UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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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)
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 by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of The Exchange Act). Yes X No .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 1, 2003:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, $10.00 par value 15,464,598
per share
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item Page
---- ----
Forward-Looking Statement Disclaimer 3
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 13
4. Controls and Procedures 13
PART II
OTHER INFORMATION
4. Submission of Matter to Vote of Security Holders 15
6. Exhibits and Reports on Form 8-K 15
Signatures 17
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. When used in this Form 10-Q, 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 acquisitions and integration of acquired businesses; and
o other factors described in "PART I, Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Such statements reflect the current views of our management with respect to
future events and are subject to these and other risks, uncertainties and
assumptions relating to our operations, results of operations, growth strategy
and liquidity. All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by this paragraph.
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. at March 31,
2003 and 2002, and December 31, 2002, and the consolidated statements of
earnings and comprehensive earnings for the three months ended March 31, 2003
and 2002, changes in shareholders' equity for the year ended December 31, 2002
and three months ended March 31, 2003, and cash flows for the three months ended
March 31, 2003 and 2002, follow on pages 4 through 8.
On April 22, 2003, the Company's Board of Directors declared a five for four
stock split in the form of a 25% stock dividend for shareholders of record on
May 16, 2003. All per share amounts in this report have been restated to reflect
this stock split. An amount equal to the par value of the additional common
shares issued pursuant to the stock split was reflected as a transfer from
retained earnings to common stock in the consolidated financial statements as of
and for the three months ended March 31, 2003.
3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
----------------------------------------------- December 31,
2003 2002 2002
------------------- ------------------- -------------------
(Unaudited)
ASSETS
Cash and due from banks $ 91,461,122 $ 72,697,896 $ 108,436,645
Federal funds sold 17,875,000 66,600,000 70,000,000
------------------- ------------------- -------------------
Cash and cash equivalents 109,336,122 139,297,896 178,436,645
Interest-bearing deposits in banks 4,830,932 3,285,862 2,324,425
Investment securities:
Securities held-to-maturity (market value of $188,678,415,
$277,205,120 and $211,862,151 at March 31, 2003,
March 31, 2002 and December 31, 2002, respectively) 178,714,336 260,525,944 200,449,784
Securities available-for-sale, at fair value 671,593,468 460,889,588 571,806,629
------------------- ------------------- -------------------
Total investment securities 850,307,804 721,415,532 772,256,413
Loans 955,650,393 940,581,045 964,039,773
Less: Allowance for loan losses 11,363,556 10,858,537 11,218,729
------------------- ------------------- -------------------
Net loans 944,286,837 929,722,508 952,821,044
Bank premises and equipment, net 41,084,401 41,999,675 40,605,401
Goodwill and intangible assets 24,836,999 24,678,180 24,870,788
Other assets 21,721,426 24,684,706 21,868,220
------------------- ------------------- -------------------
TOTAL ASSETS $ 1,996,404,521 $ 1,885,084,359 $ 1,993,182,936
=================== =================== ===================
LIABILITIES
Noninterest-bearing deposits $ 431,520,958 $ 379,903,568 $ 425,473,353
Interest-bearing deposits 1,291,883,993 1,250,010,924 1,286,088,863
------------------- ------------------- -------------------
Total deposits 1,723,404,951 1,629,914,492 1,711,562,216
Dividends payable 4,328,601 3,703,567 4,327,374
Securities sold under agreements to repurchase 12,489,786 23,366,804 26,708,994
Other liabilities 15,983,244 10,881,975 11,816,707
------------------- ------------------- -------------------
Total liabilities 1,756,206,582 1,667,866,838 1,754,415,291
------------------- ------------------- -------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $10 par value; authorized 20,000,000 shares;
15,459,289, 12,345,224 and 12,364,201 shares
issued and outstanding at March 31, 2003, March 31, 2002
and December 31, 2002, respectively 154,592,890 123,452,240 123,642,010
Capital surplus 58,103,956 57,885,885 58,087,687
Retained earnings 18,849,930 32,850,441 45,647,522
Accumulated other comprehensive income 8,651,163 3,028,955 11,390,426
------------------- ------------------- -------------------
Total shareholders' equity 240,197,939 217,217,521 238,767,645
------------------- ------------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,996,404,521 $ 1,885,084,359 $ 1,993,182,936
=================== =================== ===================
See notes to consolidated financial statements.
4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended March 31,
--------------------------------------
2003 2002
----------------- -----------------
INTEREST INCOME
Interest and fees on loans $ 15,023,065 $ 16,516,013
Interest on investment securities:
Taxable 7,678,820 7,967,321
Exempt from federal income tax 1,745,746 1,730,944
Interest on federal funds sold and
interest-bearing deposits in banks 141,695 258,410
----------------- -----------------
Total interest income 24,589,326 26,472,688
INTEREST EXPENSE
Interest-bearing deposits 4,650,611 6,985,166
Other 67,728 87,300
----------------- -----------------
Total interest expense 4,718,339 7,072,466
----------------- -----------------
NET INTEREST INCOME 19,870,987 19,400,222
Provision for loan losses 510,501 398,500
----------------- -----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,360,486 19,001,722
NONINTEREST INCOME
Trust department income 1,433,806 1,424,070
Service fees on deposit accounts 3,807,820 3,556,860
ATM fees 665,656 511,003
Real estate mortgage fees 684,363 422,029
Other 1,243,812 1,010,943
----------------- -----------------
Total noninterest income 7,835,457 6,924,905
NONINTEREST EXPENSE
Salaries and employee benefits 8,221,387 7,839,410
Net occupancy expense 942,580 954,185
Equipment expense 1,187,966 1,184,888
Printing, stationery and supplies 346,025 377,051
Correspondent bank service charges 395,055 362,992
Amortization of intangible assets 33,789 33,789
Other expenses 3,985,749 3,482,005
----------------- -----------------
Total noninterest expense 15,112,551 14,234,320
----------------- -----------------
EARNINGS BEFORE INCOME TAXES 12,083,392 11,692,307
Income tax expense 3,633,803 3,513,651
----------------- -----------------
NET EARNINGS $ 8,449,589 $ 8,178,656
================= =================
EARNINGS PER SHARE, BASIC $ 0.55 $ 0.53
================= =================
EARNINGS PER SHARE, ASSUMING DILUTION $ 0.54 $ 0.53
================= =================
DIVIDENDS PER SHARE $ 0.28 $ 0.24
================= =================
See notes to consolidated financial statements.
5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended March 31,
------------------------------------
2003 2002
----------------- -----------------
NET EARNINGS $ 8,449,589 $ 8,178,656
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized gain on
investment securities available-for-sale (4,214,251) (1,681,729)
Income tax benefit related to other
items of comprehensive earnings 1,474,988 588,605
----------------- -----------------
COMPREHENSIVE EARNINGS $ 5,710,326 $ 7,085,532
================= =================
See notes to consolidated financial statements.
6
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other Comprehensive Income
--------------------------
Common Stock Unrealized Gain Minimum Total
------------------------ Capital Retained on Securities Pension Shareholders'
Shares Amount Surplus Earnings Available-for-sale Liability Equity
---------- ------------- ------------ ------------ ------------ ------------ -------------
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 - - - 33,952,550 - - 33,952,550
Stock issuances 30,949 309,490 263,626 - - - 573,116
Cash dividends declared,
$1.08 per restated share - - - (16,680,381) - - (16,680,381)
Minimum liability pension adjustment,
net of related income taxes - - - - - (1,440,283) (1,440,283)
Change in unrealized gain in
investment securities available-
for-sale,net of related income taxes - - - - 8,708,630 - 8,708,630
---------- ------------- ------------ ------------ ------------ ------------ -------------
Balances at December 31, 2002 12,364,201 123,642,010 58,087,687 45,647,522 12,830,709 (1,440,283) 238,767,645
Net earnings - - - 8,449,589 - - 8,449,589
Stock issuances 3,230 32,300 16,269 - - - 48,569
Cash dividends declared,
$0.28 per restated share - - - (4,328,601) - - (4,328,601)
Change in unrealized gain in
investment securities available-
for-sale, net of related income taxes - - - - (2,739,263) - (2,739,263)
Five for four stock split in the
form of a 25% stock dividend 3,091,858 30,918,580 - (30,918,580) - - -
---------- ------------- ------------ ------------ ------------ ------------ -------------
Balances at March 31, 2003 (unaudited) 15,459,289 $ 154,592,890 $ 58,103,956 $ 18,849,930 $ 10,091,446 $ (1,440,283) $ 240,197,939
========== ============= ============ ============ ============ ============ =============
See notes to consolidated financial statements.
7
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Three Months Ended March 31,
-------------------------------------
2003 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 8,449,589 $ 8,178,656
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,053,539 1,076,739
Provision for loan losses 510,501 398,500
Premium amortization, net of discount accretion 1,101,460 1,227,432
(Gain) loss on sale of assets (4,488) 4,500
Deferred federal income tax benefit (128,602) (98,232)
Decrease (increase) in other assets 2,452,801 (1,880,620)
Increase in other liabilities 4,295,139 3,551,499
----------------- -----------------
Total adjustments 9,280,350 4,279,818
----------------- -----------------
Net cash provided by operating activities 17,729,939 12,458,474
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-bearing deposits in banks (2,506,507) (1,911,577)
Activity in available-for-sale securities:
Maturities 44,314,517 18,880,598
Purchases (149,554,799) (50,399,939)
Activity in held-to-maturity securities:
Maturities 23,373,180 33,404,765
Purchases (1,500,000) (1,494,822)
Net decrease (increase) in loans 7,177,902 (487,821)
Capital expenditures (1,544,904) (1,065,755)
Proceeds from sale of assets 65,427 35,561
----------------- -----------------
Net cash used in investing activities (80,175,184) (3,038,990)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 6,047,605 (9,503,098)
Net increase (decrease) in interest-bearing deposits 5,795,130 (45,745,008)
Net (decrease) increase in securities sold under agreements to repurchase (14,219,208) 3,519,737
Proceeds from stock issuances 48,569 181,544
Dividends paid (4,327,374) (3,699,977)
----------------- -----------------
Net cash used in financing activities (6,655,278) (55,246,802)
----------------- -----------------
Net decrease in cash and cash equivalents (69,100,523) (45,827,318)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 178,436,645 185,125,214
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 109,336,122 $ 139,297,896
================= =================
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS
Interest paid $ 4,860,537 $ 7,937,200
Federal income tax paid - 125,000
Assets acquired through foreclosure 845,804 30,321
Loans to finance the sale of other real estate - 134,952
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 ended March 31, 2003, are not necessarily indicative of the results to be
expected, due to seasonality and other factors, for the year ended December 31,
2003. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted under SEC rules and
regulations.
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
ended March 31, 2003 and 2002, 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 three months ended March 31, 2003 and 2002, were 15,456,529 and 15,425,441
shares, respectively. The weighted average common shares outstanding used in
computing diluted earnings per common share for the three months ended March 31,
2003 and 2002, were 15,512,345 and 15,486,929 shares, respectively. See note 4
below.
Note 3 - Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants using the intrinsic value method
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Had compensation cost for the plan been
determined consistent with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, the Company's net earnings and earnings
per share would have been reduced by insignificant amounts on a pro forma basis
for the three months ended March 31, 2003 and 2002.
Note 4 - Subsequent Events
On April 22, 2003, the Company's Board of Directors declared a five for four
stock split in the form of a 25% stock dividend effective for shareholders of
record on May 16, 2003. All per share amounts in this report have been restated
to reflect this stock split. An amount equal to the par value of the additional
common shares issued pursuant to the stock split was reflected as a transfer
from retained earnings to common stock on the consolidated financial statements
as of and for the three months ended March 31, 2003.
Additionally, on April 22, 2003, the Company's Board of Directors authorized the
repurchase of up to 500,000 shares of common stock (representing approximately
four percent of outstanding shares) over the next three years. The plan
authorizes management to repurchase the stock at such time as repurchases are
considered beneficial to stockholders. Any repurchases of the stock will be
through the open market or in privately-negotiated transactions in accordance
with applicable laws and regulations.
Note 5 - Reclassifications
Certain prior period balances have been reclassified to conform with the current
period presentation.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of operations and financial condition should be read in
conjunction with the financial statements and accompanying footnotes included in
Item 1 of this Form 10-Q as well as those included in the Company's 2002 Annual
Report on Form 10-K. On April 22, 2003, the Company's Board of Directors
declared a five for four stock split in the form of a 25% stock dividend
effective for shareholders of record on May 16, 2003. All per share amounts in
this report have been restated to reflect this stock split.
Critical Accounting Policies
- ----------------------------
The preparation of the Company's consolidated financial statements is based on
the selection of certain accounting policies, based on generally accepted
accounting principles and customary practices in the banking industry. These
policies, in certain areas, require management to make significant estimates and
assumptions. The following discussion addresses the Company's allowance for loan
loss and its provision for loan losses which is deemed by management to be its
most critical accounting policy. We have other key accounting policies and
continue to evaluate the materiality of their impact on our consolidated
financial statements, but we believe that these other policies either do not
generally require us to make estimates and judgments that are difficult or
subjective, or it is less likely that they would have a material impact on our
reported results for a given period.
A policy is deemed critical if (i) the accounting estimate required the Company
to make assumptions about matters that are highly uncertain at the time the
accounting estimate was made; and (ii) different estimates that reasonably could
have been used in the current period, or changes in the accounting estimate that
are reasonably likely to occur from period to period, would have a material
impact on the financial statements.
The allowance for loan losses is an amount that management believes will be
adequate to absorb inherent estimated losses on existing loans in which
collectibility is unlikely based upon management's review and evaluation of the
loan portfolio, including letters of credit, lines of credit and unused
commitments to provide financing. The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance is based on
general economic conditions, the financial condition of the borrower, the value
and liquidity of collateral, delinquency, prior loan loss experience, and the
results of periodic reviews of the portfolio by our loan review department and
regulatory examiners. A consistent, well documented loan review methodology has
been developed that includes allowances assigned to specific loans and
nonspecific allowances that are based on the factors noted in the prior
sentence. Our independent loan review department is responsible for performing
this evaluation for all of our subsidiary banks to ensure consistent
methodology.
Although we believe that we use the best information available to make loan loss
allowance determinations, future adjustments could be necessary if circumstances
or economic conditions differ substantially from the assumptions used in making
our initial determinations. A downturn in the economy and employment could
result in increased levels of non-performing assets and charge-offs, increased
loan loss provisions and reductions in income. Additionally, as an integral part
of their examination process, bank regulatory agencies periodically review our
allowance for loan losses. The banking agencies could require the recognition of
additions to the loan loss allowance based on their judgment of information
available to them at the time of their examination.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
10
The Company's policy requires measurement of the allowance for an impaired
collateral dependent loan based on the fair value of the collateral. Other loan
impairments are measured based on the present value of expected future cash
flows or the loan's observable market price.
Operating Results
- -----------------
Net income for the first quarter of 2003 totaled $8.5 million, an increase of
$271 thousand or 3.3% for the same period last year. The earnings improvement
over prior year, although slight, resulted primarily from increased noninterest
income offset by an increase in noninterest expenses. On a basic earnings per
share basis, earnings amounted to $0.55 per share as compared to $0.53 per share
for the first quarter of 2002. Return on average assets and return on average
equity for the first quarter of 2003 amounted to 1.72% and 14.49%, respectively.
For the same period in 2002, return on average assets and return on average
equity amounted to 1.76% and 15.50%, respectively. The declines in these returns
were primarily a result of the Company's assets and equity growing at a higher
percentage than its earnings.
Tax equivalent net interest income for the first quarter of 2003 amounted to
$20.8 million as compared to $20.3 million for the same period last year. The
increase of $531 thousand was due to increased volumes of earning assets offset
by a decreasing net interest spread. Average earning assets were $1.8 billion
for the first quarter of 2003 which is $101.8 million, or 5.9% greater than the
first quarter of 2002. The Company's yield on those average earning assets
declined to 5.69% for 2003 compared to 6.46% for 2002 as the Company's
experienced lower rates on the reinvestment of its investment securities when
the securities matured or when the Company received increased principal payments
on its collateralized mortgage obligations due to accelerated prepayments of the
underlying mortgages. The Company was able to reprice its interest bearing
liabilities to offset some of the decline in rates on its earning assets. The
Company's rate paid on interest bearing liabilities was 1.45% for the first
quarter of 2003 compared to 2.24% for the comparable period in 2002. The
Company's net interest margin was 4.64% for the first quarter of 2003 compared
to 4.79% for the first quarter of 2002.
The provision for loan losses for the first quarter of 2003 totaled $511
thousand compared to $399 thousand for the same period in 2002. Gross chargeoffs
for quarter ended March 31, 2003 totaled $902 thousand compared to $434 thousand
for 2002. Recoveries of previously charged-off loans totaling $536 thousand in
2003 (as compared to $291 thousand in 2002) offset the increase in chargeoffs
experienced in the first quarter of 2003. On an annualized basis, net chargeoffs
as a percentage of average loans was 0.15% for the first quarter of 2003
compared to 0.06% for the same period in 2002. The Company's allowance for loan
losses totaled $11.4 million at March 31, 2003 compared to $10.9 million at
March 31, 2002. As a percentage of nonperforming loans, the Company's allowance
amounted to 589.3% at March 31, 2003. As of March 31, 2003, management of the
Company believes that the Company's balance in its allowance for loan losses is
adequate to provide for losses existing in its portfolio that are deemed
uncollectible.
Total noninterest income for the first quarter of 2003 was $7.8 million, as
compared to $6.9 million for the same period last year. Trust fees totaled $1.4
million for 2003, relatively flat from the previous year. The lack of increase
in trust fees is primarily a result of the depressed equity markets and
resulting declining volumes. As certain trust fees are based on a percentage of
the market value of trust assets, the lower market valuations have resulted in
lower trust fees. Service fees on deposits increased 7.1% to $3.8 million due to
increased number of accounts and transaction volumes. ATM fees totaled $666
thousand for the first quarter of 2003 compared to $511 thousand for the first
quarter of 2002 due to the large growth in debit cards and increased volume and
an increase in fees charged for non-Company customer usage. Real estate mortgage
fees increased 62.2% in 2003 over the same period in 2002 due to the low
interest rate environment and high level of refinance. The Company believes the
level of real estate fees may level off later in 2003.
Noninterest expense for the first quarter of 2003 amounted to $15.1 million
compared to $14.2 million for the same period in 2002, an increase of 6.2%.
Salaries and benefits expense, the Company's largest noninterest expense item,
increased 4.9% to $8.2 million in 2003 due to salary increases and the increased
cost of employee benefits. Net occupancy expense and equipment expense were
relatively flat in the first quarter of 2003 compared to the first quarter of
2002.
11
Increased costs in legal and professional and public relations were the primary
cause for the increase in other expenses in 2003 over 2002. The Company also
experienced $187 thousand in losses from check fraud compared to $93 thousand in
the prior year quarter. The Company's key indicator of operating efficiency,
which measures the amount of funds expended to generate revenues (both interest
and noninterest) and which the Company strives to decrease indicating a more
efficiently run company, deteriorated only slightly from 52.31% for the first
quarter of 2002 to 52.77% for the first quarter of 2003. This ratio is
calculated by dividing noninterest expense by net interest income (on a tax
equivalent basis) plus noninterest income.
Balance Sheet Review
- --------------------
Total assets at March 31, 2003, amounted to $1.996 billion as compared to $1.993
billion at December 31, 2002, and $1.885 billion at March 31, 2002. Although
loans and deposits remained relatively stable at March 31, 2003 compared to
December 31, 2002, the Company shifted cash and due from banks and federal funds
sold totaling approximately $70 million to higher yielding investment
securities.
Loans at March 31, 2003, totaled $956 million as compared to $964 million at
year-end 2002 and $941 million at March 31, 2002. As compared to year-end 2002
amounts, loans at March 31, 2003, reflect (i) a $5.6 million decrease in
commercial, financial and agricultural loans; (ii) a $6.7 million decrease in
real estate loans; and (iii) a $3.8 million increase in consumer loans. Compared
to March 31, 2002, loans at March 31, 2003, reflect; (i) a $700 thousand
decrease in commercial, financial and agricultural loans; (ii) a $21.4 million
increase in real estate loans; and (iii) a $5.7 million decrease in consumer
loans. Investment securities at March 31, 2003, totaled $850 million as compared
to $772 million at year-end 2002 and $721 million at March 31, 2002. The net
unrealized gain in the investment portfolio at March 31, 2003, amounted to $25.5
million and had an overall tax equivalent yield of 5.15%. At March 31, 2003, the
Company did not hold any structured notes and management does not believe that
their collateralized mortgage obligations have an interest, credit or other risk
greater than their other investments. Total deposits at March 31, 2003, amounted
to $1.723 billion as compared to $1.712 billion at year-end 2002 and $1.630
billion at March 31, 2002. The slight increase in deposits at March 31, 2003
when compared to year end 2002 represents the continued movement of funds away
from the equity funds to a safer banking environment.
Nonperforming assets at March 31, 2003, totaled $3.3 million as compared to $4.3
million at December 31, 2002. The decrease resulted primarily from the
collection of two loans previously included in nonperforming loans and the
charge-off of a previously nonperforming loan. At 0.34% 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.
Liquidity and Capital
- ---------------------
Liquidity is our ability to meet cash demands as they arise. Such needs can
develop from loan demand, deposit withdrawals or acquisition opportunities.
Potential obligations resulting from the issuance of standby letters of credit
and commitments to fund future borrowings to our loan customers are other
factors affecting our liquidity needs. Many of these obligations and commitments
are expected to expire without being drawn upon; therefore the total commitment
amounts do not necessarily represent future cash requirements affecting our
liquidity position. The potential need for liquidity arising from these types of
financial instruments is represented by the contractual notional amount of the
instrument. Asset liquidity is provided by cash and assets, which are readily
marketable or which will mature in the near future. Liquid assets include cash,
federal funds sold, and short-term investments in time deposits in banks.
Liquidity is also provided by access to funding sources, which include core
depositors and correspondent banks that maintain accounts with and sell federal
funds to our subsidiary banks. Other sources of funds include our ability to
sell securities under agreement to repurchase, and an unfunded $25.0 million
line of credit established with a nonaffiliated bank which matures on June 30,
2003. We believe the line of credit will be renewed upon maturity.
12
Given the strong core deposit base and relatively low loan to deposit ratios
maintained at the subsidiary banks, management considers the current liquidity
position to be adequate to meet short- and long-term liquidity needs.
In addition, we anticipate that any future acquisition of financial institutions
and expansion of branch locations could also place a demand on our cash
resources. Available cash at our parent company, available dividends from
subsidiary banks, utilization of available lines of credit, and future debt or
equity offerings are expected to be the source of funding for these potential
acquisitions or expansions.
The Company's consolidated statements of cash flows are presented on page 8 of
this report. Total equity capital amounted to $240.2 million at March 31, 2003,
which was up from $238.8 million at year-end 2002 and $217.2 million at March
31, 2002. The Company's risk-based capital and leverage ratios at March 31,
2003, were 20.40% and 10.35%, respectively. The first quarter 2003 cash dividend
of $0.28 per share totaled $4.3 million and represented 51.23% of first quarter
earnings.
Interest Rate Risk
- ------------------
Interest rate risk results when the maturity or repricing 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. The Company and 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 March 31, 2003, management
estimates that, over the next twelve months, an upward shift of interest rates
by 150 basis points would result in an increase of projected net interest income
of 4.25% and a downward shift of interest rates by 150 basis points would result
in a reduction in projected net interest income of 6.50%. These are good faith
estimates and assume that the composition of our interest sensitive assets and
liabilities existing at March 31, 2003, will remain constant over the relevant
twelve month measurement period and that changes in market interest rates are
instantaneous and sustained across the yield curve regardless of duration of
pricing characteristics of specific assets or liabilities. Also, this analysis
does not contemplate any actions that we might undertake in response to changes
in market interest rates. In management's belief, these estimates are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. As interest-bearing
assets and liabilities reprice at different time frames and proportions to
market interest rate movements, various assumptions must be made based on
historical relationships of these variables in reaching any conclusion. Since
these correlations are based on competitive and market conditions, our future
results would, in management's belief, be different from the foregoing
estimates, and such 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
Within 90 days prior to the filing date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Securities Exchange Act Rule 15d-15. Our management,
including the principal executive officer and principal financial officer, does
not expect that our disclosure controls and procedures will prevent all errors
and all fraud.
13
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. Our principal executive officer and principal financial officer
have concluded, based on our evaluation of our disclosure controls and
procedures, that our disclosure controls and procedures under Rule 13a-14(c) and
Rule 15d-14(c) of the Securities Exchange Act of 1934 are effective.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal
controls.
14
PART II
OTHER INFORMATION
Item 4. Submission of Matter to a Vote of Security Holders
On April 22, 2003, the annual meeting of shareholders was held in Abilene,
Texas. The following directors were elected at this meeting and the respective
number of votes cast for and withheld:
Votes Votes
Director For Withheld
-------- --- --------
Joseph E. Canon 9,839,252 34,529
Mac A. Coalson 9,530,525 343,256
David Copeland 9,802,984 70,797
F. Scott Dueser 9,457,170 416,611
Derrell E. Johnson 9,839,377 34,404
Kade L. Matthews 9,839,377 34,404
Raymond A. McDaniel, Jr. 9,806,745 67,036
Bynum Miers 9,806,945 66,836
Kenneth T. Murphy 9,443,218 430,563
James M. Parker 9,463,274 410,507
Jack D. Ramsey, M.D. 9,838,277 35,504
Dian Graves Stai 9,826,777 47,004
F.L. Stephens 9,839,377 34,404
Johnny E. Trotter 9,839,377 34,404
There were no votes against, abstentions or broker non-votes. There were no
other matters voted upon at the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report:
3.1 Articles of Incorporation, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 1 of the Registrant's Amendment No.
2 to Form 8-A filed on Form 8-A/A No. 2 on November 21, 1995).
3.2 Amended and Restated Bylaws, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 2 of the Registrant's Amendment No.
1 to Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994).
4.1 Specimen certificate of First Financial Common Stock (incorporated by
reference from Exhibit 3 of the Registrant's Amendment No. 1 to Form 8-A
filed on Form 8-A/A No. 1 on January 7, 1994).
10.1 Deferred Compensation Agreement, dated October 28, 1992, between the
Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit
10.1 of the Registrant's Form 10-K Annual Report for the year ended
December 31, 2002).
10.2 Revised Deferred Compensation Agreement, dated December 28, 1995, between
the Registrant and Kenneth T. Murphy (incorporated by reference from
Exhibit 10.2 of the Registrant's Form 10-K Annual Report for the year ended
December 31, 2002).
10.3 Executive Recognition Plan (incorporated by reference from Exhibit 10.3 of
the Registrant's Form 10-K Annual Report for the year ended December 31,
2002).
10.4 Form of Executive Recognition Agreement (incorporated by reference from
Exhibit 10.4 of the Registrant's Form 10-K Annual Report for the year ended
December 31, 2002).
15
10.5 1992 Incentive Stock Option Plan (incorporated by reference from Exhibit
10.5 of the Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1998).
10.6 2002 Incentive Stock Option Plan (incorporated by reference from Appendix A
of the Registrant's Schedule 14a Definitive Proxy Statement for the 2002
Annual Meeting of Shareholders).
10.7 Consulting Agreement dated January 1, 2003 between the Registrant and
Kenneth T. Murphy (incorporated by reference from Exhibit 10.7 of the
Registrant's Form 10-K Annual Report for the year ended December 31, 2002).
16.1 Letter regarding Change in Certifying Accountant (incorporated by reference
from Exhibit 16.1 of the Registrant's Form 8-K filed on March 25, 2002).
21.1 Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1
of the Registrant's Form 10-K Annual Report for the year ended December 31,
2002).
99.1 Certification of Chief Executive Officer of First Financial Bankshares,
Inc. (ref. - Sec.906-Sarbanes-Oxley Act of 2002)
99.2 Certification of Chief Financial Officer of First Financial Bankshares,
Inc. (ref. - Sec.906-Sarbanes-Oxley Act of 2002)
(b) No Form 8-K was filed by the Company during the quarter ended March 31,
2003.
16
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: May 13, 2003 By:/S/F. Scott Dueser
------------ ------------------
F. Scott Dueser
President and Chief Executive Officer
Date: May 13, 2003 By:/S/J. Bruce Hildebrand
------------ ----------------------
J. Bruce Hildebrand
Executive Vice President and
Chief Financial Officer
17
Certification of
Chief Executive Officer
of First Financial Bankshares, Inc.
I, F. Scott Deuser, President 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.;
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 the Registrant's Board of Directors:
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: May 13, 2003
/S/ F. Scott Dueser
-------------------
Name: F. Scott Dueser
Title: Chief Executive Officer
18
Certification of
Chief Executive Officer
of First Financial Bankshares, Inc.
I, J. Bruce Hildebrand, 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 the Registrant's Board of Directors:
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: May 13, 2003
/S/ J. Bruce Hildebrand
-----------------------
Name: J. Bruce Hildebrand
Title: Chief Financial Officer
19
Exhibit 99.1
------------
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 March 31, 2003 of First Financial Bankshares, Inc.
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 Company.
Date: May 13, 2003
/S/ F. Scott Dueser
-------------------
Name: F. Scott Dueser
Title: Chief Executive Officer
Subscribed and sworn to before me this 13th day of May, 2003.
/S/ Gaila N. Kilpatrick
- -----------------------
Name: Gaila N. Kilpatrick
Title: Notary Public
My commission expires: April 15, 2005
Exhibit 99.2
------------
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 March 31, 2003 of First Financial Bankshares, Inc.
I, J. Bruce Hildrebrand, 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 Company.
Date: May 13, 2003
/S/ J. Bruce Hildebrand
-----------------------
Name: J. Bruce Hildebrand
Title: Chief Financial Officer
Subscribed and sworn to before me this 13th day of May, 2003.
/S/ Gaila N. Kilpatrick
- -----------------------
Name: Gaila N. Kilpatrick
Title: Notary Public
My commission expires: April 15, 2005