Business context and reporting period
First Financial Bankshares, Inc. is a Texas-focused financial holding company operating community banking, trust and asset-management, insurance-agency and technology businesses. This Form 10-K reports the fiscal year ended December 31, 2017; year-over-year comparisons are with 2016 unless noted. At year-end, the company operated 69 Texas financial centers and had $7.25 billion in total assets.
The January 1, 2018 acquisition of Commercial Bancshares, Inc. closed after the reporting period and is not included in 2017 results. The company issued 1,289,371 shares; the acquired bank had $390.1 million in assets, $345.9 million in deposits and $271.5 million in gross loans at December 31, 2017.
Financial performance and position
Amounts below are in millions, except per-share data and ratios.
| Metric | 2017 | 2016 |
|---|---|---|
| Interest income | $246.0 | $232.3 |
| Net interest income | $236.7 | $226.8 |
| Noninterest income | $91.0 | $85.1 |
| Provision for loan losses | $6.5 | $10.2 |
| Noninterest expense | $174.0 | $165.8 |
| Earnings before income taxes | $147.2 | $135.9 |
| Income tax expense | $26.8 | $31.2 |
| Net earnings | $120.4 | $104.8 |
| Basic / diluted EPS | $1.82 / $1.81 | $1.59 / $1.59 |
| Return on average assets / equity | 1.72% / 13.63% | 1.59% / 12.36% |
| Net interest margin, tax-equivalent | 4.01% | 4.08% |
| Efficiency ratio | 49.26% | 49.22% |
- Net earnings rose 14.9%. A $7.65 million tax benefit from remeasuring deferred tax balances under the Tax Cuts and Jobs Act contributed to the increase. Excluding it, management reported 2017 basic EPS of $1.70, ROA of 1.61% and ROE of 12.77%.
- Net interest income increased as average earning assets grew, while the net interest margin declined seven basis points. Interest expense increased faster than interest income in rate terms.
- Noninterest income increased 6.9%, led by trust fees, card fees and deposit service charges. Noninterest expense rose 4.9%, including higher compensation, software costs, professional fees and operational losses.
- Fourth-quarter 2017 net earnings were $36.1 million, or $0.55 basic EPS, compared with $26.7 million, or $0.40, in fourth-quarter 2016. Fourth-quarter 2017 tax expense was $1.5 million; the filing’s annual results include the $7.65 million tax remeasurement benefit.
Balance sheet, capital and liquidity
- At year-end, assets were $7.25 billion, loans held for investment were $3.49 billion, deposits were $5.96 billion and shareholders’ equity was $922.8 million. Compared with 2016, these increased from $6.81 billion, $3.36 billion, $5.48 billion and $837.9 million, respectively.
- Cash and cash equivalents were $372.3 million, up from $256.5 million. Operating cash flow was $190.3 million, investing cash flow was negative $398.0 million and financing cash flow was positive $323.6 million; cash increased $115.9 million.
- Borrowings were $331.0 million, down from $445.8 million. The $25 million parent-company revolving credit line and $1.22 billion FHLB line were undrawn at year-end; management considered liquidity adequate. The filing does not provide a conventional corporate debt-to-equity measure.
- Regulatory capital remained strong: consolidated total risk-based capital was 19.85%, Tier 1 and common equity Tier 1 ratios were 18.66%, and the leverage ratio was 11.09%. The bank was reported well-capitalized.
- Cash dividends declared were $0.75 per share versus $0.70 in 2016; the payout ratio was 41.24%. Management stated it did not anticipate a significant change in its dividend policy, subject to capital, regulatory and covenant limits.
Material changes, outlook and risks
- Asset quality improved: nonperforming assets were $20.1 million, or 0.57% of loans and foreclosed assets, versus $29.0 million and 0.86% in 2016. Net charge-offs were 0.12% of average loans versus 0.19%. The allowance was $48.2 million, or 1.38% of year-end loans.
- Real estate represented 66.07% of loans. Oil-and-gas-related loans were $60.2 million, or 1.72% of gross loans, down from $78.5 million and 2.32%; management noted continuing stress in this exposure.
- Hurricane Harvey affected the Houston/Gulf Coast footprint. The company evaluated regional loans and collateral and recorded additional loan-loss allowance as deemed appropriate. It reported $446.6 million of loans in the Conroe region and $396.6 million in Southeast Texas/Orange. Municipal bonds in affected counties totaled $458.2 million, of which $92.8 million were uninsured; management did not identify credit-related losses other than temporary impairment at year-end.
- Management expected interest rates to remain relatively low and to continue pressuring the net interest margin, while noting the Federal Reserve’s rate increases and anticipated further increases in 2018. The filing provides no formal earnings or revenue guidance.
- The company’s principal risks include Texas economic and real-estate concentration, interest-rate and liquidity risk, credit losses, severe weather, competition, regulatory change, cybersecurity/vendor disruption, and acquisition integration. CECL was expected to take effect in 2020 and could increase the allowance; the impact was not yet determined.
- The tax-law change reduced the federal corporate rate from 35% to 21%. The $7.65 million deferred-tax remeasurement was provisional and remained subject to further analysis. The company also planned to early-adopt a tax-effects accounting update in 2018, reclassifying $5.76 million from accumulated other comprehensive income to retained earnings.
- The company reported no material pending legal proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of 2017 earnings growth was recurring: notably, the $7.65 million tax benefit and the margin decline.
- Subsequent Commercial Bancshares integration, including realized costs, synergies, share dilution and the final purchase accounting.
- Further credit quality and collateral developments after Hurricane Harvey, particularly in the affected regions and real-estate-heavy portfolio.
- Loan growth, deposit pricing and funding costs as rates change, and whether net interest margin stabilizes or continues to compress.
- The eventual CECL allowance increase and the continuing effect of tax-law implementation on deferred tax balances and reported earnings.