FIRST FINANCIAL BANKSHARES INC - Annual Report: 2008 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
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 | (I.R.S. Employer | |
Incorporation or Organization) | Identification No.) | |
400 Pine Street, Abilene, Texas | 79601 | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrants telephone number, including area code: | (325) 627-7155 |
Securities registered pursuant to Section 12(b) of the Act:
Title of Class | Name of Exchange on Which Registered | |
Common Stock, par value $0.01 per share | Nasdaq Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
As of June 30, 2008, the last business day of the registrants most recently completed second
fiscal quarter, the aggregate market value of voting and non-voting common stock held by
non-affiliates was $888,458,000.
As of February 23, 2009, there were 20,801,099 shares of Common Stock outstanding.
Documents Incorporated by Reference
Certain information called for by Part III is incorporated by reference to the Proxy Statement
for the 2009 Annual Meeting of our shareholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 2008.
TABLE OF CONTENTS
Page | ||||||
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS | 1 | |||||
PART I |
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ITEM 1.
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Business | 2 | ||||
ITEM 1A.
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Risk Factors | 14 | ||||
ITEM 1B.
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Unresolved Staff Comments | 20 | ||||
ITEM 2.
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Properties | 20 | ||||
ITEM 3.
|
Legal Proceedings | 20 | ||||
ITEM 4.
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Submission of Matters to a Vote of Security Holders | 20 | ||||
PART II |
||||||
ITEM 5.
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Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 21 | ||||
ITEM 6.
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Selected Financial Data | 23 | ||||
ITEM 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operations | 24 | ||||
ITEM 7A.
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Quantitative and Qualitative Disclosures About Market Risk | 40 | ||||
ITEM 8.
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Financial Statements and Supplementary Data | 40 | ||||
ITEM 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 41 | ||||
ITEM 9A.
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Controls and Procedures | 41 | ||||
ITEM 9B.
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Other Information | 43 | ||||
PART III |
||||||
ITEM 10.
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Directors, Executive Officers and Corporate Governance | 44 | ||||
ITEM 11.
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Executive Compensation | 44 | ||||
ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 44 | ||||
ITEM 13.
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Certain Relationships and Related Transactions, and Director Independence | 44 | ||||
ITEM 14.
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Principal Accounting Fees and Services | 44 | ||||
PART IV |
||||||
ITEM 15.
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Exhibits, Financial Statement Schedules | 45 | ||||
SIGNATURES | 46 | |||||
EXHIBIT INDEX | 48 |
i
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
This Form 10-K 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-K, words such as anticipate, believe, estimate, expect, intend, predict,
project, and similar expressions, as they relate to us or our management, identify
forward-looking statements. These forward-looking statements are based on information currently
available to our management. Actual results could differ materially from those contemplated by the
forward-looking statements as a result of certain factors, including but not limited, to those
listed in Item 1A-Risk Factors and the following:
| General economic conditions, including our local and national real estate markets and employment trends; | ||
| Volatility and disruption in national and international financial markets; | ||
| Legislative, tax and regulatory actions and reforms; | ||
| Political instability; | ||
| The ability of the Federal government to deal with the national economic slowdown and the terms of any stimulus package enacted by Congress; | ||
| Competition from other financial institutions and financial holding companies; | ||
| The effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Governors of the Federal Reserve System; | ||
| Changes in the demand for loans; | ||
| Fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses; | ||
| Soundness of other financial institutions with which we have transactions; | ||
| Inflation, interest rate, market and monetary fluctuations; | ||
| Changes in consumer spending, borrowing and savings habits; | ||
| Legislative changes and other developments in student loan originations and sales; | ||
| Anticipated increases in FDIC deposit insurance assessments; | ||
| Our ability to attract deposits; | ||
| Consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors; | ||
| Expansion of operations, including branch openings, new product offerings and expansion into new markets; | ||
| Acquisitions and integration of acquired businesses; and | ||
| Acts of God or of war or terrorism. |
1
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
ITEM 1. BUSINESS
General
First Financial Bankshares, Inc., a Texas corporation, is a financial holding company
registered under the Bank Holding Company Act of 1956, or BHCA. As such, we are supervised by the
Board of Governors of the Federal Reserve System, or Federal Reserve Board, as well as several
other state and federal regulators. We were formed as a bank holding company in 1956 under the
original name F & M Operating Company, but our banking operations date back to 1890, when Farmers
and Merchants National Bank opened for business in Abilene, Texas. Through our wholly-owned
Delaware subsidiary, First Financial Bankshares of Delaware, Inc., we own ten banks, a trust
company, a technology operating company, and an insurance agency, all organized and located in
Texas. These subsidiaries are:
| First Financial Bank, National Association, Abilene, Texas; | ||
| Hereford State Bank, Hereford, Texas; | ||
| First Financial Bank, National Association, Sweetwater, Texas; | ||
| First Financial Bank, National Association, Eastland, Texas; | ||
| First Financial Bank, National Association, Cleburne, Texas; | ||
| First Financial Bank, National Association, Stephenville, Texas; | ||
| San Angelo National Bank, San Angelo, Texas; | ||
| Weatherford National Bank, Weatherford, Texas; | ||
| First Financial Bank, National Association, Southlake, Texas; | ||
| First Financial Bank, National Association, Mineral Wells, Texas; | ||
| First Technology Services, Inc., Abilene, Texas; | ||
| First Financial Trust & Asset Management Company, National Association, Abilene, Texas; and | ||
| First Financial Insurance Agency, Inc., Abilene, Texas. |
Through our subsidiary banks, we conduct a full-service commercial banking business. Our
service centers are located primarily in North Central and West Texas. Considering the branches and
locations of all our subsidiaries, as of December 31, 2008, we had 48 financial centers across
Texas, with ten locations in Abilene, two locations in Cleburne, three locations in Stephenville,
three locations in Granbury, two locations in San Angelo, three locations in Weatherford, and one
location each in Mineral Wells, Hereford, Sweetwater, Eastland, Ranger, Rising Star, Southlake,
Aledo, Willow Park, Brock, Alvarado, Burleson, Keller, Trophy Club, Boyd, Bridgeport, Decatur,
Roby, Trent, Merkel, Clyde, Moran, Albany, Midlothian and Glen Rose.
Even though we operate in a growing number of Texas markets, we continue to believe that
decisions are best made at the local level. Accordingly, each of our ten separately chartered
banks operates with local boards of directors, local bank presidents and local decision-making.
However, we have consolidated many of the backroom operations, such as investment securities,
accounting, check processing, technology and employee benefits, which improves each of our
subsidiary banks efficiency and frees management of our subsidiary banks to concentrate on serving
the banking needs of their local communities. We call this our one bank, ten charters concept.
Although many of our competitors branch across state lines, we have chosen to keep our Company
focused on the State of Texas, one of the nations largest, fastest-growing and most economically
diverse states. With nearly 23 million residents, Texas has more people than any other state
except California. The population of Texas grew 12.7 percent from 2000-2006, nearly double the
national rate, according to the U.S. Census Bureau. Many of the communities in which we operate
are growing faster than the statewide average, as shown below:
2
Population Growth 2000-2006*
Bridgeport and Wise County |
18.6 | % | ||
Fort Worth/Tarrant County |
15.6 | % | ||
Cleburne, Midlothian and Johnson County |
17.5 | % | ||
Weatherford, Willow Park and Aledo |
20.1 | % | ||
Granbury and Hood County |
19.8 | % |
* | Source: U.S. Census Bureau |
These economies include dynamic centers of higher education, agriculture, energy and natural
resources, healthcare, tourism, retirement living, manufacturing and distribution. Because there
are many growth opportunities in Texas, we do not believe it is necessary to look outside the
state. Additionally, we prefer to focus on the areas where we have historically done business:
the economies in the North Central, West and High Plains regions of Texas.
We have also largely foregone the larger metropolitan areas of Texas. We believe our
community matters way of doing business works best for us in small and mid-size markets, where we
can play a prominent role in the economic, civic and cultural life of the community. Our goal is
to serve these communities well and to experience growth as these markets continue to expand. In
many instances, banking competition is also less intense in smaller markets, making it easier for
us to operate rationally and attract and retain high-caliber employees who prefer not only our
community-banker concept but the high quality of life in smaller cities.
Over the years, we have grown three ways: by growing our banks internally, by opening new
branch locations and by acquisition of other banks. Since the beginning of 1997, we have completed
ten bank acquisitions and doubled total assets from $1.57 billion to $3.21 billion. We have also
established a trust and asset management company and a technology services company, both of which
operate as subsidiaries of First Financial Bankshares. Looking ahead, we will continue to grow
locally by better serving the needs of our customers and putting them first in all of our
decisions. We continually look for new branch locations, so we can provide more convenient service
to our customers, and we are actively cultivating relationships with other Texas bankers who may
have an interest in being acquired by us at some point in the future.
When targeting a bank for acquisition, the bank generally needs to be in the type of community
that fits our profile. We like growing communities with good amenities schools, infrastructure,
commerce and lifestyle. We prefer non-metropolitan markets, either within a 50-mile radius of the
Dallas/Fort Worth metroplex or along the Interstate 35 and 20 corridors in Texas. We also have an
affinity in banks in East Texas and the Texas Hill Country area. Banks in the $100 million to $300
million asset size fit our sweet spot for acquisition, but we will consider banks that are larger
or smaller, or that are in other areas of Texas if we believe they would be a good fit for our
existing Company.
We also own directly two subsidiaries, First Financial Investments, Inc. (which is dormant)
and First Financial Investments of Delaware, Inc., which owns our airplane.
Information on our revenues, profits and losses and total assets appears in the discussion of
our Results of Operations contained in Item 7 hereof.
First Financial Bankshares, Inc.
We provide management and technical resources and policy direction to our subsidiaries, which
enable them to improve or expand their banking services while continuing their local activity and
identity. Each of our subsidiaries operates under the day-to-day management of its own board of
directors and officers, with substantial authority in making decisions concerning their own loan
decisions, interest rates, service charges and marketing. We provide resources and policy direction
in, among other things, the following areas:
| asset and liability management; | ||
| investments; | ||
| accounting; | ||
| budgeting; | ||
| training; |
3
| marketing; | ||
| planning; | ||
| risk management; | ||
| loan review; | ||
| human resources; | ||
| insurance; | ||
| capitalization; and | ||
| regulatory compliance. |
In particular, we assist our subsidiaries with, among other things, decisions concerning major
capital expenditures, employee fringe benefits, including retirement plans and group medical,
dividend policies, and appointment of officers and directors and their compensation. We also
perform, through corporate staff groups or by outsourcing to third parties, internal audits,
compliance oversight and loan reviews of our subsidiaries. We provide advice and specialized
services for our banks related to lending, investing, purchasing, advertising, public relations,
and computer services.
We evaluate various potential financial institution acquisition opportunities and approve
potential locations for new branch offices. We anticipate that funding for any acquisitions or
expansions would be provided from our existing cash balances, available dividends from subsidiary
banks, utilization of available lines of credit and future debt or equity offerings.
Services Offered by Our Subsidiary Banks
Each of our subsidiary banks is a separate legal entity that operates under the day-to-day
management of its own board of directors and officers. Each of our subsidiary banks provides
general commercial banking services, which include accepting and holding checking, savings and time
deposits, making loans, automated teller machines, drive-in and night deposit services, safe
deposit facilities, transmitting funds, and performing other customary commercial banking services.
We also conduct full service trust activities through First Financial Trust & Asset Management
Company, National Association. Through our trust company, we administer all types of retirement
and employee benefit accounts, which include 401(k) profit sharing plans and IRAs. We also offer
personal trust services, which include the administration of estates, testamentary trusts,
revocable and irrevocable trusts and agency accounts. In addition, First Financial Bank, National
Association, Abilene, San Angelo National Bank and Weatherford National Bank provide securities
brokerage services through arrangements with an unrelated third party.
Competition
Commercial banking in Texas is highly competitive, and because we hold less than 1% of the
states deposits, we represent only a minor segment of the industry. To succeed in this industry,
we believe that our banks must have the capability to compete effectively in the areas of (1)
interest rates paid or charged; (2) scope of services offered; and (3) prices charged for such
services. Our subsidiary banks compete in their respective service areas against highly competitive
banks, thrifts, savings and loan associations, small loan companies, credit unions, mortgage
companies, insurance companies, and brokerage firms, all of which are engaged in providing
financial products and services and some of which are larger than our subsidiary banks in terms of
capital, resources and personnel.
Our business does not depend on any single customer or any few customers, the loss of any one
of which would have a materially adverse effect upon our business. Although we have a broad base
of customers that are not related to us, our customers also occasionally include our officers and
directors, as well as other entities with which we are affiliated. Through our subsidiary banks we
may make loans to officers and directors, and entities with which we are affiliated, in the
ordinary course of business. We make these loans on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with
other persons. Loans to directors, officers and their affiliates are also subject to numerous
restrictions under federal and state banking laws, which we describe in greater detail below.
4
Employees
With our subsidiary banks we employed approximately 1,000 full-time equivalent employees at
December 31, 2008. Our management believes that our employee relations have been and will continue
to be good.
Supervision and Regulation
Both federal and state laws extensively regulate bank holding companies, financial holding
companies and banks. These laws (and the regulations promulgated thereunder) are primarily
intended to protect depositors and the deposit insurance fund of the Federal Deposit Insurance
Corporation, or FDIC. The following information describes particular laws and regulatory
provisions relating to financial holding companies and banks. This discussion is qualified in its
entirety by reference to the particular laws and regulatory provisions. A change in any of these
laws or regulations may have a material effect on our business and the business of our subsidiary
banks.
Bank Holding Companies and Financial Holding Companies
Historically, the activities of bank holding companies were limited to the business of banking
and activities closely related or incidental to banking. Bank holding companies were generally
prohibited from acquiring control of any company that was not a bank and from engaging in any
business other than the business of banking or managing and controlling banks. The
Gramm-Leach-Bliley Act, which took effect on March 12, 2000, dismantled many Depression-era
restrictions against affiliation between banking, securities and insurance firms by permitting bank
holding companies to engage in a broader range of financial activities, so long as
certain safeguards are observed. Specifically, bank holding companies may elect to become financial holding companies
that may affiliate with securities firms and insurance companies and engage in other activities
that are financial in nature or incidental to a financial activity. Thus, with the enactment of the
Gramm-Leach-Bliley Act, banks, securities firms and insurance companies find it easier to acquire
or affiliate with each other and cross-sell financial products. The Act permits a single financial
services organization to offer a more complete array of financial products and services than
historically was permitted.
A financial holding company is essentially a bank holding company with significantly expanded
powers. Under the Gramm-Leach-Bliley Act, in addition to traditional lending activities, the
following activities are among those that are deemed financial in nature for financial holding
companies: securities underwriting, dealing in or making a market in securities, sponsoring mutual
funds and investment companies, insurance underwriting and agency activities, activities which the
Federal Reserve Board determines to be closely related to banking, and certain merchant banking
activities.
We elected to become a financial holding company in September 2001. As a financial holding
company, we have very broad discretion to affiliate with securities firms and insurance companies,
make merchant banking investments, and engage in other activities that the Federal Reserve Board
has deemed financial in nature. In order to continue as a financial holding company, we must
continue to be well-capitalized, well-managed and maintain compliance with the Community
Reinvestment Act. Depending on the types of financial activities that we may elect to engage in,
under Gramm-Leach-Blileys functional regulation principles, we may become subject to supervision
by additional government agencies. The election to be treated as a financial holding company
increases our ability to offer financial products and services that historically we were either
unable to provide or were only able to provide on a limited basis. As a result, we will face
increased competition in the markets for any new financial products and services that we may offer.
Likewise, an increased amount of consolidation among banks and securities firms or banks and
insurance firms could result in a growing number of large financial institutions that could compete
aggressively with us.
5
Mergers and Acquisitions
We generally must obtain approval from the banking regulators before we can acquire other
financial institutions. We may not engage in certain acquisitions if we are undercapitalized.
Furthermore, the BHCA provides that the Federal Reserve Board cannot approve any acquisition,
merger or consolidation that may substantially lessen competition in the banking industry, create a
monopoly in any section of the country, or be a restraint of trade. However, the Federal Reserve
Board may approve such a transaction if the convenience and needs of the community clearly outweigh
any anti-competitive effects. Specifically, the Federal Reserve Board would consider, among other
factors, the expected benefits to the public (greater convenience, increased competition, greater
efficiency, etc.) against the risks of possible adverse effects (undue concentration of resources,
decreased or unfair competition, conflicts of interest, unsound banking practices, etc.).
Banks
Federal and state laws and regulations that govern banks have the effect of, among other
things, regulating the scope of business, investments, cash reserves, the purpose and nature of
loans, the maximum interest rate chargeable on loans, the amount of dividends declared, and
required capitalization ratios.
National Banking Associations. Banks organized as national banking associations under the
National Bank Act are subject to regulation and examination by the Office of the Comptroller of the
Currency, or OCC. The OCC supervises, regulates and regularly examines:
| First Financial Bank, National Association, Abilene; | ||
| First Financial Bank, National Association, Sweetwater; | ||
| First Financial Bank, National Association, Cleburne; | ||
| First Financial Bank, National Association, Eastland; | ||
| San Angelo National Bank; | ||
| Weatherford National Bank; | ||
| First Financial Bank, National Association, Southlake; | ||
| First Financial Bank, National Association, Stephenville; | ||
| First Financial Bank, National Association, Mineral Wells; | ||
| First Financial Trust & Asset Management Company, National Association; and | ||
| First Technology Services, Inc. |
The OCCs supervision and regulation of banks is primarily intended to protect the interests of
depositors. The National Bank Act:
| requires each national banking association to maintain reserves against deposits, | ||
| restricts the nature and amount of loans that may be made and the interest that may be charged, and | ||
| restricts investments and other activities. |
State Banks. Banks that are organized as state banks under Texas law are subject to
regulation and examination by the Banking Commissioner of the State of Texas. The Commissioner
regulates and supervises, and the Texas Banking Department regularly examines our one subsidiary
state bank, Hereford State Bank. The Commissioners supervision and regulation of banks is
primarily designed to protect the interests of depositors. Texas law:
| restricts the nature and amount of loans that may be made and the interest that may be charged, and | ||
| restricts investments and other activities. |
State banks are also subject to regulation by either the FDIC or the Federal Reserve Board, at
the federal level. Because Hereford State Bank is a non-member bank, it is regulated at the federal
level by the FDIC and is subject to most of the federal laws described below.
6
Deposit Insurance
Each of our subsidiary banks is a member of the FDIC. The FDIC provides deposit insurance
protection that covers all deposit accounts in FDIC-insured depository institutions. Until October
2008, the protection generally did not exceed $100,000 per depositor. Beginning in October 2008,
the amount of protection was increased to $250,000, under the Temporary Liquidity Guarantee Program
(TLGP) of the Emergency Economic Stabilization Act of 2008. This increased protection is available
only through December 31, 2009 although we understand there are legislative proposals to extend
this level of protection permanently. The new regulations were subsequently expanded whereby the
protection for non interest bearing deposits is unlimited at institutions participating in the
TLGP. Non interest bearing deposits include, by definition, certain Interest on Lawyers Trust Accounts and
Negotiable Order of Withdrawal accounts (NOW Accounts) with interest rates no higher than 0.50
percent. All of our subsidiary banks elected to participate in the TLGP.
Our subsidiary banks must pay assessments to the FDIC under a risk-based assessment system for
this federal deposit insurance protection. FDIC-insured depository institutions that are members of
the Bank Insurance Fund pay insurance premiums at rates based on their risk classification.
Institutions assigned to higher risk classifications (i.e., institutions that pose a greater risk
of loss to the deposit insurance fund) pay assessments at higher rates than institutions assigned
to lower risk classifications. An institutions risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to bank regulators. In
addition, the FDIC can impose special assessments to cover the costs of borrowings from the U.S.
Treasury, the Federal Financing Bank and the Deposit Insurance Fund member banks. As of December
31, 2008, the assessment rate for each of our subsidiary banks was at the lowest level risk-based
premium available which was 0.05 percent of deposits per annum (with the exception of First
Financial Bank, N.A., Southlake whose rate was 0.056 percent of deposits per annum). Effective for
the first quarter of 2009, this rate increased to 0.12 percent per annum decreasing to 0.10 per
annum for the second, third and fourth quarters of 2009, subject to
change. In addition, we must pay an additional
assessment of 0.10 percent per annum of amount of noninterest bearing deposits, as defined, greater
than $250,000. See Recent Developments below.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA, an
FDIC-insured depository institution can be held liable for any losses incurred by the FDIC in
connection with (1) the default of one of its FDIC-insured subsidiaries or (2) any assistance
provided by the FDIC to one of its FDIC-insured subsidiaries in danger of default. Default is
defined generally as the appointment of a conservator or receiver, and in danger of default is
defined generally as the existence of certain conditions indicating that a default is likely to
occur in the absence of regulatory assistance.
The Federal Deposit Insurance Act, or FDIA, requires that the FDIC review (1) any merger or
consolidation by or with an insured bank, or (2) any establishment of branches by an insured bank.
The FDIC is also empowered to regulate interest rates paid by insured banks. Approval of the FDIC
is also required before an insured bank retires any part of its common or preferred stock, or any
capital notes or debentures.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other subsidiaries. We
receive most of our revenue from dividends paid to us by our Delaware holding company subsidiary.
Similarly, the Delaware holding company subsidiary receives dividends from our banking and other
subsidiaries. Described below are some of the laws and regulations that apply when either we or our
subsidiary banks pay dividends.
Each of our national bank subsidiaries is required by federal law to obtain the prior approval
of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year
would exceed the total of (1) such banks net profits (as defined and interpreted by regulation)
for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the
preceding two calendar years, less any required transfers to surplus. In addition, these banks may
only pay dividends to the extent that retained net profits (including the portion transferred to
surplus) exceed bad debts (as defined by regulation). Hereford State Bank, as a Texas state
banking association, may not pay a dividend reducing its capital and surplus without the prior
approval of the Texas Banking Commission. In additional, the FDIC has the right to prohibit the
payment of dividends by a state, non-member bank where the payment is deemed to be an unsafe or
unsound banking practice.
7
Our subsidiaries paid aggregate dividends of approximately $39.7 million in 2008 and
approximately $42.3 million in 2007. Under the dividend restrictions discussed above, as of
December 31, 2008, our subsidiary banks, without obtaining regulatory approvals, could have
declared in the aggregate additional dividends of approximately $32.4 million from retained net
profits.
To pay dividends, we and our subsidiary banks must maintain adequate capital above regulatory
guidelines. In addition, if the applicable regulatory authority believes that a bank under its
jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which,
depending on the financial condition of the bank, could include the payment of dividends), the
authority may require, after notice and hearing, that such bank cease and desist from the unsafe
practice. The FDIC and the OCC have each indicated paying dividends that deplete a banks capital
base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve
Board, the OCC and the FDIC have issued policy statements that recommend that bank holding
companies and insured banks should generally only pay dividends to the extent net income is
sufficient to cover both cash dividends and a rate of earnings retention consistent with capital
needs, asset quality and overall financial condition. No undercapitalized institution may pay a
dividend.
Affiliate Transactions
The Federal Reserve Act, the FDIA and the rules adopted under these statutes restrict the
extent to which we can borrow or otherwise obtain credit from, or engage in certain other
transactions with, our depository subsidiaries. These laws regulate covered transactions between
insured depository institutions and their subsidiaries, on the one hand, and their nondepository
affiliates, on the other hand. Covered transactions include a loan or extension of credit to a
nondepository affiliate, a purchase of securities issued by such an affiliate, a purchase of assets
from such an affiliate (unless otherwise exempted by the Federal Reserve Board), an acceptance of
securities issued by such an affiliate as collateral for a loan, and an issuance of a guarantee,
acceptance, or letter of credit for the benefit of such an affiliate. The covered transactions
that an insured depository institution and its subsidiaries are permitted to engage in with their
nondepository affiliates are limited to the following amounts: (1) in the case of any one such
affiliate, the aggregate amount of covered transactions cannot exceed ten percent of the capital
stock and the surplus of the insured depository institution; and (2) in the case of all affiliates,
the aggregate amount of covered transactions cannot exceed twenty percent of the capital stock
and surplus of the insured depository institution. In addition, extensions of credit that
constitute covered transactions must be collateralized in prescribed amounts. Further, a bank
holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit, lease or sale of property or furnishing of services.
Finally, when we and our subsidiary banks conduct transactions internally among us, we are required
to do so at arms length.
Loans to Directors, Executive Officers and Principal Shareholders
The authority of our subsidiary banks to extend credit to our directors, executive officers
and principal shareholders, including their immediate family members and corporations and other
entities that they control, is subject to substantial restrictions and requirements under Sections
22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder, as well as the
Sarbanes-Oxley Act of 2002. These statutes and regulations impose specific limits on the amount of
loans our subsidiary banks may make to directors and other insiders, and specified approval
procedures must be followed in making loans that exceed certain amounts. In addition, all loans
our subsidiary banks make to directors and other insiders must satisfy the following requirements:
| the loans must be made on substantially the same terms, including interest rates and collateral, as prevailing at the time for comparable transactions with persons not affiliated with us or the subsidiary banks; | ||
| the subsidiary banks must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with us or the subsidiary banks; and | ||
| the loans must not involve a greater than normal risk of non-payment or include other features not favorable to the bank. |
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Furthermore, each subsidiary bank must periodically report all loans made to directors and
other insiders to the bank regulators, and these loans are closely scrutinized by the regulators
for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each
loan to directors or other insiders must be pre-approved by the banks board of directors with the
interested director abstaining from voting.
Capital
Bank Holding Companies and Financial Holding Companies. The Federal Reserve Board has adopted
risk-based capital guidelines for bank holding companies and financial holding companies. The ratio
of total capital to risk weighted assets (including certain off-balance-sheet activities, such as
standby letters of credit) must be a minimum of eight percent. At least half of the total capital
is to be composed of common shareholders equity, minority interests in the equity accounts of
consolidated subsidiaries and a limited amount of perpetual preferred stock, less goodwill, which
is collectively referred to as Tier 1 Capital. The remainder of total capital may consist of
subordinated debt, other preferred stock and a limited amount of loan loss reserves.
In addition, the Federal Reserve Board has established minimum leverage ratio guidelines for
bank holding companies and financial holding companies. Bank holding companies and financial
holding companies that meet certain specified criteria, including having the highest regulatory
rating, must maintain a minimum Tier 1 Capital leverage ratio (Tier 1 Capital to average assets for
the current quarter, less goodwill) of three percent. Bank holding companies and financial holding
companies that do not have the highest regulatory rating will generally be required to maintain a
higher Tier 1 Capital leverage ratio of three percent plus an additional cushion of 100 to 200
basis points. The guidelines also provide that bank holding companies and financial holding
companies experiencing internal growth or making acquisitions will be expected to maintain strong
capital positions. Such strong capital positions must be kept substantially above the minimum
supervisory levels without significant reliance on intangible assets (e.g., goodwill and core
deposit intangibles). As of December 31, 2008, our capital ratios were as follows: (1) Tier 1
Capital to Risk-Weighted Assets Ratio, 15.89%; (2) Total Capital to Risk-Weighted Assets Ratio,
17.04%; and (3) Tier 1 Capital Leverage Ratio, 9.68%.
Banks. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA,
established five capital tiers with respect to depository institutions: well-capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. A depository institutions capital tier will depend upon where its capital
levels are in relation to various relevant capital measures, including (1) risk-based capital
measures, (2) a leverage ratio capital measure and (3) certain other factors. Regulations
establishing the specific capital tiers provide that a well-capitalized institution will have a
total risk-based capital ratio of ten percent or greater, a Tier 1 risk-based capital ratio of six
percent or greater, and a Tier 1 leverage ratio of five percent or greater, and not be subject to
any written regulatory enforcement agreement, order, capital directive or prompt corrective action
derivative. For an institution to be adequately capitalized, it will have a total risk-based
capital ratio of eight percent or greater, a Tier 1 risk-based capital ratio of four percent or
greater, and a Tier 1 leverage ratio of four percent or greater (in some cases three percent). For
an institution to be undercapitalized, it will have a total risk-based capital ratio that is less
than eight percent, a Tier 1 risk-based capital ratio less than four percent or a Tier 1 leverage
ratio less than four percent (or a leverage ratio less than three percent if the institutions
composite rating is 1 in its most recent report of examination, subject to appropriate federal
banking agency guidelines). For an institution to be significantly undercapitalized, it will have
a total risk-based capital ratio less than six percent, a Tier 1 risk-based capital ratio less than
three percent, or a Tier 1 leverage ratio less than three percent. For an institution to be
critically undercapitalized, it will have a ratio of tangible equity to total assets equal to or
less than two percent. FDICIA requires federal banking agencies to take prompt corrective action
against depository institutions that do not meet minimum capital requirements. Under current
regulations, all of our subsidiary banks were well capitalized as of December 31, 2008.
FDICIA generally prohibits a depository institution from making any capital distribution
(including payment of a dividend) or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized. An undercapitalized institution
must develop a capital restoration plan and its parent holding company must guarantee that
institutions compliance with such plan. The liability of the parent holding company under any such
guarantee is limited to the lesser of five percent of the institutions assets at the time it
became undercapitalized or the amount needed to bring the institution into compliance with all
capital standards. Furthermore, in the event of the bankruptcy of the parent holding company, such
guarantee would take priority over
9
the parents general unsecured creditors. If a depository
institution fails to submit an acceptable capital restoration plan, it shall be treated as if it is
significantly undercapitalized. Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders to sell sufficient voting
stock to become adequately capitalized, requirements to reduce total assets, and cessation of
receipt of deposits from correspondent banks. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator. Finally, FDICIA requires the various
regulatory agencies to set forth certain standards that do not relate
to capital. Such standards relate to the safety and soundness of operations and management
and to asset quality and executive compensation, and permit regulatory action against a financial
institution that does not meet such standards.
If an insured bank fails to meet its capital guidelines, it may be subject to a variety of
other enforcement remedies, including a prohibition on the taking of brokered deposits and the
termination of deposit insurance by the FDIC. Bank regulators continue to indicate their desire to
raise capital requirements beyond their current levels.
In addition to FDICIA capital standards, Texas-chartered banks must also comply with the
capital requirements imposed by the Texas Banking Department. Neither the Texas Finance Code nor
its regulations specify any minimum capital-to-assets ratio that must be maintained by a
Texas-chartered bank. Instead, the Texas Banking Department determines the appropriate ratio on a
bank by bank basis, considering factors such as the nature of a banks business, its total revenue,
and the banks total assets. As of December 31, 2008, our Texas-chartered bank exceeded the minimum
ratios applied to it.
Our Support of Our Subsidiary Banks
Under Federal Reserve Board policy, we are expected to commit resources to act as a source of
strength to support each of our subsidiary banks. This support may be required at times when,
absent such Federal Reserve Board policy, we would not otherwise be required to provide it. In
addition, any loans we make to our subsidiary banks would be subordinate in right of payment to
deposits and to other indebtedness of our banks. In the event of a bank holding companys
bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and be subject
to a priority of payment.
Under the National Bank Act, if the capital stock of a national bank is impaired by losses or
otherwise, the OCC is authorized to require the banks shareholders to pay the deficiency on a
pro-rata basis. If any shareholder refuses to pay the pro-rata assessment after three months
notice, then the banks board of directors must sell an appropriate amount of the shareholders
stock at a public auction to make up the deficiency. To the extent necessary, if a deficiency in
capital still exists and the bank refuses to go into liquidation, then a receiver may be appointed
to wind up the banks affairs. Additionally, under the Federal Deposit Insurance Act, in the event
of a loss suffered or anticipated by the FDIC (either as a result of the default of a banking
subsidiary or related to FDIC assistance provided to a subsidiary in danger of default) our other
banking subsidiaries may be assessed for the FDICs loss.
Interstate Banking and Branching Act
Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, or
Riegle-Neal Act, a bank holding company or financial holding company is able to acquire banks in
states other than its home state. The Riegle-Neal Act also authorized banks to merge across state
lines, thereby creating interstate branches. Furthermore, under this act, a bank is also able to
open new branches in a state in which it does not already have banking operations, if the laws of
such state permit it to do so. Accordingly, both the OCC and the Texas Banking Department accept
applications for interstate merger and branching transactions, subject to certain limitations on
ages of the banks to be acquired and the total amount of deposits within the state a bank or
financial holding company may control. Since our primary service area is Texas, we do not expect
that the ability to operate in other states will have any material impact on our growth strategy.
We may, however, face increased competition from out-of-state banks that branch or make
acquisitions in our primary markets in Texas.
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Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA, subjects a bank to regulatory assessment to
determine if the institution meets the credit needs of its entire community, including low- and
moderate-income neighborhoods served by the bank, and to take that determination into account in
its evaluation of any application made by such bank for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office relocation, a merger,
or the acquisition of shares of capital stock of another financial institution. The regulatory
authority prepares a written evaluation of an institutions record of meeting the credit needs of
its entire community and assigns a rating. These ratings are Outstanding, Satisfactory, Needs
Improvement and Substantial Non-Compliance. Institutions with ratings lower than Satisfactory
may be restricted from engaging in the aforementioned activities. We believe our subsidiary banks
have taken significant actions to comply with the CRA, and each has received ratings ranging from satisfactory to outstanding in its most
recent review by federal regulators with respect to its compliance with the CRA.
Monitoring and Reporting Suspicious Activity
Under the Bank Secrecy Act, IRS rules and other regulations, we are required to monitor and
report unusual or suspicious account activity as well as transactions involving the transfer or
withdrawal of amounts in excess of prescribed limits. Under the USA PATRIOT Act, financial
institutions are subject to prohibitions against specified financial transactions and account
relationships as well as enhanced due diligence and know your customer standards in their
dealings with financial institutions and foreign customers. For example, the enhanced due diligence
policies, procedures and controls generally require financial institutions to take reasonable
steps:
| to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction; | ||
| to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions; | ||
| to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and | ||
| to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information. |
Under the USA PATRIOT Act, financial institutions are also required to establish anti-money
laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs,
including:
| the development of internal policies, procedures, and controls; | ||
| the designation of a compliance officer; | ||
| an ongoing employee training program; and | ||
| an independent audit function to test the programs. |
In addition, under the USA PATRIOT Act, the Secretary of the Treasury has adopted rules
addressing a number of related issues, including increasing the cooperation and information sharing
between financial institutions, regulators, and law enforcement authorities regarding individuals,
entities and organizations engaged in, or reasonably suspected based on credible evidence of
engaging in, terrorist acts or money laundering activities. Any financial institution complying
with these rules will not be deemed to violate the privacy provisions of the Gramm-Leach-Bliley Act
that are discussed below. Finally, under the regulations of the Office of Foreign Asset Control,
we are required to monitor and block transactions with certain specially designated nationals who
OFAC has determined pose a risk to U.S. national security.
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Consumer Laws and Regulations
We are also subject to certain consumer laws and regulations that are designed to protect
consumers in transactions with banks. While the following list is not exhaustive, these laws and
regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, The Fair and
Accurate Credit Transactions Act, The Real Estate Settlement Procedures Act and the Fair Housing
Act, among others. These laws and regulations, among other things, prohibit discrimination on the
basis of race, gender or other designated characteristics and mandate various disclosure
requirements and regulate the manner in which financial institutions must deal with customers when
taking deposits or making loans to such customers. These and other laws also limit finance charges
or other fees or charges earned in our activities. We must comply with the applicable provisions
of these consumer protection laws and regulations as part of our ongoing customer relations.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements emphasizing the
importance of technology risk management and supervision in evaluating the safety and soundness of
depository institutions with respect to banks that contract with outside vendors to provide data
processing and core banking functions. The use of technology-related products, services, delivery
channels and processes exposes a bank to various risks, particularly operational, privacy,
security, strategic, reputation and compliance risk. Banks are generally expected to prudently
manage technology-related risks as part of their comprehensive risk management policies by
identifying, measuring, monitoring and controlling risks associated with the use of technology.
Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established
appropriate standards for financial institutions regarding the implementation of safeguards to
ensure the security and confidentiality of customer records and information, protection against any
anticipated threats or hazards to the security or integrity of such records and protection against
unauthorized access to or use of such records or information in a way that could result in
substantial harm or inconvenience to a customer. Among other matters, the rules require each bank
to implement a comprehensive written information security program that includes administrative,
technical and physical safeguards relating to customer information.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with
a notice of privacy policies and practices. Section 502 prohibits a financial institution from
disclosing nonpublic personal information about a customer to nonaffiliated third parties unless
the institution satisfies various notice and opt-out requirements and the customer has not elected
to opt out of the disclosure. Under Section 504, the agencies are authorized to issue regulations
as necessary to implement notice requirements and restrictions on a financial institutions ability
to disclose nonpublic personal information about customers to nonaffiliated third parties. Under
the final rule the regulators adopted, all banks must develop initial and annual privacy notices
which describe in general terms the banks information sharing practices. Banks that share
nonpublic personal information about customers with nonaffiliated third parties must also provide
customers with an opt-out notice and a reasonable period of time for the customer to opt out of any
such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can
disclose an account number or access code for credit card, deposit or transaction accounts to any
nonaffiliated third party for use in marketing.
Monetary Policy
Banks are affected by the credit policies of monetary authorities, including the Federal
Reserve Board, that affect the national supply of credit. The Federal Reserve Board regulates the
supply of credit in order to influence general economic conditions, primarily through open market
operations in United States government obligations, varying the discount rate on financial
institution borrowings, varying reserve requirements against financial institution deposits, and
restricting certain borrowings by financial institutions and their subsidiaries. The monetary
policies of the Federal Reserve Board have had a significant effect on the operating results of
banks in the past and are expected to continue to do so in the future.
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Pending and Proposed Legislation
New regulations and statutes are regularly proposed containing wide-ranging proposals for
altering the structures, regulations and competitive relationships of financial institutions
operating in the United States. We cannot predict whether, or in what form, any proposed
regulation or statute will be adopted or the extent to which our business may be affected by any
new regulation or statute.
Enforcement Powers of Federal Banking Agencies
The Federal Reserve and other state and federal banking agencies and regulators have broad
enforcement powers, including the power to terminate deposit insurance, issue cease-and-desist
orders, impose substantial fines and other civil and criminal penalties and appoint a conservator
or receiver. Our failure to comply with applicable laws, regulations and other regulatory
pronouncements could subject us, as well as our officers and directors, to administrative sanctions
and potentially substantial civil penalties.
Recent Developments
The U. S. and global economies have experienced and are experiencing significant stress and
disruptions in the financial sector. Dramatic slowdowns in the housing industry with falling home
prices and increasing foreclosures and unemployment have created strains on financial institutions,
including government-sponsored entities and investment banks. As a result, many financial
institutions have sought and continue to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail.
In response to the financial crisis affecting the banking and financial markets, in October
2008, the Emergency Economic Stabilization Act of 2008 (the EESA) was signed into law. Pursuant
to the EESA, the U.S. Treasury (the Treasury) has the authority to, among other things, purchase
up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments
from financial institutions for the purpose of stabilizing and providing liquidity to the U. S.
financial markets.
In addition, the Treasury was authorized to purchase equity stakes in U. S. financial
institutions. Under this program, known as the Troubled Asset Relief Program Capital Purchase
Program (the TARP Capital Purchase Program), from the $700 billion authorized by the EESA, the
Treasury is making $250 billion of capital available to U.S. financial institutions through the
purchase of preferred stock or subordinated debentures by the Treasury. In conjunction with the
purchase of preferred stock from publicly-held financial institutions, the Treasury is receiving
warrants to purchase common stock with an aggregate market price equal to 15% of the total amount
of the preferred investment. Participating financial institutions are required to adopt the
Treasurys standards for executive compensation and corporate governance for the period during
which the Treasury holds equity issued under the TARP Capital Purchase Program and are restricted
from increasing dividends to common shareholders or repurchasing common stock for three years
without the consent of the Treasury.
Further, after receiving a recommendation from the boards of the FDIC and the Federal Reserve
Board, the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to
temporarily provide a 100% guarantee of the senior debt of all FDIC-insured institutions and their
holding companies, as well as deposits in non- interest bearing transaction deposit accounts under
the TLGP. Coverage under the TLGP was available for 30 days without charge and thereafter at a
cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for
non-interest bearing transaction deposits above the deposit insurance limit.
The Company made a decision to not participate in the TARP Capital Purchase Program due to its
capital and liquidity positions. The Company opted out of the debt guarantee portion of the
Temporary Liquidity Guarantee Program but decided to be included in the non-interest bearing
deposit account guarantee portion.
Available Information
We file annual, quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission. You may read and copy any document we file at the Securities
and Exchange Commissions Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
Please call the Securities
13
and Exchange Commission at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public at the Securities and
Exchange Commissions web site at http://www.sec.gov. Our web site is http://www.ffin.com. You
may also obtain copies of our annual, quarterly and special reports, proxy statements and certain
other information filed with the SEC, as well as amendments thereto, free of charge from our web
site. These documents are posted to our web site after we have filed them with the SEC. Our
corporate governance guidelines, including our code of conduct applicable to all our employees,
officers and directors, as well as the charters of our audit and nominating committees, are
available at www.ffin.com. The foregoing information is also available in print to any shareholder
who requests it. Except as explicitly provided, information on any web site is not incorporated
into this Form 10-K or our other securities filings and is not a part of them.
ITEM 1A. RISK FACTORS
Our business, financial condition, operating results and cash flows can be impacted by a
number of factors, including but not limited to those set forth below, any one of which could cause
our actual results to vary materially from recent results or from our anticipated future results
and other forward-looking statements that we make from time to time in our news releases, annual
reports and other written communications, as well as oral forward-looking statements, and other
statements made from time to time by our representatives.
Our business faces unpredictable economic conditions, which could have an adverse effect on us.
General economic conditions impact the banking industry. The credit quality of our loan
portfolio necessarily reflects, among other things, the general economic conditions in the areas in
which we conduct our business. Our continued financial success depends somewhat on factors beyond
our control, including:
| general economic conditions, including national and local real estate markets; | ||
| the supply of and demand for investable funds; | ||
| demand for loans and access to credit; | ||
| interest rates; and | ||
| federal, state and local laws affecting these matters. |
Any substantial deterioration in any of the foregoing conditions could have a material adverse
effect on our financial condition and results of operations, which would likely adversely affect
the market price of our common stock.
In our business, we must effectively manage our credit risk.
As a lender, we are exposed to the risk that our loan customers may not repay their loans
according to the terms of these loans and the collateral securing the payment of these loans may be
insufficient to fully compensate us for the outstanding balance of the loan plus the costs to
dispose of the collateral. We may experience significant loan losses, which could have a material
adverse effect on our operating results and financial condition. Management makes various
assumptions and judgments about the collectibility of our loan portfolio, including the
diversification by industry of our commercial loan portfolio, the amount of nonperforming loans and
related collateral, the volume, growth and composition of our loan portfolio, the effects on the
loan portfolio of current economic indicators and their probable impact on borrowers and the
evaluation of our loan portfolio through our internal loan review process and other relevant
factors.
We maintain an allowance for credit losses in an attempt to cover credit losses inherent in
our loan portfolio. Additional credit losses will likely occur in the future and may occur at a
rate greater than we have experienced to date. In determining the amount of the allowance, we rely
on an analysis of our loan portfolio, our experience and our evaluation of general economic
conditions. If our assumptions prove to be incorrect, our current allowance may not be sufficient
and adjustments may be necessary to allow for different economic conditions or adverse developments
in our loan portfolio. Material additions to the allowance could materially decrease net income.
14
In addition, federal and state regulators periodically review our allowance for credit losses
and may require us to increase our provision for credit losses or recognize further charge-offs,
based on judgments different than those of our management. Any increase in our allowance for
credit losses or charge-offs as required by these regulatory agencies could have a material
negative effect on our operating results and financial condition.
Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect
our business.
Our network of subsidiary banks is concentrated in Texas, primarily in the Western and North
Central regions of the state. Most of our customers and revenue are derived from this area. The
economy of this region is focused on agriculture (including farming and ranching), commercial and
industrial, medical, education, oil and gas production, and real estate. Because we generally do
not derive revenue or customers from other parts of the state or nation, our business and
operations are dependent on economic conditions in this part of Texas. Any significant decline in
one or more segments of the local economy could adversely affect our business, revenue, operations
and properties.
Changes in economic conditions could cause an increase in delinquencies and non-performing assets,
including loan charge-offs, which could depress our income and growth.
Our loan portfolios include many real estate secured loans, demand for which may decrease
during economic downturns as a result of, among other things, an increase in unemployment, a
decrease in real estate values, a slowdown in housing. If we continue to see negative economic
conditions in the United States as a whole or in the portions of Texas that we serve, we could
experience higher delinquencies and loan charge-offs, which would reduce our income and adversely
affect our financial condition. Furthermore, to the extent that real estate collateral is obtained
through foreclosure, the costs of holding and marketing the real estate collateral, as well as the
ultimate values obtained from disposition could reduce our earnings and adversely affect our
financial condition.
The value of real estate collateral may fluctuate significantly resulting in an
under-collateralized loan portfolio.
The market value of real estate, particularly real estate held for investment, can fluctuate
significantly in a short period of time as a result of market conditions in the geographic area in
which the real estate is located. If the value of the real estate serving as collateral for our
loan portfolio were to decline materially, a significant part of our loan portfolio could become
under-collateralized. If the loans that are collateralized by real estate become troubled during a
time when market conditions are declining or have declined, then, in the event of foreclosure, we
may not be able to realize the amount of collateral that we anticipated at the time of originating
the loan, which could have a material adverse effect on our provision for loan losses and our
operating results and financial condition.
We do business with other financial institutions that could experience financial difficulty.
We do business through the purchase and sale of Federal funds, check clearing and through the
purchase and sale of loan participations with other financial institutions. Because these
financial institutions have many risks, as do we, we could be adversely effected should one of
these financial institutions experience significant financial difficulties or fail to comply with
our agreements with them.
Recent developments in the mortgage market may affect our ability to originate loans and the
profitability of loans in our mortgage pipeline.
During 2008, the real estate housing market throughout the United States has softened
resulting in an industry-wide increase in borrowers unable to make their mortgage payments and
increased foreclosure rates. Lenders in certain sections of the housing and mortgage markets were
forced to close or limit their operations or seek additional capital. In response, financial
institutions have tightened their underwriting standards, limiting the availability of sources of
credit and liquidity. If the housing/real estate market continues to have problems in the future,
there could be a prolonged decrease in the demand for our loans in the secondary market, adversely
affecting our earnings.
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If we are unable to continue to originate residential real estate loans and sell them into the
secondary market for a profit, our earnings could decrease.
We derive a portion of our noninterest income from the origination of residential real estate
loans and the subsequent sale of such loans into the secondary market. If we are unable to
continue to originate and sell residential real estate loans at historical or greater levels, our
residential real estate loan volume would decrease, which could decrease our earnings. A rising
interest rate environment, general economic conditions or other factors beyond our control could
adversely affect our ability to originate residential real estate loans. Additionally, we sell a
large portion of our residential real estate loans to third party investors, and rising interest
rates could negatively affect our ability to generate suitable profits on the sale of such loans.
If interest rates increase after we originate the loans, our ability to market those loans is
impaired as the profitability on the loans decreases. These fluctuations can have an adverse
effect on the revenue we generate from residential real estate loans and in certain instances,
could result in a loss on the sale of the loans.
Recent trends in the student loan market may reduce the profitability we derive from originating
and selling student loans and could lower our net income.
Recent federal legislation will reduce federal subsidies to us for making student loans and
require us to pay higher servicing fees. These factors may reduce the net income we earn from
making these loans or force us to exit the student loan market completely. Additionally, recent
trends in the capital markets may make it more difficult to sell our student loans to third parties
or government agencies. If our ability to sell these loans to third parties or
government agencies is reduced, we may realize reduced premiums from the sale of student loans or
hold them for longer periods of time, or both.
The trust wealth management fees we receive may decrease as a result of poor investment
performance, in either relative or absolute terms, which could decrease our revenues and net
earnings.
Our trust company subsidiary derives its revenues primarily from investment management fees
based on assets under management. Our ability to maintain or increase assets under management is
subject to a number of factors, including investors perception of our past performance, in either
relative or absolute terms, market and economic conditions, including changes in oil and gas
prices, and competition from investment management companies. Financial markets are affected by
many factors, all of which are beyond our control, including general economic conditions, including
changes in oil and gas prices; securities market conditions; the level and volatility of interest
rates and equity prices; competitive conditions; liquidity of global markets; international and
regional political conditions; regulatory and legislative developments; monetary and fiscal policy;
investor sentiment; availability and cost of capital; technological changes and events; outcome of
legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and
timing of transactions. A decline in the fair value of the assets under management caused by a
decline in general economic conditions would decrease our wealth management fee income.
Investment performance is one of the most important factors in retaining existing clients and
competing for new wealth management clients. Poor investment performance could reduce our revenues
and impair our growth in the following ways:
| existing clients may withdraw funds from our wealth management business in favor of better performing products; | ||
| asset-based management fees could decline from a decrease in assets under management; | ||
| our ability to attract funds from existing and new clients might diminish; and | ||
| our wealth managers and investment advisors may depart, to join a competitor or otherwise. |
Even when market conditions are generally favorable, our investment performance may be
adversely affected by the investment style of our wealth management and investment advisors and the
particular investments that they make. To the extent our future investment performance is
perceived to be poor in either relative or absolute terms, the revenues and profitability of our
wealth management business will likely be reduced and our ability to attract new clients will
likely be impaired. As such, fluctuations in the equity and debt markets can have a direct impact
upon our net earnings.
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Certain of our investment advisory and wealth management contracts are subject to termination on
short notice, and termination of a significant number of investment advisory contracts could have a
material adverse impact on our revenue.
Certain of our investment advisory and wealth management clients can terminate their
relationships with us, reduce their aggregate assets under management, or shift their funds to
other types of accounts with different rate structures for any number of reasons, including
investment performance, changes in prevailing interest rates, inflation, changes in investment
preferences of clients, changes in our reputation in the marketplace, change in management or
control of clients, loss of key investment management personnel and financial market performance.
We cannot be certain that our trust company subsidiary will be able to retain all of its clients.
If its clients terminate their investment advisory and wealth management contracts, our trust
company subsidiary, and consequently we, could lose a substantial portion of our revenues.
Our business is subject to significant government regulation.
We operate in a highly regulated environment and are subject to supervision and regulation by
a number of governmental regulatory agencies, including the Texas Department of Banking, the
Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit
Insurance Corporation. Regulations adopted by these agencies, which are generally intended to
provide protection for depositors and customers rather than for the benefit of shareholders, govern
a comprehensive range of matters relating to ownership and control of our shares, our acquisition
of other companies and businesses, permissible activities for us to engage in, maintenance of
adequate capital levels and other aspects of our operations. The bank regulatory agencies possess
broad authority to prevent or remedy unsafe or unsound practices or violations of law.
As a result, future legislation and government policy could adversely affect the banking
industry as a whole, including our results of operations. For example, new legislation or
regulation may limit the manner in which we may conduct our business, including our ability to
offer new products, obtain financing, attract deposits, make loans and achieve satisfactory
interest spreads.
Our FDIC insurance assessments are expected to increase substantially resulting in higher operating
costs.
The FDIC has announced a significant increase in the premiums charged for FDIC deposit
insurance protection. We have historically paid the lowest premium rate available due to our sound
financial position. The FDIC announced that 2009 premiums have more than doubled and should more
bank failures occur, the FDIC premiums could continue to increase. This increased premium will
have an adverse effect on our net income and results of operations.
We compete with many larger financial institutions which have substantially greater financial
resources than we have.
Competition among financial institutions in Texas is intense. We compete with other bank
holding companies, state and national commercial banks, savings and loan associations, consumer
financial companies, credit unions, securities brokers, insurance companies, mortgage banking
companies, money market mutual funds, asset-based non-bank lenders and other financial
institutions. Many of these competitors have substantially greater financial resources, larger
lending limits, larger branch networks and less regulatory oversight than we do, and are able to
offer a broader range of products and services than we can. Failure to compete effectively for
deposit, loan and other banking customers in our markets could cause us to lose market share, slow
our growth rate and may have an adverse effect on our financial condition and results of
operations.
Our operations are significantly affected by interest rate levels.
Our profitability is dependent to a large extent on our net interest income, which is the
difference between interest income we earn as a result of interest paid to us on loans and
investments and interest we pay to third parties such as our depositors and those from whom we
borrow funds. Like most financial institutions, we are affected by changes in general interest
rate levels and by other economic factors beyond our control. Interest rate risk can result from
mismatches between the dollar amount of repricing or maturing assets and liabilities and from
mismatches in
17
the timing and rate at which our assets and liabilities reprice. Although we have
implemented strategies which we believe reduce the potential effects of adverse changes in interest
rates on our results of operations, these strategies may not always be successful. In addition,
any substantial and prolonged increase in market interest rates could reduce our customers desire
to borrow money from us or adversely affect their ability to repay their outstanding loans by
increasing their credit costs since most of our loans have adjustable interest rates that reset
periodically. Any of these events could adversely affect our results of operations or financial
condition.
First Financial Bankshares, Inc. relies on dividends from its subsidiaries for most of its revenue.
First Financial Bankshares, Inc. is a separate and distinct legal entity from its
subsidiaries. It receives substantially all of its revenue from dividends paid by its
subsidiaries. These dividends are the principal source of funds to pay dividends on the Companys
common stock and interest and principal on First Financial Bankshares, Inc. debt (if we had
balances outstanding). Various federal and/or state laws and regulations limit the amount of
dividends that our bank subsidiaries may pay to First Financial Bankshares, Inc. In the event our
bank subsidiaries are unable to pay dividends to First Financial Bankshares, Inc., First Financial
Bankshares, Inc. may not be able to service debt or pay dividends on the Companys common stock.
The inability to receive dividends from our bank subsidiaries could have a material adverse effect
on the Companys business, financial condition and results of operations.
To continue our growth, we are affected by our ability to identify and acquire other financial
institutions.
We intend to continue our current growth strategy. This strategy includes opening new
branches and acquiring other banks that serve customers or markets we find desirable. The market
for acquisitions remains highly
competitive, and we may be unable to find satisfactory acquisition candidates in the future that
fit our acquisition and growth strategy. To the extent that we are unable to find suitable
acquisition candidates, an important component of our growth strategy may be lost. Additionally,
our completed acquisitions, or any future acquisitions, may not produce the revenue, earnings or
synergies that we anticipated.
Use of our common stock for future acquisitions or to raise capital may be dilutive to existing
stockholders.
When we determine that appropriate strategic opportunities exist, we may acquire other
financial institutions and related businesses, subject to applicable regulatory requirements. We
may use our common stock for such acquisitions. From time to time, we may also seek to raise
capital through selling additional common stock. It is possible that the issuance of additional
common stock in such acquisition or capital transactions may be dilutive to the interests of our
existing stockholders.
Our operational and financial results are affected by our ability to successfully integrate our
acquisitions.
Acquisitions of financial institutions involve operational risks and uncertainties and
acquired companies may have unforeseen liabilities, exposure to asset quality problems, key
employee and customer retention problems and other problems that could negatively affect our
organization. We may not be able to successfully integrate the operations, management, products
and services of the entities that we acquire nor eliminate redundancies. The integration process
may also require significant time and attention from our management that they would otherwise
direct at servicing existing business and developing new business. Our failure to successfully
integrate the entities we acquire into our existing operations may increase our operating costs
significantly and adversely affect our business and earnings.
We rely heavily on our management team, and the unexpected loss of key management may adversely
affect our operations.
Our success to date has been strongly influenced by our ability to attract and to retain
senior management experienced in banking in the markets we serve. Our ability to retain executive
officers and the current management teams will continue to be important to successful
implementation of our strategies. We do not have employment agreements with these key employees
other than executive agreements in the event of a change of control and a confidential information,
non-solicitation and non-competition agreement related to our stock options. The unexpected loss
of services of any key management personnel, or the inability to recruit and retain qualified
personnel in the future, could have an adverse effect on our business and financial results.
18
The Company may not be able to attract and retain skilled people.
The Companys success depends, in large part, on its ability to attract and retain key people.
Competition for the best people in most activities engaged in by the Company can be intense and
the Company may not be able to hire people or to retain them. The unexpected loss of services of
one or more of the Corporations key personnel could have a material adverse impact on the
Companys business because of their skills, knowledge of the Companys market, years of industry
experience and the difficulty of promptly finding qualified replacement personnel.
The Companys stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you
want and at prices you find attractive. The Companys stock price can fluctuate significantly in
response to a variety of factors including, among other things:
| actual or anticipated variations in quarterly results of operations; | ||
| recommendations by securities analysts; | ||
| operating and stock price performance of other companies that investors deem comparable to the Company; | ||
| new reports relating to trends, concerns and other issues in the financial services industry; | ||
| perceptions in the marketplace regarding the Company and/or its competitors; | ||
| new technology used, or services offered, by competitors; | ||
| significant acquisitions or business combinations involving the Company or its competitors; and | ||
| changes in government regulations. |
General market fluctuations, industry factors and general economic and political conditions
and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends
could also cause the Companys stock price to decrease regardless of operations results.
Breakdowns in our internal controls and procedures could have an adverse effect on us.
We believe our internal control system as currently documented and functioning is adequate to
provide reasonable assurance over our internal controls. Nevertheless, because of the inherent
limitation in administering a cost effective control system, misstatements due to error or fraud
may occur and not be detected. Breakdowns in our internal controls and procedures could occur in
the future, and any such breakdowns could have an adverse effect on us. See Item 9A Controls
and Procedures for additional information.
We compete in an industry that continually experiences technological change, and we may have fewer
resources than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent
introductions of new technology-driven products and services. In addition to improving the ability
to serve customers, the effective use of technology increases efficiency and enables financial
institutions to reduce costs. Our future success will depend, in part, upon our ability to address
the needs of our customers by using technology to provide products and services that will satisfy
customer demands for conveniences, as well as to create additional efficiencies in our operations.
Many of our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively implement new technology-driven products and
services or be successful in marketing these products and services to our customers.
19
System failure or breaches of our network security could subject us to increased operating costs as
well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen
problems. Our operations are dependent upon our ability to protect our computer equipment against
damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any
damage or failure that causes an interruption in our operations could have an adverse effect on our
financial condition and results of operations. In addition, our operations are dependent upon our
ability to protect the computer systems and network infrastructure utilized by us, including our
Internet banking activities, against damage from physical break-ins, security breaches and other
disruptive problems caused by the Internet or other users. Such computer break-ins and other
disruptions would jeopardize the security of information stored in and transmitted through our
computer systems and network infrastructure, which may result in significant liability to us,
damage our reputation and inhibit current and potential customers from our Internet banking
services.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the
FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in
our common stock is inherently risky for the reasons described in this Risk Factors section and
elsewhere in this Report. As a result, if you acquire our common stock, you may lose some or all
of your investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal office is located in the First Financial Bank Building at 400 Pine Street in
downtown Abilene, Texas. We lease two spaces in a building owned by First Financial Bank, National
Association, Abilene. The lease of approximately 3,300 square feet of space expires December 31,
2010. The lease of approximately 1,135 square feet of space is on a month-to-month basis. Our
subsidiary banks collectively own 40 banking facilities, some of which are detached drive-ins, and
also lease nine banking facilities and 13 ATM locations. Our management considers all our existing
locations to be well-suited for conducting the business of banking. We believe our existing
facilities are adequate to meet our requirements and our subsidiary banks requirements for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
From time to time we and our subsidiary banks are parties to lawsuits arising in the ordinary
course of our banking business. However, there are no material pending legal proceedings to which
we, our subsidiary banks or our other direct and indirect subsidiaries, or any of their properties,
are currently subject. Other than regular, routine examinations by state and federal banking
authorities, there are no proceedings pending or known to be contemplated by any governmental
authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of our
fiscal year ended December 31, 2008.
20
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Market Information
Our common stock, par value $0.01 per share, is traded on the Nasdaq Global Select Market
under the trading symbol FFIN. See Item 8Financial Statements and Supplementary DataQuarterly
Financial Data for the high, low and closing sales prices as reported by the Nasdaq National
Market for our common stock for the periods indicated.
Record Holders
As of February 1, 2009, we had approximately 1,400 shareholders of record.
Dividends
See Item 8Financial Statements and Supplementary DataQuarterly Results of Operations for
the frequency and amount of cash dividends paid by us. Also, see Item 1 Business Supervision
and Regulation Payment of Dividends and Item 7 Managements Discussion and Analysis of the
Financial Condition and Results of Operations Liquidity Dividends for restrictions on our
present or future ability to pay dividends, particularly those restrictions arising under federal
and state banking laws.
Equity Compensation Plans
See Item 12 Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
21
PERFORMANCE GRAPH
The following performance graph compares cumulative total shareholder returns for our common
stock, the Russell 3000 Index, and the SNL Bank Index, which is a banking index prepared by SNL
Financial LC and is comprised of banks with $1 billion to $5 billion in total assets, for a
five-year period (December 31, 2003 to December 31, 2008). The performance graph assumes $100
invested in our common stock at its closing price on December 31, 2003, and in each of the Russell
3000 Index and the SNL Bank Index on the same date. The performance graph also assumes the
reinvestment of all dividends. The dates on the performance graph represents the last trading day
of each year indicated. The amounts noted on the performance graph have been adjusted to give
effect to all stock splits and stock dividends.
![(PERFORMANCE GRAPH)](https://www.sec.gov/Archives/edgar/data/0000036029/000095013309000429/w72885w7288501.gif)
Period Ending | ||||||||||||||||||||||||
Index | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | ||||||||||||||||||
First Financial Bankshares, Inc. |
100.00 | 112.59 | 121.21 | 149.30 | 138.66 | 209.27 | ||||||||||||||||||
Russell 3000 |
100.00 | 111.95 | 118.80 | 137.47 | 144.54 | 90.61 | ||||||||||||||||||
SNL Bank $1B-$5B |
100.00 | 123.42 | 121.31 | 140.38 | 102.26 | 84.81 |
Source: SNL Financial LC, Charlottesville, VA
22
ITEM 6. | SELECTED FINANCIAL DATA |
The selected financial data presented below as of and for the years ended December 31, 2008,
2007, 2006, 2005, and 2004, have been derived from our audited consolidated financial statements.
The selected financial data should be read in conjunction with Item 7Managements Discussion and
Analysis of Financial Condition and Results of Operations and our consolidated financial
statements. The results of operations presented below are not necessarily indicative of the results
of operations that may be achieved in the future. The amounts related to shares of our common stock
have been adjusted to give effect to all stock dividends and stock splits. Managements Discussion
and Analysis of Financial Condition and Results of Operations incorporated information required to
be disclosed by the Securities and Exchange Commissions Industry Guide 3, Statistical Disclosure
by Bank Holding Companies.
Year Ended December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
(dollars in thousands, except per share data) | ||||||||||||||||||||
Summary Income Statement Information: |
||||||||||||||||||||
Interest income |
$ | 159,154 | $ | 169,369 | $ | 154,494 | $ | 123,944 | $ | 99,973 | ||||||||||
Interest expense |
35,259 | 58,557 | 48,628 | 28,757 | 16,077 | |||||||||||||||
Net interest income |
123,895 | 110,812 | 105,866 | 95,187 | 83,896 | |||||||||||||||
Provision for loan losses |
7,957 | 2,331 | 2,061 | 1,320 | 1,633 | |||||||||||||||
Noninterest income |
49,453 | 48,273 | 44,668 | 44,180 | 38,823 | |||||||||||||||
Noninterest expense |
91,587 | 86,827 | 83,017 | 75,487 | 65,885 | |||||||||||||||
Earnings before income taxes |
73,804 | 69,927 | 65,456 | 62,560 | 55,201 | |||||||||||||||
Income tax expense |
20,640 | 20,437 | 19,427 | 18,537 | 16,030 | |||||||||||||||
Net earnings |
$ | 53,164 | $ | 49,490 | $ | 46,029 | $ | 44,023 | $ | 39,171 | ||||||||||
Per Share Data: |
||||||||||||||||||||
Net earnings per share, basic |
$ | 2.56 | $ | 2.38 | $ | 2.22 | $ | 2.13 | $ | 1.90 | ||||||||||
Net earnings per share, assuming dilution |
2.55 | 2.38 | 2.21 | 2.12 | 1.89 | |||||||||||||||
Cash dividends declared |
1.34 | 1.26 | 1.18 | 1.10 | 1.00 | |||||||||||||||
Book value at period-end |
17.73 | 16.16 | 14.51 | 13.34 | 12.84 | |||||||||||||||
Earnings performance ratios: |
||||||||||||||||||||
Return on average assets |
1.74 | % | 1.72 | % | 1.68 | % | 1.80 | % | 1.82 | % | ||||||||||
Return on average equity |
15.27 | 15.87 | 16.20 | 16.17 | 15.09 | |||||||||||||||
Summary Balance Sheet Data (Period-end): |
||||||||||||||||||||
Securities |
$ | 1,318,406 | $ | 1,128,493 | $ | 1,129,313 | $ | 1,046,121 | $ | 854,334 | ||||||||||
Loans |
1,566,143 | 1,528,020 | 1,373,735 | 1,288,604 | 1,164,223 | |||||||||||||||
Total assets |
3,212,385 | 3,070,309 | 2,850,165 | 2,733,827 | 2,315,224 | |||||||||||||||
Deposits |
2,582,753 | 2,546,083 | 2,384,024 | 2,366,277 | 1,994,312 | |||||||||||||||
Total liabilities |
2,843,602 | 2,734,814 | 2,549,263 | 2,457,551 | 2,049,679 | |||||||||||||||
Total shareholders equity |
368,782 | 335,495 | 300,901 | 276,276 | 265,545 | |||||||||||||||
Asset quality ratios: |
||||||||||||||||||||
Allowance for loan losses/period-end loans |
1.37 | % | 1.14 | % | 1.18 | % | 1.14 | % | 1.19 | % | ||||||||||
Nonperforming assets/period-end loans plus
foreclosed assets |
0.80 | 0.31 | 0.30 | 0.33 | 0.43 | |||||||||||||||
Net charge offs/average loans |
0.25 | 0.07 | 0.04 | 0.10 | 0.12 | |||||||||||||||
Capital ratios: |
||||||||||||||||||||
Average shareholders equity/average assets |
11.37 | % | 10.84 | % | 10.38 | % | 11.11 | % | 12.08 | % | ||||||||||
Leverage ratio (1) |
9.68 | 9.23 | 8.87 | 8.56 | 9.80 | |||||||||||||||
Tier 1 risk-based capital (2) |
15.89 | 14.65 | 14.35 | 14.17 | 16.46 | |||||||||||||||
Total risk-based capital (3) |
17.04 | 15.62 | 15.32 | 15.13 | 17.49 | |||||||||||||||
Dividend payout ratio |
52.41 | 52.86 | 53.14 | 51.55 | 52.62 |
(1) | Calculated by dividing at period-end, shareholders equity (before accumulated other comprehensive earnings/loss) less intangible assets by fourth quarter average assets less intangible assets. | |
(2) | Calculated by dividing at period-end, shareholders equity (before accumulated other comprehensive earnings/loss) less intangible assets by risk-adjusted assets. | |
(3) | Calculated by dividing at period-end, shareholders equity (before accumulated other comprehensive earnings/loss) less intangible assets plus allowance for loan losses to the extent allowed under regulatory guidelines by risk-adjusted assets. |
23
ITEM 7. | 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. Our primary source of funding for our
loans and investments are deposits held by 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.
You should read the following discussion and analysis of the major elements of our
consolidated balance sheets as of December 31, 2008 and 2007, and consolidated statements of
earnings for the years 2006 through 2008 in conjunction with our consolidated financial statements,
accompanying notes, and selected financial data presented elsewhere in this Form 10-K. Average
share information and earnings per share data related to our common stock have been adjusted to
give effect to all stock splits and stock dividends, including the four-for-three stock split in
the form of a 33% stock dividend effective June 1, 2005.
Critical Accounting Policies
We prepare consolidated financial statements based on the selection of certain accounting
policies, generally accepted accounting principles 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 (1) our allowance for loan losses and its provision for
loan losses and (2) our valuation of securities, which we deem to be our most critical accounting
policies. We have other significant accounting policies and continue to evaluate the materiality
of their impact on our consolidated financial statements, but we believe 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.
Allowance for Loan Losses:
The allowance for loan losses is an amount we believe will be adequate to absorb inherent
estimated losses on existing loans in which full collectibility is unlikely based upon our review
and evaluation of the loan portfolio. The allowance for loan losses is increased by charges to
income and decreased by charge-offs (net of recoveries).
Our methodology is based on guidance provide 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 No. 118, and allowance
allocations determined in accordance with SFAS No. 5, Accounting for Contingencies. We also
follow the guidance of the Interagency Policy Statement on the Allowance for Loan and Lease
Losses, issued jointly by the OCC, the Federal Reserve Board, the FDIC, the National Credit Union
Administration and the Office of Thrift Supervision. We have developed a loan review methodology
that includes allowances assigned to certain classified loans, allowances assigned based upon
estimated loss factors and qualitative reserves. 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 department and regulatory examiners.
24
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 classified loans; (ii)
general reserves determined in accordance with SFAS 5 that consider historical loss rates; 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 an adequate level to absorb estimated
loan losses inherent in the loan portfolio. Factors contributing to the determination of specific
reserves include the credit-worthiness of the borrower, changes in the value of pledged collateral,
and general economic conditions. All classified loans 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, the loan portfolio less cash secured loans, government
guaranteed loans and classified loans is multiplied by the Companys historical loss rates. 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.
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 is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, the borrowers financial condition is such
that collection of principal and 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.
Valuation of Securities:
The Companys available-for-sale and trading securities portfolio is recorded at fair value.
Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 157, Fair Value Measurements. We also adopted Financial Accounting
Standards Board (FASB) Staff Position (FSP) No. FAS 157-3 which provided additional guidance on
valuation and disclosures. Fair values are volatile and may be influenced by a number of factors,
including market interest rates, prepayment speeds, discount rates, credit ratings and yield
curves. Fair values for investment securities are based on quoted market prices, where available.
If quoted market prices are not available, fair values are based on the quoted prices of similar
instruments or an estimate of fair value by using a range of fair value estimates in the market
place as a result of the illiquid market specific to the type of security.
When the fair value of a security is below its amortized cost, and depending on the length of
time the condition exists and the extent the fair value is below amortized cost, additional
analysis is performed to determine whether an other-than-temporary impairment condition exists.
Available-for-sale and held-to-maturity securities are analyzed quarterly for possible
other-than-temporary impairment. The analysis considers (i) the length of time and the extent to
which the fair value has been less than cost, (ii) the financial condition and near-term prospects
of the issuer, and (iii) the intent and ability of the Company to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Often,
the information available to conduct these assessments is limited and rapidly changing, making
estimates of fair value subject to judgment. If actual information or conditions are different
than estimated, the extent of the impairment of the security may be different than previously
estimated, which could have a material effect on the Companys results of operations and financial
condition.
25
Results of Operations
Performance Summary. Net earnings for 2008 were $53.2 million, an increase of $3.7 million,
or 7.4%, over net earnings for 2007 of $49.5 million. Net earnings for 2006 were $46.0 million.
The increase in net earnings for 2008 over 2007 was primarily attributable to growth in net
interest income. The increase in net earnings for 2007 over 2006 was primarily attributable to
growth in net interest income and noninterest income.
On a basic net earnings per share basis, net earnings were $2.56 for 2008 as compared to $2.38
for 2007 and $2.22 for 2006. The return on average assets was 1.74% for 2008 as compared to 1.72%
for 2007 and 1.68% for 2006. The return on average equity was 15.27% for 2008 as compared to
15.87% for 2007 and 16.20% for 2006.
Net Interest Income. Net interest income is the difference between interest income on earning
assets and interest expense on liabilities incurred to fund those assets. Our earning assets
consist primarily of loans and investment securities. Our liabilities to fund those assets consist
primarily of noninterest-bearing and interest-bearing deposits. Tax-equivalent net interest income
was $131.0 million in 2008 as compared to $116.1 million in 2007 and $110.5 million in 2006. The
increase in 2008 compared to 2007 was largely attributable to the decrease in the rate paid on
interest-bearing liabilities in an amount greater than the decrease in rates earned on interest
earning assets and an increase in the volume of earning assets. Average earning assets increased
$178.3 million in 2008 with loans contributing $109.1 million of the increase. The yield on
earning assets decreased 72 basis points in 2008, whereas the rate paid on interest-bearing
liabilities decreased 129 basis points. The increase in 2007 compared to 2006 resulted primarily
from an increase in the volume of earnings assets, which was partially reduced by increases in the
rates paid on interest bearing liabilities. Average earning assets were $2.803 billion in 2008, as
compared to $2.624 billion in 2007 and $2.483 billion in 2006. The 2008 increase in average
earning assets was attributable to internally generated loan growth and purchases of investment
securities. The 2007 increase in average earning assets was attributable primarily to internally
generated loan growth. Table 1 allocates the change in tax-equivalent net interest income between
the amount of change attributable to volume and to rate.
Table 1 Changes in Interest Income and Interest Expense (in thousands):
2008 Compared to 2007 | 2007 Compared to 2006 | |||||||||||||||||||||||
Change Attributable to | Total | Change Attributable to | Total | |||||||||||||||||||||
Volume | Rate | Change | Volume | Rate | Change | |||||||||||||||||||
Short-term investments |
$ | 207 | $ | (2,179 | ) | $ | (1,972 | ) | $ | 568 | $ | 213 | $ | 781 | ||||||||||
Taxable investment securities (1) |
854 | (1,448 | ) | (594 | ) | (1,904 | ) | 1,487 | (417 | ) | ||||||||||||||
Tax-exempt investment securities (2) |
2,809 | 570 | 3,379 | 3,228 | (603 | ) | 2,625 | |||||||||||||||||
Loans (1) |
8,765 | (17,972 | ) | (9,207 | ) | 9,345 | 3,152 | 12,497 | ||||||||||||||||
Interest income |
12,635 | (21,029 | ) | (8,394 | ) | 11,237 | 4,249 | 15,486 | ||||||||||||||||
Interest-bearing deposits |
1,165 | (20,035 | ) | (18,870 | ) | 863 | 8,145 | 9,008 | ||||||||||||||||
Short-term borrowings |
695 | (5,123 | ) | (4,428 | ) | 2,181 | (1,260 | ) | 921 | |||||||||||||||
Interest expense |
1,860 | (25,158 | ) | (23,298 | ) | 3,044 | 6,885 | 9,929 | ||||||||||||||||
Net interest income |
$ | 10,775 | $ | 4,129 | $ | 14,904 | $ | 8,193 | $ | (2,636 | ) | $ | 5,557 | |||||||||||
(1) | Trading securities are included in taxable investment securities. | |
(2) | Computed on a tax-equivalent basis assuming a marginal tax rate of 35%. |
The net interest margin, which measures tax-equivalent net interest income as a percentage of
average earning assets, is illustrated in Table 2 for the years 2006 through 2008. The net interest
margin in 2008 was 4.67%, an increase of 24 basis points from 2007 and 21 basis points from 2006.
The prime rate increased from 7.25% at January 1, 2006 to 8.25% at December 31, 2006 and returned
to 7.25% at December 31, 2007. The prime rate decreased 400 basis points in 2008, finishing the
year at 3.25%. Should interest rates remain at the current low levels in 2009, we anticipate that
the impact of lower yields on loans and investment securities and competition for deposits will put
pressure on our net interest margin.
26
Table 2 Average Balances and Average Yields and Rates (in thousands, except percentages):
2008 | 2007 | 2006 | ||||||||||||||||||||||||||||||||||
Average | Income/ | Yield/ | Average | Income/ | Yield/ | Average | Income/ | Yield/ | ||||||||||||||||||||||||||||
Balance | Expense | Rate | Balance | Expense | Rate | Balance | Expense | Rate | ||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Short-term investments |
$ | 80,495 | $ | 1,790 | 2.22 | % | $ | 76,284 | $ | 3,762 | 4.93 | % | $ | 64,056 | $ | 2,981 | 4.65 | % | ||||||||||||||||||
Taxable investment securities (1) |
851,099 | 38,286 | 4.50 | 832,807 | 38,881 | 4.67 | 875,247 | 39,298 | 4.49 | |||||||||||||||||||||||||||
Tax-exempt investment securities (2) |
334,204 | 20,658 | 6.18 | 287,468 | 17,279 | 6.01 | 235,569 | 14,653 | 6.22 | |||||||||||||||||||||||||||
Loans (2)(3) |
1,537,027 | 105,508 | 6.86 | 1,427,922 | 114,714 | 8.03 | 1,308,309 | 102,218 | 7.81 | |||||||||||||||||||||||||||
Total earning assets |
2,802,825 | 166,242 | 5.93 | 2,624,481 | 174,636 | 6.66 | 2,483,181 | 159,150 | 6.41 | |||||||||||||||||||||||||||
Cash and due from banks |
115,767 | 107,280 | 107,134 | |||||||||||||||||||||||||||||||||
Bank premises and equipment, net |
64,289 | 61,036 | 60,827 | |||||||||||||||||||||||||||||||||
Other assets |
35,776 | 34,075 | 35,283 | |||||||||||||||||||||||||||||||||
Goodwill and other intangible
assets, net |
64,598 | 65,942 | 67,555 | |||||||||||||||||||||||||||||||||
Allowance for loan losses |
(19,226 | ) | (16,621 | ) | (15,666 | ) | ||||||||||||||||||||||||||||||
Total assets |
$ | 3,064,029 | $ | 2,876,193 | $ | 2,738,314 | ||||||||||||||||||||||||||||||
Liabilities and Shareholders Equity
Interest-bearing deposits |
$ | 1,775,158 | $ | 33,110 | 1.87 | % | $ | 1,736,227 | $ | 51,980 | 2.99 | % | $ | 1,702,051 | $ | 42,972 | 2.52 | % | ||||||||||||||||||
Short-term borrowings |
178,721 | 2,149 | 1.20 | 161,648 | 6,577 | 4.07 | 120,566 | 5,656 | 4.69 | |||||||||||||||||||||||||||
Total interest-bearing liabilities |
1,953,879 | 35,259 | 1.80 | 1,897,875 | 58,557 | 3.09 | 1,822,617 | 48,628 | 2.67 | |||||||||||||||||||||||||||
Noninterest-bearing deposits |
741,418 | 649,642 | 611,023 | |||||||||||||||||||||||||||||||||
Other liabilities |
20,461 | 16,878 | 20,557 | |||||||||||||||||||||||||||||||||
Total liabilities |
2,715,758 | 2,564,395 | 2,454,197 | |||||||||||||||||||||||||||||||||
Shareholders equity |
348,271 | 311,798 | 284,117 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders
equity |
$ | 3,064,029 | $ | 2,876,193 | $ | 2,738,314 | ||||||||||||||||||||||||||||||
Net interest income |
$ | 130,983 | $ | 116,079 | $ | 110,522 | ||||||||||||||||||||||||||||||
Rate Analysis: |
||||||||||||||||||||||||||||||||||||
Interest income/earning assets |
5.93 | % | 6.66 | % | 6.41 | % | ||||||||||||||||||||||||||||||
Interest expense/earning assets |
1.26 | 2.23 | 1.95 | |||||||||||||||||||||||||||||||||
Net yield on earning assets |
4.67 | % | 4.43 | % | 4.46 | % | ||||||||||||||||||||||||||||||
(1) | Trading securities are included in taxable investment securities. | |
(2) | Computed on a tax-equivalent basis assuming a marginal tax rate of 35%. | |
(3) | Nonaccrual loans are included in loans. |
Noninterest Income. Noninterest income for 2008 was $49.5 million, an increase of $1.2
million, or 2.4%, as compared to 2007. The increase is primarily attributable to (1) an increase
of $1.4 million in ATM and credit card fees primarily as a result of increased use of debit cards,
(2) an increase of $902 thousand in the net gain on securities transactions, and (3) an increase of
$694 thousand in trust fees. The fair value of our trust assets, which are not reflected in our
balance sheet, totaled $1.882 billion at December 31, 2008 compared to $1.803 billion at December
31, 2007. These increases were partially offset by (1) a decrease of $811 thousand in real estate
mortgage fees, (2) a decrease of $323 thousand in service charges on deposit accounts and (3) a
decrease of $238 thousand in the gain on sale of student loans. The decrease in real estate
mortgage fees reflected the slowdown in residential lending activity. The decline in service
charges on deposit accounts was the result of a decrease in customer overdraft fees. In 2008, we
sold student loans totaling $63.0 million compared to $64 million in 2007. Due to changes in the
market for student loans, the Company does not currently anticipate significant net revenues from
the sale of such loans in 2009.
Noninterest income for 2007 was $48.3 million, an increase of $3.6 million, or 8.1%, as
compared to 2006. The increase is primarily attributable to (1) an increase of $1.3 million in ATM
and credit card fees primarily as a result of increased use of debit cards, (2) an increase of $1.1
million in trust fees, (3) an increase in mortgage loan fees of $808 thousand, and (4) an increase
in service charges on deposit accounts of $470 thousand. The fair value of our trust assets totaled
$1.803 billion at December 31, 2007, compared to $1.693 billion at December 31, 2006. These
increases were partially offset by a decrease of $228 thousand in the gain on the sale of student
loans. In 2007, we sold student loans totaling $64 million compared to $72 million in 2006.
27
Table 3 Noninterest Income (in thousands):
Increase | Increase | |||||||||||||||||||
2008 | (Decrease) | 2007 | (Decrease) | 2006 | ||||||||||||||||
Trust fees |
$ | 9,441 | $ | 694 | $ | 8,747 | $ | 1,082 | $ | 7,665 | ||||||||||
Service charges on deposit accounts |
22,597 | (323 | ) | 22,920 | 470 | 22,450 | ||||||||||||||
Real estate mortgage fees |
2,536 | (811 | ) | 3,347 | 808 | 2,539 | ||||||||||||||
Gain on sale of student loans |
1,675 | (238 | ) | 1,913 | (228 | ) | 2,141 | |||||||||||||
ATM and credit card fees |
8,904 | 1,383 | 7,521 | 1,307 | 6,214 | |||||||||||||||
Net gain on securities transactions |
1,052 | 902 | 150 | 88 | 62 | |||||||||||||||
Other: |
||||||||||||||||||||
Net gain (loss) on sale of other real estate |
5 | (103 | ) | 108 | 118 | (10 | ) | |||||||||||||
Check printing fees |
489 | (106 | ) | 595 | (74 | ) | 669 | |||||||||||||
Safe deposit rental fees |
446 | (3 | ) | 449 | 5 | 444 | ||||||||||||||
Exchange fees |
135 | (30 | ) | 165 | (24 | ) | 189 | |||||||||||||
Credit life and debt protection fees |
203 | (60 | ) | 263 | 44 | 219 | ||||||||||||||
Data processing fees |
91 | (18 | ) | 109 | (30 | ) | 139 | |||||||||||||
Brokerage commissions |
349 | 157 | 192 | (2 | ) | 194 | ||||||||||||||
Interest on loan recoveries |
347 | 63 | 284 | (18 | ) | 302 | ||||||||||||||
Miscellaneous income |
1,183 | (327 | ) | 1,510 | 59 | 1,451 | ||||||||||||||
Total other |
3,248 | (427 | ) | 3,675 | 78 | 3,597 | ||||||||||||||
Total Noninterest Income |
$ | 49,453 | $ | 1,180 | $ | 48,273 | $ | 3,605 | $ | 44,668 | ||||||||||
Noninterest Expense. Total noninterest expense for 2008 was $91.6 million, an increase of
$4.8 million, or 5.5%, as compared to 2007. Noninterest expense for 2007 amounted to $86.8 million,
an increase of $3.8 million, or 4.6%, as compared to 2006. An important measure in determining
whether a banking company effectively manages noninterest expenses is the efficiency ratio, which
is calculated by dividing noninterest expense by the sum of net interest income on a tax-equivalent
basis and noninterest income. Lower ratios indicate better efficiency since more income is
generated with a lower noninterest expense total. Our efficiency ratio for 2008 was 50.76%
compared to 52.83% for 2007, and 53.49% for 2006.
Salaries and employee benefits for 2008 totaled $49.3 million, an increase of $2.3 million, or
5.0%, as compared to 2007. The primary causes of this increase were higher levels of contributions
to the Companys profit sharing plan, overall pay increases effective during the first quarter of
2008 and an increase in employee medical expenses.
All other categories of non interest expense for 2008 totaled $42.3 million, an increase of
$2.4 million, or 6.1%, as compared to 2007. Net occupancy expense increased $842 thousand
primarily as a result of higher utilities expense and three new branches. ATM and debit card
interchange expenses increased $586 thousand reflecting increased debit card use by our customers,
as seen in the increase in the related income above. Equipment expense increased $327 thousand
reflecting ongoing investments in technology. Professional and service fees increased $305
thousand as a result of an increase in actuarial fees related to the Companys pension plan and
higher expenses related to the treasury management services offered to Companys customers.
Salaries and employee benefits for 2007 totaled $46.9 million, an increase of $2.8 million, or
6.3%, as compared to 2006. The primary causes of this increase were higher levels of contributions
to the Companys profit sharing plan and overall pay increases effective during the first quarter
of 2007.
All other categories of non interest expense for 2007 totaled $39.9 million, an increase of
$1.0 million, or 2.7%, as compared to 2006. ATM and debit card interchange expenses increased $465
thousand reflecting increased debit card use by our customers, as seen in the increase in the
related income above. Legal fees increased $232 thousand. Operational and other losses were $220
thousand more in 2007 than in 2006. These losses come from increased charge-offs relating to
demand accounts and other losses attributable to fraud. Partially offsetting the increase in
noninterest expense were decreases in correspondent bank service charges as a result of maintaining
higher compensating balances and in courier expense from the increased use of imaged check clearing
and remote deposit capture.
28
Table 4 Noninterest Expense (in thousands):
Increase | Increase | |||||||||||||||||||
2008 | (Decrease) | 2007 | (Decrease) | 2006 | ||||||||||||||||
Salaries |
$ | 38,263 | $ | 1,619 | $ | 36,644 | $ | 1,427 | $ | 35,217 | ||||||||||
Medical |
3,335 | 605 | 2,730 | 85 | 2,645 | |||||||||||||||
Profit sharing |
3,406 | 186 | 3,220 | 1,104 | 2,116 | |||||||||||||||
Pension |
134 | (176 | ) | 310 | (27 | ) | 337 | |||||||||||||
401(k) match expense |
1,133 | 6 | 1,127 | 86 | 1,041 | |||||||||||||||
Payroll taxes |
2,788 | 95 | 2,693 | 26 | 2,667 | |||||||||||||||
Stock option expense |
226 | 6 | 220 | 63 | 157 | |||||||||||||||
Total salaries and employee benefits |
49,285 | 2,341 | 46,944 | 2,764 | 44,180 | |||||||||||||||
Net occupancy expense |
6,735 | 842 | 5,893 | (93 | ) | 5,986 | ||||||||||||||
Equipment expense |
7,547 | 327 | 7,220 | 181 | 7,039 | |||||||||||||||
Intangible amortization |
1,204 | (291 | ) | 1,495 | 4 | 1,491 | ||||||||||||||
Other: |
||||||||||||||||||||
Data processing fees |
415 | 24 | 391 | 41 | 350 | |||||||||||||||
Postage |
1,437 | 22 | 1,415 | (4 | ) | 1,419 | ||||||||||||||
Printing, stationery and supplies |
1,891 | (113 | ) | 2,004 | (63 | ) | 2,067 | |||||||||||||
Advertising |
1,201 | 22 | 1,179 | (45 | ) | 1,224 | ||||||||||||||
Correspondent bank service charges |
1,169 | 16 | 1,153 | (200 | ) | 1,353 | ||||||||||||||
ATM expense |
3,921 | 586 | 3,335 | 465 | 2,870 | |||||||||||||||
Credit card fees |
522 | (14 | ) | 536 | 8 | 528 | ||||||||||||||
Telephone |
1,266 | 9 | 1,257 | (45 | ) | 1,302 | ||||||||||||||
Public relations and business development |
1,390 | 81 | 1,309 | 61 | 1,248 | |||||||||||||||
Directors fees |
705 | 55 | 650 | 18 | 632 | |||||||||||||||
Audit and accounting fees |
1,368 | 193 | 1,175 | 72 | 1,103 | |||||||||||||||
Legal fees |
518 | (41 | ) | 559 | 232 | 327 | ||||||||||||||
Professional and service fees |
2,285 | 305 | 1,980 | 164 | 1,816 | |||||||||||||||
Regulatory exam fees |
811 | 26 | 785 | 38 | 747 | |||||||||||||||
FDIC assessment fees |
652 | 374 | 278 | (11 | ) | 289 | ||||||||||||||
Travel |
629 | 41 | 588 | 64 | 524 | |||||||||||||||
Courier expense |
775 | 15 | 760 | (203 | ) | 963 | ||||||||||||||
Operational and other losses |
1,317 | (544 | ) | 1,861 | 220 | 1,641 | ||||||||||||||
Other miscellaneous expense |
4,544 | 484 | 4,060 | 142 | 3,918 | |||||||||||||||
Total other |
26,816 | 1,541 | 25,275 | 954 | 24,321 | |||||||||||||||
Total Noninterest Expense |
$ | 91,587 | $ | 4,760 | $ | 86,827 | $ | 3,810 | $ | 83,017 | ||||||||||
Income Taxes. Income tax expense was $20.6 million for 2008 as compared to $20.4 million for
2007 and $19.4 million for 2006. Our effective tax rates on pretax income were 28.0%, 29.2% and
29.7%, respectively, for the years 2008, 2007 and 2006. The effective tax 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 employee stock
ownership plan and Texas state taxes.
29
Balance Sheet Review
Loans. Our portfolio is comprised of loans made to businesses, professionals, individuals,
and farm and ranch operations located in the primary trade areas served by our subsidiary banks.
Real estate loans represent loans primarily for new home construction and owner-occupied real
estate. The structure of loans in the real estate mortgage classification generally provides
repricing intervals to minimize the interest rate risk inherent in long-term fixed rate loans. As
of December 31, 2008, total loans were $1.566 billion, an increase of $38.1 million, as compared to
December 31, 2007. As compared to year-end 2007, real estate loans increased $14.3 million,
commercial, financial and agricultural loans decreased $7.8 million, and consumer loans increased
$31.5 million. Included in consumer loans were student loans held for sale of $51.8 million and
$32.3 million as of December 31, 2008 and 2007, respectively. Loans averaged $1.537 billion during
2008, an increase of $109.1 million over the prior year average balances.
Table 5 Composition of Loans (in thousands):
December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Commercial, financial and agricultural |
$ | 485,707 | $ | 493,478 | $ | 430,286 | $ | 410,191 | $ | 385,193 | ||||||||||
Real estate construction |
158,000 | 196,250 | 155,285 | 112,892 | 107,148 | |||||||||||||||
Real estate mortgage |
678,788 | 626,146 | 591,893 | 568,793 | 494,524 | |||||||||||||||
Consumer, net of unearned income |
243,648 | 212,146 | 196,271 | 196,728 | 177,358 | |||||||||||||||
$ | 1,566,143 | $ | 1,528,020 | $ | 1,373,735 | $ | 1,288,604 | $ | 1,164,223 | |||||||||||
Our real estate loans represent approximately 53.4% of our loan portfolio and are comprised of
(i) commercial real estate loans (32%), generally owner occupied,
(ii) 1-4 family residence loans (31%),
(iii) residential development and construction loans (12%), which includes our custom and speculation
home construction loans, (iv) commercial development and construction
loans (6%) and (v) other (19%).
Table 6 Maturity Distribution and Interest Sensitivity of Loans at December 31, 2008 (in
thousands):
The following tables summarize maturity and repricing information for the commercial,
financial, and agricultural and the real estate-construction portion of our loan portfolio as of
December 31, 2008:
After One | ||||||||||||||||
Year | ||||||||||||||||
One Year | Through | After Five | ||||||||||||||
or less | Five Years | Years | Total | |||||||||||||
Commercial, financial, and agricultural |
$ | 282,768 | $ | 144,021 | $ | 58,918 | $ | 485,707 | ||||||||
Real estate construction |
92,942 | 44,502 | 20,556 | 158,000 | ||||||||||||
$ | 375,710 | $ | 188,523 | $ | 79,474 | $ | 643,707 | |||||||||
Maturities | ||||
After One Year | ||||
Loans with fixed interest rates |
$ | 176,037 | ||
Loans with floating or adjustable interest rates |
91,960 | |||
$ | 267,997 | |||
Asset Quality. Loan portfolios of each of our subsidiary banks are subject to periodic
reviews by our centralized independent loan review group as well as periodic examinations by state
and federal bank regulatory agencies. Loans are placed on nonaccrual status when, in the judgment
of management, the collectibility of principal or interest under the original terms becomes
doubtful. Nonperforming assets, which are comprised of nonperforming loans and foreclosed assets,
were $12.5 million at December 31, 2008, as compared to $4.7 million at December 31, 2007 and $4.1
million at December 31, 2006. As a percent of loans and foreclosed assets, nonperforming assets
were 0.80% at December 31, 2008, as compared to 0.31% at
December 31, 2007 and 0.30% at December
31, 2006. The increased level of nonperforming assets in 2008 is a result of slowing real estate
market and national and state economy. We believe the level of nonperforming assets to be manageable
and are not aware of any material classified credit not properly disclosed as nonperforming at
December 31, 2008.
30
Table 7 Nonperforming Assets (in thousands, except percentages):
At December 31, | ||||||||||||||||||||
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Nonaccrual loans |
$ | 9,893 | $ | 3,189 | $ | 3,529 | $ | 3,524 | $ | 4,142 | ||||||||||
Loans still
accruing and past due 90 days or more |
36 | 36 | 129 | 15 | 120 | |||||||||||||||
Restructured loans |
| | | | | |||||||||||||||
Nonperforming loans |
9,929 | 3,225 | 3,658 | 3,539 | 4,262 | |||||||||||||||
Foreclosed assets |
2,602 | 1,506 | 453 | 705 | 779 | |||||||||||||||
Total nonperforming assets |
$ | 12,531 | $ | 4,731 | $ | 4,111 | $ | 4,244 | $ | 5,041 | ||||||||||
As a % of loans and foreclosed assets |
0.80 | % | 0.31 | % | 0.30 | % | 0.33 | % | 0.43 | % |
We record interest payments received on impaired loans as interest income unless collections
of the remaining recorded investment are placed on nonaccrual, at which time we record payments
received as reductions of principal. We recognized interest income on impaired loans of
approximately $409,000, $100,000 and $91,000 during the years ended December 31, 2008, 2007, and
2006, respectively. If interest on impaired loans had been recognized on a full accrual basis
during the years ended December 31, 2008, 2007, and 2006, respectively, such income would have
approximated $624,000, $358,000 and $396,000.
Provision and Allowance for Loan Losses. The allowance for loan losses is the amount we
determine as of a specific date to be adequate to provide for losses on loans that we deem are
uncollectible. We determine the allowance and the required provision expense by reviewing general
loss experience and the performance of specific credits. The provision for loan losses was $8.0
million for 2008 as compared to $2.3 million for 2007 and $2.1 million for 2006. The increase in
the provision in 2008 was due to concern for a slowing real estate market and national economy and
a higher level of nonperforming assets. The increase in 2007 compared with 2006 was due to growth
in the loan portfolio and a slowing national real estate market. As a percent of average loans,
net loan charge-offs were 0.25% during 2008, 0.07% during 2007 and 0.04% during 2006. The
allowance for loan losses as a percent of loans was 1.37% as of December 31, 2008, as compared to
1.14% as of December 31, 2007. Included in Tables 8 and 9 are further analysis of our allowance
for loan losses compared to nonperforming assets and charge-offs.
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. The current
downturn in the economy or lower 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 banking agencies could require the recognition of additions to the
loan loss allowance based on their judgment of information available to them at the time of their
examination.
31
Table 8 Loan Loss Experience and Allowance for Loan Losses (in thousands, except
percentages):
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Balance at January 1, |
$ | 17,462 | $ | 16,201 | $ | 14,719 | $ | 13,837 | $ | 11,576 | ||||||||||
Allowance established from purchase acquisitions |
| | | 793 | 1,858 | |||||||||||||||
17,462 | 16,201 | 14,719 | 14,630 | 13,434 | ||||||||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial, financial and agricultural |
3,633 | 1,056 | 956 | 867 | 873 | |||||||||||||||
Consumer |
1,082 | 742 | 865 | 1,088 | 1,075 | |||||||||||||||
All other |
| | | 2 | 41 | |||||||||||||||
Total charge-offs |
4,715 | 1,798 | 1,821 | 1,957 | 1,989 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial, financial and agricultural |
475 | 346 | 747 | 213 | 342 | |||||||||||||||
Consumer |
350 | 376 | 487 | 507 | 402 | |||||||||||||||
All other |
| 6 | 8 | 6 | 15 | |||||||||||||||
Total recoveries |
825 | 728 | 1,242 | 726 | 759 | |||||||||||||||
Net charge-offs |
3,890 | 1,070 | 579 | 1,231 | 1,230 | |||||||||||||||
Provision for loan losses |
7,957 | 2,331 | 2,061 | 1,320 | 1,633 | |||||||||||||||
Balance at December 31, |
$ | 21,529 | $ | 17,462 | $ | 16,201 | $ | 14,719 | $ | 13,837 | ||||||||||
Loans at year-end |
$ | 1,566,143 | $ | 1,528,020 | $ | 1,373,735 | $ | 1,288,604 | $ | 1,164,223 | ||||||||||
Average loans |
1,537,027 | 1,427,922 | 1,308,309 | 1,209,095 | 1,044,010 | |||||||||||||||
Net charge-offs/average loans |
0.25 | % | 0.07 | % | 0.04 | % | 0.10 | % | 0.12 | % | ||||||||||
Allowance for loan losses/year-end loans |
1.37 | 1.14 | 1.18 | 1.14 | 1.19 | |||||||||||||||
Allowance for loan losses/nonperforming loans |
216.83 | 541.49 | 442.94 | 415.91 | 324.67 |
Table 9 Allocation of Allowance for Loan Losses (in thousands):
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Allocation | Allocation | Allocation | Allocation | Allocation | ||||||||||||||||
Amount | Amount | Amount | Amount | Amount | ||||||||||||||||
Commercial, financial and agricultural |
$ | 8,687 | $ | 7,786 | $ | 7,808 | $ | 5,962 | $ | 6,293 | ||||||||||
Real estate construction |
4,938 | 1,887 | 1,357 | 855 | 922 | |||||||||||||||
Real estate mortgage |
6,634 | 6,117 | 5,483 | 6,572 | 4,636 | |||||||||||||||
Consumer |
1,270 | 1,672 | 1,553 | 1,330 | 1,986 | |||||||||||||||
Total |
$ | 21,529 | $ | 17,462 | $ | 16,201 | $ | 14,719 | $ | 13,837 | ||||||||||
Percent of Total Loans:
2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||||||||
Commercial, financial and agricultural |
31.01 | % | 32.30 | % | 31.32 | % | 31.83 | % | 33.09 | % | ||||||||||
Real estate construction |
10.09 | 12.84 | 11.30 | 8.76 | 9.20 | |||||||||||||||
Real estate mortgage |
43.34 | 40.98 | 43.09 | 44.14 | 42.48 | |||||||||||||||
Consumer, net of unearned income |
15.56 | 13.88 | 14.29 | 15.27 | 15.23 |
Certain loans classified for regulatory purposes as doubtful and substandard are included in
the nonperforming asset table. Also included in classified loans are certain other loans that are
deemed to be potential problem loans. Potential problem loans are those loans that are currently
performing but for which known information about trends or uncertainties or possible credit
problems of the borrowers causes management to have serious doubts as to the ability of such
borrowers to comply with present repayment terms, possibly resulting in the transfer of such loans
to nonperforming status. These potential problem loans totaled $6.7 million as of December 31,
2008.
32
Trading Securities. As of December 31, 2008, trading securities totaled $56.0 million. The
trading securities portfolio is a government securities money market fund comprised primarily of
U.S. government agency securities and repurchase agreements collateralized by U.S. government
agency securities. The trading securities are carried at estimated fair value with unrealized
gains and losses included in earnings. The average balance on trading securities in 2008 was $37.6
million and the average yield was 1.99%. The Company did not hold trading securities in 2007 or
2006. The Company purchased trading securities in 2008 to improve its yield to and diversify its
Federal Funds sold portfolio.
Available-for-Sale and Held-to-Maturity Securities. At December 31, 2008, securities with an
amortized cost of $23.5 million were classified as securities held-to-maturity and securities with
a fair value of $1.239 billion were classified as securities available-for-sale. As compared to
December 31, 2007, the available for sale portfolio at December 31, 2008, reflected (1) an increase
of $11.7 million in U.S. Treasury securities and obligations of U.S. government
sponsored-enterprises and agencies; (2) an increase of $89.3 million in obligations of states and
political subdivisions; (3) a $22.8 million increase in corporate bonds; and (4) a $24.3 million
increase in mortgage-backed securities. As compared to December 31, 2006, the available for sale
portfolio at December 31, 2007 reflected (1) a decrease of $85.5 million in U.S. Treasury
securities and obligations of U.S. government sponsored-enterprises and agencies; (2) an increase
of $43.8 million in obligations of states and political subdivisions; (3) a decrease of $23.7
million in corporate bonds; and (4) an increase of $59.6 million in mortgage-backed securities. We
did not hold any high risk collateralized mortgage obligations or structured notes as of December
31, 2008. Our mortgage related securities are backed by GNMA, FNMA or FHLMC or are collateralized
by securities backed by these agencies.
See Note 2 to the Consolidated Financial Statements for additional disclosures relating to the
maturities and fair values of the investment portfolio at December 31, 2008 and 2007.
Table 10 Composition of Available-for-Sale and Held-to-Maturity Securities (dollars in
thousands):
At December 31, | ||||||||||||||||||||||||
2008 | 2007 | 2006 | ||||||||||||||||||||||
Held-to-Maturity: | Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | ||||||||||||||||||
Obligations of
states and
political
subdivisions |
$ | 22,574 | $ | 23,156 | $ | 25,042 | $ | 25,860 | $ | 25,007 | $ | 25,881 | ||||||||||||
Mortgage-backed
securities |
919 | 917 | 1,373 | 1,389 | 1,975 | 1,992 | ||||||||||||||||||
Other securities |
| | 4 | 4 | 4 | 4 | ||||||||||||||||||
$ | 23,493 | $ | 24,073 | $ | 26,419 | $ | 27,253 | $ | 26,986 | $ | 27,877 | |||||||||||||
Available-for-Sale: |
||||||||||||||||||||||||
U.S. Treasury securities
and obligations of U.S.
government
sponsored-enterprises
and agencies |
$ | 315,981 | $ | 330,046 | $ | 314,894 | $ | 318,381 | $ | 407,795 | $ | 403,855 | ||||||||||||
Obligations of states
and political
subdivisions |
380,009 | 379,997 | 286,293 | 290,714 | 242,748 | 246,958 | ||||||||||||||||||
Corporate bonds |
66,550 | 68,448 | 45,345 | 45,683 | 69,341 | 69,363 | ||||||||||||||||||
Mortgage-backed
securities |
444,352 | 453,924 | 427,504 | 429,596 | 375,794 | 370,013 | ||||||||||||||||||
Other securities |
6,328 | 6,507 | 17,588 | 17,700 | 12,092 | 12,138 | ||||||||||||||||||
$ | 1,213,220 | $ | 1,238,922 | $ | 1,091,624 | $ | 1,102,074 | $ | 1,107,770 | $ | 1,102,327 | |||||||||||||
33
Table 11 Maturities and Yields of Available-for-Sale and Held-to-Maturity Securities Held
at December 31, 2008 (in thousands, except percentages):
Maturing | ||||||||||||||||||||||||||||||||||||||||
After One Year | After Five Years | |||||||||||||||||||||||||||||||||||||||
One Year | Through | Through | After | |||||||||||||||||||||||||||||||||||||
or Less | Five Years | Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||
Held-to-Maturity: | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
Obligations of states and
political subdivisions |
$ | 10,414 | 7.50 | % | $ | 11,627 | 7.22 | % | $ | 240 | 6.44 | % | $ | 293 | 6.56 | % | $ | 22,574 | 7.33 | % | ||||||||||||||||||||
Mortgage-backed securities |
175 | 6.40 | % | 492 | 5.21 | % | 237 | 4.90 | % | 15 | 5.29 | % | 919 | 5.36 | % | |||||||||||||||||||||||||
Total |
$ | 10,589 | 7.49 | % | $ | 12,119 | 7.14 | % | $ | 477 | 5.68 | % | $ | 308 | 6.42 | % | $ | 23,493 | 7.26 | % | ||||||||||||||||||||
Maturing | ||||||||||||||||||||||||||||||||||||||||
After One Year | After Five Years | |||||||||||||||||||||||||||||||||||||||
One Year | Through | Through | After | |||||||||||||||||||||||||||||||||||||
or Less | Five Years | Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||
Available-for-Sale: | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
Obligations of U.S. government
sponsored-enterprises and
agencies |
$ | 73,546 | 4.48 | % | $ | 256,500 | 4.04 | % | $ | | | $ | | | $ | 330,046 | 4.14 | % | ||||||||||||||||||||||
Obligations of states and political
subdivisions |
18,570 | 6.91 | % | 111,778 | 5.89 | % | 110,251 | 5.89 | % | 139,398 | 5.93 | % | 379,997 | 5.95 | % | |||||||||||||||||||||||||
Corporate bonds and other securities |
14,439 | 4.12 | % | 49,115 | 5.09 | % | 11,401 | 7.10 | % | | | 74,955 | 5.22 | % | ||||||||||||||||||||||||||
Mortgage-backed securities |
9,451 | 4.77 | % | 341,472 | 4.99 | % | 100,568 | 4.96 | % | 2,433 | 5.51 | % | 453,924 | 4.98 | % | |||||||||||||||||||||||||
Total |
$ | 116,006 | 4.85 | % | $ | 758,865 | 4.81 | % | $ | 222,220 | 5.67 | % | $ | 141,831 | 5.92 | % | $ | 1,238,922 | 5.07 | % | ||||||||||||||||||||
Maturing | ||||||||||||||||||||||||||||||||||||||||
After One Year | After Five Years | |||||||||||||||||||||||||||||||||||||||
One Year | Through | Through | After | |||||||||||||||||||||||||||||||||||||
or Less | Five Years | Ten Years | Ten Years | Total | ||||||||||||||||||||||||||||||||||||
Total Available-for-Sale and | ||||||||||||||||||||||||||||||||||||||||
Held- to-Maturity Securities: | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||||||||||||
Obligations of U.S. government
sponsored-enterprises and
agencies |
$ | 73,546 | 4.48 | % | $ | 256,500 | 4.04 | % | $ | | | $ | | | $ | 330,046 | 4.14 | % | ||||||||||||||||||||||
Obligations of states and
political subdivisions |
28,984 | 7.13 | % | 123,405 | 6.02 | % | 110,491 | 5.89 | % | 139,691 | 5.93 | % | 402,571 | 6.03 | % | |||||||||||||||||||||||||
Corporate bonds and other
securities |
14,439 | 4.12 | % | 49,115 | 5.07 | % | 11,401 | 7.10 | % | | | 74,955 | 5.20 | % | ||||||||||||||||||||||||||
Mortgage-backed securities |
9,626 | 4.80 | % | 341,964 | 5.00 | % | 100,805 | 4.96 | % | 2,448 | 5.50 | % | 454,843 | 4.99 | % | |||||||||||||||||||||||||
Total |
$ | 126,595 | 5.07 | % | $ | 770,984 | 4.85 | % | $ | 222,697 | 5.53 | % | $ | 142,139 | 5.92 | % | $ | 1,262,415 | 5.11 | % | ||||||||||||||||||||
All yields are computed on a tax-equivalent basis assuming a marginal tax rate of 35%. Yields on
available-for-sale securities are based on amortized cost. Maturities of mortgage-backed
securities are based on contractual maturities and could differ due to prepayments of underlying
mortgages. Maturities of other securities are reported at the sooner of maturity date or call
date.
34
Table 12 Disclosure of Available-for-Sale and Held-to-Maturity Securities with Continuous
Unrealized Loss
The following tables disclose, as of December 31, 2008 and 2007, our available-for-sale and
held-to- maturity securities that have been in a continuous unrealized-loss position for less than
12 months and those that have been in a continuous unrealized-loss position for 12 or more months
(in thousands):
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
December 31, 2008 | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
Obligations of state and
political subdivisions |
$ | 155,518 | $ | 5,288 | $ | 658 | $ | 24 | $ | 156,176 | $ | 5,312 | ||||||||||||
Mortgage-backed securities |
4,016 | 9 | 15,749 | 76 | 19,765 | 85 | ||||||||||||||||||
Corporate and other securities |
19,701 | 377 | | | 19,701 | 377 | ||||||||||||||||||
Total |
$ | 179,235 | $ | 5,674 | $ | 16,407 | $ | 100 | $ | 195,642 | $ | 5,774 | ||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
December 31, 2007 | Fair Value | Loss | Fair Value | Loss | Fair Value | Loss | ||||||||||||||||||
U. S. Treasury securities and
obligations of U.S. government
sponsored-enterprises
and agencies |
$ | 8,978 | $ | 28 | $ | 93,466 | $ | 290 | $ | 102,444 | $ | 318 | ||||||||||||
Obligations of state and
political subdivisions |
40,622 | 353 | 26,521 | 412 | 67,143 | 765 | ||||||||||||||||||
Mortgage-backed securities |
55,676 | 80 | 115,141 | 1,600 | 170,817 | 1,680 | ||||||||||||||||||
Corporate and other securities |
7,021 | 60 | 5,231 | 19 | 12,252 | 79 | ||||||||||||||||||
Total |
$ | 112,297 | $ | 521 | $ | 240,359 | $ | 2,321 | $ | 352,656 | $ | 2,842 | ||||||||||||
The number of investment positions in this unrealized loss position totaled 493 at December
31, 2008. We do not believe these unrealized losses are other than temporary as (1) we have the
ability and intent to hold the investments to maturity, or a period of time sufficient to allow for
a recovery in market value and (2) it is probable that we will be able to collect the amounts
contractually due. The unrealized losses noted are interest rate related due to the level of
short-term and intermediate interest rates at December 31, 2008. We have reviewed the ratings of
the issuers and have not identified any issues related to the ultimate repayment of principal as a
result of credit concerns on these securities. Our mortgage related securities are backed by GNMA,
FNMA and FHLMC or are collateralized by securities backed by these agencies.
The portfolio had an overall tax equivalent yield of 5.13% at December 31, 2008. At December
31, 2008, the investment portfolio had a weighted average life of 4.66 years and modified duration
of 3.95 years.
Deposits. Deposits held by subsidiary banks represent our primary source of funding. Total
deposits were $2.583 billion as of December 31, 2008, as compared to $2.546 billion as of December
31, 2007 and $2.384 billion as of December 31, 2006. Table 13 provides a breakdown of average
deposits and rates paid over the past three years and the remaining maturity of time deposits of
$100,000 or more:
35
Table 13 Composition of Average Deposits and Remaining Maturity of Time Deposits of
$100,000 or More (in thousands, except percentages):
2008 | 2007 | 2006 | ||||||||||||||||||||||
Average | Average | Average | Average | Average | Average | |||||||||||||||||||
Balance | Rate | Balance | Rate | Balance | Rate | |||||||||||||||||||
Noninterest-bearing deposits |
$ | 741,418 | | $ | 649,642 | | $ | 611,023 | | |||||||||||||||
Interest-bearing deposits |
||||||||||||||||||||||||
Interest-bearing checking |
591,959 | 0.91 | % | 571,523 | 1.84 | % | 563,573 | 1.62 | % | |||||||||||||||
Savings and money market accounts |
434,294 | 0.83 | 361,778 | 1.48 | 384,102 | 1.29 | ||||||||||||||||||
Time deposits under $100,000 |
401,335 | 3.11 | 431,955 | 4.34 | 414,511 | 3.67 | ||||||||||||||||||
Time deposits of $100,000 or more |
347,570 | 3.35 | 370,991 | 4.68 | 339,865 | 4.01 | ||||||||||||||||||
Total interest-bearing deposits |
1,775,158 | 1.87 | % | 1,736,227 | 2.99 | % | 1,702,051 | 2.52 | % | |||||||||||||||
Total average deposits |
$ | 2,516,576 | $ | 2,385,869 | $ | 2,313,074 | ||||||||||||||||||
As of December 31, | ||||
2008 | ||||
Three months or less |
$ | 150,405 | ||
Over three through six months |
77,738 | |||
Over six through twelve months |
79,378 | |||
Over twelve months |
26,185 | |||
Total time deposits of $100,000 or more |
$ | 333,706 | ||
Short-Term Borrowings. Included in short-term borrowings were federal funds purchased and
securities sold under repurchase agreements of $236 million, $166 million and $143 million at
December 31, 2008, 2007, and 2006, respectively. Securities sold under repurchase agreements are
generally with significant customers of the Company that require short-term liquidity for their
funds. The average balance of federal funds purchased and securities sold under repurchase
agreements was $179 million, $162 million and $121 million in 2008, 2007 and 2006 respectively.
The average rate paid on federal funds purchased and securities sold under repurchase agreements
was 1.20%, 4.07% and 4.69% in 2008, 2007 and 2006, respectively. The weighted average rate on
federal funds purchased and securities sold under repurchase agreements was 0.41%, 2.87% and 4.77%
at December 31, 2008, 2007 and 2006, respectively. The highest amount of federal funds purchased
and securities sold under repurchase agreements at any month end during 2008, 2007 and 2006 was
$236 million, $196 million and $143 million, respectively.
Capital Resources
We evaluate capital resources by our ability to maintain adequate regulatory capital ratios to
do business in the banking industry. Issues related to capital resources arise primarily when we
are growing at an accelerated rate but not retaining a significant amount of our profits or when we
experience significant asset quality deterioration.
Total shareholders equity was $368.8 million, or 11.5% of total assets, at December 31, 2008,
as compared to $335.5 million, or 10.9% of total assets, at December 31, 2007. During 2008, total
shareholders equity averaged $348.3 million, or 11.4% of average assets, as compared to $311.8
million, or 10.8% of average assets, during 2007.
Banking regulators measure capital adequacy by means of the risk-based capital ratio and
leverage ratio. The risk-based capital rules provide for the weighting of assets and
off-balance-sheet commitments and contingencies according to prescribed risk categories ranging
from 0% to 100%. Regulatory capital is then divided by risk-weighted assets to determine the
risk-adjusted capital ratios. The leverage ratio is computed by dividing shareholders equity less
intangible assets by quarter-to-date average assets less intangible assets. Regulatory minimums
for total risk-based and leverage ratios are 8.00% and 3.00%, respectively. As of December 31,
2008, our total risk-based and leverage capital ratios were 17.04% and 9.68%, respectively, as
compared to total risk-based and leverage capital ratios of 15.62% and 9.23% as of December 31,
2007. We believe by all measurements our capital ratios remain well above regulatory minimums.
36
Interest Rate Risk. Interest rate risk results when the maturity or repricing intervals of
interest-earning assets and interest-bearing liabilities are different. Our exposure to interest
rate risk is managed primarily through our strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities that generate favorable earnings while
limiting the potential negative effects of changes in market interest rates. We use no
off-balance-sheet financial instruments to manage interest rate risk.
Each of our subsidiary banks has an asset liability management committee that monitors
interest rate risk and compliance with investment policies; there is also a holding company-wide
committee that monitors the aggregate companys interest rate risk and compliance with investment
policies. The Company and each subsidiary bank utilize an earnings simulation model as the primary
quantitative tool in measuring the amount of interest rate risk associated with changing market
rates. The model quantifies the effects of various interest rate scenarios on projected net
interest income and net income over the next 12 months. The model measures the impact on net
interest income relative to a base case scenario of hypothetical fluctuations in interest rates
over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth
and mix, pricing and the repricing and maturity characteristics of the existing and projected
balance sheet.
As of December 31, 2008, the model simulations projected that 100 and 200 basis point
increases in interest rates would result in positive variances in net interest income of 1.20% and
2.56%, respectively, relative to the base case over the next 12 months, while decreases in interest
rates of 50 and 100 basis points would result in negative variances in net interest income of 0.58%
and 1.86%, respectively, relative to the base case over the next 12 months. These are good faith
estimates and assume that the composition of our interest sensitive assets and liabilities existing
at each year-end 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. We believe 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 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,
we anticipate that our future results will likely be different from the foregoing estimates, and
such differences could be material.
Should we be unable to maintain a reasonable balance of maturities and repricing of our
interest-earning assets and our interest-bearing liabilities, we could be required to dispose of
our assets in an unfavorable manner or pay a higher than market rate to fund our activities. Our
asset liability committees oversee and monitor this risk.
Liquidity
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, as detailed in Tables 14 and 15. 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 borrow from short-term sources,
such as purchasing federal funds from correspondents and sales of securities under agreements to
repurchase, which amounted to $235.6 million at December 31, 2008, and an unfunded $50.0 million
line of credit established with a nonaffiliated bank which matures on December 31, 2009. First
Financial Bank, N. A., Abilene also has federal funds purchased lines of credit with two
non-affiliated banks totaling $60.0 million.
37
On December 19, 2008, the Company renewed its loan agreement, effective December 31, 2008,
with The Frost National Bank. Under the loan agreement, as renewed and amended, the Company is
permitted to draw up to $50.0 million on a revolving line of credit. Prior to December 31, 2009,
interest is paid quarterly at Wall Street Journal Prime and the line of credit matures December 31,
2009. If a balance exists at December 31, 2009, the principal balance coverts to a term facility
payable quarterly over five years and interest is paid quarterly at our election at Wall Street
Journal Prime plus 50 basis points or LIBOR plus 250 basis points. The line of credit is unsecured
for an outstanding balance less than or equal to $25.0 million and secured by the stock of a
subsidiary bank should the balance exceed $25.0 million. Among other provisions in the credit
agreement, the Company must satisfy certain financial covenants during the term of the loan
agreement, including, without limitation, covenants that require the Company to maintain certain
capital, tangible net worth, loan loss reserve, non-performing asset and cash flow coverage ratio.
In addition, the credit agreement contains certain operational covenants, that among others,
restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of
debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except
in the ordinary course of business. Since 1995, we have historically declared dividends as a
percentage of our consolidated net income in a range of 37% (low) in 1995 to 53% (high) in 2003 and
2006. There was no outstanding balance under the line of credit as of December 31, 2008 or 2007.
Given the strong core deposit base and relatively low loan to deposit ratios maintained at our
subsidiary banks, we consider our current liquidity position to be adequate to meet our short- and
long-term liquidity needs.
In addition, we anticipate that any future acquisition of financial institutions, expansion of
branch locations or offering of new products could also place a demand on our cash resources.
Available cash at our parent company, which totaled $35.6 million at December 31, 2008, available
dividends from subsidiary banks which totaled $32.4 million at December 31, 2008, utilization of
available lines of credit, and future debt or equity offerings are expected to be the source of
funding for these potential acquisitions or expansions. Existing cash resources at our subsidiary
banks may also be used as a source of funding for these potential acquisitions or expansions.
Table 14 Contractual Obligations As of December 31, 2008 (in thousands):
Payment Due by Period | ||||||||||||||||||||
Less than 1 | Over 5 | |||||||||||||||||||
Total Amounts | year | 2 3 years | 4 5 years | years | ||||||||||||||||
Deposits with stated maturity dates |
$ | 710,020 | $ | 641,357 | $ | 59,489 | $ | 9,174 | $ | | ||||||||||
Operating Leases |
1,591 | 558 | 804 | 217 | 12 | |||||||||||||||
Outsourcing Service Contracts |
1,150 | 960 | 190 | | | |||||||||||||||
Total Contractual Obligations |
712,761 | 642,875 | 60,483 | 9,391 | 12 | |||||||||||||||
Amounts above for deposits do not include related accrued interest.
Off-Balance Sheet Arrangements. We are a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of our customers. These
financial instruments include unfunded lines of credit, commitments to extend credit and federal
funds sold and standby letters of credit. Those instruments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in our consolidated balance
sheets.
Our exposure to credit loss in the event of nonperformance by the counterparty to the
financial instrument for unfunded lines of credit, commitments to extend credit and standby letters
of credit is represented by the contractual notional amount of these instruments. We generally use
the same credit policies in making commitments and conditional obligations as we do for
on-balance-sheet instruments.
Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the contract. These commitments
generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. We evaluate each
customers creditworthiness on a case-by-case basis. The amount of collateral
obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of
the counterparty. Collateral held varies but may include accounts receivable, inventory, property,
plant, and equipment and income-producing commercial properties.
38
Standby letters of credit are conditional commitments we issue to guarantee the performance of
a customer to a third party. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers. The average collateral value
held on letters of credit usually exceeds the contract amount.
Table 15 Commitments As of December 31, 2008 (in thousands):
Total Notional | ||||||||||||||||||||
Amounts | Less than 1 | Over 5 | ||||||||||||||||||
Committed | year | 2 3 years | 4 5 years | years | ||||||||||||||||
Unfunded lines of credit |
$ | 290,796 | $ | 282,273 | $ | 1,944 | $ | 2,260 | $ | 4,319 | ||||||||||
Unfunded commitments to
extend credit |
57,268 | 38,380 | 7,103 | 3,897 | 7,888 | |||||||||||||||
Standby letters of credit |
16,201 | 9,983 | 5,022 | 1,196 | | |||||||||||||||
Total Commercial Commitments |
$ | 364,265 | $ | 330,636 | $ | 14,069 | $ | 7,353 | $ | 12,207 | ||||||||||
We believe we have no other off-balance sheet arrangements or transactions with
unconsolidated, special purpose entities that would expose us to liability that is not reflected on
the face of the financial statements.
Parent Company Funding. Our ability to fund various operating expenses, dividends, and cash
acquisitions is generally dependent on our own earnings (without giving effect to our
subsidiaries), cash reserves and funds derived from our subsidiary banks. These funds historically
have been produced by intercompany dividends and management fees that are limited to reimbursement
of actual expenses. We anticipate that our recurring cash sources will continue to include
dividends and management fees from our subsidiary banks. At December 31, 2008, approximately $32.4
million was available for the payment of intercompany dividends by the subsidiaries without the
prior approval of regulatory agencies. Our subsidiaries paid aggregate dividends of $39.7 million
in 2008 and $42.3 million in 2007.
Dividends. Our long-term dividend policy is to pay cash dividends to our shareholders of
between 40% and 55% of net earnings while maintaining adequate capital to support growth. The cash
dividend payout ratios have amounted to 52.4%, 52.9% and 53.1% of net earnings, respectively, in
2008, 2007 and 2006. Given our current capital position and projected earnings and asset
growth rates, we do not anticipate any significant change in our current dividend policy. Also see
Payments of Dividends.
Each state bank that is a member of the Federal Reserve System and each national banking
association is required by federal law to obtain the prior approval of the Federal Reserve Board
and the OCC, respectively, to declare and pay dividends if the total of all dividends declared in
any calendar year would exceed the total of (1) such banks net profits (as defined and interpreted
by regulation) for that year plus (2) its retained net profits (as defined and interpreted by
regulation) for the preceding two calendar years, less any required transfers to surplus. In
addition, these banks may only pay dividends to the extent that retained net profits (including the
portion transferred to surplus) exceed bad debts (as defined by regulation).
To pay dividends, we and our subsidiary banks must maintain adequate capital above regulatory
guidelines. In addition, if the applicable regulatory authority believes that a bank under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending
on the financial condition of the bank, could include the payment of dividends), the authority may
require, after notice and hearing, that such bank cease and desist from the unsafe practice. The
Federal Reserve Board, the FDIC and the OCC have each indicated that paying dividends that deplete
a banks capital base to an inadequate level would be an unsafe and unsound banking practice. The
Federal Reserve Board, the OCC and the FDIC have issued policy statements that recommend that bank
holding companies and insured banks should generally only pay dividends out of current operating
earnings.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our management considers interest rate risk to be a significant market risk for us. See Item
7Managements Discussion and Analysis of Financial Condition and Results of OperationsCapital
ResourcesInterest Rate Risk for disclosure regarding this market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements begin on page F-1.
Quarterly Results of Operations (in thousands, except per share and common stock data):
The following tables set forth certain unaudited historical quarterly financial data for each
of the eight consecutive quarters in fiscal 2008 and 2007. This information is derived from
unaudited consolidated financial statements that include, in our opinion, all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation when read in
conjunction with our consolidated financial statements and notes thereto included elsewhere in this
Form 10-K.
2008 | ||||||||||||||||
4th | 3rd | 2nd | 1st | |||||||||||||
Summary Income Statement Information: |
||||||||||||||||
Interest income |
$ | 39,239 | $ | 39,218 | $ | 38,951 | $ | 41,746 | ||||||||
Interest expense |
6,593 | 7,819 | 8,931 | 11,917 | ||||||||||||
Net interest income |
32,646 | 31,399 | 30,020 | 29,829 | ||||||||||||
Provision for loan losses |
3,683 | 1,765 | 1,441 | 1,068 | ||||||||||||
Net interest income after provision for loan losses |
28,963 | 29,634 | 28,579 | 28,761 | ||||||||||||
Noninterest income |
11,049 | 12,145 | 13,289 | 11,919 | ||||||||||||
Net gain on securities transactions |
346 | 146 | 166 | 393 | ||||||||||||
Noninterest expense |
22,532 | 23,385 | 23,009 | 22,661 | ||||||||||||
Earnings before income taxes |
17,826 | 18,540 | 19,025 | 18,412 | ||||||||||||
Income tax expense |
4,787 | 5,179 | 5,423 | 5,250 | ||||||||||||
Net earnings |
$ | 13,039 | $ | 13,361 | $ | 13,602 | $ | 13,162 | ||||||||
Per Share Data: |
||||||||||||||||
Net earnings per share, basic |
$ | 0.63 | $ | 0.64 | $ | 0.65 | $ | 0.63 | ||||||||
Net earnings per share, assuming dilution |
0.62 | 0.64 | 0.65 | 0.63 | ||||||||||||
Cash dividends declared |
0.34 | 0.34 | 0.34 | 0.32 | ||||||||||||
Book value at period-end |
17.73 | 16.85 | 16.54 | 16.93 | ||||||||||||
Common stock sales price: (1) |
||||||||||||||||
High |
56.32 | 67.00 | 47.12 | 42.16 | ||||||||||||
Low |
41.30 | 43.01 | 40.43 | 35.49 | ||||||||||||
Close |
55.21 | 51.88 | 45.81 | 40.98 |
40
2007 | ||||||||||||||||
4th | 3rd | 2nd | 1st | |||||||||||||
Summary Income Statement Information: |
||||||||||||||||
Interest income |
$ | 43,482 | $ | 42,556 | $ | 42,259 | $ | 41,072 | ||||||||
Interest expense |
14,229 | 14,816 | 15,013 | 14,499 | ||||||||||||
Net interest income |
29,253 | 27,740 | 27,246 | 26,573 | ||||||||||||
Provision for loan losses |
1,377 | 475 | 237 | 242 | ||||||||||||
Net interest income after provision for loan losses |
27,876 | 27,265 | 27,009 | 26,331 | ||||||||||||
Noninterest income |
12,320 | 11,996 | 12,972 | 10,836 | ||||||||||||
Net gain on securities transactions |
70 | (5 | ) | | 84 | |||||||||||
Noninterest expense |
22,730 | 21,983 | 21,248 | 20,867 | ||||||||||||
Earnings before income taxes |
17,536 | 17,273 | 18,733 | 16,384 | ||||||||||||
Income tax expense |
5,030 | 5,022 | 5,463 | 4,922 | ||||||||||||
Net earnings |
$ | 12,506 | $ | 12,251 | $ | 13,270 | $ | 11,462 | ||||||||
Per Share Data: |
||||||||||||||||
Net earnings per share, basic |
$ | 0.60 | $ | 0.59 | $ | 0.64 | $ | 0.55 | ||||||||
Net earnings per share, assuming dilution |
0.60 | 0.59 | 0.64 | 0.55 | ||||||||||||
Cash dividends declared |
0.32 | 0.32 | 0.32 | 0.30 | ||||||||||||
Book value at period-end |
16.16 | 15.51 | 14.76 | 14.85 | ||||||||||||
Common stock sales price: (1) |
||||||||||||||||
High |
$ | 42.62 | $ | 44.00 | $ | 42.71 | $ | 43.69 | ||||||||
Low |
35.53 | 35.19 | 37.33 | 39.79 | ||||||||||||
Close |
37.65 | 40.18 | 38.81 | 41.82 |
(1) | These quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. | CONTROLS AND PROCEDURES |
As of December 31, 2008, we carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and principal financial
officer, of the effectiveness of the design and operation of our disclosure controls and procedures
pursuant to Securities Exchange Act Rule 15d-15. Our management, including the principal executive
officer and principal financial officer, does not expect that our disclosure controls and
procedures will prevent all errors and all fraud.
A control system, no matter how well conceived and operated, can provide only reasonable not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time, controls may become
inadequate because of changes in conditions or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected. Our principal executive
officer and principal financial officer have concluded, based on our evaluation of our disclosure
controls and procedures, that our disclosure controls and procedures under Rule 13a-14 (c) and Rule
15d-14 (c) of the Securities Exchange Act of 1934 are effective at the reasonable assurance level
as of December 31, 2008.
41
Subsequent to our evaluation, there were no significant changes in internal controls over
financial reporting or other factors that have materially affected, or is reasonably likely to
materially affect, these internal controls.
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of First Financial Bankshares, Inc. and subsidiaries is responsible for establishing
and maintaining adequate internal control over financial reporting. First Financial Bankshares,
Inc. and subsidiaries internal control system was designed to provide reasonable assurance to the
Companys management and board of directors regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
First Financial Bankshares, Inc. and subsidiaries management assessed the effectiveness of the
Companys internal control over financial reporting as of December 31, 2008. In making this
assessment, it used the criteria for effective internal control over financial reporting set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on our assessment we believe that, as of December 31, 2008, the
Companys internal control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f), is effective based on those criteria.
First Financial Bankshares, Inc. and subsidiaries independent auditors have issued an audit
report, dated February 16, 2009, on the effectiveness of the Companys internal control over
financial reporting as of December 31, 2008.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.
First Financial Bankshares, Inc.
We have audited First Financial Bankshares, Inc.s internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). First
Financial Bankshares, Inc.s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
42
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, First Financial Bankshares, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the 2008 consolidated financial statements of First Financial Bankshares,
Inc. and our report dated February 18, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Dallas, Texas
February 18, 2009
February 18, 2009
ITEM 9B. | OTHER INFORMATION |
On February 23, 2009, the Board of Directors of the Company amended the Amended and Restated
Bylaws, as amended (the Bylaws), of the Company to clarify the vote requirement for the election
of the Companys directors. No other changes to the Companys Bylaws were made. A copy of the
amendment to the Bylaws is attached as Exhibit 3.2 to this report.
43
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 is hereby incorporated by reference from our proxy
statement for our 2009 annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from our 2009 proxy
statement.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 related to security ownership of certain beneficial owners
and management is hereby incorporated by reference from our 2009 proxy statement. The following
chart gives aggregate information under our equity compensation plans as of December 31, 2008.
Number of Securities | ||||||||||||
Remaining Available | ||||||||||||
For Future Issuance | ||||||||||||
Number of Securities | Under Equity | |||||||||||
To be Issued Upon | Weighted Average | Compensation Plans | ||||||||||
Exercise of | Exercise Price of | (Excluding Securities | ||||||||||
Outstanding Options, | Outstanding Options, | Reflected in | ||||||||||
Warrants and Rights | Warrants and Rights | Far Left Column) | ||||||||||
Equity compensation plans
approved by security holders |
226,264 | $ | 32.65 | 587,271 | ||||||||
Equity compensation plans not
approved by security holders |
| | | |||||||||
Total |
226,264 | $ | 32.65 | 587,271 | ||||||||
The remainder of the information required by Item 12 is incorporated by reference from our 2009
proxy statement.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is hereby incorporated by reference from our 2009 proxy
statement.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by Item 14 is hereby incorporated by reference from our 2009 proxy
statement.
44
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) | Financial Statements - | ||
Report of Independent Registered Public Accounting Firm |
|||
Consolidated Balance Sheets as of December 31, 2008 and 2007 | |||
Consolidated Statements of Earnings for the years ended December 31, 2008, 2007 and 2006 | |||
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2008, 2007 and 2006 | |||
Consolidated Statements of Shareholders Equity for the years ended December 31, 2008, 2007 and 2006 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006 | |||
Notes to the Consolidated Financial Statements | |||
(2) | Financial Statement Schedules - | ||
These schedules have been omitted because they are not required, are not applicable or have been included in our consolidated financial statements. | |||
(3) | Exhibits - | ||
The information required by this Item 15(a)(3) is set forth in the Exhibit Index immediately following our signature pages. The exhibits listed herein will be furnished upon written request to J. Bruce Hildebrand, Executive Vice President, First Financial Bankshares, Inc., 400 Pine Street, Abilene, Texas 79601, and payment of a reasonable fee that will be limited to our reasonable expense in furnishing such exhibits. |
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 24, 2009 | By: | /s/ F. SCOTT DUESER | ||
F. SCOTT DUESER | ||||
Chairman of the Board, Director, President and Chief Executive Officer (Principal Executive Officer) |
||||
The undersigned directors and officers of First Financial Bankshares, Inc. hereby constitute
and appoint J. Bruce Hildebrand, with full power to act and with full power of substitution and
resubstitution, our true and lawful attorney-in-fact with full power to execute in our name and
behalf in the capacities indicated below any and all amendments to this report and to file the
same, with all exhibits thereto and other documents in connection therewith with the Securities and
Exchange Commission and hereby ratify and confirm all that such attorney-in-fact or his substitute
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name | Title | Date | ||
/s/ F. SCOTT DUESER
|
Chairman of the Board, Director, President, and Chief Executive Officer (Principal Executive Officer) | February 24, 2009 | ||
/s/ J. BRUCE HILDEBRAND
|
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | February 24, 2009 | ||
/s/ TUCKER S. BRIDWELL
|
Director | February 24, 2009 | ||
/s/ JOSEPH E. CANON
|
Director | February 24, 2009 | ||
/s/ MAC A. COALSON
|
Director | February 24, 2009 | ||
/s/ DAVID COPELAND
|
Director | February 24, 2009 |
46
Name | Title | Date | ||
/s/MURRAY EDWARDS
|
Director | February 24, 2009 | ||
/s/ DERRELL E. JOHNSON
|
Director | February 24, 2009 | ||
/s/ KADE L. MATTHEWS
|
Director | February 24, 2009 | ||
/s/ KENNETH T. MURPHY
|
Director | February 24, 2009 | ||
/s/ DIAN GRAVES STAI
|
Director | February 24, 2009 | ||
/s/ F. L. STEPHENS
|
Director | February 24, 2009 | ||
/s/ JOHNNY TROTTER
|
Director | February 24, 2009 |
47
Exhibits Index
The following exhibits are filed as part of this report:
3.1
|
| 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). | ||
*3.2
|
| Amended and Restated Bylaws, and all amendments thereto, of the Registrant. | ||
4.1
|
| 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). | ||
10.1
|
| Deferred Compensation Agreement, dated October 28, 1992, between the Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit 10.1 of the Registrants Form 10-K Annual Report for the year ended December 31, 2002). | ||
10.2
|
| Revised Deferred Compensation Agreement, dated December 28, 1995, between the Registrant and Kenneth T. Murphy (incorporated by reference from Exhibit 10.2 of the Registrants Form 10-K Annual Report for the year ended December 31, 2002). | ||
10.3
|
| Executive Recognition Plan (incorporated by reference from Exhibit 10.1 of the Registrants Form 8-K Report filed July 3, 2006). | ||
10.4
|
| 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). | ||
10.5
|
| 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). | ||
10.6
|
| 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). | ||
10.7
|
| 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). | ||
10.8
|
| 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). | ||
10.9
|
| Third Amendment to Loan Agreement, dated December 31, 2007, between First Financial Bankshares, Inc. and The Frost National Bank (incorporated by reference from Exhibit 10.4 of the Registrants Form 8-K filed December 31, 2007). | ||
10.10
|
| Fourth Amendment to Loan Agreement, dated July 24, 2008, between First Financial Bankshares, Inc. and The Frost National Bank (incorporated by reference from Exhibit 10.10 of the Registrants Form 10-Q filed July 25, 2008). | ||
10.11
|
| Fifth Amendment to Loan Agreement, dated December 19, 2008, between First Financial Bankshares, Inc. and The Frost National Bank (incorporated by reference from Exhibit 10.6 of the Registrants Form 8-K filed December 22, 2008). | ||
*21.1
|
| Subsidiaries of the Registrant. | ||
*23.1
|
| Consent of Ernst & Young LLP. | ||
24.1
|
| Power of Attorney (included on signature page of this Form 10-K). | ||
*31.1
|
| Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Executive Officer of First Financial Bankshares, Inc. | ||
*31.2
|
| Rule 13a-14(a) / 15(d)-14(a) Certification of Chief Financial Officer of First Financial Bankshares, Inc. | ||
*32.1
|
| Section 1350 Certification of Chief Executive Officer of First Financial Bankshares, Inc. | ||
*32.2
|
| Section 1350 Certification of Chief Financial Officer of First Financial Bankshares, Inc. |
* | Filed herewith |
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
First Financial Bankshares, Inc.
First Financial Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of First Financial Bankshares, Inc. (a
Texas corporation) and subsidiaries as of December 31, 2008 and 2007, and the related consolidated
statements of earnings, comprehensive earnings, shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2008. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of First Financial Bankshares, Inc. and subsidiaries
at December 31, 2008 and 2007, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2008, in conformity with U. S.
generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), First Financial Bankshares, Inc.s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 18, 2009, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP | ||||
Dallas, Texas
February 18, 2009
February 18, 2009
F-1
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2008 and 2007
Consolidated Balance Sheets
December 31, 2008 and 2007
2008 | 2007 | |||||||
ASSETS |
||||||||
CASH AND DUE FROM BANKS |
$ | 137,569,957 | $ | 163,559,942 | ||||
FEDERAL FUNDS SOLD |
27,660,000 | 99,450,000 | ||||||
INTEREST-BEARING DEPOSITS IN BANKS |
3,658,037 | 1,878,434 | ||||||
Total cash and cash equivalents |
168,887,994 | 264,888,376 | ||||||
TRADING SECURITIES, at fair value |
55,990,882 | | ||||||
SECURITIES HELD-TO-MATURITY (fair value of $24,072,925 in
2008 and $27,253,367 in 2007) |
23,493,088 | 26,419,040 | ||||||
SECURITIES AVAILABLE-FOR-SALE, at fair value |
1,238,921,868 | 1,094,492,701 | ||||||
LOANS: |
||||||||
Held for investment |
1,511,420,878 | 1,492,223,308 | ||||||
Held for sale |
54,721,837 | 35,796,281 | ||||||
1,566,142,715 | 1,528,019,589 | |||||||
Less- allowance for loan losses |
(21,528,860 | ) | (17,461,514 | ) | ||||
Net loans |
1,544,613,855 | 1,510,558,075 | ||||||
BANK PREMISES AND EQUIPMENT, net |
65,675,138 | 61,670,159 | ||||||
INTANGIBLE ASSETS |
64,002,968 | 65,207,169 | ||||||
OTHER ASSETS |
50,798,861 | 47,073,892 | ||||||
Total assets |
$ | 3,212,384,654 | $ | 3,070,309,412 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
NONINTEREST-BEARING DEPOSITS |
$ | 797,077,004 | $ | 739,180,980 | ||||
INTEREST-BEARING DEPOSITS |
1,785,676,148 | 1,806,902,038 | ||||||
Total deposits |
2,582,753,152 | 2,546,083,018 | ||||||
DIVIDENDS PAYABLE |
7,071,342 | 6,645,590 | ||||||
SHORT-TERM BORROWINGS |
235,598,268 | 166,266,426 | ||||||
OTHER LIABILITIES |
18,179,664 | 15,818,916 | ||||||
Total liabilities |
2,843,602,426 | 2,734,813,950 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS EQUITY: |
||||||||
Common stock, $0.01 par value; authorized 40,000,000
shares; 20,799,198 and
20,766,848 issued at December 31, 2008 and 2007,
respectively |
207,992 | 207,669 | ||||||
Capital surplus |
268,087,449 | 267,136,338 | ||||||
Retained earnings |
89,637,172 | 64,333,921 | ||||||
Treasury stock (shares at cost: 158,811 and 155,415 at
December 31, 2008 and 2007, respectively) |
(3,500,436 | ) | (3,170,304 | ) | ||||
Deferred Compensation |
3,500,436 | 3,170,304 | ||||||
Accumulated other comprehensive earnings |
10,849,615 | 3,817,534 | ||||||
Total shareholders equity |
368,782,228 | 335,495,462 | ||||||
Total liabilities and shareholders equity |
$ | 3,212,384,654 | $ | 3,070,309,412 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
F-2
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Earnings
Years Ended December 31, 2008, 2007 and 2006
2008 | 2007 | 2006 | ||||||||||
INTEREST INCOME: |
||||||||||||
Interest and fees on loans |
$ | 104,887,230 | $ | 114,333,665 | $ | 101,864,998 | ||||||
Interest on investment securities: |
||||||||||||
Taxable |
37,538,846 | 38,880,569 | 39,297,823 | |||||||||
Exempt from federal income tax |
14,191,012 | 12,393,019 | 10,350,154 | |||||||||
Interest on trading securities |
747,426 | | | |||||||||
Interest on federal funds sold and interest-bearing
deposits in banks |
1,789,516 | 3,761,708 | 2,980,973 | |||||||||
Total interest income |
159,154,030 | 169,368,961 | 154,493,948 | |||||||||
INTEREST EXPENSE: |
||||||||||||
Interest on deposits |
33,110,183 | 51,979,999 | 42,972,105 | |||||||||
Other |
2,148,672 | 6,577,340 | 5,655,579 | |||||||||
Total interest expense |
35,258,855 | 58,557,339 | 48,627,684 | |||||||||
Net interest income |
123,895,175 | 110,811,622 | 105,866,264 | |||||||||
PROVISION FOR LOAN LOSSES |
7,956,798 | 2,331,172 | 2,061,088 | |||||||||
Net interest income after provision for loan losses |
115,938,377 | 108,480,450 | 103,805,176 | |||||||||
NONINTEREST INCOME: |
||||||||||||
Trust fees |
9,440,936 | 8,746,756 | 7,664,810 | |||||||||
Service charges on deposit accounts |
22,596,535 | 22,919,519 | 22,449,963 | |||||||||
ATM and credit card fees |
8,904,182 | 7,520,988 | 6,213,964 | |||||||||
Real estate mortgage operations |
2,536,257 | 3,346,547 | 2,538,913 | |||||||||
Net gain on securities transactions |
1,051,822 | 149,891 | 62,091 | |||||||||
Net gain on sale of student loans |
1,675,420 | 1,913,407 | 2,141,477 | |||||||||
Net gain (loss) on sale of other real estate |
4,916 | 107,875 | (9,947 | ) | ||||||||
Other |
3,243,057 | 3,567,888 | 3,606,731 | |||||||||
Total noninterest income |
49,453,125 | 48,272,871 | 44,668,002 | |||||||||
NONINTEREST EXPENSE: |
||||||||||||
Salaries and employee benefits |
49,284,653 | 46,943,935 | 44,179,620 | |||||||||
Net occupancy expense |
6,734,968 | 5,893,468 | 5,985,527 | |||||||||
Equipment expense |
7,546,928 | 7,220,339 | 7,039,009 | |||||||||
Printing, stationery and supplies |
1,890,843 | 2,003,814 | 2,067,251 | |||||||||
Correspondent bank service charges |
1,168,863 | 1,153,015 | 1,352,793 | |||||||||
Amortization of intangible assets |
1,204,200 | 1,494,931 | 1,491,393 | |||||||||
Other expenses |
23,756,936 | 22,117,373 | 20,901,600 | |||||||||
Total noninterest expense |
91,587,391 | 86,826,875 | 83,017,193 | |||||||||
EARNINGS BEFORE INCOME TAXES |
73,804,111 | 69,926,446 | 65,455,985 | |||||||||
INCOME TAX EXPENSE |
20,639,825 | 20,436,841 | 19,426,769 | |||||||||
NET EARNINGS |
$ | 53,164,286 | $ | 49,489,605 | $ | 46,029,216 | ||||||
NET EARNINGS PER SHARE, BASIC |
$ | 2.56 | $ | 2.38 | $ | 2.22 | ||||||
NET EARNINGS PER SHARE, ASSUMING DILUTION |
$ | 2.55 | $ | 2.38 | $ | 2.21 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Comprehensive Earnings
Years Ended December 31, 2008, 2007 and 2006
2008 | 2007 | 2006 | ||||||||||
NET EARNINGS |
$ | 53,164,286 | $ | 49,489,605 | $ | 46,029,216 | ||||||
OTHER ITEMS OF COMPREHENSIVE EARNINGS: |
||||||||||||
Change in unrealized gain (loss) on investment securities
available-for-sale, before income tax |
16,322,499 | 16,042,662 | 3,979,897 | |||||||||
Reclassification adjustment for realized gains on investment
securities included in net earnings, before income tax |
(1,051,822 | ) | (149,891 | ) | (62,091 | ) | ||||||
Minimum liability pension adjustment, before income tax |
(4,452,089 | ) | 124,572 | (174,063 | ) | |||||||
Total other items of comprehensive earnings |
10,818,588 | 16,017,343 | 3,743,743 | |||||||||
Income tax benefit (expense) related to: |
||||||||||||
Investment securities |
(5,344,737 | ) | (5,562,470 | ) | (1,371,232 | ) | ||||||
Minimum liability pension adjustment |
1,558,231 | (43,600 | ) | 60,922 | ||||||||
(3,786,506 | ) | (5,606,070 | ) | (1,310,310 | ) | |||||||
COMPREHENSIVE EARNINGS |
$ | 60,196,368 | $ | 59,900,878 | $ | 48,462,649 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Shareholders Equity
Years Ended December 31, 2008, 2007 and 2006
Accumulated | ||||||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||||||
Comprehensive | Total | |||||||||||||||||||||||||||||||||||
Common Stock | Capital | Retained | Treasury Stock | Deferred | Earnings | Shareholders | ||||||||||||||||||||||||||||||
Shares | Amount | Surplus | Earnings | Shares | Amounts | Compensation | (Losses) | Equity | ||||||||||||||||||||||||||||
BALANCE, 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 from $10.00
to $0.01 |
| (206,971,541 | ) | 206,971,541 | | | | | | | ||||||||||||||||||||||||||
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
income taxes |
| | | | | | | (113,141 | ) | (113,141 | ) | |||||||||||||||||||||||||
Change in unrealized gain (loss) on investment in
securities available-for-sale, net of related 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 | |||||||||||||||||||||||||||
BALANCE, 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 |
| | | 49,489,605 | | | | | 49,489,605 | |||||||||||||||||||||||||||
Stock issuances |
27,721 | 277526,359 | | | | | | 526,636 | ||||||||||||||||||||||||||||
Cash dividends declared,
$1.26 per share |
| | | (26,159,284 | ) | | | | | (26,159,284 | ) | |||||||||||||||||||||||||
Minimum liability pension adjustment, net of related
income taxes |
| | | | | | | 80,972 | 80,972 | |||||||||||||||||||||||||||
Change in unrealized gain (loss) on investment in
securities available-for-sale, net of related taxes |
| | | | | | | 10,318,446 | 10,318,446 | |||||||||||||||||||||||||||
Additional tax benefit related to directors
deferred compensation plan |
| | 117,844 | | | | | | 117,844 | |||||||||||||||||||||||||||
Shares purchased in connection with directors
deferred compensation plan, net |
| | | | (2,228 | ) | (258,798 | ) | 258,798 | | | |||||||||||||||||||||||||
Stock option expense |
| | 220,205 | | | | | | 220,205 | |||||||||||||||||||||||||||
BALANCE, December 31, 2007 |
20,766,848 | $ | 207,669 | $ | 267,136,338 | $ | 64,333,921 | (155,415 | ) | $ | (3,170,304 | ) | $ | 3,170,304 | $ | 3,817,534 | $ | 335,495,462 | ||||||||||||||||||
Net earnings |
| | | 53,164,286 | | | | | 53,164,286 | |||||||||||||||||||||||||||
Stock issuances |
32,350 | 323 | 608,568 | | | | | | 608,891 | |||||||||||||||||||||||||||
Cash dividends declared,
$1.34 per share |
| | | (27,861,035 | ) | | | | | (27,861,035 | ) | |||||||||||||||||||||||||
Minimum liability pension adjustment, net of related
income taxes |
| | | | | | | (2,893,859 | ) | (2,893,859 | ) | |||||||||||||||||||||||||
Change in unrealized gain (loss) on investment in
securities available-for-sale, net of related taxes |
| | | | | | | 9,925,940 | 9,925,940 | |||||||||||||||||||||||||||
Additional tax benefit related to directors
deferred compensation plan |
| | 116,801 | | | | | | 116,801 | |||||||||||||||||||||||||||
Shares purchased in connection with directors
deferred compensation plan, net |
| | | | (3,396 | ) | (330,132 | ) | 330,132 | | | |||||||||||||||||||||||||
Stock option expense |
| | 225,742 | | | | | | 225,742 | |||||||||||||||||||||||||||
BALANCE, December 31, 2008 |
20,799,198 | $ | 207,992 | $ | 268,087,449 | $ | 89,637,172 | (158,811 | ) | $ | (3,500,436 | ) | $ | 3,500,436 | $ | 10,849,615 | $ | 368,782,228 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
2008 | 2007 | 2006 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net earnings |
$ | 53,164,286 | $ | 49,489,605 | $ | 46,029,216 | ||||||
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities: |
||||||||||||
Depreciation and amortization |
8,013,684 | 7,817,931 | 7,954,560 | |||||||||
Provision for loan losses |
7,956,798 | 2,331,172 | 2,061,088 | |||||||||
Securities premium amortization (discount accretion), net |
715,366 | (636,173 | ) | 215,998 | ||||||||
Gain on sale of assets, net |
(2,788,408 | ) | (2,102,712 | ) | (2,234,154 | ) | ||||||
Deferred federal income tax expense (benefit) |
(122,877 | ) | 464,397 | (26,625 | ) | |||||||
Trading security activity, net |
(55,990,882 | ) | | | ||||||||
Loans originated for resale |
(186,070,970 | ) | (190,037,588 | ) | (170,602,938 | ) | ||||||
Proceeds from sale of loans held for resale |
168,774,668 | 193,554,563 | 174,179,850 | |||||||||
Change in other assets |
(565,325 | ) | (1,629,455 | ) | (9,951,982 | ) | ||||||
Change in other liabilities |
(3,581,285 | ) | (4,461,115 | ) | 233,852 | |||||||
Total adjustments |
(63,659,231 | ) | 5,301,020 | 1,829,649 | ||||||||
Net cash provided by (used in) operating activities |
(10,494,945 | ) | 54,790,625 | 47,858,865 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Activity in available-for-sale securities: |
||||||||||||
Sales |
89,439,313 | 38,531,378 | 18,513,440 | |||||||||
Maturities |
199,925,169 | 881,288,653 | 1,858,293,402 | |||||||||
Purchases |
(421,585,072 | ) | (898,748,116 | ) | (1,978,123,309 | ) | ||||||
Activity in held-to-maturity securities: |
||||||||||||
Maturities |
2,923,808 | 1,570,217 | 26,173,833 | |||||||||
Purchases |
| (1,000,000 | ) | | ||||||||
Net increase in loans |
(25,689,003 | ) | (159,437,929 | ) | (87,566,639 | ) | ||||||
Purchases of bank premises and equipment and computer software |
(11,777,805 | ) | (8,330,954 | ) | (7,370,681 | ) | ||||||
Proceeds from sale of other assets |
2,082,569 | 2,567,705 | 707,035 | |||||||||
Net cash used in investing activities |
(164,681,021 | ) | (143,559,046 | ) | (169,372,919 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Net increase in noninterest-bearing deposits |
57,896,024 | 53,845,237 | 62,179,901 | |||||||||
Net increase (decrease) in interest-bearing deposits |
(21,225,890 | ) | 108,213,734 | (44,432,986 | ) | |||||||
Net increase in short-term borrowings |
69,331,842 | 23,022,079 | 69,005,371 | |||||||||
Common stock transactions: |
||||||||||||
Proceeds of stock issuances |
608,891 | 526,636 | 440,716 | |||||||||
Dividends paid |
(27,435,283 | ) | (24,927,542 | ) | (24,011,155 | ) | ||||||
Net cash provided by financing activities |
79,175,584 | 160,680,144 | 63,181,847 | |||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
(96,000,382 | ) | 71,911,723 | (58,332,207 | ) | |||||||
CASH AND CASH EQUIVALENTS, beginning of year |
264,888,376 | 192,976,653 | 251,308,860 | |||||||||
CASH AND CASH EQUIVALENTS, end of year |
$ | 168,887,994 | $ | 264,888,376 | $ | 192,976,653 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) (Bankshares, Company, we or us) is a
financial holding company which owns (through its wholly-owned Delaware subsidiary) all of the
capital stock of ten banks located in Texas as of December 31, 2008. Those subsidiary banks are
First Financial Bank, National Association, Abilene; Hereford State Bank; First Financial Bank,
National Association, Sweetwater; First Financial Bank, National Association, Eastland; First
Financial Bank, National Association, Cleburne; First Financial Bank, National Association,
Stephenville; San Angelo National Bank; Weatherford National Bank; First Financial Bank, National
Association, Southlake and First Financial Bank, National Association, Mineral Wells. Each
subsidiary banks primary source of revenue is providing loans and banking services to consumers
and commercial customers in the market area in which the subsidiary is located. In addition, the
Company also owns First Financial Investments of Delaware, Inc., First Financial Trust & Asset
Management Company, National Association, First Financial Insurance Agency, Inc., First Financial
Investments, Inc. and First Technology Services, Inc., an information technology subsidiary.
A summary of significant accounting policies of Bankshares and subsidiaries (collectively, the
Company) applied in the preparation of the accompanying consolidated financial statements
follows. The accounting principles followed by the Company and the methods of applying them are in
conformity with both U. S. generally accepted accounting principles and prevailing practices of the
banking industry.
Stock Transactions
On April 25, 2006, the shareholders of the Company approved an amendment to our Corporate Charter
at the Annual Shareholders Meeting to change the par value of our common stock from $10.00 to
$0.01 per share. In the second quarter of 2006, the Company transferred appropriate amounts from
common stock to capital surplus in the consolidated financial statements to reflect this change in
par value.
On April 24, 2006, the Companys Board of Directors authorized the repurchase of up to 500,000
shares of common stock over the next three years. The plan authorizes management to repurchase the
stock at such time as repurchases are considered beneficial to stockholders. Any repurchases of
the stock will be through the open market or in privately negotiated transactions in accordance
with applicable laws and regulations. No stock has been repurchased under this plan as of December
31, 2008.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U. S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination of the allowance for
loan losses, valuation of investment securities, the valuation of foreclosed real estate, deferred
income tax assets, and the fair value of financial instruments.
Consolidation
The accompanying consolidated financial statements include the accounts of Bankshares and its
subsidiaries, all of which are wholly-owned. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications have been made to 2006 and 2007
financial statements to conform to the 2008 presentation.
F-7
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Investment Securities
Management classifies debt and equity securities as held-to-maturity, available-for-sale, or
trading based on its intent. Debt securities that management has the positive intent and ability
to hold to maturity are classified as held-to-maturity and recorded at cost, adjusted for
amortization of premiums and accretion of discounts, which are recognized as adjustments to
interest income using the interest method. Securities not classified as held-to-maturity or
trading are classified as available-for-sale and recorded at estimated fair value, adjusted for
amortization of premiums and accretion of discounts, with all unrealized gains and unrealized
losses judged to be temporary, net of deferred income taxes, excluded from earnings and reported as
a separate component of shareholders equity. Available for-sale securities that have unrealized
losses that are judged other than temporary are included in gain (loss) on sale of securities and a
new cost basis is established. Securities classified as trading are recorded at estimated fair
value with unrealized gains and losses included in earnings.
Effective January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 157, Fair Value Measurements. We also adopted Financial Accounting Standards Board
(FASB) Staff Position (FSP) No. FAS 157-3 which provide additional guidance on valuation and
disclosures. Fair values are volatile and may be influenced by a number of factors, including
market interest rates, prepayment speeds, discount rates and yield curves. Fair values for our
investment securities are based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on the quoted prices of similar instruments or an estimate
of fair value by using a range of fair value estimates in the market place as a result of the
illiquid market specific to the type of security.
When the fair value of a security is below its amortized cost, and depending on the length of time
the condition exists and the extent the fair market value is below amortized cost, additional
analysis is performed to determine whether an other than temporary impairment condition exists.
Available-for-sale and held- to-maturity securities are analyzed quarterly for possible other than
temporary impairment. The analysis considers (i) the length of time and the extent to which the
fair value has been less than cost, (ii) the financial condition and near-term prospects of the
issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair value. Often, the
information available to conduct these assessments is limited and rapidly changing, making
estimates of fair value subject to judgment. If actual information or conditions are different
than estimated, the extent of the impairment of the security may be different than previously
estimated, which could have a material effect on the Companys results of operations and financial
condition.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for
loan losses. Interest on loans is calculated by using the simple interest method on daily balances
of the principal amounts outstanding. The Company defers and amortizes net loan origination fees
and costs as an adjustment to yield. The allowance for loan losses is established through a
provision for loan losses charged to expense. Loans are charged against the allowance for loan
losses when management believes the collectibility of the principal is unlikely.
The allowance is an amount management believes will be adequate to absorb estimated inherent losses
on existing loans that are deemed uncollectible based upon managements review and evaluation of
the loan portfolio. The allowance for loan losses is comprised of three elements: (i) specific
reserves determined in accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS 118 based on probable losses
on specific classified loans; (ii) general reserve determined in accordance with SFAS No. 5
Accounting for Contingencies, that consider historical loss rates; 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. The allowance for loan losses
is increased by charges to income and decreased by charge-offs (net of recoveries). Managements
periodic evaluation of the adequacy of the allowance is based on general economic conditions, the
financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan
loss experience, and the results of periodic reviews of the portfolio. For purposes of determining
our general reserve, the loan portfolio, less cash secured loans, government
F-8
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
guaranteed loans and classified loans, is multiplied by the Companys historical loss rate. Our
methodology is constructed so that specific allocations are increased in accordance with
deterioration in credit quality and a corresponding increase in risk of loss. In addition, we
adjust our allowance for qualitative factors such as current local economic conditions and trends,
changes in lending staff, policies and procedures, changes in credit concentrations, changes in the
trends and severity of problem loans and changes in trends in volume and terms of loans. This
additional allocation based on qualitative factors serves to compensate for additional areas of
uncertainty inherent in our portfolio. Accrual of interest is discontinued on a loan and payments
applied to principal when management believes, after considering economic and business conditions
and collection efforts, the borrowers financial condition is such that collection of interest is
doubtful. Generally all loans past due greater than 90 days, based on contractual terms, are placed
on non-accrual.
The Companys 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. At December 31,
2008 and 2007, all significant impaired loans have been determined to be collateral dependent and
the allowance for loss has been measured utilizing the estimated fair value of the collateral.
The Company originates (1) mortgage loans primarily for sale in the secondary market and (2)
student loans for sale to the Department of Education or another financial institution.
Accordingly, these loans are classified as held for sale and are carried at the lower of cost or
fair value. The mortgage loans sales contracts contain indemnification clauses should the loans
default, generally in the first sixty to ninety days. The student loans are guaranteed by an
agency of the U. S. Government.
Other Real Estate
Other real estate is foreclosed property held pending disposition and is valued at fair value,
less estimated costs to sell, or the recorded investment in the related loan. At foreclosure, if
the fair value, less estimated costs to sell, of the real estate acquired is less than the
Companys recorded investment in the related loan, a write-down is recognized through a charge to
the allowance for loan losses. Any subsequent reduction in value is recognized by a charge to
income. Operating and holding expenses of such properties, net of related income, and gains and
losses on their disposition are included in noninterest expense.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed principally on a straight-line basis over the estimated
useful lives of the related assets. Leasehold improvements are amortized over the life of the
respective lease or the estimated useful lives of the improvements, whichever is shorter.
Business Combinations, Goodwill and Other Intangible Assets
The Company accounts for all business combinations under the purchase method of accounting.
Tangible and intangible assets and liabilities of the acquired entity are recorded at fair value on
the purchase date. Intangible assets with finite useful lives continue to be amortized and goodwill
and intangible assets with indefinite lives are not amortized, but rather tested annually for
impairment as of June 30 each year. There was no impairment recorded for the years ended December
31, 2008, 2007 and 2006.
Other identifiable intangible assets recorded by the Company represent the future benefit
associated with the acquisition of the core deposits and are being amortized over seven years,
utilizing a method that approximates the expected attrition of the deposits.
The carrying amount of goodwill and other intangible assets arising from acquisitions that qualify
as an asset purchase for federal income tax purposes amounting to approximately $39,755,000 and
$41,883,000, respectively, at December 31, 2008 and 2007, is deductible for federal income tax
purposes.
F-9
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase, which are classified as short-term borrowings,
generally mature within one to four days from the transaction date. Securities sold under
agreements to repurchase are reflected at the amount of the cash received in connection with the
transaction. The Company may be required to provide additional collateral based on the estimated
fair value of the underlying securities.
Segment Reporting
The Company has determined that its banking subsidiaries meet the aggregation criteria of SFAS No.
131, Segment Disclosures and Related Information since each of its community banks offers similar
products and services, operates in a similar manner, has similar customers and reports to the same
regulatory authority, and therefore operates one line of business (community banking) located in a
single geographic area (Texas).
Statements of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due
from banks, including interest bearing deposits, and federal funds sold.
Accumulated Other Comprehensive Income (Loss)
Unrealized gains on the Companys available-for-sale securities (after applicable income tax
expense) totaling $16,706,000 and $6,780,000 at December 31, 2008 and 2007, respectively, and the
minimum pension liability adjustment (after applicable income tax benefit) totaling $5,856,000 and
$2,963,000 at December 31, 2008 and 2007, respectively, are included in accumulated other
comprehensive income (loss).
Income Taxes
The Companys provision for income taxes is based on income before income taxes adjusted for
permanent differences between financial reporting and taxable income. Deferred tax assets and
liabilities are determined using the liability (or balance sheet) method. Under this method, the
net deferred tax asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance sheet assets and liabilities and
gives current recognition to changes in tax rates and laws.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees with an exercise price
equal to the fair value of the shares at the date of grant. SFAS No. 123R, Share-Based Payment,
became effective January 1, 2006 and requires companies to recognize in the statement of earnings
the grant-date fair value of stock options issued to employees. The Company recorded stock option
expense totaling $226,000, $220,000 and $157,000 for the years ended December 31, 2008, 2007 and
2006, respectively, using the modified prospective method for transition to the new rules whereby
grants after the implementation date, as well as unvested awards granted prior to the
implementation date, are measured and accounted for under SFAS No. 123R.
Advertising Costs
Advertising costs are expensed as incurred.
F-10
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Per Share Data
Net earnings per share (EPS) are computed by dividing net earnings by the weighted average number
of shares of common stock outstanding during the period. The Company calculates dilutive EPS
assuming all outstanding options to purchase common stock have been exercised at the beginning of
the year (or the time of issuance, if later.) The dilutive effect of the outstanding options is
reflected by application of the treasury stock method, whereby the proceeds from the exercised
options are assumed to be used to purchase common stock at the average market price during the
period. The following table reconciles the computation of basic EPS to dilutive EPS:
Weighted | ||||||||||||
Net | Average | Per Share | ||||||||||
Earnings | Shares | Amount | ||||||||||
For the year ended December 31, 2008 |
||||||||||||
Net earnings per share, basic
|
$ | 53,164,286 | 20,787,243 | $ | 2.56 | |||||||
Effect of stock options
|
| 54,120 | (0.01 | ) | ||||||||
Net earnings per share, assuming dilution
|
$ | 53,164,286 | 20,841,363 | $ | 2.55 | |||||||
For the year ended December 31, 2007: |
||||||||||||
Net earnings per share, basic
|
$ | 49,489,605 | 20,757,868 | $ | 2.38 | |||||||
Effect of stock options
|
| 42,242 | | |||||||||
Net earnings per share, assuming dilution
|
$ | 49,489,605 | 20,800,110 | $ | 2.38 | |||||||
For the year ended December 31, 2006: |
||||||||||||
Net earnings per share, basic
|
$ | 46,029,216 | 20,725,432 | $ | 2.22 | |||||||
Effect of stock options
|
| 62,137 | (0.01 | ) | ||||||||
Net earnings per share, assuming dilution
|
$ | 46,029,216 | 20,787,569 | $ | 2.21 | |||||||
New Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations a replacement of FASB
No. 141. SFAS 141R replaces SFAS 141, Business Combinations, and applies to all transaction and
other events in which one entity obtains control over one or more other businesses. SFAS 141R
requires an acquirer, upon initially obtaining control of another entity, to recognize the assets,
liabilities and any non-controlling interest in the acquiree at fair value as of the acquisition
date. Contingent consideration is required to be recognized and measured at fair value on the date
of acquisition rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the cost-allocation
process required under SFAS 141 whereby the cost of an acquisition was allocated to the individual
assets acquired and liabilities assumed based on their estimated fair value. SFAS 141R requires
acquirers to expense acquisition-related costs as incurred rather than allocating such costs to
the assets acquired and liabilities assumed, as was previously the case under SFAS 141. Under SFAS
141R, the requirements of SFAS 146, Accounting for Costs Associated with Exit or Disposal
Activities, would have to be met in order to accrue for a restructuring plan in purchase
accounting. Pre-acquisition contingencies are to be recognized at fair value, unless it is a
non-contractual contingency that is not likely to materialize, in which case, nothing should be
recognized in purchase accounting and, instead, that contingency would be subject to the probable
and estimable recognition criteria of SFAS 5, Accounting for Contingencies. SFAS 141R is
expected to have a significant impact on the Companys accounting for business combinations closing
on or after January 1, 2009.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging
Activities, an Amendment of FASB Statement No. 133. SFAS 161 amends SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, to amend and expand the disclosure requirements of
SFAS 133 to provide greater transparency about (i) how and why an entity uses derivative
instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS
133 and its related interpretations, and (iii) how derivative instruments and related hedged items
affect an entitys financial position, results of operations and cash flows. To meet those
objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of gains and losses on
derivative instruments and
F-11
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is
effective for the Company on January 1, 2009 and is not expected to have a significant impact on
the Companys financial position, results of operations or cash flows.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active. This FSP clarifies the application of SFAS No.
157 in a market that is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that financial asset is not
active. This FSP was effective for the Company upon issuance, including prior periods for which
financial statements have not been issued; and, therefore was effective for the Companys financial
statements in 2008. Adoption of FSP No. FAS 157-3 did not have a significant impact on the
Companys financial position, results of operations or cash flows.
2. CASH AND SECURITIES:
As of December 31, 2008, trading securities totaled $56.0 million. The trading securities
portfolio is a government securities money market fund comprised primarily of U.S. government
agency securities and repurchase agreements collateralized by U.S. government agency securities.
The trading securities are carried at estimated fair value with unrealized gains and losses
included in earnings. The Company did not hold trading securities in 2007.
The amortized cost, estimated fair values, and gross unrealized gains and losses of the Companys
held-to-maturity and available-for-sale securities as of December 31, 2008 and 2007 are as follows:
December 31, 2008 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost Basis | Holding Gains | Holding Losses | Fair Value | |||||||||||||
Securities held-to-maturity: |
||||||||||||||||
Obligations of state and
political subdivisions |
$ | 22,574,235 | $ | 644,537 | $ | (62,624 | ) | $ | 23,156,148 | |||||||
Mortgage-backed securities |
918,853 | 9,954 | (12,030 | ) | 916,777 | |||||||||||
Total debt
securities held-to-maturity |
$ | 23,493,088 | $ | 654,491 | $ | (74,654 | ) | $ | 24,072,925 | |||||||
Securities available-for-sale: |
||||||||||||||||
Obligations of U.S. government
sponsored-enterprises and
agencies |
$ | 315,981,202 | $ | 14,064,387 | $ | | $ | 330,045,589 | ||||||||
Obligations of state and
political subdivisions |
380,008,865 | 5,238,612 | (5,250,230 | ) | 379,997,247 | |||||||||||
Corporate bonds and other |
72,878,148 | 2,453,858 | (376,519 | ) | 74,955,487 | |||||||||||
Mortgage-backed securities |
444,351,476 | 9,644,561 | (72,492 | ) | 453,923,545 | |||||||||||
Total securities available-for-sale |
$ | 1,213,219,691 | $ | 31,401,418 | $ | (5,699,241 | ) | $ | 1,238,921,868 | |||||||
F-12
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
December 31, 2007 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Estimated | |||||||||||||
Cost Basis | Holding Gains | Holding Losses | Fair Value | |||||||||||||
Securities held-to-maturity: |
||||||||||||||||
Obligations of state and
political subdivisions |
$ | 25,041,674 | $ | 847,037 | $ | (28,210 | ) | $ | 25,860,501 | |||||||
Other |
4,000 | | | 4,000 | ||||||||||||
Mortgage-backed securities |
1,373,366 | 19,542 | (4,042 | ) | 1,388,866 | |||||||||||
Total debt securities
held-to-maturity |
$ | 26,419,040 | $ | 866,579 | $ | (32,252 | ) | $ | 27,253,367 | |||||||
Securities available-for-sale: |
||||||||||||||||
U.S. Treasury securities and
obligations of U.S.
government
sponsored-enterprises
and agencies |
$ | 314,893,622 | $ | 3,804,878 | $ | (317,678 | ) | $ | 318,380,822 | |||||||
Obligations of state and
political subdivisions |
286,292,954 | 5,157,715 | (736,804 | ) | 290,713,865 | |||||||||||
Corporate bonds and other |
55,352,211 | 528,497 | (79,125 | ) | 55,801,583 | |||||||||||
Mortgage-backed securities |
427,504,026 | 3,768,693 | (1,676,288 | ) | 429,596,431 | |||||||||||
Total securities available-for-sale |
$ | 1,084,042,813 | $ | 13,259,783 | $ | (2,809,895 | ) | $ | 1,094,492,701 | |||||||
The Company invests in mortgage-backed securities that have expected maturities that differ from
their contractual maturities. These differences arise because borrowers may have the right to call
or prepay obligations with or without a prepayment penalty. These securities include
collateralized mortgage obligations (CMOs) and other asset backed securities. The expected
maturities of these securities at December 31, 2008 and 2007, were computed by using scheduled
amortization of balances and historical prepayment rates. At December 31, 2008 and 2007, the
Company did not hold any CMOs that entail higher risks than standard mortgage-backed securities.
F-13
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The amortized cost and estimated fair value of debt securities at December 31, 2008, by contractual
and expected maturity, are shown below (in thousands):
Held-to-Maturity | Available-for-Sale | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
Cost Basis | Fair Value | Cost Basis | Fair Value | |||||||||||||
Due within one year |
$ | 10,414 | $ | 10,551 | $ | 105,437 | $ | 106,555 | ||||||||
Due after one year through five years |
11,627 | 12,105 | 400,721 | 417,393 | ||||||||||||
Due after five years through ten years |
240 | 236 | 118,673 | 121,652 | ||||||||||||
Due after ten years |
293 | 264 | 144,037 | 139,398 | ||||||||||||
Mortgage-backed securities |
919 | 917 | 444,352 | 453,924 | ||||||||||||
Total |
$ | 23,493 | $ | 24,073 | $ | 1,213,220 | $ | 1,238,922 | ||||||||
The following table discloses, as of December 31, 2008 and 2007, the Companys investment
securities that have been in a continuous unrealized-loss position for less than 12 months and
those that have been in a continuous unrealized-loss position for 12 or more months (in thousands):
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
December 31, 2008 | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
Obligations of state and
political subdivisions |
$ | 155,518 | $ | 5,288 | 658 | $ | 24 | $ | 156,176 | $ | 5,312 | |||||||||||||
Mortgage-backed securities |
4,016 | 9 | 15,749 | 76 | 19,765 | 85 | ||||||||||||||||||
Corporate bonds |
19,701 | 377 | | | 19,701 | 377 | ||||||||||||||||||
Total |
$ | 179,235 | $ | 5,674 | $ | 16,407 | $ | 100 | $ | 195,642 | $ | 5,774 | ||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
December 31, 2007 | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
U. S. Treasury securities and
obligations of U.S. government
sponsored-enterprises
and agencies |
$ | 8,978 | $ | 28 | $ | 93,466 | $ | 290 | $ | 102,444 | $ | 318 | ||||||||||||
Obligations of state and
political subdivisions |
40,622 | 353 | 26,521 | 412 | 67,143 | 765 | ||||||||||||||||||
Mortgage-backed securities |
55,676 | 80 | 115,141 | 1,600 | 170,817 | 1,680 | ||||||||||||||||||
Corporate bonds |
7,021 | 60 | 5,231 | 19 | 12,252 | 79 | ||||||||||||||||||
Total |
$ | 112,297 | $ | 521 | $ | 240,359 | $ | 2,321 | $ | 352,656 | $ | 2,842 | ||||||||||||
The number of investment positions in this unrealized loss position totaled 493 at December 31,
2008. We do not believe these unrealized losses are other than temporary as (1) the Company has
the ability and intent to hold the investments to maturity, or a period of time sufficient to allow
for a recovery in market value and, (2) it is probable that the Company will be able to collect
the amounts contractually due. The unrealized losses noted are
interest rate related due to short-term
and intermediate interest rates at December 31, 2008. We have reviewed the ratings of the issuers
and have not identified any issues related to the ultimate repayment of principal as a result of
credit concerns on these securities. Our mortgage related securities are backed by GNMA, FNMA and
FHLMC or are collateralized by securities backed by the agencies.
Securities, carried at approximately $730,328,000 and $640,744,000 at December 31, 2008 and 2007,
respectively, were pledged as collateral for public or trust fund deposits and for other purposes
required or permitted by law.
F-14
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
During 2008, 2007, and 2006, sales of investment securities that were classified as
available-for-sale totaled approximately $89,439,000, $38,531,000, and $18,513,000 respectively.
Gross realized gains from 2008 securities sales were approximately $1,052,000. There were no losses
on securities sales in 2008. Gross realized gains and losses for 2007 sales were approximately
$243,000 and $93,000, respectively. Gross realized gains and losses for 2006 sales were
approximately $104,000 and $42,000, respectively. The specific identification method was used to
determine cost in computing the realized gains and losses.
Certain subsidiary banks may be required at times to maintain reserve balances with the Federal
Reserve Bank. At December 31, 2008, the subsidiary banks met reserve balance requirements with
vault cash and were not required to maintain reserve balances with the Federal Reserve Bank. At
December 31, 2007, such required reserve balances totaled approximately $10,127,000.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES:
Major classifications of loans are as follows:
December 31, | ||||||||
2008 | 2007 | |||||||
Commercial, financial and agricultural |
$ | 485,706,651 | $ | 493,478,236 | ||||
Real estate construction |
158,000,276 | 196,250,070 | ||||||
Real estate mortgage |
678,787,848 | 626,145,282 | ||||||
Consumer |
243,647,940 | 212,146,001 | ||||||
Total loans |
$ | 1,566,142,715 | $ | 1,528,019,589 | ||||
Included in real estate-mortgage and consumer loans above are $2.9 million and $51.8 million,
respectively, in loans held for sale at December 31, 2008 and $3.5 million and $32.3 million,
respectively, in loans held for sale at December 31, 2007 in which the carrying amounts approximate
market.
The Companys recorded investment in impaired loans and the related valuation allowance are as
follows:
December 31, 2008 | December 31, 2007 | |||||
Recorded | Valuation | Recorded | Valuation | |||
Investment | Allowance | Investment | Allowance | |||
$9,893,144 | $2,040,323 | $3,189,067 | $477,873 | |||
The average recorded investment in impaired loans for the years ended December 31, 2008, 2007, and
2006 was approximately $6,541,000, $3,359,000, and $3,526,000 respectively. The Company had
approximately $12,531,000, $4,731,000 and $4,111,000 in nonperforming assets at December 31, 2008,
2007 and 2006, respectively. No additional funds are committed to be advanced in connection with
impaired loans.
Interest payments received on impaired loans are recorded as interest income unless collections of
the remaining recorded investment are doubtful, at which time payments received are recorded as
reductions of principal. The Company recognized interest income on impaired loans of approximately
$409,000, $100,000 and $91,000 during the years ended December 31, 2008, 2007, and 2006,
respectively. If interest on impaired loans had been recognized on a full accrual basis during the
years ended December 31, 2008, 2007, and 2006, respectively, such income would have approximated
$624,000, $358,000 and $396,000.
F-15
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The allowance for loan losses as of December 31, 2008 and 2007, is presented below. Management has
evaluated the adequacy of the allowance for loan losses by estimating the losses in various
categories of the loan portfolio which are identified below:
2008 | 2007 | |||||||
Allowance for loan losses provided for: |
||||||||
Loans specifically evaluated as impaired |
$ | 2,040,323 | $ | 477,873 | ||||
Remaining portfolio |
19,488,537 | 16,983,641 | ||||||
Total allowance for loan losses |
$ | 21,528,860 | $ | 17,461,514 | ||||
Changes in the allowance for loan losses are summarized as follows:
December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Balance at beginning of year |
$ | 17,461,514 | $ | 16,200,804 | $ | 14,719,140 | ||||||
Add: |
||||||||||||
Provision for loan losses |
7,956,798 | 2,331,172 | 2,061,088 | |||||||||
Loan recoveries |
825,427 | 727,189 | 1,241,991 | |||||||||
Deduct: |
||||||||||||
Loan charge-offs |
(4,714,879 | ) | (1,797,651 | ) | (1,821,415 | ) | ||||||
Balance at end of year |
$ | 21,528,860 | $ | 17,461,514 | $ | 16,200,804 | ||||||
An analysis of the changes in loans to officers, directors, principal shareholders, or associates
of such persons for the year ended December 31, 2008 (determined as of each respective year-end)
follows:
Beginning | Additional | Ending | ||||||||||||||
Balance | Loans | Payments | Balance | |||||||||||||
Year ended December 31, 2008 |
$ | 41,326,683 | $ | 38,336,949 | $ | 49,745,431 | $ | 29,918,201 |
In the opinion of management, those loans are on substantially the same terms, including interest
rates and collateral requirements, as those prevailing at the time for comparable transactions with
unaffiliated persons.
Certain of our subsidiary banks have established lines of credit with the Federal Home Loan Bank of
Dallas to provide liquidity and meet pledging requirements for those customers eligible to have
securities pledged to secure certain uninsured deposits. At December 31, 2008, approximately
$196,158,000 in loans held by these subsidiaries were subject to blanket liens as security for
letters of credit issued under these lines of credit.
During the years ended December 31, 2008 and 2007, the Company sold student loans totaling $62.7
million and $63.9 million, respectively, recognizing net profits of $1.7 million and $1.9 million,
respectively, to a financial institution of which an executive officer of one of our wholly owned
subsidiary banks was 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.
F-16
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
4. BANK PREMISES AND EQUIPMENT:
The following is a summary of bank premises and equipment:
December 31, | ||||||
Useful Life | 2008 | 2007 | ||||
Land |
| $14,932,113 | $14,887,261 | |||
Buildings |
20 to 40 years | 66,157,568 | 61,616,881 | |||
Furniture and equipment |
3 to 10 years | 38,476,890 | 35,050,420 | |||
Leasehold improvements |
Lesser of lease term or 5 to 15 years | 4,033,457 | 4,002,984 | |||
123,600,028 | 115,557,546 | |||||
Less- accumulated depreciation and amortization | (57,924,890) | (53,887,387) | ||||
$65,675,138 | $61,670,159 | |||||
Depreciation expense for the years ended December 31, 2008, 2007 and 2006 amounted to $6,080,000,
$5,789,000, and $5,964,000, respectively and is included in the captions net occupancy expense and
equipment expense in the accompanying consolidated statements of earnings.
The Company is lessor for portions of its banking premises. Total rental income for all leases
included in net occupancy expense is approximately $1,686,000, $1,663,000 and $1,644,000, for the
years ended December 31, 2008, 2007, and 2006, respectively.
5. DEPOSITS
Time deposits of $100,000 or more totaled approximately $333,706,000 and $352,216,000 at December
31, 2008 and 2007, respectively. Interest expense on these deposits was approximately $11,643,000,
$17,363,000, and $13,642,000 during 2008, 2007, and 2006, respectively.
At December 31, 2008, the scheduled maturities of time deposits (in thousands) were, as follows:
Year ending | ||||
December 31, | ||||
2009 |
$ | 641,357 | ||
2010 |
48,781 | |||
2011 |
10,708 | |||
2012 |
6,382 | |||
2013 |
2,792 |
Deposits received from related parties at December 31, 2008 totaled $47,269,000.
F-17
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
6. LINE OF CREDIT
On December 19, 2008, the Company renewed its loan agreement, effective December 31, 2008, with The
Frost National Bank. Under the loan agreement, as renewed and amended, the Company is permitted to
draw up to $50.0 million on a revolving line of credit. Prior to December 31, 2009, interest is
paid quarterly at Wall Street Journal Prime and the line of credit matures December 31, 2009. If a
balance exists at December 31, 2009, the principal balance converts to a term facility payable
quarterly over five years and interest is paid quarterly at the election of the Registrant at Wall
Street Journal Prime plus 50 basis points or LIBOR plus 250 basis points. The line of credit is
unsecured for an outstanding balance equal to or under $25.0 million and secured by the stock of a
subsidiary bank should the balance exceed $25.0 million. Among other provisions in the credit
agreement, the Company must satisfy certain financial covenants during the term of the loan
agreement, including without limitation, covenants that require the Company to maintain certain
capital, tangible net worth, loan loss reserve, non-performing asset and cash flow coverage ratio.
In addition, the credit agreement contains certain operational covenants, that among others,
restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of
debt (excluding any amounts acquired in an acquisition) and prohibits the disposal of assets except
in the ordinary course of business. Management believes the Company was in compliance with the
financial covenants at December 31, 2008 and 2007. There was no outstanding balance under the line
of credit as of December 31, 2008 or 2007.
7. INCOME TAXES:
The Company files a consolidated federal income tax return. Income tax expense is comprised of the
following:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Current federal income tax |
$ | 20,465,138 | $ | 19,681,877 | $ | 19,334,533 | ||||||
Current state income tax |
297,564 | 290,567 | 118,861 | |||||||||
Deferred federal income tax expense (benefit) |
(122,877 | ) | 464,397 | (26,625 | ) | |||||||
Income tax expense |
$ | 20,639,825 | $ | 20,436,841 | $ | 19,426,769 | ||||||
Income tax expense, as a percentage of pretax earnings, differs from the statutory federal income
tax rate as follows:
As a Percent of Pretax Earnings | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Reductions in tax rate resulting from
interest income exempt from
federal income tax |
(7.6 | )% | (6.6 | )% | (5.8 | )% | ||||||
Effect of state income tax |
0.4 | % | 0.4 | % | 0.2 | % | ||||||
ESOP tax credit |
(0.3 | )% | (0.4 | )% | (0.4 | )% | ||||||
Other |
0.5 | % | 0.8 | % | 0.7 | % | ||||||
Effective income tax rate |
28.0 | % | 29.2 | % | 29.7 | % | ||||||
F-18
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The approximate effects of each type of difference that gave rise to the Companys deferred tax
assets and liabilities at December 31, 2008 and 2007 are as follows:
2008 | 2007 | |||||||
Deferred tax assets: |
||||||||
Tax basis of loans in excess of financial statement basis |
$ | 7,605,608 | $ | 5,873,531 | ||||
Minimum liability in defined benefit plan |
3,153,659 | 1,595,422 | ||||||
Recognized for financial reporting purposes but not
for tax purposes: |
||||||||
Deferred compensation |
1,445,556 | 1,324,188 | ||||||
Write-downs and adjustments to other
real estate owned and repossessed assets |
21,451 | | ||||||
Other deferred tax assets |
305,199 | 256,674 | ||||||
Total deferred tax assets |
12,531,473 | 9,049,815 | ||||||
Deferred tax liabilities: |
||||||||
Financial statement basis of fixed assets in excess of
tax basis |
1,548,749 | 967,135 | ||||||
Intangible asset amortization deductible for tax purposes,
but not for financial reporting purposes |
4,839,242 | 4,075,928 | ||||||
Recognized for financial reporting purposes but not
for tax purposes: |
||||||||
Accretion on investment securities |
1,247,474 | 1,050,873 | ||||||
Pension plan contributions |
854,134 | 621,140 | ||||||
Net unrealized gain on investment securities
Available-for-sale |
8,995,762 | 3,651,026 | ||||||
Other deferred tax liabilities |
328,619 | 302,598 | ||||||
Total deferred tax liabilities |
17,813,980 | 10,668,700 | ||||||
Net deferred tax asset (liability) |
$ | (5,282,507 | ) | $ | (1,618,885 | ) | ||
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement 109, effective January 1, 2007. Interpretation
48 prescribes a recognition threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
Benefits from tax positions should 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 cumulative 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 should 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 should
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. Adoption of Interpretation 48 did not have a
significant impact on the Companys financial statements. The Company files income tax returns in
the U.S. federal jurisdiction and several U.S. state jurisdictions. We are no longer subject to
U.S. federal income tax examinations by tax authorities for years before 2005.
F-19
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
8. FAIR VALUE DISCLOSURES:
SFAS 157, which became effective in 2008, defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the asset or transfer
the liability occurs in the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market for the asset or liability. The price in the
principal (or most advantageous) market used to measure the fair value of the asset or liability
shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes
exposure to the market for a period prior to the measurement date to allow for marketing activities
that are usual and customary for transactions involving such assets and liabilities; it is not a
forced transaction. Market participants are buyers and sellers in the principal market that are (i)
independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the
income approach and/or the cost approach. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets and
liabilities. The income approach uses valuation techniques to convert future amounts, such as cash
flows or earnings, to a single present amount on a discounted basis. The cost approach is based on
the amount that currently would be required to replace the service capacity of an asset
(replacement costs). Valuation techniques should be consistently applied. Inputs to valuation
techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Inputs may be observable, meaning those that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data obtained from
independent sources, or unobservable, meaning those that reflect the reporting entitys own
assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. In that regard, SFAS 157
establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted
prices in active markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
| Level 1 Inputs Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. | ||
| Level 2 Inputs Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means. | ||
| Level 3 Inputs Significant unobservable inputs that reflect an entitys own assumptions that market participants would use in pricing the assets or liabilities. |
A description of the valuation methodologies used for assets and liabilities measured at fair
value, as well as the general classification of such instruments pursuant to the valuation
hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon internally developed models that primarily use,
as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that
financial instruments are recorded at fair value. While management believes the Companys valuation
methodologies are appropriate and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial instruments could
result in a different estimate of fair value at the reporting date.
Investment Securities Available for Sale and Trading Securities classified as available for sale
and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company
obtains fair value measurements from an independent pricing service. The fair value measurements
consider observable data that may include dealer
F-20
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels, trade
execution data, market consensus prepayments speeds, credit information and the bonds terms and
conditions, among other things.
The following table summarizes financial assets and financial liabilities measured at fair value on
a recurring basis as of December 31, 2008, segregated by the level of the valuation inputs within
the fair value hierarchy utilized to measure fair value (dollars in thousands):
Level 1 | Level 2 | Level 3 | Total Fair | |||||||||||||
Inputs | Inputs | Inputs | Value | |||||||||||||
Investment securities available for sale |
$ | 22,681 | $ | 1,216,241 | $ | | $ | 1,238,922 | ||||||||
Trading investment securities |
55,991 | | | 55,991 |
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring
basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject
to fair value adjustments in certain circumstances (for example, when there is evidence of
impairment). Financial assets and financial liabilities measured at fair value on a non-recurring
basis include the following at December 31, 2008:
Impaired Loans Impaired loans are reported at the fair value of the underlying collateral if
repayment is expected solely from the collateral. Collateral values are estimated using Level 2
inputs based on observable market data or Level 3 input based on the discounting of the collateral.
At December 31, 2008, impaired loans with a carrying value of $9.9 million were reduced by
specific valuation allowance totaling $1.9 million resulting in a net fair value of $8.0 million,
based on Level 3 inputs.
Loans Held for Sale Loans held for sale are reported at the lower of cost or fair value. In
determining whether the fair value of loans held for sale is less than cost when quoted market
prices are not available, the Company considers investor
commitments/contracts. These loans are considered Level 2 of the fair value
hierarchy. At December 31, 2008, the Companys mortgage loans held for sale and student loans held
for sale were recorded at cost as fair value exceeded cost.
Certain non-financial assets and non-financial liabilities measured at fair value on a recurring
and non-recurring basis include goodwill and other intangible assets and other non-financial
long-lived assets. SFAS 157 will be applicable to these fair value measurements beginning January
1, 2009.
Under SFAS 107, the Company is required to disclose the estimated fair value of other financial
instrument assets and liabilities that are not subject to the requirements of SFAS 157. For the
Company, as for most financial institutions, substantially all of its assets and liabilities are
considered financial instruments as defined. Many of the Companys financial instruments, however,
lack an available trading market as characterized by a willing buyer and willing seller engaging in
an exchange transaction.
The estimated fair value amounts of financial instruments have been determined by the Company using
available market information and appropriate valuation methodologies. However, considerable
judgment is required to interpret data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
F-21
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The estimated fair values and carrying values of all financial instruments covered by SFAS 157 and
SFAS 107 at December 31, 2008 and 2007, were as follows:
2008 | 2007 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Value | Fair Value | Value | Fair Value | |||||||||||||
Cash and due from banks |
$ | 137,569,957 | $ | 137,569,957 | $ | 163,559,942 | $ | 163,559,942 | ||||||||
Federal funds sold |
27,660,000 | 27,660,000 | 99,450,000 | 99,450,000 | ||||||||||||
Interest-bearing deposits in banks |
3,658,037 | 3,658,037 | 1,878,434 | 1,878,434 | ||||||||||||
Trading securities |
55,990,882 | 55,990,882 | | | ||||||||||||
Held to maturity securities |
23,493,088 | 24,072,925 | 26,419,040 | 27,253,367 | ||||||||||||
Available for sale securities |
1,238,921,868 | 1,238,921,868 | 1,094,492,701 | 1,094,492,701 | ||||||||||||
Net loans |
1,544,613,855 | 1,572,986,026 | 1,510,558,075 | 1,518,677,572 | ||||||||||||
Accrued interest receivable |
21,101,632 | 21,101,632 | 21,834,040 | 21,834,040 | ||||||||||||
Deposits with stated maturities |
710,019,705 | 715,204,080 | 774,033,645 | 778,371,624 | ||||||||||||
Deposits with no stated
maturities |
1,872,733,447 | 1,872,733,447 | 1,772,049,373 | 1,772,049,373 | ||||||||||||
Short term borrowings |
235,598,268 | 235,598,268 | 166,266,426 | 166,266,426 | ||||||||||||
Accrued interest payable |
2,281,142 | 2,281,142 | 4,654,496 | 4,654,496 |
Financial instruments actively traded in a secondary market have been valued using quoted available
market prices. Financial instruments with stated maturities have been valued using a present value
discounted cash flow with a discount rate approximating current market for similar assets and
liabilities. Financial instrument assets with variable rates and financial instrument liabilities
with no stated maturities have an estimated fair value equal to both the amount payable on demand
and the carrying value. Changes in assumptions or estimation methodologies may have a material
effect on these estimated fair values.
The carrying value and the estimated fair value of the Companys contractual off-balance-sheet
unfunded lines of credit, loan commitments and letters of credit, which are generally priced at
market at the time of funding, are not material.
Reasonable comparability between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be made given the absence of
active secondary markets for many of the financial instruments. This lack of uniform valuation
methodologies also introduces a greater degree of subjectivity to these estimated fair values.
F-22
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
9. COMMITMENTS AND CONTINGENCIES:
The Company is engaged in legal actions arising from the normal course of business. In
managements opinion, the Company has adequate legal defenses with respect to these actions, and
the resolution of these matters will have no material adverse effects upon the results of
operations or financial condition of the Company.
The Company leases a portion of its bank premises and equipment under operating leases. At
December 31, 2008, future minimum lease commitments were: 2009 $558,000; 2010 $430,000; 2011 -
$374,000; 2012 $194,000; 2013 $23,000 and thereafter $12,000.
10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include
unfunded lines of credit, commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets.
The Companys exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for unfunded lines of credit, commitments to extend credit and standby letters
of credit is represented by the contractual notional amount of these instruments. The Company
generally uses the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Contract or | ||||
Notional Amount at | ||||
December 31, 2008 | ||||
Financial instruments whose contract amounts
represent credit risk: |
||||
Unfunded lines of credit |
$ | 290,796,000 | ||
Unfunded commitments to extend credit |
57,268,000 | |||
Standby letters of credit |
16,201,000 | |||
$ | 364,265,000 | |||
Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. These commitments
generally have fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The Company evaluates
each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on managements credit
evaluation of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, livestock, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to customers. The average
collateral value held on letters of credit usually exceeds the contract amount.
The Company has no other off-balance sheet arrangements or transactions that would expose the
Company to liability that is not reflected on the face of the financial statements.
F-23
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
11. CONCENTRATION OF CREDIT RISK:
The Company grants commercial, retail, agriculture and residential real estate loans to customers
primarily in North Central and West Texas. Although the Company has a diversified loan portfolio,
a substantial portion of its debtors ability to honor their contracts is dependent upon this local
economic sector. In addition, the Company holds mortgage related securities which are backed by
GNMA, FNMA or FHLMC or are collateralized by securities backed by these agencies.
12. PENSION AND PROFIT SHARING PLANS:
The Companys defined benefit pension plan was frozen effective January 1, 2004 whereby no
additional years of service 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 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 in future years to fund any shortfalls. The Company evaluated the provisions of
the Act as well as Internal Revenue Services funding standards to develop a preliminary plan for
funding in future years. The Company made a contribution totaling $800,000 and $1.5 million in 2008
and 2007, respectively, and is continuing to evaluate future funding amounts.
Using an actuarial measurement date of December 31, 2008 and September 30, 2007, respectively,
benefit obligation activity and fair value of plan assets for the years ended December 31, 2008 and
2007, and a statement of the funded status as of December 31, 2008 and 2007, are as follows:
2008 | 2007 | |||||||
Reconciliation of benefit obligations: |
||||||||
Benefit obligation at January 1 |
$ | 19,612,417 | $ | 18,471,240 | ||||
Interest cost on projected benefit obligation |
1,389,106 | 1,111,110 | ||||||
Actuarial loss |
(1,349,082 | ) | 942,799 | |||||
Benefits paid |
(1,232,200 | ) | (912,732 | ) | ||||
Benefit obligation at December 31 |
18,420,241 | 19,612,417 | ||||||
Reconciliation of fair value of plan assets: |
||||||||
Fair value of plan assets at January 1 |
16,828,739 | 14,372,733 | ||||||
Actual return on plan assets |
(4,546,363 | ) | 1,868,738 | |||||
Employer contributions |
800,000 | 1,500,000 | ||||||
Benefits paid |
(1,232,200 | ) | (912,732 | ) | ||||
Fair value of plan assets at December 31 |
11,850,176 | 16,828,739 | ||||||
Funded status |
$ | (6,570,065 | ) | $ | (2,783,678 | ) | ||
Reconciliation of funded status to accrued
pension liability: |
||||||||
Funded status at December 31 |
$ | (6,570,065 | ) | $ | (2,783,678 | ) | ||
Unrecognized loss from past experience different than
that assumed and effects of changes in assumptions |
9,333,269 | 4,881,178 | ||||||
Additional minimum liability recorded |
(9,333,269 | ) | (4,881,178 | ) | ||||
Accrued pension liability |
$ | (6,570,065 | ) | $ | (2,783,678 | ) | ||
F-24
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
In September 2006, SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Post-retirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) was issued which
required an employer to recognize the overfunded or underfunded status of defined benefit
post-retirement benefit plans as an asset or a liability in its balance sheet. The funded status
is measured as the difference between plan assets at fair value and the benefit obligation. An
employer is also required to measure the funded status of a plan as of the date of its year-end
statement of financial position with changes in the funded status recognized through comprehensive
income. SFAS 158 also requires certain disclosures regarding the effects on net periodic benefit
cost for the next fiscal year that arise from delayed recognition of gains or losses. The Company
had previously recognized the funded status of its pension plans in prior financial statements.
The requirement to measure plan assets and benefit obligations as of the date of the year-end
statement of financial position was effective for the Companys 2008 financial statements. The
impact of this change was not significant to the Companys financial position or results of
operations.
Net periodic pension cost for the years ended December 31, 2008, 2007, and 2006, included:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Service cost benefits earned during the period |
$ | | $ | | $ | | ||||||
Interest cost on projected benefit obligation |
1,389,106 | 1,111,110 | 1,045,011 | |||||||||
Expected return on plan assets |
(1,503,104 | ) | (998,838 | ) | (901,938 | ) | ||||||
Amortization of unrecognized net loss |
248,294 | 197,470 | 193,780 | |||||||||
Net periodic pension cost |
$ | 134,296 | $ | 309,742 | $ | 336,853 | ||||||
The following table sets forth the rates used in the actuarial calculations of the present value of
benefit obligations and net periodic pension cost and the rate of return on plan assets:
2008 | 2007 | 2006 | ||||||||||
Weighted average discount rate |
6.50 | % | 5.85 | % | 5.85 | % | ||||||
Rate of increase in future compensation levels |
| | | |||||||||
Expected long-term rate of return on assets |
7.25 | % | 6.50 | % | 6.50 | % |
The expected long-term rate of return on plan assets is based on historical returns and
expectations of future returns based on asset mix, after consultation with our investment advisors
and actuaries. The weighted average discount rate is estimated based on setting a discount rate
to establish an obligation for pension benefits equivalent to an amount that, if invested in high
quality fixed income securities, would produce a return that matches the expected benefit payment
stream.
The major type of plan assets in the pension plan and the targeted allocation percentage as of
December 31, 2008 and 2007 is as follows:
F-25
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
December 31, 2008 | December 31, 2007 | Targeted | ||||||||||
Allocation | Allocation | Allocation | ||||||||||
Equity securities |
66 | % | 71 | % | 75 | % | ||||||
Debt securities |
32 | % | 23 | % | 25 | % | ||||||
Cash and equivalents |
2 | % | 6 | % | |
The range and weighted average final maturities of debt securities held in the pension plan as of
December 31, 2008 are 2 to 13 years and approximately 5.8 years, respectively.
First Financial Trust & Asset Management Company, National Association, a wholly owned subsidiary
of the Company, manages the pension plan assets as well as the profit sharing plan assets (see
below). The investment strategy and targeted allocations are based on similar strategies
First Financial Trust & Asset Management Company, National Association employs for most of
its managed accounts whereby appropriate diversification is achieved. First Financial Trust &
Asset Management Company, National Association is prohibited from holding investments deemed to be
high risk by the Office of the Comptroller of the Currency.
An estimate of the undiscounted projected future payments to eligible participants for the next
five years and the following five years in the aggregate is as follows (dollars in thousands):
Year Ending December 31, | ||||
2009 |
$ | 1,109 | ||
2010 |
1,182 | |||
2011 |
1,319 | |||
2012 |
1,359 | |||
2013 |
1,422 | |||
2014 to 2018 |
8,133 |
As of December 31, 2008 and 2007, the pension plans assets included Company common stock valued at
approximately $1,134,000 and $773,000, respectively.
The Company also provides a profit sharing plan, which covers substantially all full-time
employees. The profit sharing plan is a defined contribution plan and allows employees to
contribute a percentage of their base annual salary. Employees are fully vested to the extent of
their contributions and become fully vested in the Companys contributions over a six-year vesting
period. Costs related to the Companys defined contribution plan totaled approximately $3,406,000,
$3,219,000, and $2,116,000 in 2008, 2007 and 2006, respectively, and are included in salaries and
employee benefits in the accompanying consolidated statements of earnings. As of December 31, 2008
and 2007, the profit sharing plans assets included Company common stock valued at approximately
$29,578,000 and $20,709,000, respectively.
In 2004, after freezing our pension plan, we added a safe harbor match to the 401(k) plan. We
match a maximum of 4% on employee deferrals of 5% of their employee compensation. Total expense
for this matching in 2008, 2007 and 2006 was $1,133,000, $1,127,000 and $1,041,000, respectively,
and is included in salaries and employee benefits in the statements of earnings.
The Company has a directors deferred compensation plan whereby the directors may elect to defer up
to 100% of their directors fees. All deferred compensation is invested in the Companys common
stock held in a rabbi trust. The stock is held in nominee name of the trustee, and the principal
and earnings of the trust are held separate and apart from other funds of the Company, and are used
exclusively for the uses and purposes of the deferred compensation agreement. The accounts of the
trust have been consolidated in the financial statements of the Company.
F-26
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
13. DIVIDENDS FROM SUBSIDIARIES:
At December 31, 2008, approximately $32.4 million was available for the declaration of dividends by
the Companys subsidiary banks without the prior approval of regulatory agencies.
14. REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Companys financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, each of Bankshares subsidiaries must meet
specific capital guidelines that involve quantitative measures of the subsidiaries assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The subsidiaries capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
each of its subsidiaries to maintain minimum amounts and ratios (set forth in the table below) of
total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined) to average assets (as defined). Management believes as of December
31, 2008 and 2007, that Company and each of its subsidiaries meet all capital adequacy requirements
to which they are subject.
As of December 31, 2008 and 2007, the most recent notification from each respective subsidiarys
primary regulator categorized each of the Companys subsidiaries as well-capitalized, except that
Hereford State Banks 2007 total risk-based capital ratio was 9.92% versus the well capitalized
minimum of 10%. To be categorized as well-capitalized, the subsidiaries must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following
table.
There are no conditions or events since that notification that management believes have changed the
institutions categories. Bankshares and its significant subsidiaries actual capital amounts and
ratios are presented in the table below:
F-27
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes: | Action Provisions: | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2008: |
||||||||||||||||||||||||
Total Capital (to Risk-Weighted Assets): |
||||||||||||||||||||||||
Consolidated |
$ | 321,024,000 | 17 | % | >$150,747,000 | >8 | % | N/A | ||||||||||||||||
First Financial Bank-Abilene |
$ | 78,509,000 | 13 | % | >$48,079,000 | >8 | % | >$60,098,000 | >10 | |||||||||||||||
San Angelo National Bank |
$ | 36,167,000 | 21 | % | >$13,957,000 | >8 | % | >$17,447,000 | >10 | |||||||||||||||
Weatherford National Bank |
$ | 26,954,000 | 14 | % | >$15,594,000 | >8 | % | >$19,493,000 | >10 | |||||||||||||||
First Financial Bank-Stephenville |
$ | 28,948,000 | 14 | % | >$17,075,000 | >8 | % | >$21,344,000 | >10 | |||||||||||||||
First Financial Bank-Southlake |
$ | 26,962,000 | 15 | % | >$14,386,000 | >8 | % | >$17,983,000 | >10 | |||||||||||||||
Tier1 Capital (to Risk-Weighted Assets): |
||||||||||||||||||||||||
Consolidated |
$ | 299,415,000 | 16 | % | >$75,373,000 | >4 | % | N/A | ||||||||||||||||
First Financial Bank-Abilene |
$ | 72,654,000 | 12 | % | >$24,039,000 | >4 | % | >$36,059,000 | >6 | |||||||||||||||
San Angelo National Bank |
$ | 34,390,000 | 20 | % | >$6,979,000 | >4 | % | >$10,468,000 | >6 | |||||||||||||||
Weatherford National Bank |
$ | 24,917,000 | 13 | % | >$7,797,000 | >4 | % | >$11,696,000 | >6 | |||||||||||||||
First Financial Bank-Stephenville |
$ | 26,477,000 | 12 | % | >$8,538,000 | >4 | % | >$12,806,000 | >6 | |||||||||||||||
First Financial Bank-Southlake |
$ | 24,700,000 | 14 | % | >$7,193,000 | >4 | % | >$10,790,000 | >6 | |||||||||||||||
Tier1 Capital (to Average Assets): |
||||||||||||||||||||||||
Consolidated |
$ | 299,415,000 | 10 | % | >$92,818,000 | >3 | % | N/A | ||||||||||||||||
First Financial Bank-Abilene |
$ | 72,654,000 | 7 | % | >$31,276,000 | >3 | % | >$52,126,000 | >5 | |||||||||||||||
San Angelo National Bank |
$ | 34,390,000 | 11 | % | >$9,518,000 | >3 | % | >$15,863,000 | >5 | |||||||||||||||
Weatherford National Bank |
$ | 24,917,000 | 8 | % | >$10,123,000 | >3 | % | >$16,872,000 | >5 | |||||||||||||||
First Financial Bank-Stephenville |
$ | 26,477,000 | 9 | % | >$9,604,000 | >3 | % | >$16,006,000 | >5 | |||||||||||||||
First Financial Bank-Southlake |
$ | 24,700,000 | 7 | % | >$7,965,000 | >3 | % | >$13,275,000 | >5 |
F-28
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
To Be Well | ||||||||||||||||||||||||
Capitalized Under | ||||||||||||||||||||||||
For Capital | Prompt Corrective | |||||||||||||||||||||||
Actual | Adequacy Purposes: | Action Provisions: | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2007: |
||||||||||||||||||||||||
Total Capital
(to
Risk-Weighted
Assets): |
||||||||||||||||||||||||
Consolidated |
$ | 284,250,000 | 16 | % | >$145,546,000 | >8 | % | N/A | ||||||||||||||||
First
Financial
Bank-Abilene |
$ | 71,985,000 | 12 | % | >$46,696,000 | >8 | % | >$58,370,000 | >10 | % | ||||||||||||||
San Angelo
National Bank |
$ | 31,915,000 | 18 | % | >$14,289,000 | >8 | % | >$17,861,000 | >10 | % | ||||||||||||||
Weatherford
National Bank |
$ | 24,211,000 | 14 | % | >$14,294,000 | >8 | % | >$17,868,000 | >10 | % | ||||||||||||||
First
Financial
Bank-Stephenville |
$ | 26,118,000 | 12 | % | >$17,154,000 | >8 | % | >$21,443,000 | >10 | % | ||||||||||||||
First
Financial
Bank-Southlake |
$ | 24,613,000 | 13 | % | >$15,461,000 | >8 | % | >$19,326,000 | >10 | % | ||||||||||||||
Tier1 Capital
(to
Risk-Weighted
Assets): |
||||||||||||||||||||||||
Consolidated |
$ | 266,738,000 | 15 | % | >$72,773,000 | >4 | % | N/A | ||||||||||||||||
First
Financial
Bank-Abilene |
$ | 67,201,000 | 12 | % | >$23,348,000 | >4 | % | >$35,022,000 | >6 | % | ||||||||||||||
San Angelo
National Bank |
$ | 30,418,000 | 17 | % | >$7,144,000 | >4 | % | >$10,717,000 | >6 | % | ||||||||||||||
Weatherford
National Bank |
$ | 22,505,000 | 13 | % | >$7,147,000 | >4 | % | >$10,721,000 | >6 | % | ||||||||||||||
First
Financial
Bank-Stephenville |
$ | 23,814,000 | 11 | % | >$8,577,000 | >4 | % | >$12,866,000 | >6 | % | ||||||||||||||
First
Financial
Bank-Southlake |
$ | 22,516,000 | 12 | % | >$7,730,000 | >4 | % | >$11,596,000 | >6 | % | ||||||||||||||
Tier1 Capital
(to Average
Assets): |
||||||||||||||||||||||||
Consolidated |
$ | 266,738,000 | 9 | % | >$86,669,000 | >3 | % | N/A | ||||||||||||||||
First
Financial
Bank-Abilene |
$ | 67,201,000 | 7 | % | >$28,574,000 | >3 | % | >$47,624,000 | >5 | % | ||||||||||||||
San Angelo
National Bank |
$ | 30,418,000 | 10 | % | >$9,342,000 | >3 | % | >$15,571,000 | >5 | % | ||||||||||||||
Weatherford
National Bank |
$ | 22,505,000 | 7 | % | >$10,134,000 | >3 | % | >$16,891,000 | >5 | % | ||||||||||||||
First
Financial
Bank-Stephenville |
$ | 23,814,000 | 8 | % | >$9,260,000 | >3 | % | >$15,433,000 | >5 | % | ||||||||||||||
First
Financial
Bank-Southlake |
$ | 22,516,000 | 8 | % | >$8,294,000 | >3 | % | >$13,824,000 | >5 | % |
In connection with our Trust Companys application to obtain our trust charter, we are required to
maintain tangible net assets of $2.0 million at all times. As of December 31, 2008, our Trust
Company had tangible net assets totaling $3.5 million.
F-29
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
15. STOCK OPTION PLAN:
The Company has an incentive stock plan to provide for the granting of options to senior management
of the Company at prices not less than market at the date of grant. At December 31, 2008, the
Company had allocated 813,535 shares of stock for issuance under the plan. The plan provides that
options granted are exercisable after two years from date of grant at a rate of 20% each year
cumulatively during the 10-year term of the option. An analysis of stock option activity for the
year ended December 31, 2008 is presented in the table and narrative below:
Weighted- | ||||||||||||||||
Average | Aggregate | |||||||||||||||
Weighted-Average | Remaining | Intrinsic | ||||||||||||||
Shares | Ex. Price | Contractual Term | Value ($000) | |||||||||||||
Outstanding, beginning of year |
266,174 | $ | 25.23 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
(32,350 | ) | 18.82 | |||||||||||||
Cancelled |
(7,560 | ) | 33.53 | |||||||||||||
Outstanding, end of year |
226,264 | 32.65 | 6.17 | 5,105 | ||||||||||||
Exercisable at end of year |
79,670 | 25.20 | 3.61 | 1,751 | ||||||||||||
The options outstanding at December 31, 2008, had exercise prices ranging between $12.48 and $40.98.
Stock options have been adjusted retroactively for the effects of stock dividends and splits.
The following table summarizes information concerning outstanding and vested stock options as of
December 31, 2008:
Remaining | ||||||
Number | Contracted | |||||
Exercise Price | Outstanding | Life (Years) | Number Vested | |||
$12.48
|
12,431 | 1.24 | 12,431 | |||
18.30 | 1,667 | 3.06 | 1,667 | |||
23.10 | 48,612 | 4.35 | 34,778 | |||
33.08 | 78,954 | 6.07 | 30,794 | |||
40.98 | 84,600 | 8.09 | |
F-30
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
From inception of the plan until December 31, 2005, the Company accounted for this plan under APB
25 under which no compensation cost has been recognized for options granted. Effective January 1,
2006, the Company accounted for this plan under SFAS No. 123R whereby the fair value of options is
recognized as compensation expense over the vesting period. The fair value of the options granted
in 2007, was estimated using the Black-Scholes options pricing model with the following
weighted-average assumptions: risk-free interest rate of 4.26%; expected dividend yield of 3.39%;
expected life of 5.61 years; and expected volatility of 18.4%.
The weighted-average grant-date fair value of options granted during the year ended December 31,
2007 was $7.31. There were no grants during 2008 or 2006. The total intrinsic value of options
exercised during the years ended December 31, 2008, 2007 and 2006, was $1,394,000, $1,126,000 and
$495,000 respectively.
As of December 31, 2008, there was $539,000 of total unrecognized compensation cost related to
nonvested share-based compensation arrangements granted under the Plan. That cost is expected to
be recognized over a weighted-average period of 1.8 years. The total fair value of shares vested
during the years ended December 31, 2008, 2007, and 2006 was $175,000, $181,000 and $103,000
respectively.
The aggregate intrinsic value of vested stock options at December 31, 2008 totaled $2,391,000.
F-31
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
16. CONDENSED FINANCIAL INFORMATION PARENT COMPANY:
Condensed Balance Sheets-December 31, 2008 and 2007
2008 | 2007 | |||||||
ASSETS |
||||||||
Cash in subsidiary bank |
$ | 13,932,456 | $ | 6,855,875 | ||||
Cash in unaffiliated bank |
4,881 | 4,859 | ||||||
Interest-bearing deposits in subsidiary banks |
21,644,609 | 29,760,871 | ||||||
Total cash and cash equivalents |
35,581,946 | 36,621,605 | ||||||
Securities available-for-sale, at fair value |
10,258,875 | | ||||||
Investment in and advances to subsidiaries, at equity |
329,357,364 | 305,194,582 | ||||||
Intangible assets |
723,375 | 723,375 | ||||||
Other assets |
879,436 | 589,828 | ||||||
Total assets |
$ | 376,800,996 | $ | 343,129,390 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Total liabilities |
$ | 8,018,768 | $ | 7,633,928 | ||||
Shareholders equity: |
||||||||
Common stock |
207,992 | 207,669 | ||||||
Capital surplus |
268,087,449 | 267,136,338 | ||||||
Retained earnings |
89,637,172 | 64,333,921 | ||||||
Accumulated other comprehensive earnings |
10,849,615 | 3,817,534 | ||||||
Total shareholders equity |
368,782,228 | 335,495,462 | ||||||
Total liabilities and shareholders equity |
$ | 376,800,996 | $ | 343,129,390 | ||||
Condensed Statements of Earnings-
For the Years Ended December 31, 2008, 2007, and 2006
For the Years Ended December 31, 2008, 2007, and 2006
2008 | 2007 | 2006 | ||||||||||
Income: |
||||||||||||
Cash dividends from subsidiaries |
$ | 39,675,000 | $ | 42,275,000 | $ | 39,726,766 | ||||||
Excess of earnings over dividends of
subsidiary banks |
14,762,316 | 8,219,675 | 7,660,591 | |||||||||
Other income |
1,589,525 | 1,737,370 | 1,052,705 | |||||||||
56,026,841 | 52,232,045 | 48,440,062 | ||||||||||
Expenses: |
||||||||||||
Salaries and employee benefits |
2,094,244 | 1,936,884 | 1,783,904 | |||||||||
Other operating expenses |
1,850,361 | 1,690,594 | 1,704,905 | |||||||||
3,944,605 | 3,627,478 | 3,488,809 | ||||||||||
Earnings before income taxes |
52,082,236 | 48,604,567 | 44,951,253 | |||||||||
Income tax benefit |
1,082,050 | 885,038 | 1,077,963 | |||||||||
Net earnings |
$ | 53,164,286 | $ | 49,489,605 | $ | 46,029,216 | ||||||
F-32
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Condensed Statements of Cash Flows-
For the Years Ended December 31, 2008, 2007, and 2006
For the Years Ended December 31, 2008, 2007, and 2006
2008 | 2007 | 2006 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 53,164,286 | $ | 49,489,605 | $ | 46,029,216 | ||||||
Adjustments to reconcile net earnings to net
cash provided by operating activities: |
||||||||||||
Excess of earnings over
dividends of subsidiary banks |
(14,762,316 | ) | (8,219,675 | ) | (7,660,591 | ) | ||||||
Depreciation |
25,011 | 39,501 | 54,268 | |||||||||
Decrease (increase) in other assets |
(238,202 | ) | (182,548 | ) | 329,034 | |||||||
Increase (decrease) in liabilities |
(282,479 | ) | (514,736 | ) | 277,742 | |||||||
Net cash provided by operating activities |
37,906,300 | 40,612,147 | 39,029,669 | |||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of available for sale securities |
(10,151,310 | ) | | | ||||||||
Purchases of bank premises and equipment |
(46,170 | ) | (12,268 | ) | (9,441 | ) | ||||||
Repayment from (of advances related to) investment
in and advances to subsidiaries |
(1,922,087 | ) | 500,000 | (3,300,000 | ) | |||||||
Net cash provided by (used in)
investing activities |
(12,119,567 | ) | 487,732 | (3,309,441 | ) | |||||||
Cash flows from financing activities: |
||||||||||||
Proceeds of stock issuances |
608,891 | 526,636 | 440,716 | |||||||||
Cash dividends paid |
(27,435,283 | ) | (24,927,542 | ) | (24,011,155 | ) | ||||||
Net cash used in financing activities |
(26,826,392 | ) | (24,400,906 | ) | (23,570,439 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
(1,039,659 | ) | 16,698,973 | 12,149,789 | ||||||||
Cash and cash equivalents, beginning of year |
36,621,605 | 19,922,632 | 7,772,843 | |||||||||
Cash and cash equivalents, end of year |
$ | 35,581,946 | $ | 36,621,605 | $ | 19,922,632 | ||||||
F-33
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
17. CASH FLOW INFORMATION:
Supplemental information on cash flows and noncash transactions is as follows:
Year Ended December 31, | ||||||||||||
2008 | 2007 | 2006 | ||||||||||
Supplemental cash flow information: |
||||||||||||
Interest paid |
$ | 37,632,209 | $ | 58,269,719 | $ | 47,598,695 | ||||||
Federal income taxes paid |
20,026,772 | 20,537,026 | 19,130,331 | |||||||||
Schedule of noncash investing and financing activities: |
||||||||||||
Assets acquired through foreclosure |
2,648,147 | 3,412,077 | 421,531 | |||||||||
Loans to finance the sale of other real estate |
| 969,500 | | |||||||||
Investment securities purchased but
not settled |
778,142 | 4,161,418 | 4,285,000 |
F-34