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, 2004
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 5, 2004:
Class Number of Shares Outstanding
----- ----------------------------
Common Stock, $10.00 par value
per share 15,501,477
1
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
Item Page
---- ----
Forward-Looking Statement Disclaimer 3
1. 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 19
4. Controls and Procedures 19
PART II
OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 21
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 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, 2004 and 2003 and December 31, 2003, and the consolidated statements of
earnings and comprehensive earnings for the three and nine months ended
September 30, 2004 and 2003, changes in shareholders' equity for the nine months
ended September 30, 2004 and the year ended December 31, 2003, and cash flows
for the nine months ended September 30, 2004 and 2003, follow on pages 4 through
8.
3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30 December 31,
----------------------------------- ----------------
2004 2003 2003
--------------- ---------------- ----------------
ASSETS (Unaudited)
Cash and due from banks $ 88,658,958 $ 110,524,394 $ 111,940,573
Federal funds sold 7,750,000 30,750,000 1,900,000
--------------- ---------------- ----------------
Cash and cash equivalents 96,408,958 141,274,394 113,840,573
Interest-bearing deposits in banks 611,072 1,491,978 876,839
Investment securities:
Securities held-to-maturity (market value of $102,506,374,
$157,974,511 and $138,594,081 at September 30, 2004,
September 30, 2003 and December 31, 2003, respectively) 97,995,810 148,816,926 131,326,111
Securities available-for-sale, at fair value 794,986,243 751,767,671 778,976,003
--------------- ---------------- ----------------
Total investment securities 892,982,053 900,584,597 910,302,114
Loans 1,125,939,593 948,521,401 987,523,103
Less: Allowance for loan losses (13,679,833) (11,461,925) (11,576,299)
--------------- ---------------- ----------------
Net loans 1,112,259,760 937,059,476 975,946,804
Bank premises and equipment, net 47,602,377 42,844,071 43,902,112
Goodwill and intangible assets 31,824,033 24,769,421 24,717,671
Other assets 24,063,241 21,834,825 22,985,321
--------------- ---------------- ----------------
TOTAL ASSETS $ 2,205,751,494 $ 2,069,858,762 $ 2,092,571,434
=============== ================ ================
LIABILITIES
Noninterest-bearing deposits $ 486,255,460 $ 446,795,912 $ 472,574,590
Interest-bearing deposits 1,361,142,598 1,341,546,877 1,323,696,580
--------------- ---------------- ----------------
Total deposits 1,847,398,058 1,788,342,789 1,796,271,170
Dividends payable 5,270,500 4,797,333 4,798,948
Federal funds purchased and securities sold
under agreements to repurchase 72,000,304 13,933,662 28,975,167
Other liabilities 16,750,955 13,696,413 11,039,392
--------------- ---------------- ----------------
Total liabilities 1,941,419,817 1,820,770,197 1,841,084,677
--------------- ---------------- ----------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock - $10 par value; authorized 40,000,000 shares;
15,501,471, 15,475,767 and 15,480,679 shares issued and
outstanding at September 30, 2004, September 30, 2003
and December 31, 2003, respectively 155,014,710 154,757,670 154,806,790
Capital surplus 58,431,930 58,215,719 58,253,180
Retained earnings 45,050,364 27,555,147 31,276,464
Accumulated other comprehensive income 5,834,673 8,560,029 7,150,323
--------------- ---------------- ----------------
Total shareholders' equity 264,331,677 249,088,565 251,486,757
--------------- ---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,205,751,494 $ 2,069,858,762 $ 2,092,571,434
=============== ================ ================
See notes to consolidated financial statements.
4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ---------------------------------
2004 2003 2004 2003
-------------- --------------- -------------- --------------
INTEREST INCOME
Interest and fees on loans $ 15,941,856 $ 14,127,672 $ 44,168,195 $ 43,387,135
Interest on investment securities:
Taxable 6,964,532 6,826,173 21,746,401 22,082,362
Exempt from federal income tax 2,437,077 2,156,872 7,231,493 5,658,345
Interest on federal funds sold and
interest-bearing deposits in banks 47,292 98,547 164,978 427,838
-------------- --------------- -------------- --------------
Total interest income 25,390,757 23,209,264 73,311,067 71,555,680
INTEREST EXPENSE
Interest-bearing deposits 3,840,609 4,073,260 10,874,150 13,182,232
Other 252,975 24,399 503,644 119,784
-------------- --------------- -------------- --------------
Total interest expense 4,093,584 4,097,659 11,377,794 13,302,016
-------------- --------------- -------------- --------------
NET INTEREST INCOME 21,297,173 19,111,605 61,933,273 58,253,664
Provision for loan losses 532,286 232,500 1,018,536 968,868
-------------- --------------- -------------- --------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 20,764,887 18,879,105 60,914,737 57,284,796
NONINTEREST INCOME
Trust department income 1,578,176 1,498,959 4,667,348 4,411,627
Service fees on deposit accounts 5,784,606 3,982,741 15,056,765 11,778,301
ATM fees 799,502 704,797 2,225,156 2,108,101
Real estate mortgage fees 572,826 983,525 1,547,616 2,483,219
Net gain on sale of securities 32,747 20,435 51,173 15,684
Net gain on sale of student loans 81,615 17,947 2,511,264 1,839,151
Net gain on sale of real estate and other assets 54,807 702,176 171,336 727,570
Other 946,605 945,807 2,876,075 3,067,137
-------------- --------------- -------------- --------------
Total noninterest income 9,850,884 8,856,387 29,106,733 26,430,790
NONINTEREST EXPENSE
Salaries and employee benefits 9,094,717 8,028,687 26,758,318 24,841,928
Net occupancy expense 1,094,001 1,004,557 3,136,215 2,968,568
Equipment expense 1,309,284 1,226,162 4,146,195 3,602,888
Printing, stationery and supplies 352,047 360,347 1,061,353 1,034,104
Correspondent bank service charges 410,930 367,668 1,192,704 1,127,328
Amortization of intangible assets 47,789 33,789 115,367 101,367
Other expenses 4,503,383 3,883,674 12,789,632 11,855,089
-------------- --------------- -------------- --------------
Total noninterest expense 16,812,151 14,904,884 49,199,784 45,531,272
-------------- --------------- -------------- --------------
EARNINGS BEFORE INCOME TAXES 13,803,620 12,830,608 40,821,686 38,184,314
Income tax expense 3,950,793 3,716,483 11,708,427 11,399,779
-------------- --------------- -------------- --------------
NET EARNINGS $ 9,852,827 $ 9,114,125 $ 29,113,259 $ 26,784,535
============== =============== ============== ==============
EARNINGS PER SHARE, BASIC $ 0.64 $ 0.59 $ 1.88 $ 1.73
EARNINGS PER SHARE, ASSUMING DILUTION $ 0.63 $ 0.59 $ 1.87 $ 1.73
DIVIDENDS PER SHARE $ 0.34 $ 0.31 $ 0.99 $ 0.90
See notes to consolidated financial statements.
5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- --------------------------------
2004 2003 2004 2003
---------------- -------------- --------------- --------------
NET EARNINGS $ 9,852,827 $ 9,114,125 $ 29,113,259 $ 26,784,535
OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):
Change in unrealized gain (loss) on
investment securities available-for-sale 15,903,599 (9,971,318) (1,972,904) (4,338,772)
Reclassification adjustment for realized
gains on investment securities
included in net earnings, before income tax (32,747) (20,435) (51,173) (15,684)
---------------- -------------- --------------- --------------
Total other items of comprehensive earnings (loss) 15,870,852 (9,991,753) (2,024,077) (4,354,456)
Income tax expense (benefit) related to other
items of comprehensive earnings 5,554,798 (3,497,113) (708,427) (1,524,059)
---------------- -------------- --------------- --------------
COMPREHENSIVE EARNINGS $ 20,168,881 $ 2,619,485 $ 27,797,609 $ 23,954,138
================ ============== =============== ==============
See notes to consolidated financial statements.
6
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other Comprehensive Income
-----------------------
Unrealized Gain
Common Stock on Securities Minimum Total
----------------------- Capital Retained Available- Pension Shareholders'
Shares Amount Surplus Earnings for-sale Liability Equity
---------- ------------ ----------- ------------ ----------- ----------- -------------
Balances at December 31, 2002 12,364,201 $123,642,010 $58,087,687 $ 45,647,522 $12,830,709 $(1,440,283) $ 238,767,645
Net earnings - - - 35,304,800 - - 35,304,800
Five for four stock split,
effected in the
form of a 25% stock dividend 3,092,995 30,929,950 - (30,929,950) - - -
Stock issuances 23,483 234,830 165,493 - - - 400,323
Cash dividends declared,
$1.21 per share - - - (18,745,908) - - (18,745,908)
Minimum liability pension adjustment,
net of related taxes - - - - - 438,507 438,507
Change in unrealized gain in
investment securities available-
for-sale, net of related income taxes - - - - (4,678,610) - (4,678,610)
---------- ------------ ----------- ------------ ----------- ----------- -------------
Balances at December 31, 2003 15,480,679 154,806,790 58,253,180 31,276,464 8,152,099 (1,001,776) 251,486,757
Net earnings (unaudited) - - - 29,113,259 - - 29,113,259
Stock issuances (unaudited) 20,792 207,920 178,750 - - - 386,670
Cash dividends declared,
$0.99 per share (unaudited) - - - (15,339,359) - - (15,339,359)
Change in unrealized gain in
investment securities available-
for-sale, net of related income
taxes (unaudited) - - - - - (1,315,650) (1,315,650)
---------- ------------ ----------- ------------ ----------- ----------- -------------
Balances at September 30, 2004 (unaudited) 15,501,471 $155,014,710 $58,431,930 $ 45,050,364 $ 6,836,449 $(1,001,776) $ 264,331,677
========== ============ =========== ============ =========== =========== =============
See notes to consolidated financial statements.
7
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Nine Months Ended September 30,
-----------------------------------
2004 2003
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 29,113,259 $ 26,784,535
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 3,530,932 3,199,936
Provision for loan losses 1,018,536 968,868
Premium amortization, net of discount accretion 2,893,524 3,940,082
Gain on sale of assets (2,733,773) (2,582,405)
Deferred federal income tax expense (benefit) 27,129 (427,674)
Decrease in other assets 110,117 832,069
Increase in other liabilities 4,417,965 3,831,439
-------------- ----------------
Total adjustments 9,264,430 9,762,315
-------------- ----------------
Net cash provided by operating activities 38,377,689 36,546,850
-------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in banks 265,767 832,447
Cash paid in acquisiton of bank, net of cash acquired (8,532,384) -
Activity in available-for-sale securities:
Sales 11,485,775 47,202,878
Maturities 62,595,940 145,068,529
Purchases (89,242,387) (382,104,021)
Activity in held-to-maturity securities:
Maturities 35,569,134 55,590,576
Purchases - (2,365,000)
Net decrease (increase) in loans (88,292,027) 15,745,499
Capital expenditures (6,214,788) (5,619,005)
Proceeds from sale of assets 243,658 1,097,014
-------------- ----------------
Net cash used in investing activities (82,121,312) (124,551,083)
-------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 7,171,186 21,322,559
Net increase (decrease) in interest-bearing deposits (9,403,178) 55,458,014
Net increase (decrease) in federal funds sold and securities sold
under agreements to repurchase 43,025,137 (12,775,332)
Proceeds from stock issuances 386,670 313,742
Dividends paid (14,867,807) (13,477,001)
-------------- ----------------
Net cash provided by financing activities 26,312,008 50,841,982
-------------- ----------------
Net decrease in cash and cash equivalents (17,431,615) (37,162,251)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 113,840,573 178,436,645
-------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 96,408,958 $ 141,274,394
============== ================
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS
Interest paid $ 11,763,442 $ 13,664,584
Federal income tax paid 11,415,873 10,976,193
Assets acquired through foreclosure 114,832 905,752
Loans to finance the sale of other real estate 953,309 19,400
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 and
nine months ended September 30, 2004, are not necessarily indicative of the
results to be expected for the year ending December 31, 2004, due to seasonality
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 - 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, 2004 and 2003, the Company assumes that 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, 2004 and
2003, were 15,498,069 and 15,474,478 shares, respectively. The weighted average
common shares outstanding used in computing basic earnings per common share for
the nine months ended September 30, 2004 and 2003, were 15,490,849 and
15,465,858 shares, respectively. The weighted average common shares outstanding
used in computing diluted earnings per common share for the three months ended
September 30, 2004 and 2003, were 15,563,627 and 15,542,769 shares,
respectively. The weighted average common shares outstanding used in computing
fully diluted earnings per common share for the nine months ended September 30,
2004 and 2003, were 15,561,233 and 15,523,260, respectively.
Note 3 - Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with
an exercise price equal to the fair value of the shares at the date of grant.
The Company accounts for stock option grants using the intrinsic value method
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB
25"). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. Had compensation cost for the plan been
determined consistent with Statement of Financial Accounting Standard No. 123,
Accounting for Stock-Based Compensation, the Company's net earnings and earnings
per share would have been reduced by insignificant amounts on a pro forma basis
for the three months and nine months ended September 30, 2004 and 2003.
9
Note 4 - Pension Plan
The Company has a defined benefit pension plan covering substantially all of its
employees. The benefits are 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 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 service to date but also for those expected to be earned
in the future. Effective January 1, 2004, the pension plan was frozen whereby no
additional years of service accrue to participants, unless the pension plan is
subsequently reinstated. Under current accounting principles generally accepted
in the United States and utilizing current assumptions, we do not expect any
significant pension costs in 2004 and beyond as a result of this action.
Accordingly, no amount of net periodic benefit cost was recorded in the three
and nine months ended September 30, 2004 as the interest cost component is
generally offset with the expected return on plan assets.
The Company does not expect to make a contribution to the pension plan during
the year ending December 31, 2004.
Note 5 - Acquisitions
On March 4, 2004, we entered into a stock purchase agreement with the principal
shareholders of Liberty National Bank, Granbury, Texas. On July 26, 2004, the
transaction was completed. Pursuant to the purchase agreement, the Company paid
approximately $12.3 million for all of the outstanding shares of Liberty
National Bank. At closing, Liberty National Bank became a direct subsidiary of
First Financial Bankshares of Delaware, Inc., our wholly owned Delaware bank
holding company and effective November 1, 2004, it was merged with our wholly
owned bank subsidiary, Stephenville Bank & Trust Company. The total purchase
price exceeded the estimated fair value of tangible net assets acquired by
approximately $7.2 million, of which approximately $534,000 was assigned to an
identifiable intangible asset with the balance recorded by the Company as
goodwill. The identifiable intangible asset represents the future benefit
associated with the acquisition of the core deposits of Liberty National Bank
and is being amortized over seven years utilizing a method that approximates the
expected attrition of the deposits.
The primary purpose of the acquisition was to expand the Company's market share
in areas with close proximity to Dallas/Ft. Worth, Texas. Factors that
contributed to a purchase price resulting in goodwill include Liberty's historic
record of earnings, capable management and its geographic location, which
complements the Company's existing service locations. The results of operations
of Liberty National Bank are included in the consolidated earnings of the
Company commencing July 27, 2004.
The following is a condensed balance sheet disclosing the preliminary estimated
fair value amounts assigned to the major asset and liability captions at the
acquisition date.
ASSETS
Cash and cash equivalents $ 3,763,765
Investment in securities 7,954,831
Loans, net 45,689,723
Goodwill 6,688,141
Identifiable intangible asset 533,588
Other assets 2,999,878
-----------
Total assets $67,629,926
===========
10
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest-bearing deposits $ 6,509,685
Interest-bearing deposits 46,849,196
Other liabilities 1,974,896
Shareholder's equity 12,296,149
-----------
Total liabilities and shareholder's equity $67,629,926
===========
Goodwill recorded in the acquisition of Liberty will be accounted for in
accordance with SFAS No. 142. Accordingly, goodwill will not be amortized,
rather it will be tested for impairment annually. The goodwill and identifiable
intangible asset recorded are expected to be deductible for federal income tax
purposes.
Cash flow information relative to the acquisition of Liberty is as follows:
Fair value of assets acquired $67,629,926
Cash paid for the capital stock of Liberty 12,296,149
-----------
Liabilities assumed $55,333,777
===========
On September 7, 2004, we entered into a stock purchase agreement with the
shareholders of Southwestern Bancshares, Inc., the parent company of the First
National Bank, Glen Rose, Texas. Pursuant to the purchase agreement, we will pay
approximately $13.4 million for all of the outstanding shares of Southwestern
Bancshares, Inc.
First National Bank is located in the city of Glen Rose, Somervell County,
Texas, approximately 60 miles southwest of Fort Worth, Texas. As of June 30,
2004, First National Bank had assets totaling approximately $47.3 million and
shareholder's equity of approximately $4.7 million. We expect the transaction to
close in December 2004, subject to regulatory approvals.
On October 25, 2004, we entered into a stock purchase agreement with the
shareholders of Clyde Financial Corporation, the parent company of The Peoples
State Bank in Clyde, Texas. Pursuant to the purchase agreement, we will pay
approximately $25.4 million for all of the outstanding shares of Clyde Financial
Corporation.
The main office of The Peoples State Bank is located in the city of Clyde,
Callahan County, Texas, approximately 12 miles east of Abilene, Texas. As of
June 30, 2004, The Peoples State Bank had assets totaling approximately $113
million and shareholder's equity of approximately $12.7 million. The Peoples
State Bank operates branches in Ranger, Rising Star and Moran, Texas, for a
total of four banking offices. We expect the transaction to close in late 2004
or first quarter 2005, subject to regulatory approvals.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
As a multi-bank financial holding company, we generate most of our revenue from
interest on loans and investments, trust fees, and service charges. Our primary
source of funding for our loans is deposits we hold in our subsidiary banks. Our
largest expenses are interest on these deposits and salaries and related
employee benefits. We usually measure our performance by calculating our return
on average assets, return on average equity, our regulatory leverage and risk
based capital ratios, and our efficiency ratio, which is calculated by dividing
noninterest expense by the sum of net interest income on a tax equivalent basis
and noninterest income.
The following discussion of operations and financial condition should be read in
conjunction with the financial statements and accompanying footnotes included in
Item 1 of this Form 10-Q as well as those included in the Company's 2003 Annual
Report on Form 10-K.
Critical Accounting Policies
- ----------------------------
We prepare consolidated financial statements based on the selection of certain
accounting policies, accounting principles generally accepted in the United
States and customary practices in the banking industry. These policies, in
certain areas, require us to make significant estimates and assumptions.
We deem a policy critical if (1) the accounting estimate required us to make
assumptions about matters that are highly uncertain at the time we make the
accounting estimate; and (2) different estimates that reasonably could have been
used in the current period, or changes in the accounting estimate that are
reasonably likely to occur from period to period, would have a material impact
on the financial statements.
The following discussion addresses our allowance for loan loss and 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 that they would
have a material impact on our reported results for a given period.
The allowance for loan losses is an amount that 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
charge-offs (net of recoveries).
Our periodic evaluation of the adequacy of the allowance is based on general
economic conditions, the financial condition of our borrowers, the value and
liquidity of collateral, delinquency, prior loan loss experience, and the
results of periodic reviews of the portfolio by our independent loan review
department and regulatory examiners. We have developed a consistent,
well-documented loan review methodology that includes allowances assigned to
specific loans and nonspecific allowances, which are based on the factors noted
in the prior sentence. 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.
12
Although we believe that we use the best information available to make loan loss
allowance determinations, future adjustments could be necessary if circumstances
or economic conditions differ substantially from the assumptions used in making
our initial determinations. A downturn in the economy and employment could
result in increased levels of 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 the
recognition of additions to the loan loss allowance based on their judgment of
information available to them at the time of their examination.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrower's financial condition is such that collection of interest is doubtful.
Our policy requires measurement of the allowance for an impaired collateral
dependent loan based on the fair value of the collateral. Other loan impairments
are measured based on the present value of expected future cash flows or the
loan's observable market price.
Operating Results
- -----------------
Three months ended September 30, 2004 and 2003
- ----------------------------------------------
Net income for the third quarter of 2004 totaled $9.85 million, an increase of
$739 thousand or 8.11% over the same period last year. The primary reason for
the increase in net income in the third quarter was an increase in net interest
income and an increase in service fees on deposits. Interest and fees on loans
were $1.8 million, or 12.8% more for this quarter than for the same quarter last
year. This change, in turn, is the result of recent interest rate increases as
the Federal Reserve adjusts its policies on managing interest rates as well as
overall growth in loans. Service charges on deposits were $1.8 million, or
45.2%, higher than the same quarter last year as a result of enhancements to our
overdraft privilege products. On a basic earnings per share basis, earnings
amounted to $0.64 per share for the third quarter of 2004 as compared to $0.59
per share for the third quarter of 2003. Return on average assets and return on
average equity for the third quarter of 2004 amounted to 1.82% and 15.14%,
respectively. For the same period in 2003, return on average assets and return
on average equity amounted to 1.78% and 14.69%, respectively.
Tax equivalent net interest income for the third quarter of 2004 amounted to
$22.6 million as compared to $20.2 million for the same period last year. Our
rates on interest earning assets increased approximately 16 basis points while
our rates paid on deposits declined 7 basis points. The increase in volume of
average interest earning assets of $123.6 million enhanced the increase
attributable to interest rates. Average interest bearing liabilities also
increased $85.4 million, which partially offset the decreased cost of funds from
the decline in interest rates. Average earning assets were $1.989 billion for
the third quarter of 2004 which is 6.62% greater than the third quarter of 2003.
Average interest bearing liabilities were $1.417 billion for the third quarter
of 2004 which is 6.42% greater than the third quarter of 2003. The Company's
interest spread increased to 4.18% for 2004 compared to 4.00% for 2003. The
Company's net interest margin was 4.52% for the third quarter of 2004 compared
to 4.35% for the same period of 2003. These changes are again attributable to
rising interest rates.
The provision for loan losses for the third quarter of 2004 totaled $532
thousand compared to $233 thousand for the same period in 2003. Gross chargeoffs
for the quarter ended September 30, 2004 totaled $331 thousand compared to $526
thousand for the same period of 2003. Recoveries of previously charged-off loans
totaling $147 thousand in the quarter ended September 30, 2004 (as compared to
$232 thousand in 2003) offset the chargeoffs experienced. On an annualized
basis, net chargeoffs as a percentage of average loans was 0.07% for the third
quarter of 2004 as compared to 0.12% for the same period in 2003. The Company's
allowance for loan losses totaled $13.7 million at September 30, 2004, as
compared to $11.5 million at September 30, 2003. The increase was primarily due
to the allowance established related to our acquisition of Liberty National Bank
13
and the growth overall in our loan portfolio. As a percentage of nonperforming
loans, the Company's allowance amounted to 295.8% at September 30, 2004. As of
September 30, 2004, management of the Company believes that the Company's
balance in allowance for loan losses is adequate to provide for loans in its
portfolio that prove to be uncollectible.
Total noninterest income for the third quarter of 2004 was $9.85 million, as
compared to $8.86 million for the same period last year. Trust fees totaled
$1.58 million for the third quarter of 2004, up 5.3% over the same period in
2003. Service fees on deposits totaled $5.78 million for the third quarter of
2004 compared to $3.98 million for the same period of 2003, an improvement of
$1.8 million, due to increased volume from enhancements to the Company's
overdraft privilege products. The Company's real estate mortgage fees declined
from $984 thousand to $573 thousand as the volume of refinancing decreased with
the stabilization and subsequent increase in mortgage rates.
Noninterest expense for the third quarter of 2004 amounted to $16.8 million as
compared to $14.9 million for the same period in 2003. Salaries and benefits
expense, the Company's largest noninterest expense item, increased 13.3% to $9.1
million in the third quarter of 2004, up $1.1 million over the same period in
2003. The primary cause of this increase was the overall pay increases effected
in March 2004 and increased profit sharing expense from increased earnings over
the prior year. Net occupancy expense was relatively flat in the third quarter
of 2004 compared to the third quarter of 2003. Equipment expense increased $83
thousand in the third quarter of 2004 over the same period of 2003 due to the
depreciation of new technology expenditures in the latter part of 2003 and
continuing in 2004 as the Company improved its technology infrastructure.
The Company's other expense increased $619 thousand in the third quarter of 2004
compared to the third quarter of 2003 due primarily to professional fees and
other costs from the implementation of the enhanced overdraft privilege program
and telephone consulting fees.
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. This ratio was 51.86%
for the third quarter of 2004 compared to 51.27% for the third quarter of 2003,
due primarily to the noninterest expense growing at a slightly faster rate than
income.
Nine-months ended September 30, 2004 and 2003
- ---------------------------------------------
Net income for the nine months of 2004 totaled $29.11 million, an increase of
$2.33 million or 8.7% over the same period last year. On a basic earnings per
share basis, earnings amounted to $1.88 per share as compared to $1.73 per share
for the nine months of 2003. During the nine month 2004 period, the Company
continued to increase its net interest income, 6.3% over the prior 2003 period,
and experienced a 27.8% increase in total service fees on deposit accounts, all
contributing factors to strong growth for the nine month period. Return on
average assets and return on average equity for the first nine months of 2004
amounted to 1.85% and 15.13%, respectively. For the same periods in 2003, return
on average assets and return on average equity amounted to 1.78% and 14.70%,
respectively.
Tax equivalent net interest income for the first nine months of 2004 amounted to
$65.7 million as compared to $61.1 million for the same period last year, an
increase of $4.6 million. Our rates on interest earning assets declined
approximately 12 basis points while our rates paid on deposits declined 25 basis
points when comparing 2004 with 2003. The increase in volume of average earning
assets of $106 million offset the decline caused by interest rates. Average
interest bearing liabilities increased $64 million, which only partially offset
the decreased cost of funds from the decline in interest rates. Average earning
assets were $1.9 billion for the first nine months of 2004 which is 5.7% greater
than the same period in 2003. Average interest bearing liabilities were $1.4
billion for the first nine months of 2004 which is 4.8% greater than the same
period of 2003. The Company's net interest spread improved to 4.18% for 2004
compared to 4.00% for 2003. The Company's net interest margin increased to 4.51%
for the first nine months of 2004, up from 4.38% for the first nine months of
2003.
14
The provision for loan losses for the first nine months of 2004 totaled $1.0
million compared to $969 thousand for the same period in 2003. Gross chargeoffs
for the nine months ended September 30, 2004 totaled $889 thousand compared to
$1.8 million for the same period of 2003. Recoveries of previously charged-off
loans totaling $575 thousand in the nine months ended September 30, 2004 (as
compared to $1.0 million in 2003) contributed to improved net chargeoffs in the
first nine months of 2004. On an annualized basis, net chargeoffs as a
percentage of average loans was 0.04% for the first nine months of 2004 as
compared to 0.10% for the same period in 2003. The Company's allowance for loan
losses totaled $13.7 million at September 30, 2004 compared to $11.5 million at
September 30, 2003, the increase due primarily to an overall increase in loans,
net of the sale of student loans and due to the allowance established related to
our acquisition of Liberty National Bank and its loan portfolio. As a percentage
of nonperforming loans, the Company's allowance amounted to 295.8% at September
30, 2004. As of September 30, 2004, management of the Company believes that the
Company's balance in allowance for loan losses is adequate to provide for loans
in its portfolio that prove to be uncollectible.
Total noninterest income for the first nine months of 2004 was $29.1 million, as
compared to $26.4 million for the same period last year. During the nine month
period, the Company sold $80 million in student loans recognizing a gain of $2.5
million in 2004 as compared to selling $70.4 million in loans resulting in $1.8
million in gains in 2003. Real estate mortgage fees decreased to $1.5 million
for the first nine months of 2004 from $2.5 million in the same period of 2003
as the Company saw the level of refinancings decline from 2003 levels. Trust
fees totaled $4.7 million for 2004, up from $4.4 million in 2003, as the Company
experienced a 8.4% increase in trust assets managed. Service fees on deposits
increased 27.8% to $15.1 million due to increased utilization of our overdraft
privilege products.
Noninterest expense for the first nine months of 2004 amounted to $49.2 million
compared to $45.5 million for the same period in 2003, an increase of 8.1%.
Salaries and benefits expense, the Company's largest noninterest expense item,
increased 7.7% to $26.8 million in 2004 due to annual salary increases and an
increase in profit sharing expense from increased net income. Net occupancy
expense was relatively flat in the first nine months of 2004 compared to the
first nine months of 2003. Equipment expense increased $543 thousand in 2004
over 2003 due to depreciation of new technology expenditures in the latter part
of 2003 and continuing in 2004 as the Company improved its technology
infrastructure.
The Company's other expense increased $935 thousand for the first nine months of
2004 compared to the same period in 2003, a 7.9% increase, due primarily to
professional fees and costs from the implementation of the enhanced overdraft
privilege products.
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 goal is to
continue to decrease the ratio, which indicates what we believe to be a more
efficiently run company. We were able to slightly improve this ratio to 51.90%
for the first nine months of 2004 compared to 51.99% for the first nine months
of 2003.
Balance Sheet Review
- --------------------
Total assets at September 30, 2004 amounted to $2.21 billion as compared to
$2.09 billion at December 31, 2003, and $2.07 billion at September 30, 2003.
Since December 31, 2003, loans have increased $138 million even though student
loans declined from the sales discussed above. Our Liberty National Bank
acquisition accounted for $44.6 million of the increase. Deposits totaled $1.85
billion at September 30, 2004 compared to $1.80 billion at December 31, 2003, up
2.8%.
Loans at September 30, 2004, totaled $1.13 billion as compared to $988 million
at year-end 2003 and $949 million at September 30, 2003. As compared to
September 30, 2003 amounts, loans at September 30, 2004 reflect (i) a $53
million increase in commercial, financial and agricultural loans; (ii) a $143
million increase in real estate loans; and (iii) a $19.2 million decrease in
15
consumer loans; student loans decreased $21.8 million while other consumer loans
increased $2.6 million. Investment securities at September 30, 2004, totaled
$893.0 million as compared to $910.3 million at year-end 2003 and $900.6 million
at September 30, 2003. The net unrealized gain, net of income tax, in the
available-for-sale investment portfolio at September 30, 2004, amounted to $6.8
million and had an overall tax equivalent yield of 4.78%. Since December 31,
2003, the bond market has experienced an increase in interest rates which as a
result, decreased our unrealized gain on our investment portfolio. At September
30, 2004, 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.
The following table discloses, as of September 30, 2004, our investment
securities that have been in a continuous unrealized-loss position for less than
12 months and those that have been in a continuous unrealized-loss position for
12 or more months (in thousands):
Less than 12 Months 12 Months or Longer Total
----------------------- ---------------------- ---------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
------- ------ ------- ------ -------- ------
U.S. Treasury securities
and obligations of U.S.
government sponsored-
enterprises and agencies $86,041 $ 456 $15,796 $ 445 $101,837 $ 901
Obligations of state and
political subdivisions 21,018 314 19,539 736 40,557 1,050
Mortgage-backed securities 40,300 147 77,942 1,566 118,242 1,713
We believe the investment securities in the table above are within ranges
customary for the banking industry. There are 281 investments that have an
unrealized loss position at September 30, 2004. We do not believe these
unrealized losses are "other than temporary" as (1) the Company has the ability
and intent to hold the investments to maturity, or a period of time sufficient
to allow for a recovery in market value, (2) it is not probable that the Company
will be unable to collect the amounts contractually due and (3) no decision to
dispose of the investments was made prior to the date of issuance of this
report. The unrealized losses noted are interest rate related due to rising
rates at September 30, 2004, in relation to previous rates in the early part of
2004. The duration of these investments is less than 5 years for all securities
other than the municipal bonds, which is less than 15 years. We have not
identified any issues related to the ultimate repayment of principal as a result
of credit concerns on these securities.
The Emerging Issues Task Force (EITF) has issued EITF #03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,"
that could effect in the future how the Company accounts for unrealized losses
on its available-for-sale securities. As issued, EITF #03-1 was to be effective
September 30, 2004 but was delayed while certain implementation issues are
clarified. The Company continues to monitor the provisions of EITF #03-1 but to
date does not believe implementation will have a significant effect on the
Company's results of operations or financial condition, although the Company in
the future may be restricted somewhat in its sale of its available-for-sale
securities as an asset/liability and liquidity management tool.
Nonperforming assets at September 30, 2004, totaled $5.1 million as compared to
$3.2 million at December 31, 2003. The increase resulted primarily from assets
acquired in connection with the purchase of Liberty National Bank. At 0.46% of
loans plus foreclosed assets compared to 0.32% at September 30, 2003, management
considers nonperforming assets to be at a manageable level. This increase is
primarily attributable to our acquisition of Liberty National Bank.
16
Acquisitions
- ------------
On March 4, 2004, we entered into a stock purchase agreement with the principal
shareholders of Liberty National Bank, Granbury, Texas. On July 26, 2004 the
transaction was completed. Pursuant to the purchase agreement, the Company paid
approximately $12.3 million for all of the outstanding shares of Liberty
National Bank. At closing, Liberty National Bank became a direct subsidiary of
First Financial Bankshares of Delaware, Inc., our wholly owned Delaware bank
holding company and effective November 1, 2004, it was merged with our wholly
owned bank subsidiary, Stephenville Bank and Trust Company. The total purchase
price exceeded the estimated fair value of tangible net assets acquired by
approximately $7.2 million, of which approximately $534,000 was assigned to an
identifiable intangible asset with the balance recorded by the Company as
goodwill. The identifiable intangible asset represents the future benefit
associated with the acquisition of the core deposits of Liberty National Bank
and is being amortized over seven years utilizing a method that approximates the
expected attrition of the deposits.
The primary purpose of the acquisition was to expand the Company's market share
in areas with close proximity to Dallas/Ft. Worth, Texas. Factors that
contributed to a purchase price resulting in goodwill include Liberty's historic
record of earnings, capable management and its geographic location, which
complements the Company's existing service locations. The results of operations
of Liberty National Bank are included in the consolidated earnings of the
Company commencing July 27, 2004.
The following is a condensed balance sheet disclosing the preliminary estimated
fair value amounts assigned to the major asset and liability captions at the
acquisition date.
ASSETS
Cash and cash equivalents $ 3,763,765
Investment in securities 7,954,831
Loans, net 45,689,723
Goodwill 6,688,141
Identifiable intangible asset 533,588
Other assets 2,999,878
-----------
Total assets $67,629,926
===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Noninterest-bearing deposits $ 6,509,685
Interest-bearing deposits 46,849,196
Other liabilities 1,974,896
Shareholders' equity 12,296,149
-----------
Total liabilities and shareholder's equity $67,629,926
===========
Goodwill recorded in the acquisition of Liberty will be accounted for in
accordance with SFAS No. 142. Accordingly, goodwill will not be amortized,
rather it will be tested for impairment annually. The goodwill and identifiable
intangible asset recorded are expected to be deductible for federal income tax
purposes.
17
Cash flow information relative to the acquisition of Liberty is as follows:
Fair value of assets acquired $67,629,926
Cash paid for the capital stock of Liberty 12,296,149
-----------
Liabilities assumed $55,333,777
===========
On September 7, 2004, we entered into a stock purchase agreement with the
shareholders of Southwestern Bancshares, Inc., the parent company of the First
National Bank, Glen Rose, Texas. Pursuant to the purchase agreement, we will pay
approximately $13.4 million for all of the outstanding shares of Southwestern
Bancshares, Inc.
First National Bank, is located in the city of Glen Rose, Somervell County,
Texas, approximately 60 miles southwest of Fort Worth, Texas. As of June 30,
2004, First National Bank had assets totaling approximately $47.3 million and
shareholder's equity of approximately $4.7 million. We expect the transaction to
close in December 2004, subject to regulatory approvals.
On October 25, 2004, we entered into a stock purchase agreement with the
shareholders of Clyde Financial Corporation, the parent company of The Peoples
State Bank in Clyde, Texas. Pursuant to the purchase agreement, we will pay
approximately $25.4 million for all of the outstanding shares of Clyde Financial
Corporation.
The main office of The Peoples State Bank is located in the city of Clyde,
Callahan County, Texas, approximately 12 miles east of Abilene, Texas. As of
June 30, 2004, The Peoples State Bank had assets totaling approximately $113
million and shareholder's equity of approximately $12.7 million. The Peoples
State Bank operates branches in Ranger, Rising Star and Moran, Texas, for a
total of four banking offices. We expect the transaction to close in late 2004
or first quarter 2005, subject to regulatory approvals.
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. Liquidity is provided by 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 includes 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 line of credit established with
a nonaffiliated bank which matured on June 30, 2004. We are in the process of
negotiating with the lender to renew this line of credit under similar terms for
another year.
Given the strong core deposit base and relatively low loan to deposit ratios
maintained at the subsidiary banks, management considers the current liquidity
position to be adequate to meet short- and long-term liquidity needs.
We funded the acquisition of Liberty National Bank with internal cash funds and
expect to do likewise for the Glen Rose and Clyde acquisitions. We anticipate
that any future additional acquisitions of financial institutions and expansion
of branch locations could place a demand on our cash resources. Available cash
18
at our parent company, available dividends from our subsidiary banks,
utilization of available lines of credit, and future debt or equity offerings
are expected to be the source of funding for these potential acquisitions or
expansions.
The Company's consolidated statements of cash flows are presented on page 8 of
this report. Total equity capital amounted to $264 million at September 30,
2004, up from $251 million at year-end 2003 and $249 million at September 30,
2003. The Company's risk-based capital and leverage ratios at September 30, 2004
were 17.50% and 10.46%, respectively. The third quarter 2004 cash dividend of
$0.34 per share totaled $5.3 million and represented 53.5% of third quarter
earnings.
Interest Rate Risk
- ------------------
Interest rate risk results when the maturity or repricing intervals of
interest-earning assets and interest bearing liabilities are different. The
Company's exposure to interest rate risk is managed primarily through the
Company's strategy of selecting the types and terms of interest-earning assets
and interest-bearing liabilities which generate favorable earnings, while
limiting the potential negative effects of changes in market interest rates. The
Company uses no off-balance-sheet financial instruments to manage interest rate
risk. The Company and each subsidiary bank have 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 September 30, 2004, 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 2.47% and a downward shift of interest rates by 150 basis points would result
in a reduction in projected net interest income of 8.71%. These are good faith
estimates and assume that the composition of our interest sensitive assets and
liabilities existing at September 30, 2004, will remain constant over the
relevant twelve month measurement period and that changes in market interest
rates are instantaneous and sustained across the yield curve regardless of
duration of pricing characteristics of specific assets or liabilities. Also,
this analysis does not contemplate any actions that we might undertake in
response to changes in market interest rates. In management's belief, these
estimates are not necessarily indicative of what actually could occur in the
event of immediate interest rate increases or decreases of this magnitude. As
interest-bearing assets and liabilities reprice at different time frames and
proportions to market interest rate movements, various assumptions must be made
based on historical relationships of these variables in reaching any conclusion.
Since these correlations are based on competitive and market conditions, our
future results could in management's belief, be different from the foregoing
estimates, and such results could be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Management considers interest rate risk to be a significant market risk for the
Company. See "Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations" for disclosure regarding this market risk.
Item 4. Controls and Procedures
As of September 30, 2004, we carried out an evaluation, under the supervision
and with the participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Securities
Exchange Act Rule 15d-15. Our management, including the principal executive
officer and principal financial officer, does not expect that our disclosure
controls and procedures will prevent all errors and all fraud.
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
19
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected. Our principal executive officer and principal financial officer
have concluded, based on our evaluation of our disclosure controls and
procedures, that our disclosure controls and procedures under Rule 13a-14 (c)
and Rule 15d - 14 (c) of the Securities Exchange Act of 1934 are effective at
the reasonable assurance level as of September 30, 2004.
Subsequent to our evaluation, there were no significant changes in internal
controls or other factors that could significantly affect these internal
controls.
20
PART II
OTHER INFORMATION
Item 6. Exhibits
(a) The following exhibits are filed as part of this report:
3.1 Articles of Incorporation, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 1 of the Registrant's Amendment No.
2 to Form 8-A filed on Form 8-A/A No. 2 on November 21, 1995).
3.2 Amended and Restated Bylaws, and all amendments thereto, of the Registrant
(incorporated by reference from Exhibit 2 of the Registrant's Amendment No.
1 to Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994).
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 the year ended December 31,
2002).
10.4 Form of Executive Recognition Agreement (incorporated by reference from
Exhibit 10.4 of the Registrant's Form 10-K Annual Report for the year ended
December 31, 2002).
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, 2004 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, 2003).
*31.1Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer of
First Financial Bankshares, Inc.
*31.2Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer of
First Financial Bankshares, Inc.
*32.1Section 1350 Certification of Chief Executive Officer of First Financial
Bankshares, Inc.
*32.2Section 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 5, 2004 By:/S/ F. Scott Dueser
-------------------
F. Scott Dueser
President and Chief Executive Officer
Date: November 5, 2004 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. [Intentionally omitted];
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 5, 2004
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. [Intentionally omitted];
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 5, 2004 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, 2004 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 5, 2004
By: /s/ F. SCOTT DUESER
-------------------
F. Scott Dueser
Chief Executive Officer
Subscribed and sworn to before me this 5th of November, 2004.
/s/ Gaila N. Kilpatrick
- -----------------------
Gaila N. Kilpatrick
Notary Public
My commission expires: April 15, 2005
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, 2004 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 5, 2004
By: /s/ J. Bruce Hildebrand
-----------------------
J. Bruce Hildebrand
Chief Financial Officer
Subscribed and sworn to before me this 5th of November, 2004.
/s/ Gaila N. Kilpatrick
- -----------------------
Gaila N. Kilpatrick
Notary Public
My commission expires: April 15, 2005