FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly
period ended June 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-7674
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FIRST FINANCIAL BANKSHARES, INC.
--------------------------------
(Exact name of registrant as Specified in its charter)
Texas 75-0944023
- --------------------------------------------- ---------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
400 Pine Street, Abilene, Texas 79601
-------------------------------------
(Address of principal executive offices)
(Zip Code)
(915)627-7155
-------------
(Registrant's telephone number, including area code)
NO CHANGE
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of August 2, 2002.
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, Par Value $10.00 Per Share 12,355,782
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item Page
---- ----
1. Consolidated Financial Statements and Notes to
Consolidated Financial Statements 3
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
3. Quantitative and Qualitative Disclosures About Market Risk 12
Signatures 13
PART II
OTHER INFORMATION
6. Exhibits 14
-2-
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
The consolidated balance sheets of First Financial Bankshares, Inc. at June 30,
2002 and 2001, and December 31, 2001, and the consolidated statements of
earnings and comprehensive earnings for the three months and six months ended
June 30, 2002 and 2001, changes in shareholders' equity for the year ended
December 31, 2001 and six months ended June 30, 2002, and cash flows for the six
months ended June 30, 2002 and 2001, follow on pages 4 through 8.
-3-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
------------------------------------
Unaudited
------------------------------------ December 31,
2002 2001 2001
---------------- ---------------- -----------------
ASSETS
Cash and due from banks $ 93,908,407 $ 78,397,631 $ 112,150,214
Federal funds sold 46,450,000 74,125,000 72,975,000
---------------- ---------------- -----------------
Cash and cash equivalents 140,358,407 152,522,631 185,125,214
Interest-bearing deposits in banks 21,071 304,455 1,374,285
Investment securities:
Securities held-to-maturity (market value of
$250,770,960 and $338,568,090 at June 30, 2002
and 2001, respectively; $298,569,794 at December 31, 2001) 241,270,327 321,058,211 290,674,490
Securities available-for-sale, at market value 514,055,402 339,525,470 431,019,205
---------------- ---------------- -----------------
Total investment securities 755,325,729 660,583,681 721,693,695
Loans 935,174,382 862,786,862 940,130,975
Less: Allowance for loan losses 11,119,945 9,672,505 10,602,419
---------------- ---------------- -----------------
Net loans 924,054,437 853,114,357 929,528,556
Bank premises and equipment, net 41,355,266 40,754,291 42,012,431
Goodwill and intangible assets 24,644,391 17,694,621 24,711,969
Other assets 24,781,515 26,384,417 25,247,980
---------------- ---------------- -----------------
TOTAL ASSETS $ 1,910,540,816 $ 1,751,358,453 $ 1,929,694,130
================ ================ =================
LIABILITIES
Noninterest-bearing deposits $ 398,219,497 $ 330,407,818 $ 389,406,666
Interest-bearing deposits 1,249,649,814 1,188,058,484 1,295,755,932
---------------- ---------------- -----------------
Total deposits 1,647,869,311 1,518,466,302 1,685,162,598
Dividends payable 4,323,622 3,695,865 3,699,976
Securities sold under agreements to repurchase 22,349,997 12,586,776 19,847,067
Other liabilities 8,282,439 9,961,101 7,330,476
---------------- ---------------- -----------------
Total liabilities 1,682,825,369 1,544,710,044 1,716,040,117
---------------- ---------------- -----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $10 par value; authorized 20,000,000 shares; 12,354,111 amd
12,319,549 issued and outstanding at June 30, 2002 and 2001,
respectively; 12,333,252
issued and outstanding at December 31, 2001 123,541,110 123,195,490 123,332,520
Capital surplus 57,980,651 57,721,279 57,824,061
Retained earnings 37,048,374 20,708,837 28,375,353
Unrealized gain on investment securities available-for-sale, net 9,145,312 5,022,803 4,122,079
---------------- ---------------- -----------------
Total shareholders' equity 227,715,447 206,648,409 213,654,013
---------------- ---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,910,540,816 $ 1,751,358,453 $ 1,929,694,130
================ ================ =================
See notes to consolidated financial statements.
-4-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
INTEREST INCOME
Interest and fees on loans $ 16,205,273 $ 18,792,018 $ 32,721,285 $ 38,367,324
Interest on investment securities:
Taxable 8,110,070 7,759,393 16,031,768 15,566,024
Exempt from federal income tax 1,786,690 1,540,063 3,517,634 3,018,344
Interest on federal funds sold and
interest-bearing deposits in banks 312,244 1,120,820 570,653 2,207,112
--------------- --------------- --------------- ---------------
Total interest income 26,414,277 29,212,294 52,841,340 59,158,804
INTEREST EXPENSE
Interest-bearing deposits 6,174,507 11,531,888 13,159,675 24,242,985
Other 71,196 247,051 158,496 562,571
--------------- --------------- --------------- ---------------
Total interest expense 6,245,703 11,778,939 13,318,171 24,805,556
--------------- --------------- --------------- ---------------
NET INTEREST INCOME 20,168,574 17,433,355 39,523,169 34,353,248
Provision for loan losses 510,334 497,334 908,834 863,717
--------------- --------------- --------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,658,240 16,936,021 38,614,335 33,489,531
NONINTEREST INCOME
Trust department income 1,448,115 1,478,317 2,872,185 2,995,365
Service fees on deposit accounts 3,807,718 3,741,899 7,364,577 7,248,672
ATM fees 591,208 478,447 1,102,212 929,691
Real estate mortgage fees 369,130 497,458 791,158 769,854
Net gain on securities transactions 19,256 12,763 19,256 67,612
Other 960,049 852,343 2,016,615 1,746,716
--------------- --------------- --------------- ---------------
Total noninterest income 7,195,476 7,061,227 14,166,003 13,757,910
NONINTEREST EXPENSE
Salaries and employee benefits 7,870,706 6,985,845 15,710,117 13,872,049
Net occupancy expense 1,031,438 953,849 1,985,623 1,890,423
Equipment expense 1,156,209 1,058,845 2,341,096 2,139,121
Printing, stationery & supplies 439,231 243,583 860,661 470,103
Correspondent bank service charges 375,845 329,584 738,837 633,409
Amortization of intangible assets 33,789 410,437 67,578 820,778
Other expenses 3,769,600 3,526,259 7,207,223 6,833,285
--------------- --------------- --------------- ---------------
Total noninterest expense 14,676,818 13,508,402 28,911,135 26,659,168
--------------- --------------- --------------- ---------------
EARNINGS BEFORE INCOME TAXES 12,176,898 10,488,846 23,869,203 20,588,273
Income tax expense 3,655,140 3,201,825 7,168,792 6,297,502
--------------- --------------- --------------- ---------------
NET EARNINGS $ 8,521,758 $ 7,287,021 $ 16,700,411 $ 14,290,771
=============== =============== =============== ===============
EARNINGS PER SHARE, BASIC (1) $ 0.69 $ 0.59 $ 1.35 $ 1.16
EARNINGS PER SHARE, ASSUMING DILUTION (1) $ 0.69 $ 0.59 $ 1.35 $ 1.15
DIVIDENDS PER SHARE (1) $ 0.35 $ 0.30 $ 0.65 $ 0.56
(1) Per share amounts are adjusted to reflect 25% stock dividend issued June 1,
2001.
See notes to consolidated financial statements.
-5-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
NET EARNINGS $ 8,521,758 $ 7,287,021 $ 16,700,411 $ 14,290,771
OTHER ITEMS OF COMPREHENSIVE EARNINGS
Change in unrealized gain on investment
securities available-for-sale, before income taxes 9,429,036 1,756,146 7,747,307 5,302,029
Reclassification adjustment for realized gains on investment
in securities included in net earnings, before income taxes (19,256) (12,763) (19,256) (67,612)
------------- ------------- ------------- -------------
Total other items of comprehensive earnings, before tax 9,409,780 1,743,383 7,728,051 5,234,417
Income tax expense related to other
items of comprehensive earnings 3,293,423 610,184 2,704,818 1,832,046
------------- ------------- ------------- -------------
COMPREHENSIVE EARNINGS $ 14,638,115 $ 8,420,220 $ 21,723,644 $ 17,693,142
============= ============= ============= =============
See notes to consolidated financial statements.
-6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unrealized
Gain on
Investment
Common Stock Securities Total
------------------------- Capital Retained Treasury Available Shareholders'
Shares Amount Surplus Earnings Stock,at cost For Sale,Net Equity
---------- ------------- ------------ ------------ ----------- ----------- -------------
Balances at December 31, 2000 9,983,002 $ 99,830,020 $ 60,592,310 $ 38,003,195 $(3,925,069) $ 1,620,432 $ 196,120,888
Net earnings - - - 29,354,505 - - 29,354,505
Stock split-up, effected in the
form of a 25% stock dividend 2,461,770 24,617,700 - (24,617,700) - - -
Stock issuances 24,480 244,800 111,870 - - - 356,670
Cash dividends declared,
$1.16 per share - - - (14,364,647) - - (14,364,647)
Acquisition of treasury stock - - - - (315,050) - (315,050)
Retirement of treasury stock (136,000) (1,360,000) (2,880,119) - 4,240,119 - -
Change in unrealized gain
on investment securities
available-for-sale, net - - - - - 2,501,647 2,501,647
---------- ------------- ------------ ------------ ----------- ----------- -------------
Balances at December 31, 2001 12,333,252 123,332,520 57,824,061 28,375,353 - 4,122,079 213,654,013
Net earnings - - - 16,700,411 - - 16,700,411
Stock issuances 20,859 208,590 156,590 - - - 365,180
Cash dividends declared,
$.65 per share - - - (8,027,390) - - (8,027,390)
Change in unrealized gain
on investment securities
available-for-sale, net - - - - - 5,023,233 5,023,233
---------- ------------- ------------ ------------ ----------- ----------- -------------
Balances at June 30,2002(unaudited) 12,354,111 $ 123,541,110 $ 57,980,651 $ 37,048,374 $ - $ 9,145,312 $ 227,715,447
========== ============= ============ ============ =========== =========== =============
See notes to consolidated financial statements.
-7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Six Months Ended
June 30,
------------------------------------
2002 2001
----------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 16,700,411 $ 14,290,771
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,151,454 2,781,694
Provision for loan losses 908,834 863,717
Premium amortization, net of discount accretion 2,037,782 397,684
Loss (gain) on sale of assets 75,290 (53,909)
Deferred federal income tax benefit (478,789) (795,754)
(Increase) decrease in other assets (1,610,784) 1,428,986
Increase in other liabilities 951,963 1,562,374
----------------- ----------------
Total adjustments 4,035,750 6,184,792
----------------- ----------------
Net cash provided by operating activities 20,736,161 20,475,563
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease (increase) in interest-bearing deposits in banks 1,353,214 (200,117)
Activity in available-for-sale securities:
Sales 2,213,004 12,629,496
Maturities 32,247,526 46,790,210
Purchases (113,749,043) (122,185,407)
Activity in held-to-maturity securities:
Maturities 52,865,349 121,471,592
Purchases (1,494,822) (60,132,509)
Net (increase) decrease in loans 4,317,452 (4,615,481)
Capital expenditures (1,462,272) (2,708,673)
Proceeds from sale of assets 35,545 178,522
----------------- ----------------
Net cash used in investing activities (23,674,047) (8,772,367)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing deposits 8,812,831 (5,869,115)
Net (decrease) increase in interest-bearing deposits (46,106,118) 4,461,717
Net incresase (decrease) in securities sold under agreements to repurchase 2,502,930 (13,577,583)
Common stock transactions:
Acquisition of treasury stock - (315,050)
Proceeds from stock issuances 365,180 116,858
Dividends paid (7,403,744) (6,528,104)
----------------- ----------------
Net cash used in financing activities (41,828,921) (21,711,277)
----------------- ----------------
Net decrease in cash and cash equivalents (44,766,807) (10,008,081)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 185,125,214 162,530,712
----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 140,358,407 $ 152,522,631
================= ================
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS
Interest paid $ 13,811,522 $ 24,387,048
Federal income tax paid 7,413,227 6,378,823
Assets acquired through foreclosure 424,358 54,614
Loans to finance the sale of other real estate 176,526 -
Retirement of treasury stock - 4,240,119
See notes to consolidated financial statements.
-8-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Basis of Presentation
In the opinion of management, the unaudited consolidated financial statements
reflect all adjustments necessary for a fair presentation of the Company's
financial position and unaudited results of operations. All adjustments were of
a normal recurring nature. However, the results of operations for the three
months and six months ended June 30, 2002 are not necessarily indicative of the
results to be expected for the year ended December 31, 2002.
Note 2 - Earnings Per Share
Basic earnings per common share is computed by dividing net income available to
common shareholders by the weighted average number of shares outstanding during
the period. In computing diluted earnings per common share for the three months
and six months ended June 30, 2002 and 2001, the Company assumes that all
outstanding options to purchase common stock have been exercised at the
beginning of the year (or time of issuance, if later). The dilutive effect of
the outstanding options is reflected by application of the treasury stock
method, whereby, the proceeds from the exercised options are assumed to be used
to purchase common stock at the average market price during the respective
period. The weighted average common shares outstanding used in computing basic
earnings per common share for the quarters ended June 30, 2002 and 2001, were
12,348,153 and 12,319,900 shares, respectively. The weighted average common
shares outstanding used in computing basic earnings per common share for the
six-months periods ended June 30, 2002 and 2001, were 12,344,275 and 12,312,706
shares, respectively. The weighted average common shares outstanding used in
computing diluted earnings per common share for the quarters ended June 30, 2002
and 2001, were ,12,404,898 and 12,363,974 shares, respectively. The weighted
average common shares outstanding used in computing diluted earnings per common
share for the six-month periods ended June 30, 2002 and 2001, were 12,401,632
and 12,366,251shares, respectively.
Note 3 - Goodwill and Other Intangible Assets - Adoption of Statement 142
In June 2001, the Financial Accounting Standards Board issued Statement on
Financial Accounting (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS
142 requires that goodwill no longer be amortized, but instead be reviewed for
impairment. The Company adopted SFAS 142 on January 1, 2002 and discontinued
amortization on goodwill amounting to $23,765,896. The Company conducted its
initial impairment test in the three months ending June 30, 2002. There was no
reduction of recorded goodwill resulting from the impairment test. A
reconciliation adjusting comparative net earnings and earnings per share for the
three months and six months ended June 30, 2002 and 2001, follows:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------ ----------- ------------ ------------
Reported net earnings $ 8,521,758 $ 7,287,021 $ 16,700,411 $ 14,290,771
Add back: Goodwill
amortization, net of tax benefit - 305,436 - 610,778
------------ ----------- ------------ ------------
Adjusted net earnings $ 8,521,758 $ 7,592,457 $ 16,700,411 $ 14,901,549
============ =========== ============ ============
Basic earnings per share:
Reported net earnings $ .69 $ .59 $ 1.35 $ 1.16
Goodwill amortization,
net of tax benefit - .03 - .05
------------ ----------- ------------ ------------
Adjusted net earnings $ .69 $ .62 $ 1.35 $ 1.21
============ =========== ============ ============
Earnings per share, assuming dilution:
Reported net earnings $ .69 $ .59 $ 1.35 $ 1.15
Goodwill amortization,
net of tax benefit - .02 - .05
------------ ----------- ------------ ------------
Adjusted net earnings $ .69 $ .61 $ 1.35 $ 1.20
============ =========== ============ ============
-9-
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Operating Results
- -----------------
For the six months ended June 30, 2002, the Company's net income amounted to
$16.7 million, or $1.35 per basic share. For the same period last year, net
income amounted to $14.3 million, or $1.16 per basic share. Return on average
assets and return on average equity for the six months ended June 30, 2002,
amounted to 1.78 percent and 15.62 percent, respectively. The Company's return
on average assets and return on average equity for the same period last year
amounted to 1.64 percent and 14.48 percent, respectively. Net income for the
second quarter 2002 totaled $8.5 million, or $0.69 per basic share, as compared
to $7.3 million, or $0.59 per basic share, earned in the second quarter 2001.
Return on average assets for the second quarter 2002 amounted to 1.80 percent as
compared to 1.65 for the second quarter 2001. Return on average equity for the
second quarter 2002 amounted to 15.73 percent as compared to 14.47 percent for
the second quarter 2001.
Net interest income on a tax-equivalent basis for the six months ended June 30,
2002, totaled $41.3 million as compared to $35.8 million for the same period
last year. Net interest income on a tax-equivalent basis for the second quarter
of 2002 totaled $21.1 million as compared to $18.2 million for the second
quarter 2001. The increases in tax-equivalent net interest income for 2002
resulted from growth in average earning assets, primarily investment securities
and loans, coupled with improved net interest margins. Earning assets averaged
$1.725 billion for the six months ended June 30, 2002, and were $122.9 million
above the same period last year. Earning assets averaged $1.735 billion for
second quarter 2002 and were $117.1 million above the second quarter 2001. When
compared to the same periods last year, approximately $72.0 million of the
growth in earning assets is attributable to the cash purchase acquisition
finalized in July 2001.The net interest margin amounted to 4.83 percent for the
first six months of 2002 as compared to 4.51 percent for the same period last
year. For the second quarter 2002, the net interest margin was 4.88 percent, as
compared to 4.51 percent for the first quarter 2001. The improved net interest
margins for 2002 resulted primarily from the re-pricing of interest bearing
liabilities following the rapid decrease in interest rates during the first six
months of 2001.
For the six months ended June 30, 2002, the provision for loan losses amounted
to $909 thousand as compared to $864 thousand for the same period last year. Net
charge offs for the six months ended June 30, 2002, totaled $391 thousand as
compared to $1.1 million for the same period last year. Net charge offs on an
annualized basis amounted to .09 percent of average loans as compared to .25
percent for the first six months last year. At June 30, 2002, the allowance for
loan losses was 1.19 percent of loans and was considered by Management to be
adequate. For the second quarter 2002, the provision for loan losses was $510
thousand as compared to $497 thousand for the second quarter 2001. Net charge
offs for the second quarter 2002 totaled $248 thousand as compared to $400
thousand for same quarter last year.
Total noninterest income for the six months ended June 30, 2002, amounted to
$14.2 million as compared to $13.8 million for the same period last year. Trust
fees for the first six months of 2002 totaled $2.9 million as compared to $3.0
million for the same period last year. Lower trust fees for 2002 reflect lower
market values of trust asset as compared to the same period last year. Service
charges on deposit accounts for the six months ended June 30, 2002, totaled $7.4
million as compared to $7.3 million for the same period last year. The modest
increase for 2002 is attributable to a lower volume of insufficient funds items
when compared to the same period last year. ATM fees which includes fees earned
on check card transactions totaled $1.1 million for the first six months as
compared to $930 thousand for the same period last year. The increase for 2002
is attributable to an increase in both the number of cardholders and an increase
in the volume of transactions. For the six months ended June 30, 2002 real
estate mortgage fees totaled $791 thousand as compared to $770 thousand for the
same period last year. The modest increase for 2002 reflects a lower growth in
the volume of new loan and refinance transactions during the first six months of
2002 as compared to the same period last year. Other noninterest income for the
first six months of 2002 totaled $2.0 million as compared to $1.7 million for
the first six months ended June 30, 2001. Other noninterest income for 2002
includes $325 thousand, which represents check printing fees that, in periods
prior to 2002, were recorded as a reduction in printing and supplies expense.
-10-
This change in classification for check printing fees was made in response to a
change in bank regulatory financial reporting guidelines. Noninterest income for
the second quarter 2002 amounted to $7.2 million as compared to $7.1 million for
the same period last year. The various factors contributing to the second
quarter 2002 variances from the second quarter 2001 were, for the most part, the
factors contributing to changes in the year-to-date June 30, 2002, amounts as
compared to the first six months last year.
Noninterest expense for the six months ended June 30, 2002, totaled $28.9
million as compared to $26.7 million for the same period last year. Salaries and
employee benefits expense for first six months of 2002 totaled $15.7 million,
which was $1.8 million above the same period last year. The cash purchase
acquisition finalized in July 2001 accounted for $622 thousand of the increase
over the 2001 amount with the balance attributable primarily to salary increases
and higher profit sharing and pension expense. Combined occupancy and equipment
expense for the first six months of 2002 totaled $4.3million, which was $297
thousand above the combined amounts for the same period last year. When compared
to the same period last year, the higher occupancy and equipment expense for the
first six months of 2002 relates primarily to the cash purchase acquisition
finalized in July 2001. Printing and supplies expense for the first six months
of 2002 totaled $861 thousand and was $391 thousand above the same period last
year. The increase for 2002 was due primarily to $325 thousand in check printing
fees included in noninterest income in 2002 versus as a reduction in expense for
prior years. As compared to the same period last year, intangible asset
amortization expense for the six months ended June 30, 2002, was down $753
thousand due to a change in accounting principles which was effective January 1,
2002. Other noninterest expense for the first six months of 2002 totaled $7.2
million as compared to $6.8 million for the same period last year. The increase
was attributable primarily to higher ATM processing fees and higher examination
fees and audit and accounting fees, which were up $130 thousand and $80
thousand, respectively, from amounts recorded for the first six months of 2001.
Noninterest expense for the second quarter 2002 totaled $14.7 million, an
increase of $1.2 million over the $13.5 million reported for the second quarter
2001. The second quarter 2002 increase over the same quarter last year was
attributable primarily to: (i) an $885 thousand increase for salaries and
benefits; (ii) a $175 thousand increase in equipment and occupancy expense;
(iii) a $196 thousand increase for printing and supplies expense; (iv) a $376
thousand decrease for amortization of intangibles; (v) an $87 thousand increase
in ATM transaction processing expense (included in other noninterest expense);
and (vi) a $42 thousand increase in examination fees and audit and accounting
fees (included in other noninterest expense). The efficiency ratio (noninterest
expense as a percent of net interest income plus noninterest income) is a key
indicator of how well noninterest expense is controlled. The Company's 52.11
percent efficiency ratio for the first six months of 2002 reflected improvement
when compared to 53.83 percent for the same period last year.
Balance Sheet Review
- --------------------
Total assets at June 30, 2002, totaled $1.911 billion as compared to $1.930
billion at December 31, 2001, and $1.751 billion at June 30, 2001. The balance
sheets presented reflect normal recurring adjustments and accruals.
Loans at June 30, 2002, totaled $935 million as compared to $940 million at
year-end 2001 and $863 million at June 30, 2001. As compared to year-end 2001
amounts, loans at June 30, 2002, reflect (i) a $1.4 million increase in
commercial loans; (ii) a $9.4 million increase in real estate loans; and (iii) a
$15.8 million decrease in agricultural loans. The decrease in loans during the
first half of 2002 reflects pay-downs on several significant commercial loan
relationships coupled with seasonal pay-downs from loans to farm and cattle
operations. Investment securities at June 30, 2002, totaled $755 million as
compared to $722 million at year-end 2001 and $661 million at June 30, 2001. The
net unrealized gain in the investment portfolio at June30, 2002, amounted to
$23.6 million and had an overall yield of 5.90 percent. At June 30, 2002, the
Company did not hold any structured notes or CMOs that entail higher risks than
standard mortgage-backed securities. Total deposits at June 30, 2002, amounted
to $1.648 billion as compared to $1.685 billion at year-end 2001 and $1.518
billion at June 30, 2001. As compared to year-end 2001 amounts,
-11-
noninterest-bearing demand deposits increased $8.8 million and interest-bearing
deposits decreased $46.1 million which reflects the Company's continued strategy
not to match higher market rates on certain interest-bearing deposit products.
Nonperforming assets at June 30, 2002, totaled $5.1 million as compared to $4.8
million at December 31, 2001. The increase resulted primarily from a $309
thousand increase in nonaccrual loans. At .55 percent of loans plus foreclosed
assets, Management considers nonperforming assets to be at a manageable level
and is unaware of any material classified credit not properly disclosed as
nonperforming.
Liquidity and Capital
- ---------------------
The Company's consolidated statements of cash flows are presented on page 8 of
this report. At June 30, 2002, the parent company had no debt outstanding under
its $25 million line of credit with an unaffiliated financial institution. Total
equity capital amounted to $227.7 million at June 30, 2002, which was up from
$213.6 million at year-end 2001 and $206.6 million at June 30, 2001. The
Company's risk-based capital and leverage ratios at June 30, 2002, were 19.26
percent and 10.37 percent, respectively. The second quarter 2002 cash dividend
of $0.35 per share totaled $4.3 million and represented 50.6 percent of second
quarter earnings. On July 23, 2002, the Company declared a $0.35 per share cash
dividend payable October 1, 2002.
Interest Rate Risk
- ------------------
Interest rate risk results when the maturity or re-pricing intervals of
interest-earning assets and interest-bearing liabilities are different. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of selecting the types and terms of interest-earning assets
and interest-bearing liabilities which generate favorable earnings, while
limiting the potential negative effects of changes in market interest rates. The
Company uses no off-balance-sheet financial instruments to manage interest rate
risk. Each subsidiary bank has an asset/liability committee, which monitors
interest rate risk and compliance with investment policies. Interest-sensitivity
gap and simulation analysis are among the ways that the subsidiary banks track
interest rate risk. As of June 30, 2002, Management estimates that, over the
next 12 months, an upward shift of interest rates by 150 basis points would
result in an increase of projected net interest income of 3.00 percent and a
downward shift of interest rates by 150 basis points would result in a reduction
in projected net interest income of 6.89 percent. These are good faith estimates
and assume that the composition of our interest sensitive assets and liabilities
existing at June 30, 2002, will remain constant over the relevant 12 month
measurement period and that changes in market interest rates are instantaneous
and sustained across the yield curve regardless of duration of pricing
characteristics of specific assets or liabilities. Also, this analysis does not
contemplate any actions that we might undertake in response to changes in market
interest rates. In Management's belief, these estimates are not necessarily
indicative of what actually could occur in the event of immediate interest rate
increases or decreases of this magnitude. As interest-bearing assets and
liabilities re-price at different time frames and proportions to market interest
rate movements, various assumptions must be made based on historical
relationships of these variables in reaching any conclusion. Since these
correlations are based on competitive and market conditions, our future results
would, in Management's belief, be different from the foregoing estimates, and
such results could be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management considers interest rate risk to be a significant market risk for the
Company. See "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" for disclosure regarding this market risk.
-12-
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: August 14, 2002 By:/S/ F. Scott Dueser
--------------- --------------------------------------
F. Scott Dueser
President and Chief Executive Officer
Date: August 14, 2002 By:/S/ Curtis R. Harvey
--------------- --------------------------------------
Curtis R. Harvey
Executive Vice President and
Chief Financial Officer
-13-
PART II
OTHER INFORMATION
Item 6. Exhibits
The following exhibits are filed as part of this report:
99.1 Certification of Chief Executive Officer of First Financial
Bankshares, Inc.
99.2 Certification of Chief Financial Officer of First Financial
Bankshares, Inc.
-14-
Exhibit 99.1
------------
Certification of
Chief Executive Officer
of First Financial Bankshares, Inc.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for
the quarter ended June 30, 2002 of First Financial Bankshares, Inc. (the
"Issuer").
I, F. Scott Dueser, the President and Chief Executive Officerof the Issuer
certify that:
(i) 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
(ii) the information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Issuer.
Dated: August 14, 2002
/S/ F. Scott Dueser
--------------------
Name: F. Scott Dueser
Title: President and Chief Executive Officer
Subscribed and sworn to before me
this 14th. day of August, 2002.
/S/ Gaila N. Kilpatrick
- -----------------------
Name: Gaila N. Kilpatrick
-------------------
Title: Notary Public
My commission expires: April 15, 2005
Exhibit 99.2
------------
Certification of
Chief Financial Officer
of First Financial Bankshares, Inc.
This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for
the quarter ended June 30, 2002 of First Financial Bankshares, Inc. (the
"Issuer").
I, Curtis R. Harvey, the Executive Vice President and Chief Financial Officer of
the Issuer certify that :
(i) 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
(ii) the information contained in the Form 10-Q fairly presents, in all material
respects, the financial condition and results of operations of the Issuer.
Dated: August 14, 2002
/S/ Curtis R. Harvey
--------------------
Name: Curtis R. Harvey
Title: Executive Vice President and CFO
Subscribed and sworn to before me
this 14th. day of August, 2002.
/S/ Gaila N. Kilpatrick
- -----------------------
Name: Gaila N. Kilpatrick
-------------------
Title: Notary Public
My commission expires: April 15, 2005