First Financial Bankshares, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with FY2019. The company is a Texas-focused community banking and financial services holding company. On January 1, 2020, it completed the TB&T Bancshares acquisition, issuing 6.28 million shares; reported results include TB&T from that date.
Financial performance and position
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Interest income | $364.1 million | $319.2 million | +14.1% |
| Net interest income | $349.9 million | $289.1 million | +21.0% |
| Net interest margin | 3.79% | 3.98% | Down 19 basis points |
| Noninterest income | $139.9 million | $108.4 million | +29.1%; mortgage-related income was a key contributor |
| Provision for credit losses | $19.5 million | $3.0 million | Higher provision reflected pandemic-related economic stress |
| Noninterest expense | $227.9 million | $196.5 million | +16.0%, including acquisition-related costs |
| Net earnings | $202.0 million | $164.8 million | +22.6% |
| Diluted EPS | $1.42 | $1.21 | FY2020 reported EPS was $1.42 |
| Efficiency ratio | 45.49% | 48.61% | Improved; PPP-related balance-sheet growth and deferred origination costs contributed |
| Return on average assets / equity | 1.98% / 12.93% | 2.08% / 14.37% | ROAA and ROE declined year over year |
| Operating cash flow | $210.7 million | $202.5 million | Investing cash outflow was $1.26 billion; financing cash inflow was $1.50 billion |
| Total assets | $10.90 billion | $8.26 billion | +32.0%, reflecting acquisition and deposit/PPP-related growth |
| Loans held for investment | $5.17 billion | $4.19 billion | +23.3%; included $479.4 million in PPP loans at year-end |
| Deposits | $8.68 billion | $6.60 billion | +31.4% |
| Borrowings | $430.1 million | $381.4 million | Year-end borrowings increased $48.7 million |
| Shareholders’ equity | $1.68 billion | $1.23 billion | 15.39% of assets, versus 14.85% |
| Cash and cash equivalents | $729.1 million | $282.6 million | Year-end balance increased substantially |
Capital remained strong: consolidated total risk-based capital was 22.03%, CET1 was 20.79%, and the leverage ratio was 11.86%. The bank was reported as well capitalized. The company declared $0.51 per share in cash dividends for 2020, a 35.88% payout ratio.
Material changes and notable items
- Net earnings rose despite lower net interest margin, supported by balance-sheet growth, lower funding costs, higher mortgage and other fee income, and the TB&T acquisition.
- Mortgage loan originations increased to $1.21 billion from $551.8 million; mortgage gain and fee income rose to $43.9 million from $18.1 million.
- Nonperforming assets increased to $42.9 million, or 0.83% of loans held for investment plus foreclosed assets, from $25.8 million, or 0.61%. Net charge-offs remained low at 0.06% of average loans.
- The allowance for credit losses was $66.5 million, or 1.29% of loans held for investment (1.42% excluding PPP loans). FY2020 provision expense was $19.5 million. The company adopted CECL effective January 1, 2020, recording a $466,000 after-tax transition reduction to retained earnings; it had elected to defer implementation during the first nine months under CARES Act relief.
- Available-for-sale securities totaled $4.39 billion, up from $3.41 billion. Year-end accumulated other comprehensive earnings included $170.4 million of after-tax unrealized securities gains, versus $67.5 million in 2019.
- The company repurchased and retired 324,802 shares for $8.0 million during March and April. The authorization permits repurchases of up to 4 million shares through September 2021.
Outlook, risks and contingencies
- Management said it intended to continue organic growth, pursue branch opportunities and consider acquisitions. It expected no significant change to its dividend policy, which targets approximately 35%–40% of annual net earnings, subject to regulatory and covenant limits. No earnings or revenue guidance was provided.
- Management described continuing uncertainty from COVID-19, including borrower repayment capacity, collateral values, customer activity, staffing and vendors. The company funded approximately 6,500 PPP loans totaling $703.7 million during 2020; $483.7 million remained outstanding at year-end. It was assisting with the second PPP round.
- Low interest rates and the company’s asset sensitivity pressured net interest margin. The filing’s rate simulation estimated net interest income would rise 4.75% under a 100-basis-point increase and decline 3.46% under a 100-basis-point decrease over 12 months; management cautioned that these are model estimates, not forecasts.
- Credit exposures warranting attention included oil and gas loans of $106.2 million, or 2.27% of loans excluding PPP, and retail, restaurant and hospitality loans of $359.3 million, or 7.67% excluding PPP. Management reported additional monitoring of these portfolios.
- Crossing $10 billion in assets made the bank subject to expanded regulatory requirements, including CFPB supervision; temporary relief may defer some threshold-related requirements until 2022. Management estimated future debit interchange restrictions could reduce annual pretax income by approximately $14 million once applicable.
- Liquidity sources included cash, deposits, and available borrowing facilities; the company reported no outstanding balance on its $25 million parent-company revolver or its $1.53 billion FHLB line at year-end. Commercial commitments totaled $1.65 billion, with a $5.49 million reserve for unfunded commitments.
- The filing reported no material pending legal proceedings. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How post-pandemic borrower performance, deferrals and criticized/nonperforming credits affect provisions and the allowance, especially in commercial real estate and identified industry exposures.
- Whether PPP loan forgiveness, repayment and fee amortization materially change loan growth, interest income and reported efficiency.
- How sustainable mortgage origination income is after the unusually strong 2020 volume, and how much profit growth depends on acquisition effects.
- The effects and timing of the $10 billion regulatory threshold, including potential interchange-fee reductions and increased compliance costs.
- Whether deposit growth and available liquidity remain stable as stimulus and PPP-related balances change, and whether capital and dividend plans remain consistent with regulatory and credit-agreement limits.
- The filing provides annual cash-flow totals but not a standalone Q4 cash-flow figure; quarterly net earnings were $58.5 million in Q4 2020, compared with $41.4 million in Q4 2019. Q4 2020 included an $8.0 million reversal of credit-loss provision.