First Financial Bankshares, Inc. — FY 2019 Form 10-K
Business context and reporting period. Texas-based financial holding company providing community banking, trust and wealth management, insurance and related services. This summary covers the fiscal year ended December 31, 2019; amounts are in U.S. dollars. The company operated 73 banking locations at year-end. Its acquisition of TB&T Bancshares closed January 1, 2020 and is therefore a subsequent event, not included in 2019 results.
Key financial results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets, year-end | $8.26 billion | $7.73 billion | Up 6.9% |
| Loans held for investment, year-end | $4.19 billion | $3.95 billion | Up 6.1% |
| Deposits, year-end | $6.60 billion | $6.18 billion | Up 6.8% |
| Net interest income | $289.1 million | $272.8 million | Up 6.0% |
| Net earnings | $164.8 million | $150.6 million | Up 9.4% |
| Diluted earnings per share | $1.21 | $1.11 | Up 9.0% |
| Return on average assets | 2.08% | 1.98% | Up 10 basis points |
| Return on average equity | 14.37% | 15.37% | Down 100 basis points |
| Net interest margin, tax-equivalent | 3.98% | 3.96% | Up 2 basis points |
| Efficiency ratio | 48.61% | 49.72% | Improved |
Income, expenses and cash flow. Interest income was $319.2 million and interest expense $30.1 million. Noninterest income rose 6.6% to $108.4 million, led in part by mortgage operations and card fees; noninterest expense increased 3.1% to $196.5 million. Provision for loan losses declined to $3.0 million from $5.7 million. Operating cash flow was $204.1 million; investing cash outflow was $449.5 million and financing cash inflow was $279.3 million. Cash and cash equivalents ended the year at $282.6 million.
Balance sheet, debt and liquidity. Shareholders’ equity was $1.23 billion, or 14.85% of assets. Borrowings fell to $381.4 million from $468.7 million; deposits remained the primary funding source. The company reported $125.1 million of parent-company cash, no balance drawn on its $25 million revolving credit line, and no balance on its $1.35 billion FHLB line. Management considered liquidity adequate. The parent’s dividend payout ratio was 38.31%; declared cash dividends were $0.47 per share for the year.
Credit quality and capital. Nonperforming assets were $25.8 million, or 0.61% of loans plus foreclosed assets, down from $29.6 million and 0.75% in 2018. Net charge-offs were 0.04% of average loans, compared with 0.07%; the allowance for loan losses was $52.5 million, or 1.24% of year-end loans. Total risk-based capital was 21.13%, Tier 1 and CET1 ratios were 20.06%, and the leverage ratio was 12.60%. The bank was classified as well capitalized.
Material changes and unusual items
- Earnings growth reflected higher net interest income and noninterest income. Average earning assets increased, particularly loans and taxable securities, while funding costs rose: the rate paid on interest-bearing liabilities increased 23 basis points.
- The company recorded $2.67 million of pension settlement expense in 2019 as it completed termination of its defined-benefit pension obligation; a $1.55 million partial-settlement expense was recorded in 2018. The plan obligation was extinguished by year-end 2019.
- Available-for-sale securities increased to $3.41 billion. Their net unrealized gain included in accumulated other comprehensive income rose to $67.5 million from $4.2 million, contributing to higher reported equity.
- A two-for-one stock split became effective June 3, 2019; per-share data in the filing is restated for the split.
- TB&T Bancshares was acquired on January 1, 2020 for approximately 6.28 million shares valued at $220.3 million. Its year-end 2019 assets were $631.1 million, loans $455.4 million and deposits $551.9 million. The estimated excess purchase price over fair-value net assets was approximately $143.2 million and recorded as goodwill.
Outlook, risks and contingencies
Management described continued organic growth, new branches and selective Texas bank acquisitions as strategic priorities, and stated it did not anticipate a significant change in its dividend policy. The filing provides no specific earnings or revenue guidance. Management cited margin pressure from low short-term rates and a flat or inverted yield curve, alongside the effects of changing deposit costs; the Federal Reserve cut rates by 75 basis points during 2019. Interest-rate simulation estimated net interest income would increase 2.29% under a 100-basis-point rate rise and decrease 2.77% under a 100-basis-point decline over twelve months, subject to stated modeling assumptions.
Principal risks include concentration in Texas markets, economic and commodity-price weakness, real-estate collateral and credit losses, interest-rate and liquidity risk, competition, acquisition execution, cybersecurity and vendor dependence, regulation, and fluctuations in trust assets under management. Oil-and-gas-related loans were 2.84% of gross loans ($119.8 million); management said exposure was monitored closely. The company expected its January 1, 2020 adoption of the CECL credit-loss standard to produce an opening allowance of $45 million to $51 million, versus $52.5 million under the prior measure at December 31, 2019; the estimate remained subject to refinement. Management anticipated no significant regulatory-capital impact. No material pending legal proceedings were reported. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth, credit quality and the $45–$51 million CECL opening allowance estimate developed as expected after adoption.
- How the TB&T acquisition affected 2020 earnings, integration costs, share count and goodwill impairment risk.
- Whether deposit pricing and interest-rate movements sustain net interest margin and earnings growth.
- Whether the substantial securities portfolio’s valuation changes and Texas municipal exposure affect equity, liquidity or capital.
- Whether dividend capacity and the stated liquidity sources remain adequate as the company grows.