First Financial Bankshares, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 22, 2022. First Financial is a Texas-focused community banking and financial holding company operating 78 financial centers, alongside trust, mortgage, insurance and related businesses. The figures below are annual unless noted.
Financial performance and condition
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Net interest income | $370.4 million | $349.9 million | Up 5.9%; tax-equivalent net interest income was $385.1 million, up from $361.1 million. |
| Net interest margin | 3.40% | 3.79% | Down 39 basis points. |
| Noninterest income | $142.2 million | $139.9 million | Up 1.6%. |
| Noninterest expense | $241.7 million | $227.9 million | Up 6.0%; efficiency ratio was 45.84%, versus 45.49%. |
| Provision for credit losses | $(1.1) million | $19.5 million | Net reversal in 2021, reflecting improved outlook and asset quality, partly offset by loan growth. |
| Net earnings | $227.6 million | $202.0 million | Up 12.6%; diluted EPS was $1.59 versus $1.42. |
| Return on average assets / equity | 1.89% / 13.31% | 1.98% / 12.93% | ROAA declined; ROAE increased. |
| Total assets | $13.10 billion | $10.90 billion | Up 20.2%. |
| Loans held for investment | $5.39 billion | $5.17 billion | Up $217.9 million; real estate growth was partly offset by lower commercial balances. |
| Deposits | $10.57 billion | $8.68 billion | Up 21.8%; average total deposit cost fell to 0.06% from 0.16%. |
| Borrowings | $671.2 million | $430.1 million | Increase primarily in repurchase agreements; the company had no balance on its $25 million revolving line of credit. |
| Cash and cash equivalents | $528.6 million | $729.1 million | Down $200.5 million. |
| Net cash from operating activities | $353.2 million | $210.7 million | Investing activities used $2.61 billion, largely reflecting securities purchases; financing activities provided $2.06 billion. |
| Shareholders’ equity / total risk-based capital ratio | $1.76 billion / 20.34% | $1.68 billion / 22.03% | Equity increased, while capital ratios declined and remained above stated regulatory minimums. |
Material changes and operating drivers
- Earnings grew on higher net interest income, larger earning-asset balances, lower funding costs, fee growth and a credit-loss reserve reversal. Average earning assets rose to $11.34 billion from $9.52 billion.
- Low interest rates and a flat-to-inverted yield curve pressured asset yields and margin. Interest income included $23.49 million of PPP loan fees, versus $14.96 million in 2020.
- Trust fees rose $6.6 million, supported by higher assets under management and oil-and-gas-related activity. Mortgage income fell $10.6 million as origination volumes and loan-sale margins declined.
- Loans outstanding included $52.8 million of PPP loans at year-end, down from $483.7 million in 2020, following repayments and forgiveness. The company funded approximately 9,700 PPP loans totaling $970.9 million during 2020 and 2021.
- Available-for-sale securities increased to $6.57 billion from $4.39 billion. Their after-tax unrealized gains in equity fell to $99.3 million from $170.4 million, contributing to the decline in reported equity as a share of assets.
- Nonperforming assets declined to $34.2 million, or 0.63% of loans and foreclosed assets, from $42.9 million, or 0.83%. Net charge-offs were 0.02% of average loans, versus 0.06%.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management said it expected the Federal Reserve to raise rates during 2022 and described the company as asset-sensitive in its interest-rate simulation; modeled results are estimates, not forecasts.
- Management’s stated strategy is continued organic growth, selective Texas branch expansion and pursuit of acquisitions that fit the company’s culture and markets. A new authorization permits repurchases of up to 5 million shares through July 31, 2023; no shares were repurchased under that authorization through February 22, 2022.
- Management described liquidity as adequate, citing core deposits, cash, marketable securities and available borrowing capacity. At year-end, the bank had a $2.09 billion available FHLB line, $130 million of federal-funds lines and access to Federal Reserve lending; no amounts were drawn on the cited credit lines.
- Key risks include sensitivity to interest rates and securities values, loan and real-estate credit risk, reliance on Texas economic conditions, deposit liquidity, COVID-related uncertainty, cybersecurity and third-party service providers, and regulatory requirements. The loan portfolio is concentrated in Texas real estate and commercial lending.
- Oil-and-gas loans were $140.0 million, or 2.62% of loans excluding PPP, at year-end. Retail, restaurant and hospitality loans were $526.1 million, or 9.86% of loans excluding PPP; those industries had $1.5 million of nonaccrual loans.
- Potential unusual or judgment-sensitive items include the $1.1 million net credit-loss reversal; CECL adoption, applied retrospectively to January 1, 2020, with a $466,000 after-tax transition reduction to retained earnings; and fair-value changes in the securities portfolio. The allowance for credit losses was a critical audit matter.
- Management reported no material pending legal proceedings. Ernst & Young issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting.
- The board’s dividend policy targets approximately 35%–40% of annual net earnings, subject to capital, regulatory and loan-covenant limits. The 2021 payout ratio was 36.30%; management did not anticipate a significant change in policy.
Important facts for investors to verify
- Whether deposit growth and low funding costs can persist, and how Federal Reserve rate changes affect net interest margin and securities valuations.
- Whether credit quality remains stable as PPP balances run off and economic conditions evolve; assess allowance assumptions, criticized loans and concentrations in real estate and hospitality.
- How the $6.57 billion securities portfolio’s duration, unrealized losses and available-for-sale classification affect future earnings, equity and regulatory capital.
- Whether growth in fee businesses can offset lower mortgage income and the expected effect of debit-card interchange restrictions, which management estimated could reduce annual pretax fee income by approximately $16 million beginning July 1, 2022.
- Confirm the availability and terms of liquidity sources, the composition and behavior of deposits, and the implications of $3.86 billion in estimated uninsured and uncollateralized deposits.
- Review the full audited statements and notes for cash-flow details, commitments, regulatory capital, and the valuation judgments highlighted by the auditor.