Dueser - 16,265 and all executive officers and directors as a group -
54,191.
(5) Includes 2,850 shares of our common stock owned by Mr. McDaniel's spouse.
(6) Includes 6,700 shares of our common stock owned by Mr. Miers' spouse.
(7) Includes 201,073 shares of our common stock for which Mr. Parker serves
as trustee.
THE BOARD OF DIRECTORS RECOMMENDS YOU
VOTE "FOR" THE ELECTION OF EACH OF THESE NOMINEES.
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PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The audit committee of your board of directors has selected Ernst & Young
LLP to serve as our independent certified public accountants for the year ending
December 31, 2004 and to serve until the next annual meeting in April 2005.
Ernst & Young LLP has served as the Company's independent accountants since
2002. We have been advised by Ernst & Young LLP that neither its firm nor any of
its members has any financial interest, direct or indirect, in us, nor has had
any connection with us or any of our subsidiaries in any capacity other than
independent accountants. Your board of directors recommends that you vote for
the ratification of the selection of Ernst & Young LLP. Shareholder ratification
of the selection of Ernst & Young LLP as our independent accountants is not
required by our articles of incorporation, bylaws or otherwise. Nevertheless,
your board of directors is submitting this matter to the shareholders as what we
believe is a matter of good corporate practice. If the shareholders do not
ratify the appointment of Ernst & Young LLP, then the appointment of independent
accountants will be reconsidered by our audit committee. Representatives of
Ernst & Young LLP are expected to be present at the annual shareholders meeting,
and they may have the opportunity to make a statement, if they desire to do so,
and to respond to appropriate questions.
We retained Ernst & Young LLP to serve as our independent auditors for 2002
and 2003, 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.
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.
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.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE
RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP.
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PROPOSAL 3
AMENDMENT TO RESTATED ARTICLES OF INCORPORATION
TO INCREASE AUTHORIZED SHARES
Our restated articles of incorporation currently authorize 20,000,000
shares, par value $10.00 per share, which we frequently refer to as our common
stock. Because approximately 15,490,000 shares are currently issued and
outstanding, we have less than 5,000,000 shares available for future issuances.
Accordingly, we believe it is necessary to increase our total number of
authorized shares to 40,000,000 so that we have the flexibility in the future to
issue more shares, whether as a stock dividend, as consideration for an
acquisition, in accordance with our stock option plans, to raise additional
capital or otherwise. Although the proposed increase in our authorized shares
could be construed as having anti-takeover effects, neither your board of
directors nor our management views this proposal in that perspective, and we are
not aware of any takeover bid at this time. Your board of directors have
approved this amendment, but your approval is also required under Texas law to
amend our restated articles of incorporation. Therefore, we are asking you to
vote on the following resolution:
RESOLVED, that the Restated Articles of Incorporation of First Financial
Bankshares, Inc. be amended to increase the total number of authorized shares so
that the Corporation is authorized to issue 40,000,000 shares, to be effected by
amending Article Four of the Corporation's Restated Articles of Incorporation to
read in its entirety as follows:
"The aggregate number of shares that the Corporation shall
have authority to issue is 40,000,000 of the par value of Ten
Dollars ($10.00) each."
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE
AMENDMENT AND INCREASE IN AUTHORIZED SHARES.
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Executive Officers
Set forth in the following table are our executive officers, and the shares
of our common stock beneficially owned by each of them as of February 1, 2004,
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 66 Chairman 17 Chairman, First Financial 237,814 (1) 1.54%
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 161,161 (1)(2) 1.04%
Chief Executive 3 Executive Officer of
Officer First Financial
Bankshares, Inc.;
Chairman, First National
Bank of Abilene*;
President and Chief
Executive Officer, First
National Bank of Abilene*
(1991-2001); Executive
Vice President of First
Financial Bankshares,
Inc. (1999-2001)
Gary S. Gragg 44 Senior Vice 7 Senior Vice President of 4,989 (1)(3) 0.03%
President First Financial
Bankshares, Inc.
J. Bruce Hildebrand 48 Executive Vice Executive Vice President 717 (1) -
President and 1 and Chief Financial
Chief Financial Officer of First
Officer Financial Bankshares,
Inc.; Partner, KPMG LLP
(1990-2002)
Robert S. Patterson 63 Senior Vice 10 Senior Vice President of 7,239 (1)(4) 0.05%
President First Financial
Bankshares, Inc.
Gary L. Webb 46 Executive Vice 1 Executive Vice President - -
President of First Financial
Bankshares, Inc.;
Managing Partner,
BearingPoint (2002);
Partner, Arthur Andersen
(2001-2002); Senior
Manager, Arthur Andersen
(1998-2001)
*A bank subsidiary.
(1) Includes shares indirectly owned as of February 1, 2004 through our
employee stock ownership plan portion of the profit sharing plan, which
each participant has sole voting power, as follows: Mr. Murphy - 33,134,
Mr. Dueser - 16,265, Mr. Gragg - 1,897, Mr. Hildebrand - 81, and Mr.
Patterson - 2,814.
(2) Includes 3,099 shares of our common stock issuable upon exercise of options
presently exercisable or exercisable within 60 days of February 1, 2004.
Also includes 28,541 shares owned by his wife of which he disclaims
beneficial ownership.
(3) Includes 2,419 shares of our common stock issuable upon exercise of options
presently exercisable or exercisable within 60 days of February 1, 2004.
(4) Includes 4,175 shares of our common stock issuable upon exercise of options
presently exercisable or exercisable within 60 days of February 1, 2004.
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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 our
chief executive officer and our most highly compensated executive officers
during 2003 whose total annual salary and bonus was in excess of $100,000.
Summary Compensation Table
Long Term
Compensation
Awards
Annual -----------------------
Compensation Securities All Other
--------------------- ----------------------- Compensation
Name and Principal Position Year Salary ($) Bonus ($) Underlying Options(#)(1) ($)(2)
--------------------------- ---- --------------------- ------------------------ -------------------
Kenneth T. Murphy, Chairman of the Board
First Financial Bankshares, Inc. 2003 - - - $345,514 (3)
2002 $351,635 - - 24,445 (2)
2001 332,000 - - 17,729 (2)
F. Scott Dueser, President and Chief 2003 356,000 - 4,375 12,259 (2)
Executive Officer 2002 336,000 $45,423 - 26,247 (2)
First Financial Bankshares, Inc. 2001 310,000 - - 20,521 (2)
J. Bruce Hildebrand, Executive Vice President 2003 200,000 - 2,500 12,259 (2)
and Chief Financial Officer 2002 16,667 - - -
First Financial Bankshares, Inc. 2001 - - - -
Robert S. Patterson, Senior Vice President
First Financial Bankshares, Inc. 2003 158,333 - 1,875 10,282 (2)
2002 154,167 - - 18,516 (2)
2001 149,167 - - 19,445 (2)
Gary L. Webb, Executive Vice President
First Financial Bankshares, Inc. 2003 166,667 15,000 2,500 -
2002 - - - -
2001 - - - -
(1) Adjusted for stock splits and stock dividends.
(2) Represents the contributions we made to our profit sharing plan for the
benefit of such officer.
(3) Represents amount paid under his consulting agreement, pension plan and
deferred compensation agreement.
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The following table sets forth certain information concerning options
exercised during the last fiscal year by the named executive officers.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year End (#) at Fiscal Year End ($)(1)
Acquired on Value --------------------------- ---------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ------------ ----------- ------------- ----------- -------------
Kenneth T. Murphy - $ - - - $ - $ -
F. Scott Dueser 756 13,525 - 9,037 - 154,150
J. Bruce Hildebrand - - - 2,500 - 25,800
Robert S. Patterson 250 4,755 1,030 5,770 18,231 121,267
Gary L. Webb - - - 2,500 - 25,800
(1) Based upon the closing price per share of our common stock of $41.12 on
December 31, 2003.
Stock options were issued to Mr. Dueser, Mr. Hildebrand, Mr. Patterson and Mr.
Webb during the year ended December 31, 2003, totaling 4,375, 2,500, 1,875 and
2,500 shares, respectively.
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. See changes made to these plans described below. 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 2002. First Technology Services, Inc. and
First Financial Trust & Asset Management Company, National Association, adopted
all benefit plans effective in 2003.
Profit Sharing Plan
We, and each of our subsidiaries 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 compensation committee.
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.
Effective January 1, 2004, the plan includes a safe harbor Company match equal
to 100% of each Participant's deferral contributions not exceeding 3% of the
Participant's compensation, plus 50% of each Participant's deferral
contributions in excess of 3%, but not in excess of 5% of the Participant's
compensation. Prior to January 1, 2004, the plan did not include a mandatory
Company match but did provide a safe harbor profit sharing contribution equal to
3% of the qualifying participant's compensation. 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, and overtime
pay, 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
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$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.
Effective July 1, 2003, we added an employee stock ownership plan (ESOP)
feature to our profit sharing plan. Shares of our common stock held by the
profit sharing plan were allocated to participants generally based on the ratio
that each participant's balance bears to the total balances in the profit
sharing plan. Participants are given the option to receive cash dividends on
these shares in cash or reinvest the dividends in additional shares.
The profit sharing plan provides for benefits to vest 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 and shares resulting from
the reinvestment of dividends in the ESOP 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. The plan also provides for immediate vesting
upon attainment of normal retirement age and upon death or disability. 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. Effective January 1, 2004, the pension plan was frozen and no
additional benefits will accrue under the plan after this date.
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 $621,030 in 1999; $754,416 in 2000; $742,923 in 2001; $726,989 in 2002; and
$1,038,031 in 2003.
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
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As of December 31, 2002, Mr. Murphy was credited with 32 years of service,
at which time he began receiving payments under the pension plan. As of December
31, 2003, Mr. Dueser was credited with 27 years of service, Mr. Hildebrand was
credited with one year of service and Mr. Patterson was credited with nine years
of service. The covered compensation of Mr. Dueser and Mr. Hildebrand during
2003 was $200,000, and for Mr. Patterson was $158,333. The maximum covered
compensation is $200,000. Mr. Webb began employment in March 2003 and was not
credited with any years of service.
Flexible Spending Account Benefit Plan
With our subsidiaries, 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 provided that, following his retirement
in December 2002, we would pay him, or his beneficiary, the sum of $8,750 per
month for a period of 84 months. The monthly amount was considered to be an
appropriate level of supplemental income to partially offset Mr. Murphy's
reduction in personal income following retirement and was 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 compensation committee, to offer our key
executive officers and those of our subsidiaries an executive recognition
agreement. Mr. Dueser, Mr. Gragg, Mr. Hildebrand, Mr. Patterson, Mr. Webb and
our other senior officers 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
subsidiaries 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 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, Mr. Hildebrand
and Mr. Webb, the percentage of annual base salary to be received upon a change
in control pursuant to his executive recognition agreement is 200%. With respect
to Mr. Gragg and Mr. Patterson, the percentage is 100%. 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
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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 625,000 subject to
adjustment for stock dividends and similar events. The stock option plan is
administered by our compensation 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. During
2003, 71,560 stock options were issued to certain of our officers 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 109,790 are exercisable as of
December 31, 2003, 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.
Consulting Agreement
Effective January 1, 2003, we entered into a consulting agreement with Mr.
Murphy whereby Mr. Murphy provided various services to us and our subsidiaries
with respect to strategic planning and potential acquisitions among other
things. The term of the agreement was one year and compensation payable was
$14,583 per month. The agreement was renewed for one year effective January 1,
2004, under similar terms except the monthly compensation was reduced to $8,333
per month.
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.
Although we do not have a formal policy regarding attendance by members of
the board of directors at the our annual meeting of shareholders, we encourage
directors to attend and historically more than a majority have done so. For
example, 100% of the directors attended the 2003 annual meeting of shareholders.
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, Copeland, Dueser, McDaniel,
Murphy, Parker, Ramsey and Stephens. The executive committee also functioned in
2003 as the nominating committee. All current directors are being nominated for
election as director for 2004. A separate independent nominating committee is
being proposed beginning with the meeting of our board of directors scheduled
for April 27, 2004. The nominating committee will follow the guidelines of the
nominating committee charter that was approved by the executive committee of
your board of directors. Our nominating committee charter is available on our
web site at http://www.ffin.com. The foregoing is also available in print to any
shareholder who requests it. The executive committee met six times during 2003.
Historically, we have not had a formal process by which a shareholder may
nominate an individual to stand for election to the board of directors at our
annual meeting of shareholders. Nor have we had a formal policy concerning
shareholder recommendations to the nominating committee (or its predecessor, the
executive committee). To date, we have not received any recommendations from
shareholders requesting that the executive committee or nominating committee
consider a candidate for inclusion among the slate of nominees in our proxy
statement. The absence of such a policy does not mean, however, that a
recommendation would not have been considered had one been received. We
anticipate that the nominating committee will consider this matter fully during
the upcoming year with a view to adopting and publishing a policy on shareholder
recommendations for director nominees before our 2005 annual meeting of
shareholders.
-11-
Historically, our goal has been to assemble a board of directors that
brings to us a variety of perspectives and skills derived from high quality
business and professional experience. The committee has generally considered
factors such as:
o our needs with respect to the particular talents and experience of our
directors;
o the knowledge, skills and experience of nominees, particularly with
respect to the community banking business in North Central and West
Texas;
o a nominee's experience with accounting rules and practices;
o appreciation of the relationship of our banking business to the
communities we serve; and
o other requirements that may be imposed by the bank regulatory
agencies.
Under our bylaws, an individual may not stand for election or reelection as
a director upon attaining age 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.
Otherwise, there are no stated minimum criteria for director nominees. We expect
that the nominating committee will identify nominees by first evaluating the
current members of your board of directors willing to continue in service.
Current members of the board with skills and experience that are relevant to our
business and who are wiling to continue in service will be considered for
re-nomination, balancing the value of continuity of service by existing members
of the board with that of obtaining a new perspective. If any member of the
board does not wish to continue in service or if the nominating committee or the
board decides not to re-nominate a member for re-election, we anticipate that
the nominating committee will identify the desired skills and experience of a
new nominee in light of the criteria above and begin a search for appropriately
qualified individuals. To date, we have not engaged third parties to identify or
evaluate or assist in identifying potential nominees, although we reserve the
right in the future to retain a third party search firm, if necessary.
Historically, we have not adopted a formal process for shareholder
communications with the board. Nevertheless, we believe we have made every
effort to ensure that the views of shareholders are heard by your board of
directors or individual directors, as applicable, and that appropriate responses
are provided to shareholders in a timely manner. During the upcoming year we
expect the board will give full consideration to the adoption of a formal
process for shareholder communications with it and, if adopted, publish it
promptly and post it to our web site.
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. Copeland, Johnson, McDaniel,
Miers and Trotter. We believe that each member of the audit committee is
independent under The Nasdaq National Market listing standards. During 2003, the
audit committee met four times. The board of directors has determined that it
believes all audit committee members are financially literate under the current
listing standards of Nasdaq. The board also determined that it believes Mr.
Copeland qualifies as an "audit committee financial expert" as defined by the
SEC rules adopted pursuant to the Sarbanes-Oxley Act of 2002.
Compensation Committee. The compensation committee is responsible for
compensation matters for the Company as well as administering our profit
sharing, pension and flexible spending plans and overseeing our incentive stock
option plan for key employees. The current members are Mrs. Stai, Dr. Ramsey,
Mssrs. Canon, Coalson, Matthews and Stephens. The committee met three times
during 2003.
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 $2,000 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.
-12-
Compensation Committee Interlocks and Insider Participation
No person who served as a member of the compensation committee was, during
2003, an officer or employee of us or any of our subsidiaries, or had any
relationship requiring disclosure in this proxy statement. However, committee
member Mr. Coalson maintained loans from subsidiaries during 2003. 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.
-13-
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
During 2003, the executive compensation program was administered by 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 did not receive a bonus in 2003. Effective January 1, 2001, Mr.
Dueser assumed Chief Executive Officer responsibilities and Mr. Murphy retained
the title of Chairman. In setting Mr. Dueser's base salary the Compensation
Committee considered:
o the scope of the Chief Executive Officer's responsibilities;
o base salary compared to several compensation surveys;
o subjective evaluation of Mr. Dueser's contribution to the overall
success of First Financial Bankshares, Inc.; and
o tenure with First Financial Bankshares, Inc..
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, Inc.;
o evaluation input from subsidiary 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.
COMPENSATION COMMITTEE
F. L. Stephens, Chairman
Joseph E. Canon
Mac A. Coalson
Kade L. Matthews
Jack D. Ramsey, M.D.
Dian Graves Stai
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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
2003, 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 four meetings during the year ended
December 31, 2003.
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 our 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, 2003, 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 is filed as an
appendix to this definitive proxy statement filed with the Securities and
Exchange Commission. The members of the committee are considered independent
because we believe they satisfy the independence requirements for audit
committee members prescribed by Nasdaq and the SEC.
AUDIT COMMITTEE
David Copeland, Chairman
Raymond A. McDaniel, Jr.
Bynum Miers
Derrell E. Johnson
Johnny E. Trotter
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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, 1998
to December 31, 2003). The performance graph assumes $100 invested in our common
stock at its closing price on December 31, 1998, 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
[GRAPHIC OMITTED]
Year Ended
-------------------------------------------------------------------
Index 1998 1999 2000 2001 2002 2003
---------------------------------------------------------------------------------------------------------------
First Financial Bankshares, Inc. 100.00 91.04 97.29 121.25 158.76 222.15
S&P 500 * 100.00 121.11 110.34 97.32 75.75 97.40
SNL $1B-$5B Bank Index 100.00 91.91 104.29 126.72 146.28 198.92
*Source: CRSP, Center for Research in Security Prices, Graduate School of
Business, the University of Chicago 2004. Used with permission. All rights
reserved. crsp.com.
-16-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 1, 2004, 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, 2004, First Financial Trust & Asset Management
Company, National Association held of record in various fiduciary capacities an
aggregate of 2,639,390 shares of our common stock. Of the total shares held:
First Financial Trust & Asset Management Company, National Association had sole
power to vote 1,336,669 shares (8.63%), shared with others the power to vote
44,351 shares (0.29%) and had no authority to vote 1,258,370 shares (8.13%). All
the shares held by this subsidiary entity, 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 1, 2004. In the aggregate, all director
nominees and executive officers as a group (17 individuals) beneficially owned
1,759,770 shares of our common stock, or 11.37%, as of February 1, 2004.
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 2003 on a timely basis with the following
exceptions: Mr. Trotter filed a Form 3 and Form 4 during January 2004 to amend
previously filed reports and Messrs. McDaniel, Matthews, Ramsey and Stephens
filed Forms 4 during 2003 and 2004 past the required two-business day deadline.
INDEPENDENT ACCOUNTANTS
We retained Ernst & Young LLP to serve as our independent auditors for 2002
and 2003, 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.
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.
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.
-17-
The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant who performed the
audit of our annual financial statements and review of the quarterly financial
statements follows:
Year ended December 31,
-----------------------
2003 2002
-------- --------
Audit Fees $191,878 $175,000
Audit Related Fees 1,495 2,395
Tax Fees None None
All Other Fees None None
Audit-related fees for 2003 totaling $1,495 were for research regarding the
accounting treatment of termination of contract with a proposed acquisition.
Audit-related fees for 2002 totaling $2,395 were for research related to pension
accounting and disclosures.
Our audit committee has adopted a policy that requires advance approval of
all audit, audit-related, tax services, and other services performed by the
independent auditor. The policy provides for pre-approval by the audit committee
of specifically defined audit and non-audit services. Except as permitted under
Rule 2-01 of SEC Regulation S-X, unless the specific service has been previously
pre-approved with respect to that year, the audit committee must approve the
permitted service before the independent auditor is engaged to perform it. The
audit committee has delegated to its Chairman of the audit committee authority
to approve permitted services provided that the Chair reports any decisions to
the committee at its next scheduled meeting.
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.
-18-
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:
o general economic conditions;
o legislative and regulatory actions and reforms;
o competition from other financial institutions and financial holding
companies;
o the effects of and changes in trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o changes in the demand for loans;
o fluctuations in value of collateral and loan reserves;
o inflation, interest rate, market and monetary fluctuations;
o changes in consumer spending, borrowing and savings habits;
o our ability to attract deposits;
o consequences of continued bank mergers and acquisitions in our market
area, resulting in fewer but much larger and stronger competitors;
o acquisitions and integration of acquired businesses.
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. We undertake no obligation to publicly update
or otherwise revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
SHAREHOLDER PROPOSALS FOR NEXT YEAR'S ANNUAL MEETING
To be considered for inclusion in our proxy statement for the 2005 annual
meeting, shareholder proposals must be received at our principal executive
offices no later than December 1, 2004. Under Rule 14a-4(c)(1) of the Securities
Exchange Act of 1934, if any shareholder proposal intended to be presented at
the 2005 annual meeting without inclusion in our proxy statement for this
meeting is received at our principal executive offices after February 14, 2005,
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 25, 2004
-19-
Appendix
--------
Audit Committee Charter
First Financial Bankshares, Inc.
Statement of Policy
The audit committee will use its business judgment to assist the board of
directors in overseeing:
o the integrity of the Company's financial statements including the
financial reporting process and systems of internal controls regarding
finance, accounting and legal compliance,
o the Company's compliance with legal and regulatory requirements,
o the independent auditor's qualifications and independence,
o and the performance of the Company's internal and external auditors.
In so doing, the audit committee will maintain free and open communication
between the board of directors, the independent auditors, the internal auditors,
and management of the Company. The audit committee will have the authority and
necessary funding to engage independent counsel and other outside advisers as
necessary to discharge its responsibilities and will have full access to all
books, records, facilities and personnel of the Company.
The function of the audit committee is oversight. It is not the duty of the
audit committee to plan or conduct audits or to determine that the Company's
financial statements are complete and accurate and are in accordance with
generally accepted accounting principles. Management is responsible for the
preparation, presentation, and integrity of the Company's financial statements
and for the appropriateness of the accounting principles and reporting policies
that are used by the Company. The independent auditors are responsible for
auditing the Company's financial statements and for reviewing the Company's
unaudited interim financial statements.
Organization
The audit committee will consist of a minimum of three members, which are
members of the board of directors and are appointed by the board of directors,
and will be comprised entirely of directors who are independent of management
and the Company as determined in accordance with applicable law and NASDAQ
rules.
All audit committee members should be financially literate (as determined by the
board in its business judgment) at the time of their appointment to the
committee, and at least one member of the audit committee should meet the
requirements of an "audit committee financial expert" as defined in applicable
SEC rules.
Tasks
The audit committee will perform such tasks as may be required by law or
applicable NASDAQ rules including:
o Meet at least four times per year (but not less than quarterly) or
more often as needed.
o Obtain the board of directors' approval of this charter and review and
reassess this charter as conditions dictate (at least annually).
o Be directly responsible for the appointment, retention, compensation,
evaluation and termination of the Company's independent auditors. The
independent auditors shall report directly to the audit committee.
o Have sole authority to approve all auditing and non-audit services
(other than those non-auditing services prohibited by law) to be
provided by the independent auditors. Before the independent auditors
are engaged to perform any such non-audit services, the audit
committee should review the scope of all services to be performed by
the independent auditors that do not relate directly to the audit of
the Company's financial statements. The chairperson of the committee
may represent the entire committee for purposes of this review so long
as any such determination by the chairperson is disclosed to the full
audit committee as soon as possible after the determination is made,
and in no event later than the audit committee's next scheduled
meeting.
o If an outside firm is retained to provide internal audit services,
review and concur with management's appointment, termination, or
replacement of the internal audit firm providing those services.
o Discuss with the independent and internal auditors of the Company the
scope and plans of the proposed external and internal audits and
timely quarterly reviews and the procedures to be utilized, including
adequacy of staffing and the conclusions reached as a result of such
audits or reviews, including any comments or recommendations.
o Review with the independent auditors, the internal auditors, and
financial and accounting personnel the adequacy and effectiveness of
the accounting and financial controls of the Company, and elicit any
recommendations for the improvement of such internal controls or
particular areas where new or more detailed controls or procedures are
desirable. This review should include the legal and ethical compliance
programs of the Company.
o Discuss with management the Company's major financial risk exposures,
including the Company's risk assessment and risk management policies.
o Review with the internal auditors the significant findings during the
year and management's response thereto.
o Review reports received from regulators and other legal and regulatory
matters that may have a material effect on the financial statements or
related Company compliance policies.
o Monitor hiring policies for current and former employees of the
independent auditors in accordance with applicable laws.
o Determine that the lead audit partner from the independent auditors
serves no longer than five fiscal years in that capacity and that any
partner of the independent auditors other than the lead audit partner
serves no longer than seven years at the partner level on the
Company's audit.
o Review the financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in
the Company's Annual Report to Shareholders on Form 10-K, its
Quarterly Reports on Form 10-Q prior to the filing or mailing of such
reports with management and the independent auditors to determine that
the independent auditors are satisfied with the disclosure and content
of the financial statements to be presented. The chairperson of the
committee may represent the entire committee for purposes of the
review of the Company's Form 10-Q or other earnings guidance, but all
members of the committee should participate in the review of the Form
10-K.
o Discuss with independent auditors any other matters that are to be
communicated to the committee as required by applicable law and
accounting pronouncements, including Statement on Auditing Standards
No. 61 and amended by Statement on Auditing Standards No. 90. Also
review with financial management and the independent auditors their
judgments about the quality, not just acceptability, of accounting
principles and the clarity of the financial disclosure practices used
or proposed to be used, and particularly, the degree of aggressiveness
or conservatism of the organization's accounting principles and
underlying estimates, and other significant decisions made in
preparing the financial statements.
o Provide sufficient opportunity for the internal auditors and the
independent auditors to meet with the members of the audit committee
without members of management present. Among the items to be discussed
in these meetings are the independent auditor's evaluation of the
Company's financial, accounting, and auditing personnel providing
internal audit services, the cooperation that the independent auditors
received during the course of the audit and management's response to
any questionable accounting issues that may have arisen.
o Report the results of the annual audit to the board of directors. If
requested by the board, invite the independent auditors to attend the
full board of directors meeting to assist in reporting the results of
the annual audit or to answer other directors' questions.
Alternatively, the other directors, particularly the other independent
directors, may be invited to attend the audit committee meeting during
which the results of the annual audit are reviewed.
o On an annual basis, obtain from the independent auditors a written
communication delineating all their relationships and professional
services as required by Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees. In addition, review
with the independent auditors the nature and scope of any disclosed
relationships or professional services and take, or recommend that the
board of directors take, appropriate action to ensure the continuing
independence of the auditors.
o At least annually, obtain and review a report of the independent
auditors' firm describing (1) the firm's internal quality control
procedures, (2) any material issues raised by the most recent internal
quality-control review, or prior review, of the firm, or by any
inquiry or investigation by governmental or professional authorities,
within the last five years with respect to one or more independent
audits carried out by the firm, and any steps taken to address any
such issues, and (3) with a view towards assessing the independent
auditor's independence, all relevant relationships between the
independent auditors and the Company.
o Prepare the report of the audit committee to be included in the
Company's annual proxy statement as required by SEC regulations.
o Submit the minutes of all meetings of the audit committee to, or
discuss the matters discussed at each committee meeting with, the
board of directors.
o Discuss with the independent auditors (1) all critical accounting
policies and practices to be used, (2) all alternate treatments of
financial information within generally accepted accounting principles
that have been discussed with management, ramifications of the use of
these alternative disclosures and treatments, and the treatment
preferred by the independent auditors and (3) the content of other
material written communications between the independent auditors and
management, including but not limited to management letters and
schedules of unadjusted differences.
o Review management's assertion on its assessment of the effectiveness
of internal controls, as of the end of the most recent fiscal year,
and the independent auditors' report on management's assertion.
o Establish and maintain appropriate procedures for the receipt,
retention and treatment of complaints regarding accounting, internal
accounting controls or auditing matters and the confidential,
anonymous submission by employees regarding accounting or auditing
matters over which they have concerns or disagreements.
o Review the Company's disclosures in the proxy statement for its annual
meeting of shareholders.
o Receive any report by outside counsel regarding any evidence of a
material violation of securities law, breach of fiduciary duty or
similar violation by the Company or its agents.
o Review and approve all (1) transactions between the Company and
related parties and (2) waivers of the Company's code of conduct with
respect to directors and executive officers.
o Annually evaluate the effectiveness of the audit committee (which
evaluation shall compare the performance of the audit committee with
the requirements of this charter), and report the results of this
evaluation to the board of directors.