First Financial Bankshares, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 24, 2011. The filing reports full-year results and quarterly data, not a standalone “2010 Q4” filing. The company is a Texas-based financial holding company operating community banks and related financial businesses, primarily in North and West Texas.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Interest income | $149.7 million | $146.4 million |
| Net interest income | $136.2 million | $129.2 million |
| Net interest margin, tax-equivalent | 4.68% | 4.80% |
| Provision for loan losses | $9.0 million | $11.4 million |
| Noninterest income | $49.5 million | $48.6 million |
| Noninterest expense | $98.3 million | $94.0 million |
| Net earnings | $59.7 million | $53.8 million |
| Diluted EPS | $2.86 | $2.58 |
| Return on average assets / equity | 1.75% / 13.74% | 1.72% / 13.63% |
| Efficiency ratio | 49.49% | 50.11% |
- Full-year net earnings rose 10.9%. Excluding a $1.3 million after-tax extraordinary gain, 2010 earnings were $58.4 million and EPS was $2.80.
- Fourth-quarter net earnings were $15.5 million, or $0.74 per diluted share, versus $12.5 million and $0.60 in Q4 2009. The 2010 extraordinary gain was recorded in Q3, not Q4.
- At year-end, total assets were $3.776 billion, loans $1.690 billion, securities $1.546 billion, deposits $3.113 billion, and shareholders’ equity $441.7 million. Compared with 2009, assets increased 15.2%, loans 11.6%, deposits 16.0%, and securities 20.4%.
- Cash and cash equivalents were $368.0 million. Operating cash flow was $71.8 million; investing cash outflow was $308.7 million, principally reflecting securities purchases; financing cash inflow was $283.3 million.
- Short-term borrowings were $178.4 million. The $25 million parent-company credit line had no balance outstanding; no long-term debt balance is reported in the presented balance sheet. The company also reported $80 million of subsidiary-bank federal-funds lines and $227.2 million of Federal Home Loan Bank lines, with no balances outstanding on the latter at year-end.
- Capital ratios were strong: Tier 1 risk-based 17.01%, total risk-based 18.26%, and leverage 10.28%. All subsidiary banks were categorized as well-capitalized.
- Cash dividends declared were $1.36 per share, unchanged from 2009; the stated payout ratio was 47.6%.
Material changes versus 2009
- Tax-equivalent net interest income increased $8.1 million, driven mainly by growth in average earning assets. The net interest margin nevertheless narrowed 12 basis points as low short-term rates reduced asset yields.
- Loan-loss provision declined by $2.5 million, but nonperforming assets rose to $26.0 million from $22.1 million. The allowance increased to $31.1 million, or 1.84% of period-end loans, from $27.6 million, or 1.82%.
- Noninterest income increased modestly. Higher trust fees, ATM and card fees, mortgage fees, and gains on foreclosed assets were partly offset by lower deposit service charges and securities gains; student-loan sale gains ceased.
- Noninterest expense rose 4.5%, including higher salaries and employee benefits and acquisition-related costs. The efficiency ratio improved.
- The company acquired Sam Houston Financial Corp., parent of The First State Bank in Huntsville, on November 1, 2010, for approximately $22.0 million in cash and stock. The transaction added approximately $174.0 million of estimated assets, including $9.8 million of goodwill, and contributed results only from the closing date.
Outlook, commentary, risks, and unusual items
- Management said prolonged low interest rates could continue to pressure net interest margin through lower loan and investment yields and competition for deposits. Its year-end interest-rate simulation projected net interest income increases of 0.28% and 1.30% under immediate 100- and 200-basis-point rate increases, respectively, and a 1.53% decline under a 50-basis-point decrease; management cautioned that these are assumption-dependent estimates, not forecasts.
- Management described liquidity as adequate, citing core deposits, relatively low loan-to-deposit ratios, $36.2 million of parent-company cash and cash equivalents, available subsidiary-bank dividends, and borrowing facilities. Approximately $52.1 million of subsidiary-bank dividends were available without prior regulatory approval.
- Credit risk remains a key concern: the loan portfolio is concentrated in Texas and includes substantial real estate lending. Nonperforming assets increased, foreclosed assets rose to $8.3 million from $3.5 million, and potential problem loans totaled $7.3 million. Management considered the allowance adequate but warned that economic weakness could increase losses and provisions.
- TXDOT expropriated land at the Southlake branch for highway expansion. The company recorded a $2.0 million pretax gain ($1.3 million after tax), announced a replacement branch, and planned to hold the existing location for sale.
- Regulatory changes, including Dodd-Frank, overdraft opt-in requirements, FDIC assessments, and future Basel III implementation, could reduce revenues or increase costs. The company did not participate in TARP, citing its capital and liquidity position.
- Other material risks include interest-rate exposure, real-estate collateral values, deposit funding, mortgage-loan sale indemnities, trust assets under management and investment performance, acquisition integration, technology and cybersecurity, and dependence on subsidiary dividends. No material pending legal proceedings were reported. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the increase in nonperforming assets and foreclosed property stabilizes, and whether the $31.1 million allowance remains adequate as loan growth and local economic conditions evolve.
- How the Huntsville acquisition performs after its limited 2010 contribution, including integration costs, deposit retention, credit quality, and the recoverability of acquisition goodwill.
- Whether low rates, deposit competition, and changes in loan and securities yields continue to compress margins.
- The sensitivity of fee income and operating costs to overdraft and other regulatory changes, FDIC assessments, and implementation of Dodd-Frank and Basel III requirements.
- Liquidity and funding assumptions, including deposit maturities, short-term borrowings, unused credit facilities, and dividend availability subject to regulatory and loan-covenant limits.