| FIRST FINANCIAL BANKSHARES INC ITEM 1A Risk Factors |
| 11 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 |
| 11 Our Business Faces Unpredictable Economic Conditions 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: o national and local economic conditions: o the supply of and demand for investable funds; o demand for loans; o interest rates; and o 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 |
| 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 |
| The economy of this region is focused on agriculture (including farming and ranching), oil and gas production, and real estate development |
| Historically, these industries have fluctuated widely between boom and bust |
| 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 decline in one or more segments of the local economy could adversely affect our business, revenue, operations and properties |
| The Value Of Real Estate Collateral May Fluctuate Significantly 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 |
| 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, 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 |
| In addition, 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 |
| 12 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 |
| 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 |
| 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 |
| 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 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, which are currently rising 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 the timing and rate at which our assets and liabilities reprice |
| Although we have implemented strategies which we believe reduce the potential effects of 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 &apos 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 |
| 13 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 |
| 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 and 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 severance agreements in the event of a change of control |
| 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 |
| A relatively small percentage of our outstanding common stock is actively traded on the Nasdaq Stock Market |
| The risks of low liquidity include increased volatility of the price of our common stock |
| 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 "e Item 9A - Controls and Procedures "e 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 |
| 14 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 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 and deter potential customers |
| Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful |