First Financial Bankshares, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are primarily with 2015. The company is a Texas-focused community banking and financial services holding company with 69 banking centers.
Financial performance and position
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Net interest income | $226.8 million | $217.5 million | Up 4.3%; tax-equivalent net interest income was $251.8 million, up from $240.5 million. |
| Noninterest income | $85.1 million | $73.4 million | Up 15.9%, led by mortgage operations, card fees and deposit service charges. |
| Provision for loan losses | $10.2 million | $9.7 million | Higher provision reflected credit costs and economic pressures in oil and gas and cattle-related markets. |
| Noninterest expense | $165.8 million | $149.5 million | Up 11.0%; salaries, technology-related costs and acquisition-related expenses contributed. |
| Net earnings / diluted EPS | $104.8 million / $1.59 | $100.4 million / $1.54 | Net earnings increased 4.4%; basic EPS was $1.59 versus $1.55. |
| Profitability and efficiency | ROAA 1.59%; ROAE 12.36%; efficiency ratio 49.22% | 1.61%; 13.60%; 47.61% | Returns and efficiency weakened modestly despite higher earnings. |
| Assets / loans / deposits | $6.81 billion / $3.38 billion / $5.48 billion | $6.67 billion / $3.35 billion / $5.19 billion | Loans and deposits grew; securities were $2.86 billion at year-end. |
| Capital | Total risk-based 18.45%; Tier 1 17.30%; leverage 10.71% | 16.97%; 15.90%; 9.96% | Company reported capital above applicable requirements; bank was well-capitalized. |
| Cash flows | Operating +$160.7 million; investing −$252.0 million; financing +$74.8 million | Operating +$109.1 million; investing −$384.2 million; financing +$294.5 million | Cash and cash equivalents decreased $16.4 million to $256.5 million. |
Margins and funding: Net interest margin was 4.08%, down four basis points. Average earning-asset yield declined two basis points while the average rate paid on interest-bearing liabilities increased three basis points. Year-end borrowings were $445.8 million, down from $615.7 million; deposits remained the primary funding source.
Credit quality: Nonperforming assets were $29.0 million, or 0.86% of loans and foreclosed assets, compared with $29.8 million and 0.89% in 2015. Net charge-offs rose to 0.19% of average loans from 0.15%; the allowance was $45.8 million, or 1.35% of loans, versus $41.9 million and 1.25%. One commercial loan accounted for a $4.3 million charge-down during 2016.
Material changes versus 2015
- Interest and noninterest income growth drove higher earnings, while the net interest margin narrowed and expense growth exceeded income growth.
- Mortgage operations income rose to $16.1 million from $10.4 million; management cited a stronger mortgage market and the 2015 4Trust acquisition. Card-related fees and service charges also grew, partly reflecting the Conroe acquisition.
- Loans increased only modestly year over year at period-end, with real estate and consumer growth offset by declines in commercial and agricultural loans. Real estate represented 65.23% of held-for-investment loans.
- Capital ratios improved. Available-for-sale securities’ unrealized gains declined as interest rates rose in the fourth quarter; accumulated other comprehensive income fell to $18.4 million from $47.4 million.
Outlook, risks and unusual items
- Management expected interest rates to remain relatively low and continue to pressure net interest margin, despite Federal Reserve rate increases and guidance pointing to further increases. No earnings or growth guidance was provided.
- Management described liquidity as adequate, citing a strong core deposit base and relatively low loan-to-deposit ratios. Available funding included a $1.15 billion FHLB line, of which $75 million was drawn, and unused bank credit lines; the parent’s $25 million Frost Bank revolver was undrawn and matured June 30, 2017.
- The company’s long-term dividend policy targeted approximately 40% of annual net earnings. The 2016 payout ratio was 44.14%; dividends remain subject to regulatory, capital and loan-covenant limits.
- Key risks include dependence on Texas economic conditions, real estate and borrower credit quality, interest-rate and securities valuation exposure, deposit and liquidity risk, and technology, vendor and cybersecurity risks. Oil-and-gas loans were 2.32% of gross loans ($78.5 million), down from 2.89%; management reported continued stress and additional monitoring.
- Off-balance-sheet commercial commitments totaled $775.6 million, including $549.0 million in unfunded lines, $199.2 million in commitments to extend credit and $27.4 million in standby letters of credit. Many commitments may not be drawn.
- Unusual or notable items included the 2015 Conroe bank acquisition and 4Trust mortgage asset purchase, which affected year-over-year comparability; a $267,000 pension settlement expense in 2016; and the securities-related decline in other comprehensive income. The company reported no material pending legal proceedings and no goodwill impairment in 2016.
- Management expected the new credit-loss standard (CECL) to increase the allowance, but was still assessing the impact; adoption was scheduled for 2020. The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified auditor opinion.
Important facts for investors to verify
- Whether Texas market conditions, particularly real estate, oil and gas, and agriculture, change loan classifications, charge-offs or required loan-loss reserves.
- Whether margin pressure eases or intensifies as rates and deposit costs change, and how the securities portfolio responds to rate movements.
- Whether expense growth, especially personnel and technology costs, moderates relative to income growth.
- How much of the reported income growth reflects recurring operations versus mortgage-market conditions and the ongoing effects of acquisitions.
- Liquidity and funding needs, including the maturity of the Frost Bank revolver and the potential funding of customer commitments or future acquisitions.
- The eventual allowance and implementation impact of CECL, and any material changes in regulatory capital, dividends or asset quality.