First Financial Bankshares, Inc. — 2013 Form 10-K
Business context and reporting period. Texas-focused financial holding company operating 60 banking centers across 12 regions, alongside trust, insurance and technology subsidiaries. This annual filing covers the fiscal year ended December 31, 2013; comparisons are primarily with 2012. The company acquired Orange Savings Bank on May 31, 2013, adding five Southeast Texas locations.
Financial performance and condition
| Metric | 2013 | 2012 |
|---|---|---|
| Net interest income (GAAP) | $172.3 million | $154.7 million |
| Noninterest income | $62.1 million | $57.2 million |
| Net earnings | $78.9 million | $74.2 million |
| Diluted EPS | $2.47 | $2.36 |
| Return on average assets / equity | 1.64% / 13.75% | 1.75% / 13.85% |
| Net interest margin (tax-equivalent) | 4.22% | 4.28% |
| Efficiency ratio | 50.19% | 48.14% |
| Total assets | $5.22 billion | $4.50 billion |
| Loans / deposits | $2.68 billion / $4.14 billion | $2.09 billion / $3.63 billion |
| Shareholders’ equity | $587.6 million | $557.0 million |
- Growth and earnings: Net earnings rose 6.3%. Net interest income on a tax-equivalent basis increased 11.6% to $189.0 million, mainly from higher earning-asset volume; average earning assets grew to $4.48 billion. Lower asset yields partly offset growth.
- Cash flow: Operating activities provided $109.9 million; investing activities used $556.8 million and financing activities provided $298.2 million. Cash and cash equivalents fell $148.7 million to $212.0 million, reflecting substantial loan and securities investment and the acquisition.
- Credit quality: Provision for loan losses was $3.8 million; net charge-offs were $3.6 million, or 0.15% of average loans. Nonperforming assets were $31.1 million, up from $25.5 million, but fell to 1.16% of loans plus foreclosed assets from 1.22%. The allowance was $33.9 million, or 1.26% of loans, versus 1.67%; acquired Orange loans were initially recorded at fair value without an allowance.
- Liquidity and funding: Deposits were the principal funding source. Period-end short-term borrowings were $463.9 million, including $267.3 million in repurchase agreements and $191.1 million in FHLB advances. No balance was drawn on the company’s $25 million unsecured revolving line; the bank also had unused correspondent lines and substantial FHLB capacity. Management considered liquidity adequate.
- Capital: Consolidated Tier 1 risk-based, total risk-based and leverage ratios were 15.82%, 16.92% and 9.84%, respectively; the bank was classified as well-capitalized. The company reported that pro forma capital met Basel III requirements, including the full conservation buffer, as if effective at year-end.
- Quarterly snapshot: Fourth-quarter 2013 net earnings were $21.2 million and diluted EPS was $0.66, versus $18.3 million and $0.58 in fourth-quarter 2012. Fourth-quarter net interest income was $46.7 million versus $38.8 million.
Material changes and unusual items
- The Orange Savings Bank purchase price was $62.3 million: $39.2 million cash and 420,000 shares valued at $23.1 million. The acquisition added $293.3 million of loans and $386.0 million of deposits at fair value and generated $23.0 million of goodwill. Results were included from June 1, 2013.
- Assets increased 16.0% and loans increased 29.2% year over year, with acquisition effects contributing materially. Real estate loans accounted for 62.5% of the loan portfolio.
- Noninterest expense rose 15.6% to $126.0 million. Management attributed much of the increase to Orange acquisition staffing, integration and technology conversion costs, as well as new-branch and benefit costs; the efficiency ratio consequently worsened.
- Net gains on sales of available-for-sale securities declined to $0.1 million from $2.8 million. The available-for-sale portfolio had $22.9 million of gross unrealized losses at year-end, largely attributed by management to interest rates; accumulated other comprehensive earnings declined to $10.4 million from $51.3 million.
- Cash dividends declared were $1.03 per share, with a 41.62% payout ratio. Management stated it did not anticipate a significant change to its approximate 40% long-term payout policy.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expected short-term interest rates to remain low until 2015, continuing pressure on net interest margin. The company’s rate simulations estimated net interest income declines of 0.54% and 1.38% under immediate 100- and 200-basis-point rate increases, and a 4.14% decline under a 100-basis-point decrease; management cautioned these are model estimates, not forecasts.
- Key risks include concentration in Texas markets; commercial real estate and other credit exposure; changing collateral values and loan-loss estimates; interest-rate and securities valuation risk; deposit competition and liquidity needs; acquisition integration; and evolving banking, consumer-protection and Basel III requirements. Cybersecurity, technology reliability and regulatory compliance are also identified risks.
- Commitments included $453.6 million in unfunded lines of credit, $118.2 million in commitments to extend credit and $32.9 million in standby letters of credit. These amounts are contractual notional commitments, not necessarily expected cash outflows.
- The filing reports no material pending legal proceedings. Management and the independent auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of 2013’s loan, deposit and earnings growth came from the Orange acquisition versus organic growth, and whether integration costs persist.
- Whether credit quality and reserve adequacy remain sound as nonperforming loans increased and the allowance-to-loans ratio declined, including the acquired portfolio’s performance.
- How the large securities portfolio, unrealized losses and interest-rate sensitivity affect capital, earnings and future net interest margin.
- Funding composition and borrowing trends, including repurchase agreements and FHLB advances, alongside deposit stability and the company’s liquidity assumptions.
- Implementation of Basel III, including the company’s one-time AOCI opt-out decision, and any resulting effects on regulatory capital and distributions.