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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-7674 ------ FIRST FINANCIAL BANKSHARES, INC. -------------------------------- (Exact name of registrant as Specified in its charter) Texas 75-0944023 - --------------------------------------------- --------------------- (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 400 Pine Street, Abilene, Texas 79601 ------------------------------------- (Address of principal executive offices) (Zip Code) (915)627-7155 ------------- (Registrant's telephone number, including area code) NO CHANGE --------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 1, 2001. Class Number of Shares Outstanding - ---------------------------------------- ---------------------------- Common Stock, Par Value $10.00 Per Share 9,849,592
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 12 Signatures 13 -2-
PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements. The consolidated balance sheets of First Financial Bankshares, Inc. at March 31, 2001 and 2000, and December 31, 2000, and the consolidated statements of earnings, comprehensive earnings and cash flows for the three months ended March 31, 2001 and 2000, and the changes in shareholders' equity for the year ended December 31, 2000 and three months ended March 31, 2001, follow on pages 4 through 8. -3-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31, ---------------------------------------- Unaudited ---------------------------------------- December 31, 2001 2000 2000 ------------------- ------------------- ------------------- <S> <C> <C> <C> ASSETS Cash and due from banks $ 77,523,944 $ 80,391,699 $ 100,300,424 Federal funds sold 137,035,000 69,772,210 62,230,288 ------------------- ------------------- ------------------- Cash and cash equivalents 214,558,944 150,163,909 162,530,712 Interest-bearing deposits in banks 304,402 104,136 104,338 Investment securities: Securities held-to-maturity (market value of $359,166,606 and $418,381,256 at March 31, 2001 and 2000, respectively; $393,590,628 at December 31, 2000) 342,956,710 425,921,492 391,918,076 Securities available-for-sale, at market value 282,657,647 244,942,097 262,334,642 ------------------- ------------------- ------------------- Total investment securities 625,614,357 670,863,589 654,252,718 Loans 868,839,197 807,751,947 859,270,728 Less: Allowance for loan losses 9,575,017 9,286,278 9,887,646 ------------------- ------------------- ------------------- Net loans 859,264,180 798,465,669 849,383,082 Bank premises and equipment, net 39,719,772 41,017,056 40,090,733 Goodwill, net 18,104,962 19,746,330 18,515,304 Other assets 26,513,375 28,062,765 28,937,327 ------------------- ------------------- ------------------- TOTAL ASSETS $ 1,784,079,992 $ 1,708,423,454 $ 1,753,814,214 =================== =================== =================== LIABILITIES Noninterest-bearing deposits $ 338,892,867 $ 328,121,854 $ 336,276,933 Interest-bearing deposits 1,202,155,016 1,171,467,775 1,183,596,767 ------------------- ------------------- ------------------- Total deposits 1,541,047,883 1,499,589,629 1,519,873,700 Dividends payable 3,251,223 2,992,292 3,256,540 Securities sold under agreements to repurchase 25,441,199 13,109,015 26,164,359 Other liabilities 12,463,925 10,319,135 8,398,727 ------------------- ------------------- ------------------- Total liabilities 1,582,204,230 1,526,010,071 1,557,693,326 ------------------- ------------------- ------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock - $10 par value; authorized 20,000,000 shares; 9,852,192 and 9,974,306 shares issued; 9,849,592 and 9,974,306 shares outstanding at March 31, 2001 and 2000, respectively; 9,983,002 shares issued and 9,856,902 shares outstanding at December 31, 2000 98,521,920 99,743,060 99,830,020 Capital surplus 57,790,905 60,517,351 60,592,310 Retained earnings 41,755,721 26,249,480 38,003,195 Treasury stock, at cost - 2,600 and 126,100 shares at March 31, 2001 and December 31, 2000, respectively (82,388) - (3,925,069) Unrealized gain (loss) on investment securities available-for-sale, net 3,889,604 (4,096,508) 1,620,432 ------------------- ------------------- ------------------- Total shareholders' equity 201,875,762 182,413,383 196,120,888 ------------------- ------------------- ------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,784,079,992 $ 1,708,423,454 $ 1,753,814,214 =================== =================== =================== See notes to consolidated financial statements. </TABLE> -4-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS - (UNAUDITED) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------- 2001 2000 ---------------- ---------------- <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 19,575,307 $ 17,648,788 Interest on investment securities: Taxable 7,806,633 8,300,400 Exempt from federal income tax 1,478,280 1,409,955 Interest on federal funds sold and interest-bearing deposits in banks 1,086,292 899,720 ---------------- ---------------- Total interest income 29,946,512 28,258,863 INTEREST EXPENSE Interest-bearing deposits 12,711,098 11,129,124 Other 315,519 154,976 ---------------- ---------------- Total interest expense 13,026,617 11,284,100 ---------------- ---------------- NET INTEREST INCOME 16,919,895 16,974,763 Provision for loan losses 366,383 740,750 ---------------- ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 16,553,512 16,234,013 NONINTEREST INCOME Trust department income 1,517,048 1,346,238 Service fees on deposit accounts 3,506,308 3,387,995 ATM fees 451,976 329,402 Real estate mortgage fees 272,396 232,026 Net gain on securities transactions 54,850 - Other 898,223 1,170,792 ---------------- ---------------- Total noninterest income 6,700,801 6,466,453 NONINTEREST EXPENSE Salaries and employee benefits 6,886,204 6,831,209 Net occupancy expense 936,575 874,280 Equipment expense 1,081,623 1,013,763 Goodwill amortization 410,342 410,342 Other expenses 3,840,141 3,810,185 ---------------- ---------------- Total noninterest expense 13,154,885 12,939,779 ---------------- ---------------- EARNINGS BEFORE INCOME TAXES 10,099,428 9,760,687 Income tax expense 3,095,678 3,014,174 ---------------- ---------------- NET EARNINGS $ 7,003,750 $ 6,746,513 ================ ================ EARNINGS PER SHARE, BASIC $ 0.71 $ 0.68 EARNINGS PER SHARE, ASSUMING DILUTION $ 0.71 $ 0.68 DIVIDENDS PER SHARE $ 0.33 $ 0.30 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, --------------------------------- 2001 2000 -------------- -------------- <S> <C> <C> NET EARNINGS $ 7,003,750 $ 6,746,513 OTHER ITEMS OF COMPREHENSIVE EARNINGS Change in unrealized gain (loss) on investment securities available-for-sale, before income taxes 3,545,884 (5,817) Reclassification adjustment for realized gains on investment in securities included in net earnings, before income tax (54,850) - -------------- -------------- Total other items of comprehensive earnings 3,491,034 (5,817) -------------- -------------- OTHER COMPREHENSIVE EARNINGS, BEFORE INCOME TAXES 10,494,784 6,740,696 Income tax expense (benefit) related to other items of comprehensive earnings 1,221,862 (2,036) -------------- -------------- COMPREHENSIVE EARNINGS $ 9,272,922 $ 6,742,732 ============== ============== See notes to consolidated financial statements. </TABLE> -6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY <TABLE> <CAPTION> Unrealized Gain (Loss) on Investment Common Stock Securities Total ----------------------- Capital Retained Treasury Available Shareholders' Shares Amount Surplus Earnings Stock, at cost For Sale, Net Equity --------- ------------ ------------ ------------ --------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1999 9,974,306 $ 99,743,060 $ 60,517,351 $ 22,495,259 $ - $(4,092,727) $ 178,662,943 Net earnings - - - 28,316,047 - - 28,316,047 Stock issuances 8,696 86,960 74,959 - - - 161,919 Cash dividends declared, $1.29 per share - - - (12,808,111) - - (12,808,111) Acquisition of treasury stock - - - - (3,925,069) - (3,925,069) Change in unrealized gain on investment securities available-for-sale, net - - - - - 5,713,159 5,713,159 --------- ------------ ------------ ------------ --------- ----------- ------------- Balances at December 31, 2000 9,983,002 99,830,020 60,592,310 38,003,195 (3,925,069) 1,620,432 196,120,888 Net earnings - - - 7,003,750 - - 7,003,750 Stock issuances 2,590 25,900 22,326 - - - 48,226 Cash dividends declared, $.33 per share - - - (3,251,224) - - (3,251,224) Acquisition of treasury stock - - - - (315,050) - (315,050) Retirement of treasury stock (133,400) (1,334,000) (2,823,731) - 4,157,731 - - Change in unrealized gain on investment securities available-for-sale, net - - - - - 2,269,172 2,269,172 --------- ------------ ------------ ------------ --------- ----------- ------------- Balances at March 31, 2001 (unaudited) 9,852,192 $ 98,521,920 $ 57,790,905 $ 41,755,721 $ (82,388) $ 3,889,604 $ 201,875,762 ========= ============ ============ ============ ========= =========== ============= 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, ------------------------------------ 2001 2000 ----------------- ---------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 7,003,750 $ 6,746,513 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,384,044 1,443,062 Provision for loan losses 366,383 740,750 Premium amortization, net of discount accretion 295,083 465,778 Gain on sale of assets (49,335) (7,382) Deferred federal income tax (benefit) expense (534,272) 1,203 Decrease in other assets 1,693,635 1,271,994 Increase in other liabilities 4,065,198 2,947,353 ----------------- ---------------- Total adjustments 7,220,736 6,862,758 ----------------- ---------------- Net cash provided by operating activities 14,224,486 13,609,271 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in interest-bearing deposits in banks (200,064) (100,056) Activity in available-for-sale securities: Sales 11,629,482 - Maturities 23,235,639 2,792,856 Purchases (51,772,872) (14,103,351) Activity in held-to-maturity securities: Maturities 69,737,620 24,495,787 Purchases (20,940,707) (28,302,721) Net increase in loans (10,296,565) (11,109,990) Capital expenditures (686,845) (518,482) Proceeds from sale of assets 170,400 66,365 ----------------- ---------------- Net cash provided by (used in) investing activities 20,876,088 (26,779,592) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in noninterest-bearing deposits 2,615,934 (12,391,883) Net increase (decrease) increase in interest-bearing deposits 18,558,249 (12,722,934) Net (decrease) increase in securities sold under agreements to repurchase (723,160) 3,471,281 Common stock transactions: Acquisition of treasury stock (315,050) - Proceeds from stock issuances 48,226 - Dividends paid (3,256,541) (2,992,292) ----------------- ---------------- Net cash provided by (used in) financing activities 16,927,658 (24,635,828) ----------------- ---------------- Net decrease in cash and cash equivalents 52,028,232 (37,806,149) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 162,530,712 187,970,058 ----------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 214,558,944 $ 150,163,909 ================= ================ SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS Interest paid $ 12,273,377 $ 11,554,123 Assets acquired through foreclosure 54,614 370,791 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 unaudited results of operations for the three months ended March 31, 2001 are not necessarily indicative of the results to be expected for the year ended December 31, 2001. Note 2 - Earnings Per Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. In computing diluted earnings per common share for the quarters ended March 31, 2001 and 2000, the Company assumes that all outstanding options to purchase common stock have been exercised at the beginning of the year (or time of issuance, if later). The dilutive effect of the outstanding options is reflected by application of the treasury stock method, whereby the proceeds from the exercised options are assumed to be used to purchase common stock at the average market price during the respective period. The weighted average common shares outstanding used in computing basic earnings per common share for the quarters ended March 31, 2001 and 2000, were 9,850,739 and 9,974,306 shares, respectively. The weighted average common shares outstanding used in computing diluted earnings per common share for the quarters ended March 31, 2001 and 2000, were 9,876,894 and 10,006,257 shares, respectively. Note 3 - Subsequent Events On April 10, 2001, the Company entered into agreement to purchase all of its outstanding shares of City Bancshares, Inc. for $16,500,000. City Bancshares, Inc. through its subsidiary, City Delaware Financial Corporation, is the owner of City National Bank in Mineral Wells, Texas. The acquisition, to be accounted for utilizing the purchase method of accounting, is expected to increase assets of the Company by approximately $90,000,000 and will result in goodwill approximating $7,500,000. The transaction is expected to close in the third quarter of 2001. On April 24, 2001, the Company declared a 25% stock dividend payable June 1, 2001. Historical financial information will be restated to reflect the stock dividend beginning in the second quarter of 2001; however, the following tables reflect the pro forma effect on weighted average shares outstanding, earnings per share and dividends per share presented in these financial statements: <TABLE> <CAPTION> As Presented Pro forma Three Months Ended March 31, Three Months Ended March 31, ------------------------------ ------------------------------- 2001 2000 2001 2000 ---------- ----------- ----------- ----------- <S> <C> <C> <C> <C> Weighted average common shares - basic 9,850,739 9,974,306 12,313,424 12,467,882 Weighted average common shares - diluted 9,876,894 10,006,257 12,346,117 12,507,821 Earnings per share - basic $ 0.71 $ 0.68 $ 0.57 $ 0.54 Earnings per share - diluted 0.71 0.68 0.57 0.54 Dividends per share 0.33 0.30 0.26 0.24 </TABLE> -9-
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Results - ----------------- Net income for the first quarter 2001 totaled $7.0 million, an increase of $300 thousand, or 3.8% over earnings of $6.7 million for the same period last year. A lower loan loss provision coupled with higher noninterest income were the primary factors contributing to the improved earnings. On a per share basis, earnings amounted to $0.71 per share as compared to $0.68 per share for first quarter 2000. Return on average assets and return on average equity for the first quarter 2001 amounted to 1.63% and 14.50%, respectively. For the same period in 2000, return on average assets and return on average equity amounted to 1.60% and 15.18%, respectively. Tax-equivalent net interest income for the first quarter 2001 amounted to $17.6 million, virtually unchanged from the same period last year. Additional interest income generated from growth in earnings assets was offset with a reduction in the net interest yield. For the first quarter 2001, the net interest yield amounted to 4.51% as compared to 4.64% for the first quarter last year. The decrease is attributable to first quarter rate reductions that resulted in earning asset yields falling in advance of the repricing of interest-bearing deposits. The provision for loan losses for the first quarter 2001 totaled $366 thousand as compared to $741 thousand for the first quarter last year. Net charge offs for the first quarter totaled $679 thousand which, on an annualized basis, amounted to .32% of average loans as compared to .18% for the full year of 2000. At March 31, 2001, the allowance for loan losses amounted to 300.2% of nonperforming loans and 1.10% of total loans, which was considered by Management to be adequate. Total noninterest income for the first quarter was $6.7 million, as compared to $6.5 million for the same period last year. Trust fees and service fees on deposit accounts were up $171 thousand and $118 thousand, respectively, over prior year amount. Growth in accounts and transaction volumes were the primary factors contributing to the increased level of fees. Noninterest expense for the first quarter 2001 amounted to $13.2 million which was $200 thousand above the same period last year. Salaries and employee benefits expense were $55 thousand higher than the first quarter 2000 amount. Net occupancy and equipment expense in aggregate for the first quarter 2001 increased $130 thousand over the same period last year. Higher utilities and maintenance were the primary factors contributing to the increase. The Company's key indicator of operating efficiency, noninterest expense as a percent of net interest income and noninterest income, was 54.18% for the first quarter as compared to 53.61% for the first quarter in 2000. Balance Sheet Review - -------------------- Total assets at March 31, 2001, amounted to $1.784 billion as compared to $1.754 billion at December 31, 2000, and $1.708 billion at March 31, 2000. The balance sheets presented reflect normal recurring adjustments and accruals. Loans at March 31, 2001, totaled $869 million as compared to $859 million at year-end 2000 and $808 million at March 31, 2000. As compared to year-end 2000 amounts, loans at March 31, 2001, reflect (i) a $4 million decrease in commercial, financial and agricultural loans; (ii) an $8 million increase in real estate loans; and (iii) a $6 million increase in loans to individuals. Investment securities at March 31, 2001, totaled $626 million as compared to $654 million at year-end 2000 and $671 million at March 31, 2000. The net unrealized gain in the investment portfolio at March 31, 2001, amounted to $22.2 million and had an overall yield of 6.37%. At March 31, 2001, the Company did not hold any structured notes or CMOs that entail higher risks than standard mortgage-backed securities. Total deposits at March 31, 2001, amounted to $1.541 billion as compared to $1.520 billion at year-end 2000 and $1.500 billion at March 31, 2000. -10-
Nonperforming assets at March 31, 2001, totaled $3.6 million as compared to $4.1 million at December 31, 2000. The decrease resulted primarily from a $384 thousand decrease in nonaccrual loans. At .41% 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, 2001, the parent company had no debt outstanding under its $25 million line of credit with an unaffiliated financial institution. Total equity capital amounted to $201.9 million at March 31, 2001, which was up from $196.1 million at year-end 2000 and $182.4 million at March 31, 2000. The Company's risk-based capital and leverage ratios at March 31, 2001, were 19.14% and 10.43%, respectively. The first quarter 2001 cash dividend of $0.33 per share totaled $3.2 million and represented 46.4% of first quarter earnings. On April 24, 2001, the Company declared a 25% stock dividend payable June 1, 2001, and a $0.30 per share cash dividend payable July 2, 2001. Interest Rate Risk - ------------------ Interest rate risk results when the maturity or repricing intervals of interest-earning assets and interest-bearing liabilities are different. The Company's exposure to interest rate risk is managed primarily through the Company's strategy of selecting the types and terms of interest-earning assets and interest-bearing liabilities which generate favorable earnings, while limiting the potential negative effects of changes in market interest rates. The Company uses no off-balance-sheet financial instruments to manage interest rate risk. Each subsidiary bank has an asset/liability committee which monitors interest rate risk and compliance with investment policies. Interest-sensitivity gap and simulation analysis are among the ways that the subsidiary banks track interest rate risk. As of March 31, 2001, Management estimates that, over the next twelve months, an upward shift of interest rates by 200 basis points would result in an increase of projected net interest income of 5.1% and a downward shift of interest rates by 200 basis points would result in a reduction in projected net interest income of 8.5%. These are good faith estimates and assume that the composition of our interest sensitive assets and liabilities existing at March 31, 2001, will remain constant over the relevant twelve month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. In Management's belief, these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities reprice at different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, our future results would, in Management's belief, be different from the foregoing estimates, and such results could be material. -11-
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. -12-
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 9, 2001 By:/S/CURTIS R. HARVEY --------------------- ----------------------------- Curtis R. Harvey Executive Vice President and Chief Financial Officer Date: May 9, 2001 By:/S/SANDY LESTER --------------------- ----------------------------- Sandy Lester Secretary-Treasurer -13-