FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended September 30, 2002
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-7674
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FIRST FINANCIAL BANKSHARES, INC.
--------------------------------
(Exact name of registrant as Specified in its charter)
Texas 75-0944023
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
400 Pine Street, Abilene, Texas 79601
-------------------------------------
(Address of principal executive offices)
(Zip Code)
(915)627-7155
-------------
(Registrant's telephone number, including area code)
NO CHANGE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of November 1, 2002.
Class Number of Shares Outstanding
---------------------------------------- ----------------------------
Common Stock, Par Value $10.00 Per Share 12,358,910
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item Page
---- ----
1. Consolidated Financial Statements and Notes to Consolidated
Financial Statements 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
3. Quantitative and Qualitative Disclosures About Market Risk 12
4. Controls and Procedures 12
Signatures 14
PART II
OTHER INFORMATION
6. Exhibits 15
-2-
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. at September
30, 2002 and 2001, and December 31, 2001, and the consolidated statements of
earnings and comprehensive earnings for the three months and nine months ended
September 30, 2002 and 2001, changes in shareholders' equity for the year ended
December 31, 2001 and nine months ended September 30, 2002, and cash flows for
the nine months ended September 30, 2002 and 2001, follow on pages 4 through 8.
-3-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
----------------------------------------
Unaudited
---------------------------------------- December 31,
2002 2001 2001
------------------- ------------------- ------------------
ASSETS
Cash and due from banks $ 100,504,696 $ 87,504,488 $ 112,150,214
Federal funds sold 52,575,000 41,258,066 72,975,000
------------------- ------------------- ------------------
Cash and cash equivalents 153,079,696 128,762,554 185,125,214
Interest-bearing deposits in banks 2,566,449 304,497 1,374,285
Investment securities:
Securities held-to-maturity (market value of
$235,108,463 and $335,347,542 at September 30, 2002
and 2001, respectively; $298,569,794 at December 31, 2001) 222,450,034 313,989,514 290,674,490
Securities available-for-sale, at market value 548,681,206 401,043,693 431,019,205
------------------- ------------------- ------------------
Total investment securities 771,131,240 715,033,207 721,693,695
Loans 950,291,585 935,557,546 940,130,975
Less: Allowance for loan losses 11,530,150 10,504,589 10,602,419
------------------- ------------------- ------------------
Net loans 938,761,435 925,052,957 929,528,556
Bank premises and equipment, net 40,982,215 41,823,428 42,012,431
Goodwill and intangible assets 24,610,602 25,122,311 24,711,969
Other assets 21,956,163 25,227,130 25,247,980
------------------- ------------------- ------------------
TOTAL ASSETS $ 1,953,087,800 $ 1,861,326,084 $ 1,929,694,130
=================== =================== ==================
LIABILITIES
Noninterest-bearing deposits $ 419,554,456 $ 346,159,673 $ 389,406,666
Interest-bearing deposits 1,252,968,421 1,259,910,504 1,295,755,932
------------------- ------------------- ------------------
Total deposits 1,672,522,877 1,606,070,177 1,685,162,598
Dividends payable 4,325,619 3,697,242 3,699,976
Securities sold under agreements to repurchase 28,466,138 23,225,722 19,847,067
Other liabilities 9,848,932 14,982,173 7,330,476
------------------- ------------------- ------------------
Total liabilities 1,715,163,566 1,647,975,314 1,716,040,117
------------------- ------------------- ------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $10 par value; authorized 20,000,000
shares; 12,358,910 and 12,324,141 issued and outstanding
at September 30, 2002 and 2001, respectively; 12,333,252
shares issued and outstanding at December 31, 2001 123,589,100 123,241,410 123,332,520
Capital surplus 58,018,533 57,735,976 57,824,061
Retained earnings 41,423,413 24,544,462 28,375,353
Unrealized gain on investment securities available-for-sale, net 14,893,188 7,828,922 4,122,079
------------------- ------------------- ------------------
Total shareholders' equity 237,924,234 213,350,770 213,654,013
------------------- ------------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,953,087,800 $ 1,861,326,084 $ 1,929,694,130
=================== =================== ==================
See notes to consolidated financial statements.
-4-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ ------------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
INTEREST INCOME
Interest and fees on loans $ 16,157,691 $ 18,921,994 $ 48,878,976 $ 57,289,318
Interest on investment securities:
Taxable 8,184,561 8,292,472 24,221,876 23,858,497
Exempt from federal income tax 1,757,725 1,627,261 5,275,357 4,645,604
Interest on federal funds sold and
interest-bearing deposits in banks 216,442 658,318 787,098 2,865,430
--------------- --------------- --------------- ---------------
Total interest income 26,316,419 29,500,045 79,163,307 88,658,849
INTEREST EXPENSE
Interest-bearing deposits 5,750,249 10,756,921 18,909,925 34,999,907
Other 67,752 201,044 226,248 763,615
--------------- --------------- --------------- ---------------
Total interest expense 5,818,001 10,957,965 19,136,173 35,763,522
--------------- --------------- --------------- ---------------
NET INTEREST INCOME 20,498,418 18,542,080 60,027,134 52,895,327
Provision for loan losses 652,000 538,833 1,560,834 1,402,550
--------------- --------------- --------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,846,418 18,003,247 58,466,300 51,492,777
NONINTEREST INCOME
Trust department income 1,439,434 1,451,525 4,311,619 4,446,890
Service fees on deposit accounts 3,946,986 3,688,601 11,311,561 10,937,274
ATM fees 626,590 495,788 1,728,755 1,425,510
Real estate mortgage fees 526,091 433,902 1,317,250 1,203,756
Net (loss) gain on securities transactions (2,883) 177 16,373 67,789
Other 987,615 779,425 3,021,208 2,526,107
--------------- --------------- --------------- ---------------
Total noninterest income 7,523,833 6,849,418 21,706,766 20,607,326
NONINTEREST EXPENSE
Salaries and employee benefits 7,939,817 7,266,165 23,649,935 21,138,214
Net occupancy expense 1,044,037 1,082,346 3,029,660 2,972,769
Equipment expense 1,238,535 1,135,747 3,579,632 3,274,867
Printing, stationery & supplies 362,310 293,994 1,096,806 764,095
Correspondent bank service charges 367,576 350,781 1,106,414 984,190
Amortization of intangible assets 33,789 410,437 101,367 1,231,120
Other expenses 3,915,856 3,508,896 11,271,269 10,342,279
--------------- --------------- --------------- ---------------
Total noninterest expense 14,901,920 14,048,366 43,835,083 40,707,534
--------------- --------------- --------------- ---------------
EARNINGS BEFORE INCOME TAXES 12,468,331 10,804,299 36,337,983 31,392,569
Income tax expense 3,768,124 3,271,428 10,936,915 9,568,931
--------------- --------------- --------------- ---------------
NET EARNINGS $ 8,700,207 $ 7,532,871 $ 25,401,068 $ 21,823,638
=============== =============== =============== ===============
EARNINGS PER SHARE, BASIC $ 0.70 $ 0.61 $ 2.06 $ 1.77
EARNINGS PER SHARE, ASSUMING DILUTION $ 0.70 $ 0.61 $ 2.05 $ 1.76
DIVIDENDS PER SHARE $ 0.35 $ 0.30 $ 1.00 $ 0.86
See notes to consolidated financial statements.
-5-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- ---------------
NET EARNINGS $ 8,700,207 $ 7,532,871 $ 25,401,068 $ 21,823,638
OTHER ITEMS OF COMPREHENSIVE EARNINGS
Change in unrealized gain on investment
securities available-for-sale, before income taxes 8,840,003 4,317,283 16,587,310 9,619,312
Reclassification adjustment for realized losses
(gains) on investment securities included in
net earnings, before income taxes 2,883 (177) (16,373) (67,789)
--------------- ---------------- --------------- ---------------
Total other items of comprehensive earnings,
before tax 8,842,886 4,317,106 16,570,937 9,551,523
Income tax expense related to other
items of comprehensive earnings 3,095,010 1,510,987 5,799,828 3,343,033
--------------- ---------------- --------------- ---------------
COMPREHENSIVE EARNINGS $ 14,448,083 $ 10,338,990 $ 36,172,177 $ 28,032,128
=============== ================ =============== ===============
See notes to consolidated financial statements.
-6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized
Gain on
Investment
Common Stock Securities Total
------------------------ Capital Retained Treasury Available Shareholders'
Shares Amount Surplus Earnings Stock,at cost For Sale,Net Equity
---------- ------------- ------------ ------------ ------------ ------------ ------------
Balances at December 31, 2000 9,983,002 $ 99,830,020 $ 60,592,310 $ 38,003,195 $ (3,925,069)$ 1,620,432 $196,120,888
Net earnings - - - 29,354,505 - - 29,354,505
Stock split-up, effected in the
form of a 25% stock dividend 2,461,770 24,617,700 - (24,617,700) - - -
Stock issuances 24,480 244,800 111,870 - - - 356,670
Cash dividends declared,
$1.16 per share - - - (14,364,647) - - (14,364,647)
Acquisition of treasury stock - - - - (315,050) - (315,050)
Retirement of treasury stock (136,000) (1,360,000) (2,880,119) - 4,240,119 - -
Change in unrealized gain
on investment securities
available-for-sale, net - - - - - 2,501,647 2,501,647
---------- ------------- ------------ ------------ ------------ ------------ ------------
Balances at December 31, 2001 12,333,252 123,332,520 57,824,061 28,375,353 - 4,122,079 213,654,013
Net earnings - - - 25,401,068 - - 25,401,068
Stock issuances 25,658 256,580 194,472 - - - 451,052
Cash dividends declared,
$1.00 per share - - - (12,353,008) - - (12,353,008)
Change in unrealized gain
on investment securities
available-for-sale, net - - - - - 10,771,109 10,771,109
---------- ------------- ------------ ------------ ------------ ------------ ------------
Balances at September 30,2002 (unaudited) 12,358,910 $ 123,589,100 $ 58,018,533 $ 41,423,413 $ - $ 14,893,188 $237,924,234
========== ============= ============ ============ ============ ============ ============
See notes to consolidated financial statements.
-7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Nine Months Ended
September 30,
------------------------------------
2002 2001
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 25,401,068 $ 21,823,638
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,221,412 4,219,424
Provision for loan losses 1,560,834 1,402,550
Premium amortization, net of discount accretion 3,660,305 992,913
Loss (gain) on sale of assets 37,094 (52,815)
Deferred federal income tax (benefit) expense (595,790) 158,302
(Increase) decrease in other asset (1,760,942) 847,959
Increase in other liabilities 2,518,456 5,873,371
---------------- -----------------
Total adjustments 8,641,369 13,441,704
---------------- -----------------
Net cash provided by operating activities 34,042,437 35,265,342
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-bearing deposits in banks (1,192,164) (200,159)
Payment for stock of City Bancshares, Inc., net of cash acquired - (6,848,231)
Activity in available-for-sale securities:
Sales 2,724,931 12,926,715
Maturities 55,730,144 56,572,060
Purchases (163,686,609) (150,343,528)
Activity in held-to-maturity securities:
Maturities 70,490,816 150,907,110
Purchases (1,769,822) (92,498,613)
Net increase in loans (11,149,286) (26,186,131)
Capital expenditures (2,126,689) (3,912,942)
Proceeds from sale of assets 187,687 178,945
---------------- -----------------
Net cash used in investing activities (50,790,992) (59,404,774)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 30,147,790 (2,067,026)
Net (decrease) increase in interest-bearing deposits (42,787,511) 5,738,481
Net increase (decrease) in securities sold under agreements to repurchase 8,619,071 (2,938,637)
Common stock transactions:
Acquisition of treasury stock - (315,050)
Proceeds from stock issuances 451,052 177,475
Dividends paid (11,727,365) (10,223,969)
---------------- -----------------
Net cash used in financing activities (15,296,963) (9,628,726)
---------------- -----------------
Net decrease in cash and cash equivalents (32,045,518) (33,768,158)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 185,125,214 162,530,712
---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 153,079,696 $ 128,762,554
================ =================
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS
Interest paid $ 20,028,463 $ 35,978,699
Federal income tax paid 11,318,471 6,378,823
Assets acquired through foreclosure 559,115 209,566
Loans to finance the sale of other real estate 203,542 -
Retirement of treasury stock - 4,240,119
See notes to consolidated financial statements.
-8-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
In the opinion of Management, the unaudited consolidated financial statements
reflect all adjustments necessary for a fair presentation of the Company's
financial position and unaudited results of operations. All adjustments were of
a normal recurring nature. However, the results of operations for the three
months and nine months ended September 30, 2002, are not necessarily indicative
of the results to be expected for the year ended December 31, 2002.
Note 2 - Earnings Per Share
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted average number of shares outstanding during
the period. In computing diluted earnings per common share for the three months
and nine months ended September 30, 2002 and 2001, the Company assumes that all
outstanding options to purchase common stock have been exercised at the
beginning of the year (or time of issuance, if later). The dilutive effect of
the outstanding options is reflected by application of the treasury stock
method, whereby, the proceeds from the exercised options are assumed to be used
to purchase common stock at the average market price during the respective
period. The weighted average common shares outstanding used in computing basic
earnings per common share for the quarters ended September 30, 2002 and 2001,
were 12,356,709 and 12,321,964 shares, respectively. The weighted average common
shares outstanding used in computing basic earnings per common share for the
nine-months periods ended September 30, 2002 and 2001, were 12,348,465 and
12,315,826 shares, respectively. The weighted average common shares outstanding
used in computing diluted earnings per common share for the quarters ended
September 30, 2002 and 2001, were 12,405,265 and 12,412,979 shares,
respectively. The weighted average common shares outstanding used in computing
diluted earnings per common share for the nine-month periods ended September 30,
2002 and 2001, were 12,397,797 and 12,362,422 shares, respectively.
Note 3 - Goodwill and Other Intangible Assets - Adoption of Statement 142
In June 2001, the Financial Accounting Standards Board issued Statement on
Financial Accounting (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS
142 requires that goodwill no longer be amortized, but instead be reviewed for
impairment. The Company adopted SFAS 142 on January 1, 2002 and discontinued
amortization on goodwill amounting to $23,765,896. The Company conducted its
initial impairment test in the three months ending June 30, 2002. There was no
reduction of recorded goodwill resulting from the impairment test. A
reconciliation adjusting comparative net earnings and earnings per share for the
three months and nine months ended September 30, 2002 and 2001, follows:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ------------ ------------
Reported net earnings $ 8,700,207 $ 7,532,871 $ 25,401,068 $ 21,823,638
Add back: Goodwill
amortization, net of tax - 305,389 - 916,167
----------- ----------- ------------ ------------
Adjusted net earnings $ 8,700,207 $ 7,838,260 $ 25,401,068 $ 22,739,805
=========== =========== ============ ============
Basic earnings per share:
Reported net earnings $ .70 $ .61 $ 2.06 $ 1.77
Goodwill amortization,
net of tax - .03 - .08
----------- ----------- ------------ ------------
Adjusted net earnings $ .70 $ .64 $ 2.06 $ 1.85
=========== =========== ============ ============
Earnings per share,assuming dilution:
Reported net earnings $ .70 $ .61 $ 2.05 $ 1.76
Goodwill amortization,
net of tax - .02 - .08
----------- ----------- ------------ ------------
Adjusted net earnings $ .70 $ .63 $ 2.05 $ 1.84
=========== =========== ============ ============
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operating Results
- -----------------
For the nine months ended September 30, 2002, the Company's net income amounted
to $25.4 million, or $2.06 per basic share. For the same period last year, net
income amounted to $21.8 million, or $1.77 per basic share. Return on average
assets and return on average equity for the nine months ended September 30,
2002, amounted to 1.79 percent and 15.45 percent, respectively. The Company's
return on average assets and return on average equity for the same period last
year amounted to 1.64 percent and 14.48 percent, respectively. Net income for
the third quarter 2002 totaled $8.7 million, or $0.70 per basic share, as
compared to $7.5 million, or $0.61 per basic share, earned in the third quarter
2001. Return on average assets for the third quarter 2002 amounted to 1.80
percent as compared to 1.62 for the third quarter 2001. Return on average equity
for the third quarter 2002 amounted to 15.14 percent as compared to 14.47
percent for the third quarter 2001.
Net interest income on a tax-equivalent basis for the nine months ended
September 30, 2002, totaled $62.8 million as compared to $55.2 million for the
same period last year. Net interest income on a tax-equivalent basis for the
third quarter of 2002 totaled $21.4 million as compared to $19.4 million for the
third quarter 2001. The increases in tax-equivalent net interest income for 2002
resulted from growth in average earning assets, primarily investment securities
and loans, coupled with improved net interest margins. Earning assets averaged
$1.735 billion for the nine months ended September 30, 2002, and were $103.3
million above the same period last year. Earning assets averaged $1.755 billion
for the third quarter 2002 and were $65.8 million above the third quarter 2001.
The net interest margin amounted to 4.84 percent for the first nine months of
2002 as compared to 4.52 percent for the same period last year. For the third
quarter 2002, the net interest margin was 4.85 percent, as compared to 4.55
percent for the third quarter 2001. The improved net interest margins for 2002
resulted primarily from the re-pricing of interest-bearing liabilities following
the rapid decrease in interest rates during 2001.
For the nine months ended September 30, 2002, the provision for loan losses
amounted to $1.6 million as compared to $1.4 million for the same period last
year. Net charge offs for the nine months ended September 30, 2002, totaled $633
thousand, which on an annualized basis amounted to .09 percent of average loans
as compared to .18 percent for the first nine months last year. At September 30,
2002, the allowance for loan losses was 1.21 percent of loans and was considered
by Management to be adequate. For the third quarter 2002, the provision for loan
losses was $652 thousand as compared to $539 thousand for the third quarter
2001.
Total noninterest income for the nine months ended September 30, 2002, amounted
to $21.7 million as compared to $20.6 million for the same period last year.
Trust fees for the first nine months of 2002 totaled $4.3 million as compared to
$4.4 million for the same period last year. Lower trust fees for 2002 reflect
lower market values of trust assets as compared to the same period last year.
Service charges on deposit accounts for the nine months ended September 30,
2002, totaled $11.3 million as compared to $10.9 million for the same period
last year. During 2002, the Company has experienced a lower volume of
insufficient funds items as compared to the same period last year which has
limited the growth in deposit service fees. ATM fees, which includes fees earned
on check card transactions, totaled $1.7 million for the first nine months as
compared to $1.4 million for the same period last year. The increase for 2002
reflects the Company's focus to increase the cardholder base and usage of check
cards. For the nine months ended September 30, 2002, real estate mortgage fees
totaled $1.3 million as compared to $1.2 million for the same period last year.
The increase represents a modest growth in the volume of new loan and refinance
transactions during 2002 when compared to the same period last year. Other
noninterest income for the first nine months of 2002 totaled $3.0 million as
compared to $2.5 million for the nine months ended September 30, 2001. Other
noninterest income for 2002 includes $529 thousand, which represents check
printing fees that, in periods prior to 2002, were recorded as a reduction in
printing and supplies expense. This change in classification for check printing
fees was made in response to a change in bank regulatory financial reporting
guidelines.
-10-
Total noninterest income for the third quarter 2002 amounted to $7.5 million as
compared to $6.8 million for the same period last year. The higher noninterest
income for the third quarter 2002 resulted primarily from: (i) an increase of
$258 thousand in service charges on deposit accounts; (ii) $168 thousand in
check printing fees (classified as a reduction in printing and supplies in prior
years); and (iii) an increase of $131 thousand in ATM fees.
Noninterest expense for the nine months ended September 30, 2002, totaled $43.8
million as compared to $40.7 million for the same period last year. Salaries and
employee benefits expense for first nine months of 2002 totaled $23.6 million,
which was $2.5 million above the same period last year. Salary increases and
higher profit sharing and pension expense, coupled with an increase in number of
employees, were factors contributing to higher salaries and benefits for 2002.
Combined occupancy and equipment expense for the first nine months of 2002
totaled $6.6 million, which was $362 thousand above the combined amounts for the
same period last year. When compared the same period last year, the higher
occupancy and equipment expense for the first nine months of 2002 resulted
primarily from higher depreciation expense. Printing and supplies expense for
the first nine months of 2002 totaled $1.1 million and was $333 thousand above
the same period last year. The increase for 2002 was due to $529 thousand in
checking printing fees included in noninterest income in 2002 versus as a
reduction in expense for prior years. As compared to the same period last year,
intangible asset amortization expense for the nine months ended September 30,
2002, was down $1.1 million due to a change in accounting principles which was
effective January 1, 2002. Other noninterest expense for the first nine months
of 2002 totaled $11.3 million as compared to $10.3 million for the same period
last year. The 2002 total reflects: (i) an increase of $213 thousand in ATM
expense; (ii) an increase of $118 thousand in examination and audit fees; and
(iii) an increase of $140 thousand in operational losses. Noninterest expense
for the third quarter 2002 totaled $14.9 million as compared to $14.0 million
for the third quarter 2001. When compared to the third quarter last year, third
quarter 2002 variances in noninterest expense track closely to the year-to-date
increases previously highlighted. The Company's efficiency ratio for the first
nine months of 2002 reflected improvement at 51.90 percent as compared to 53.74
percent for the same period last year.
Balance Sheet Review
- --------------------
Total assets at September 30, 2002, totaled $1.953 billion as compared to $1.930
billion at December 31, 2001, and $1.861 billion at September 30, 2001. The
balance sheets presented reflect normal recurring adjustments and accruals.
Loans at September 30, 2002, totaled $950 million as compared to $940 million at
year-end 2001 and $936 million at September 30, 2001. As compared to year-end
2001 amounts, loans at September 30, 2002, reflect (i) a $500 thousand increase
in commercial loans; (ii) an $18.6 million increase in real estate loans; and
(iii) a $9.1 million decrease in agricultural loans. Investment securities at
September 30, 2002, totaled $771 million as compared to $722 million at year-end
2001 and $715 million at September 30, 2001. The net unrealized gain in the
investment portfolio at September 30, 2002, amounted to $35.6 million and had an
overall yield of 5.70 percent. At September 30, 2002, the Company did not hold
any structured notes or CMOs that entail higher risks than standard
mortgage-backed securities. Total deposits at September 30, 2002, amounted to
$1.673 billion as compared to $1.685 billion at year-end 2001 and $1.606 billion
at September 30, 2001. As compared to year-end 2001 amounts, noninterest-bearing
demand deposits increased $30.1 million and interest-bearing deposits decreased
$42.8 million which reflects the Company's continued strategy not to match
higher rates on certain interest-bearing deposit products.
Nonperforming assets at September 30, 2002, totaled $5.4 million as compared to
$4.8 million at December 31, 2001. The increase resulted primarily from a $561
thousand increase in nonaccrual loans. At .57 percent of loans plus foreclosed
assets, Management considers nonperforming assets to be at a manageable level
and is unaware of any material classified credit not properly disclosed as
nonperforming.
-11-
Liquidity and Capital
- ---------------------
The Company's consolidated statements of cash flows are presented on page 8 of
this report. At September 30, 2002, the parent company had no debt outstanding
under its $25 million line of credit with an unaffiliated financial institution.
Total equity capital amounted to $237.9 million at September 30, 2002, which was
up from $213.7 million at year-end 2001 and $213.4 million at September 30,
2001. The Company's risk-based capital and leverage ratios at September 30,
2002, were 18.51 percent and 10.51 percent, respectively. The third quarter 2002
cash dividend of $0.35 per share totaled $4.3 million and represented 49.7
percent of third quarter earnings. On October 22, 2002, the Company declared a
$0.35 per share cash dividend payable January 2, 2003.
Interest Rate Risk
- ------------------
Interest rate risk results when the maturity or re-pricing intervals of
interest-earning assets and interest-bearing liabilities are different. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of selecting the types and terms of interest-earning assets
and interest-bearing liabilities which generate favorable earnings, while
limiting the potential negative effects of changes in market interest rates. The
Company uses no off-balance-sheet financial instruments to manage interest rate
risk. Each subsidiary bank has an asset/liability committee, which monitors
interest rate risk and compliance with investment policies. Interest-sensitivity
gap and simulation analysis are among the ways that the subsidiary banks track
interest rate risk. As of September 30, 2002, Management estimates that, over
the next 12 months, an upward shift of interest rates by 150 basis points would
result in an increase of projected net interest income of 3.9 percent and a
downward shift of interest rates by 150 basis points would result in a reduction
in projected net interest income of 6.8 percent. These are good faith estimates
and assume that the composition of our interest sensitive assets and liabilities
existing at September 30, 2002, will remain constant over the relevant 12-month
measurement period and that changes in market interest rates are instantaneous
and sustained across the yield curve regardless of duration of pricing
characteristics of specific assets or liabilities. Also, this analysis does not
contemplate any actions that we might undertake in response to changes in market
interest rates. In Management's belief, these estimates are not necessarily
indicative of what actually could occur in the event of immediate interest rate
increases or decreases of this magnitude. As interest-bearing assets and
liabilities re-price at different time frames and proportions to market interest
rate movements, various assumptions must be made based on historical
relationships of these variables in reaching any conclusion. Since these
correlations are based on competitive and market conditions, our future results
would, in Management's belief, be different from the foregoing estimates, and
such results could be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management considers interest rate risk to be a significant market risk for the
Company. See "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" for disclosure regarding this market risk.
Item 4. Controls and Procedures
The Chairman and Chief Executive Officer and the Chief Financial Officer of
First Finanical (its principal executive officer and principal financial
officer, respectively) have concluded, based on their evaluation as of a date
within 90 days prior to the date of the filing of this Report, that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by First Financial in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and include controls and procedures designed to
-12-
ensure that information required to be disclosed by First Financial in such
reports is accumulated and communicated to the Company's management, including
the Chairman and Chief Executive Officer and the Chief Financial Officer of
First Financial, as appropriate to allow timely decisions regarding required
disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date: November 13, 2002 By:/S/ F. Scott Dueser
----------------- -------------------
F. Scott Dueser
President and Chief Executive Officer
Date: November 13, 2002 By:/S/ Curtis R. Harvey
----------------- --------------------
Curtis R. Harvey
Executive Vice President and
Chief Financial Officer
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PART II
OTHER INFORMATION
Item 6. Exhibits
The following exhibits are filed as part of this report:
99.1 Certification of Chief Executive Officer of First Financial Bankshares,Inc.
99.2 Certification of Chief Financial Officer of First Financial Bankshares,Inc.
99.3 Certification of Chief Executive Officer of First Financial Bankshares,
Inc. - (ref. - Sec.906-Sarbanes-Oxley Act of 2002)
99.4 Certification of Chief Financial Officer of First Financial Bankshares,
Inc. - (ref. - Sec.906-Sarbanes-Oxley Act of 2002)
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Exhibit 99.1
------------
Certification of
Chief Executive Officer
of First Financial Bankshares, Inc.
I, F. Scott Deuser, Chairman and Chief Executive Officer of First Financial
Bankshares, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Financial
Bankshares, Inc, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/S/ F. Scott Dueser
-------------------
Name: F. Scott Dueser
Title: Chief Executive Officer
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Exhibit 99.2
------------
Certification of
Chief Financial Officer
of First Financial Bankshares, Inc.
I, Curtis R. Harvey, Chief Financial Officer of First Financial Bankshares,Inc.,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Financial
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/S/ Curtis R. Harvey
--------------------
Name: Curtis R. Harvey
Title: Chief Financial Officer
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Exhibit 99.3
------------
Certification of
Chief Executive Officer
of First Financial Bankshares, Inc.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for
the quarter ended September 30, 2002 of First Financial Bankshares, Inc. (the
"Issuer"').
I, F. Scott Dueser, the President and Chief Executive Officer of the Issuer
certify that:
1. the Form 10-Q fully complies with the requirements of section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d); and
2. the information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Issuer.
Date: November 13, 2002
/S/ F. Scott Dueser
-------------------
Name: F. Scott Dueser
Title: Chief Executive Officer
Subscribed and sworn to before me this 13th day of November, 2002.
/S/ Gaila N. Kilpatrick
- -----------------------
Name: Gaila N. Kilpatrick
Title: Notary Public
My commission expires: April 15, 2005
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Exhibit 99.4
------------
Certification of
Chief Financial Officer
of First Financial Bankshares, Inc.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for
the quarter ended September 30, 2002 of First Financial Bankshares, Inc. (the
"Issuer").
I, Curtis R. Harvey, the Executive Vice President and Chief Financial Officer of
the Issuer certify that:
1. the Form 10-Q fully complies with the requirements of section 13(a) or
section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or
78o(d); and
2. the information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Issuer.
Date: November 13, 2002
/S/ Curtis R. Harvey
--------------------
Name: Curtis R. Harvey
Title: Chief Financial Officer
Subscribed and sworn to before me this 13th day of November, 2002.
/S/ Gaila N. Kilpatrick
- -----------------------
Name: Gaila N. Kilpatrick
Title: Notary Public
My commission expires: April 15, 2005
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