First Financial Bankshares, Inc. — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014; filed February 20, 2015. The company is a Texas-focused community banking holding company operating 62 financial centers through 12 regions, with trust, insurance and technology subsidiaries. Figures below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Financial performance and position
| Metric | FY2014 / year-end 2014 | Comparable 2013 |
|---|---|---|
| Interest income | $198.5 | $176.4 |
| Net interest income | $194.4 | $172.3 |
| Noninterest income | $66.6 | $62.1 |
| Provision for loan losses | $4.5 | $3.8 |
| Noninterest expense | $137.9 | $126.0 |
| Net earnings | $89.6 | $78.9 |
| Diluted earnings per share | $1.39 | $1.24 |
| Net interest margin (tax-equivalent) | 4.20% | 4.22% |
| Efficiency ratio | 49.24% | 50.19% |
- Net earnings increased 13.6%, driven mainly by growth in net interest income and noninterest income. Return on average assets was 1.65% (1.64% in 2013); return on average equity was 14.00% (13.75%).
- Net interest income on a tax-equivalent basis rose to $213.5 million from $189.0 million, largely reflecting higher average earning assets, up $602.5 million to $5.08 billion. Earning-asset yield fell 3 basis points; the rate paid on interest-bearing liabilities fell 1 basis point.
- Noninterest income growth reflected higher trust fees and ATM/interchange/card fees; mortgage fees and deposit service charges declined. Trust assets under management were $3.76 billion at year-end, up from $3.36 billion.
- Noninterest expense rose 9.5%. Items cited included $2.91 million of pension-settlement expense and $2.39 million related to a litigation settlement and hail-damage deductible, as well as higher staffing and operating costs.
- Total assets were $5.85 billion, up 12.0%; loans held for investment were $2.93 billion, up 9.1%; deposits were $4.75 billion, up 14.9%. Securities available-for-sale were $2.42 billion.
- Allowance for loan losses was $36.8 million, or 1.25% of loans, versus $33.9 million, or 1.26%, in 2013. Net charge-offs declined to 0.06% of average loans from 0.15%; nonperforming assets fell to $21.7 million from $31.1 million, or 0.74% of loans and foreclosed assets versus 1.16%.
- Operating cash flow was $131.4 million, compared with $109.9 million. Investing activities used $575.2 million, principally reflecting securities purchases and loan growth; financing activities provided $485.3 million, including deposit growth. Cash and cash equivalents ended the year at $253.5 million.
- Shareholders’ equity was $681.5 million, 11.65% of assets. Consolidated Tier 1 risk-based, total risk-based and leverage ratios were 16.05%, 17.16% and 9.89%, respectively; the bank was reported well-capitalized.
- Short-term borrowings were $367.1 million, down from $463.9 million. The company had no balance drawn on its $25 million unsecured revolving line of credit, which matures June 30, 2015. The bank also reported $901.0 million of available FHLB capacity, with $1.01 million in advances and $5.0 million in letters of credit outstanding.
Changes, outlook and material matters
- Compared with 2013, loan and deposit growth expanded the balance sheet and earnings, while margin narrowed slightly amid persistently low rates. Management expected low rates to continue pressuring margins.
- Asset quality improved year over year: nonperforming assets and net charge-offs declined. Real estate represented 62.23% of loans; direct oil and gas lending was approximately 3% of loans. Management cautioned that a sustained oil-price decline could weaken Texas markets and borrowers.
- The company completed its Orange Savings Bank acquisition in May 2013; no acquisition was completed in 2014. The 2014 results also reflect a two-for-one stock split, with share and per-share data restated.
- Management intended to pursue organic growth, branches and suitable Texas bank acquisitions. It stated that it did not anticipate a significant change in its dividend policy; the long-term target was cash dividends of approximately 40% of annual net earnings. The 2014 declared dividend was $0.55 per share, with a 39.34% payout ratio.
- Basel III requirements became effective for the company beginning January 1, 2015. Management’s pro forma analysis indicated the company met the requirements, including the full capital conservation buffer, as if effective at year-end 2014. It expected to elect the one-time option to exclude most accumulated other comprehensive income from regulatory capital.
- Key risks include Texas economic concentration, including sensitivity to oil and gas prices; real-estate-heavy lending; interest-rate and securities valuation risk; deposit and liquidity needs; competition; regulatory change; cybersecurity and technology risks; and acquisition execution. The company reported no material pending legal proceedings; ordinary-course claims were not expected by management to have a material adverse effect.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether loan growth, credit quality and the allowance remain appropriate as Texas economic conditions respond to lower oil and gas prices.
- Whether low rates, deposit pricing and asset mix affect net interest margin and future earnings.
- The scale and composition of securities-related unrealized gains, and the effect of the company’s planned Basel III AOCI opt-out.
- Whether noninterest expense normalizes after the pension settlement, litigation settlement and hail-related costs.
- Liquidity and funding exposure, including short-term borrowings, large time-deposit maturities, contingent commitments and the June 2015 line-of-credit maturity.
- The sustainability of trust fee growth, dividend payments and future growth plans, including acquisition opportunities and related capital needs.