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 September 30, 2001 ------------------ 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 ------ 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 --------- (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 November 1, 2001. Class Number of Shares Outstanding ----- ---------------------------- Common Stock, Par Value $10.00 Per Share 12,324,141
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 11 3. Quantitative and Qualitative Disclosures About Market Risk 14 Signatures 15 -2-
PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. The consolidated balance sheets of First Financial Bankshares, Inc. at September 30, 2001 and 2000, and December 31, 2000, and the consolidated statements of earnings and comprehensive earnings for the three and nine months ended September 30, 2001 and 2000, and the changes in shareholders' equity for the year ended December 31, 2000 and nine months ended September 30, 2001, and the cash flows for the nine months ended September 30, 2001 and 2000, follow on pages 4 through 8. -3-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> September 30, --------------------------------------- Unaudited --------------------------------------- December 31, 2001 2000 2000 ------------------ ------------------ ------------------ <S> <C> <C> <C> ASSETS Cash and due from banks $ 87,504,488 $ 75,752,498 $ 100,300,424 Federal funds sold 41,258,066 28,988,293 62,230,288 ------------------ ------------------ ------------------ Cash and cash equivalents 128,762,554 104,740,791 162,530,712 Interest-bearing deposits in banks 304,497 104,268 104,338 Investment securities: Securities held-to-maturity (market value of $335,347,542 and $411,316,933 at September 30, 2001 313,989,514 423,207,056 391,918,076 and 2000, respectively; $393,590,628 at December 31, 2000) Securities available-for-sale, at market value 401,043,693 248,557,951 262,334,642 ------------------ ------------------ ------------------ Total investment securities 715,033,207 671,765,007 654,252,718 Loans 935,557,546 841,836,075 859,270,728 Less: Allowance for loan losses 10,504,589 9,516,300 9,887,646 ------------------ ------------------ ------------------ Net loans 925,052,957 832,319,775 849,383,082 Bank premises and equipment, net 41,823,428 40,383,912 40,090,733 Goodwill, net 25,122,311 18,925,646 18,515,304 Other assets 25,227,130 28,731,925 28,937,327 ------------------ ------------------ ------------------ TOTAL ASSETS $ 1,861,326,084 $ 1,696,971,324 $ 1,753,814,214 ================== ================== ================== LIABILITIES Noninterest-bearing deposits $ 346,159,673 $ 326,949,272 $ 336,276,933 Interest-bearing deposits 1,259,910,504 1,142,383,096 1,183,596,767 ------------------ ------------------ ------------------ Total deposits 1,606,070,177 1,469,332,368 1,519,873,700 Dividends payable 3,697,242 3,267,050 3,256,540 Securities sold under agreements to repurchase 23,225,722 25,831,099 26,164,359 Other liabilities 14,982,173 9,054,014 8,398,727 ------------------ ------------------ ------------------ Total liabilities 1,647,975,314 1,507,484,531 1,557,693,326 ------------------ ------------------ ------------------ COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - $10 par value; authorized 20,000,000 shares; 12,324,141 and 9,977,153 issued and outstanding at September 30,2001 and 2000, respectively; 9,983,002 shares issued and 9,856,902 shares oustanding at December 31, 2000 123,241,410 99,771,530 99,830,020 Capital surplus 57,735,976 60,541,892 60,592,310 Retained earnings 24,544,462 34,030,917 38,003,195 Treasury stock, at cost - 126,100 shares at December 31, 2000 and 99,500 shares at September 30, 2000 - (3,093,219) (3,925,069) Unrealized gain (loss) on investment securities available-for-sale, net 7,828,922 (1,764,327) 1,620,432 ------------------ ------------------ ------------------ Total shareholders' equity 213,350,770 189,486,793 196,120,888 ------------------ ------------------ ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,861,326,084 $ 1,696,971,324 $ 1,753,814,214 ================== ================== ================== See notes to consolidated financial statements. </TABLE> -4-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ----------------------------------- -------------------------------------- 2001 2000 2001 2000 --------------- --------------- ----------------- ----------------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 18,921,994 $ 19,440,985 $ 57,289,318 $ 55,449,284 Interest on investment securities: Taxable 8,292,472 8,457,372 23,858,497 25,188,990 Exempt from federal income tax 1,627,261 1,451,133 4,645,604 4,282,321 Interest on federal funds sold and interest-bearing deposits in banks 658,318 498,866 2,865,430 2,354,856 --------------- --------------- ----------------- ----------------- Total interest income 29,500,045 29,848,356 88,658,849 87,275,451 INTEREST EXPENSE Interest-bearing deposits 10,756,921 12,187,427 34,999,907 34,839,534 Other 201,044 306,330 763,615 677,165 --------------- --------------- ----------------- ----------------- Total interest expense 10,957,965 12,493,757 35,763,522 35,516,699 --------------- --------------- ----------------- ----------------- NET INTEREST INCOME 18,542,080 17,354,599 52,895,327 51,758,752 Provision for loan losses 538,833 426,000 1,402,550 1,586,250 --------------- --------------- ----------------- ----------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,003,247 16,928,599 51,492,777 50,172,502 NONINTEREST INCOME Trust department income 1,451,525 1,376,699 4,446,890 4,120,221 Service fees on deposit accounts 3,688,601 3,561,381 10,937,274 10,492,613 ATM fees 495,788 407,815 1,425,510 1,122,289 Real estate mortgage fees 433,902 298,642 1,203,756 794,452 Net gain on securities transactions 177 - 67,789 - Other 779,425 805,302 2,526,107 2,649,167 --------------- --------------- ----------------- ----------------- Total noninterest income 6,849,418 6,449,839 20,607,326 19,178,742 NONINTEREST EXPENSE Salaries and employee benefits 7,266,165 6,718,219 21,138,214 20,343,732 Net occupancy expense 1,082,346 903,012 2,972,769 2,673,285 Equipment expense 1,135,747 1,045,528 3,274,867 3,119,065 Goodwill amortization 410,437 410,341 1,231,120 1,231,026 Other expenses 4,153,671 3,852,420 12,090,564 11,425,759 --------------- --------------- ----------------- ----------------- Total noninterest expense 14,048,366 12,929,520 40,707,534 38,792,867 --------------- --------------- ----------------- ----------------- EARNINGS BEFORE INCOME TAXES 10,804,299 10,448,918 31,392,569 30,558,377 Income tax expense 3,271,428 3,236,767 9,568,931 9,471,147 --------------- --------------- ----------------- ----------------- NET EARNINGS $ 7,532,871 $ 7,212,151 $ 21,823,638 $ 21,087,230 =============== =============== ================= ================= EARNINGS PER SHARE, BASIC (1) $ 0.61 $ 0.58 $ 1.77 $ 1.69 EARNINGS PER SHARE, ASSUMING DILUTION (1) $ 0.61 $ 0.57 $ 1.76 $ 1.68 DIVIDENDS PER SHARE (2) $ 0.30 $ 0.26 $ 0.86 $ 0.77 <FN> (1)Earnings per share are calculated using weighted average shares outstanding for each period presented with prior periods adjusted for 25% stock dividend issued June 1, 2001. (2)Dividends per share are calculated using actual number of shares outstanding at the end of each period presented with prior periods adjusted for 25% stock dividend issued June 1, 2001. </FN> See notes to consolidated financial statements. </TABLE> -5-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------- ---------------------------------- 2001 2000 2001 2000 --------------- ----------------- --------------- -------------- <S> <C> <C> <C> <C> NET EARNINGS $ 7,532,871 $ 7,212,151 $ 21,823,638 $ 21,087,230 OTHER ITEMS OF COMPREHENSIVE EARNINGS Change in unrealized gain on investment securities available-for-sale, before income taxes 4,317,283 3,750,316 9,619,312 3,582,154 Reclassification adjustment for realized gains on investment in securities included in net earnings, before income taxes (177) - (67,789) - --------------- ----------------- --------------- -------------- Total other items of comprehensive earnings, before tax 4,317,106 3,750,316 9,551,523 3,582,154 --------------- ----------------- --------------- -------------- Income tax expense related to other items of comprehensive earnings 1,510,987 1,312,611 3,343,033 1,253,754 --------------- ----------------- --------------- -------------- COMPREHENSIVE EARNINGS $ 10,338,990 $ 9,649,856 $ 28,032,128 $ 23,415,630 =============== ================= =============== ============== See notes to consolidated financial statements. </TABLE> -6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY <TABLE> <CAPTION> Unrealized Gain (Loss) on Investment Common Stock Treasury Securities Total ------------------------ Capital Retained Stock, Available Shareholders' Shares Amount Surplus Earnings at cost For Sale, Net Equity ---------- ------------- ------------ ------------ ----------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1999 9,974,306 $ 99,743,060 $ 60,517,351 $ 22,495,259 $ - $(4,092,727)$ 178,662,943 Net earnings - - - 28,316,047 - - 28,316,047 Stock issuances 8,696 86,960 74,959 - - - 161,919 Cash dividends declared, $1.29 per share - - - (12,808,111) - - (12,808,111) Acquisition of treasury stock - - - - (3,925,069) - (3,925,069) Change in unrealized gain (loss) on investment securities available-for-sale, net - - - - - 5,713,159 5,713,159 ---------- ------------- ------------ ------------ ----------- ----------- ------------- 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 - - - 21,823,638 - - 21,823,638 Stock split-up, effected in the form of a 25% stock dividend 2,461,770 24,617,700 - (24,617,700) - - - Stock issuances 15,369 153,690 23,785 - - - 177,475 Cash dividends declared, $.86 per share - - - (10,664,671) - - (10,664,671) 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 - - - - - 6,208,490 6,208,490 ---------- ------------- ------------ ------------ ----------- ----------- ------------- Balances at September 30, 2001(unaudited) 12,324,141 $ 123,241,410 $ 57,735,976 $ 24,544,462 $ - $ 7,828,922 $ 213,350,770 ========== ============= ============ ============ =========== =========== ============= See notes to consolidated financial statements. </TABLE> -7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED) <TABLE> <CAPTION> Nine Months Ended September 30, ------------------------------------ 2001 2000 ----------------- ---------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 21,823,638 $ 21,087,230 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 4,219,424 4,306,211 Provision for loan losses 1,402,550 1,586,250 Premium amortization, net of discount accretion 992,913 1,344,389 Gain on sale of assets (52,815) (5,694) Deferred federal income tax expense (benefit) 158,302 (374,435) Decrease (increase) in other assets 847,959 (484,229) Increase in other liabilities 5,873,371 1,682,232 ----------------- ---------------- Total adjustments 13,441,704 8,054,724 ----------------- ---------------- Net cash provided by operating activities 35,265,342 29,141,954 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in interest-bearing deposits in banks (200,159) (100,188) Payment for stock of City Bancshares, Inc., net of cash acquired (6,848,231) - Activity in available-for-sale securities: Sales 12,926,715 - Maturities 56,572,060 9,602,976 Purchases (150,343,528) (28,869,707) Activity in held-to-maturity securities: Maturities 150,907,110 63,600,687 Purchases (92,498,613) (57,643,443) Net increase in loans (26,186,131) (45,838,881) Capital expenditures (3,912,942) (2,009,332) Proceeds from sale of assets 178,945 382,402 ----------------- ---------------- Net cash used in investing activities (59,404,773) (60,875,486) CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in noninterest-bearing deposits (2,067,026) (13,564,465) Net increase (decrease) in interest-bearing deposits 5,738,481 (41,807,613) Net (decrease) increase in securities sold under agreements to repurchase (2,938,637) 16,193,365 Common stock transactions: Acquisition of treasury stock (315,050) (3,093,219) Proceeds from stock issuances 177,475 53,011 Dividends paid (10,223,969) (9,276,814) ----------------- ---------------- Net cash used in financing activities (9,628,726) (51,495,735) ----------------- ---------------- Net decrease in cash and cash equivalents (33,768,158) (83,229,267) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 162,530,712 187,970,058 ----------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 128,762,554 $ 104,740,791 ================= ================ SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS Interest paid $ 35,978,699 $ 35,193,198 Federal income tax paid 6,378,823 9,884,787 Assets acquired through foreclosure 209,566 270,639 Retirement of treasury stock 4,240,119 - See notes to consolidated financial statements. </TABLE> -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 nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the year ended December 31, 2001. Note 2 - Earnings Per Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. In computing diluted earnings per common share for the quarters ended September 30, 2001 and 2000, the Company assumes that all outstanding options to purchase common stock have been exercised at the beginning of the year (or time of issuance, if later). The dilutive effect of the outstanding options is reflected by application of the treasury stock method, whereby, the proceeds from the exercised options are assumed to be used to purchase common stock at the average market price during the respective period. The weighted average common shares outstanding used in computing basic earnings per common share for the quarters ended September 30, 2001 and 2000, were 12,321,964 and 12,432,878 shares, respectively. The weighted average common shares outstanding used in computing basic earnings per common share for the nine-month periods ended September 30, 2001 and 2000, were 12,315,826 and 12,456,286 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the quarters ended September 30, 2001 and 2000, were 12,412,979 and 12,464,512 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the nine-month periods ended September 30, 2001 and 2000, were 12,362,422 and 12,492,585 shares, respectively. Note 3 - Recent Accounting Standards In June 2001, the Financial Accounting Standards Board issued SFAS No.141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS 141 prospectively prohibits the pooling of interests method of accounting for business combinations initiated after June 30, 2001. SFAS 142 requires that goodwill no longer be amortized, but instead be reviewed for impairment. The Company will fully adopt SFAS 142 on January 1, 2002. Upon full adoption, the Company will assign goodwill to the lowest reporting unit level and perform an initial impairment test. Subsequently, an impairment test will be performed annually or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value. On January 1, 2002, the Company will discontinue amortizing goodwill recorded prior to June 30, 2001. Goodwill initially recorded subsequent to June 30, 2001, is not being amortized. The Company is in the process of evaluating but has not yet determined the financial statement impact of SFAS 142. In July 2001, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation Issues" ("SAB 102"). This staff accounting bulletin expresses certain of the SEC staff's views on the development, documentation, and application of a systematic methodology that the staff normally would expect registrants to prepare and maintain in support of their allowances for loan losses. The Company believes it is substantially in compliance with the provisions of SAB 102 and expects the guidance to have no impact on its financial reporting process. Parallel guidance was issued by federal banking agencies through the Federal Financial Institutions Examination Council as interagency guidance, "Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions." -9-
Note 4 - Business Combination In July 2001, the Company purchased all of the outstanding stock of City National Bancshares, Inc. ("City") and its subsidiary, City National Bank for $16,500,000 in cash. The total purchase price exceeded the fair market value of net assets acquired by approximately $7,800,000, which was recorded by the Company as goodwill. Initially, no portion of the excess price was assigned to intangible assets other than goodwill. 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 City's historically stable record of earnings, capable management and its geographic location, which complements the Company's existing service locations. Subsequent to the acquisition, the Company liquidated the stock of City and City National Bank is operating as a subsidiary of the Company. The results of operations of City National Bank are included in the consolidated earnings of the Company commencing July 1, 2001. The following is a condensed consolidated balance sheet disclosing estimated fair value amounts assigned to the major asset and liability captions at the acquisition date. These amounts are preliminary and subject to adjustment. ASSETS Cash and cash equivalents $ 9,651,769 Investment in securities 29,717,834 Loans, net 51,061,735 Goodwill 7,838,032 Other assets 1,465,727 -------------- Total assets $ 99,735,097 ============= LIABILITIES AND SHAREHOLDER'S EQUITY Noninterest-bearing deposits $ 11,949,766 Interest-bearing deposits 70,575,256 Other liabilities 710,075 Shareholders' equity 16,500,000 -------------- Total liabilities and shareholder's equity $ 99,735,097 ============== Goodwill recorded in the acquisition of City will be accounted for in accordance with SFAS 142. Accordingly, goodwill will not be amortized, rather it will be tested for impairment annually. The goodwill recorded is not expected to be deductible for federal income tax purposes. The proforma impact of City is not material to the Company's financial statements. Cash flow information relative to the acquisition of City is, as follows: Fair value of assets acquired $ 91,897,065 Cash paid for the capital stock of City 16,500,000 -------------- Liabilities assumed $ 75,397,065 ============== -10-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Results - ----------------- For the nine months ended September 30, 2001, the Company's net income amounted to $21.8 million, or $1.77 per basic share. For the same period last year, net income amounted to $21.1 million, or $1.69 per basic share. Return on average assets and return on average equity for the nine months ended September 30, 2001, amounted to 1.64 percent and 14.48 percent, respectively, on an annualized basis. The Company's return on average assets and return on average equity for the same period last year amounted to 1.67 percent and 15.46 percent, respectively, on an annualized basis. Net income for the third quarter 2001 totaled $7.5 million, or $0.61 per basic share, as compared to $7.2 million, or $0.58 per basic share, earned in the third quarter 2000. Net interest income on a tax-equivalent basis for the nine months ended September 30, 2001, amounted to $55.2 million as compared to $53.8 million for the same period last year. Net interest income on a tax-equivalent basis for the third quarter 2001 amounted to $19.4 million, as compared to $18.1 million reported for the same period last year. The higher net interest income for 2001 is attributable primarily to an acquisition finalized July 3, 2001. For the first nine months of 2001, the net interest margin was 4.52 percent as compared to 4.69 percent for the same period last year. For the third quarter 2001, the net interest margin was 4.55 percent, a slight improvement over 4.52 percent for the second quarter 2001, but below the 4.71 percent reported for the third quarter last year. The lower net interest margin for 2001 reflects the significant decline in interest rates that has occurred during 2001. For the nine months ended September 30, 2001, the provision for loan losses amounted to $1.4 million as compared to $1.6 million for the same period last year. Net charge offs for the nine months ended September 30, 2001, totaled $1.2 million, which on an annualized basis amounted to .18 percent of average loans and was unchanged from the .18 percent reported for the full year of 2000. At September 30, 2001, the allowance for loan losses was 1.12 percent of loans and was considered by Management to be adequate. For the third quarter 2001, the provision for loan losses was $539 thousand as compared to $426 thousand for the third quarter 2000. Total noninterest income for the nine months ended September 30, 2001, amounted to $20.6 million as compared to $19.2 million for the same period last year. The increase was primarily a result of (i) an increase in trust fees of $327 thousand due primarily to growth in trust assets; (ii) an increase of $444 thousand in service fees on deposit accounts which reflects an increase in accounts and transaction volumes; (iii) an increase of $409 thousand in real estate mortgage fees resulting from the increased volume of mortgage loan transactions during 2001; and an increase of $303 thousand in ATM fees which reflects growth in the cardholder base and transaction volumes. Noninterest income for the third quarter 2001 amounted to $6.8 million as compared to $6.4 million for the same period last year. The improvement resulted primarily from higher trust fees, service fees on deposit accounts, and real estate mortgage fees which increased $75 thousand, $127 thousand, and $135 thousand, respectively. Noninterest expense for the nine months ended September 30, 2001, totaled $40.7 million, an increase of $1.9 million above the $38.8 million reported for the same period last year. The higher level of noninterest expenses was primarily a result of (i) a $794 thousand increase in salaries and benefits; (ii) a $300 thousand increase in occupancy expense due primarily to higher utilities expense; (iii) a $152 thousand increase in professional fees, primarily fees relating to implementation of information systems enhancements; and (iv)a $134 thousand increase in printing and supplies expense. Noninterest expense for the third quarter 2001 amounted to $14.0 million, an increase of $1.1 million above the $12.9 million reported for the same period last year. The increase over the third quarter 2000 is attributable primarily to a $548 thousand increase in salaries and benefits, and a $269 thousand combined increase in net occupancy and equipment expense. The Company's efficiency ratio for the first nine months of 2001 amounted to 53.74 percent as compared to 53.14 percent for the same period last year. -11-
Balance Sheet Review - -------------------- Total assets at September 30, 2001, amounted to $1.861 billion as compared to $1.754 billion at December 31, 2000, and $1.697 billion at September 30, 2000. The acquisition finalized July 3, 2001 accounted for approximately $90 million in the increase in total assets when compared to year-end 2000 and September 30, 2000. Loans at September 30, 2001, totaled $936 million as compared to $859 million at year-end 2000 and $842 million at September 30, 2000. As compared to year-end 2000 amounts, loans at September 30, 2001, reflect (i) a $3 million increase in commercial, financial and agricultural loans; (ii) a $65 million increase in real estate loans; and (iii) an $8 million increase in loans to individuals. Investment securities at September 30, 2001, totaled $715 million as compared to $654 million at year-end 2000 and $672 million at September 30, 2000. The net unrealized gain in the investment portfolio at September 30, 2001, amounted to $33.4 million and had an overall yield of 6.14 percent. At September 30, 2001, the Company did not hold any structured notes or CMOs that entail higher risks than standard mortgage-backed securities. Total deposits at September 30, 2001, amounted to $1.606 billion as compared to $1.520 billion at year-end 2000 and $1.469 billion at September 30, 2000. Nonperforming assets at September 30, 2001, totaled $3.5 million as compared to $4.1 million at December 31, 2000. The decrease resulted primarily from a $525 thousand decrease in nonaccrual loans. At .38 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 September 30, 2001, the parent company had no debt outstanding under its $25 million line of credit with an unaffiliated financial institution. Total equity capital amounted to $213.4 million at September 30, 2001, which was up from $196.1 million at year-end 2000 and $189.5 million at September 30, 2000. The Company's risk-based capital and leverage ratios at September 30, 2001, were 17.91 percent and 9.91 percent, respectively. The third quarter 2001 cash dividend of $0.30 per share totaled $3.7 million and represented 49.1 percent of third quarter earnings. On October 23, 2001, the Company declared a $0.30 per share cash dividend payable October 1, 2001. Interest Rate Risk - ------------------ Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. The Company's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. The Company uses no off-balance-sheet financial instruments to manage interest rate risk. Each subsidiary bank has an asset/liability committee which monitors interest rate risk and compliance with investment policies. Interest-sensitivity gap and simulation analysis are among the ways that the subsidiary banks track interest rate risk. As of September 30, 2001, Management estimates that, over the next 12 months, an upward shift of interest rates by 200 basis points would result in an increase of projected net interest income of 4.7 percent and a downward shift of interest rates by 200 basis points would result in a reduction in projected net interest income of 13.1 percent. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at September 30, 2001, 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. -12-
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. -13-
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. -14-
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 13, 2001 By:/S/CURTIS R. HARVEY ------------------ ---------------------------- Curtis R. Harvey Executive Vice President and Chief Financial Officer Date: November 13, 2001 By:/S/SANDY LESTER ------------------ ------------------------------ Sandy Lester Secretary-Treasurer -15-