e10vq
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, 2007
Commission file number 0-7674
FIRST FINANCIAL BANKSHARES, INC.
(Exact name of registrant as Specified in its charter)
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Texas
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75-0944023 |
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(State or other jurisdiction of incorporation
or organization)
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(I.R.S. Employer
Identification No.) |
400 Pine Street, Abilene, Texas 79601
(Address of principal executive offices)
(Zip Code)
(325) 627-7155
(Registrants 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 þ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
Large accelerated filerþ Accelerated filero Non-accelerated filero
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yeso Noþ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of July 27, 2007:
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Class
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Number of Shares Outstanding |
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Common Stock, $0.01 par value
per share
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20,760,733 |
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
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Item |
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Page |
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Forward-Looking Statement Disclaimer |
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3 |
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1. |
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Financial Statements |
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3 |
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2. |
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Managements Discussion and Analysis of Financial
Condition and Results of Operations |
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12 |
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3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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19 |
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4. |
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Controls and Procedures |
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19 |
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PART II |
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OTHER INFORMATION |
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6. |
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Exhibits |
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20 |
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Signatures |
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21 |
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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 those listed in Item 1A-
Risk Factors in our Annual Report on Form 10-K and the following:
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General economic conditions, including national and local real estate markets; |
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Legislative and regulatory actions and reforms; |
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Competition from other financial institutions and financial holding companies; |
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The effects of and changes in trade, monetary and fiscal policies and laws,
including interest rate policies of the Federal Reserve Board; |
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Changes in the demand for loans; |
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Fluctuations in the value of collateral and in loan reserves; |
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Inflation, interest rate, market and monetary fluctuations; |
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Changes in consumer spending, borrowing and savings habits; |
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Our ability to attract deposits; |
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Consequences of continued bank mergers and acquisitions in our market area,
resulting in fewer but much larger and stronger competitors; and |
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Acquisitions and integration of acquired businesses. |
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, 2007 and 2006 and
December 31, 2006, and the consolidated statements of earnings and comprehensive earnings for the
three and six months ended June 30, 2007 and 2006, changes in shareholders equity for the six
months ended June 30, 2007 and the year ended December 31, 2006, and cash flows for the six months
ended June 30, 2007 and 2006, follow on pages 4 through 8.
3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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June 30, |
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December 31, |
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2007 |
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2006 |
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2006 |
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ASSETS |
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(Unaudited) |
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Cash and due from banks |
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$ |
112,784,167 |
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$ |
116,909,597 |
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$ |
127,419,210 |
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Federal funds sold |
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54,760,000 |
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30,950,000 |
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64,485,000 |
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Interest-bearing deposits in banks |
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1,009,932 |
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8,885,731 |
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1,072,443 |
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Cash and cash equivalents |
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168,554,099 |
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156,745,328 |
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192,976,653 |
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Investment securities: |
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Securities held-to-maturity (market value of $26,521,998, $34,306,763
and $27,876,959 at June 30, 2007 and 2006
and December 31, 2006, respectively) |
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26,014,072 |
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33,483,736 |
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26,985,570 |
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Securities available-for-sale, at fair value |
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1,109,118,659 |
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1,078,628,832 |
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1,102,327,223 |
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Total investment securities |
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1,135,132,731 |
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1,112,112,568 |
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1,129,312,793 |
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Loans |
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1,391,983,553 |
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1,293,111,362 |
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1,373,734,620 |
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Less: Allowance for loan losses |
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(16,425,474 |
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(15,472,923 |
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(16,200,804 |
) |
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Net loans |
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1,375,558,079 |
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1,277,638,439 |
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1,357,533,816 |
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Bank premises and equipment, net |
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61,203,665 |
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58,905,858 |
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59,467,923 |
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Intangible assets |
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65,941,972 |
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67,615,619 |
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66,702,100 |
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Other assets |
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44,061,679 |
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42,405,165 |
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44,171,229 |
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TOTAL ASSETS |
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$ |
2,850,452,225 |
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$ |
2,715,422,977 |
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$ |
2,850,164,514 |
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LIABILITIES |
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Noninterest-bearing deposits |
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$ |
664,952,156 |
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$ |
622,993,821 |
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$ |
685,335,743 |
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Interest-bearing deposits |
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1,711,799,191 |
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1,683,628,792 |
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1,698,688,304 |
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Total deposits |
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2,376,751,347 |
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2,306,622,613 |
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2,384,024,047 |
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Dividends payable |
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5,769,262 |
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5,322,565 |
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5,413,848 |
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Short-term borrowings |
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147,109,790 |
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110,842,143 |
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143,244,347 |
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Other liabilities |
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14,305,640 |
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12,864,130 |
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16,581,234 |
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Total liabilities |
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2,543,936,039 |
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2,435,651,451 |
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2,549,263,476 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS EQUITY |
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Common stock $0.01 par value, authorized 40,000,000 shares;
20,760,116, 20,727,734, and 20,739,127 shares issued
at June 30, 2007 and 2006 and December 31, 2006,
respectively |
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207,601 |
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207,277 |
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207,392 |
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Capital surplus |
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266,821,404 |
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266,001,145 |
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266,271,930 |
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Retained earnings |
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52,867,251 |
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30,330,988 |
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41,003,600 |
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Treasury stock (shares at cost: 155,242, 150,968 and 153,187 at
June 30, 2007 and 2006, and December 31, 2006, respectively) |
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(3,059,738 |
) |
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(2,790,346 |
) |
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(2,911,506 |
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Deferred compensation |
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3,059,738 |
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2,790,346 |
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2,911,506 |
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Accumulated other comprehensive income (loss) |
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(13,380,070 |
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(16,767,884 |
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(6,581,884 |
) |
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Total shareholders equity |
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306,516,186 |
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279,771,526 |
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300,901,038 |
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |
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$ |
2,850,452,225 |
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$ |
2,715,422,977 |
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$ |
2,850,164,514 |
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See notes
to consolidated financial statements.
-4-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2007 |
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2006 |
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2007 |
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2006 |
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INTEREST INCOME |
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Interest and fees on loans |
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$ |
28,276,354 |
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$ |
24,652,410 |
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$ |
55,927,984 |
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$ |
48,096,338 |
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Interest on investment securities: |
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Taxable |
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9,650,781 |
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10,088,060 |
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19,412,220 |
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19,338,347 |
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Exempt from federal income tax |
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|
3,078,412 |
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2,541,440 |
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5,974,927 |
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5,067,645 |
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Interest on federal funds sold and
interest-bearing deposits in banks |
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|
1,253,703 |
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|
858,770 |
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|
2,016,268 |
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|
2,039,255 |
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Total interest income |
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|
42,259,250 |
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|
38,140,680 |
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|
83,331,399 |
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|
74,541,585 |
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INTEREST EXPENSE |
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Interest-bearing deposits |
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|
13,388,996 |
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10,395,316 |
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26,297,388 |
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|
20,249,005 |
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Other |
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|
1,624,033 |
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|
1,203,119 |
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3,214,930 |
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2,099,354 |
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Total interest expense |
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15,013,029 |
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11,598,435 |
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29,512,318 |
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22,348,359 |
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NET INTEREST INCOME |
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27,246,221 |
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26,542,245 |
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|
53,819,081 |
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|
52,193,226 |
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Provision for loan losses |
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|
237,596 |
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|
389,413 |
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|
479,672 |
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|
722,664 |
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES |
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27,008,625 |
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26,152,832 |
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|
53,339,409 |
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51,470,562 |
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NONINTEREST INCOME |
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Trust department income |
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|
2,272,435 |
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|
1,833,819 |
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|
4,372,335 |
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|
3,681,272 |
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Service charges on deposit accounts |
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|
5,552,822 |
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|
|
5,658,224 |
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|
|
10,692,239 |
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|
10,945,998 |
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ATM and credit card fees |
|
|
1,859,409 |
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|
|
1,542,216 |
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|
|
3,577,809 |
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|
|
2,981,725 |
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Real estate mortgage fees |
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|
863,619 |
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|
559,546 |
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|
1,601,971 |
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|
|
1,008,746 |
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Net gain on sale of securities |
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|
|
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|
84,782 |
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Net gain on sale of student loans |
|
|
1,615,891 |
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|
|
462,102 |
|
|
|
1,780,133 |
|
|
|
1,871,733 |
|
Other |
|
|
807,387 |
|
|
|
898,494 |
|
|
|
1,782,774 |
|
|
|
1,943,158 |
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|
Total noninterest income |
|
|
12,971,563 |
|
|
|
10,954,401 |
|
|
|
23,892,043 |
|
|
|
22,432,632 |
|
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|
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NONINTEREST EXPENSE |
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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Salaries and employee benefits |
|
|
11,448,305 |
|
|
|
11,127,571 |
|
|
|
22,887,384 |
|
|
|
22,425,739 |
|
Net occupancy expense |
|
|
1,445,283 |
|
|
|
1,514,103 |
|
|
|
2,854,189 |
|
|
|
2,989,544 |
|
Equipment expense |
|
|
1,812,425 |
|
|
|
1,790,090 |
|
|
|
3,557,152 |
|
|
|
3,495,558 |
|
Printing, stationery & supplies |
|
|
519,573 |
|
|
|
512,955 |
|
|
|
991,830 |
|
|
|
1,011,111 |
|
Correspondent bank service charges |
|
|
293,254 |
|
|
|
290,602 |
|
|
|
618,812 |
|
|
|
602,106 |
|
Amortization of intangible assets |
|
|
376,878 |
|
|
|
384,740 |
|
|
|
760,128 |
|
|
|
611,056 |
|
Other expenses |
|
|
5,351,395 |
|
|
|
5,185,044 |
|
|
|
10,444,444 |
|
|
|
10,147,277 |
|
|
|
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|
|
|
|
|
|
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|
|
Total noninterest expense |
|
|
21,247,113 |
|
|
|
20,805,105 |
|
|
|
42,113,939 |
|
|
|
41,282,391 |
|
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EARNINGS BEFORE INCOME TAXES |
|
|
18,733,075 |
|
|
|
16,302,128 |
|
|
|
35,117,513 |
|
|
|
32,620,803 |
|
Income tax expense |
|
|
5,462,779 |
|
|
|
4,854,026 |
|
|
|
10,384,806 |
|
|
|
9,705,374 |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS |
|
$ |
13,270,296 |
|
|
$ |
11,448,102 |
|
|
$ |
24,732,707 |
|
|
$ |
22,915,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE, BASIC |
|
$ |
0.64 |
|
|
$ |
0.55 |
|
|
$ |
1.19 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE, ASSUMING DILUTION |
|
$ |
0.64 |
|
|
$ |
0.55 |
|
|
$ |
1.18 |
|
|
$ |
1.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS PER SHARE |
|
$ |
0.32 |
|
|
$ |
0.30 |
|
|
$ |
0.62 |
|
|
$ |
0.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-5-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
NET EARNINGS |
|
$ |
13,270,296 |
|
|
$ |
11,448,102 |
|
|
$ |
24,732,707 |
|
|
$ |
22,915,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ITEMS OF COMPREHENSIVE EARNINGS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized loss on
investment securities available-for-sale, before
income taxes |
|
|
(13,073,526 |
) |
|
|
(9,733,848 |
) |
|
|
(10,373,966 |
) |
|
|
(11,927,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized
gains on investment securities
included in net earnings, before income tax |
|
|
|
|
|
|
|
|
|
|
(84,782 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other items of comprehensive earnings (losses) |
|
|
(13,073,526 |
) |
|
|
(9,733,848 |
) |
|
|
(10,458,748 |
) |
|
|
(11,927,026 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit related to other items
of comprehensive earnings |
|
|
4,575,734 |
|
|
|
3,406,847 |
|
|
|
3,660,562 |
|
|
|
4,174,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE EARNINGS |
|
$ |
4,772,504 |
|
|
$ |
5,121,101 |
|
|
$ |
17,934,521 |
|
|
$ |
15,162,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-6-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common Stock |
|
|
Capital |
|
|
Retained |
|
|
Treasury Stock |
|
|
Deferred |
|
|
Comprehensive |
|
|
Shareholders |
|
|
|
Shares |
|
|
Amount |
|
|
Surplus |
|
|
Earnings |
|
|
Shares |
|
|
Amounts |
|
|
Compensation |
|
|
Earnings (Losses) |
|
|
Equity |
|
Balances at December 31, 2005 |
|
|
20,714,401 |
|
|
$ |
207,144,010 |
|
|
$ |
58,712,508 |
|
|
$ |
19,434,606 |
|
|
|
(145,322 |
) |
|
$ |
(2,592,413 |
) |
|
$ |
2,592,413 |
|
|
$ |
(9,015,317 |
) |
|
$ |
276,275,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in par value of common stock |
|
|
|
|
|
|
(206,971,541 |
) |
|
|
206,971,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
from $10.00 to $0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,029,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,029,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuances |
|
|
24,726 |
|
|
|
34,923 |
|
|
|
405,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
440,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared,
$1.18 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,460,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,460,222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum liability pension adjustment,
net of related incomes taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(113,141 |
) |
|
|
(113,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) in
investment securities available-
for-sale, net of related income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,546,574 |
|
|
|
2,546,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional tax benefit related to directors
deferred compensation plan |
|
|
|
|
|
|
|
|
|
|
24,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares purchased in connection with
directors deferred compensation plan, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,865 |
) |
|
|
(319,093 |
) |
|
|
319,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
157,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 |
|
|
20,739,127 |
|
|
$ |
207,392 |
|
|
$ |
266,271,930 |
|
|
$ |
41,003,600 |
|
|
|
(153,187 |
) |
|
$ |
(2,911,506 |
) |
|
$ |
2,911,506 |
|
|
$ |
(6,581,884 |
) |
|
$ |
300,901,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,732,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,732,707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issuances (unaudited) |
|
|
20,989 |
|
|
|
209 |
|
|
|
412,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
412,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared,
$0.62 per share (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,869,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,869,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) in
investment securities available-
for-sale, net of related income taxes
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,798,186 |
) |
|
|
(6,798,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional tax benefit related to directors
deferred compensation plan (unaudited) |
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares purchased in connection with
directors deferred compensation plan,
net (unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,055 |
) |
|
|
(148,232 |
) |
|
|
148,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense (unaudited) |
|
|
|
|
|
|
|
|
|
|
107,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007 (unaudited) |
|
|
20,760,116 |
|
|
$ |
207,601 |
|
|
$ |
266,821,404 |
|
|
$ |
52,867,251 |
|
|
|
(155,242 |
) |
|
$ |
(3,059,738 |
) |
|
$ |
3,059,738 |
|
|
$ |
(13,380,070 |
) |
|
$ |
306,516,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
-7-
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
24,732,707 |
|
|
$ |
22,915,429 |
|
Adjustments to reconcile net earnings to
net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,847,726 |
|
|
|
3,836,501 |
|
Provision for loan losses |
|
|
479,672 |
|
|
|
722,664 |
|
Premium amortization, net of discount accretion |
|
|
(285,916 |
) |
|
|
483,322 |
|
Gain on sale of assets |
|
|
(1,906,369 |
) |
|
|
(1,899,413 |
) |
Deferred federal income tax expense (benefit) |
|
|
14,590 |
|
|
|
(268,448 |
) |
Loans originated for resale |
|
|
(88,351,551 |
) |
|
|
(81,568,001 |
) |
Proceeds from sales of loans held for resale |
|
|
115,402,374 |
|
|
|
110,906,267 |
|
Decrease (increase) in other assets |
|
|
5,124,449 |
|
|
|
(2,583,368 |
) |
Increase (decrease) in other liabilities |
|
|
(2,138,375 |
) |
|
|
889,282 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
32,186,600 |
|
|
|
30,518,806 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
56,919,307 |
|
|
|
53,434,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Activity in available-for-sale securities: |
|
|
|
|
|
|
|
|
Sales |
|
|
8,984,812 |
|
|
|
|
|
Maturities |
|
|
174,344,790 |
|
|
|
382,056,407 |
|
Purchases |
|
|
(200,208,896 |
) |
|
|
(480,132,870 |
) |
Activity in held-to-maturity securities
Maturities |
|
|
971,306 |
|
|
|
19,674,805 |
|
Net increase in loans |
|
|
(45,685,508 |
) |
|
|
(32,229,087 |
) |
Capital expenditures |
|
|
(4,583,540 |
) |
|
|
(3,489,317 |
) |
Proceeds from sale of assets |
|
|
343,610 |
|
|
|
578,564 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(65,833,426 |
) |
|
|
(113,541,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net decrease in noninterest-bearing deposits |
|
|
(20,383,587 |
) |
|
|
(162,021 |
) |
Net
increase (decrease) in interest-bearing deposits |
|
|
13,110,887 |
|
|
|
(59,492,498 |
) |
Net increase in short-term borrowings |
|
|
3,865,443 |
|
|
|
36,603,167 |
|
Proceeds from stock issuances |
|
|
412,464 |
|
|
|
256,346 |
|
Dividends paid |
|
|
(12,513,642 |
) |
|
|
(11,661,263 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(15,508,435 |
) |
|
|
(34,456,269 |
) |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(24,422,554 |
) |
|
|
(94,563,532 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR |
|
|
192,976,653 |
|
|
|
251,308,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
168,554,099 |
|
|
$ |
156,745,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL INFORMATION AND NONCASH TRANSACTIONS |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
29,252,062 |
|
|
$ |
22,384,771 |
|
Federal income tax paid |
|
|
10,802,747 |
|
|
|
9,840,727 |
|
Assets acquired through foreclosure |
|
|
1,910,878 |
|
|
|
292,139 |
|
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 Companys 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, 2007, are not necessarily indicative of the
results to be expected for the year ending December 31, 2007, due to seasonality, changes in
economic conditions, interest rate fluctuations 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. Certain reclassifications have been made to the 2006 financial statements to
conform to the 2007 presentation.
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, 2007 and 2006, the
Company assumes that all dilutive 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, 2007 and 2006, were
20,756,846 and 20,722,054 shares, respectively. The weighted average common shares outstanding used
in computing basic earnings per share for the six months ended June 30, 2007 and 2006, were
20,752,044 and 20,718,763, respectively. The weighted average common shares outstanding used in
computing fully diluted earnings per common share for the three months ended June 30, 2007 and
2006, were 20,888,879 and 20,775,448, respectively. The weighted average common shares outstanding
used in computing fully diluted earnings per common share for the six months ended June 30, 2007
and 2006, were 20,872,613 and 20,775,648, respectively.
Note 3
Stock Based Compensation
The Company grants stock options for a fixed number of shares with an exercise price equal to the
fair value of the shares at the date of grant to employees. On January 30, 2007, the Company
granted 90,500 options to key employees at an exercise price of $40.98. The Company recorded stock
option expense totaling $51,000 and $38,000, respectively, for the three months ended June 30, 2007
and 2006. The Company recorded stock option expense totaling $107,000 and $82,000, respectively,
for the six months ended June 30, 2007 and 2006, respectively.
The additional disclosure requirements of SFAS No. 123R have been omitted due to immateriality.
Note 4
Pension Plan
The Companys defined benefit pension plan was frozen effective January 1, 2004 whereby no
additional years of service will accrue to participants, unless the pension plan is reinstated at a
future date. The pension plan covered substantially all of the Companys employees. The benefits
were based on years of service and a percentage of the employees qualifying compensation during
the final years of employment. The Companys funding policy was and is to contribute annually the
amount necessary to satisfy the Internal Revenue Services funding standards. Contributions
to the pension plan, prior to
9
freezing the plan, were intended to provide not only for benefits attributed to service to date but
also for those expected to be earned in the future. As a result of freezing the pension plan, we
did not expect contributions or pension expense to be significant in future years. However as a
result of the Pension Protection Act of 2006, the Company will be required to contribute amounts
over seven years to fund any shortfalls. The Company evaluated the provisions of the Act as well
as IRS funding standards to develop a plan for funding in future years. The Company made a
contribution totaling $1.5 million in July 2007 and will continue to evaluate future funding
amounts. The Company did not make a contribution to the pension plan during the year ended December
31, 2006, or for the six months ended June 30, 2007, as permitted by the Internal Revenue Services
funding standards. Net periodic benefit costs totaling $77,000 and $168,000 were recorded,
respectively, in the three and six months ended June 30, 2007. No amount was recorded in the three
and six months ended June 30, 2006.
Note 5
Related Party Transactions
During the three months ended June 30, 2007 and 2006, the Company sold student loans totaling
approximately $53.7 million and $15.2 million, respectively, recognizing net gains of $1.6 million
and $462 thousand, respectively, to a financial institution of which an executive officer of one of
our wholly owned subsidiary banks is a board member. In the opinion of management, these loan
sales are on substantially the same terms as those prevailing at the time for comparable
transactions with unaffiliated persons.
Note 6
Recently Issued Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes
an Interpretation of FASB Statement No. 109. The interpretation prescribes a recognition
threshold and measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. Benefits from tax positions must be
recognized in the financial statements only when it is more likely than not that the tax position
will be sustained upon examination by the appropriate taxing authority that would have full
knowledge of all relevant information. A tax position that meets the more-likely-than-not
recognition threshold is measured at the largest amount of benefit that is greater than fifty
percent likely of being realized upon ultimate settlement. Tax positions that previously failed to
meet the more-likely-than-not recognition threshold must be recognized in the first subsequent
financial reporting period in which that threshold is met. Previously recognized tax positions
that no longer meet the more-likely-than-not recognition threshold must be derecognized in the
first subsequent financial reporting period in which that threshold is no longer met.
Interpretation 48 also provides guidance on the accounting for and disclosure of unrecognized tax
benefits, interest and penalties. The new interpretation was effective for the Company January 1,
2007. The implementation of the provisions of the new interpretation did not have a significant
impact on the Companys financial position or results of operations. The Company files income tax
returns in the U. S. federal jurisdiction and is no longer subject to U. S. federal income tax
examinations by tax authorities for years before 2003.
In September 2006, the Financial Account Standards Board (FASB) issued SFAS No. 157 Fair Value
Measurements which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value measurements.
SFAS 157 is effective for the Company on January 1, 2008 and is not expected to have a significant
impact on the Companys financial statements.
10
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities, which permits companies to choose to measure many financial instruments and
certain other items at fair value. The objective of the new pronouncement is to improve financial
reporting by providing companies with the opportunity to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having to apply complex
hedge accounting provisions. SFAS 159 is effective for the Company in 2008. The Company has not
yet made a determination if it will elect to apply the options available in SFAS 159.
11
Item 2. Managements 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 on deposit accounts. Our primary source of
funding for our loans is 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 noninterest
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 Companys 2006 Annual Report on Form 10-K.
Critical Accounting Policies
We prepare consolidated financial statements based on the application 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 losses and our 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 they would have a
material impact on our reported results for a given period.
The allowance for loan losses is an amount we believe will be adequate to absorb inherent estimated
losses on existing loans for which full collectibility is unlikely based upon our review and
evaluation of the loan portfolio. The allowance for loan losses is increased by charges to income
and decreased by charged off loans (net of recoveries).
Our methodology is based on guidance provided in SEC Staff Accounting Bulletin No. 102, Selected
Loan Loss Allowance Methodology and Documentation Issues and includes allowance allocations
calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS 118, and allowance
allocations determined in accordance with SFAS No. 5, Accounting for Contingencies. We have
developed a consistent, well- documented loan review methodology that includes allowances assigned
to certain classified loans, allowances assigned based upon estimated loss factors and qualitative
reserves.
12
The level of the allowance reflects our periodic evaluation of general economic conditions, the
financial condition of our borrowers, the value and liquidity of collateral, delinquencies, prior
loan loss experience, and the results of periodic reviews of the portfolio by our independent loan
review staff and regulatory examiners.
Our allowance for loan losses is comprised of three elements: (i) specific reserves determined in
accordance with SFAS 114 based on probable losses on specific loans; (ii) general reserves
determined in accordance with SFAS 5 that consider historical loss rates, loan classifications and
other factors; and (iii) a qualitative reserve determined in accordance with SFAS 5 based upon
general economic conditions and other qualitative risk factors both internal and external to the
Company. We regularly evaluate our allowance for loan losses to maintain a level adequate to absorb
estimated loan losses inherent in the loan portfolio. Factors contributing to the determination of
the specific reserves include the credit worthiness of the borrower, changes in the value of
pledged collateral, and general economic conditions. All nonaccrual loans rated substandard or
worse and greater than $50 thousand are specifically reviewed and a specific allocation is assigned
based on the losses expected to be realized from those loans. For purposes of determining the
general reserve, a certain portion of the loan portfolio is assigned a reserve allocation
percentage. The reserve allocation percentage is multiplied by the outstanding loan principal
balance, less cash secured loans, government guaranteed loans and classified loans to calculate the
required general reserve. The general reserve allocation percentages assigned to groups of loans
consider historical loss rates, loan classifications and other factors. The qualitative reserves
are determined by evaluating such things as current economic conditions and trends, changes in
lending staff, policies or procedures, changes in credit concentrations, changes in the trends and
severity of problem loans and changes in trends in volume and terms of loans. The portion of the
allowance that is not derived by the general reserve allocation percentages compensates for the
uncertainty and complexity in estimating loan losses including factors and conditions that may not
be fully reflected in the determination and application of the general reserve allocation
percentages.
Although we believe 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 on a loan is discontinued when management believes, after considering economic
and business conditions and collection efforts, the borrowers 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 loans observable market price.
13
Operating Results
Three-months ended June 30, 2007 and 2006
Net income for the second quarter of 2007 totaled $13.3 million, an increase of $1.8 million, or
15.9%, from the same period last year. This increase is principally attributable to an increase
in net interest income of $704 thousand, an increase in ATM and credit card fees of $317 thousand,
increased trust fees of $439 thousand, an increase of $304 thousand in real estate mortgage fees,
and an increase in the gains on sale of student loans of $1.2 million. The increase in the gains
on sale of student loans resulted from the decision to defer the sale of a substantial portion of
the student loan portfolio from the first quarter of 2007 to the second quarter of 2007. Deferring
the sale of these loans provided additional interest income. Offsetting these items were increases
in salaries and employee benefits of $321 thousand, in ATM and credit card expenses of $100
thousand and in income tax expense of $609 thousand.
Basic earnings per share were $0.64 for the second quarter of 2007, as compared to $0.55 for the
second quarter of 2006. The return on average assets and return on average equity for the second
quarter of 2007 were 1.86% and 17.25%, respectively. For the same period in 2006, the return on
average assets and return on average equity amounted to 1.68% and 16.48%, respectively.
Tax equivalent net interest income for the second quarter of 2007 amounted to $28.5 million as
compared to $27.7 million for the same period last year. Our yield on interest earning assets
increased approximately 30 basis points while our rates paid on interest bearing liabilities
increased approximately 62 basis points. The increase in volume of average interest earning assets
of $144.2 million combined with the increase in rates to improve interest income. Average interest
bearing liabilities increased $80.2 million, and coupled with the increase in rates, partially
offset the increase in interest income. Average earning assets were $2.62 billion for the second
quarter of 2007, which is 5.8% greater than for the second quarter of 2006. Average interest
bearing liabilities were $1.89 billion for the second quarter of 2007, which is 4.4% greater than
for the second quarter of 2006. The Companys interest spread decreased to 3.50% for 2007 from
3.82% for 2006. The Companys net interest margin was 4.38% for the second quarter of 2007,
compared to 4.50% for the same period of 2006. Our net interest margin declined from the prior year
primarily due to the somewhat inverted interest rate yield curve coupled with our 58.6% loan to
deposit ratio and more aggressive pricing of our interest bearing deposits as a result of
competitive pressures.
The provision for loan losses for the second quarter of 2007 totaled $238 thousand compared to $389
thousand for the same period in 2006. The decrease was due primarily to continued favorable
experience in charge-offs and the relatively stable level of classified loans. Gross charge-offs
for the quarter ended June 30, 2007 totaled $505 thousand compared to $379 thousand for the same
period of 2006. Recoveries of previously charged-off loans totaling $235 thousand in the quarter
ended June 30, 2007 (as compared to $347 thousand in the same period of 2006) partially offset the
charge-offs experienced. On an annualized basis, net-charge offs as a percentage of average loans
were 0.08% for the second quarter of 2007, as compared to a 0.01% for the same period in 2006. The
Companys allowance for loan losses totaled $16.4 million at June 30, 2007, up $953 thousand from
the balance of $15.5 million at June 30, 2006. The increased allowance since last June is primarily
due to growth in the loan portfolio. The Companys allowance as a percentage of nonperforming loans
amounted to 387.4% at June 30, 2007. As of June 30, 2007, management of the Company believes the
Companys allowance for loan losses is adequate to provide for loans existing in its portfolio that
are deemed uncollectible.
14
Total noninterest income for the second quarter of 2007 was $13.0 million, as compared to $11.0
million for the same period last year. Trust fees totaled $2.3 million for 2007, up $439 thousand
over the same period in 2006 due primarily to an increase in the volume of trust assets managed.
The market value of trust assets managed totaled $1.78 billion at June 30, 2007, compared to $1.54
billion at June 30, 2006. Service charges on deposit accounts totaled $5.6 million for the second
quarter of 2007, compared to $5.7 million for the same period of 2006, a decrease of $105 thousand
reflecting declining use of overdraft privileges, offset in part by strong growth in net new
accounts. The gain on sale of student loans totaled $1.6 million for the quarter ended June 30,
2007, compared to $462 thousand for the same 2006 quarter. The increase resulted from the decision
to defer the sale of a substantial portion of the student loan portfolio from the first quarter of
2007 to the second quarter of 2007 in order to earn additional interest income. The Companys real
estate mortgage fees of $864 thousand represented an increase of $304 thousand over the $560
thousand recognized in the second quarter of 2006. ATM and credit card fees increased 20.6% to
$1.9 million versus $1.5 million a year ago, indicative of continued increases in the use of debit
cards and growth in net new accounts.
Noninterest expense for the second quarter of 2007 amounted to $21.2 million, as compared to $20.8
million for the same period in 2006. Salaries and benefits expense, the Companys largest
noninterest expense item, increased 2.9% to $11.4 million in 2007, up $321 thousand over the same
period in 2006. Net occupancy expense decreased $69 thousand to $1.4 million. Equipment expense
increased $22 thousand in 2007 over 2006. Amortization of intangible assets was $377 thousand for
the second quarter of 2007, a decrease of $8 thousand over the same period last year.
The Companys other categories of noninterest expense increased $176 thousand in the second quarter
of 2007 compared to the second quarter of 2006. Contributing to this increase were a volume related
increase of $100 thousand related to ATM and credit card expenses (related income increased $317
thousand) and increases in certain other components of noninterest expense, none of which were
individually significant. Offsetting these increases was a decrease of $80 thousand in our
courier expense due to the increased use of technology as well as small declines in various other
categories of expense.
Income tax expense was $5.5 million for the second quarter of 2007 as compared to $4.9 million for
the same period in 2006. Our effective tax rates on pretax income were 29.2%, and 29.8%,
respectively, for the second quarters of 2007 and 2006. The effective tax rates differ from the
federal statutory tax rate of 35% largely due to tax exempt interest income earned on certain
investment securities and loans, the deductibility of dividends paid to our employee stock
ownership plan and the Texas franchise/margin tax.
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 efficiency ratio was 51.19% for the second quarter of 2007 and 53.82% for the second
quarter of 2006.
Six-months ended June 30, 2007 and 2006
Net income for the first six months of 2007 totaled $24.7 million, an increase of $1.8 million, or
7.9%, from the same period last year. This increase is principally attributable to an increase in
net interest income of $1.6 million, an increase in ATM and credit card fees of $596 thousand, an
increase in trust fees of $691 thousand, and an increase in real estate mortgage fees of $593
thousand. Offsetting these items were a decrease in service charges on deposit accounts of $254
thousand and an increases in salaries and employee benefits of $462 thousand. We sold approximately
$59.3 million in student loans in the first six-months of 2007, recognizing a premium of $1.8
million. This compares to a sale of approximately $62.5 million in student loans, with premium
recognition of $1.9 million in the first six months of 2006. Fees from ATM and credit card
transactions increased in the first half of 2007 over 2006 as a result of continued increases in
the use of our debit cards and an increase in number of deposit accounts.
15
Basic earnings per share amounted to $1.19 for the first six months of 2007, as compared to $1.11
per share for the second quarter of 2006. The return on average assets and return on average equity
for the first six months of 2007 amounted to 1.75% and 16.35%, respectively. For the same periods
in 2006, the return on average assets and return on average equity amounted to 1.69% and 16.59%,
respectively.
Tax equivalent net interest income for the first six months of 2007 amounted to $56.3 million, as
compared to $54.5 million for the same period last year. Our rates on interest earning assets
increased approximately 39 basis points while our rates paid on interest bearing liabilities
increased approximately 69 basis points. The increase in volume of average interest earning assets
of $125.3 million combined with the increase in rates to improve interest income. Average interest
bearing liabilities increased $59.8 million, and coupled with the increase in rates, partially
offset the increase in interest income. Average earning assets were $2.60 billion for the first
six months of 2007, which is 5.1% greater than for the first half of 2006. Average interest
bearing liabilities were $1.89 billion for the first six months of 2007, which is 3.3% greater than
for the first half of 2006. The Companys interest spread decreased to 3.52% for 2007 from 3.82%
for 2006. The Companys net interest margin was 4.38% for the first six months of 2007, compared
to 4.45% for the same period of 2006. Our net interest margin declined compared to the prior year
primarily due to the somewhat inverted interest rate curve coupled with our 58.6% loan to deposit
ratio and more aggressive pricing of our interest bearing deposits as a result of competitive
pressures.
The provision for loan losses for the first six months
of 2007 totaled $480 thousand compared with
$723 thousand for the same period in 2006. Gross charge-offs for the six months ended June 30,
2007, totaled $652 thousand compared to $759 thousand for the same period of 2006. Recoveries of
previously charged-off loans totaling $397 thousand for the six months ended June 30, 2007,
compared to $791 thousand in the same period of 2006. On an annualized basis, net charge-offs as a
percentage of average loans were 0.04% for the first six months of 2007, as compared to 0.01% for
the same period in 2006. The Companys allowance for loan losses totaled $16.4 million at June 30,
2007, up $953 thousand from the balance of $15.5 million at June 30, 2006. The increased allowance
is primarily due to growth in the loan portfolio. The Companys allowance as a percentage of
nonperforming loans amounted to 387.4% at June 30, 2007. As of June 30, 2007, management of the
Company believes the Companys allowance for loan losses is adequate to provide for loans existing
in its portfolio that are deemed uncollectible.
Total noninterest income for the first six months of 2007 was $23.9 million, as compared to $22.4
million for the same period last year. Trust fees totaled $4.4 million for 2007, up $691 thousand
over the same period in 2006 due to an increase in the volume of trust assets managed. The market
value of trust assets managed totaled $1.78 billion at June 30, 2007, compared to $1.54 billion at
June 30, 2006. Service charges on deposit accounts totaled $10.7 million for the first six months
of 2007 compared to $10.9 million for the same period of 2006, a decrease of $254 thousand. During
the first six months of 2007, the Company sold approximately $59.3 million in student loans,
recognizing a premium of $1.8 million. In the first six months of 2006, the Company sold
approximately $62.5 million of its student loans, recognizing a premium of $1.9 million. ATM and
credit card fees increased $596 thousand to $3.6 million in the first six months of 2007 due to
increased usage of debit cards and an increase in the number of deposit accounts. The Companys
real estate mortgage fees were $1.6 million, an increase of $593 thousand, or 58.8%, over 2006.
Noninterest expense for the first six months of 2007 amounted to $42.1 million as compared to $41.3
million for the same period in 2006. Salaries and employee benefits expense, the Companys largest
noninterest expense item, was $22.9 million for the first six months of 2007, an increase of $462
thousand, or 2.1%, over the same period in 2006. The primary causes of this increase were pay
increases effective during the first quarter of 2007 and expenses related to the Companys pension
plan of $168 thousand. There was no pension plan expense recorded in the first six months of 2006.
Net occupancy expense decreased approximately $135 thousand to $2.9 million. Equipment expense
increased $62 thousand, or 1.8%, in 2007 over 2006. Amortization of core deposit intangible assets
was $760 thousand for the first half of 2007, an increase of $149 thousand over the same period
last year.
16
The Companys other categories of expense increased $295 thousand in the first six months of 2007
compared to the first six months of 2006. Contributing to this increase were a volume related
increase of $218 thousand related to ATM and credit card expenses (related income increased $596
thousand) and a $142 thousand increase in legal, tax and professional fees. These increases were
partially offset by declines in various other categories of expense.
Income tax expense was $10.4 million for six months ended June 30, 2007, as compared to $9.7
million for the same period in 2006. Our effective tax rates on pre-tax income were 29.6% and
29.8%, respectively, for six month periods of 2007 and 2006. The effective rates differ from the
statutory federal tax rate of 35%, largely due to tax exempt interest income earned on certain
investment securities and loans, the deductibility of dividends paid to our employees stock
ownership plan and the Texas franchise/margin tax.
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 efficiency ratio was 52.50% for the first six months of 2007 and 53.64% for the first
six months of 2006.
Balance Sheet Review
Total assets at June 30, 2007, amounted to $2.85 billion, unchanged from the balance at December
31, 2006, and $2.72 billion at June 30, 2006. Deposits totaled $2.38 billion at June 30, 2007, down
$7.3 million from December 31, 2006 amounts. Deposits at June 30, 2006, were $2.31 billion.
Loans totaled $1.39 billion, $1.37 billion and $1.29 billion at June 30, 2007, December 31, 2006
and June 30, 2006, respectively. As compared to June 30, 2006, loans at June 30, 2007, reflect (i)
an $11.1 million increase in commercial, financial and agricultural loans; (ii) an $81.3 million
increase in real estate loans; (iii) a $2.2 million decrease in student loans; and (iv) an $8.6
million increase in consumer loans.
Investment securities at June 30, 2007, totaled $1.14 billion as compared to $1.13 billion at
year-end 2006 and $1.11 billion at June 30, 2006. The unrealized loss in the investment portfolio
at June 30, 2007 was $15.4 million. The portfolio had an overall tax equivalent yield of 5.07% as
of June 30, 2007. At June 30, 2007, the investment portfolio had a weighted average life of 4.1
years and modified duration of 3.4 years. At June 30, 2007, the Company did not hold any structured
notes and management does not believe that their collateralized mortgage obligations have interest,
credit or other risks greater than their other investments.
Nonperforming assets at June 30, 2007, totaled $6.4 million as compared to $4.1 million at December
31, 2006. The increase is due primarily to the foreclosure on the collateral securing one real
estate loan, of which the Company believes it has adequately provided for existing exposure. This
real estate loan was included in nonaccrual loans at the end of the first quarter of 2007.
Approximately $650 thousand was collected on this credit prior to foreclosure. At 0.46% 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.
17
Liquidity and Capital
Liquidity is our ability to meet cash demands as they arise. Such needs can develop from loan
demand, deposit withdrawals or acquisition opportunities. Potential obligations resulting from the
issuance of standby letters of credit and commitments to fund future borrowings to our loan
customers are other factors affecting our liquidity needs. Many of these obligations and
commitments are expected to expire without being drawn upon; therefore the total commitment amounts
do not necessarily represent future cash requirements affecting our liquidity position. The
potential need for liquidity arising from these types of financial instruments is represented by
the contractual notional amount of the instrument. Asset
liquidity is provided by cash and assets which are readily marketable or which will mature in the
near future. Liquid assets include cash, federal funds sold, and short-term investments in time
deposits in banks. Liquidity is also provided by access to funding sources, which include
core depositors and correspondent banks that maintain accounts with, and sell federal funds to,
our subsidiary banks. Other sources of funds include our ability to sell securities under
agreements to repurchase, and an unfunded $50 million line of credit which matures December 31,
2007, established with a nonaffiliated bank. One of our subsidiary banks also has federal funds
purchased lines of credit with two non-affiliated banks totaling $50 million.
Given the strong core deposit base and relatively low loan to deposit ratios maintained at our
subsidiary banks, management considers the current liquidity position to be adequate to meet short-
and long-term liquidity needs.
We anticipate that any future 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 subsidiary banks, utilization of available lines of credit, and future
debt or equity offerings are expected to be the sources of funding for these potential acquisitions
or expansions.
The Companys consolidated statements of cash flows are presented on page 8 of this report. Total
equity capital amounted to $306.5 million at June 30, 2007, which was up from $300.9 million at
year-end 2006 and $279.8 million at June 30, 2006. The Companys total risk-based capital and
leverage ratios at June 30, 2007 were 15.81% and 9.05%, respectively. The second quarter 2007 cash
dividend of $0.32 per share totaled $6.6 million and represented 50.1% 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 Companys exposure to interest rate risk is managed
primarily through the Companys 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. Simulation analyses are the primary way that the Company and the
subsidiary banks monitor interest rate risk. As of June 30, 2007, management estimates that, over
the next twelve months, an upward shift of interest rates of 200 basis points would result in an
increase in projected net interest income of 4.44% and a downward shift of interest rates of 200
basis points would result in a reduction in projected net interest income of 2.66%.
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These are good faith estimates and assume the composition of our interest sensitive assets and
liabilities existing at June 30, 2007, will remain constant over the relevant twelve month
measurement period and changes in market interest rates are instantaneous and sustained across the
yield curve, regardless of duration or pricing characteristics of specific assets or liabilities.
Also, this estimate does not contemplate any actions that we might undertake in response to changes
in market interest rates. In managements opinion, these estimates are not necessarily indicative
of what actually could occur in the event of immediate interest rate increases or decreases of this
magnitude. Because interest-bearing assets and liabilities reprice in 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 managements belief, be different
from the foregoing estimates, and such changes in 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 Managements 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, 2007, 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 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; additionally, 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 controls. 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 due to changes in conditions; also the degree of compliance
with 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, our disclosure controls and procedures under
Rule 13a-15 and Rule 15d 15 of the Securities Exchange Act of 1934 are effective at the
reasonable assurance level as of June 30, 2007.
Subsequent to our evaluation, there were no significant changes in internal controls or other
factors that have materially affected, or are reasonably likely to materially affect, these
internal controls.
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PART II
OTHER INFORMATION
Item 6. Exhibits
The following exhibits are filed as part of this report:
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3.1
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Amended and Restated Certificate of Formation
(incorporated by reference from Exhibit 3.1 of the
Registrants Form 10-Q Quarterly Report for the quarter
ended March 31, 2006). |
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3.2
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Amended and Restated Bylaws, and all amendments thereto,
of the Registrant (incorporated by reference from
Exhibit 2 of the Registrants Amendment No. 1 to Form
8-A filed on Form 8-A/A No. 1 on January 7, 1994). |
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3.3
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Amendment to Amended and Restated Bylaws of the
Registrant, dated April 27, 1994 (incorporated by
reference from Exhibit 3.4 of the Registrants Form 10-Q
Quarterly Report for the quarter ended March 31, 2004). |
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3.4
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Amendment to Amended and Restated Bylaws of the
Registrant, dated October 23, 2001 (incorporated by
reference from Exhibit 3.5 of the Registrants Form 10-Q
Quarterly Report for the quarter ended March 31, 2004). |
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4.1
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Specimen certificate of First Financial Common Stock
(incorporated by reference from Exhibit 3 of the
Registrants Amendment No. 1 to Form 8-A filed on Form
8-A/A No. 1 on January 7, 1994). |
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10.1
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Deferred Compensation Agreement, dated October 28, 1992,
between the Registrant and Kenneth T. Murphy
(incorporated by reference from Exhibit 10.1 of the
Registrants Form 10-K Annual Report for the year ended
December 31, 2002). |
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10.2
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Revised Deferred Compensation Agreement, dated December
28, 1995, between the Registrant and Kenneth T. Murphy
(incorporated by reference from Exhibit 10.2 of the
Registrants Form 10-K Annual Report for the year ended
December 31, 2002). |
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10.3
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Executive Recognition Plan (incorporated by reference
from Exhibit 10.1 of the Registrants Form 8-K Report
filed July 3, 2006). |
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10.4
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1992 Incentive Stock Option Plan (incorporated by
reference from Exhibit 10.5 of the Registrants Form
10-K Annual Report for the fiscal year ended December
31, 1998). |
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10.5
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2002 Incentive Stock Option Plan (incorporated by
reference from Appendix A of the Registrants Schedule
14A Definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders) |
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10.6
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Loan Agreement dated December 31, 2004, between First
Financial Bankshares, Inc. and The Frost National Bank
(incorporated by reference from Exhibit 10.1 of the
Registrants Form 8-K filed December 31, 2004). |
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10.7
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First Amendment to Loan Agreement, dated December 28,
2005, between First Financial Bankshares, Inc. and The
Frost National Bank (incorporated by reference from
Exhibit 10.2 of the Registrants Form 8-K filed December
28, 2005). |
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10.8
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Second Amendment to Loan Agreement, dated December 31,
2006, between First Financial Bankshares, Inc. and The
Frost National Bank (incorporated by reference from
Exhibit 10.3 of the Registrants Form 8-K filed December
31, 2006). |
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*31.1
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Rule 13a-14(a) / 15(d)-14(a) Certification of Chief
Executive Officer of First Financial Bankshares, Inc. |
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*31.2
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Rule 13a-14(a) / 15(d)-14(a) Certification of Chief
Financial Officer of First Financial Bankshares, Inc. |
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*32.1
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Section 1350 Certification of Chief Executive Officer
of First Financial Bankshares, Inc. |
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*32.2
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Section 1350 Certification of Chief Financial Officer of
First Financial Bankshares, Inc. |
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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.
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FIRST FINANCIAL BANKSHARES, INC. |
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Date: July 27, 2007
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By:
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/S/ F. Scott Dueser |
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F. Scott Dueser |
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President and Chief Executive Officer |
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Date: July 27, 2007
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By:
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/S/ J. Bruce Hildebrand |
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J. Bruce Hildebrand |
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Executive Vice President and |
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Chief Financial Officer |
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21