First Financial Bankshares, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 22, 2012. The company is a Texas-focused financial holding company operating 11 banks, a trust and asset management company, an insurance agency and a technology services company. Its community banks serve primarily Central, North Central and West Texas.
Financial performance and position
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Net interest income | $152.0 million | $136.2 million | Up 11.6%; tax-equivalent net interest income was $164.8 million versus $147.1 million. |
| Noninterest income | $51.4 million | $49.5 million | Up 4.0%. |
| Net earnings | $68.4 million | $59.7 million | Up 14.6%; 2010 included a $1.3 million after-tax extraordinary gain. |
| Diluted EPS | $2.17 | $1.91 | 2010 EPS was $1.87 before the extraordinary item. Per-share amounts reflect the 2011 three-for-two stock split. |
| Net interest margin | 4.62% | 4.68% | Down 6 basis points. |
| Return on average assets / equity | 1.78% / 14.44% | 1.75% / 13.74% | Both improved. |
| Noninterest expense / efficiency ratio | $104.6 million / 48.37% | $98.3 million / 49.49% | Expense increased 6.5%; efficiency ratio improved. |
| Loans held for investment, year-end | $1.776 billion | $1.677 billion | Up $98.7 million; real estate and consumer lending contributed to growth. |
| Deposits / total assets, year-end | $3.335 billion / $4.121 billion | $3.113 billion / $3.776 billion | Deposits increased $221.5 million; total assets increased $344.2 million. |
| Allowance for loan losses | $34.3 million; 1.92% of loans | $31.1 million; 1.84% | Allowance increased despite lower provision expense. |
| Nonperforming assets | $29.5 million; 1.64% of loans plus foreclosed assets | $26.0 million; 1.53% | Higher than 2010, attributed to ongoing economic and real estate weakness. |
| Capital ratios | Tier 1 risk-based 17.49%; total risk-based 18.74%; leverage 10.33% | 17.01%; 18.26%; 10.28% | All subsidiary banks were reported well-capitalized. |
Operating cash flow was $95.1 million, investing cash flow was negative $331.0 million and financing cash flow was positive $222.5 million. Cash and cash equivalents ended the year at $250.8 million, down $13.4 million. The company reported $207.8 million of short-term borrowings at year-end, primarily federal funds purchased and repurchase agreements; its $25 million parent-company revolving credit line had no outstanding balance. Shareholders’ equity was $508.5 million.
Material changes and notable items
- Net interest income growth reflected higher average earning assets, partly offset by lower yields. Average earning assets rose to $3.572 billion from $3.141 billion, while their yield fell to 4.84% from 5.11%.
- Interest expense declined to $8.0 million from $13.5 million as rates paid on interest-bearing liabilities fell. The average rate paid on those liabilities decreased to 0.34% from 0.64%.
- Provision for loan losses declined to $6.6 million from $9.0 million; net charge-offs were $3.4 million, or 0.20% of average loans, versus $5.5 million, or 0.35%.
- Fee mix shifted: trust fees rose to $12.7 million and ATM, interchange and card fees to $13.6 million, while deposit service charges fell to $17.7 million. Management cited lower overdraft activity and opt-in rules. Losses on sales of foreclosed assets were $1.3 million, compared with a $0.5 million gain in 2010.
- Noninterest expense growth included higher salaries and employee benefits, card-related costs, technology and marketing expenses. Lower FDIC insurance premiums partly offset increases.
- The 2010 comparison includes the $1.3 million after-tax Southlake property expropriation gain. The company acquired Sam Houston Financial Corp. in November 2010; its Huntsville bank operations were included for all of 2011.
- Available-for-sale securities reached $1.841 billion at fair value, up from $1.537 billion. Net unrealized gains increased shareholders’ equity through accumulated other comprehensive income; these gains are not net earnings.
- The board authorized repurchases of up to 750,000 shares through September 30, 2014; none had been repurchased by year-end. Cash dividends declared were $0.95 per share, with a 43.6% payout ratio.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management noted that the Federal Reserve expected short-term rates to remain low until 2014, which could pressure margins. Its model projected that, with rates unchanged, 2012 net interest income would be 1.99% below 2011; modeled immediate rate increases of 100 and 200 basis points would raise projected 12-month net interest income by 0.53% and 1.05%, respectively. These are estimates based on assumptions, not forecasts.
- Key risks include credit deterioration and collateral values, the concentration of operations and lending in Texas, interest-rate and margin sensitivity, deposit and liquidity conditions, securities valuation, regulatory change, competition, technology and cybersecurity, and the ability to complete and integrate acquisitions.
- Real estate represented approximately 57.7% of loans. Nonaccrual loans increased to $20.0 million from $15.4 million, and foreclosed assets increased to $9.5 million from $8.3 million. Management considered asset quality manageable but warned that economic weakness could increase losses and provisions.
- Off-balance-sheet commercial commitments totaled $536.7 million, including $449.1 million in unfunded lines, $67.1 million in commitments to extend credit and $20.5 million in standby letters of credit. Many commitments may expire undrawn.
- The allowance for loan losses and securities fair values rely on management estimates. Mortgage loan sale agreements include repurchase or indemnification provisions for certain early defaults or documentation deficiencies; historic losses were described as insignificant.
- The company disclosed no material pending legal proceedings. The external auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded controls were effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether the increase in nonperforming assets, particularly real estate-related exposures, continues and whether the $34.3 million allowance adequately covers emerging losses.
- Whether loan and deposit growth can sustain earnings as low rates weigh on asset yields and the net interest margin.
- The quality, duration, valuation and liquidity implications of the $1.841 billion available-for-sale securities portfolio and its unrealized gains.
- How fee income responds to overdraft regulation, debit-card interchange rules and customer activity, and whether expense growth remains controlled.
- That liquidity sources, regulatory dividend capacity and capital remain sufficient to support planned growth, dividends and any acquisitions; review the commitments and credit-line covenants.
- The effect of the 2010 Southlake gain and Huntsville acquisition when comparing recurring performance, and whether future results rely on similar nonrecurring items.