10-Q 1 tenq3-03.txt FIRST FINANCIAL BANKSHARES, INC. 3/31/03-10Q 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 March 31, 2003 -------------- 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) 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 May 1, 2003: Class Number of Shares Outstanding ----- ---------------------------- Common Stock, $10.00 par value 15,464,598 per share TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item Page ---- ---- Forward-Looking Statement Disclaimer 3 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 3. Quantitative and Qualitative Disclosures About Market Risk 13 4. Controls and Procedures 13 PART II OTHER INFORMATION 4. Submission of Matter to Vote of Security Holders 15 6. Exhibits and Reports on Form 8-K 15 Signatures 17 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 our 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 value of collateral and loan reserves; o inflation, interest rate, market and monetary fluctuations; o changes in consumer spending, borrowing and savings habits; 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. PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. The consolidated balance sheets of First Financial Bankshares, Inc. at March 31, 2003 and 2002, and December 31, 2002, and the consolidated statements of earnings and comprehensive earnings for the three months ended March 31, 2003 and 2002, changes in shareholders' equity for the year ended December 31, 2002 and three months ended March 31, 2003, and cash flows for the three months ended March 31, 2003 and 2002, follow on pages 4 through 8. On April 22, 2003, the Company's Board of Directors declared a five for four stock split in the form of a 25% stock dividend for shareholders of record on May 16, 2003. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock in the consolidated financial statements as of and for the three months ended March 31, 2003. 3 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, ----------------------------------------------- December 31, 2003 2002 2002 ------------------- ------------------- ------------------- (Unaudited) ASSETS Cash and due from banks $ 91,461,122 $ 72,697,896 $ 108,436,645 Federal funds sold 17,875,000 66,600,000 70,000,000 ------------------- ------------------- ------------------- Cash and cash equivalents 109,336,122 139,297,896 178,436,645 Interest-bearing deposits in banks 4,830,932 3,285,862 2,324,425 Investment securities: Securities held-to-maturity (market value of $188,678,415, $277,205,120 and $211,862,151 at March 31, 2003, March 31, 2002 and December 31, 2002, respectively) 178,714,336 260,525,944 200,449,784 Securities available-for-sale, at fair value 671,593,468 460,889,588 571,806,629 ------------------- ------------------- ------------------- Total investment securities 850,307,804 721,415,532 772,256,413 Loans 955,650,393 940,581,045 964,039,773 Less: Allowance for loan losses 11,363,556 10,858,537 11,218,729 ------------------- ------------------- ------------------- Net loans 944,286,837 929,722,508 952,821,044 Bank premises and equipment, net 41,084,401 41,999,675 40,605,401 Goodwill and intangible assets 24,836,999 24,678,180 24,870,788 Other assets 21,721,426 24,684,706 21,868,220 ------------------- ------------------- ------------------- TOTAL ASSETS $ 1,996,404,521 $ 1,885,084,359 $ 1,993,182,936 =================== =================== =================== LIABILITIES Noninterest-bearing deposits $ 431,520,958 $ 379,903,568 $ 425,473,353 Interest-bearing deposits 1,291,883,993 1,250,010,924 1,286,088,863 ------------------- ------------------- ------------------- Total deposits 1,723,404,951 1,629,914,492 1,711,562,216 Dividends payable 4,328,601 3,703,567 4,327,374 Securities sold under agreements to repurchase 12,489,786 23,366,804 26,708,994 Other liabilities 15,983,244 10,881,975 11,816,707 ------------------- ------------------- ------------------- Total liabilities 1,756,206,582 1,667,866,838 1,754,415,291 ------------------- ------------------- ------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - $10 par value; authorized 20,000,000 shares; 15,459,289, 12,345,224 and 12,364,201 shares issued and outstanding at March 31, 2003, March 31, 2002 and December 31, 2002, respectively 154,592,890 123,452,240 123,642,010 Capital surplus 58,103,956 57,885,885 58,087,687 Retained earnings 18,849,930 32,850,441 45,647,522 Accumulated other comprehensive income 8,651,163 3,028,955 11,390,426 ------------------- ------------------- ------------------- Total shareholders' equity 240,197,939 217,217,521 238,767,645 ------------------- ------------------- ------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,996,404,521 $ 1,885,084,359 $ 1,993,182,936 =================== =================== =================== See notes to consolidated financial statements.
4 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended March 31, -------------------------------------- 2003 2002 ----------------- ----------------- INTEREST INCOME Interest and fees on loans $ 15,023,065 $ 16,516,013 Interest on investment securities: Taxable 7,678,820 7,967,321 Exempt from federal income tax 1,745,746 1,730,944 Interest on federal funds sold and interest-bearing deposits in banks 141,695 258,410 ----------------- ----------------- Total interest income 24,589,326 26,472,688 INTEREST EXPENSE Interest-bearing deposits 4,650,611 6,985,166 Other 67,728 87,300 ----------------- ----------------- Total interest expense 4,718,339 7,072,466 ----------------- ----------------- NET INTEREST INCOME 19,870,987 19,400,222 Provision for loan losses 510,501 398,500 ----------------- ----------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,360,486 19,001,722 NONINTEREST INCOME Trust department income 1,433,806 1,424,070 Service fees on deposit accounts 3,807,820 3,556,860 ATM fees 665,656 511,003 Real estate mortgage fees 684,363 422,029 Other 1,243,812 1,010,943 ----------------- ----------------- Total noninterest income 7,835,457 6,924,905 NONINTEREST EXPENSE Salaries and employee benefits 8,221,387 7,839,410 Net occupancy expense 942,580 954,185 Equipment expense 1,187,966 1,184,888 Printing, stationery and supplies 346,025 377,051 Correspondent bank service charges 395,055 362,992 Amortization of intangible assets 33,789 33,789 Other expenses 3,985,749 3,482,005 ----------------- ----------------- Total noninterest expense 15,112,551 14,234,320 ----------------- ----------------- EARNINGS BEFORE INCOME TAXES 12,083,392 11,692,307 Income tax expense 3,633,803 3,513,651 ----------------- ----------------- NET EARNINGS $ 8,449,589 $ 8,178,656 ================= ================= EARNINGS PER SHARE, BASIC $ 0.55 $ 0.53 ================= ================= EARNINGS PER SHARE, ASSUMING DILUTION $ 0.54 $ 0.53 ================= ================= DIVIDENDS PER SHARE $ 0.28 $ 0.24 ================= ================= See notes to consolidated financial statements.
5 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED)
Three Months Ended March 31, ------------------------------------ 2003 2002 ----------------- ----------------- NET EARNINGS $ 8,449,589 $ 8,178,656 OTHER ITEMS OF COMPREHENSIVE EARNINGS: Change in unrealized gain on investment securities available-for-sale (4,214,251) (1,681,729) Income tax benefit related to other items of comprehensive earnings 1,474,988 588,605 ----------------- ----------------- COMPREHENSIVE EARNINGS $ 5,710,326 $ 7,085,532 ================= ================= See notes to consolidated financial statements.
6 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Other Comprehensive Income -------------------------- Common Stock Unrealized Gain Minimum Total ------------------------ Capital Retained on Securities Pension Shareholders' Shares Amount Surplus Earnings Available-for-sale Liability Equity ---------- ------------- ------------ ------------ ------------ ------------ ------------- Balances at December 31, 2001 12,333,252 $ 123,332,520 $ 57,824,061 $ 28,375,353 $ 4,122,079 $ - $ 213,654,013 Net earnings - - - 33,952,550 - - 33,952,550 Stock issuances 30,949 309,490 263,626 - - - 573,116 Cash dividends declared, $1.08 per restated share - - - (16,680,381) - - (16,680,381) Minimum liability pension adjustment, net of related income taxes - - - - - (1,440,283) (1,440,283) Change in unrealized gain in investment securities available- for-sale,net of related income taxes - - - - 8,708,630 - 8,708,630 ---------- ------------- ------------ ------------ ------------ ------------ ------------- 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 - - - 8,449,589 - - 8,449,589 Stock issuances 3,230 32,300 16,269 - - - 48,569 Cash dividends declared, $0.28 per restated share - - - (4,328,601) - - (4,328,601) Change in unrealized gain in investment securities available- for-sale, net of related income taxes - - - - (2,739,263) - (2,739,263) Five for four stock split in the form of a 25% stock dividend 3,091,858 30,918,580 - (30,918,580) - - - ---------- ------------- ------------ ------------ ------------ ------------ ------------- Balances at March 31, 2003 (unaudited) 15,459,289 $ 154,592,890 $ 58,103,956 $ 18,849,930 $ 10,091,446 $ (1,440,283) $ 240,197,939 ========== ============= ============ ============ ============ ============ ============= See notes to consolidated financial statements.
7 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Three Months Ended March 31, ------------------------------------- 2003 2002 ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 8,449,589 $ 8,178,656 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,053,539 1,076,739 Provision for loan losses 510,501 398,500 Premium amortization, net of discount accretion 1,101,460 1,227,432 (Gain) loss on sale of assets (4,488) 4,500 Deferred federal income tax benefit (128,602) (98,232) Decrease (increase) in other assets 2,452,801 (1,880,620) Increase in other liabilities 4,295,139 3,551,499 ----------------- ----------------- Total adjustments 9,280,350 4,279,818 ----------------- ----------------- Net cash provided by operating activities 17,729,939 12,458,474 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in interest-bearing deposits in banks (2,506,507) (1,911,577) Activity in available-for-sale securities: Maturities 44,314,517 18,880,598 Purchases (149,554,799) (50,399,939) Activity in held-to-maturity securities: Maturities 23,373,180 33,404,765 Purchases (1,500,000) (1,494,822) Net decrease (increase) in loans 7,177,902 (487,821) Capital expenditures (1,544,904) (1,065,755) Proceeds from sale of assets 65,427 35,561 ----------------- ----------------- Net cash used in investing activities (80,175,184) (3,038,990) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in noninterest-bearing deposits 6,047,605 (9,503,098) Net increase (decrease) in interest-bearing deposits 5,795,130 (45,745,008) Net (decrease) increase in securities sold under agreements to repurchase (14,219,208) 3,519,737 Proceeds from stock issuances 48,569 181,544 Dividends paid (4,327,374) (3,699,977) ----------------- ----------------- Net cash used in financing activities (6,655,278) (55,246,802) ----------------- ----------------- Net decrease in cash and cash equivalents (69,100,523) (45,827,318) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 178,436,645 185,125,214 ----------------- ----------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 109,336,122 $ 139,297,896 ================= ================= SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS Interest paid $ 4,860,537 $ 7,937,200 Federal income tax paid - 125,000 Assets acquired through foreclosure 845,804 30,321 Loans to finance the sale of other real estate - 134,952 See notes to consolidated financial statements.
8 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation In the opinion of Management, the unaudited consolidated financial statements reflect all adjustments necessary for a fair presentation of the Company's financial position and unaudited results of operations. All adjustments were of a normal recurring nature. However, the results of operations for the three months ended March 31, 2003, are not necessarily indicative of the results to be expected, due to seasonality and other factors, for the year ended December 31, 2003. 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 period. In computing diluted earnings per common share for the three months ended March 31, 2003 and 2002, 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 three months ended March 31, 2003 and 2002, were 15,456,529 and 15,425,441 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the three months ended March 31, 2003 and 2002, were 15,512,345 and 15,486,929 shares, respectively. See note 4 below. 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 Standards 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 ended March 31, 2003 and 2002. Note 4 - Subsequent Events On April 22, 2003, the Company's Board of Directors declared a five for four stock split in the form of a 25% stock dividend effective for shareholders of record on May 16, 2003. All per share amounts in this report have been restated to reflect this stock split. An amount equal to the par value of the additional common shares issued pursuant to the stock split was reflected as a transfer from retained earnings to common stock on the consolidated financial statements as of and for the three months ended March 31, 2003. Additionally, on April 22, 2003, the Company's Board of Directors authorized the repurchase of up to 500,000 shares of common stock (representing approximately four percent of outstanding shares) over the next three years. The plan authorizes management to repurchase the stock at such time as repurchases are considered beneficial to stockholders. Any repurchases of the stock will be through the open market or in privately-negotiated transactions in accordance with applicable laws and regulations. Note 5 - Reclassifications Certain prior period balances have been reclassified to conform with the current period presentation. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 2002 Annual Report on Form 10-K. On April 22, 2003, the Company's Board of Directors declared a five for four stock split in the form of a 25% stock dividend effective for shareholders of record on May 16, 2003. All per share amounts in this report have been restated to reflect this stock split. Critical Accounting Policies ---------------------------- The preparation of the Company's consolidated financial statements is based on the selection of certain accounting policies, based on generally accepted accounting principles and customary practices in the banking industry. These policies, in certain areas, require management to make significant estimates and assumptions. The following discussion addresses the Company's allowance for loan loss and its provision for loan losses which is deemed by management to be its most critical accounting policy. We have other key 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. A policy is deemed critical if (i) the accounting estimate required the Company to make assumptions about matters that are highly uncertain at the time the accounting estimate was made; and (ii) 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 allowance for loan losses is an amount that management believes will be adequate to absorb inherent estimated losses on existing loans in which collectibility is unlikely based upon management's 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). Management's periodic evaluation of the adequacy of the allowance is based on general economic conditions, the financial condition of the borrower, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio by our loan review department and regulatory examiners. A consistent, well documented loan review methodology has been developed that includes allowances assigned to specific loans and nonspecific allowances that are based on the factors noted in the prior sentence. Our independent loan review department is responsible for performing this evaluation for all of our subsidiary banks to ensure consistent methodology. 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 non-performing 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 banking 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. 10 The Company's 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 ----------------- Net income for the first quarter of 2003 totaled $8.5 million, an increase of $271 thousand or 3.3% for the same period last year. The earnings improvement over prior year, although slight, resulted primarily from increased noninterest income offset by an increase in noninterest expenses. On a basic earnings per share basis, earnings amounted to $0.55 per share as compared to $0.53 per share for the first quarter of 2002. Return on average assets and return on average equity for the first quarter of 2003 amounted to 1.72% and 14.49%, respectively. For the same period in 2002, return on average assets and return on average equity amounted to 1.76% and 15.50%, respectively. The declines in these returns were primarily a result of the Company's assets and equity growing at a higher percentage than its earnings. Tax equivalent net interest income for the first quarter of 2003 amounted to $20.8 million as compared to $20.3 million for the same period last year. The increase of $531 thousand was due to increased volumes of earning assets offset by a decreasing net interest spread. Average earning assets were $1.8 billion for the first quarter of 2003 which is $101.8 million, or 5.9% greater than the first quarter of 2002. The Company's yield on those average earning assets declined to 5.69% for 2003 compared to 6.46% for 2002 as the Company's experienced lower rates on the reinvestment of its investment securities when the securities matured or when the Company received increased principal payments on its collateralized mortgage obligations due to accelerated prepayments of the underlying mortgages. The Company was able to reprice its interest bearing liabilities to offset some of the decline in rates on its earning assets. The Company's rate paid on interest bearing liabilities was 1.45% for the first quarter of 2003 compared to 2.24% for the comparable period in 2002. The Company's net interest margin was 4.64% for the first quarter of 2003 compared to 4.79% for the first quarter of 2002. The provision for loan losses for the first quarter of 2003 totaled $511 thousand compared to $399 thousand for the same period in 2002. Gross chargeoffs for quarter ended March 31, 2003 totaled $902 thousand compared to $434 thousand for 2002. Recoveries of previously charged-off loans totaling $536 thousand in 2003 (as compared to $291 thousand in 2002) offset the increase in chargeoffs experienced in the first quarter of 2003. On an annualized basis, net chargeoffs as a percentage of average loans was 0.15% for the first quarter of 2003 compared to 0.06% for the same period in 2002. The Company's allowance for loan losses totaled $11.4 million at March 31, 2003 compared to $10.9 million at March 31, 2002. As a percentage of nonperforming loans, the Company's allowance amounted to 589.3% at March 31, 2003. As of March 31, 2003, management of the Company believes that the Company's balance in its allowance for loan losses is adequate to provide for losses existing in its portfolio that are deemed uncollectible. Total noninterest income for the first quarter of 2003 was $7.8 million, as compared to $6.9 million for the same period last year. Trust fees totaled $1.4 million for 2003, relatively flat from the previous year. The lack of increase in trust fees is primarily a result of the depressed equity markets and resulting declining volumes. As certain trust fees are based on a percentage of the market value of trust assets, the lower market valuations have resulted in lower trust fees. Service fees on deposits increased 7.1% to $3.8 million due to increased number of accounts and transaction volumes. ATM fees totaled $666 thousand for the first quarter of 2003 compared to $511 thousand for the first quarter of 2002 due to the large growth in debit cards and increased volume and an increase in fees charged for non-Company customer usage. Real estate mortgage fees increased 62.2% in 2003 over the same period in 2002 due to the low interest rate environment and high level of refinance. The Company believes the level of real estate fees may level off later in 2003. Noninterest expense for the first quarter of 2003 amounted to $15.1 million compared to $14.2 million for the same period in 2002, an increase of 6.2%. Salaries and benefits expense, the Company's largest noninterest expense item, increased 4.9% to $8.2 million in 2003 due to salary increases and the increased cost of employee benefits. Net occupancy expense and equipment expense were relatively flat in the first quarter of 2003 compared to the first quarter of 2002. 11 Increased costs in legal and professional and public relations were the primary cause for the increase in other expenses in 2003 over 2002. The Company also experienced $187 thousand in losses from check fraud compared to $93 thousand in the prior year quarter. The Company's key indicator of operating efficiency, which measures the amount of funds expended to generate revenues (both interest and noninterest) and which the Company strives to decrease indicating a more efficiently run company, deteriorated only slightly from 52.31% for the first quarter of 2002 to 52.77% for the first quarter of 2003. This ratio is calculated by dividing noninterest expense by net interest income (on a tax equivalent basis) plus noninterest income. Balance Sheet Review -------------------- Total assets at March 31, 2003, amounted to $1.996 billion as compared to $1.993 billion at December 31, 2002, and $1.885 billion at March 31, 2002. Although loans and deposits remained relatively stable at March 31, 2003 compared to December 31, 2002, the Company shifted cash and due from banks and federal funds sold totaling approximately $70 million to higher yielding investment securities. Loans at March 31, 2003, totaled $956 million as compared to $964 million at year-end 2002 and $941 million at March 31, 2002. As compared to year-end 2002 amounts, loans at March 31, 2003, reflect (i) a $5.6 million decrease in commercial, financial and agricultural loans; (ii) a $6.7 million decrease in real estate loans; and (iii) a $3.8 million increase in consumer loans. Compared to March 31, 2002, loans at March 31, 2003, reflect; (i) a $700 thousand decrease in commercial, financial and agricultural loans; (ii) a $21.4 million increase in real estate loans; and (iii) a $5.7 million decrease in consumer loans. Investment securities at March 31, 2003, totaled $850 million as compared to $772 million at year-end 2002 and $721 million at March 31, 2002. The net unrealized gain in the investment portfolio at March 31, 2003, amounted to $25.5 million and had an overall tax equivalent yield of 5.15%. At March 31, 2003, 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. Total deposits at March 31, 2003, amounted to $1.723 billion as compared to $1.712 billion at year-end 2002 and $1.630 billion at March 31, 2002. The slight increase in deposits at March 31, 2003 when compared to year end 2002 represents the continued movement of funds away from the equity funds to a safer banking environment. Nonperforming assets at March 31, 2003, totaled $3.3 million as compared to $4.3 million at December 31, 2002. The decrease resulted primarily from the collection of two loans previously included in nonperforming loans and the charge-off of a previously nonperforming loan. At 0.34% 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 --------------------- 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. Asset liquidity is provided by cash and 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 include 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 agreement to repurchase, and an unfunded $25.0 million line of credit established with a nonaffiliated bank which matures on June 30, 2003. We believe the line of credit will be renewed upon maturity. 12 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. In addition, we anticipate that any future acquisition of financial institutions and expansion of branch locations could also place a demand on our cash resources. Available cash at our parent company, available dividends from 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 $240.2 million at March 31, 2003, which was up from $238.8 million at year-end 2002 and $217.2 million at March 31, 2002. The Company's risk-based capital and leverage ratios at March 31, 2003, were 20.40% and 10.35%, respectively. The first quarter 2003 cash dividend of $0.28 per share totaled $4.3 million and represented 51.23% of first 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 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 March 31, 2003, management estimates that, over the next twelve months, an upward shift of interest rates by 150 basis points would result in an increase of projected net interest income of 4.25% and a downward shift of interest rates by 150 basis points would result in a reduction in projected net interest income of 6.50%. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at March 31, 2003, 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 would, in management's belief, be different from the foregoing estimates, and such results could be material. Item 3. Quantitative and Qualitative Disclosures About Market Risk Management considers interest rate risk to be a significant market risk for the Company. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for disclosure regarding this market risk. Item 4. Controls and Procedures Within 90 days prior to the filing date of this report, 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. 13 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 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. Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect these internal controls. 14 PART II OTHER INFORMATION Item 4. Submission of Matter to a Vote of Security Holders On April 22, 2003, the annual meeting of shareholders was held in Abilene, Texas. The following directors were elected at this meeting and the respective number of votes cast for and withheld: Votes Votes Director For Withheld -------- --- -------- Joseph E. Canon 9,839,252 34,529 Mac A. Coalson 9,530,525 343,256 David Copeland 9,802,984 70,797 F. Scott Dueser 9,457,170 416,611 Derrell E. Johnson 9,839,377 34,404 Kade L. Matthews 9,839,377 34,404 Raymond A. McDaniel, Jr. 9,806,745 67,036 Bynum Miers 9,806,945 66,836 Kenneth T. Murphy 9,443,218 430,563 James M. Parker 9,463,274 410,507 Jack D. Ramsey, M.D. 9,838,277 35,504 Dian Graves Stai 9,826,777 47,004 F.L. Stephens 9,839,377 34,404 Johnny E. Trotter 9,839,377 34,404 There were no votes against, abstentions or broker non-votes. There were no other matters voted upon at the meeting. Item 6. Exhibits and Reports on Form 8-K (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). 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). 15 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 Consulting Agreement dated January 1, 2003 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, 2002). 16.1 Letter regarding Change in Certifying Accountant (incorporated by reference from Exhibit 16.1 of the Registrant's Form 8-K filed on March 25, 2002). 21.1 Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 of the Registrant's Form 10-K Annual Report for the year ended December 31, 2002). 99.1 Certification of Chief Executive Officer of First Financial Bankshares, Inc. (ref. - Sec.906-Sarbanes-Oxley Act of 2002) 99.2 Certification of Chief Financial Officer of First Financial Bankshares, Inc. (ref. - Sec.906-Sarbanes-Oxley Act of 2002) (b) No Form 8-K was filed by the Company during the quarter ended March 31, 2003. 16 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: May 13, 2003 By:/S/F. Scott Dueser ------------ ------------------ F. Scott Dueser President and Chief Executive Officer Date: May 13, 2003 By:/S/J. Bruce Hildebrand ------------ ---------------------- J. Bruce Hildebrand Executive Vice President and Chief Financial Officer 17 Certification of Chief Executive Officer of First Financial Bankshares, Inc. I, F. Scott Deuser, President and Chief Executive Officer of First Financial Bankshares, Inc., certify that: 1. I have reviewed this quarterly report on 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /S/ F. Scott Dueser ------------------- Name: F. Scott Dueser Title: Chief Executive Officer 18 Certification of Chief Executive Officer of First Financial Bankshares, Inc. I, J. Bruce Hildebrand, Chief Financial Officer of First Financial Bankshares, Inc., certify that: 1. I have reviewed this quarterly report on 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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have: a) designed such disclosure controls and procedures 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 quarterly report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of the Registrant's Board of Directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /S/ J. Bruce Hildebrand ----------------------- Name: J. Bruce Hildebrand Title: Chief Financial Officer 19 Exhibit 99.1 ------------ Certification of Chief Executive Officer of First Financial Bankshares, Inc. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended March 31, 2003 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. Date: May 13, 2003 /S/ F. Scott Dueser ------------------- Name: F. Scott Dueser Title: Chief Executive Officer Subscribed and sworn to before me this 13th day of May, 2003. /S/ Gaila N. Kilpatrick ----------------------- Name: Gaila N. Kilpatrick Title: Notary Public My commission expires: April 15, 2005 Exhibit 99.2 ------------ Certification of Chief Financial Officer of First Financial Bankshares, Inc. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended March 31, 2003 of First Financial Bankshares, Inc. I, J. Bruce Hildrebrand, 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. Date: May 13, 2003 /S/ J. Bruce Hildebrand ----------------------- Name: J. Bruce Hildebrand Title: Chief Financial Officer Subscribed and sworn to before me this 13th day of May, 2003. /S/ Gaila N. Kilpatrick ----------------------- Name: Gaila N. Kilpatrick Title: Notary Public My commission expires: April 15, 2005