FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-7674 ------ FIRST FINANCIAL BANKSHARES, INC. -------------------------------- (Exact name of registrant as Specified in its charter) Texas 75-0944023 - --------------------------------------------- --------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 400 Pine Street, Abilene, Texas 79601 ------------------------------------- (Address of principal executive offices) (Zip Code) (915)627-7155 ------------- (Registrant's telephone number, including area code) NO CHANGE --------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 2, 2002. Class Number of Shares Outstanding - ---------------------------------------- ---------------------------- Common Stock, Par Value $10.00 Per Share 12,345,718 THE AUDIT COMMITTEE OF THE COMPANY DECIDED TO NOT APPOINT ARTHUR ANDERSEN, LLP AS AUDITORS FOR THE YEAR ENDED DECEMBER 31, 2002: THEREFORE, THIS FORM 10-Q HAS NOT BEEN REVIEWED BY INDEPENDENT PUBLIC ACCOUNTANTS.
TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item Page ---- ---- 1. Consolidated Financial Statements and Notes to Consolidated Financial Statements 3 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 3. Quantitative and Qualitative Disclosures About Market Risk 13 Signatures 14 -2-
PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. The consolidated balance sheets of First Financial Bankshares, Inc. at March 31, 2002 and 2001, and December 31, 2001, and the consolidated statements of earnings and comprehensive earnings for the three months ended March 31, 2002 and 2001, changes in shareholders' equity for the year ended December 31, 2001 and three months ended March 31, 2002, and cash flows for the three months ended March 31, 2002 and 2001, follow on pages 4 through 8. THE COMPANY IS IN THE PROCESS OF ENGAGING NEW INDEPENDENT PUBLIC ACCOUNTANTS, WHOSE REVIEW OF FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002, WILL INCLUDE A REVIEW OF FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2002. IF, UPON COMPLETION OF THE REVIEW BY THE NEW INDEPENDENT PUBLIC ACCOUNTANTS, THERE IS A CHANGE TO THE FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002, THE COMPANY WILL AMEND THIS FORM 10-Q. -3-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31, --------------------------------------- Unaudited --------------------------------------- December 31, 2002 2001 2001 ------------------ ------------------ ------------------ <S> <C> <C> <C> ASSETS Cash and due from banks $ 72,697,896 $ 77,523,944 $ 112,150,214 Federal funds sold 66,600,000 137,035,000 72,975,000 ------------------ ------------------ ------------------ Cash and cash equivalents 139,297,896 214,558,944 185,125,214 Interest-bearing deposits in banks 3,285,862 304,402 1,374,285 Investment securities: Securities held-to-maturity (market value of $277,205,120 and $359,166,606 at March 31, 2002 and 2001, respectively and $298,569,794 at December 31, 2001) 260,525,944 342,956,710 290,674,490 Securities available-for-sale, at market value 457,867,988 282,657,647 431,019,205 ------------------ ------------------ ------------------ Total investment securities 718,393,932 625,614,357 721,693,695 Loans 940,581,045 868,839,197 940,130,975 Less: Allowance for loan losses 10,858,537 9,575,017 10,602,419 ------------------ ------------------ ------------------ Net loans 929,722,508 859,264,180 929,528,556 Bank premises and equipment, net 41,999,675 39,719,772 42,012,431 Goodwill and intangible assets 24,678,180 18,104,962 24,711,969 Other assets 27,706,306 26,513,375 25,247,980 ------------------ ------------------ ------------------ TOTAL ASSETS $ 1,885,084,359 $ 1,784,079,992 $ 1,929,694,130 ================== ================== ================== LIABILITIES Noninterest-bearing deposits $ 379,903,568 $ 338,892,867 $ 389,406,666 Interest-bearing deposits 1,250,010,924 1,202,155,016 1,295,755,932 ------------------ ------------------ ------------------ Total deposits 1,629,914,492 1,541,047,883 1,685,162,598 Dividends payable 3,703,567 3,251,223 3,699,976 Securities sold under agreements to repurchase 23,366,804 25,441,199 19,847,067 Other liabilities 10,881,975 12,463,925 7,330,476 ------------------ ------------------ ------------------ Total liabilities 1,667,866,838 1,582,204,230 1,716,040,117 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - $10 par value; authorized 20,000,000 shares; 12,345,224 issued and outstanding at March 31, 2002; 9,852,192 shares issued and 9,849,592 shares oustanding at March 31, 2001; 12,333,252 shares issued and outstanding at December 31, 2001 123,452,240 98,521,920 123,332,520 Capital surplus 57,885,885 57,790,905 57,824,061 Retained earnings 32,850,441 41,755,721 28,375,353 Treasury stock, at cost - 2,600 shares at March 31, 2001 - (82,388) - Unrealized gain on investment securities available-for-sale, net 3,028,955 3,889,604 4,122,079 Total shareholders' equity 217,217,521 201,875,762 213,654,013 ------------------ ------------------ ------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,885,084,359 $ 1,784,079,992 $ 1,929,694,130 ================== ================== ================== See notes to consolidated financial statements. </TABLE> -4-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, -------------------------------------- 2002 2001 ----------------- ----------------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 16,516,013 $ 19,575,307 Interest on investment securities: Taxable 7,967,321 7,806,633 Exempt from federal income tax 1,730,944 1,478,280 Interest on federal funds sold and interest-bearing deposits in banks 258,410 1,086,292 ----------------- ----------------- Total interest income 26,472,688 29,946,512 INTEREST EXPENSE Interest-bearing deposits 6,985,166 12,711,098 Other 87,300 315,519 ----------------- ----------------- Total interest expense 7,072,466 13,026,617 ----------------- ----------------- NET INTEREST INCOME 19,400,222 16,919,895 Provision for loan losses 398,500 366,383 ----------------- ----------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,001,722 16,553,512 NONINTEREST INCOME Trust department income 1,424,070 1,517,048 Service fees on deposit accounts 3,556,860 3,506,308 ATM fees 511,003 451,976 Real estate mortgage fees 422,029 272,396 Net gain on securities transactions - 54,850 Other 1,010,943 898,223 ----------------- ----------------- Total noninterest income 6,924,905 6,700,801 NONINTEREST EXPENSE Salaries and employee benefits 7,839,410 6,886,204 Net occupancy expense 954,185 936,575 Equipment expense 1,184,888 1,081,623 Printing, stationery & supplies 419,625 230,116 Correspondent bank service charges 362,992 303,822 Amortization of intangible assets 33,789 410,342 Other expenses 3,439,431 3,306,203 ----------------- ----------------- Total noninterest expense 14,234,320 13,154,885 ----------------- ----------------- EARNINGS BEFORE INCOME TAXES 11,692,307 10,099,428 Income tax expense 3,513,651 3,095,678 ----------------- ----------------- NET EARNINGS $ 8,178,656 $ 7,003,750 ================= ================= EARNINGS PER SHARE, BASIC (1) $ 0.66 $ 0.57 EARNINGS PER SHARE, ASSUMING DILUTION (1) $ 0.66 $ 0.56 DIVIDENDS PER SHARE (1) $ 0.30 $ 0.26 (1) Per share amounts are adjusted to reflect 25% stock dividend issued June 1, 2001 See notes to consolidated financial statements. </TABLE> -5-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS - (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------ 2002 2001 --------------- ----------------- <S> <C> <C> NET EARNINGS $ 8,178,656 $ 7,003,750 OTHER ITEMS OF COMPREHENSIVE EARNINGS Change in unrealized gain on investment securities available-for-sale, before income taxes (1,681,729) 3,545,884 Reclassification adjustment for realized gains on investment in securities included in net earnings, before income taxes - (54,850) --------------- ----------------- Total other items of comprehensive earnings, before tax (1,681,729) 3,491,034 Income tax (benefit) expense related to other items of comprehensive earnings (588,605) 1,221,862 --------------- ----------------- COMPREHENSIVE EARNINGS $ 7,085,532 $ 9,272,922 =============== ================= See notes to consolidated financial statements. </TABLE> -6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY <TABLE> <CAPTION> Unrealized Gain on Investment Common Stock Securities Total ------------------------- Capital Retained Treasury Available Shareholders' Shares Amount Surplus Earnings Stock, at cost For Sale, Net Equity ---------- ------------- ------------ ------------ ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 2000 9,983,002 $ 99,830,020 $ 60,592,310 $ 38,003,195 $ (3,925,069) $ 1,620,432 $ 196,120,888 Net earnings - - - 29,354,505 - - 29,354,505 Stock split-up,effected in the form of a 25% stock dividend 2,461,770 24,617,700 - (24,617,700) - - - Stock issuances 24,480 244,800 111,870 - - - 356,670 Cash dividends declared, $1.16 per share - - - (14,364,647) - - (14,364,647) Acquisition of treasury stock - - - - (315,050) - (315,050) Retirement of treasury stock (136,000) (1,360,000) (2,880,119) - 4,240,119 - - Change in unrealized gain on investment securities available-for-sale, net - - - - - 2,501,647 2,501,647 ---------- ------------- ------------ ------------ ------------- ----------- ------------- 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 - - - 8,178,656 - - 8,178,656 Stock issuances 11,972 119,720 61,824 - - - 181,544 Cash dividends declared, $.30 per share - - - (3,703,568) - - (3,703,568) Change in unrealized gain on investment securities available-for-sale, net - - - - - (1,093,124) (1,093,124) ---------- ------------- ------------ ------------ ------------- ----------- ------------- Balances at March 31, 2002 (unaudited) 12,345,224 $ 123,452,240 $ 57,885,885 $ 32,850,441 $ - $ 3,028,955 $ 217,217,521 ========== ============= ============ ============ ============= =========== ============= See notes to consolidated financial statements. </TABLE> -7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------ 2002 2001 ----------------- ---------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 8,178,656 $ 7,003,750 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,076,739 1,384,044 Provision for loan losses 398,500 366,383 Premium amortization, net of discount accretion 1,227,432 295,083 Loss (gain) on sale of assets 4,500 (49,335) Deferred federal income tax benefit (98,232) (534,272) (Increase) decrease in other asset (1,880,620) 1,693,635 Increase in other liabilities 3,551,499 4,065,198 ----------------- ---------------- Total adjustments 4,279,818 7,220,736 ----------------- ---------------- Net cash provided by operating activities 12,458,474 14,224,486 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in interest-bearing deposits in banks (1,911,577) (200,064) Activity in available-for-sale securities: Sales - 11,629,482 Maturities 18,880,598 23,235,639 Purchases (50,399,939) (51,772,872) Activity in held-to-maturity securities: Maturities 33,404,765 69,737,620 Purchases (1,494,822) (20,940,707) Net increase in loans (487,821) (10,296,565) Capital expenditures (1,065,755) (686,845) Proceeds from sale of assets 35,561 170,400 ----------------- ---------------- Net cash (used in) provided by investing activities (3,038,990) 20,876,088 CASH FLOWS FROM FINANCING ACTIVITIES Net (decrease) increase in noninterest-bearing deposits (9,503,098) 2,615,934 Net (decrease) increase in interest-bearing deposits (45,745,008) 18,558,249 Net increase (decrease) in securities sold under agreements to repurchase 3,519,737 (723,160) Common stock transactions: Acquisition of treasury stock - (315,050) Proceeds from stock issuances 181,544 48,226 Dividends paid (3,699,977) (3,256,541) ----------------- ---------------- Net cash (used in) provided by financing activities (55,246,802) 16,927,658 ----------------- ---------------- Net (decrease) increase in cash and cash equivalents (45,827,318) 52,028,232 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 185,125,214 162,530,712 ----------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 139,297,896 $ 214,558,944 ================= ================ SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS Interest paid $ 7,937,200 $ 12,273,377 Federal income tax paid 125,000 - Assets acquired through foreclosure 30,321 54,614 Loans to finance the sale of other real estate 134,952 - Retirement of treasury stock - 4,157,731 See notes to consolidated financial statements. </TABLE> -8-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation In the opinion of management, the unaudited consolidated financial statements reflect all adjustments necessary for a fair presentation of the Company's financial position and unaudited results of operations. All adjustments were of a normal recurring nature. However, the results of operations for the three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the year ended December 31, 2002. Note 2 - Earnings Per Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. In computing diluted earnings per common share for the quarters ended March 31, 2002 and 2001, the Company assumes that all outstanding options to purchase common stock have been exercised at the beginning of the year (or time of issuance, if later). The dilutive effect of the outstanding options is reflected by application of the treasury stock method, whereby, the proceeds from the exercised options are assumed to be used to purchase common stock at the average market price during the respective period. The weighted average common shares outstanding used in computing basic earnings per common share for the quarters ended March 31, 2002 and 2001, were 12,340,353 and 12,312,509 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the quarters ended March 31, 2002 and 2001, were 12,389,543 and 12,346,117 shares, respectively. Note 3 - Goodwill and Other Intangible Assets - Adoption of Statement 142 In June 2001, the Financial Accounting Standards Board issued Statement on Financial Accounting (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS 142 requires that goodwill no longer be amortized, but instead be reviewed for impairment. The Company adopted SFAS 142 on January 1, 2002 and discontinued amortization on goodwill amounting to $23,765,896. The Company plans to conduct its initial impairment test in the three months ending June 30, 2002. A reconciliation adjusting comparative net earnings and earnings per share for the three months ended March 31, 2002, follows: <TABLE> <CAPTION> Three Months Ended --------------------------------- 2002 2001 ------------ ------------- <S> <C> <C> Reported net earnings $ 8,178,656 $ 7,003,750 Add back: Goodwill amortization, net of tax benefit - 305,342 ------------ ------------- Adjusted net earnings $ 8,178,656 $ 7,309,092 ============ ============= Basic earnings per share: Reported net earnings $ .66 $ .57 Goodwill amortization, net of tax benefit - .02 ------------ ------------- Adjusted net earnings $ .66 $ .59 ============ ============= Earnings per share, assuming dilution: Reported net earnings $ .66 $ .56 Goodwill amortization, net of tax benefit - .02 ------------ ------------- Adjusted net earnings $ .66 $ .58 ============ ============= </TABLE> -9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Results - ----------------- Net income for the first quarter 2002 totaled $8.2 million, an increase of $1.2 million, or 16.8% over earnings of $7.0 million for the same period last year. The earnings improvement for 2002 resulted primarily form increased net interest income. On a basic earnings per share basis, earnings amounted to $0.66 per share as compared to $0.57 per share for first quarter 2001. Return on average assets and return on average equity for the first quarter 2002 amounted to 1.76% and 15.50%, respectively. For the same period in 2001, return on average assets and return on average equity amounted to 1.63% and 14.50%, respectively. Tax-equivalent net interest income for the first quarter 2002 amounted to $20.3 million as compared to $17.6 million for the same period last year. The increase resulted from growth in average earning assets coupled with an improved net interest margin. Average earning assets were $1.718 billion for the first quarter of 2002 which was $132 million, or 8.3% above the first quarter 2001 average. The cash purchase acquisition completed in July 2001contributed approximately $89 million to the 2002 growth. The Company's net interest margin amounted to 4.79% for the first quarter 2002 as compared to 4.51% for the same period last year. The higher net interest margin for 2002 reflects the Company's progress in repricing interest bearing liabilities following the rapid decline in interest rates which occurred in the early part of 2001. The provision for loan losses for the first quarter 2002 totaled $399 thousand as compared to $366 thousand for the first quarter last year. Net charge offs for the first quarter totaled $143 thousand as compared to $679 thousand for the first quarter 2001. On an annualized basis, net charge offs for the first quarter 2002 amounted to .06% of loans as compared to .32% for the same period last year. At March 31, 2002 the allowance for losses amounted to 224.9% of nonperforming loans and 1.15% of total loans, which was considered by management to be adequate. Total noninterest income for the first quarter was $6.9 million, as compared to $6.7 million for the same period last year. Trust fees for the first quarter 2002 amounted to $1.4 million which was $93 thousand below the first quarter 2001 total. The decrease resulted primarily from lower fees earned on certain trust assets affected by lower market valuations. For the first quarter 2002 service charges on deposit accounts amounted to $3.5 million, $50 thousand higher than the amount earned in the same period last year. ATM fees amounted to $511 thousand for the first quarter 2002 as compared to $452 for the same period last year. Real estate mortgage fees for the first quarter 2002 amounted to $422 thousand which represented a $150 thousand increase when compared to the same period last year. The higher level of real estate mortgage fees reflect an increased volume of new loan and refinance transactions during 2002 attributable to relative low mortgage loan rates. Other noninterest income for the first quarter 2002 amounted to $1.0 million as compared to $898 thousand for the same period last year. The first quarter 2002 total other noninterest income includes $175 thousand which represents check printing fees that, in prior periods, were recorded as a reduction in printing and supplies expense. Noninterest expense for the first quarter 2002 amounted to $14.2 million as compared to $13.2 million for the first quarter 2001. Salaries and employee benefits expense for the first quarter totaled $7.8 million as compared to $6.9 million for the first quarter last year. The cash purchase acquisition completed in July 2001 accounted for $297 thousand of the increase over the first quarter 2001 salaries and benefits expense with the remaining increase attributable to salary increases and higher costs of employee benefits. Net occupancy and equipment expense in aggregate for the first quarter 2002 increased $120. Higher depreciation expense was the primary factor contributing to the increase. Amortization expense for intangible assets for the first quarter 2002 decreased $377 thousand due to a change in accounting principles. Printing and supplies expense for the first quarter amounted to $420 thousand as compared to $230 thousand for the first quarter last year, primarily due to $175 thousand in check printing fees included in noninterest income in 2002, which were recorded as a reduction in printing and supplies expense in 2001. The Company's key indicator of operating efficiency, noninterest expense as a percent of net interest income and noninterest income, improved to 52.31% for the first quarter as compared to 54.18% for the first quarter in 2001. -10-
Balance Sheet Review - -------------------- Total assets at March 31, 2002, amounted to $1.885 billion as compared to $1.930 billion at December 31, 2001, and $1.784 billion at March 31, 2001. The decrease in total assets from December 31, 2001 resulted primarily from a reduction in cash and due from banks which reflects a decrease in total deposits. Loans at March 31, 2002, totaled $941 million as compared to $940 million at year-end 2001 and $869 million at March 31, 2001. As compared to year-end 2001 amounts, loans at March 31, 2002, reflect (i) a $6.4 million increase in commercial loans; (ii) a $7.2 million decrease in agricultural loans; and (iii) a $1 million increase in consumer loans. Compared to March 31, 2001, loans at March 31, 2002, reflect; (i.) a $13.7 million increase in commercial loans; (ii) a $59.8 million increase in real estate loans; and (iii) a $2.5 million decrease in consumer loans. Investment securities at March 31, 2002, totaled $718 million as compared to $722 million at year-end 2001 and $626 million at March 31, 2001. The net unrealized gain in the investment portfolio at March 31, 2002, amounted to $12.3 million and had an overall yield of 5.96%. At March 31, 2002, the Company did not hold any structured notes or CMOs that entail higher risks than standard mortgage-backed securities. Total deposits at March 31, 2002, amounted to $1.630 billion as compared to $1.685 billion at year-end 2001 and $1.541 billion at March 31, 2001. The decrease in deposits at March 31, 2002 when compared to year end 2001 represents seasonal declines plus the Company's strategy not to match higher market rates on certain interest-bearing deposit products. Nonperforming assets at March 31, 2002, totaled $5.6 million as compared to $4.8 million at December 31, 2001. The increase resulted primarily from a $1.0 million increase nonaccrual loans. At .60% of loans plus foreclosed assets, management considers nonperforming assets to be at a manageable level and is unaware of any material classified credit not properly disclosed as nonperforming. Liquidity and Capital - --------------------- The Company's consolidated statements of cash flows are presented on page 8 of this report. At March 31, 2002, the parent company had no debt outstanding under its $25 million line of credit with an unaffiliated financial institution. Total equity capital amounted to $217.2 million at March 31, 2002, which was up from $213.7 million at year-end 2001 and $201.9 million at March 31, 2001. The Company's risk-based capital and leverage ratios at March 31, 2002, were 18.64% and 10.22%, respectively. The first quarter 2002 cash dividend of $0.30 per share totaled $3.7 million and represented 45.3% of first quarter earnings. On April 23, 2002, the Company declared a $0.35 per share cash dividend payable July 1, 2002. Interest Rate Risk - ------------------ Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. The Company's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. The Company uses no off-balance-sheet financial instruments to manage interest rate risk. Each subsidiary bank has an asset/liability committee which monitors interest rate risk and compliance with investment policies. Interest-sensitivity gap and simulation analysis are among the ways that the subsidiary banks track interest rate risk. As of March 31, 2002, 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 2.35% and a downward shift of interest rates by 150 basis points would result in a reduction in projected net interest income of 5.22%. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at March 31, 2002, 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 -11-
interest rates. In management's belief, these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice at different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, our future results would, in management's belief, be different from the foregoing estimates, and such results could be material. -12-
Item 3. Quantitative and Qualitative Disclosures About Market Risk Management considers interest rate risk to be a significant market risk for the Company. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for disclosure regarding this market risk. -13-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST FINANCIAL BANKSHARES, INC. Date: May 14, 2002 By: /S/CURTIS R. HARVEY ------------------ ---------------------------------- Curtis R. Harvey Executive Vice President and Chief Financial Officer Date: May 14, 2002 By: /S/SANDY LESTER ------------------ ---------------------------------- Sandy Lester Secretary-Treasurer