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 September 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 November 3, 2005:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, $10.00 par value
per share 20,708,569
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 20
Signatures 22
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 September
30, 2005 and 2004 and December 31, 2004, and the consolidated statements of
earnings and comprehensive earnings for the three and nine months ended
September 30, 2005 and 2004, changes in shareholders' equity for the nine months
ended September 30, 2005 and the year ended December 31, 2004, and cash flows
for the nine months ended September 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 nine months ended
September 30, 2005.
4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Septemer 30, December 31,
----------------------------------
2005 2004 2004
---------------- --------------- ----------------
ASSETS (Unaudited)
Cash and due from banks $ 94,612,253 $ 88,658,958 $ 94,508,165
Federal funds sold 103,500,000 7,750,000 99,750,000
---------------- --------------- ----------------
Cash and cash equivalents 198,112,253 96,408,958 194,258,165
Interest-bearing deposits in banks 683,537 611,072 489,957
Investment securities:
Securities held-to-maturity (market value of $65,744,972,
$102,506,374 and $93,470,201 at September 30, 2005
and 2004 and December 31, 2004, respectively) 63,965,757 97,995,810 90,066,367
Securities available-for-sale, at fair value 886,748,369 794,986,243 764,267,168
---------------- --------------- ----------------
Total investment securities 950,714,126 892,982,053 854,333,535
Loans 1,206,972,732 1,125,939,593 1,164,223,381
Less: Allowance for loan losses (14,374,609) (13,679,833) (13,837,133)
---------------- --------------- ----------------
Net loans 1,192,598,123 1,112,259,760 1,150,386,248
Bank premises and equipment, net 56,356,456 47,602,377 49,740,268
Intangible assets 53,821,382 31,824,033 40,546,052
Other assets 25,974,763 24,063,241 25,470,206
---------------- --------------- ----------------
TOTAL ASSETS $ 2,478,260,640 $ 2,205,751,494 $ 2,315,224,431
================ =============== ================
LIABILITIES
Noninterest-bearing deposits $ 543,477,717 $ 486,255,460 $ 512,009,366
Interest-bearing deposits 1,577,732,307 1,361,142,598 1,482,302,826
---------------- --------------- ----------------
Total deposits 2,121,210,024 1,847,398,058 1,994,312,192
Dividends payable 5,797,268 5,270,500 5,273,808
Short-term borrowings 63,374,118 72,000,304 35,691,608
Other liabilities 11,561,679 16,750,955 14,401,439
---------------- --------------- ----------------
Total liabilities 2,201,943,089 1,941,419,817 2,049,679,047
---------------- --------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $10 par value; authorized 40,000,000 shares;
20,704,527, 15,501,471 and 15,511,576 shares issued at
September 30, 2005 and 2004 and December 31, 2004, respectively 207,045,270 155,014,710 155,115,760
Capital surplus 58,622,063 58,431,930 58,529,113
Retained earnings 14,654,019 45,050,364 49,834,536
Treasury stock (shares at cost: 142,467, 96,618 and 100,189 at
September 30, 2005 and 2004, and December 31, 2004, respectively) (2,500,375) (2,223,104) (2,289,729)
Deferred compensation 2,500,375 2,223,104 2,289,729
Accumulated other comprehensive income (loss) (4,003,801) 5,834,673 2,065,975
---------------- --------------- ----------------
Total shareholders' equity 276,317,551 264,331,677 265,545,384
---------------- --------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,478,260,640 $ 2,205,751,494 $ 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 September 30, Nine Months Ended September 30,
------------------------------- -----------------------------
2005 2004 2005 2004
------------- ------------- ------------ ------------
INTEREST INCOME
Interest and fees on loans $ 20,815,514 $ 15,941,856 $ 59,252,056 $ 44,168,195
Interest on investment securities:
Taxable 7,794,887 6,964,532 22,641,201 21,746,401
Exempt from federal income tax 2,433,238 2,437,077 7,161,923 7,231,493
Interest on federal funds sold and
interest-bearing deposits in banks 261,714 47,292 1,078,313 164,978
------------- ------------- ------------ ------------
Total interest income 31,305,353 25,390,757 90,133,493 73,311,067
INTEREST EXPENSE
Interest-bearing deposits 6,930,623 3,840,609 18,546,052 10,874,150
Other 557,445 252,975 1,188,372 503,644
--------------- --------------- -------------- --------------
Total interest expense 7,488,068 4,093,584 19,734,424 11,377,794
------------- ------------- ------------ ------------
NET INTEREST INCOME 23,817,285 21,297,173 70,399,069 61,933,273
Provision for loan losses 317,400 532,286 1,050,842 1,018,536
------------- ------------- ------------ ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 23,499,885 20,764,887 69,348,227 60,914,737
NONINTEREST INCOME
Trust fees 1,728,013 1,578,176 5,151,899 4,667,348
Service fees on deposit accounts 5,481,664 5,784,606 15,887,546 15,056,765
ATM and credit card fees 1,282,908 1,018,843 3,630,369 2,844,921
Real estate mortgage fees 684,318 572,826 1,606,503 1,547,616
Net gain on sale of securities 46,116 32,747 229,800 51,173
Net gain on sale of student loans 95,294 81,615 1,754,009 2,511,264
Net gain on sale of PULSE ownership rights 401,823 - 3,894,684 -
Other 605,485 782,071 2,059,884 2,427,646
------------- ------------- ------------ ------------
Total noninterest income 10,325,621 9,850,884 34,214,694 29,106,733
NONINTEREST EXPENSE
Salaries and employee benefits 10,058,130 9,094,717 30,049,754 26,758,318
Net occupancy expense 1,277,768 1,094,001 3,690,372 3,136,215
Equipment expense 1,543,166 1,309,284 4,516,045 4,146,195
Printing, stationery & supplies 474,775 420,837 1,490,963 1,260,486
Correspondent bank service charges 349,973 410,930 1,095,861 1,192,704
Amortization of intangible assets 186,988 47,789 465,771 115,367
Other expenses 4,833,910 4,434,593 14,819,056 12,590,499
------------- ------------- ------------ ------------
Total noninterest expense 18,724,710 16,812,151 56,127,822 49,199,784
------------- ------------- ------------ ------------
EARNINGS BEFORE INCOME TAXES 15,100,796 13,803,620 47,435,099 40,821,686
Income tax expense 4,338,345 3,950,793 13,992,680 11,708,427
------------- ------------- ------------ ------------
NET EARNINGS $ 10,762,451 $ 9,852,827 $ 33,442,419 $ 29,113,259
============= ============= ============ ============
EARNINGS PER SHARE, BASIC $ 0.52 $ 0.48 $ 1.62 $ 1.41
============= ============= ============ ============
EARNINGS PER SHARE, ASSUMING DILUTION $ 0.52 $ 0.47 $ 1.61 $ 1.40
============= ============= ============ ============
DIVIDENDS PER SHARE $ 0.28 $ 0.26 $ 0.82 $ 0.74
============= ============= ============ ============
See notes to consolidated financial statements.
-6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------- ------------------------------
2005 2004 2005 2004
------------ ------------- ------------- -------------
NET EARNINGS $ 10,762,451 $ 9,852,827 $ 33,442,419 $ 29,113,259
OTHER ITEMS OF COMPREHENSIVE EARNINGS:
Change in unrealized gain (loss) on
investment securities available-for-sale (4,145,773) 15,903,599 (9,108,317) (1,972,904)
Reclassification adjustment for realized
gain on investment securities
included in net earnings, before income tax (46,116) (32,747) (229,800) (51,173)
------------ ------------- ------------- -------------
Total other items of comprehensive
earningS (losses) (4,191,889) 15,870,852 (9,338,117) (2,024,077)
Income tax (expense) benefit related to other
items of comprehensive earnings 1,467,161 (5,554,798) 3,268,341 708,427
------------ ------------- ------------- -------------
COMPREHENSIVE EARNINGS $ 8,037,723 $ 20,168,881 $ 27,372,643 $ 27,797,609
============ ============= ============= =============
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(Losses) Equity
---------- ------------ ----------- ----------- --------- ----------- ---------- ----------- ------------
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
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) - - - -
Net earnings(unaudited) - - - 33,442,419 - - - - 33,442,419
Stock issuances
(unaudited) 20,080 200,800 92,950 - - - - - 293,750
Cash dividends
declared, $0.82 per
share (unaudited) - - - (16,894,226) - - - - (16,894,226)
Change in unrealized
gain (loss) in
investment securities
available-for-sale,
net of related income
taxes (unaudited) - - - - - - - (6,069,776) (6,069,776)
Shares purchased in
connection with
directors' deferred
compensation plan,
net (unaudited) - - - - (6,980) (210,646) 210,646 - -
---------- ------------ ----------- ----------- --------- ----------- ---------- ----------- ------------
Balances at September
30, 2005 (unaudited) 20,704,527 $207,045,270 $58,622,063 $14,654,019 $(142,467) $(2,500,375) $2,500,375 $(4,003,801) $276,317,551
========== ============ =========== =========== ========= =========== ========== =========== ============
See notes to consolidated financial statements.
-8-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Nine Months Ended September 30,
------------------------------------
2005 2004
---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 33,442,419 $ 29,113,259
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,530,838 3,530,932
Provision for loan losses 1,050,842 1,018,536
Premium amortization, net of discount accretion 2,477,186 2,893,524
Gain on sale of assets (5,942,797) (2,733,773)
Deferred federal income tax benefit (expense) (464,707) 27,129
Loans originated for resale (129,267,415) (121,268,712)
Proceeds from sales of loans held for resale 131,545,991 141,498,153
Decrease in other assets 3,311,529 110,117
Increase (decrease) in other liabilities (3,449,841) 4,417,965
---------------- -----------------
Total adjustments 3,791,626 29,493,871
---------------- -----------------
Net cash provided by operating activities 37,234,045 58,607,130
---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits in banks (193,580) 265,767
Cash paid in acquisition of common stock, net of cash acquired (1,126,694) (8,532,384)
Activity in available-for-sale securities:
Sales 58,232,162 11,485,775
Maturities 688,787,697 62,595,940
Purchases (846,415,453) (89,242,387)
Activity in held-to-maturity securities:
Maturities 26,530,104 35,569,134
Purchases (620,000) -
Net decrease (increase) in loans 11,477,699 (108,521,468)
Capital expenditures (8,196,862) (6,214,788)
Proceeds from sale of assets 5,032,306 243,658
---------------- -----------------
Net cash used in investing activities (66,492,621) (102,350,753)
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 4,028,648 7,171,186
Net increase (decrease) in interest-bearing deposits 17,478,522 (9,403,178)
Net increase in short term borrowings 27,682,510 43,025,137
Proceeds from stock issuances 293,750 386,670
Dividends paid (16,370,766) (14,867,807)
---------------- -----------------
Net cash provided by financing activities 33,112,664 26,312,008
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 3,854,088 (17,431,615)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 194,258,165 113,840,573
---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 198,112,253 $ 96,408,958
================ =================
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS
Interest paid $ 19,058,986 $ 11,763,442
Federal income tax paid 13,954,386 11,415,873
Assets acquired through foreclosure 1,002,950 114,832
Loans to finance the sale of other real estate - 953,309
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 nine
months ended September 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 nine months
ended September 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 nine months ended September 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 September 30, 2005 and
2004, were 20,700,760 and 20,664,092 shares, respectively. The weighted average
common shares outstanding used in computing basic earnings per common share for
the nine months ended September 30, 2005 and 2004, were 20,692,722 and
20,654,465, respectively. The weighted average common shares outstanding used in
computing fully diluted earnings per common share for the three months ended
September 30, 2005 and 2004, were 20,782,051 and 20,751,503 shares,
respectively. The weighted average common shares outstanding used in computing
fully diluted earnings per common share for the nine months ended September 30,
2005 and 2004, were 20,772,503 and 20,748,311, 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 nine months ended September 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
will use 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, are 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 nine months ended
September 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 - Acquisition Announcement
On August 10, 2005, we entered into an agreement and plan of merger with
Bridgeport Financial Corporation, the parent company of The First National Bank
of Bridgeport, Bridgeport, Texas. Pursuant to the agreement, we will pay $20.3
million plus the assumption of $5.5 million in debt and trust preferred
securities for all of the outstanding shares of Bridgeport Financial Corporation
and its subsidiary bank, which we expect to combine with First Financial Bank,
N.A., Southlake.
The First National Bank of Bridgeport is located in the City of Bridgeport, Wise
County, Texas, approximately 35 miles northwest of Fort Worth, Texas. The First
National Bank of Bridgeport was established in 1907 and, as of September 30,
2005, had assets totaling approximately $145.2 million and shareholder's equity
of approximately $14.8 million. Subject to regulatory approval, we anticipate
completing the acquisition of Bridgeport Financial Corporation in the fourth
quarter of 2005.
Note 7 - Reclassifications
Certain prior period balances have been reclassified to conform to 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, fees we charge for our trust services and
service charges on deposit accounts. 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 requires 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 be 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 rates, 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 we believe have a higher than normal risk and nonspecific
allowances for inherent risk in the portfolio; these allowances 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 owed on the loan.
Operating Results
- -----------------
Three-months ended September 30, 2005 and 2004
- ----------------------------------------------
Net income for the third quarter of 2005 totaled $10.76 million, an increase of
$910 thousand or 9.23% over the same period last year. The earnings improvement
resulted primarily from an increase in net interest income of $2.5 million, a
$402 thousand gain from the final special distribution of proceeds from the
merger of PULSE EFT Association and Discover Financial Services, Inc., a $264
thousand increase in ATM and credit card fees, a $150 thousand increase in trust
fees and an increase of $111 thousand in real estate mortgage fees. Offsetting
these items was a decline in our income from service charges on deposits of $303
thousand and a $1.9 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 $0.52 per share for the third quarter of
2005, as compared to $0.48 per share for the third quarter of 2004. Return on
average assets and return on average equity for the third quarter of 2005
amounted to 1.76% and 15.61%, respectively. For the same period in 2004, return
on average assets and return on average equity amounted to 1.82% and 15.14%,
respectively.
Tax equivalent net interest income for the third quarter of 2005 amounted to
$25.0 million as compared to $22.6 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 72 basis points. The increase
in volume of average interest earning assets of $224.0 million, along with the
continued increase in the prime interest rate, improved our interest income.
Average interest bearing liabilities increased $186.0 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 third quarter of 2005, which is
11.3% greater than for the third quarter of 2004. Average interest bearing
liabilities were $1.6 billion for the third quarter of 2005, which is 13.1%
greater than for the third quarter of 2004. The Company's interest spread
decreased to 3.95% for 2005 from 4.18% for 2004. The Company's net interest
margin was 4.48% for the third quarter of 2005, compared to 4.52% for the same
period of 2004. As short-term interest rates have risen, we have generally been
able to increase rates on our variable rate loans and loans that have renewed at
a faster pace than the increases in rates we paid on our interest bearing
deposits. However, due to the flat interest rate yield curve, as we have
received proceeds from maturities of our investment securities and reinvested at
today's interest rates, we have generally reinvested at lower rates leading to a
lower interest margin.
13
The provision for loan losses for the third quarter of 2005 totaled $317
thousand compared to $532 thousand for the same period in 2004. The decrease was
due primarily to changes in certain loan classifications offset by growth in the
loan portfolio. Gross chargeoffs for the quarter ended September 30, 2005
totaled $486 thousand compared to $331 thousand for the same period of 2004.
Recoveries of previously charged-off loans totaling $221 thousand in the quarter
ended September 30, 2005 (as compared to $147 thousand in 2004) offset the
chargeoffs experienced. On an annualized basis, net chargeoffs as a percentage
of average loans were 0.09% for the third quarter of 2005, as compared to 0.07%
for the same period in 2004. The Company's allowance for loan losses totaled
$14.4 million at September 30, 2005, up $695 thousand from the balance of $13.7
million at September 30, 2004. The increased allowance is primarily due to
growth in the loan portfolio and additions from our acquisitions of banks in
Glen Rose and Clyde as well as changes to specific allocations for individual
loans. The Company's allowance as a percentage of nonperforming loans amounted
to 475.1% at September 30, 2005. As of September 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 third quarter of 2005 was $10.3 million, as
compared to $9.9 million for the same period last year. The Company recognized a
$402 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 $150 thousand over the same period in 2004 due
to increased volume of trust assets managed, an increase in rates charged and
improvement in overall equity markets. The market value of trust assets held
totaled $1.414 billion at September 30, 2005 compared to $1.281 billion at
September 30, 2004. Service fees on deposits totaled $5.5 million for the third
quarter of 2005, compared to $5.8 million for the same period of 2004, a decline
of $303 thousand, due primarily to lower income from commercial accounts as a
result of increased earnings credits as overall interest rates increase and a
stabilization of the use of our enhanced overdraft privilege product. During the
third quarter of 2005, the Company sold approximately $3.3 million in student
loans, recognizing a premium of $95 thousand. In 2004, the Company sold $2.8
million of its student loans, recognizing a premium of $82 thousand. The
Company's real estate mortgage fees of $684 thousand were up from the $573
thousand recognized in the third quarter of 2004. Fees from ATM and credit card
transactions increased $264 thousand, to $1.3 million, in the third quarter of
2005 as a result of the continued increased use of debit cards.
Noninterest expense for the third quarter of 2005 amounted to $18.7 million as
compared to $16.8 million for the same period in 2004. Salaries and benefits
expense, the Company's largest noninterest expense item, increased 10.6% to
$10.1 million in 2005, up $963 thousand 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 $184 thousand, to $1.3 million, also
attributable to facilities obtained through our acquisitions and increased
utility costs. Equipment expense increased $234 thousand in 2005 over 2004 due
to the depreciation of new technology expenditures made in 2004 and 2005 and
depreciation associated with our acquisitions.
The Company's other categories of noninterest expense increased $531 thousand in
the third quarter of 2005 compared to the third quarter of 2004. Several factors
contributed to this increase, including an increase in printing and supplies of
$54 thousand principally due to our communications with customers related to our
acquisitions; a volume related increase of $193 thousand in ATM and credit card
fees (related income increased $264 thousand) and an increase of $139 thousand
in amortization of core deposit 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. Our efficiency ratio
was 52.99% for the third quarter of 2005, compared to 51.86% for the third
quarter of 2004; this change is principally attributable to the increase in
noninterest expense resulting from our acquisition activity.
14
Nine months ended September 30, 2005 and 2004
- ---------------------------------------------
Net income for the nine months of 2005 totaled $33.4 million, an increase of
$4.3 million or 14.9% over the same period last year. The earnings improvement
resulted primarily from an increase in net interest income of $8.5 million, a
$3.9 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 $831 thousand, principally due to our enhanced
overdraft privilege product, a $785 thousand increase in ATM and credit card
fees and a $485 thousand increase in trust fees. Offsetting these items was a
decline in our gain from the sale of student loans of $757 thousand and a $6.9
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 $1.62 per share for the first nine months of 2005, as compared to
$1.41 per share for the first nine months of 2004. Return on average assets and
return on average equity for the nine months of 2005 amounted to 1.86% and
16.46%, respectively. For the same period in 2004, return on average assets and
return on average equity amounted to 1.84% and 15.13%, respectively.
Tax equivalent net interest income for the nine months of 2005 amounted to $74.0
million as compared to $65.7 million for the same period last year. Our rates on
interest earning assets increased approximately 43 basis points while the rates
we paid on deposits increased approximately 55 basis points. The increase in
volume of average interest earning assets of $246.2 million worked with the
increase in rates to improve interest income. Average interest bearing
liabilities increased $210.9 million, and coupled with the continued increase in
the prime interest rate, 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 nine months of 2005, which is 12.6% greater than for the first nine
months of 2004. Average interest bearing liabilities were $1.6 billion for the
nine months of 2005, which is 15.2% greater than for the same period of 2004.
The Company's interest spread decreased to 4.06% for 2005 from 4.18% for 2004.
The Company's net interest margin was 4.51% for the first nine months of 2005,
unchanged from the same period of 2004. As short-term interest rates have risen,
we have generally been able to increase rates on our variable rate loans and
loans that have renewed at a faster pace than the increases in rates we paid on
our interest bearing deposits. However, due to the flat interest rate yield
curve, as we have received proceeds from maturities of our investment securities
and reinvested at today's interest rates, we have generally reinvested at lower
rates leading to a lower interest margin.
The provision for loan losses for the nine months ended September 30, 2005
totaled $1.1 million compared to $1.0 million for the same period in 2004. The
slight increase was due primarily to loan growth as a result of our acquisitions
offset by changes in certain loan classifications. Gross chargeoffs for the nine
months ended September 30, 2005 totaled $1.4 million compared to $889 thousand
for the same period of 2004. Recoveries of previously charged-off loans totaling
$551 thousand in the nine months ended September 30, 2005 (as compared to $575
thousand in 2004) offset the chargeoffs experienced. On an annualized basis, net
chargeoffs as a percentage of average loans were 0.10% for the nine months ended
September 30, 2005, as compared to 0.04% for the same period in 2004. The
Company's allowance for loan losses totaled $14.4 million at September 30, 2005,
up $695 thousand from the balance of $13.7 million at September 30, 2004. The
increased allowance is primarily due to growth in the loan portfolio and
additions from our acquisitions of banks in Glen Rose and Clyde as well as
changes to specific allocations for individual loans. The Company's allowance as
a percentage of nonperforming loans amounted to 475.1% at September 30, 2005. As
of September 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 nine months of 2005 was $34.2 million, as
compared to $29.1 million for the same period last year. The Company recognized
a $3.9 million gain from the special distribution of proceeds from the merger of
PULSE EFT Association and Discover Financial Services, Inc. Trust fees totaled
$5.2 million for 2005, up $485 thousand over the same period in 2004 due to
increased volume of trust assets managed, an increase in rates charged and
improvement in overall equity markets. Service fees on deposits totaled $15.9
million for the first nine months of 2005, compared to $15.1 million for the
15
same period of 2004, an improvement of $831 thousand, due primarily to increased
fees from enhancements to the Company's overdraft privilege products. During
2005, the Company sold approximately $59.5 million in student loans, recognizing
a premium of $1.8 million. In 2004, the Company sold $75.7 million of its
student loans, recognizing a premium of $2.5 million. The Company's real estate
mortgage fees of $1.6 million were slightly more than the $1.5 million
recognized in the first nine months of 2004. Fees from ATM and credit card
transactions increased $785 thousand in the first nine months of 2005 as a
result of the continued increased use of our debit cards.
Noninterest expense for the first nine months of 2005 amounted to $56.1 million
as compared to $49.2 million for the same period in 2004. Salaries and benefits
expense, the Company's largest noninterest expense item, increased 12.3% to
$30.0 million in 2005, up $3.3 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 $554 thousand, to $3.7 million, also
attributable to facilities obtained through our acquisitions and increased
utility costs. Equipment expense increased $370 thousand in 2005 over 2004 due
to the depreciation of new technology expenditures made in the latter part of
2004 and 2005 and depreciation associated with our acquisitions.
The Company's other categories of noninterest expense increased $2.7 million in
the first nine months of 2005 compared to the same period of 2004. Several
factors contributed to this increase, including an increase of $230 thousand in
printing and supplies principally due to our communications with customers
related to our acquisitions; a volume related increase of $500 thousand in ATM
and credit card fees (related income increased $785 thousand); an increase of
$170 thousand in audit fees, principally related to procedures required under
the Sarbanes-Oxley Act; an increase in legal and professional fees of $319
thousand, principally as a result of costs associated with the integration of
our Clyde acquisition into our data processing systems; an increase of $271
thousand in advertising and public relations costs associated with our
acquisitions; and an increase of $351 thousand in amortization of core deposit
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 51.90% for the first nine months of 2004 to 51.87% for the
first nine months of 2005. This improvement is the result of a significant
increase in noninterest income offset by higher operating costs of our bank
acquisitions.
Balance Sheet Review
- --------------------
Total assets at September 30, 2005 amounted to $2.5 billion as compared to $2.3
billion at December 31, 2004, and $2.2 billion at September 30, 2004. Since
December 31, 2004, loans increased $42.7 million. The $59.2 million sale of our
student loans mentioned above was offset by the acquisition of approximately
$56.3 million in loans from the Clyde acquisition and $45.6 million in new
loans. The increase in intangible assets from December 31, 2004 to September 30,
2005 of $13.3 million is due to our acquisition of the bank in Clyde, Texas, in
the first quarter of 2005. We continue to experience competitive pressures in
several of our markets which have negatively affected our ability to increase
our loans while at the same time maintaining our credit quality standards.
Deposits totaled $2.1 billion at September 30, 2005 compared to $2.0 billion at
December 31, 2004, up 6.36%, principally attributable to the Clyde acquisition
($113.9 million). Deposits at September 30, 2004 were $1.8 billion.
Loans at September 30, 2005, totaled $1.207 billion, compared to $1.164 billion
at year-end 2004. Loans totaled $1.126 billion at September 30, 2004. As
compared to September 30, 2004 amounts, loans at September 30, 2005 reflect (i)
a $16.6 million increase in commercial, financial and agricultural loans; (ii) a
$50.2 million increase in real estate loans; and (iii) a $14.2 million increase
in consumer and student loans.
16
Investment securities at September 30, 2005, totaled $950.7 million as compared
to $854.3 million at year-end 2004 and $893.0 million at September 30, 2004. The
unrealized loss, net of income tax benefit, in the investment portfolio at
September 30, 2005, amounted to $2.0 million; the portfolio had an overall tax
equivalent yield of 4.67% for the nine months ended September 30, 2005. At
September 30, 2005, the investment portfolio had a weighted average life of 3.55
years and modified duration of 3.07 years. At September 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.
Nonperforming assets at September 30, 2005, totaled $3.8 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 0.32% 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.
Acquisition
- -----------
On August 10, 2005, we entered into an agreement and plan of merger with
Bridgeport Financial Corporation, the parent company of The First National Bank
of Bridgeport, Bridgeport, Texas. Pursuant to the agreement, we will pay $20.3
million plus the assumption of $5.5 million in debt and trust preferred
securities for all of the outstanding shares of Bridgeport Financial Corporation
and its subsidiary bank, which we expect to combine with First Financial Bank,
N.A., Southlake.
The First National Bank of Bridgeport is located in the City of Bridgeport, Wise
County, Texas, approximately 35 miles northwest of Fort Worth, Texas. The First
National Bank of Bridgeport was established in 1907 and, as of September 30,
2005, had assets totaling approximately $145.2 million and shareholder's equity
of approximately $14.8 million. Subject to regulatory approval, we anticipate
completing the acquisition of Bridgeport Financial Corporation in the fourth
quarter of 2005.
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. We expect to renew this line of credit for another year at comparable
amounts and terms.
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. We also expect to fund the Bridgeport acquisition through existing
cash balances. Nevertheless, we anticipate that future acquisitions, if any, of
financial institutions and expansion of branch locations could place a demand on
17
our cash resources. Available cash at the 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 $276.3 million at September 30,
2005, which was up from $265.5 million at year-end 2004 and $264.3 million at
September 30, 2004. The Company's risk-based capital and leverage ratios at
September 30, 2005 were 15.90% and 9.30%, respectively. The 2005 cash dividends
of $.82 per share totaled $16.9 million and represented 50.5% of earnings for
the first nine 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 September 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 2.57% and a downward shift of interest rates by 150 basis
points would result in a reduction in projected net interest income of 6.69%.
These are good faith estimates and assume the composition of our interest
sensitive assets and liabilities existing at September 30, 2005, will remain
constant over the relevant 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 September 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.
18
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 September 30, 2005.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal
controls.
19
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.
20
*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
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date: November 3, 2005 By:/S/ F. Scott Dueser
-------------------
F. Scott Dueser
President and Chief Executive Officer
Date: November 3, 2005 By:/S/ J. Bruce Hildebrand
-----------------------
J. Bruce Hildebrand
Executive Vice President and
Chief Financial Officer
22
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: November 3, 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: November 3, 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 September 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: November 3, 2005
By: /s/ F. SCOTT DUESER
---------------------------
F. Scott Dueser
Chief Executive Officer
Subscribed and sworn to before me this 3rd of November, 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 September 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: November 3, 2005
By: /s/ J. Bruce Hildebrand
---------------------------
J. Bruce Hildebrand
Chief Financial Officer
Subscribed and sworn to before me this 3rd of November, 2005.
/s/ Gaila N. Kilpatrick
- -----------------------
Gaila N. Kilpatrick
Notary Public
My commission expires: April 15, 2009