FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 August 1, 2001. Class Number of Shares Outstanding ----- ---------------------------- Common Stock, Par Value $10.00 Per Share 12,319,979
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 13 Signatures 14 -2-
PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. The consolidated balance sheets of First Financial Bankshares, Inc. at June 30, 2001 and 2000, and December 31, 2000, and the consolidated statements of earnings and comprehensive earnings for the three and six months ended June 30, 2001 and 2000, and the changes in shareholders' equity for the year ended December 31, 2000 and six months ended June 30, 2001, and the cash flows for the six months ended June 30, 2001 and 2000, follow on pages 4 through 8. -3-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, --------------------------------- Unaudited --------------------------------- December 31, 2001 2000 2000 --------------- --------------- --------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 78,397,631 $ 78,551,793 $ 100,300,424 Federal funds sold 74,125,000 30,206,548 62,230,288 --------------- --------------- --------------- Cash and cash equivalents 152,522,631 108,758,341 162,530,712 Interest-bearing deposits in banks 304,455 104,199 104,338 Investment securities: Securities held-to-maturity (market value of $338,568,090 and $414,828,996 at June 30, 2001 321,058,211 423,573,107 391,918,076 and 2000, respectively; $393,590,628 at December 31, 2000) Securities available-for-sale, at market value 339,525,470 248,557,951 262,334,642 --------------- --------------- --------------- Total investment securities 660,583,681 672,131,058 654,252,718 Loans 862,786,862 812,147,143 859,270,728 Less: Allowance for loan losses 9,672,505 9,587,639 9,887,646 --------------- --------------- --------------- Net loans 853,114,357 802,559,504 849,383,082 Bank premises and equipment, net 40,754,291 40,388,723 40,090,733 Goodwill, net 17,694,621 19,335,988 18,515,304 Other assets 26,384,417 29,429,903 28,937,327 --------------- --------------- --------------- TOTAL ASSETS $ 1,751,358,453 $ 1,672,707,716 $ 1,753,814,214 =============== =============== =============== LIABILITIES Noninterest-bearing deposits $ 330,407,818 $ 325,657,904 $ 336,276,933 Interest-bearing deposits 1,188,058,484 1,134,688,021 1,183,596,767 --------------- --------------- --------------- Total deposits 1,518,466,302 1,460,345,925 1,519,873,700 Dividends payable 3,695,865 3,292,229 3,256,540 Securities sold under agreements to repurchase 12,586,776 14,486,306 26,164,359 Other liabilities 9,961,101 8,399,083 8,398,727 --------------- --------------- --------------- Total liabilities 1,544,710,044 1,486,523,543 1,557,693,326 --------------- --------------- --------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - $10 par value; authorized 20,000,000 shares; 12,319,549 and 9,976,453 issued and outstanding at June 30,2001 and 2000,respectively; 9,983,002 shares issued and 9,856,902 shares oustanding at December 31, 2000 123,195,490 99,764,530 99,830,020 Capital surplus 57,721,279 60,535,858 60,592,310 Retained earnings 20,708,837 30,085,817 38,003,195 Treasury stock, at cost - 126,100 shares at December 31, 2000 -- -- (3,925,069) Unrealized gain (loss) on investment securities available-for-sale, net 5,022,803 (4,202,032) 1,620,432 --------------- --------------- --------------- Total shareholders' equity 206,648,409 186,184,173 196,120,888 --------------- --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,751,358,453 $ 1,672,707,716 $ 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 Six Months Ended June 30, June 30, ---------------------------------- -------------------------------------- 2001 2000 2001 2000 --------------- --------------- ----------------- ----------------- <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans $ 18,792,018 $ 18,359,511 $ 38,367,324 $ 36,008,300 Interest on investment securities: Taxable 7,759,393 8,431,214 15,566,024 16,731,616 Exempt from federal income tax 1,540,063 1,421,235 3,018,344 2,831,189 Interest on federal funds sold and interest-bearing deposits in banks 1,120,820 955,593 2,207,112 1,855,313 --------------- --------------- ----------------- ----------------- Total interest income 29,212,294 29,167,553 59,158,804 57,426,418 INTEREST EXPENSE Interest-bearing deposits 11,531,888 11,522,982 24,242,985 22,652,108 Other 247,051 215,183 562,571 370,158 --------------- --------------- ----------------- ----------------- Total interest expense 11,778,939 11,738,165 24,805,556 23,022,266 --------------- --------------- ----------------- ----------------- NET INTEREST INCOME 17,433,355 17,429,388 34,353,248 34,404,152 Provision for loan losses 497,334 419,500 863,717 1,160,250 --------------- --------------- ----------------- ----------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,936,021 17,009,888 33,489,531 33,243,902 NONINTEREST INCOME Trust department income 1,478,317 1,397,284 2,995,365 2,743,522 Service fees on deposit accounts 3,741,899 3,542,862 7,248,672 6,931,232 ATM fees 478,447 385,075 929,691 714,475 Real estate mortgage fees 497,458 263,783 769,854 495,809 Net gain on securities transactions 12,763 - 67,612 - Other 852,343 673,429 1,746,716 1,843,860 --------------- --------------- ----------------- ----------------- Total noninterest income 7,061,227 6,262,433 13,757,910 12,728,898 NONINTEREST EXPENSE Salaries and employee benefits 6,985,845 6,794,304 13,872,049 13,625,513 Net occupancy expense 953,849 895,994 1,890,423 1,770,271 Equipment expense 1,058,845 1,059,775 2,139,121 2,073,537 Goodwill amortization 410,437 410,341 820,778 820,683 Other expenses 4,099,426 3,763,136 7,936,797 7,573,338 --------------- --------------- ----------------- ----------------- Total noninterest expense 13,508,402 12,923,550 26,659,168 25,863,342 --------------- --------------- ----------------- ----------------- EARNINGS BEFORE INCOME TAXES 10,488,846 10,348,771 20,588,273 20,109,458 Income tax expense 3,201,825 3,220,204 6,297,502 6,234,379 --------------- --------------- ----------------- ----------------- NET EARNINGS $ 7,287,021 $ 7,128,567 $ 14,290,771 $ 13,875,079 =============== =============== ================= ================= EARNINGS PER SHARE, BASIC (1) $ 0.59 $ 0.57 $ 1.16 $ 1.11 EARNINGS PER SHARE, ASSUMING DILUTION (1) $ 0.59 $ 0.57 $ 1.16 $ 1.11 DIVIDENDS PER SHARE (2) $ 0.26 $ 0.24 $ 0.57 $ 0.50 (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. 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 Six Months Ended June 30, June 30, -------------------------------- ---------------------------------- 2001 2000 2001 2000 -------------- -------------- --------------- --------------- <S> <C> <C> <C> <C> NET EARNINGS $ 7,287,021 $ 7,128,567 $ 14,290,771 $ 13,875,079 OTHER ITEMS OF COMPREHENSIVE EARNINGS Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes 1,756,146 (162,345) 5,302,029 (168,162) Reclassification adjustment for realized gains on investment in securities included in net earnings, before income taxes (12,763) - (67,612) - -------------- -------------- --------------- --------------- Total other items of comprehensive earnings 1,743,383 (162,345) 5,234,417 (168,162) -------------- -------------- --------------- --------------- OTHER COMPREHENSIVE EARNINGS, BEFORE INCOME TAXES 9,030,404 6,966,222 19,525,188 13,706,917 Income tax expense (benefit) related to other items of comprehensive earnings 610,184 (56,821) 1,832,046 (58,857) -------------- -------------- --------------- --------------- COMPREHENSIVE EARNINGS $ 8,420,220 $ 7,023,043 $ 17,693,142 $ 13,765,774 ============== ============== =============== =============== 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 Securities Total ------------------------- Capital Retained Treasury Available Shareholders' Shares Amount Surplus Earnings Stock, 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 - - - 14,290,771 - - 14,290,771 Stock split-up, effected in the form of a 25% stock dividend 2,461,770 24,617,700 - (24,617,700) - - - Stock issuances 10,777 107,770 9,088 - - - 116,858 Cash dividends declared, $.57 per share - - - (6,967,429) - - (6,967,429) 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 - - - - - 3,402,371 3,402,371 ---------- ------------- ------------ ------------ ------------ ----------- ------------- Balances at June 30, 2001 (unaudited) 12,319,549 $ 123,195,490 $ 57,721,279 $ 20,708,837 $ - $ 5,022,803 $ 206,648,409 ========== ============= ============ ============ ============ =========== ============= See notes to consolidated financial statements. </TABLE> -7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED) <TABLE> <CAPTION> Six Months Ended June 30, ------------------------------------ 2001 2000 ----------------- ---------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 14,290,771 $ 13,875,079 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,781,694 2,881,036 Provision for loan losses 863,717 1,160,250 Premium amortization, net of discount accretion 397,684 946,028 Gain on sale of assets (53,909) (6,083) Deferred federal income tax (benefit) expense (795,754) 58,024 Decrease (increase) in other assets 1,428,986 (211,583) Increase in other liabilities 1,562,374 1,027,301 ----------------- ---------------- Total adjustments 6,184,792 5,854,973 ----------------- ---------------- Net cash provided by operating activities 20,475,563 19,730,052 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in interest-bearing deposits in banks (200,117) (100,119) Activity in available-for-sale securities: Sales 12,629,496 - Maturities 46,790,210 5,952,639 Purchases (122,185,407) (20,981,825) Activity in held-to-maturity securities: Maturities 121,471,592 39,785,258 Purchases (60,132,509) (41,783,566) Net increase in loans (4,615,481) (15,649,135) Capital expenditures (2,708,673) (917,081) Proceeds from sale of assets 178,522 206,616 ----------------- ---------------- Net cash used in investing activities (8,772,367) (33,487,213) CASH FLOWS FROM FINANCING ACTIVITIES Net decrease in noninterest-bearing deposits (5,869,115) (14,855,833) Net increase (decrease) in interest-bearing deposits 4,461,717 (49,502,688) Net (decrease) increase in securities sold under agreements to repurchase (13,577,583) 4,848,572 Common stock transactions: Acquisition of treasury stock (315,050) - Proceeds from stock issuances 116,858 39,977 Dividends paid (6,528,104) (5,984,584) ----------------- ---------------- Net cash used in financing activities (21,711,277) (65,454,556) ----------------- ---------------- Net decrease in cash and cash equivalents (10,008,081) (79,211,717) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 162,530,712 187,970,058 ----------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 152,522,631 $ 108,758,341 ================= ================ SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS Interest paid $ 24,387,048 $ 23,138,254 Federal income tax paid 6,378,823 6,702,275 Assets acquired through foreclosure 54,614 267,164 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 unaudited results of operations for the three months and six months ended June 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 June 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 June 30, 2001 and 2000, were 12,312,900 and 12,468,353 shares, respectively. The weighted average common shares outstanding used in computing basic earnings per share for the six-month periods ended June 30, 2001 and 2000, were 12,312,706 and 12,468,118 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the quarters ended June 30, 2001 and 2000, were 12,363,974 and 12,502,503 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the six-month periods ended June 30, 2001 and 2000, were 12,366,251 and 12,497,990 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 adopt SFAS 142 on January 1, 2002. Upon 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 will not be 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 - Subsequent Events 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 will be 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. -10-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Results - ----------------- For the six months ended June 30, 2001, the Company's net income amounted to $14.3 million, or $1.16 per basic share. For the same period last year, net income amounted to $13.9 million, or $1.11 per basic share. Return on average assets and return on average equity for the six months ended June 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 1.65 percent and 15.45 percent, respectively, on an annualized basis. Net income for the second quarter 2001 totaled $7.3 million, or $0.59 per basic share, as compared to $7.1 million, or $0.57 per basic share, earned in the second quarter of 2000. Net interest income on a tax-equivalent basis for the six months ended June 30, 2001, amounted to $35.8 million and was unchanged from the same period last year. Net interest income on a tax-equivalent basis for the second quarter of 2001 amounted to $18.2 million, a slight increase over the $18.1 million reported for the same period last year. The lack of growth in net interest income for 2001 is attributable to a compressed net interest margin resulting from the dramatic decline in interest rates during the first six months of the year. For the first six months of 2001, the net interest margin was 4.51 percent as compared to 4.69 percent for the same period last year. For the second quarter 2001, the net interest margin was 4.51 percent, unchanged from the first quarter 2000, but below the 4.74 percent reported in the second quarter last year. For the six months ended June 30, 2001, the provision for loan losses amounted to $864 thousand as compared to $1.2 million for the same period last year. Net charge offs for the six months ended June 30, 2001, totaled $1.1 million, which on an annualized basis amounted to .25 percent of average loans as compared to .18 percent for the full year of 2000. At June 30, 2001, the allowance for loan losses was 1.12 percent of loans and was considered by Management to be adequate. For the second quarter of 2001, the provision for loan losses was $497 thousand as compared to $420 thousand for the second quarter in 2000. Total noninterest income for the six months ended June 30, 2001, amounted to $13.8 million as compared to $12.7 million for the same period last year. The increase was primarily a result of (i) an increase in trust fees of $251 thousand due primarily to growth in trust assets; (ii) an increase of $317 thousand in service fees on deposit accounts which reflects increased transaction volumes; (iii) an increase of $274 thousand in real estate mortgage fees resulting from the increased volume of mortgage loan transactions during 2001; and an increase of $216 thousand in ATM fees which reflects growth in the cardholder base and transaction volumes. Noninterest income for the second quarter 2001 amounted to $7.1 million as compared to $6.3 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 $81 thousand, $200 thousand, and $233 thousand, respectively. Noninterest expense for the six months ended June 30, 2001, totaled $26.7 million, an increase of $800 thousand, or 3.1 percent, above the $25.9 million reported for the same period last year. The higher level of noninterest expenses was primarily a result of (i) a $246 thousand, or 1.8 percent, increase in salaries and benefits; (ii) a $120 thousand increase in occupancy expense due primarily to higher utilities expense; and (iii) a $150 thousand increase in professional fees, primarily fees relating to implementation of information systems enhancements. Noninterest expense for the second quarter 2001 amounted to $13.5 million as compared to $12.9 million for the same period last year. For the most part, the second quarter 2001 increase over the second quarter 2000 is attributable to the same expense categories which are reflected in the year-to-date increases previously highlighted. The Company's efficiency ratio for the first six months of 2001 amounted to 53.83 percent as compared to 53.34 percent for the same period last year. -11-
Balance Sheet Review - -------------------- Total assets at June 30, 2001, amounted to $1.751 billion as compared to $1.754 billion at December 31, 2000, and $1.673 billion at June 30, 2000. The consolidated balance sheets presented reflect normal recurring adjustments and accruals. Loans at June 30, 2001, totaled $863 million as compared to $859 million at year-end 2000 and $812 million at June 30, 2000. As compared to year-end 2000 amounts, loans at June 30, 2001, reflect (i) a $14 million decrease in commercial, financial and agricultural loans; (ii) a $14 million increase in real estate loans; and (iii) a $4 million increase in loans to individuals. Investment securities at June 30, 2001, totaled $661 million as compared to $654 million at year-end 2000 and $672 million at June 30, 2000. The net unrealized gain in the investment portfolio at June 30, 2001, amounted to $25.2 million and had an overall yield of 6.28 percent. At June 30, 2001, the Company did not hold any structured notes or CMOs that entail higher risks than standard mortgage-backed securities. Total deposits at June 30, 2001, amounted to $1.518 billion as compared to $1.520 billion at year-end 2000 and $1.460 billion at June 30, 2000. Nonperforming assets at June 30, 2001, totaled $3.2 million as compared to $4.1 million at December 31, 2000. The decrease resulted primarily from a $955 thousand decrease in nonaccrual loans. At .37 percent of loans plus foreclosed assets, Management considers nonperforming assets to be at a manageable level and is unaware of any material classified credit not properly disclosed as nonperforming. Liquidity and Capital - --------------------- The Company's consolidated statements of cash flows are presented on page 8 of this report. At June 30, 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 $206.6 million at June 30, 2001, which was up from $196.1 million at year-end 2000 and $186.2 million at June 30, 2000. The Company's risk-based capital and leverage ratios at June 30, 2001, were 19.40 percent and 10.52 percent, respectively. The second quarter 2001 cash dividend of $0.30 per share totaled $3.7 million and represented 50.7 percent of second quarter earnings. On July 24, 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 June 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 4.3 percent and a downward shift of interest rates by 200 basis points would result in a reduction in projected net interest income of 7.0 percent. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at June 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 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 would, in Management's belief, be different from the foregoing estimates, and such results could be material. -12-
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. -13-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST FINANCIAL BANKSHARES, INC. Date: August 9, 2001 By:/S/CURTIS R. HARVEY -------------- ----------------------------- Curtis R. Harvey Executive Vice President and Chief Financial Officer Date: August 9, 2001 By:/S/SANDY LESTER -------------- ----------------------------- Sandy Lester Secretary-Treasurer -14-