-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GNcfM604tlKMkiauYW+8IZgYg2i2sBAZtwOV5+wz3eQ/ndrNHf3J0S9J090ZnF4A KMu4o1MWNFoOBx+lrimxiw== 0000036029-04-000068.txt : 20040803 0000036029-04-000068.hdr.sgml : 20040803 20040803171814 ACCESSION NUMBER: 0000036029-04-000068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST FINANCIAL BANKSHARES INC CENTRAL INDEX KEY: 0000036029 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 750944023 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-07674 FILM NUMBER: 04949319 BUSINESS ADDRESS: STREET 1: 400 PINE STREET STREET 2: P.O. BOX 701 CITY: ABILENE STATE: TX ZIP: 79601 BUSINESS PHONE: 325.627.7167 MAIL ADDRESS: STREET 1: P.O. BOX 701 CITY: ABILENE STATE: TX ZIP: 79604 10-Q 1 tenq6-04.txt FIRST FINANCIAL BANKSHARES JUNE 30, 2004 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 June 30, 2004 Commission file number 0-7674 FIRST FINANCIAL BANKSHARES, INC. -------------------------------- (Exact name of registrant as Specified in its charter) Texas 75-0944023 - --------------------------------------------- ------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 400 Pine Street, Abilene, Texas 79601 ------------------------------------- (Address of principal executive offices) (Zip Code) (325) 627-7155 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 3, 2004: Class Number of Shares Outstanding - ------------------------------ ---------------------------- Common Stock, $10.00 par value per share 15,496,153 1 TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item Page ---- ---- Forward-Looking Statement Disclaimer 3 1. Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 3. Quantitative and Qualitative Disclosures About Market Risk 17 4. Controls and Procedures 17 PART II OTHER INFORMATION 6. Exhibits and Reports on Form 8-K 18 Signatures 19 2 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-Q, words such as "anticipate", "believe", "estimate", "expect", "intend", "predict", "project", and similar expressions, as they relate to us or management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to: o general economic conditions; o legislative and regulatory actions and reforms; o competition from other financial institutions and financial holding companies; o the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board; o changes in the demand for loans; o fluctuations in the value of collateral and loan reserves; o inflation, interest rate, market and monetary fluctuations; o changes in consumer spending, borrowing and savings habits; o our ability to attract deposits; o consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors; o acquisitions and integration of acquired businesses; and o other factors described in "Part I, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Such statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise. PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. The consolidated balance sheets of First Financial Bankshares, Inc. at June 30, 2004 and 2003 and December 31, 2003, and the consolidated statements of earnings and comprehensive earnings (loss) for the three and six months ended June 30, 2004 and 2003, changes in shareholders' equity for the six months ended June 30, 2004 and the year ended December 31, 2003, and cash flows for the six months ended June 30, 2004 and 2003, follow on pages 4 through 8. 3 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, ---------------------------------- --------------- 2004 2003 2003 -------------- --------------- --------------- ASSETS (Unaudited) Cash and due from banks $ 82,663,662 $ 104,575,826 $ 111,940,573 Federal funds sold - 43,725,000 1,900,000 -------------- --------------- --------------- Cash and cash equivalents 82,663,662 148,300,826 113,840,573 Interest-bearing deposits in banks 657,177 5,219,177 876,839 Investment securities: Securities held-to-maturity (market value of $114,016,943, $179,751,258 and $138,594,081 at June 30, 2004, June 30, 2003 and December 31, 2003, respectively) 109,861,289 168,667,372 131,326,111 Securities available-for-sale, at fair value 794,608,889 710,513,311 778,976,003 -------------- --------------- --------------- Total investment securities 904,470,178 879,180,683 910,302,114 Loans 1,009,796,488 920,941,697 987,523,103 Less: Allowance for loan losses (11,932,080) (11,523,162) (11,576,299) -------------- --------------- --------------- Net loans 997,864,408 909,418,535 975,946,804 Bank premises and equipment, net 44,726,782 40,995,682 43,902,112 Goodwill and intangible assets 24,650,093 24,803,210 24,717,671 Other assets 25,674,102 20,407,757 22,985,321 -------------- --------------- --------------- TOTAL ASSETS $ 2,080,706,402 $ 2,028,325,870 $ 2,092,571,434 ============== =============== =============== LIABILITIES Noninterest-bearing deposits $ 451,386,916 $ 443,674,597 $ 472,574,590 Interest-bearing deposits 1,296,007,123 1,300,142,994 1,323,696,580 -------------- --------------- --------------- Total deposits 1,747,394,039 1,743,817,591 1,796,271,170 Dividends payable 5,268,098 4,796,143 4,798,948 Federal funds purchased and securities sold under agreements to repurchase 66,693,889 12,056,116 28,975,167 Other liabilities 12,048,876 16,475,782 11,039,392 -------------- --------------- --------------- Total liabilities 1,831,404,902 1,777,145,632 1,841,084,677 -------------- --------------- --------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - $10 par value; authorized 40,000,000 shares; 15,494,406, 15,471,429 and 15,480,679 shares issued and outstanding at June 30, 2004, June 30, 2003 and December 31, 2003, respectively 154,944,060 154,714,290 154,806,790 Capital surplus 58,370,784 58,172,924 58,253,180 Retained earnings 40,468,037 23,238,355 31,276,464 Accumulated other comprehensive income (loss) (4,481,381) 15,054,669 7,150,323 -------------- --------------- --------------- Total shareholders' equity 249,301,500 251,180,238 251,486,757 -------------- --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,080,706,402 $ 2,028,325,870 $ 2,092,571,434 ============== =============== =============== See notes to consolidated financial statements.
4 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, ---------------------------------- --------------------------------- 2004 2003 2004 2003 -------------- --------------- -------------- -------------- INTEREST INCOME Interest and fees on loans $ 14,207,802 $ 14,472,914 $ 28,226,338 $ 29,259,463 Interest on investment securities: Taxable 7,202,703 7,577,369 14,781,869 15,256,189 Exempt from federal income tax 2,391,300 1,755,727 4,794,416 3,501,474 Interest on federal funds sold and interest-bearing deposits in banks 25,709 183,707 117,686 329,289 -------------- --------------- -------------- -------------- Total interest income 23,827,514 23,989,717 47,920,309 48,346,415 INTEREST EXPENSE Interest-bearing deposits 3,458,893 4,454,474 7,033,541 9,108,972 Other 116,346 27,659 250,669 95,385 -------------- --------------- -------------- -------------- Total interest expense 3,575,239 4,482,133 7,284,210 9,204,357 -------------- --------------- -------------- -------------- NET INTEREST INCOME 20,252,275 19,507,584 40,636,099 39,142,058 Provision for loan losses 308,250 225,867 486,250 736,368 -------------- --------------- -------------- -------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,944,025 19,281,717 40,149,849 38,405,690 NONINTEREST INCOME Trust department income 1,513,651 1,478,862 3,089,172 2,912,668 Service fees on deposit accounts 5,001,504 3,987,738 9,272,151 7,795,560 ATM fees 751,619 737,650 1,425,654 1,403,304 Real estate mortgage fees 551,162 815,331 974,789 1,499,694 Net gain (loss) on sale of securities - (4,752) 18,426 (4,752) Net gain on sale of student loans 637,790 1,606,120 2,429,648 1,842,635 Other 897,410 887,775 2,046,009 2,125,295 -------------- --------------- -------------- -------------- Total noninterest income 9,353,136 9,508,724 19,255,849 17,574,404 NONINTEREST EXPENSE Salaries and employee benefits 8,873,074 8,591,855 17,663,602 16,813,242 Net occupancy expense 1,043,676 1,021,432 2,042,214 1,964,011 Equipment expense 1,421,798 1,188,760 2,836,911 2,376,726 Printing, stationery & supplies 363,232 330,709 709,306 673,758 Correspondent bank service charges 398,118 364,606 781,774 759,660 Amortization of intangible assets 33,789 33,789 67,578 67,578 Other expenses 4,364,394 3,988,980 8,286,248 7,971,414 -------------- --------------- -------------- -------------- Total noninterest expense 16,498,081 15,520,131 32,387,633 30,626,389 -------------- --------------- -------------- -------------- EARNINGS BEFORE INCOME TAXES 12,799,080 13,270,310 27,018,065 25,353,705 Income tax expense 3,631,567 4,049,492 7,757,634 7,683,296 -------------- --------------- -------------- -------------- NET EARNINGS $ 9,167,513 $ 9,220,818 $ 19,260,431 $ 17,670,409 ============== =============== ============== ============== EARNINGS PER SHARE, BASIC $ 0.59 $ 0.60 $ 1.24 $ 1.14 EARNINGS PER SHARE, ASSUMING DILUTION $ 0.59 $ 0.59 $ 1.24 $ 1.14 DIVIDENDS PER SHARE $ 0.34 $ 0.31 $ 0.65 $ 0.59 See notes to consolidated financial statements.
5 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS) - (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, ---------------------------------- -------------------------------- 2004 2003 2004 2003 ---------------- -------------- --------------- -------------- NET EARNINGS $ 9,167,513 $ 9,220,818 $ 19,260,431 $ 17,670,409 OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS): Change in unrealized gain (loss) on investment securities available-for-sale (27,893,832) 9,846,796 (17,876,503) 5,632,545 Reclassification adjustment for realized losses (gains) on investment securities included in net earnings, before income tax - 4,752 (18,426) 4,752 ---------------- -------------- --------------- -------------- Total other items of comprehensive earnings (loss) (27,893,832) 9,851,548 (17,894,929) 5,637,297 Income tax expense (benefit) related to other items of comprehensive earnings 9,762,841 (3,448,042) 6,263,225 (1,973,054) ---------------- -------------- --------------- -------------- COMPREHENSIVE EARNINGS (LOSS) $ (8,963,478) $ 15,624,324 $ 7,628,727 $ 21,334,652 ================ ============== =============== ============== 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, 2002 12,364,201 $ 123,642,010 $ 58,087,687 $ 45,647,522 $ 12,830,709 $ (1,440,283) $ 238,767,645 Net earnings - - - 35,304,800 - - 35,304,800 Five for four stock split, effected in the form of a 25% stock dividend 3,092,995 30,929,950 - (30,929,950) - - - Stock issuances 23,483 234,830 165,493 - - - 400,323 Cash dividends declared, $1.21 per share - - - (18,745,908) - - (18,745,908) Minimum liability pension adjustment, net of related taxes - - - - - 438,507 438,507 Change in unrealized gain in investment securities available-for-sale, net of related income taxes - - - - (4,678,610) - (4,678,610) ---------- ------------- ------------ ------------- ------------ ------------ ------------- Balances at December 31, 2003 15,480,679 154,806,790 58,253,180 31,276,464 8,152,099 (1,001,776) 251,486,757 Net earnings (unaudited) - - - 19,260,431 - - 19,260,431 Stock issuances (unaudited) 13,727 137,270 117,604 - - - 254,874 Cash dividends declared, $0.65 per share (unaudited) - - - (10,068,858) - - (10,068,858) Change in unrealized gain (loss) in investment securities available-for-sale, net of related income taxes (unaudited) - - - - (11,631,704) - (11,631,704) ---------- ------------- ------------ ------------- ------------ ------------ ------------- Balances at June 30, 2004 (unaudited) 15,494,406 $ 154,944,060 $ 58,370,784 $ 40,468,037 $ (3,479,605) $ (1,001,776) $ 249,301,500 ========== ============= ============ ============= ============ ============ ============= See notes to consolidated financial statements.
7 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
Six Months Ended June 30, --------------------------------------- 2004 2003 ----------------- ------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 19,260,431 $ 17,670,409 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,450,526 2,096,240 Provision for loan losses 486,250 736,368 Premium amortization, net of discount accretion 1,921,792 2,605,227 Gain on sale of assets (2,564,603) (1,841,847) Deferred federal income tax expense (benefit) 75,336 (741,823) Decrease (increase) in other assets (3,197,267) 314,400 Increase in other liabilities 7,197,372 5,400,899 ----------------- ------------------- Total adjustments 6,369,406 8,569,464 ----------------- ------------------- Net cash provided by operating activities 25,629,837 26,239,873 ----------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net decrease (increase) in interest-bearing deposits in banks 219,662 (2,894,752) Activity in available-for-sale securities: Sales 6,444,774 41,152,973 Maturities 44,683,106 97,745,538 Purchases (88,695,156) (274,508,292) Activity in held-to-maturity securities: Maturities 23,600,915 33,212,829 Purchases - (1,500,000) Net decrease (increase) in loans (19,635,791) 43,665,569 Capital expenditures (3,255,540) (2,479,791) Proceeds from sale of assets 334,525 81,027 ----------------- ------------------- Net cash used in investing activities (36,303,505) (65,524,899) ----------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in noninterest-bearing deposits (21,187,674) 18,201,244 Net increase (decrease) in interest-bearing deposits (27,689,457) 14,054,131 Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase 37,718,722 (14,652,878) Proceeds from stock issuances 254,874 227,567 Dividends paid (9,599,708) (8,680,857) ----------------- ------------------- Net cash provided by (used in) financing activities (20,503,243) 9,149,207 ----------------- ------------------- Net decrease in cash and cash equivalents (31,176,911) (30,135,819) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 113,840,573 178,436,645 ----------------- ------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82,663,662 $ 148,300,826 ================= =================== SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS Interest paid $ 7,807,825 $ 8,828,151 Federal income tax paid 7,680,193 7,533,118 Assets acquired through foreclosure 425,146 845,804 Loans to finance the sale of other real estate 18,800 - See notes to consolidated financial statements.
8 FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation In the opinion of Management, the unaudited consolidated financial statements reflect all adjustments necessary for a fair presentation of the Company's financial position and unaudited results of operations. All adjustments were of a normal recurring nature. However, the results of operations for the three and six months ended June 30, 2004, are not necessarily indicative of the results to be expected for the year ending December 31, 2004, due to seasonality and other factors. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted under SEC rules and regulations. Note 2 - Earnings Per Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the periods. In computing diluted earnings per common share for the three months and six months ended June 30, 2004 and 2003, the Company assumes that all outstanding options to purchase common stock have been exercised at the beginning of the year (or the time of issuance, if later). The dilutive effect of the outstanding options is reflected by application of the treasury stock method, whereby the proceeds from the exercised options are assumed to be used to purchase common stock at the average market price during the respective periods. The weighted average common shares outstanding used in computing basic earnings per common share for the three months ended June 30, 2004 and 2003, were 15,490,643 and 15,466,371 shares, respectively. The weighted average common shares outstanding used in computing basic earnings per common share for the six months ended June 30, 2004 and 2003, were 15,487,200 and 15,461,477 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the three months ended June 30, 2004 and 2003, were 15,561,547 and 15,519,299 shares, respectively. The weighted average common shares outstanding used in computing fully diluted earnings per common share for the six months ended June 30, 2004 and 2003, were 15,560,050 and 15,514,470, respectively. Note 3 - Stock Based Compensation The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for stock option grants using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Had compensation cost for the plan been determined consistent with Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation, the Company's net earnings and earnings per share would have been reduced by insignificant amounts on a pro forma basis for the three months and six months ended June 30, 2004 and 2003. Note 4 - Pension Plan The Company has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and a percentage of the employee's qualifying compensation during the final years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy the Internal Revenue Service's funding standards. Contributions to the pension plan through December 31, 2003 were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Effective January 1, 2004, the pension plan was frozen whereby no additional years of service accrue to participants, unless the pension plan is subsequently reinstated. Under current accounting principles generally accepted in the United States and utilizing current assumptions, we do not expect any 9 significant pension costs in 2004 and beyond as a result of this action. Accordingly, no amount of net periodic benefit cost was recorded in the three and six months ended June 30, 2004 as the interest cost component is generally offset with the expected return on plan assets. The Company does not expect to make a contribution to the pension plan during the year ending December 31, 2004 as required by IRS funding standards. Note 5 - Acquisition Announcement - Subsequent Event On March 4, 2004, we entered into a stock purchase agreement with the principal shareholders of Liberty National Bank, Granbury, Texas. On July 26, 2004, the transaction was completed. Pursuant to the purchase agreement, the Company paid approximately $12.8 million for all of the outstanding shares of Liberty National Bank. Liberty National Bank is a direct subsidiary of First Financial Bankshares of Delaware, Inc., our wholly owned Delaware bank holding company. Liberty National Bank is located in the City of Granbury, Hood County, Texas, approximately 40 miles southwest of Fort Worth, Texas. Liberty National Bank was chartered in 1997 and as of June 30, 2004, had assets totaling approximately $60 million and shareholders' equity of approximately $6.2 million. Note 6 - Increase in Authorized Shares On April 27, 2004, the shareholders of the Company voted at the annual shareholder meeting to increase the number of authorized shares of common stock from 20,000,000 to 40,000,000. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction As a multi-bank financial holding company, we generate most of our revenue from interest on loans and investments, trust fees, and service charges. Our primary source of funding for our loans are deposits we hold in our subsidiary banks. Our largest expenses are interest on these deposits and salaries and related employee benefits. We usually measure our performance by calculating our return on average assets, return on average equity, our regulatory leverage and risk based capital ratios, and our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterset income. The following discussion of operations and financial condition should be read in conjunction with the financial statements and accompanying footnotes included in Item 1 of this Form 10-Q as well as those included in the Company's 2003 Annual Report on Form 10-K. Critical Accounting Policies - ---------------------------- We prepare consolidated financial statements based on the selection of certain accounting policies, accounting principles generally accepted in the United States and customary practices in the banking industry. These policies, in certain areas, require us to make significant estimates and assumptions. We deem a policy critical if (1) the accounting estimate required us to make assumptions about matters that are highly uncertain at the time we make the accounting estimate; and (2) different estimates that reasonably could have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on the financial statements. The following discussion addresses our allowance for loan loss and its provision for loan losses, which we deem to be our most critical accounting policy. We have other significant accounting policies and continue to evaluate the materiality of their impact on our consolidated financial statements, but we believe that these other policies either do not generally require us to make estimates and judgments that are difficult or subjective, or it is less likely that they would have a material impact on our reported results for a given period. The allowance for loan losses is an amount that we believe will be adequate to absorb inherent estimated losses on existing loans in which full collectibility is unlikely based upon our review and evaluation of the loan portfolio, including letters of credit, lines of credit and unused commitments to provide financing. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Our periodic evaluation of the adequacy of the allowance is based on general economic conditions, the financial condition of the borrower, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio by our independent loan review department and regulatory examiners. We have developed a consistent, well-documented loan review methodology that includes allowances assigned to specific loans and nonspecific allowances, which are based on the factors noted in the prior sentence. While each subsidiary bank is responsible for the adequacy of its allowance, our independent loan review department is responsible for reviewing this evaluation for all of our subsidiary banks to ensure consistent methodology and overall adequacy. 11 Although we believe that we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances or economic conditions differ substantially from the assumptions used in making our initial determinations. A downturn in the economy and employment could result in increased levels of nonperforming assets and charge-offs, increased loan loss provisions and reductions in income. Additionally, as an integral part of their examination process, bank regulatory agencies periodically review our allowance for loan losses. The bank regulatory agencies could require the recognition of additions to the loan loss allowance based on their judgment of information available to them at the time of their examination. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Our policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan's observable market price. Operating Results - ----------------- Three months ended June 30, 2004 and 2003 - ----------------------------------------- Net income for the second quarter of 2004 totaled $9.17 million, a decrease of $53,305 or 0.58% for the same period last year. The primary reason for the slight decline in net income in the second quarter was the difference in the amount of student loan sales in this year's second quarter compared to the same quarter last year. During the second quarter of 2003, the Company had a $1.6 million gain from the sale of $53 million in student loans, compared to $638,000 in gains from $17 million in student loan sales in the second quarter of 2004. A large $1.6 million gain from the sale of $60 million in student loans was recognized in the first quarter of 2004. On a basic earnings per share basis, earnings amounted to $0.59 per share for the second quarter of 2004 as compared to $0.60 per share for the second quarter of 2003. Return on average assets and return on average equity for the second quarter of 2004 amounted to 1.77% and 14.50%, respectively. For the same period in 2003, return on average assets and return on average equity amounted to 1.84% and 15.09%, respectively. Tax equivalent net interest income for the second quarter of 2004 amounted to $21.5 million as compared to $20.4 million for the same period last year. Our rates on interest earning assets declined approximately 16 basis points while our rates paid on deposits declined 31 basis points. The increase in volume of average interest earning assets of $76.0 million offset the decline caused by interest rates. Average interest bearing liabilities increased $41.2 million, which only partially offset the decreased cost of funds from the decline in interest rates. Average earning assets were $1.920 billion for the second quarter of 2004 which is 4.1% greater than the second quarter of 2003. Average interest bearing liabilities were $1.353 billion for the second quarter of 2004 which is 3.1% greater than the second quarter of 2003. The Company's interest spread increased to 4.19% for 2004 compared to 4.04% for 2003. The Company's net interest margin was 4.51% for the second quarter of 2004 compared to 4.44% for the same period of 2003. The provision for loan losses for the second quarter of 2004 totaled $308 thousand compared to $226 thousand for the same period in 2003. Gross chargeoffs for the quarter ended June 30, 2004 totaled $317 thousand compared to $347 thousand for the same period of 2003. Recoveries of previously charged-off loans totaling $149 thousand in the quarter ended June 30, 2004 (as compared to $281 thousand in 2003) offset the chargeoffs experienced. On an annualized basis, net chargeoffs as a percentage of average loans was 0.07% for the second quarter of 2004 as compared to 0.03% for the same period in 2003. The Company's allowance for loan losses totaled $11.9 million at June 30, 2004, as compared to $11.5 million at June 30, 2003. As a percentage of nonperforming loans, the Company's allowance amounted to 690.7% at June 30, 2004. As of June 30, 2004, management of the Company believes that the Company's balance in allowance for loan losses is adequate to provide for losses existing in its portfolio that are deemed uncollectible. 12 Total noninterest income for the second quarter of 2004 was $9.4 million, as compared to $9.5 million for the same period last year. Trust fees totaled $1.514 million for the second quarter of 2004, up 2.4% over the same period in 2003. Service fees on deposits totaled $5.002 million for the second quarter of 2004 compared to $3.988 million for the same period of 2003, an improvement of $1.014 million, due to increased volume from enhancements to the Company's overdraft privilege products. During the second quarter of 2003, the Company had a $1.6 million gain from the sale of $53 million in student loans, compared to $638,000 in gains from $17 million in student loan sales in the second quarter of 2004. A large $1.8 million gain from the sale of $60 million in student loans was recognized in the first quarter of 2004. The Company's real estate mortgage fees declined from $815 thousand to $551 thousand as the Company experienced a slow down in the volume of refinancing. Noninterest expense for the second quarter of 2004 amounted to $16.5 million as compared to $15.5 million for the same period in 2003. Salaries and benefits expense, the Company's largest noninterest expense item, increased 3.3% to $8.9 million in the second quarter of 2004, up $281 thousand over the same period in 2003. The primary cause of this increase was the overall pay increases effected in March 2004. Net occupancy expense was relatively flat in the second quarter of 2004 compared to the second quarter of 2003. Equipment expense increased $233 thousand in the second quarter of 2004 over the same period of 2003 due to the depreciation of new technology expenditures in the latter part of 2003 and continuing in 2004 as the Company improved its technology infrastructure. The Company's other expense increased $375 thousand in the second quarter of 2004 compared to the second quarter of 2003 due primarily to professional fees from the implementation of the enhanced overdraft privilege program and telephone consulting fees. We believe a key indicator of our operating efficiency is expressed by the ratio that is calculated by dividing noninterest expense by the sum of net interest income (on a tax equivalent basis) and noninterest income. This ratio in effect measures the amount of funds expended to generate revenue. This ratio was 53.49% for the second quarter of 2004 compared to 51.88% for the second quarter of 2003, due primarily to the decline in noninterest income, the largest of which was related to student loans. Six-months ended June 30, 2004 and 2003 - --------------------------------------- Net income for the six months of 2004 totaled $19.26 million, an increase of $1.59 million or 9.0% for the same period last year. On a basic earnings per share basis, earnings amounted to $1.24 per share as compared to $1.14 per share for the six months of 2003. During the six month 2004 period, the Company continued to increase its net interest income, 3.8% over the prior 2003 period, and experienced an 18.9% increase in total service fees on deposits, all contributing factors to strong growth for the six month period. Return on average assets and return on average equity for the first six months of 2004 amounted to 1.85% and 15.21%, respectively. For the same periods in 2003, return on average assets and return on average equity amounted to 1.78% and 14.70%, respectively. Tax equivalent net interest income for the first six months of 2004 amounted to $43.1 million as compared to $41.2 million for the same period last year, an increase of $1.9 million. Our rates on interest earning assets declined approximately 27 basis points while our rates paid on deposits declined 34 basis points. The increase in volume of average earning assets of $91 million offset the decline caused by interest rates. Average interest bearing liabilities increased $47 million, which only partially offset the decreased cost of funds from the decline in interest rates. Average earning assets were $1.923 billion for the first six months of 2004 which is 4.9% greater than the same period in 2003. Average interest bearing liabilities were $1.363 billion for the first six months of 2004 which is 3.6% greater than the same period of 2003. The Company's net interest spread improved to 4.20% for 2004 compared to 4.13% for 2003. The Company's net interest margin was 4.51% for the first six months of 2004, unchanged compared to the first six months of 2003. 13 The provision for loan losses for the first six months of 2004 totaled $486 thousand compared to $736 thousand for the same period in 2003. Gross chargeoffs for the six months ended June 30, 2004 totaled $559 thousand compared to $1.25 million for the same period of 2003. Recoveries of previously charged-off loans totaling $428 thousand in the six months ended June 30, 2004 (as compared to $817 thousand in 2003) offset the increase in chargeoffs experienced in the first six months of 2004. On an annualized basis, net chargeoffs as a percentage of average loans was 0.3% for the first six months of 2004 as compared to 0.9% for the same period in 2003. The Company's allowance for loan losses totaled $11.9 million at June 30, 2004 compared to $11.5 million at June 30, 2003, the increase due primarily to an overall increase in loans, net of the sale of student loans. As a percentage of nonperforming loans, the Company's allowance amounted to 690.7% at June 30, 2004. As of June 30, 2004, management of the Company believes that the Company's balance in allowance for loan losses is adequate to provide for losses existing in its portfolio that are deemed uncollectible. Total noninterest income for the first six months of 2004 was $19.3 million, as compared to $17.6 million for the same period last year. During the six month period, the Company sold $77 million in student loans recognizing a gain of $2.4 million in 2004 as compared to selling $53 million in loans resulting in $1.8 million in gains in 2003. Real estate mortgage fees decreased to $975 thousand for the first six months of 2004 from $1.5 million in the same period of 2003 as the Company saw the level of refinancings decline from 2003 levels. Trust fees totaled $3.1 million for 2004, up from $2.9 million in 2003, as the Company experienced a 9.9% increase in trust assets managed. Service fees on deposits increased 18.9% to $9.3 million due to increased volume from enhancements to the Company's overdraft privilege products. Noninterest expense for the first six months of 2004 amounted to $32.4 million compared to $30.6 million for the same period in 2003, an increase of 5.8%. Salaries and benefits expense, the Company's largest noninterest expense item, increased 5.1% to $17.7 million in 2004 due to annual salary increases and an increase in profit sharing expense from increased net income. Net occupancy expense was relatively flat in the first six months of 2004 compared to the first six months of 2003. Equipment expense increased $460 thousand in 2004 over 2003 due to depreciation of new technology expenditures in the latter part of 2003 and continuing in 2004 as the Company improved its technology infrastructure. The Company's other expense increased $315 thousand for the first six months of 2004 compared to the same period in 2003, a 3.9% increase, due primarily to professional fees from the implementation of the enhanced overdraft privilege products and telephone consulting fees. We believe a key indicator of our operating efficiency is expressed by the ratio that is calculated by dividing noninterest expense by the sum of net interest income (on a tax equivalent basis) and noninterest income. This ratio in effect measures the amount of funds expended to generate revenue. Our goal is to continue to decrease the ratio, which indicates what we believe to be a more efficiently run company. We improved this ratio to 51.93% for the first six months of 2004 compared to 52.35% for the first six months of 2003. Balance Sheet Review - -------------------- Total assets at June 30, 2004 amounted to $2.081 billion as compared to $2.093 billion at December 31, 2003, and $2.028 billion at June 30, 2003. Since December 31, 2003, loans have increased $22.3 million even though student loans declined from the sales discussed above. Deposits totaled $1.747 billion at June 30, 2004 compared to $1.796 billion at December 31, 2003, down 2.7%. Loans at June 30, 2004, totaled $1.010 billion as compared to $987.5 million at year-end 2003 and $920.9 million at June 30, 2003. As compared to June 30, 2003 amounts, loans at June 30, 2004 reflects (i) a $38.7 million increase in commercial, financial and agricultural loans; (ii) a $82.3 million increase in real estate loans; and (iii) a $9.2 million decrease in consumer loans. 14 Investment securities at June 30, 2004, totaled $904.5 million as compared to $910.3 million at year-end 2003 and $879.2 million at June 30, 2003. The net unrealized loss, net of income tax in the available-for-sale investment portfolio at June 30, 2004, amounted to $3.5 million and had an overall tax equivalent yield of 4.63%. Since December 31, 2003, the bond market has experienced an increase in interest rates which as a result, decreased our unrealized gain on our investment portfolio. At June 30, 2004, the Company did not hold any structured notes and management does not believe that their collateralized mortgage obligations have an interest, credit or other risk greater than their other investments. The following table discloses, as of June 30, 2004, our investment securities that have been in a continuous unrealized-loss position for less than 12 months and those that have been in a continuous unrealized-loss position for 12 or more months (in thousands):
Less than 12 Months 12 Months or Longer Total ----------------------- ---------------------- --------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ---------- ------- ----------- ------ -------- -------- U.S. Treasury securities and obligations of U.S. government sponsored-enterprises and agencies $ 133,694 $ 3,163 $ 15,417 $ 842 $149,111 $ 4,005 Obligations of state and political subdivisions 64,600 2,902 15,116 1,557 79,716 4,459 Mortgage-backed securities 142,306 2,722 73,420 2,786 215,726 5,508
We believe the investment securities in the table above are within ranges customary for the banking industry. The number of investment positions in this unrealized loss position totals 529. We do not believe these unrealized losses are "other than temporary" as (1) the Company has the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value, (2) it is not probable that the Company will be unable to collect the amounts contractually due and (3) no decision to dispose of the investments were made prior to the balance sheet date. The unrealized losses noted are interest rate related due to rising rates at June 30, 2004, in relation to previous rates in the early part of 2004. The duration of these investments is less than 5 years for all securities other than the municipal bonds, which is less than 15 years. We have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Nonperforming assets at June 30, 2004, totaled $2.5 million as compared to $3.2 million at December 31, 2003. The decrease resulted primarily from the collection of certain loans previously included in nonperforming loans. At 0.25% 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. Acquisition Announcement - ------------------------ On March 4, 2004, we entered into a stock purchase agreement with the principal shareholders of Liberty National Bank, Granbury, Texas. On July 26, 2004 the transaction was completed. Pursuant to the purchase agreement, the Company paid approximately $12.8 million for all of the outstanding shares of Liberty National Bank. Liberty National Bank is a direct subsidiary of First Financial Bankshares of Delaware, Inc., our wholly owned Delaware bank holding company. Liberty National Bank is located in the City of Granbury, Hood County, Texas, approximately 40 miles southwest of Fort Worth, Texas. Liberty National Bank was chartered in 1997 and as of June 30, 2004, had assets totaling approximately $60 million and shareholders' equity of $6.2 million. 15 Liquidity and Capital - --------------------- Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the issuance of standby letters of credit and commitments to fund future borrowings to our loan customers are other factors affecting our liquidity needs. Many of these obligations and commitments are expected to expire without being drawn upon; therefore the total commitment amounts do not necessarily represent future cash requirements affecting our liquidity position. The potential need for liquidity arising from these types of financial instruments is represented by the contractual notional amount of the instrument. Liquidity is provided by assets which are readily marketable or which will mature in the near future. Liquid assets include cash, federal funds sold, and short-term investments in time deposits in banks. Liquidity is also provided by access to funding sources, which includes core depositors and correspondent banks that maintain accounts with and sell federal funds to our subsidiary banks. Other sources of funds include our ability to sell securities under agreements to repurchase, and an unfunded $20.0 million line of credit established with a nonaffiliated bank which matured on June 30, 2004. We expect to renew this line of credit at maturity under similar terms for another year. Given the strong core deposit base and relatively low loan to deposit ratios maintained at the subsidiary banks, management considers the current liquidity position to be adequate to meet short- and long-term liquidity needs. We funded the acquisition of Liberty National Bank with internal cash funds. We anticipate that any future additional acquisitions of financial institutions and expansion of branch locations could place a demand on our cash resources. Available cash at our parent company, available dividends from our subsidiary banks, utilization of available lines of credit, and future debt or equity offerings are expected to be the source of funding for these potential acquisitions or expansions. The Company's consolidated statements of cash flows are presented on page 8 of this report. Total equity capital amounted to $249.3 million at June 30, 2004, down slightly from $251.5 million at year-end 2003 and $251.2 million at June 30, 2003, primarily as a result of the decrease in fair value of our available-for-sale securities as a result of rising interest rates. The Company's risk-based capital and leverage ratios at June 30, 2004 were 19.87% and 10.95%, respectively. The second quarter 2004 cash dividend of $0.34 per share totaled $5.3 million and represented 57.5% of second quarter earnings. Interest Rate Risk - ------------------ Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest bearing liabilities are different. The Company's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. The Company uses no off-balance-sheet financial instruments to manage interest rate risk. The Company and each subsidiary bank have an asset/liability committee which monitors interest rate risk and compliance with investment policies. Interest-sensitivity gap and simulation analysis are among the ways that the subsidiary banks track interest rate risk. As of June 30, 2004, management estimates that, over the next twelve months, an upward shift of interest rates by 150 basis points would result in an increase in projected net interest income of 1.58% and a downward shift of interest rates by 100 basis points would result in a reduction in projected net interest income of 4.84%. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at June 30, 2004, will remain constant over the relevant twelve month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. In management's belief, these estimates are not 16 necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice at different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, our future results could in management's belief, be different from the foregoing estimates, and such results could be material. Item 3. Quantitative and Qualitative Disclosures About Market Risk Management considers interest rate risk to be a significant market risk for the Company. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for disclosure regarding this market risk. Item 4. Controls and Procedures As of June 30, 2004, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 15d-15. Our management, including the principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Our principal executive officer and principal financial officer have concluded, based on our evaluation of our disclosure controls and procedures, that our disclosure controls and procedures under Rule 13a-14 (c) and Rule 15d - 14 (c) of the Securities Exchange Act of 1934 are effective at the reasonable assurance level as of June 30, 2004. Subsequent to our evaluation, there were no significant changes in internal controls or other factors that could significantly affect these internal controls. 17 PART II OTHER INFORMATION 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). 3.3 Amendment to the Articles of Incorporation of the Registrant, dated April 27, 2004 (incorporated by reference from Exhibit 3.3 of the Registrant's Form 10-Q Quarterly Report for the quarter ended March 31, 2004). 3.4 Amendment to Amended and Restated Bylaws of the Registrant, dated April 27, 1994 (incorporated by reference from Exhibit 3.4 of the Registrant's Form 10-Q Quarterly Report for the quarter ended March 31, 2004). 3.5 Amendment to Amended and Restated Bylaws of the Registrant, dated October 23, 2001 (incorporated by reference from Exhibit 3.5 of the Registrant's Form 10-Q Quarterly Report for the quarter ended March 31, 2004). 4.1 Specimen certificate of First Financial Common Stock (incorporated by reference from Exhibit 3 of the Registrant's Amendment No. 1 to Form 8-A filed on Form 8-A/A No. 1 on January 7, 1994). 10.1 Deferred Compensation Agreement, dated October 28, 1992, between the Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit 10.1 of the Registrant's Form 10-K Annual Report for the year ended December 31, 2002). 10.2 Revised Deferred Compensation Agreement, dated December 28, 1995, between the Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-K Annual Report for the year ended December 31, 2002). 10.3 Executive Recognition Plan (incorporated by reference from Exhibit 10.3 of the Registrant's Form 10-K Annual Report for the year ended December 31, 2002). 10.4 Form of Executive Recognition Agreement (incorporated by reference from Exhibit 10.4 of the Registrant's Form 10-K Annual Report for the year ended December 31, 2002). 10.5 1992 Incentive Stock Option Plan (incorporated by reference from Exhibit 10.5 of the Registrant's Form 10-K Annual Report for the fiscal year ended December 31, 1998). 10.6 2002 Incentive Stock Option Plan (incorporated by reference from Appendix A of the Registrant's Schedule 14a Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders). 10.7 Revised Consulting Agreement dated January 1, 2004 between the Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit 10.7 of the Registrant's Form 10-K Annual Report for the year ended December 31, 2003). *31.1 Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer of First Financial Bankshares, Inc. *31.2 Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer of First Financial Bankshares, Inc. *32.1 Section 1350 Certification of Chief Executive Officer of First Financial Bankshares, Inc. *32.2 Section 1350 Certification of Chief Financial Officer of First Financial Bankshares, Inc. - ---------------- * Filed herewith (b) On July 20, 2004, we furnished a report on Form 8-K relating to our earnings release for the quarter ended June 30, 2004. 18 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 3, 2004 By:/S/ F. Scott Dueser ------------------- F. Scott Dueser President and Chief Executive Officer Date: August 3, 2004 By:/S/ J. Bruce Hildebrand ----------------------- J. Bruce Hildebrand Executive Vice President and Chief Financial Officer 19 Exhibit 31.1 ------------ Certification of Chief Executive Officer of First Financial Bankshares, Inc. I, F. Scott Dueser, President and Chief Executive Officer of First Financial Bankshares, Inc., certify that: 1. I have reviewed this Form 10-Q of First Financial Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. [Intentionally omitted]; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectives of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2004 By: /s/ F. SCOTT DUESER ------------------------------------- F. Scott Dueser President and Chief Executive Officer Exhibit 31.2 ------------ Certification of Chief Financial Officer of First Financial Bankshares, Inc. I, J. Bruce Hildebrand, Executive Vice President and Chief Financial Officer of First Financial Bankshares, Inc., certify that: 1. I have reviewed this Form 10-Q of First Financial Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. [Intentionally omitted]; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectives of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2004 By: /s/ J. Bruce Hildebrand ---------------------------------- J. Bruce Hildebrand Executive Vice President and Chief Financial Officer Exhibit 32.1 ------------ Certification of Chief Executive Officer of First Financial Bankshares, Inc. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States code) and accompanies the quarterly report on Form 10-Q (the "Form 10-Q") for the quarter ended June 30, 2004 of First Financial Bankshares, Inc. I, F. Scott Dueser, the President and Chief Executive Officer of the Issuer certify that: 1. the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 3, 2004 By: /s/ F. SCOTT DUESER --------------------------- F. Scott Dueser Chief Executive Officer Subscribed and sworn to before me this 3rd of August, 2004. /s/ Gaila N. Kilpatrick - ----------------------- Gaila N. Kilpatrick Notary Public My commission expires: April 15, 2005 Exhibit 32.2 ------------ Certification of Chief Financial Officer of First Financial Bankshares, Inc. This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States code) and accompanies the annual report on Form 10-Q (the "Form 10-Q") for the quarter ended June 30, 2004 of First Financial Bankshares, Inc. I, J. Bruce Hildebrand, the Executive Vice President and Chief Financial Officer of the Issuer certify that: 1. the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2. the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 3, 2004 By: /s/ J. Bruce Hildebrand --------------------------- J. Bruce Hildebrand Chief Financial Officer Subscribed and sworn to before me this 3rd of August, 2004. /s/ Gaila N. Kilpatrick - ----------------------- Gaila N. Kilpatrick Notary Public My commission expires: April 15, 2005 -----END PRIVACY-ENHANCED MESSAGE-----