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 June 30, 2005
Commission file number 0-7674
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)
(325) 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 July 29, 2005:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, $10.00 par value
per share 20,699,312
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item Page
---- ----
Forward-Looking Statement Disclaimer 3
1. Consolidated Financial Statements 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
3. Quantitative and Qualitative Disclosures About Market Risk 18
4. Controls and Procedures 18
PART II
OTHER INFORMATION
5. Exhibits 19
Signatures 21
2
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 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 the value of collateral and in loan reserves;
o inflation, interest rate, market and monetary fluctuations;
o changes in consumer spending, borrowing and savings habits;
o our ability to attract deposits;
o consequences of continued bank mergers and acquisitions in our market
area, resulting in fewer but much larger and stronger competitors;
o acquisitions and integration of acquired businesses; 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. We undertake no obligation to publicly update
or otherwise revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. at June 30,
2005 and 2004 and December 31, 2004, and the consolidated statements of earnings
and comprehensive earnings for the three and six months ended June 30, 2005 and
2004, changes in shareholders' equity for the six months ended June 30, 2005 and
the year ended December 31, 2004, and cash flows for the six months ended June
30, 2005 and 2004, follow on pages 5 through 9.
3
On April 26, 2005, the Company's Board of Directors declared a four for three
stock split in the form of a 33% stock dividend effective June 1, 2005. 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 is reflected as a transfer from retained earnings to common
stock in the consolidated financial statements as of and for the three and six
months ended June 30, 2005.
4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
----------------------------------
2005 2004 2004
---------------- --------------- ----------------
ASSETS (Unaudited)
Cash and due from banks $ 90,006,360 $ 82,663,662 $ 94,508,165
Federal funds sold 40,100,000 - 99,750,000
---------------- --------------- ----------------
Cash and cash equivalents 130,106,360 82,663,662 194,258,165
Interest-bearing deposits in banks 642,182 657,177 489,957
Investment securities:
Securities held-to-maturity (market value of $74,823,846,
$114,016,943 and $93,470,201 at June 30, 2005 and 2004
and December 31, 2004, respectively) 72,694,878 109,861,289 90,066,367
Securities available-for-sale, at fair value 908,103,344 794,608,889 764,267,168
---------------- --------------- ----------------
Total investment securities 980,798,222 904,470,178 854,333,535
Loans 1,192,212,166 1,009,796,488 1,164,223,381
Less: Allowance for loan losses (14,323,245) (11,932,080) (13,837,133)
---------------- --------------- ----------------
Net loans 1,177,888,921 997,864,408 1,150,386,248
Bank premises and equipment, net 55,216,190 44,726,782 49,740,268
Intangible assets 54,010,170 24,650,093 40,546,052
Other assets 27,162,648 25,674,102 25,470,206
---------------- --------------- ----------------
TOTAL ASSETS $ 2,425,824,693 $ 2,080,706,402 $ 2,315,224,431
================ =============== ================
LIABILITIES
Noninterest-bearing deposits $ 553,682,430 $ 451,386,916 $ 512,009,366
Interest-bearing deposits 1,540,390,865 1,296,007,123 1,482,302,826
---------------- --------------- ----------------
Total deposits 2,094,073,295 1,747,394,039 1,994,312,192
Dividends payable 5,794,998 5,268,098 5,273,808
Short-term borrowings 38,279,102 66,693,889 35,691,608
Other liabilities 13,666,859 12,048,876 14,401,439
---------------- --------------- ----------------
Total liabilities 2,151,814,254 1,831,404,902 2,049,679,047
---------------- --------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $10 par value; authorized 40,000,000 shares;
20,697,633, 15,494,406 and 15,511,576 shares issued at
June 30, 2005 and 2004 and December 31, 2004, respectively 206,976,330 154,944,060 155,115,760
Capital surplus 58,624,345 58,370,784 58,529,113
Retained earnings 9,688,836 40,468,037 49,834,536
Treasury stock (shares at cost: 140,682, 95,708 and 100,189 at
June 30, 2005 and 2004, and December 31, 2004, respectively) (2,430,529) (2,133,404) (2,289,729)
Deferred compensation 2,430,529 2,133,404 2,289,729
Accumulated other comprehensive income (loss) (1,279,072) (4,481,381) 2,065,975
---------------- --------------- ----------------
Total shareholders' equity 274,010,439 249,301,500 265,545,384
---------------- --------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,425,824,693 $ 2,080,706,402 $ 2,315,224,431
================ =============== ================
See notes to consolidated financial statements.
-5-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 19,720,515 $ 14,207,802 $ 38,436,542 $ 28,226,338
Interest on investment securities:
Taxable 7,850,286 7,202,703 14,846,314 14,781,869
Exempt from federal income tax 2,347,554 2,391,300 4,728,685 4,794,416
Interest on federal funds sold and
interest-bearing deposits in banks 375,793 25,709 816,599 117,686
------------ ------------ ------------ ------------
Total interest income 30,294,148 23,827,514 58,828,140 47,920,309
INTEREST EXPENSE
Interest-bearing deposits 6,172,089 3,458,893 11,615,429 7,033,541
Other 397,045 116,346 630,926 250,669
------------ ------------ ------------ ------------
Total interest expense 6,569,134 3,575,239 12,246,355 7,284,210
------------ ------------ ------------ ------------
NET INTEREST INCOME 23,725,014 20,252,275 46,581,785 40,636,099
Provision for loan losses 323,275 308,250 733,442 486,250
------------ ------------ ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 23,401,739 19,944,025 45,848,343 40,149,849
NONINTEREST INCOME
Trust department income 1,709,077 1,513,651 3,423,886 3,089,172
Service fees on deposit accounts 5,387,971 5,001,504 10,405,883 9,272,151
ATM and credit card fees 1,224,042 951,019 2,347,461 1,826,077
Real estate mortgage fees 510,014 551,162 922,185 974,789
Net gain on sale of securities 142,878 - 183,684 18,426
Net gain on sale of student loans 349,491 637,790 1,658,714 2,429,648
Net gain on sale of PULSE
ownership rights 513,276 - 3,492,861 -
Other 701,790 698,010 1,454,399 1,645,586
------------ ------------ ------------ ------------
Total noninterest income 10,538,539 9,353,136 23,889,073 19,255,849
NONINTEREST EXPENSE
Salaries and employee benefits 10,112,843 8,873,074 19,991,624 17,663,602
Net occupancy expense 1,257,295 1,043,676 2,412,604 2,042,214
Equipment expense 1,487,141 1,421,798 2,972,879 2,836,911
Printing, stationery & supplies 495,103 425,843 1,016,189 839,649
Correspondent bank service charges 362,878 398,118 745,887 781,774
Amortization of intangible assets 176,118 33,789 278,783 67,578
Other expenses 4,970,052 4,301,783 9,985,145 8,155,905
------------ ------------ ------------ ------------
Total noninterest expense 18,861,430 16,498,081 37,403,111 32,387,633
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES 15,078,848 12,799,080 32,334,305 27,018,065
Income tax expense 4,474,882 3,631,567 9,654,337 7,757,634
------------ ------------ ------------ ------------
NET EARNINGS $ 10,603,966 $ 9,167,513 $ 22,679,968 $ 19,260,431
============ ============ ============ ============
EARNINGS PER SHARE, BASIC $ 0.51 $ 0.44 $ 1.10 $ 0.93
============ ============ ============ ============
EARNINGS PER SHARE, ASSUMING DILUTION $ 0.51 $ 0.44 $ 1.09 $ 0.93
============ ============ ============ ============
DIVIDENDS PER SHARE $ 0.28 $ 0.26 $ 0.54 $ 0.49
============ ============ ============ ============
See notes to consolidated financial statements.
-6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ --------------------------------
2005 2004 2005 2004
------------- ------------- ------------- --------------
NET EARNINGS $ 10,603,966 $ 9,167,513 $ 22,679,968 $ 19,260,431
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized gain (loss) on
investment securities available-for-sale 4,036,643 (27,893,832) (4,962,542) (17,876,503)
Reclassification adjustment for realized
gains on investment securities
included in net earnings, before income tax (142,878) - (183,684) (18,426)
------------- ------------- ------------- --------------
Total other items of comprehensive
earnings (losses) 3,893,765 (27,893,832) (5,146,226) (17,894,929)
Income tax (expense) benefit related to other
items of comprehensive earnings (1,362,818) 9,762,841 1,801,179 6,263,225
------------- ------------- ------------- --------------
COMPREHENSIVE EARNINGS $ 13,134,913 $ (8,963,478) $ 19,334,921 $ 7,628,727
============= ============= ============= ==============
See notes to consolidated financial statements.
-7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
UNAUDITED
Accumulated
Common Stock Treasury Stock Other Total
----------------------- Capital Retained --------------------- Deferred Comprehensive Shareholders'
Shares Amount Surplus Earnings Shares Amounts Compensation Earnings Equity
(Losses)
---------- ------------ ----------- ------------ -------- ----------- ---------- ----------- ------------
Balances at
December 31, 2003 15,480,679 $154,806,790 $58,253,180 $ 31,276,464 (90,918) $(1,934,604) $1,934,604 $ 7,150,323 $251,486,757
Net earnings - - - 39,171,239 - - - - 39,171,239
Stock issuances 30,897 308,970 275,933 - - - - - 584,903
Cash dividends
declared, $1.00
per share - - - (20,613,167) - - - - (20,613,167)
Minimum liability
pensions adjustment,
net of related
income taxes - - - - - - - (1,042,630) (1,042,630)
Change in unrealized
gain in investment
securities available-
for-sale, net of
related income taxes - - - - - - - (4,041,718) (4,041,718)
Shares purchased in
connection with
directors' deferred
compensation
plan, net - - - - (9,271) (355,125) 355,125 - -
---------- ------------ ----------- ------------ -------- ----------- ---------- ----------- ------------
Balances at
December 31, 2004 15,511,576 155,115,760 58,529,113 49,834,536 (100,189) (2,289,729) 2,289,729 2,065,975 265,545,384
Net earnings
(unaudited) - - - 22,679,968 - - - - 22,679,968
Stock issuances
(unaudited) 13,186 131,860 95,232 - - - - - 227,092
Cash dividends
declared,(unaudited)
$0.54 per share - - - (11,096,958) - - - - (11,096,958)
Change in unrealized
gain (loss) in
investment securities
available-for-sale,
net of related income
taxes (unaudited) - - - - - - - (3,345,047) (3,345,047)
Shares purchased in
connection with
directors' deferred
compensation plan,
net (unaudited) - - - - (5,195) (140,800) 140,800 - -
Four-for-three
stock split in
the form of a 33%
stock dividend
(unaudited) 5,172,871 51,728,710 - (51,728,710) (35,298) - - - -
---------- ------------ ----------- ------------ -------- ----------- ---------- ----------- ------------
Balances at June 30,
2005 (unaudited) 20,697,633 $206,976,330 $58,624,345 $ 9,688,836 (140,682) $(2,430,529) $2,430,529 $(1,279,072) $274,010,439
========== ============ =========== ============ ======== =========== ========== =========== ============
See notes to consolidated financial statements.
-8-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Six Months Ended June 30,
----------------------------------
2005 2004
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 22,679,968 $ 19,260,431
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,941,309 2,450,526
Provision for loan losses 733,442 486,250
Premium amortization, net of discount accretion 1,657,333 1,921,792
Gain on sale of assets (5,380,449) (2,564,603)
Deferred federal income tax benefit (expense) (808,151) 75,336
Loans originated for resale (74,493,028) (74,641,736)
Proceeds from sales of loans held for resale 96,286,338 116,953,347
Decrease (Increase) in other assets 1,035,000 (3,197,267)
Increase (Decrease) in other liabilities (1,344,661) 7,197,372
-------------- ---------------
Total adjustments 20,627,133 48,681,017
-------------- ---------------
Net cash provided by operating activities 43,307,101 67,941,448
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits in banks (152,225) 219,662
Cash paid in acquisition of common stock, net of cash acquired (1,126,694) -
Activity in available-for-sale securities:
Sales 47,015,498 6,444,774
Maturities 59,558,354 44,683,106
Purchases (222,501,258) (88,695,156)
Activity in held-to-maturity securities:
Maturities 17,938,709 23,600,915
Purchases (620,000) -
Net decrease (increase) in loans 6,914,080 (61,947,402)
Capital expenditures (5,658,858) (3,255,540)
Proceeds from sale of assets 4,564,229 334,525
-------------- ---------------
Net cash used in investing activities (94,068,165) (78,615,116)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease (increase) in noninterest-bearing deposits 14,233,361 (21,187,674)
Net decrease in interest-bearing deposits (19,862,920) (27,689,457)
Net increase (decrease) in securities sold under agreements to repurchase 2,587,494 37,718,722
Proceeds from stock issuances 227,092 254,874
Dividends paid (10,575,768) (9,599,708)
-------------- ---------------
Net cash used in financing activities (13,390,741) (20,503,243)
-------------- ---------------
Net decrease in cash and cash equivalents (64,151,805) (31,176,911)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 194,258,165 113,840,573
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 130,106,360 $ 82,663,662
============== ===============
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS
Interest paid $ 11,660,645 $ 7,807,825
Federal income tax paid 10,262,824 7,680,193
Assets acquired through foreclosure 983,142 425,146
Loans to finance the sale of other real estate - 18,800
See notes to consolidated financial statements.
-9-
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 results of operations. All adjustments were of a normal
recurring nature. However, the results of operations for the three and six
months ended June 30, 2005, are not necessarily indicative of the results to be
expected for the year ending December 31, 2005, due to seasonality, changes in
economic conditions, interest rate fluctuations and other factors. 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 - Stock Dividend
On April 26, 2005, the Company's Board of Directors declared a four-for-three
stock split in the form of a 33% stock dividend effective June 1, 2005. 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 is reflected as a transfer from retained earnings to common
stock on the consolidated financial statements as of and for the three and six
months ended June 30, 2005.
Note 3 - 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 periods. In computing diluted earnings per common share for the three months
and six months ended June 30, 2005 and 2004, the Company assumes all outstanding
options to purchase common stock have been exercised at the beginning of the
year (or the 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 periods. The weighted
average common shares outstanding used in computing basic earnings per common
share for the three months ended June 30, 2005 and 2004, were 20,692,904 and
20,654,191 shares, respectively. The weighted average common shares outstanding
used in computing basic earnings per common share for the six months ended June
30, 2005 and 2004, were 20,688,637 and 20,649,600, respectively. The weighted
average common shares outstanding used in computing fully diluted earnings per
common share for the three months ended June 30, 2005 and 2004, were 20,768,007
and 20,748,729 shares, respectively. The weighted average common shares
outstanding used in computing fully diluted earnings per common share for the
six months ended June 30, 2005 and 2004, were 20,768,694 and 20,746,733,
respectively. See Note 2 above.
Note 4- Stock Based Compensation
The Company grants stock options for a fixed number of shares with an exercise
price equal to the fair value of the shares at the date of grant to employees.
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 Standard (SFAS) No.
123, Accounting for Stock-Based Compensation, the Company's net earnings and
earnings per share would have been reduced by an insignificant amount on a pro
forma basis for the three months and six months ended June 30, 2005 and 2004.
10
On January 25, 2005, the Company granted 101,066 options to key employees under
the 2002 Incentive Stock Option Plan. The options were granted at market price
on the grant date, as adjusted for the four for three stock split.
In December 2004, SFAS No. 123R, "Share-Based Payment," was issued. SFAS No.
123R requires companies to recognize in the statements of earnings the
grant-date fair value of stock options issued to employees. The statement was to
be effective for the third quarter of 2005 but in April 2005, the Securities and
Exchange Commission deferred the effective date until the first quarter of 2006
for calendar year-end companies. Due to the low volume of stock options granted
and outstanding, the implementation of this new pronouncement is not expected to
have a significant effect on the Company's results of operations. The Company
expects to utilize the modified prospective method for transition to the new
rules whereby grants after the implementation date as well as unvested awards
granted prior to the implementation date will be measured and accounted for
under SFAS No. 123R.
Note 5 - Pension Plan
The Company's defined benefit pension plan was frozen effective January 1, 2004
whereby no additional years of service will accrue to participants, unless the
pension plan is reinstated at a future date. The pension plan covered
substantially all of the Company's employees. The benefits were based on years
of service and a percentage of the employee's qualifying compensation during the
final years of employment. The Company's funding policy was and is to contribute
annually the amount necessary to satisfy the Internal Revenue Service's funding
standards. Contributions to the pension plan through December 31, 2003 were
intended to provide not only for benefits attributed to years of service to date
but also for those expected to be earned in the future. As a result of freezing
the pension plan, we do not expect contributions or pension expense to be
significant in future years. Accordingly, no amount of net periodic benefit cost
was recorded in the three months and six months ended June 30, 2005 and 2004 as
the interest cost component is generally offset with the expected return on plan
assets.
The Company did not make a contribution to the pension plan during the year
ended December 31, 2004 and does not expect to make a contribution during the
year ending December 31, 2005, based on Internal Revenue Service's funding
standards.
Note 6 - Reclassifications
Certain prior period balances have been reclassified to conform with the current
period presentation.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
As a multi-bank financial holding company, we generate most of our revenue from
interest on loans and investments, trust fees, and service charges. Our primary
source of funding for our loans is deposits we hold in our subsidiary banks. Our
largest expenses are interest on these deposits and salaries and related
employee benefits. We usually measure our performance by calculating our return
on average assets, return on average equity, our regulatory leverage and risk
based capital ratios, and our efficiency ratio, which is calculated by dividing
noninterest expense by the sum of net interest income on a tax equivalent basis
and noninterest income.
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 2004 Annual
Report on Form 10-K. On April 26, 2005, the Company's Board of Directors
declared a four-for-three stock split in the form of a 33% stock dividend
effective June 1, 2005. All per share amounts in this report have been restated
to reflect this stock split.
Critical Accounting Policies
- ----------------------------
We prepare consolidated financial statements based on the application of certain
accounting policies, accounting principles generally accepted in the United
States and customary practices in the banking industry. These policies, in
certain areas, require us to make significant estimates and assumptions.
We deem a policy critical if (1) the accounting estimate required us to make
assumptions about matters that are highly uncertain at the time we make the
accounting estimate; and (2) 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 following discussion addresses our allowance for loan loss and our provision
for loan losses, which we deem to be our most critical accounting policy. We
have other significant 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
they would have a material impact on our reported results for a given period.
The allowance for loan losses is an amount we believe will be adequate to absorb
inherent estimated losses on existing loans for which full collectibility is
unlikely based upon our 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
charged off loans (net of recoveries).
Our periodic evaluation of the adequacy of the allowance is based on general
economic conditions, the financial condition of our borrowers, the value and
liquidity of collateral, delinquency, prior loan loss experience, and the
results of periodic reviews of the portfolio by our independent loan review
department and by regulatory examiners. We have developed a consistent,
well-documented loan review methodology that includes allowances assigned to
specific loans and nonspecific allowances, which are based on the factors noted
above. While each subsidiary bank is responsible for the adequacy of its
allowance, our independent loan review department is responsible for reviewing
this evaluation for all of our subsidiary banks to ensure consistent methodology
and overall adequacy for us.
12
Although we believe 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 current determinations. A downturn in the economy and employment could
result in increased levels of nonperforming 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 bank regulatory agencies could require additions
to the loan loss allowance based on their judgment or on 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, the
borrower's financial condition is such that collection of interest is doubtful.
Our policy requires measurement of the allowance for an impaired
collateral-dependent loan based on the difference in the fair value of the
collateral and the amount owed on the loan. Other loan impairments are measured
based on the difference in the present value of expected future cash flows or
the loan's observable market price and the balance of the loan.
Operating Results
- -----------------
Three-months ended June 30, 2005 and 2004
- -----------------------------------------
Net income for the second quarter of 2005 totaled $10.6 million, an increase of
$1.4 million or 15.7% over the same period last year. The earnings improvement
resulted primarily from an increase in net interest income of $3.5 million, a
$513 thousand gain from the final special distribution of proceeds from the
merger of PULSE EFT Association and Discover Financial Services, Inc., an
increase in service charges on deposits of $386 thousand, principally due to our
enhanced overdraft privilege product, a $273 thousand increase in ATM and credit
card fees and a $195 thousand increase in trust fees. Offsetting these items was
a decline in our gain from the sale of student loans of $288 thousand, and a
$2.4 million increase in noninterest expenses, primarily in the salaries and
benefits category, from annual pay increases and our three bank acquisitions in
July and December 2004 and February 2005. On a basic earnings per share basis,
earnings amounted to $0.51 per share for the second quarter of 2005, as compared
to $0.44 per share for the second quarter of 2004. Return on average assets and
return on average equity for the second quarter of 2005 amounted to 1.76% and
15.70%, respectively. For the same period in 2004, return on average assets and
return on average equity amounted to 1.77% and 14.50%, respectively.
Tax equivalent net interest income for the second quarter of 2005 amounted to
$24.9 million as compared to $21.5 million for the same period last year. Our
rates on interest earning assets increased approximately 47 basis points while
our rates paid on deposits increased approximately 58 basis points. The increase
in volume of average interest earning assets of $289.0 million worked with the
increase in rates to improve interest income. Average interest bearing
liabilities increased $249.2 million, and coupled with the increase in rates,
partially offset the increase in interest income. The increase in average
interest earning assets and interest bearing liabilities is primarily due to our
acquisitions of banks in Granbury, Glen Rose and Clyde. Average earning assets
were $2.2 billion for the second quarter of 2005, which is 15.1% greater than
for the second quarter of 2004. Average interest bearing liabilities were $1.6
billion for the second quarter of 2005, which is 18.4% greater than for the
second quarter of 2004. The Company's interest spread decreased to 4.07% for
2005 from 4.19% for 2004. The Company's net interest margin was 4.53% for the
second quarter of 2005, compared to 4.51% for the same period of 2004. Although
the rising rate environment was generally positive for us, our net interest
margin was relatively unchanged primarily due to the proceeds from maturities of
our investment securities being reinvested at lower interest rates and
competitive factors in our markets leading to more aggressive deposit pricing.
13
The provision for loan losses for the second quarter of 2005 totaled $323
thousand compared to $308 thousand for the same period in 2004. The slight
increase was due primarily to loan growth and changes in certain loan
classifications. Gross chargeoffs for the quarter ended June 30, 2005 totaled
$553 thousand compared to $317 thousand for the same period of 2004. Recoveries
of previously charged-off loans totaling $143 thousand in the quarter ended June
30, 2005 (as compared to $149 thousand in 2004) offset the chargeoffs
experienced. On an annualized basis, net chargeoffs as a percentage of average
loans were 0.14% for the second quarter of 2005, as compared to 0.07% for the
same period in 2004. The Company's allowance for loan losses totaled $14.3
million at June 30, 2005, up $2.4 million from the balance of $11.9 million at
June 30, 2004. The increased allowance is primarily due to growth in the loan
portfolio and additions from our acquisitions of banks in Granbury, Glen Rose
and Clyde as well as changes to individual loan grades. The Company's allowance
as a percentage of nonperforming loans amounted to 609.7% at June 30, 2005. As
of June 30, 2005, management of the Company believes the Company's balance in
allowance for loan losses is adequate to provide for loans existing in its
portfolio that are deemed uncollectible.
Total noninterest income for the second quarter of 2005 was $10.5 million, as
compared to $9.4 million for the same period last year. The Company recognized a
$513 thousand gain from the final special distribution of proceeds from the
merger of PULSE EFT Association and Discover Financial Services, Inc. Trust fees
totaled $1.7 million for 2005, up $195 thousand over the same period in 2004 due
to increased volume of trust assets managed and improvement in overall equity
markets. The market value of trust assets managed totaled $1.370 billion at June
30, 2005 compared to $1.283 billion at June 30, 2004. Service fees on deposits
totaled $5.4 million for the second quarter of 2005, compared to $5.0 million
for the same period of 2004, an improvement of $386 thousand, due primarily to
increased fees from enhancements to the Company's overdraft privilege products.
During the second quarter of 2005, the Company sold approximately $12.1 million
in student loans, recognizing a premium of $350 thousand. In 2004, the Company
sold $17 million of its student loans, recognizing a premium of $638 thousand.
The Company's real estate mortgage fees of $510 thousand were slightly less than
the $551 thousand recognized in the second quarter of 2004. Fees from ATM and
credit card transactions increased $273 thousand in the second quarter of 2005
from the continued increase in use of debit cards.
Noninterest expense for the second quarter of 2005 amounted to $18.9 million as
compared to $16.5 million for the same period in 2004. Salaries and benefits
expense, the Company's largest noninterest expense item, increased 14.0% to
$10.1 million in 2005, up $1.2 million over the same period in 2004, due
primarily to the increase in number of employees resulting from our acquisitions
and overall pay increases effective during the first quarter of 2005. Net
occupancy expense increased approximately $214 thousand, to $1.3 million, also
attributable to facilities obtained through our acquisitions and increased
utility costs. Equipment expense increased $65 thousand in 2005 over 2004 due to
the depreciation of new technology expenditures made in the latter part of 2004
and depreciation associated with our acquisitions.
The Company's other categories of noninterest expense increased $845 thousand in
the second quarter of 2005 compared to the second quarter of 2004. Several
factors contributed to this increase, including an increase in printing and
supplies of $69 thousand principally due to our communications with customers
related to our acquisitions; a volume related increase of $177 thousand in ATM
and credit card fees (related income increased $273 thousand); increased
professional fees of $94 thousand principally as a result of fees associated
with our enhanced overdraft privilege product; and an increase of $142 thousand
in amortization of intangibles associated with deposits we have acquired.
We believe a key indicator of our operating efficiency is expressed by the ratio
that is calculated by dividing noninterest expense by the sum of net interest
income (on a tax equivalent basis) and noninterest income. This ratio in effect
measures the amount of funds expended to generate revenue. We improved this
efficiency ratio slightly from 53.49% for the second quarter of 2004 to 53.21%
for the second quarter of 2005.
14
Six months ended June 30, 2005 and 2004
- ---------------------------------------
Net income for the six months of 2005 totaled $22.7 million, an increase of $3.4
million or 17.8% over the same period last year. The earnings improvement
resulted primarily from an increase in net interest income of $5.9 million, a
$3.5 million gain from the special distribution of proceeds from the merger of
PULSE EFT Association and Discover Financial Services, Inc., an increase in
service charges on deposits of $1.1 million, principally due to our enhanced
overdraft privilege product, a $521 thousand increase in ATM and credit card
fees and a $335 thousand increase in trust fees. Offsetting these items was a
decline in our gain from the sale of student loans of $771 thousand, an increase
in provision for loan losses of $247 thousand and a $5.0 million increase in
noninterest expenses, primarily in the salaries and employee benefit category,
from annual pay increases and our bank acquisitions in Granbury, Glen Rose and
Clyde. On a basic earnings per share basis, earnings amounted to $1.10 per share
for the first six months of 2005, as compared to $0.93 per share for the first
six months of 2004. Return on average assets and return on average equity for
the six months of 2005 amounted to 1.90% and 17.00%, respectively. For the same
period in 2004, return on average assets and return on average equity amounted
to 1.85% and 15.21%, respectively.
Tax equivalent net interest income for the six months of 2005 amounted to $49.0
million as compared to $43.1 million for the same period last year. Our rates on
interest earning assets increased approximately 38 basis points while the rates
we paid on deposits increased approximately 48 basis points. The increase in
volume of average interest earning assets of $263.4 million worked with the
increase in rates to improve interest income. Average interest bearing
liabilities increased $229.5 million, and coupled with the increase in rates,
partially offset the increase in interest income. The increase in average
interest earning assets and interest bearing liabilities is primarily due to our
acquisitions. Average earning assets were $2.2 billion for the first six months
of 2005, which is 13.7% greater than for the first six months of 2004. Average
interest bearing liabilities were $1.6 billion for the six months of 2005, which
is 16.8% greater than for the same period of 2004. The Company's interest spread
decreased to 4.10% for 2005 from 4.20% for 2004. The Company's net interest
margin was 4.52% for the first six months of 2005, compared to 4.51% for the
same period of 2004. Although the rising rate environment was generally positive
for us, our net interest margin was relatively unchanged, primarily due to the
proceeds from maturities of our investment securities being reinvested at lower
interest rates and competitive factors in our markets leading to more aggressive
deposit pricing.
The provision for loan losses for the six months ended June 30, 2005 totaled
$733 thousand compared to $486 thousand for the same period in 2004. The
increase was due primarily to loan growth, both as a result of acquisitions and
internally generated growth, and changes in certain loan classifications. Gross
chargeoffs for the six months ended June 30, 2005 totaled $943 thousand compared
to $559 thousand for the same period of 2004. Recoveries of previously
charged-off loans totaling $331 thousand in the six months ended June 30, 2005
(as compared to $428 thousand in 2004) offset the chargeoffs experienced. On an
annualized basis, net chargeoffs as a percentage of average loans were 0.10% for
the six months ended June 30, 2005, as compared to 0.03% for the same period in
2004. The Company's allowance for loan losses totaled $14.3 million at June 30,
2005, up $2.4 million from the balance of $11.9 million at June 30, 2004. The
increased allowance is primarily due to growth in the loan portfolio and
additions from our acquisitions. The Company's allowance as a percentage of
nonperforming loans amounted to 609.7% at June 30, 2005. As of June 30, 2005,
management of the Company believes the Company's balance in allowance for loan
losses is adequate to provide for loans existing in its portfolio that are
deemed uncollectible.
Total noninterest income for the first six months of 2005 was $23.9 million, as
compared to $19.3 million for the same period last year. The Company recognized
a $3.5 million gain from the special distribution of proceeds from the merger of
PULSE EFT Association and Discover Financial Services, Inc. Trust fees totaled
$3.4 million for 2005, up $335 thousand over the same period in 2004 due to
increased volume of trust assets managed and improvement in overall equity
markets. Service fees on deposits totaled $10.4 million for the first six months
of 2005, compared to $9.3 million for the same period of 2004, an improvement of
$1.1 million due primarily to increased fees from enhancements to the Company's
15
overdraft privilege products. During 2005, the Company sold approximately $56
million in student loans, recognizing a premium of $1.7 million. In 2004, the
Company sold $77 million of its student loans, recognizing a premium of $2.4
million. The Company's real estate mortgage fees of $922 thousand were slightly
less than the $975 thousand recognized in the first six months of 2004. Fees
from ATM and credit card transactions increased $521 thousand in the first half
of 2005 from the continued increase in use of debit cards.
Noninterest expense for the first six months of 2005 amounted to $37.4 million
as compared to $32.4 million for the same period in 2004. Salaries and benefits
expense, the Company's largest noninterest expense item, increased 13.2% to
$20.0 million in 2005, up $2.3 million over the same period in 2004, due
primarily to the increase in number of employees resulting from our acquisitions
and overall pay increases effective during the first quarter of 2005. Net
occupancy expense increased approximately $370 thousand, to $2.4 million, also
attributable to facilities obtained through our acquisitions and increased
utility costs. Equipment expense increased $136 thousand in 2005 over 2004 due
to the depreciation of new technology expenditures made in the latter part of
2004 and depreciation associated with our acquisitions.
The Company's other categories of noninterest expense increased $2.2 million in
the first six months of 2005 compared to the same period of 2004. Several
factors contributed to this increase, including an increase of $177 thousand
principally due to our communications with customers related to our
acquisitions; a volume related increase of $307 thousand in ATM and credit card
fees (related income increased $521 thousand); an increase of $221 thousand in
audit fees, principally related to procedures required under the Sarbanes-Oxley
Act; an increase in professional fees of $424 thousand, principally as a result
of expenses associated with our enhanced overdraft privilege product and costs
associated with the integration of our Clyde acquisition into our data
processing systems; an increase of $156 thousand in advertising and public
relations costs associated with our acquisitions; and an increase of $211
thousand in amortization of intangibles associated with deposits we have
acquired.
We believe a key indicator of our operating efficiency is expressed by the ratio
that is calculated by dividing noninterest expense by the sum of net interest
income (on a tax equivalent basis) and noninterest income. This ratio in effect
measures the amount of funds expended to generate revenue. We improved this
efficiency ratio from 51.93% for the first six months of 2004 to 51.32% for the
first six months of 2005.
Balance Sheet Review
- --------------------
Total assets at June 30, 2005 amounted to $2.4 billion as compared to $2.3
billion at December 31, 2004, and $2.1 billion at June 30, 2004. Since December
31, 2004, loans increased $28.0 million. The $56 million sale of our student
loans mentioned above was offset by the acquisition of approximately $56 million
in loans from the Clyde acquisition and nearly $28 million in new loans. The
increase in intangible assets from December 31, 2004 to June 30, 2005 of $13.5
million is due to our acquisition of the bank in Clyde in the first quarter of
2005. Deposits totaled $2.1 billion at June 30, 2005 compared to $2.0 billion at
December 31, 2004, up 5.0%, principally attributable to the Clyde acquisition
($114 million). Deposits at June 30, 2004 were $1.7 billion.
Loans at June 30, 2005, totaled $1.192 billion, compared to $1.164 billion at
year-end 2004. Loans totaled $1.010 billion at June 30, 2004. As compared to
June 30, 2004 amounts, loans at June 30, 2005 reflect (i) a $36.0 million
increase in commercial, financial and agricultural loans; (ii) a $127.1 million
increase in real estate loans; and (iii) a $19.3 million increase in consumer
and student loans.
Investment securities at June 30, 2005, totaled $980.8 million as compared to
$854.3 million at year-end 2004 and $904.5 million at June 30, 2004. The
unrealized gain, net of income tax, in the investment portfolio at June 30,
2005, amounted to $765 thousand; the portfolio had an overall tax equivalent
yield of 4.67% for the six months ended June 30, 2005. At June 30, 2005, the
investment portfolio had a weighted average life of 3.66 years and modified
duration of 3.14 years. At June 30, 2005, 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.
16
Nonperforming assets at June 30, 2005, totaled $3.2 million as compared to $5.0
million at December 31, 2004. The decrease resulted primarily from the
collection of certain loans previously classified nonaccrual because of concerns
about the borrowers' ability to repay. At 0.27% 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 agreements to repurchase, and an unfunded $50.0 million
line of credit which matures December 31, 2005, established with a nonaffiliated
bank.
Given the strong core deposit base and relatively low loan to deposit ratios
maintained at our subsidiary banks, management considers the current liquidity
position to be adequate to meet short- and long-term liquidity needs.
We have funded our acquisitions during the past twelve months from existing cash
balances. Nevertheless, we anticipate that future acquisitions, if any, of
financial institutions and expansion of branch locations could 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 sources of funding for potential
acquisitions and expansions.
The Company's consolidated statements of cash flows are presented on page 9 of
this report. Total equity capital amounted to $274.0 million at June 30, 2005,
which was up from $265.5 million at year-end 2004 and $249.3 million at June 30,
2004. The Company's risk-based capital and leverage ratios at June 30, 2005 were
15.60% and 9.08%, respectively. The 2005 cash dividends of $.54 per share
totaled $11.1 million and represented 48.9% of earnings for the first six months
of 2005.
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 have an asset/liability committee
which monitors interest rate risk and compliance with investment policies.
Interest-sensitivity gap and simulation analyses are among the ways that the
subsidiary banks monitor interest rate risk. As of June 30, 2005, management
estimates that, over the next twelve months, an upward shift of interest rates
by 150 basis points would result in an increase in projected net interest income
of 2.23% and a downward shift of interest rates by 150 basis points would result
in a reduction in projected net interest income of 7.39%. These are good faith
estimates and assume the composition of our interest sensitive assets and
liabilities existing at June 30, 2005, will remain constant over the relevant
17
twelve month measurement period and changes in market interest rates are
instantaneous and sustained across the yield curve, regardless of duration or
pricing characteristics of specific assets and liabilities. Also, this estimate
does not contemplate any actions that we might undertake in response to changes
in market interest rates. In management's opinion, these estimates are not
necessarily indicative of what actually could occur in the event of immediate
interest rate increases or decreases of this magnitude. Because interest-bearing
assets and liabilities reprice in 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 could, in management's belief, be different from the foregoing
estimates, and such changes in 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
As of June 30, 2005, 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 our disclosure controls
and procedures will prevent all errors and all fraud.
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; additionally, 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 controls. 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
due to changes in conditions; also the degree of compliance with 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, our disclosure controls and procedures under Rule 13a-14 (c) and
Rule 15d - 14 (c) of the Securities Exchange Act of 1934 are effective at the
reasonable assurance level as of June 30, 2005.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal
controls.
18
PART II
OTHER INFORMATION
Item 6. Exhibits
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).
3.3 -- Amendment to the Articles of Incorporation of the Registrant,
dated April 27, 2004 (incorporated by reference from Exhibit 3.3
of the Registrant's Form 10-Q Quarterly Report for the quarter
ended March 31, 2004).
3.4 -- Amendment to Amended and Restated Bylaws of the Registrant,
dated April 27, 1994 (incorporated by reference from Exhibit 3.4
of the Registrant's Form 10-Q Quarterly Report for the quarter
ended March 31, 2004).
3.5 -- Amendment to Amended and Restated Bylaws of the Registrant,
dated October 23, 2001 (incorporated by reference from Exhibit
3.5 of the Registrant's Form 10-Q Quarterly Report for the
quarter ended March 31 2004).
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 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).
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 -- Revised Consulting Agreement dated January 1, 2005 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, 2004).
*31.1 -- Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Executive
Officer of First Financial Bankshares, Inc.
*31.2 -- Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Financial
Officer of First Financial Bankshares, Inc.
19
*32.1 -- Section 1350 Certification of Chief Executive Officer of
First Financial Bankshares, Inc.
*32.2 -- Section 1350 Certification of Chief Financial Officer of
First Financial Bankshares, Inc.
- ---------------
*Filed herewith
20
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: July 29, 2005 By:/S/ F. Scott Dueser
-------------------------------------
F. Scott Dueser
President and Chief Executive Officer
Date: July 29, 2005 By:/S/ J. Bruce Hildebrand
-------------------------------------
J. Bruce Hildebrand
Executive Vice President and
Chief Financial Officer
21
Exhibit 31.1
------------
Certification of
Chief Executive Officer
of First Financial Bankshares, Inc.
I, F. Scott Dueser, President and Chief Executive Officer of First
Financial Bankshares, Inc., certify that:
1. I have reviewed this 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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectives of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 29, 2005
By: /s/ F. SCOTT DUESER
-------------------------------------
F. Scott Dueser
President and Chief Executive Officer
Exhibit 31.2
------------
Certification of
Chief Financial Officer
of First Financial Bankshares, Inc.
I, J. Bruce Hildebrand, Executive Vice President and Chief Financial
Officer of First Financial Bankshares, Inc., certify that:
1. I have reviewed this 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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15 (e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectives of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 29, 2005 By: /s/ J. Bruce Hildebrand
----------------------------------
J. Bruce Hildebrand
Executive Vice President and Chief
Financial Officer
Exhibit 32.1
------------
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 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States code) and accompanies the quarterly report on Form 10-Q (the "Form 10-Q")
for the quarter ended June 30, 2005 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.
Dated: July 29, 2005
By: /s/ F. SCOTT DUESER
---------------------------
F. Scott Dueser
Chief Executive Officer
Subscribed and sworn to before me this 29th of July 2005.
/s/ Gaila N. Kilpatrick
- -----------------------
Gaila N. Kilpatrick
Notary Public
My commission expires: April 15, 2009
Exhibit 32.2
------------
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 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United
States code) and accompanies the annual report on Form 10-Q (the "Form 10-Q")
for the quarter ended June 30, 2005 of First Financial Bankshares, Inc.
I, J. Bruce Hildebrand, 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.
Dated: July 29, 2005
By: /s/ J. Bruce Hildebrand
---------------------------
J. Bruce Hildebrand
Chief Financial Officer
Subscribed and sworn to before me this 29th of July 2005.
/s/ Gaila N. Kilpatrick
- -----------------------
Gaila N. Kilpatrick
Notary Public
My commission expires: April 15, 2009