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 Quarter Ended Commission File Number
September 30, 1998 0-7674
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FIRST FINANCIAL BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Texas 75-0944023
- --------------- ----------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
400 Pine Street, Abilene, Texas 79601
- ------------------------------- ----------------------
(Address of Executive Offices) (Zip Code)
Registrant's Telephone Number (915) 627-7155
Securities Registered Pursuant to Section 12(b) of the Act:
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None
Securities Registered Pursuant to Section 12(g) of the Act:
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Common Stock, Par Value $10.00 Per Share
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(Title of Class)
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 .
--- ---
There were 8,667,173 shares of common stock outstanding as of November
10, 1998.
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item Page
1. Consolidated Financial Statements and Notes
to Consolidated Financial Statements 4
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Signatures 15
-2-
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. at September
30, 1998 and 1997, and December 31, 1997, and the consolidated statements of
earnings and comprehensive earnings for the three and nine months ended
September 30, 1998 and 1997, and the changes in shareholders' equity for the
year ended December 31, 1997 and nine months ended September 30, 1998, and the
cash flows for the nine months ended September 30, 1998 and 1997, follow on
pages 4 through 8.
-3-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30,
-------------------------------------
1998 1997 December 31,
(Unaudited) (Unaudited) 1997
-------------- -------------- --------------
ASSETS
Cash and due from banks $ 69,624,356 $ 77,919,838 $ 88,795,827
Interest-bearing deposits in banks 203,837 498,620 398,671
Federal funds sold 63,426,882 114,811,597 114,485,839
Investment securities:
Securities held to maturity (approximate market value
of $370,418,770 and $437,147,519, at September 30, 1998
and 1997, and $414,160,027 at December 31, 1997) 364,923,235 433,326,026 411,857,644
Securities available for sale, at approximate market value 192,055,857 138,918,365 170,697,516
-------------- -------------- --------------
Total investment securities 556,979,092 572,244,391 582,555,160
Loans 763,888,458 682,466,812 716,792,426
Less: Allowance for loan losses 9,124,252 10,653,376 10,288,200
Unearned discount 6,051,725 8,267,204 7,853,724
-------------- -------------- --------------
Net loans 748,712,481 663,546,232 698,650,502
Bank premises and equipment - net 41,658,253 41,766,457 41,501,074
Goodwill 21,897,272 23,456,019 23,054,329
Other assets 23,916,310 22,292,727 24,067,522
-------------- -------------- --------------
TOTAL ASSETS $ 1,526,418,483 $ 1,516,535,881 $ 1,573,508,924
============== ============== ==============
LIABILITIES
Noninterest-bearing deposits $ 287,856,512 $ 282,064,874 $ 311,318,296
Interest-bearing demand deposits 380,987,726 370,677,702 399,745,364
Interest-bearing time deposits 684,954,936 701,084,838 701,660,161
-------------- -------------- --------------
Total deposits 1,353,799,174 1,353,827,414 1,412,723,821
Dividends payable 2,382,828 2,105,210 2,162,899
Other short-term borrowings 150,000 6,305,000 4,770,000
Other liabilities 10,187,164 9,233,943 5,625,741
-------------- -------------- --------------
Total liabilities 1,366,519,166 1,371,471,567 1,425,282,461
-------------- -------------- --------------
SHAREHOLDERS' EQUITY
Capital stock - $10 par value;
20,000,000 shares authorized 86,648,300 86,372,810 86,515,950
Capital surplus 36,362,237 36,319,537 36,350,673
Retained earnings 34,707,633 22,143,724 24,996,973
Unrealized gain (loss) on investment securities
available for sale 2,181,147 228,243 362,867
-------------- -------------- --------------
Total shareholders' equity 159,899,317 145,064,314 148,226,463
-------------- -------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,526,418,483 $ 1,516,535,881 $ 1,573,508,924
============== ============== ==============
See notes to consolidated financial statements.
-4-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
INTEREST INCOME
Loans, including fees ........................................ $17,345,562 $14,660,816 $50,630,964 $42,916,941
Investment income - taxable .................................. 7,516,193 7,756,797 23,841,324 23,043,280
Investment income - tax exempt ............................... 825,637 435,201 2,068,735 1,227,594
Interest on interest bearing deposits ........................ 2,964 7,679 10,882 33,958
Interest on federal funds sold and other ..................... 1,032,339 910,639 3,162,942 2,189,615
----------- ----------- ----------- -----------
Total interest income ........................................ 26,722,695 23,771,132 79,714,847 69,411,388
INTEREST EXPENSE
Interest-bearing deposits .................................... 11,019,675 9,739,254 33,060,521 28,112,830
Short-term borrowings ........................................ 23,591 7,095 150,287 12,000
----------- ----------- ----------- -----------
Total interest expense ....................................... 11,043,266 9,746,349 33,210,808 28,124,830
----------- ----------- ----------- -----------
NET INTEREST INCOME .............................................. 15,679,429 14,024,783 46,504,039 41,286,558
Provision for loan losses .................................... 245,000 252,500 664,500 686,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES .................................... 15,434,429 13,772,283 45,839,539 40,600,558
NONINTEREST INCOME
Trust fees ................................................... 1,176,347 988,318 3,578,476 2,941,191
Service fees on deposit accounts ............................. 2,852,716 2,561,722 8,162,935 7,363,782
Other ........................................................ 1,359,608 1,270,694 4,010,569 3,518,882
----------- ----------- ----------- -----------
Total noninterest income 5,388,671 4,820,734 15,751,980 13,823,855
NONINTEREST EXPENSE
Salaries and employee benefits ............................... 6,407,312 5,611,710 18,982,674 16,446,536
Net occupancy and equipment expenses ......................... 1,016,230 921,394 2,946,729 2,665,503
Equipment expense ............................................ 996,052 954,809 2,910,518 2,581,095
Goodwill amortization ........................................ 402,053 101,691 1,205,536 300,941
Other ........................................................ 3,684,735 3,361,691 10,863,770 9,851,485
----------- ----------- ----------- -----------
Total noninterest expense 12,506,382 10,951,295 36,909,227 31,845,560
----------- ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES ..................................... 8,316,718 7,641,722 24,682,292 22,578,853
Provision for income taxes ................................... 2,666,708 2,530,439 8,042,220 7,531,930
----------- ----------- ----------- -----------
NET EARNINGS ..................................................... $ 5,650,010 $ 5,111,283 $16,640,072 $15,046,923
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE ......................................... $ 0.59 $ 0.54 $ 1.75 $ 1.59
EARNINGS PER SHARE, ASSUMING DILUTION ............................ $ 0.59 $ 0.54 $ 1.74 $ 1.58
DIVIDENDS PER SHARE .............................................. $ 0.25 $ 0.23 $ 0.73 $ 0.65
See notes to consolidated financial statements.
-5-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
NET EARNINGS ..................................................... $ 5,650,010 $ 5,111,283 $ 16,640,072 $ 15,046,923
Other items of comprenshive earnings:
Change in unrealized gain on investment
securities available for sale, before tax 2,594,843 415,660 2,801,286 754,393
Reclassification adjustment for realized (gains) losses
on investment securities included in net earnings (5,511) 2,748 (3,932) (1,867)
------------ ------------ ------------ ------------
Total other items of comprehensive earnings 2,589,332 418,408 2,797,354 752,526
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE
EARNINGS, BEFORE TAX ......................................... 8,239,342 5,529,691 19,437,426 15,799,449
Income tax expense related to other
items of comprehensive earnings 906,266 146,443 979,074 263,384
------------ ------------ ------------ ------------
COMPREHENSIVE EARNINGS ........................................... $ 7,333,076 $ 5,383,248 $ 18,458,352 $ 15,536,065
============ ============ ============ ============
See notes to consolidated financial statements.
-6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized
Gain (Loss)
On Investment
Capital Stock Securities Total
------------------------ Capital Retained Available Shareholders'
Shares Amount Surplus Earnings For Sale Equity
--------- ------------ ------------ ------------ ----------- --------------
Balances at December 31, 1996 6,718,886 $ 67,188,860 $ 36,874,707 $ 27,363,902 $ (266,623) $ 131,160,846
Adjustments for pooling of interests 216,442 2,164,420 (521,224) 2,658,712 (4,283) 4,297,625
--------- ------------ ------------ ------------ ----------- --------------
Balances at January 1, 1997 6,935,328 69,353,280 36,353,483 30,022,614 (270,906) 135,458,471
Net earnings - - - 20,063,105 - 20,063,105
Stock issuances 34,873 348,730 (2,810) - - 345,920
Cash dividends declared - - - (8,274,806) - (8,274,806)
Stock split effected in
the form of a dividend 1,681,394 16,813,940 - (16,813,940) - -
Change in unrealized gain (loss) - - - - 633,773 633,773
--------- ------------ ------------ ------------ ----------- --------------
Balances at December 31, 1997 8,651,595 86,515,950 36,350,673 24,996,973 362,867 148,226,463
Net earnings - - - 16,640,072 - 16,640,072
Stock issuances 13,235 132,350 11,564 - - 143,914
Cash dividends declared - - - (6,929,412) - (6,929,412)
Change in unrealized gain - - - - 1,818,280 1,818,280
--------- ------------ ------------ ------------ ----------- --------------
Balances at September 30,1998 (unaudited) 8,664,830 $ 86,648,300 $ 36,362,237 $ 34,707,633 $ 2,181,147 $ 159,899,317
========= ============ ============ ============ =========== ==============
See notes to consolidated financial statements.
-7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Nine Months Ended
September 30,
------------------------------
1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ............................................................................... $ 16,640,072 $ 15,046,923
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization .......................................................... 4,378,779 3,079,008
Provision for loan losses .............................................................. 664,500 686,000
Premium amortization, net of discount accretion ........................................ 1,527,734 721,844
Gain on sale of assets ................................................................. (1,279) (8,487)
Deferred federal income tax benefit .................................................... (233,020) (203,518)
Increase in other assets ............................................................... (1,057,949) (262,110)
Increase in other liabilities .......................................................... 4,561,423 1,755,826
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Total adjustments 9,840,188 5,768,563
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Net cash provided by operating activities .............................................. 26,480,260 20,815,486
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in banks ......................................... 194,834 489,874
Cash and cash equivalents received through purchase
of assets and liabilities, net of cash paid ................................................ -- 70,702,534
Proceeds from sale of securities available for sale ........................................ 4,064,365 8,568,116
Proceeds from maturity of securities available for sale .................................... 95,916,498 4,647,185
Proceeds from maturity of securities held to maturity ...................................... 162,119,691 169,975,814
Purchase of securities available for sale .................................................. (116,219,621) (97,157,778)
Purchase of securities held to maturity .................................................... (119,031,313) (136,216,613)
Net increase in loans ...................................................................... (50,748,079) (12,645,088)
Capital expenditures ....................................................................... (3,404,762) (3,880,468)
Proceeds from sale of assets ............................................................... 507,915 325,418
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Net cash used in investing activities .................................................. (26,600,472) 4,808,994
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in noninterest-bearing deposits ............................................... (23,461,784) (17,722,275)
Net (decrease) increase in interest-bearing deposits ....................................... (35,462,863) 47,629,419
Net (decrease) increase in other short-term borrowings ..................................... (4,620,000) 6,090,000
Proceeds from stock issuances .............................................................. 143,914 203,117
Dividends paid ............................................................................. (6,709,483) (5,887,938)
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Net cash used in financing activities .................................................. (70,110,216) 30,312,323
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Net (decrease) increasein cash and cash equivalents ........................................ (70,230,428) 55,936,803
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................................. 203,281,666 136,794,632
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................................................... $ 133,051,238 $ 192,731,435
============= =============
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS
Interest paid .............................................................................. $ 33,038,532 $ 27,779,907
Federal income tax paid .................................................................... 8,269,043 7,808,774
Assets acquired through foreclosure ........................................................ 21,600 40,585
Change in unrealized gain on investment securities available for sale ...................... 2,801,286 762,533
The Company purchased certain assets and liabilities from the San Angelo
branch of Texas Commerce Bank for cash, along with assumption of
certain liabilities (primarily deposits)
Fair value of assets acquired (other than cash)....................................... -- 85,044,234
Liabilities assumed................................................................... -- 155,746,768
Cash acquired......................................................................... -- 70,702,534
See notes to consolidated financial statements.
-8-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. FAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. The Company adopted FAS 130 on
January 1, 1998.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS 133"). FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires that all
derivatives be recognized as either assets or liabilities in the statement
of financial position and that those instruments be measured at fair value.
The statement is effective for years beginning after December 15, 1999, with
early application encouraged. The adoption of the statement will not have a
significant impact on the Company. The Company plans to adopt FAS 133 on
January 1, 2000 or earlier.
Note 2 - Earnings Per Share
Basic earnings per common share is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding
during the period. In computing diluted earnings per common share for the
quarters and nine-month periods ended September 30, 1998 and 1997, the
Company assumes that all outstanding options to purchase common stock have
been exercised at the beginning of the year (or time of issuance, if later).
The dilutive effect of the outstanding options is reflected by application
of the treasury stock method, whereby the proceeds from the exercised
options are assumed to be used to purchase common stock at the average
market price during the respective period. The weighted average common
shares outstanding used in computing basic earnings per common share for the
quarters ended September 30, 1998 and 1997, was 9,529,879 and 9,498,368
shares, respectively. The weighted average common shares outstanding used in
computing basic earnings per share for the nine-month periods ended
September 30, 1998 and 1997, was 9,526,003 and 9,489,857 shares,
respectively. The weighted average common shares outstanding used in
computing diluted earnings per common share for the quarters ended September
30, 1998 and 1997, was 9,584,385 and 9,565,782 shares, respectively. The
weighted average common shares outstanding used in computing diluted
earnings per common share for the nine-month periods ended September 30,
1998 and 1997, was 9,585,314 and 9,554,701 shares, respectively.
The Company's per share financial information has been adjusted to reflect
the 10 percent stock dividend declared on October 27, 1998, payable on
December 1, 1998, to shareholders of record on November 16, 1998.
Note 3 - Pending Acquisition
On September 4, 1998, First Financial Bankshares, Inc. (the "Company")
executed a Stock Exchange Agreement with Cleburne State Bank ("CSB") to
acquire all of the issued and outstanding shares of the common stock of CSB.
The Board of Governors of the Federal Reserve System approved the proposed
acquisition on October 21, 1998.
-9-
The Registration Statement filed with the Securities and Exchange
Commission became effective November 6, 1998 and a Prospectus was mailed to
CSB shareholders offering 2.1073 shares of the Company's stock for each
share of CSB stock. The Company plans to account for the CSB acquisition as
an immaterial pooling-of-interests. It is anticipated that the transaction
will be completed in December 1998. It is also anticipated that CSB will be
merged into the Company's subsidiary bank, First National Bank in Cleburne
during the first quarter of 1999.
CSB is a state chartered banking association chartered in 1980. CSB has
total assets of $84,000,000 and deposits of $76,000,000, and operates two
full service locations, one in Cleburne, Texas and a branch in nearby
Alvarado, Texas. The Company's subsidiary bank in Cleburne, Texas, First
National Bank in Cleburne, has total assets of $103,000,000 and operates
locations in Cleburne, Texas and Burleson, Texas.
-10-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operating Results
- -----------------
For the nine months ended September 30, 1998, the Company's net income amounted
to $16.6 million, or $1.75 per basic share. For the same period last year, net
income amounted to $15.0 million, or $1.59 per basic share. Net income for the
third quarter 1998 totaled $5.6 million, or $0.59 per basic share, as compared
to $5.1 million, or $0.54 per basic share, earned in the third quarter of 1997.
Per share amounts for all periods have been adjusted to reflect the 10 percent
dividend declared on October 27,1998, payable on December 1,1998 to shareholders
of record on November 16, 1998. Return on average assets and return on average
equity for the nine months ended September 30,1998, amounted to 1.45 percent and
14.65 percent, respectively. The Company's return on average assets and return
on average equity for the same period last year amounted to 1.54 percent and
14.50 percent, respectively.
Net interest income for the nine months ended September 30, 1998, amounted to
$46.5 million, up $5.2 million from the same period last year. Net interest
income for the third quarter amounted to $15.7 million, an increase of $1.7
million over the third quarter of 1997. The improvement in net interest income
resulted primarily from growth in average loans. The net interest margin of 4.54
percent through September 30, 1998, represents a decrease from 4.63 percent for
the same period last year and is attributable to higher rates on
interest-bearing liabilities during 1998. For the nine months ended September
30, 1998, the provision for loan losses amounted to $665 thousand as compared to
$686 thousand for the same period in 1997. For the third quarter, the provision
for loan losses was $245 thousand, as compared to $253 thousand in the third
quarter of 1997.
Total noninterest income for the nine months ended September 30, 1998, amounted
to $15.7 million as compared to the prior year total of $13.8 million. Through
September 30, 1998, trust fees and service fees on deposit accounts were up $637
thousand and $799 thousand, respectively. Trust accounts and deposit accounts
added through a purchase transaction in September 1997 contributed to these
increases. Through the third quarter of 1998, real estate mortgage fees and ATM
fees were up $319 thousand and $225 thousand, respectively, from the prior year
amounts and were the primary factors contributing to the improvement in other
noninterest income. For the third quarter 1998, total noninterest income was up
$567 thousand over the same quarter last year and resulted primarily from higher
trust fees and service fees on deposit accounts.
Noninterest expense for the first nine months of 1998 totaled $36.9 million, an
increase of $5.1 million over the same period last year. Higher employee costs
and goodwill amortization were the primary factors contributing to the increase.
Communication expense, professional service fees, and correspondent bank service
charges were factors in the higher level of other noninterest expense which
increased $1.0 million from the 1997 nine months total. Excluding the effect of
the Company's purchase acquisition completed in September 1997, total
noninterest expense increased approximately $2.1 million, or 6.6 percent. The
Company's key indicator of operating efficiency, noninterest expense as a
percent of net interest income and noninterest income, for the year-to-date
through September 1998 was 58.66 percent as compared to 58.79 percent for the
same period in 1997. For the third quarter of 1998, noninterest expense amounted
to $12.5 million, an increase of $1.6 million from the same period last year and
resulted primarily from increased employee costs and goodwill amortization.
Balance Sheet Review
- --------------------
Total assets at September 30, 1998, amounted to $1.526 billion as compared to
$1.574 billion at December 31, 1997, and $1.517 billion at September 30, 1997.
The September 30, 1998, decline in total assets from the year-end 1997 balance
reflects a seasonal decrease in total deposits. The balance sheets presented
reflect normal recurring adjustments and accruals.
-11-
Loans at September 30, 1998, totaled $758 million as compared to $709 million at
year-end 1997 and $674 million at September 30, 1997. Investment securities at
September 30, 1998, totaled $557 million as compared to $583 million at year-end
1997 and $572 million at September 30, 1997. The net unrealized gain in the
investment portfolio at September 30, 1998, amounted to $8.9 million as compared
to a $2.9 million unrealized gain at December 31, 1997. Approximately $220
million, or 40 percent, of the portfolio matures within two years which protects
the Company from significant interest rate risk should interest rates move up.
The investment portfolio has an overall yield of 6.15 percent and at September
30, 1998, the Company did not hold any CMOs that entail higher risks than
standard mortgage-backed securities. Total investment securities at September
30, 1998, included structured notes with an amortized cost of $7.0 million and
an approximate market value of $6.9 million. Total deposits at September 30,
1998, amounted to $1.367 billion as compared to $1.413 billion at year-end 1997
and $1.354 billion at September 30, 1997.
Nonperforming assets at September 30, 1998, totaled $3.4 million, or .45 percent
of loans and foreclosed assets, and were down $1.4 million from the December 31,
1997, amount. At September 30, 1998, the allowance for loan losses amounted to
267.5 percent of nonperforming assets. Management is not aware of any material
classified credit not properly disclosed as nonperforming and considers the
allowance for loan losses to be adequate. During 1998, the markets in which the
subsidiary banks operate have experienced a lack of rainfall. Management
continues to assess the impact this may have to its agricultural lending and, as
required, will provide adjustments to the allowance for loan losses.
Liquidity and Capital
- ---------------------
The Company's consolidated statements of cash flows are presented on page 8 of
this report. At September 30, 1998, the parent company had no debt outstanding
under its $18 million line of credit with an unaffiliated financial institution.
Total equity capital amounted to $159.9 million at September 30, 1998, which was
up from $148.2 million at year-end 1997 and $145.1 million at September 30,
1997. The Company's risk-based capital and leverage ratios at September 30,
1998, were 16.32 percent and 9.01 percent, respectively. The third quarter cash
dividend of $0.25 per share totaled $2.4 million and represented 42.2 percent
of third quarter earnings. On October 27, 1998, the Company declared a 10
percent stock dividend payable December 1, 1998, and a $0.275 per share cash
dividend payable January 2, 1999.
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. Each subsidiary bank has an asset/liability committee which monitors
interest rate risk and compliance with investment policies. Interest-sensitivity
gap and simulation analysis are among the ways that the subsidiary banks track
interest rate risk. Since year-end 1997, there has been no material change in
the Company's interest rate risk.
Year 2000 Issue
- ---------------
The Year 2000 issue is a programming issue that may affect many electronic
processing systems. Until relatively recently, in order to minimize the length
of data fields, most date-sensitive programs eliminated the first two digits of
the year. This issue could affect information technology ("IT") systems and
date-sensitive embedded technology that controls certain systems (such as
telecommunications systems, security systems, etc.) leaving them unable to
properly recognize or distinguish dates in the twentieth and twenty-first
centuries and thereafter. For example, date-sensitive calculations may treat
"00" as the year 1900 rather than the year 2000. This treatment could result in
significant miscalculations when processing critical date-sensitive information
relating to dates after December 31, 1999.
-12-
The Company has completed its initial Year 2000 compliance assessment of its
core IT systems, which include loan, deposit and check processing systems. These
core IT systems are licensed from third parties, and these third parties have
warranted to the Company that their system is Year 2000 compliant. The Company
anticipates performing and completing compliance testing of these core IT
systems during the quarter ended December 31, 1998. There can be no assurance,
however, that these core IT systems will be Year 2000 compliant by December 31,
1999. If any of these core IT systems are not Year 2000 compliant by December
31, 1999, then the Year 2000 issue will have a material adverse effect on the
operations, financial condition and results of operations of the Company.
The Company has also completed its initial Year 2000 compliance assessment of
its other IT systems, which includes automatic teller machine software systems.
These other IT systems are also licensed from third parties. These third parties
have either assured the Company that their system is Year 2000 compliant or
identified necessary system upgrades to make their system Year 2000 compliant.
The Company anticipates receiving the necessary systems upgrades and completing
Year 2000 compliance testing of these other IT systems by March 31, 1999. There
can be no assurance that these other IT systems will be Year 2000 compliant by
December 31, 1999. If any of these other IT systems are not Year 2000 compliant
by December 31, 1999, then the Year 2000 issue could have a material adverse
effect on the operations, financial condition and results of operations of the
Company.
The Year 2000 issue may also affect the Company's date-sensitive embedded
technology, which controls systems such as the telecommunications systems,
security systems, etc. The Company does not believe that the cost to modify or
replace such technology to make it Year 2000 compliant will be material. But, if
such modifications or replacements, if required, are not made, the Year 2000
issue could have a material adverse effect on the operations, financial
condition and results of operations of the Company.
Ultimately, the potential impact of the Year 2000 issue will depend not only on
the corrective measures the Company undertakes, but also on the way in which the
Year 2000 issue is addressed by governmental agencies, businesses and other
entities that provide data to, or receive data from, the Company or any of its
subsidiaries, or whose financial condition or operations are important to the
Company or any of its subsidiaries, such as bank regulatory agencies, the
Federal Reserve banking system, and significant suppliers and customers. The
Company is initiating communications with significant customers and vendors to
evaluate the risk of their failure to be Year 2000 compliant and the extent to
which the Company may be vulnerable to such failure. There can be no assurance
that the systems of these third parties will be Year 2000 compliant by December
31, 1999, or that the failure of these third parties to be Year 2000 compliant
will not have a material adverse effect on the operations, financial condition
and results of operation of the Company.
The cost of IT and embedded technology systems testing and upgrades is not
expected to be material to the Company's consolidated operating results. The
Company estimates incurring costs of $200,000 for Year 2000 compliance testing
and its communications program, which will be recorded as noninterest expense.
The Company also estimates the cost of system upgrades to be approximately
$800,000, which will be capitalized and amortized over future periods. The
Company intends to fund these costs with cash from operations.
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The Company believes that the most significant Year 2000 issue risks relate to
third parties' failures to be Year 2000 compliant. But, because the Company's
assessment of and solution implementation for the Year 2000 issue is still in
process, the Company has not yet developed contingency plans for these risks and
the risk of the Company's failure to be Year 2000 compliant. Management intends
to complete contingency plans for the Year 2000 issue by December 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST FINANCIAL BANKSHARES, INC.
Date November 12, 1998 By:/S/CURTIS R. HARVEY
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Curtis R. Harvey
Executive Vice President and
Chief Financial Officer
Date November 12, 1998 By:/S/SANDY LESTER
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Sandy Lester
Secretary-Treasurer
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