First Financial Bankshares, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; comparisons are primarily with 2014. The company is a Texas-focused community banking and financial holding company operating 70 financial centers. Figures below are in U.S. dollars; “million” and “billion” are abbreviated as m and bn.
Financial performance and position
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Interest income | $221.6m | $198.5m | Up 11.6% |
| Net interest income | $217.5m | $194.4m | Up 11.9%; tax-equivalent net interest income was $240.5m, up from $213.5m |
| Net interest margin | 4.12% | 4.20% | Down 8 basis points |
| Noninterest income | $73.4m | $66.6m | Up 10.2% |
| Provision for loan losses | $9.7m | $4.5m | More than doubled |
| Noninterest expense | $149.5m | $137.9m | Up 8.4% |
| Net earnings | $100.4m | $89.6m | Up 12.1% |
| Diluted EPS | $1.54 | $1.39 | Up $0.15 |
| Efficiency ratio | 47.61% | 49.24% | Improved; lower is more efficient |
| Return on average assets / equity | 1.61% / 13.60% | 1.65% / 14.00% | Both declined |
| Operating cash flow | $109.1m | $131.4m | Down despite higher net earnings |
| Cash and cash equivalents, year-end | $272.9m | $253.5m | Up $19.4m |
- Balance-sheet growth: Total assets were $6.67bn, up 14.0%; year-end loans were $3.35bn, up 14.0%; deposits were $5.19bn, up 9.3%; and available-for-sale securities were $2.73bn, up from $2.42bn.
- Credit quality: Nonperforming assets were $29.8m, or 0.89% of loans plus foreclosed assets, versus $21.7m and 0.74% a year earlier. The allowance was $41.9m, or 1.25% of loans, versus $36.8m and 1.25%. Net charge-offs rose to $4.6m from $1.5m; the ratio to average loans increased to 0.15% from 0.06%.
- Debt and liquidity: Year-end borrowings were $615.7m, compared with $367.1m in 2014, including $299.0m of Federal Home Loan Bank advances and $310.3m in repurchase-agreement borrowings. The parent’s $25m revolving credit line had no balance outstanding. Management considered liquidity adequate, citing core deposits and available borrowing capacity.
- Capital: Year-end total risk-based capital was 16.97%, Tier 1 risk-based capital 15.90%, and Tier 1 leverage 9.96%. The bank was categorized as well capitalized and the company reported compliance with Basel III requirements.
- Shareholder returns: Cash dividends declared were $0.62 per share, versus $0.55 in 2014; the payout ratio was 40.20%. Management described a long-term target of approximately 40% of annual net earnings, subject to capital needs and restrictions.
Material changes and significant items
- The July 2015 acquisition of FBC Bancshares/First Bank in Conroe added approximately $248.4m of loans and $343.6m of deposits at acquisition. Consideration was $59.6m in company shares; $43.9m of goodwill was recorded. Acquired results were included from August 1, 2015.
- The June 2015 4Trust Mortgage asset purchase expanded residential mortgage origination and secondary-market sales. Mortgage fees increased by $3.9m year over year, partly reflecting the acquisition and stronger mortgage activity.
- Growth in net interest income largely reflected higher earning-asset volume, including acquisition effects. Management said the extended low-rate environment reduced asset yields and pressured the margin.
- Net interest margin declined while the efficiency ratio improved. Compensation expense increased 15.0%, with additions related to compliance, 4Trust and the Conroe acquisition, as well as healthcare claims and pay increases.
- The allowance for loan losses increased alongside higher provision expense and charge-offs. Management cited loan growth and continuing nonperforming and classified assets, including oil-and-gas-related credits.
- There was no material goodwill impairment in 2015. Goodwill and other intangible assets totaled $144.4m at year-end. The filing reports no material pending legal proceedings.
Outlook, risks and contingencies
- Outlook: The filing provides no numerical earnings or revenue guidance. Management expected interest rates to remain relatively low and continue to pressure net interest margin, while noting Federal Reserve rate increases were anticipated. It planned to pursue organic growth, new locations and suitable acquisitions, and did not anticipate a significant change in dividend policy.
- Regional and credit risks: Operations and most customers are concentrated in Texas. Oil-and-gas exposure was approximately 2.9% of loans; management cautioned that prolonged low commodity prices could weaken local economies. Real estate-related lending is a substantial portfolio component.
- Interest-rate and liquidity risks: Results depend materially on the spread between asset yields and funding costs. The company also highlighted the risk of deposit withdrawals, funding-market disruption and changes in securities values. Its modeled rate scenarios are estimates, not forecasts.
- Other risks: The filing identifies regulatory and capital requirements, competition, acquisition integration and goodwill impairment, mortgage origination and loan-sale indemnities, cybersecurity and technology disruption, and weather or natural-disaster impacts.
- Off-balance-sheet commitments: Commercial commitments totaled $664.5m, including $461.0m of unfunded lines, $172.4m of loan commitments and $31.1m of standby letters of credit. Many may expire undrawn; amounts are not necessarily expected cash outflows.
- Audit and controls: Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and financial reporting controls as of year-end.
Important facts for investors to verify
- Whether the increase in nonperforming assets, provision and net charge-offs persists, and how much is associated with Texas energy-related or acquired credits.
- How much of reported growth and earnings reflects the Conroe acquisition and 4Trust purchase versus continuing organic performance, including associated integration costs and goodwill.
- Whether net interest margin stabilizes or continues to contract as market rates, loan yields and deposit pricing change.
- Whether higher borrowings and the mix and stability of deposits remain consistent with management’s liquidity assessment.
- Whether mortgage-fee growth and other noninterest-income gains are sustainable, and how loan-sale indemnification exposure develops.
- Any subsequent changes to capital, dividend capacity, credit quality, or the assumptions supporting the allowance for loan losses.