First Financial Bankshares, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018; filed February 19, 2019. The company is a Texas-focused community banking and financial-services holding company, operating 73 financial centers. Results include Commercial Bancshares/Commercial State Bank from its January 1, 2018 acquisition, affecting year-over-year comparability.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Interest income | $291.7 million | $246.0 million | +18.6% |
| Net interest income | $272.8 million | $236.7 million | +15.2% |
| Noninterest income | $101.8 million | $91.0 million | +11.8% |
| Noninterest expense | $190.7 million | $174.0 million | +9.6% |
| Net earnings | $150.6 million | $120.4 million | +25.1% |
| Diluted EPS | $2.22 | $1.81 | +22.7% |
- Management reported tax-equivalent net interest income of $281.8 million, up from $262.2 million. Net interest margin declined to 3.96% from 4.01%, reflecting the tax-rate change’s effect on tax-exempt assets and rising deposit funding costs. Average earning assets increased to $7.12 billion.
- Return on average assets was 1.98% versus 1.72%; return on average equity was 15.37% versus 13.63%. The efficiency ratio increased to 49.72% from 49.26%.
- Provision for loan losses decreased to $5.7 million from $6.5 million. Net charge-offs were 0.07% of average loans, down from 0.12%.
- For Q4 2018, net earnings were $38.4 million, or $0.56 diluted EPS, versus $36.1 million, or $0.54, in Q4 2017. Q4 2017 income tax expense was unusually low at $1.5 million, including the deferred-tax remeasurement benefit associated with the Tax Cuts and Jobs Act.
Balance sheet, liquidity and capital
- Total assets were $7.73 billion, up 6.6%; period-end loans were $3.98 billion, up 13.6%; deposits were $6.18 billion, up 3.6% year over year. Loan growth included acquired balances.
- Cash and cash equivalents were $248.6 million, down from $372.3 million. Operating cash flow was $189.0 million, compared with $190.3 million in 2017; investing activities used $275.9 million and financing activities used $36.8 million.
- Borrowings totaled $468.7 million, versus $331.0 million, mainly repurchase-agreement funding and $55.0 million of FHLB advances. The parent company’s $25 million revolving credit line had no balance outstanding; $130 million of bank federal-funds lines were also undrawn. The company described liquidity as adequate and reported access to a $1.23 billion FHLB line, of which $55 million was drawn.
- Shareholders’ equity was $1.05 billion, or 13.62% of assets. Consolidated total risk-based capital was 20.61%, Tier 1 risk-based capital 19.47%, and Tier 1 leverage 11.85%; the bank was classified as well capitalized.
- Cash dividends declared were $0.82 per share, up from $0.75; the payout ratio was 36.84%. Management stated a long-term target of approximately 40% of annual net earnings, subject to capital and regulatory constraints.
Material changes, outlook and risks
- The Kingwood-area acquisition added four Houston-area branches, $266.3 million of acquired loans and $31.6 million of goodwill; consideration included 1.29 million shares. Integration-related technology costs were $1.75 million in 2018.
- Net interest income and fee income benefited from loan growth and the acquisition. Trust fees rose $4.5 million, supported by higher assets under management and oil-and-gas production. Salaries and benefits rose 10.4%; expenses also included a $1.55 million pension settlement loss.
- The 2018 effective tax rate was 15.46%, compared with 18.22% in 2017. The company recorded a further $664,000 deferred-tax benefit in 2018 following its analysis of the Tax Cuts and Jobs Act; tax-exempt interest also reduced the effective rate.
- Asset quality warrants attention: nonperforming assets rose to $29.6 million, or 0.75% of loans and foreclosed assets, from $20.1 million, or 0.57%. Nonaccrual loans increased to $27.5 million from $17.7 million. The allowance was $51.2 million, 1.29% of loans, versus $48.2 million, 1.38%.
- Oil-and-gas loans increased to $113.5 million, or 2.86% of gross loans, from $60.2 million, or 1.72%, primarily due to the acquisition. Management reported monitoring the portfolio and $1.0 million of nonaccrual oil-and-gas loans.
- The company reported $960.9 million of commercial commitments, including unfunded lines, loan commitments and standby letters of credit; many are expected to expire undrawn. It reported no material pending litigation and received unqualified audit opinions on its financial statements and internal control over financial reporting.
- No specific earnings or growth guidance was provided. Management intended to pursue organic growth, new branches and potential Texas-area acquisitions. Key risks include Texas economic and real-estate conditions, interest-rate and deposit-cost sensitivity, credit deterioration, liquidity, acquisition integration, cybersecurity and vendor dependence. CECL was scheduled for adoption January 1, 2020; management expected a potentially higher allowance but had not determined the impact.
Most important facts for investors to verify
- How much of 2018 earnings and loan growth came from the Kingwood acquisition versus organic growth, and whether integration costs persist.
- Whether rising nonaccrual loans and nonperforming assets lead to higher provisions or charge-offs, particularly in real estate and acquired portfolios.
- Whether deposit pricing continues to rise faster than loan yields and pressures net interest margin.
- The value and duration sensitivity of the securities portfolio, including its $29.4 million of unrealized losses at year-end, and the potential impact on capital and liquidity.
- The eventual CECL allowance adjustment, completion and cost of the pension-plan termination, and continued availability of subsidiary dividends and borrowing facilities.