First Financial Bankshares, Inc. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; comparative results are for 2011 and 2010. The company is a Texas-focused community banking and financial-services holding company operating 55 financial centers. On December 30, 2012, it consolidated 11 bank charters into one, retaining local management through 11 regions. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Net interest income | $154.7 million | $152.0 million |
| Provision for loan losses | $3.5 million | $6.6 million |
| Noninterest income | $57.2 million | $51.4 million |
| Noninterest expense | $109.0 million | $104.6 million |
| Net earnings | $74.2 million | $68.4 million |
| Diluted EPS | $2.36 | $2.17 |
| Return on average assets / equity | 1.75% / 13.85% | 1.78% / 14.44% |
| Tax-equivalent net interest margin | 4.28% | 4.62% |
| Efficiency ratio | 48.14% | 48.37% |
- Growth and balance sheet: Total assets rose 9.3% to $4.50 billion. Period-end loans held for investment increased 17.0% to $2.08 billion; deposits increased 8.9% to $3.63 billion. Securities were $1.82 billion and shareholders’ equity was $557.0 million.
- Cash flow: Operating activities provided $93.1 million; investing activities used $295.0 million; financing activities provided $311.8 million. Cash and cash equivalents ended the year at $360.7 million, up from $250.8 million.
- Credit quality: Nonperforming assets fell to $25.5 million, or 1.22% of loans plus foreclosed assets, from $29.5 million, or 1.64%. Net charge-offs were 0.15% of average loans versus 0.20%. The allowance was $34.8 million, equal to 1.67% of year-end loans, down from 1.92%.
- Capital and funding: Consolidated total risk-based, Tier 1 risk-based and leverage ratios were 18.68%, 17.43% and 10.60%, respectively. Short-term borrowings were $259.7 million; the company reported no balance on its $25 million parent-company credit line. The filing reports no long-term debt balance.
Changes versus prior year
- Net earnings increased 8.6%, supported by higher net interest income and noninterest income and a lower loan-loss provision. Loan growth increased net interest income, but lower asset yields reduced the net interest margin by 34 basis points.
- Noninterest income rose 11.2%, led by trust fees, ATM/interchange/card fees, mortgage operations and securities-sale gains. Deposit service charges declined $1.0 million, mainly reflecting lower overdraft usage and related rule changes.
- Noninterest expense increased 4.2%, including costs for staffing and new branches, equipment, software/database integration and the bank-charter consolidation. The efficiency ratio improved slightly.
- Loan growth was concentrated in real estate and consumer loans. Nonaccrual loans increased to $21.8 million from $20.0 million, while foreclosed assets declined to $3.6 million from $9.5 million.
Outlook, risks and unusual items
- Management cited persistently low interest rates as pressure on margins. Its interest-rate model projected that, if rates remain unchanged, 2013 net interest income would decrease 3.56% from 2012; this is a model estimate, not formal earnings guidance. Management noted the Federal Reserve expected rates to remain low through 2015.
- The filing identifies credit and real-estate exposure, concentration in Texas markets, interest-rate and margin risk, deposit and liquidity risks, regulatory and compliance costs, competition, mortgage-sale indemnities, technology/cybersecurity, and dependence on subsidiary dividends as material risks. Real estate represented about 59% of loans.
- Liquidity was described as adequate. Available sources included $72.0 million of parent-company cash, approximately $60.0 million of subsidiary dividends available without prior regulatory approval, bank credit lines and deposit funding. The Frost line of credit matures June 30, 2013 and includes financial and dividend covenants; management reported compliance at year-end.
- The company declared $0.99 per share in cash dividends for 2012 and stated its long-term policy is to distribute approximately 40% of annual earnings, subject to capital needs and restrictions.
- Subsequent event: On February 20, 2013, the company announced an agreement to acquire Orange Savings Bank, SSB for approximately $56 million in cash and stock, subject to regulatory and shareholder approval, with closing expected in the second quarter of 2013.
- The 2010 comparison includes a $1.3 million after-tax extraordinary gain from TXDOT’s expropriation of property. No material pending legal proceedings were reported. The pension plan was underfunded by $6.7 million at year-end.
Key facts for investors to verify
- Whether loan growth, especially real-estate lending, is being matched by stable credit performance and an adequate allowance.
- Whether net interest margin and net interest income perform in line with management’s rate-sensitivity assumptions as low-rate conditions persist.
- Whether the Orange Savings Bank acquisition receives approvals, closes on expected terms and delivers the anticipated strategic or financial benefits.
- Whether charter-consolidation and technology integration costs produce the expected operating efficiencies.
- Whether deposit growth, liquidity sources, capital ratios and dividend capacity remain adequate, including under regulatory or economic stress.