Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ☐ No ☒
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation
S-K
is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form
10-K
or any amendment to this Form
10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company or an emerging growth company. See the definitions of large accelerated filer, accelerated file, smaller reporting company
and emerging growth company in Rule
12b-2
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act). Yes ☐ No ☒
As of June 30, 2017, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market
value of the registrants voting and
non-voting
common stock held by
non-affiliates
was $2.78 billion.
As of February 16, 2018, there were 67,574,990 shares of common stock outstanding.
Certain information called for by Part III is incorporated by reference to the proxy statement for our 2018 annual meeting of shareholders,
which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2017.
Such forward-looking statements reflect the current views of our
management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new
information, future events or otherwise (except as required by law).
PART I
General
First Financial Bankshares, Inc., a Texas corporation (the Company), is a financial holding company registered under the Bank
Holding Company Act of 1956, as amended, or BHCA. As such, we are supervised by the Federal Reserve Board, as well as several other bank regulators. We were formed as a bank holding company in 1956 under the original name F & M Operating
Company, but our banking operations date back to 1890, when Farmers and Merchants National Bank opened for business in Abilene, Texas. On January 1, 2018, we acquired Commercial Bancshares, Inc. and its wholly owned subsidiary, Commercial State
Bank, Kingwood, Texas and merged these entities with and into the Company and our subsidiary bank, respectively. On July 31, 2015, we acquired FBC Bancshares, Inc. and its wholly owned subsidiary, First Bank, N.A., Conroe, Texas and merged
these entities with and into the Company and our subsidiary bank, respectively. We also completed an asset purchase of 4Trust Mortgage, Inc. on June 1, 2015 that significantly increased our residential mortgages/loan originations that are sold
in the secondary market. On January 1, 2015, our technology subsidiary, First Technology Services, Inc., was contributed to our bank subsidiary, First Financial Bank, National Association, Abilene, Texas, and therefore became an indirect
subsidiary of the Company. As of December 31, 2017, our subsidiaries are:
|
|
|
First Financial Bank, National Association, Abilene, Texas;
|
2
|
|
|
First Technology Services, Inc., Abilene, Texas, a wholly owned subsidiary of First Financial Bank, National Association, Abilene, Texas;
|
|
|
|
First Financial Trust & Asset Management Company, National Association, Abilene, Texas;
|
|
|
|
First Financial Insurance Agency, Inc., Abilene, Texas; and
|
|
|
|
First Financial Investments, Inc., Abilene, Texas.
|
Through our subsidiaries, we conduct a
full-service commercial banking business. Our banking centers are located primarily in Central, North Central, Southeast and West Texas. As of December 31, 2017, we had 69 financial centers across Texas, with eleven locations in Abilene, three
locations in San Angelo and Weatherford, two locations in Cleburne, Conroe, Stephenville, and Granbury, and one location each in Acton, Albany, Aledo, Alvarado, Beaumont, Boyd, Bridgeport, Brock, Burleson, Cisco, Clyde, Cut and Shoot, Decatur,
Eastland, Fort Worth, Glen Rose, Grapevine, Hereford, Huntsville, Keller, Magnolia, Mauriceville, Merkel, Midlothian, Mineral Wells, Montgomery, Moran, New Waverly, Newton, Odessa, Orange, Port Arthur, Ranger, Rising Star, Roby, Southlake,
Sweetwater, Tomball, Trent, Trophy Club, Vidor, Waxahachie, Willis and Willow Park, all in Texas. On January 1, 2018, we completed our acquisition of Commercial Bancshares, Inc. and its wholly owned bank subsidiary,
Commercial State Bank and, as a result, added branch locations in Kingwood, Fulshear, El Campo and Palacios.
Even though we operate in a
growing number of Texas markets, we continue to believe that decisions are best made at the local level. Although we consolidated our bank charters into one charter, we continue to regionally manage our operations with local advisory boards of
directors, local bank region presidents and local decision-makers. We have consolidated many of the backroom operations, such as investment securities, accounting, check processing, technology and employee benefits, which improves our efficiency and
frees management of our bank regions to concentrate on serving the banking needs of their local communities. On January 1, 2016, we combined our Huntsville and Conroe Regions and our Abilene, Sweetwater and Eastland Regions and established a
Fort Worth Region that previously was a branch of our Weatherford Region. On January 1, 2018, we combined our Mineral Wells and Stephenville Regions.
In the past, we have chosen to keep our Company focused on the State of Texas, one of the nations largest, fastest-growing and most
economically diverse states. With approximately 27.9 million residents, Texas has more people than any other state except California. The population of Texas grew 19.3% from 2006-2016 according to the U.S. Census Bureau. Many of the communities
in which we operate are also experiencing positive growth as shown below:
Population Growth 2006-2016*
|
|
|
|
|
|
|
|
|
|
|
Bridgeport and Wise County
|
|
|
13.5%
|
|
|
Weatherford, Willow Park, Aledo and Parker County
|
|
|
23.6%
|
|
Fort Worth and Tarrant County
|
|
|
21.5%
|
|
|
Stephenville and Erath County
|
|
|
18.0%
|
|
Cleburne and Johnson County
|
|
|
11.7%
|
|
|
Conroe and Montgomery County
|
|
|
41.3%
|
|
Granbury and Hood County
|
|
|
31.1%
|
|
|
*Source: U. S. Census Bureau
|
|
|
|
|
These economies include dynamic centers of higher education, agriculture, wind energy and natural resources,
retail, military, healthcare, tourism, retirement living, manufacturing and distribution.
We believe our community approach to doing
business works best for us in small and
mid-size
markets, where we can play a prominent role in the economic, civic and cultural life of the community. Our goal is to serve these communities well and to
experience growth as these markets continue to expand. In many instances, banking competition is less intense in smaller markets, making it easier for us to operate rationally and attract and retain high-caliber employees who prefer not only our
community-banker concept but the high quality of life in smaller cities.
Over the years, we have grown in three ways: by growing
organically, by opening new branch locations and by acquiring other banks. Since 1997, we have completed thirteen bank acquisitions and have increased our total assets from $1.57 billion to $7.25 billion as of December 31, 2017. We
have also established a trust and asset management company and a technology services company. First Financial Trust and Asset Management Company, National
3
Association operates as a subsidiary of First Financial Bankshares, Inc. and First Technology Services, Inc. operates as a subsidiary of First Financial Bank, National Association, Abilene,
Texas. Looking ahead, we intend to continue to grow organically by better serving the needs of our customers and putting them first in all of our decisions. We continually look for new branch locations, so we can provide more convenient service to
our customers, and we are actively pursuing acquisition opportunities by calling on banks that we are interested in possibly acquiring.
When targeting a bank for acquisition, the subject bank generally needs to be well managed and profitable, while being located in the type of
community that fits our profile. We seek to enter growing communities with good amenities schools, infrastructure, commerce and lifestyle. We prefer
non-metropolitan
markets, either around Dallas/Fort
Worth, Houston, San Antonio or Austin or along the Interstate 35, 45, 10 and 20 corridors in Texas. We might also consider the acquisition of banks in East Texas, the Texas Hill Country area or in states contiguous to Texas. Banks between
$300 million and $1.0 billion in asset size fit our sweet spot for acquisition, but we would consider banks that are larger or smaller, or that are in other areas of Texas if we believe they would be a good fit for our Company.
Information on our revenues, profits and losses and total assets appears in Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in Item 7 hereof.
First Financial Bankshares, Inc.
We provide management, technical resources and policy direction to our subsidiaries, which enable them to improve or expand their services
while continuing their local activity and identity. Each of our subsidiaries operates under the
day-to-day
management of its own board of directors and officers,
including advisory boards of directors for our bank regions. We provide resources and policy direction in, among other things, the following areas:
|
|
|
asset and liability management;
|
|
|
|
regulatory compliance; and
|
In particular, we assist our subsidiaries with, among other things, decisions
concerning major capital expenditures, employee fringe benefits, including retirement plans and group medical coverage, dividend policies, and appointment of officers and directors, including advisory directors, and their compensation. We also
perform, through corporate staff groups or by outsourcing to third parties, internal audits, compliance oversight and loan reviews of our subsidiaries. We provide advice and specialized services for our bank regions related to lending, investing,
purchasing, advertising, public relations, and technology services.
4
We evaluate various potential financial institution acquisition opportunities and approve
potential locations for new branch offices. We anticipate that funding for any acquisitions or expansions would be provided from our existing cash balances, available dividends from our subsidiaries, utilization of available lines of credit and
future debt or equity offerings.
Services Offered by Our Subsidiaries
Our subsidiary bank, First Financial Bank, National Association, is a separate legal entity that operates under the
day-to-day
management of its board of directors and officers. Our multiple banking regions, which operate under our subsidiary bank, each have separate advisory boards that
make recommendations and provide assistance to regional management of the bank regarding the operations of their respective region. Each of our bank regions provides general commercial banking services, which include accepting and holding checking,
savings and time deposits, making loans, automated teller machines,
drive-in
and night deposit services, safe deposit facilities, remote deposit capture, internet banking, mobile banking, payroll cards,
transmitting funds, and performing other customary commercial banking services. We also conduct full service trust activities through First Financial Trust & Asset Management Company, National Association, our trust company. Our trust
company has seven locations which are located in Abilene, Fort Worth, Odessa, Beaumont, San Angelo, Stephenville and Sweetwater, all in Texas. Through our trust company, we offer personal trust services, which include wealth management, the
administration of estates, testamentary trusts, revocable and irrevocable trusts and agency accounts. We also administer all types of retirement and employee benefit accounts, which include 401(k) profit sharing plans and IRAs. In addition, we
provide securities brokerage services through arrangements with an unrelated third party in our Abilene, Cleburne, San Angelo and Weatherford banking regions.
Competition
Commercial banking in Texas
is highly competitive, and because we hold less than 1% of the states deposits, we represent only a minor segment of the industry. To succeed in this industry, we believe that we must have the capability to compete effectively in the areas of
(1) interest rates paid or charged; (2) scope of services offered; and (3) prices charged for such services. Our bank regions compete in their respective service areas against highly competitive banks, thrifts, savings and loan
associations, small loan companies, credit unions, mortgage companies, insurance companies, and brokerage firms, all of which are engaged in providing financial products and services and some of which are larger than us in terms of capital,
resources and personnel.
Our business does not depend on any single customer or any few customers, and the loss of any one would not have
a materially adverse effect upon our business. Although we have a broad base of customers that are not related to us, our customers also occasionally include our officers and directors, as well as other entities with which we are affiliated. Through
our bank regions we may make loans to our officers and directors, and entities with which we are affiliated, in the ordinary course of business. We make these loans on substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons. Loans to our directors, officers and their affiliates are also subject to numerous restrictions under federal and state banking laws, which we describe in greater detail below,
under the heading Supervision and Regulation Loans to Directors, Executive Officers and Principal Shareholders.
Employees
Including all of our subsidiaries, we employed approximately 1,300 full-time equivalent employees at December 31, 2017. Our management
believes that our employee relations have been and will continue to be good.
Supervision and Regulation
Both federal and state laws extensively regulate bank holding companies, financial holding companies and banks. These laws (and the regulations
promulgated thereunder) are primarily intended to protect depositors and the deposit insurance fund (the DIF) of the Federal Deposit Insurance Corporation, or the FDIC. The following information describes particular laws and regulatory
provisions relating to financial holding companies and banks. This discussion is qualified in its entirety by reference to the particular laws and regulatory provisions. A change in any of these laws or regulations may have a material effect on our
business and the business of our subsidiaries. Recent political developments, including the change in administration of the United States federal government, have added additional uncertainty in the implementation, scope and timing of regulatory
reforms.
5
Bank Holding Companies and Financial Holding Companies
Historically, the activities of bank holding companies were limited to the business of banking and activities closely related or incidental to
banking. Bank holding companies were generally prohibited from acquiring control of any company that was not a bank and from engaging in any business other than the business of banking or managing and controlling banks. The Gramm-Leach-Bliley Act,
which took effect on March 12, 2000, dismantled many
Depression-era
restrictions against affiliations between banking, securities and insurance firms by permitting bank holding companies to engage in a
broader range of financial activities, so long as certain safeguards are observed. Specifically, bank holding companies may elect to become financial holding companies that may affiliate with securities firms and insurance companies and
engage in other activities that are financial in nature or incidental to a financial activity. Thus, with the enactment of the Gramm-Leach-Bliley Act, banks, security firms and insurance companies find it easier to acquire or affiliate with each
other and cross-sell financial products. The Gramm-Leach-Bliley Act permits a single financial services organization to offer a more complete array of financial products and services than historically was permitted.
A financial holding company is essentially a bank holding company with significantly expanded powers. Under the Gramm-Leach-Bliley Act, in
addition to traditional lending activities, the following activities are among those that are deemed financial in nature for financial holding companies: securities underwriting, dealing in or making a market in securities, sponsoring
mutual funds and investment companies, insurance underwriting and agency activities, activities which the Federal Reserve Board determines to be closely related to banking, and certain merchant banking activities.
We elected to become a financial holding company in September 2001. As a financial holding company, we have very broad discretion to affiliate
with securities firms and insurance companies, provide merchant banking services, and engage in other activities that the Federal Reserve Board has deemed financial in nature. In order to continue as a financial holding company, we must continue to
be well-capitalized, well-managed and maintain compliance with the Community Reinvestment Act. Depending on the types of financial activities that we may elect to engage in, under the Gramm-Leach-Bliley Acts functional regulation principles,
we may become subject to supervision by additional government agencies. The election to be treated as a financial holding company increases our ability to offer financial products and services that historically we were either unable to provide or
were only able to provide on a limited basis. As a result, we will face increased competition in the markets for any new financial products and services that we may offer. Likewise, an increased amount of consolidation among banks and securities
firms or banks and insurance firms could result in a growing number of large financial institutions that could compete aggressively with us.
Mergers
and Acquisitions
We generally must obtain approval from the banking regulators before we can acquire other financial institutions. We
may not engage in certain acquisitions if we are undercapitalized. Furthermore, the BHCA provides that the Federal Reserve Board cannot approve any acquisition, merger or consolidation that may substantially lessen competition in the banking
industry, create a monopoly in any section of the country, or be a restraint of trade. However, the Federal Reserve Board may approve such a transaction if the convenience and needs of the community clearly outweigh any anti-competitive effects.
Specifically, the Federal Reserve Board would consider, among other factors, the expected benefits to the public (greater convenience, increased competition, greater efficiency, etc.) against the risks of possible adverse effects (undue
concentration of resources, decreased or unfair competition, conflicts of interest, unsound banking practices, etc.).
Under the BHCA, the
Company must obtain the prior approval of the Federal Reserve Board, or acting under delegated authority, the Federal Reserve Bank of Dallas before (1) acquiring direct or indirect ownership or control of any class of voting securities of any
bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or
(3) merging or consolidating with another bank holding company.
6
The Change in Bank Control Act of 1978, as amended, or the CIBCA, and the related regulations of
the Federal Reserve Board require any person or groups of persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the Federal Reserve Board before the person or group acquires
control of the Company. The CIBCA defines control as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable
presumption of control arises under the CIBCA where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934, as
amended, such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.
Banks
Federal and state laws and regulations that govern banks have the effect of, among other things, regulating the scope of business, investments,
cash reserves, the purpose and nature of loans, the maximum interest rate chargeable on loans, the amount of dividends declared, and required capitalization ratios.
National Banking Associations
. Banks organized as national banking associations under the National Bank Act are subject to regulation
and examination by the Office of the Comptroller of the Currency, or OCC. Effective December 30, 2012, we consolidated our then eleven bank charters into one, that being our Abilene charter. As a result, the OCC now supervises, regulates and
regularly examines the following subsidiaries:
|
|
|
First Financial Bank, National Association, Abilene, Texas;
|
|
|
|
First Financial Trust & Asset Management Company, National Association; and
|
|
|
|
First Technology Services, Inc. (a wholly owned subsidiary of First Financial Bank, National Association)
|
The
OCCs supervision and regulation of banks is primarily intended to protect the interests of depositors. The National Bank Act:
|
|
|
requires each national banking association to maintain reserves against deposits;
|
|
|
|
restricts the nature and amount of loans that may be made and the interest that may be charged; and
|
|
|
|
restricts investments and other activities.
|
Deposit Insurance Coverage and Assessments
Our subsidiary bank is a member of the FDIC. Through the DIF, the FDIC provides deposit insurance protection that covers all deposit accounts
in FDIC-insured depository institutions up to applicable limits (currently, $250,000 per depositor).
Our
subsidiary bank must pay assessments to the FDIC under a risk-based assessment system for this federal deposit insurance protection. FDIC-insured depository institutions that are members of the Bank Insurance Fund pay insurance premiums at rates
based on their risk classification. Institutions assigned to higher risk classifications (i.e., institutions that pose a greater risk of loss to the DIF) pay assessments at higher rates than institutions assigned to lower risk classifications. An
institutions risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to bank regulators. Through June 30, 2017, the assessment rate for our subsidiary bank was at the lowest
risk-based premium available, which was 3.00% of the assessment base per annum. In addition, the FDIC can impose special assessments to cover shortages in the DIF and has imposed special assessments in the past.
In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reaches 1.35% by September 30,
2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets effective the quarter after the fund reserve ratio reached
1.15%. As of June 30, 2016, the FDIC announced that the fund reserve ratio had reached 1.15%. As a result, the Companys assessment rate was decreased to the rate stated above. The Dodd-Frank Act also eliminated the requirement that the
FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. The Dodd-Frank Act requires the FDIC to offset the effect of increasing the reserve ratio on institutions with total consolidated assets of less
than $10 billion, such as the Company.
7
As required by the Dodd-Frank Act, the FDIC also revised the deposit insurance assessment
system, effective April 1, 2011, to base assessments on the average total consolidated assets of insured depository institutions during the assessment period, less the average tangible equity of the institution during the assessment period as
opposed to solely bank deposits at an institution. This base assessment change necessitated that the FDIC adjust the assessment rates to ensure that the revenue collected under the new assessment system will approximately equal that under the
existing assessment system.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA, an FDIC-insured
depository institution can be held liable for any losses incurred by the FDIC in connection with (1) the default of one of its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one of its FDIC-receivers,
and in danger of default is defined generally as the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance.
The FDIC is also empowered to regulate interest rates paid by insured banks. Approval of the FDIC is also required before an insured bank
retires any part of its common or preferred stock, or any capital notes or debentures.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other subsidiaries. We receive most of our revenue from dividends paid to us
by our bank and trust company subsidiaries. Described below are some of the laws and regulations that apply when either we or our subsidiaries pay or paid dividends.
The Federal Reserve Board, the OCC and the FDIC have issued policy statements that recommend that bank holding companies and insured banks
should generally only pay dividends to the extent net income is sufficient to cover both cash dividends and a rate of earnings retention consistent with capital needs, asset quality and overall financial condition. Further, the Federal Reserve
Boards policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding companys ability to serve as a source of strength to its banking subsidiaries. In addition, the Federal
Reserve Board has indicated that each bank holding company should carefully review its dividend policy, and has discouraged payment ratios that are at maximum allowable levels, which is the maximum dividend amount that may be issued and allow the
company to still maintain its target Tier 1 capital ratio, unless both asset quality and capital are very strong.
To pay dividends, our
subsidiaries must maintain adequate capital above regulatory guidelines. Under federal law, our subsidiary bank cannot pay a dividend if, after paying the dividend, the bank would be undercapitalized. In addition, if the FDIC believes
that a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the FDIC may require, after notice and
hearing, that such bank cease and desist from the unsafe practice. The FDIC and the OCC have each indicated paying dividends that deplete a banks capital base to an inadequate level would be an unsafe and unsound banking practice.
National banks are required by federal law to obtain the prior approval of the OCC in order to declare and pay dividends if the total of all
dividends declared in any calendar year would exceed the total of (1) such banks net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for
the preceding two calendar years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by
regulation).
Our subsidiaries paid aggregate dividends to us of $30.8 million in 2017 and $48.8 million in 2016. Under the
dividend restrictions discussed above, as of December 31, 2017, our subsidiaries could have declared in the aggregate additional dividends of approximately $205.75 million from retained net profits, without obtaining regulatory approvals.
8
Federal Income Tax
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary
change for the Company was to lower the corporate income tax rate to 21% from 35%. The Companys deferred tax assets and liabilities were
re-measured
based on the income tax rates at which they are
expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of the calculation which could potentially affect the measurement of these balances or
potentially give rise to new deferred tax amounts. The provisional amount recorded related to the
re-measurement
of the Companys deferred tax balance was $7.65 million, a reduction of income tax
expense for the year ended December 31, 2017.
Affiliate Transactions
The Federal Reserve Act, the Federal Deposit Insurance Act (FDIA) and the rules adopted under these statutes restrict the extent to
which we can borrow or otherwise obtain credit from, or engage in certain other transactions with, our subsidiaries. These laws regulate covered transactions between insured depository institutions and their subsidiaries, on the one
hand, and their nondepository affiliates, on the other hand. The Dodd-Frank Act expanded the definition of affiliate to make any investment fund, including a mutual fund, for which a depository institution or its affiliates serve as investment
advisor an affiliate of the depository institution. Covered transactions include a loan or extension of credit to a
non-depository
affiliate, a purchase of securities issued by such an affiliate, a
purchase of assets from such an affiliate (unless otherwise exempted by the Federal Reserve Board), an acceptance of securities issued by such an affiliate as collateral for a loan, and an issuance of a guarantee, acceptance, or letter of credit for
the benefit of such an affiliate. The Dodd-Frank Act extended the limitations to derivative transactions, repurchase agreements and securities lending and borrowing transactions that create credit exposure to an affiliate or an insider. The
covered transactions that an insured depository institution and its subsidiaries are permitted to engage in with their
non-depository
affiliates are limited to the following amounts: (1) in
the case of any one such affiliate, the aggregate amount of covered transactions cannot exceed ten percent of the capital stock and the surplus of the insured depository institution; and (2) in the case of all affiliates, the
aggregate amount of covered transactions cannot exceed twenty percent of the capital stock and surplus of the insured depository institution. In addition, extensions of credit that constitute covered transactions must be
collateralized in prescribed amounts. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain
tie-in
arrangements in connection with any extension of credit, lease or sale
of property or furnishing of services. Finally, when we and our subsidiaries conduct transactions internally among us, we are required to do so at arms length.
Loans to Directors, Executive Officers and Principal Shareholders
The authority of our subsidiary bank to extend credit to our directors, executive officers and principal shareholders, including their
immediate family members, corporations and other entities that they control, is subject to substantial restrictions and requirements under Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated thereunder, as well as the
Sarbanes-Oxley Act of 2002. These statutes and regulations impose specific limits on the amount of loans our subsidiary bank may make to directors and other insiders, and specified approval procedures must be followed in making loans that exceed
certain amounts. In addition, all loans our subsidiary bank makes to directors and other insiders must satisfy the following requirements:
|
|
|
the loans must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with persons not affiliated with us or our subsidiary bank;
|
|
|
|
the subsidiary bank must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with persons who are not affiliated with us or our subsidiary bank; and
|
|
|
|
the loans must not involve a greater than normal risk of
non-payment
or include other features not favorable to our subsidiary bank.
|
Furthermore, our subsidiary bank must periodically report all loans made to directors and other insiders to the bank regulators, and these
loans are closely scrutinized by the regulators for compliance with Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O. Each loan to directors or other insiders must be
pre-approved
by the
banks board of directors with the interested director abstaining from voting.
9
Capital
We and our bank subsidiary are each required to comply with applicable capital adequacy standards established by the Federal Reserve Board and
the OCC, respectively. The current risk-based capital standards applicable to us and our bank subsidiary, parts of which are currently in the process of being
phased-in,
are based on the December 2010
final capital framework for strengthening international capital standards, known as Basel III, of the Basel Committee on Banking Supervision (the Basel Committee).
In July 2013, the federal bank regulators approved final rules (the Basel III Rules) implementing the Basel III
framework as well as certain provisions of the Dodd-Frank Act. The Basel III Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The Basel III
Rules became effective for us and our subsidiary bank on January 1, 2015 (subject to a
phase-in
period for certain provisions).
The Basel III Rules established three components of regulatory capital: (1) common equity tier 1 capital (CET1), (2)
additional tier 1 capital, and (3) tier 2 capital. Tier 1 capital is the sum of CET1 and additional tier 1 capital instruments meeting certain revised requirements. Total capital is the sum of tier 1 capital and tier 2 capital. Under the Basel
III Rules, for most banking organizations, the most common form of additional tier 1 capital is
non-cumulative
perpetual preferred stock and the most common form of tier 2 capital is subordinated notes and a
portion of the allocation for loan and lease losses, in each case, subject to the Basel III Rules specific requirements. As of December 31, 2017, we do not have any
non-cumulative
perpetual
preferred stock or subordinated notes. CET1, tier 1 capital, and total capital serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized approach in the Basel III Capital Rules
for us and our subsidiary bank, provide the denominator for such ratios. There is also a leverage ratio that compares tier 1 capital to average total assets.
Pursuant to the Basel III Rules, the effects of certain accumulated other comprehensive income or loss (AOCI) items are not
excluded; however,
non-advanced
approaches banking organizations, including us and our subsidiary bank, could make a
one-time
permanent election to continue
to exclude these items. The Company made its a
one-time,
permanent election to continue to exclude AOCI from capital in its filing with the Federal Reserve Board for the quarter ended March 31, 2015. If
the Company would not have made this election, unrealized gains and losses would have been included in the calculation of its regulatory capital. The Basel III Rules also preclude certain hybrid securities, such as trust preferred securities issued
prior to May 19, 2010, from inclusion in our Tier 1 capital, subject to grandfathering in the case of companies, such as us, that had less than $15 billion in total consolidated assets as of December 31, 2009.
Under the Basel III Rules, the minimum capital ratios effective as of January 1, 2015 are:
|
|
|
4.5% CET1 to risk-weighted assets;
|
|
|
|
6.0% Tier 1 capital to risk-weighted assets;
|
|
|
|
8.0% Total capital to risk-weighted assets; and
|
|
|
|
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage ratio).
|
The Basel III Rules also establish a fully-phased capital conservation buffer of 2.5% above the new regulatory minimum risk-based
capital requirements. The conservation buffer, when added to the capital requirements, results in the following minimum ratios: (i) a CET1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total
risk-based capital ratio of 10.5%. The new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. At
December 31, 2017, the required capital conservation buffer was 1.50%. An institution is subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its
capital level is below the buffer amount.
10
The Basel III Rules prescribe a standardized approach for risk weightings that expanded the
risk-weighting categories from the general risk-based capital rules to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600%
for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.
With respect to our bank
subsidiary, the Basel III Rules also revise the prompt corrective action regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as discussed below under Prompt Corrective Action.
As of December 31, 2017, we had a total risk-based capital ratio of 19.85%, a Tier 1 capital to risk-weighted asset ratio of 18.66%, a
common equity Tier 1 to risk-weighted assets ratio of 18.66% and a Tier 1 leverage ratio of 11.09%. These regulatory capital ratios were calculated under Basel III rules.
Prompt Corrective Action.
A banking
organizations capital plays an important role in connection with regulatory enforcement as well. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators powers depends on whether the institution in question is adequately capitalized, undercapitalized, significantly undercapitalized or critically
undercapitalized, in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators corrective powers include: (i) requiring the institution to submit a capital
restoration plan; (ii) limiting the institutions asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired;
(iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring
that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment
of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
Under current
regulations, our subsidiary bank was well capitalized as of December 31, 2017.
Our Support of Our Subsidiaries
Under Federal Reserve Board policy, we are expected to commit resources to act as a source of strength to support each of our subsidiaries. The
Dodd-Frank Act codified this policy as a statutory requirement. This support may be required at times when, absent such Federal Reserve Board policy, we would not otherwise be required to provide it. In addition, any loans we make to our
subsidiaries would be subordinate in right of payment to deposits and to other indebtedness of our subsidiaries. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and be subject to a priority of payment.
Under the
Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC (either as a result of the default of a banking subsidiary or related to FDIC assistance provided to a subsidiary in danger of default) our other subsidiaries
may be assessed for the FDICs loss.
Safe and Sound Banking Practices.
Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Boards Regulation Y, for
example, generally requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or
redemptions in the preceding year, is equal to 10% or more of the bank holding companys consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound
practice or would violate any law or regulation. Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.
11
The Federal Reserve Board has broad authority to prohibit activities of bank holding
companies and their nonbanking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless
basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues.
Interstate Banking and Branching
Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended the Federal Deposit Insurance Act
and certain other statutes to permit state and national banks with different home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior
to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches at any location in the
state at which any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. If a state opted out of interstate branching within the specified time period, no bank in any
other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.
However, under the
Dodd-Frank Act, the national branching requirements have been relaxed and national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state.
The Federal Deposit Insurance Act, or FDIA, requires that the FDIC review (1) any merger or consolidation by or with an insured
bank, or (2) any establishment of branches by an insured bank. Additionally, the Texas Department of Banking Banking Department accepts applications for interstate merger and branching transactions, subject to certain limitations on
ages of the banks to be acquired and the total amount of deposits within the state a bank or financial holding company may control. Since our primary service area is Texas, we do not expect that the ability to operate in other states will have any
material impact on our growth strategy. We may, however, face increased competition from
out-of-state
banks that branch or make acquisitions in our primary markets in
Texas.
Community Reinvestment Act of 1977
The Community Reinvestment Act of 1977, or CRA, subjects a bank to regulatory assessment to determine if the institution meets the credit needs
of its entire community, including
low-
and moderate-income neighborhoods served by the bank, and to take that determination into account in its evaluation of any application made by such bank for, among other
things, approval of the acquisition or establishment of a branch or other depository facility, an office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The regulatory authority prepares a
written evaluation of an institutions record of meeting the credit needs of its entire community and assigns a rating. These ratings are Outstanding, Satisfactory, Needs Improvement and Substantial
Non-Compliance.
Institutions with ratings lower than Satisfactory may be restricted from engaging in the aforementioned activities. We believe our subsidiary bank has taken and takes significant
actions to comply with the CRA, and received a satisfactory rating in its most recent review by federal regulators with respect to its compliance with the CRA.
Monitoring and Reporting Suspicious Activity
Under the Bank Secrecy Act, or BSA, we are required to monitor and report unusual or suspicious account activity that might signify money
laundering, tax evasion or other criminal activities, as well as transactions involving the transfer or withdrawal of amounts in excess of prescribed limits. The BSA is sometimes referred to as an anti-money laundering law
(AML). Several AML acts, including provisions in Title III of the USA PATRIOT Act of 2001, have been enacted up to the present to amend the BSA. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against
specified financial transactions and account relationships as well as enhanced due diligence and know your customer standards in their dealings with financial institutions and foreign customers. For example, the enhanced due diligence
policies, procedures and controls generally require financial institutions to take reasonable steps:
|
|
|
to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;
|
12
|
|
|
to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;
|
|
|
|
to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and
|
|
|
|
to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.
|
Under the USA PATRIOT Act, financial institutions are also required to establish anti-money laundering programs. The USA PATRIOT Act sets
forth minimum standards for these programs, including:
|
|
|
the development of internal policies, procedures, and controls;
|
|
|
|
the designation of a compliance officer;
|
|
|
|
an ongoing employee training program; and
|
|
|
|
an independent audit function to test the programs.
|
In addition, under the USA PATRIOT Act,
the Secretary of the U.S. Department of the Treasury, or Treasury, has adopted rules addressing a number of related issues, including increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement
authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not
be deemed to violate the privacy provisions of the Gramm-Leach-Bliley Act that are discussed below. Finally, under the regulations of the Office of Foreign Asset Control, or OFAC, we are required to monitor and block transactions with certain
specially designated nationals who OFAC has determined pose a risk to U.S. national security.
Incentive Compensation
In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure
that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially
affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organizations incentive compensation arrangements should (i) provide incentives that do not encourage
risk-taking beyond the organizations ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active
and effective oversight by the organizations board of directors.
The Federal Reserve Board will review, as part of the regular,
risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not large, complex banking organizations. These reviews will be tailored to each organization based on the
scope and complexity of the organizations activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the
organizations supervisory ratings, which can affect the organizations ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or
related risk-management control or governance processes, pose a risk to the organizations safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
13
In addition, Section 956 of the Dodd-Frank Act required certain regulators (including the
FDIC, SEC and Federal Reserve Board) to adopt requirements or guidelines prohibiting excessive compensation. In April and May 2016, the Federal Reserve, jointly with five other federal regulators, published a proposed rule in response to
Section 956 of the Dodd-Frank Act, which requires implementation of regulations or guidelines to: (1) prohibit incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions by providing excessive
compensation or that could lead to material financial loss, and (2) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.
The proposed rule identifies three categories of institutions that would be covered by these regulations based on average total consolidated
assets, applying less prescriptive incentive-based compensation program requirements to the smallest covered institutions (Level 3) and progressively more rigorous requirements to the larger covered institutions (Level 1). Under the proposed rule,
we would fall into the smallest category (Level 3), which applies to financial institutions with average total consolidated assets greater than $1 billion and less than $50 billion. The proposed rules would establish general qualitative
requirements applicable to all covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage
inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and
(v) mandating appropriate recordkeeping. Under the proposed rule, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions
senior executive officers and significant risk-takers. These additional requirements would not be applicable to us because we currently have less than $50 billion in total consolidated assets. Comments on the proposed
rule were due by July 22, 2016. As of the date of this document, the final rule has not yet been published by these regulators.
In
addition, the Dodd-Frank Act requires publicly traded companies to give stockholders a
non-binding
vote on executive compensation at their first annual meeting taking place six months after the date of
enactment and at least every three years thereafter and on
so-called
golden parachute payments in connection with approvals of mergers and acquisitions unless previously voted on by shareholders.
The new legislation also authorizes the Securities and Exchange Commission (SEC) to promulgate rules that would allow stockholders to nominate their own candidates using a companys proxy materials. Additionally, the Dodd-Frank Act
directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is
publicly traded or not. The Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Consumer Laws and Regulations
We are
also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the following list is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings
Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, The Fair and Accurate Credit Transactions Act, The Real Estate Settlement Procedures Act and the Fair Housing Act, among others. These
laws and regulations, among other things, prohibit discrimination on the basis of race, gender or other designated characteristics and mandate various disclosure requirements and regulate the manner in which financial institutions must deal with
customers when taking deposits or making loans to such customers. These and other laws also limit finance charges or other fees or charges earned in our activities. We must comply with the applicable provisions of these consumer protection laws and
regulations as part of our ongoing customer relations.
Consumer Financial Protection Bureau
The Dodd-Frank Act created a new, independent federal agency called the Consumer Financial Protection Bureau (CFPB), which is
granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting
Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary
14
enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but continue to be
examined and supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act
permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits the state attorney general to enforce compliance with both the state and federal
laws and regulations.
The CFPB has finalized rules relating to, among other things, remittance transfers under the Electronic Fund
Transfer Act, which requires companies to provide consumers with certain disclosures before the consumer pays for a remittance transfer. These rules became effective in October 2013. The CFPB has also amended certain rules under Regulation C
relating to home mortgage disclosure to reflect a change in the
asset-size
exemption threshold for depository institutions based on the annual percentage change in the Consumer Price Index for Urban Wage
Earners and Clerical Workers. In addition, on January 10, 2013, the CFPB released its final
Ability-to-Repay/Qualified
Mortgage rules, which amended the
Truth in Lending Act (Regulation Z). Regulation Z prohibits a creditor from making a higher-priced mortgage loan without regard to the consumers ability to repay the loan. The final amended rule implemented sections 1411 and 1412 of the
Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumers ability to repay any consumer credit transaction secured by a dwelling (excluding an
open-end
credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for qualified mortgages. The final rule also
implemented section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became
effective January 10, 2014.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements emphasizing the importance of technology risk management and
supervision in evaluating the safety and soundness of depository institutions with respect to banks that contract with outside vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery
channels and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputation and compliance risk. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive
risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.
Under
Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records
and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or
inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with a notice of privacy policies and practices.
Section 502 prohibits a financial institution from disclosing nonpublic personal information about a customer to nonaffiliated third parties unless the institution satisfies various notice and
opt-out
requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial institutions
ability to disclose nonpublic personal information about customers to nonaffiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the banks
information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also provide customers with an
opt-out
notice and a reasonable period of
time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit or transaction accounts to any
nonaffiliated third party for use in marketing.
15
Concentrated Commercial Real Estate Lending Regulations
The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial
real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or
(ii) total reported loans secured by multifamily and
non-farm
residential properties and loans for construction, land development, and other land represent 300% or more of total capital and the
banks commercial real estate loan portfolio has increased 50% or more during the prior 36 months. Owner occupied loans are excluded from this second category. If a concentration is present, management must employ heightened risk management
practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress
testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending.
UDAP and UDAAP
Banking regulatory agencies have increasingly used a general consumer protection statute to address unethical or otherwise
bad business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade
Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. Unjustified consumer
injury is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been
expanded under the Dodd-Frank Act to apply to unfair, deceptive or abusive acts or practices, referred to as UDAAP, which have been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination
Manual that addresses compliance with and the examination of UDAAP.
Monetary Policy
Banks are affected by the credit policies of monetary authorities, including the Federal Reserve Board, that affect the national supply of
credit. The Federal Reserve Board regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate on financial institution
borrowings, varying reserve requirements against financial institution deposits, and restricting certain borrowings by financial institutions and their subsidiaries. The monetary policies of the Federal Reserve Board have had a significant effect on
the operating results of banks in the past and are expected to continue to do so in the future.
Enforcement Powers of Federal Banking Agencies
The Federal Reserve and other state and federal banking agencies and regulators have broad enforcement powers, including the power to
terminate deposit insurance, issue
cease-and-desist
orders, impose substantial fines and other civil and criminal penalties and appoint a conservator or receiver. Our
failure to comply with applicable laws, regulations and other regulatory pronouncements could subject us, as well as our officers and directors, to administrative sanctions and potentially substantial civil penalties.
Regulatory Reform and Legislation
From
time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and
depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted,
such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot
predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or
regulatory policies applicable to the Company or our subsidiaries could have a material effect on the Companys business, financial condition and results of operations.
16
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act, which was enacted in July 2010, effected a fundamental restructuring of federal banking regulation. In addition to those
provisions discussed above, among the Dodd-Frank Act provisions that have affected us are the following:
|
|
|
creation of a new Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms;
|
|
|
|
elimination of the federal statutory prohibition against the payment of interest on business checking accounts;
|
|
|
|
prohibition on state-chartered banks engaging in derivatives transactions unless the loans to one borrower of the state in which the bank is chartered takes into consideration credit exposure to derivative transactions.
For this purpose, derivative transactions include any contract, agreement, swap, warrant, note or option that is based in whole or in part on the value of, any interest in, or any quantitative measure or the occurrence of any event relating to, one
or more commodity securities, currencies, interest or other rates, indices or other assets;
|
|
|
|
requirement that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. On June 29, 2011,
the Federal Reserve Board set the interchange rate cap at $0.21 per transaction and 5 basis points multiplied by the value of the transaction. While the restrictions on interchange fees do not apply to banks that, together with their affiliates,
have assets of less than $10 billion, the rule could affect the competitiveness of debit cards issued by smaller banks; and
|
|
|
|
restrictions under the Volcker Rule of the Companys ability to engage in proprietary trading and to invest in, sponsor and engage in certain types of transactions with certain private funds. The Company had until
July 15, 2015 to fully conform to the Volcker Rules restrictions.
|
Many of the Dodd-Frank Acts provisions are
still subject to the final rulemaking by federal banking agencies, and the implication of the Dodd-Frank Act for the Companys business will depend to a large extent on how such rules are adopted and implemented. The Companys management
continues to review actively the provisions of the DoddFrank Act and assess its probable impact on its business, financial condition, and results of operations.
Available Information
We file annual,
quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the public reference room. Our SEC filings are also available to the public at the SECs
web site at http://www.sec.gov. Our web site is
http://www.ffin.com
. You may also obtain copies of our annual, quarterly and special reports, proxy statements and certain other information filed with the SEC, as well as amendments thereto,
free of charge from our web site. These documents are posted to our web site after we have filed them with the SEC. Our corporate governance guidelines, including our code of conduct applicable to all our employees, officers and directors, as well
as the charters of our audit and nominating committees, are available at
www.ffin.com
. The foregoing information is also available in print to any shareholder who requests it. Except as explicitly provided, information on any web site is not
incorporated into this Form
10-K
or our other securities filings and is not a part of them.
17
Our business, financial condition, operating results and cash flows can be
impacted by a number of factors, including but not limited to those set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results and other forward-looking statements
that we make from time to time in our news releases, annual reports and other written communications, as well as oral forward-looking statements, and other statements made from time to time by our representatives.
Our business faces unpredictable economic conditions, which could have an adverse effect on us.
General economic conditions impact the banking industry. The credit quality of our loan portfolio necessarily reflects, among other things, the
general economic conditions in the areas in which we conduct our business. Our continued financial success depends somewhat on factors beyond our control, including:
|
|
|
general economic conditions, including national and local real estate markets and the price of oil and gas and other commodity prices;
|
|
|
|
the supply of and demand for investable funds;
|
|
|
|
demand for loans and access to credit;
|
|
|
|
federal, state and local laws affecting these matters.
|
Any substantial deterioration in any
of the foregoing conditions could have a material adverse effect on our financial condition, results of operations and liquidity, which would likely adversely affect the market price of our common stock.
Our business is concentrated in Texas and a downturn in the economy of Texas may adversely affect our business.
Our network of bank regions is concentrated in Texas, primarily in the Central, North Central, Southeast and Western regions of the state. Most
of our customers and revenue are derived from this area. These economies include dynamic centers of higher education, agriculture, energy and natural resources, retail, military, healthcare, tourism, retirement living, manufacturing and
distribution. Because we generally do not derive revenue or customers from other parts of the state or nation, our business and operations are dependent on economic conditions in our Texas markets. Any significant decline in one or more segments of
the local economies could adversely affect our business, revenue, operations and properties.
The significant decline and volatility in
oil and gas prices has resulted in uncertainty about the Texas economy. While we consider our exposure to credits related to the oil and gas industry to not be significant, at approximately 1.72% of total loans as of December 31, 2017, should
the price of oil and gas decline further and/or remain at the current low price for an extended period, the general economic conditions in our Texas markets could be negatively affected, which could have a material adverse affect on our business,
financial condition and results of operations.
Our Company lends primarily to small to
medium-sized
businesses
that may have fewer resources to weather a downturn in the economy, which could adversely impact the Companys operating results.
The Company makes loans to privately-owned businesses, many of which are considered to be small to
medium-sized
businesses. Small to
medium-sized
businesses frequently have smaller market share than their competition, may be more vulnerable to economic downturns,
often need additional capital to expand or compete and may experience more volatility in operating results. Any one or more of these factors may impair the borrowers ability to repay a loan. In addition, the success of a small to
medium-sized
businesses often depends on the management talents and efforts of a small group of persons, and the death, disability or resignation of one or more of these persons could have adverse impact on the
business and its ability to repay our loans. Economic downturns, a sustained decline in commodity prices and other events that could negatively impact the businesses could cause the Company to incur credit losses that could negatively affect the
Companys results of operations and financial condition.
18
In our business, we must effectively manage our credit risk.
As a lender, we are exposed to the risk that our loan customers may not repay their loans according to the terms of these loans and the
collateral securing the payment of these loans may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs to dispose of the collateral. We may experience significant loan losses, which could have a material
adverse effect on our operating results and financial condition. Management makes various assumptions and judgments about the collectability of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the
amount of nonperforming loans and related collateral, the volume, growth and composition of our loan portfolio, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers and the evaluation of our loan
portfolio through our internal loan review process and other relevant factors.
We maintain an allowance for credit losses, which is an
allowance established through a provision for loan losses charged to expense that represents managements best estimate of probable losses inherent in our loan portfolio. Additional credit losses will likely occur in the future and may occur at
a rate greater than we have experienced to date. In determining the amount of the allowance, we rely on an analysis of our loan portfolio, our experience and our evaluation of general economic conditions. If our assumptions prove to be incorrect,
our current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Material additions to the allowance could materially decrease our net income.
In addition, banking regulators periodically review our allowance for credit losses and may require us to increase our provision for credit
losses or recognize further charge-offs, based on judgments different than those of our management. Any increase in our allowance for credit losses or charge-offs as required by these regulatory agencies could have a material negative effect on our
operating results, financial condition and liquidity.
Hurricanes, extended drought conditions, severe weather and natural disasters could
significantly impact the Companys business.
Hurricanes, extended drought conditions, severe weather and natural disasters and
other adverse external events could have a significant impact on the Companys ability to conduct business. In late August 2017 and continuing into the fourth quarter of 2017, Houston and the surrounding area around the Gulf Coast were
significantly affected by Hurricane Harvey. Our Orange and Conroe regions of the Company are in these areas and were impacted by the severe winds and floods. See Managements Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 33 for specific information of the impact of Hurricane Harvey on our Company. Such events affect the stability of the Companys deposit base, impair the ability of borrowers to repay outstanding loans, impair the
value of the collateral securing our loans, cause significant property damage, result in loss of revenue and/or cause the Company to incur additional expenses. The occurrence of any such event in the future could have a material adverse effect on
the Companys business, which in turn, could have a material adverse effect on the Companys business, financial condition and result of operations.
Changes in economic conditions could cause an increase in delinquencies and
non-performing
assets, including loan
charge-offs, which could depress our net income and growth.
Our loan portfolio includes many real estate secured loans, demand for
which may decrease during economic downturns as a result of, among other things, an increase in unemployment, a decrease in real estate values and a slowdown in housing. If we see negative economic conditions develop in the United States as a whole
or in the portions of Texas that we serve, we could experience higher delinquencies and loan charge-offs, which would reduce our net income and adversely affect our financial condition. Furthermore, to the extent that real estate collateral is
obtained through foreclosure, the costs of holding and marketing the real estate collateral, as well as the ultimate values obtained from disposition, could reduce our earnings and adversely affect our financial condition.
19
The value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan
portfolio.
The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short
period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a significant part of our loan
portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, we may not be able to realize
the amount of collateral that we anticipated at the time of originating the loan. This could have a material adverse effect on our provision for loan losses and our operating results and financial condition.
New lines of business or new products and services may subject the Company to additional risks.
From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There
are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or products and services the Company may invest
significant time and resources. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. If
we are unable to successfully manage these risks in the development and implementation of new lines of business or new products or services, it could have a material adverse effect on the Companys business, financial condition and result of
operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take
title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected propertys value or limit our ability to use or sell the affected property. In addition, future laws or
more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient to detect
all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, financial condition and results of operations.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, we must rely on information furnished by or on behalf of customers and
counterparties, including financial statements, credit reports and other financial information. We also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and
completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations.
The repeal of prohibitions on paying interest on demand deposits could increase our interest expense.
Effective July 2011, all federal prohibitions on financial institutions paying interest on demand deposit accounts were repealed as part of the
Dodd-Frank Act. As a result, some financial institutions have commenced and are considering offering interest on demand deposits to compete for customers. If interest rates begin to rise, our interest expense could increase and our net interest
margin could decrease if we begin offering interest on demand deposits to maintain current customers or attract new customers, which could have a material adverse effect on our financial condition and results of operations.
We do business with other financial institutions that could experience financial difficulty.
We do business through the purchase and sale of Federal funds, check clearing and through the purchase and sale of loan participations with
other financial institutions. Because these financial institutions have many risks, as do we, we could be adversely affected should one of these financial institutions experience significant financial difficulties or fail to comply with our
agreements with them.
20
If we are unable to continue to originate residential real estate loans and sell them into the secondary
market for a profit, our earnings could decrease.
We derive a portion of our noninterest income from the origination of residential
real estate loans and the subsequent sale of such loans into the secondary market. If we are unable to continue to originate and sell residential real estate loans at historical or greater levels, our residential real estate loan volume would
decrease, which could decrease our earnings. A rising interest rate environment, general economic conditions or other factors beyond our control could adversely affect our ability to originate residential real estate loans. We also are experiencing
an increase in regulations and compliance requirements related to mortgage loan originations necessitating technology upgrades and other changes. If new regulations continue to increase and we are unable to make technology upgrades, our ability to
originate mortgage loans will be reduced or eliminated. Additionally, we sell a large portion of our residential real estate loans to third party investors, and rising interest rates could negatively affect our ability to generate suitable profits
on the sale of such loans. If interest rates increase after we originate the loans, our ability to market those loans is impaired as the profitability on the loans decreases. These fluctuations can have an adverse effect on the revenue we generate
from residential real estate loans and in certain instances, could result in a loss on the sale of the loans.
Further, for the mortgage
loans we sell in the secondary market, the mortgage loan sales contracts contain indemnification clauses should the loans default, generally in the first sixty to ninety days, or if documentation is determined not to be in compliance with
regulations. While the Companys historic losses as a result of these indemnities have been insignificant, we could be required to repurchase the mortgage loans or reimburse the purchaser of our loans for losses incurred. Both of these
situations could have an adverse effect on the profitability of our mortgage loan activities and negatively impact our net income.
Difficult or
changes in market conditions could adversely affect the financial services industry.
The financial markets have experienced volatility
over the past several years. In some cases, the financial markets have produced downward pressure on stock prices and credit availability for certain companies without regard to those companies underlying financial strength. If financial
market volatility worsens, or there are disruptions in these financial markets, including disruptions to the United States banking systems, there can be no assurance that we will not experience an adverse effect on our ability to access capital and
our business, financial condition and result of operations could be adversely impacted.
We may need to raise additional capital and such funds may not
be available when needed
.
We may need to raise additional capital in the future to provide us with sufficient capital resources to
meet our commitments and business needs, particularly if our asset quality or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital and financial
markets at that time, which are outside of our control, and our financial performance. Economic conditions and the loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of
capital, other financial institution borrowings and borrowings from the discount window of the Federal Reserve. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of other financial institutions, or
counterparties participating in the capital markets, may adversely affect our costs and our ability to raise capital. An inability to raise additional capital on acceptable terms when needed could have a materially adverse effect on our financial
condition and results of operations.
We may be subject to more stringent capital and liquidity requirements which would adversely affect our net
income and future growth.
On July 2, 2013, the Federal Reserve Board, and on July 9, 2013, the FDIC and OCC, adopted a final
rule that implements the Basel III changes to the international regulatory capital framework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthen identified areas of weakness in capital rules
and to address relevant provisions of the Dodd-Frank Act.
21
The final rule established a stricter regulatory capital framework that requires banking
organizations to hold more and higher-quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. The final rule increased capital ratios for all banking organizations
and introduced a capital conservation buffer which is in addition to each capital ratio. If a banking organization dips into its capital conservation buffer, it may be restricted in its ability to pay dividends and discretionary bonus
payments to its executive officers. The final rule assigned a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition,
development or construction of real property. The final rule also required unrealized gains and losses on certain
available-for-sale
securities holdings to
be included for purposes of calculating regulatory capital requirements unless a
one-time
opt-out
is exercised. We exercised this
opt-out
right in our March 31, 2015 quarterly financial filing. The final rule also included changes in what constitutes regulatory capital, some of which are subject to a
two-year
transition period. These changes included the
phasing-out
of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the
amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital, subject
to a
two-year
transition period.
The final rule became effective for us on January 1, 2015.
As of December 31, 2017, we met all of these new requirements, including the full capital conservation buffer.
Although we currently
cannot predict the specific impact and long-term effects that Basel III will have on our Company and the banking industry more generally, the Company will be required to maintain higher regulatory capital levels which could impact our operations,
net income and ability to grow. Furthermore, the Companys failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us which could restrict our future growth or operations.
The trust wealth management fees we receive may decrease as a result of poor investment performance, in either relative or absolute terms, which could
decrease our revenues and net earnings.
Our trust company subsidiary derives its revenues primarily from investment management fees
based on assets under management. Our ability to maintain or increase assets under management is subject to a number of factors, including investors perception of our past performance, in either relative or absolute terms, market and economic
conditions, including changes in oil and gas prices, and competition from investment management companies. Financial markets are affected by many factors, all of which are beyond our control, including general economic conditions, including changes
in oil and gas prices; securities market conditions; the level and volatility of interest rates and equity prices; competitive conditions; liquidity of global markets; international and regional political conditions; regulatory and legislative
developments; monetary and fiscal policy; investor sentiment; availability and cost of capital; technological changes and events; outcome of legal proceedings; changes in currency values; inflation; credit ratings; and the size, volume and timing of
transactions. A decline in the fair value of the assets under management, caused by a decline in general economic conditions, would decrease our wealth management fee income.
Investment performance is one of the most important factors in retaining existing clients and competing for new wealth management clients.
Poor investment performance could reduce our revenues and impair our growth in the following ways:
|
|
|
existing clients may withdraw funds from our wealth management business in favor of better performing
|
products;
|
|
|
asset-based management fees could decline from a decrease in assets under management;
|
|
|
|
our ability to attract funds from existing and new clients might diminish; and
|
|
|
|
our wealth managers and investment advisors may depart, to join a competitor or otherwise.
|
22
Even when market conditions are generally favorable, our investment performance may be adversely
affected by the investment style of our wealth management and investment advisors and the particular investments that they make. To the extent our future investment performance is perceived to be poor in either relative or absolute terms, the
revenues and profitability of our wealth management business will likely be reduced and our ability to attract new clients will likely be impaired. As such, fluctuations in the equity and debt markets can have a direct impact upon our net earnings.
Certain of our investment advisory and wealth management contracts are subject to termination on short notice, and termination of a significant number
of investment advisory contracts could have a material adverse impact on our revenue.
Certain of our investment advisory and wealth
management clients can terminate, with little or no notice, their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons,
including investment performance, changes in prevailing interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, change in management or control of clients, loss of key investment
management personnel and financial market performance. We cannot be certain that our trust company subsidiary will be able to retain all of its clients. If its clients terminate their investment advisory and wealth management contracts, our trust
company subsidiary, and consequently we, could lose a substantial portion of our revenues.
We are subject to possible claims and litigation pertaining
to fiduciary responsibility.
From time to time, customers could make claims and take legal action pertaining to our performance of our
fiduciary responsibilities. Whether customer claims and legal action related to our performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may
result in significant financial liability and/or adversely affect our market perception of our products and services as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a
material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
Our business is subject to significant government regulation.
We operate in a highly-regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies,
including the Texas Department of Banking, the Federal Reserve Board, the OCC, and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of
shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other
aspects of our operations. The bank regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of
the recent performance of and government intervention in the financial services sector. Other changes to statues, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could
affect the Company in substantial and unpredictable ways. Such changes could subject the Company to reduced revenues, additional costs, limit the types of financial services and products the Company may offer and/or increase the ability of
non-banks
to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or
reputation damage, which could have a material adverse effect on the Companys business, financial condition and results of operations. Additionally, the banking regulations could prohibit and significantly delay the Companys acquisition
of other financial institutions.
Included in the Dodd-Frank Act are, for example, changes related to interchange fees and overdraft
services. While the changes for interchange fees that can be charged for electronic debit transactions by payment card issuers relate only to banks with assets greater than $10 billion, concern exists that the regulations will also impact our
Company. Beginning in the third quarter of 2010, we were prohibited from charging customers fees for paying overdrafts on automated teller machine and debit card transactions, unless the consumer opts in. We continue to monitor the impact of these
new regulations and other developments on our service charge revenue.
23
Federal income tax reform could have unforeseen effects on our financial condition and results of operations.
On December 22, 2017, the President of the United States signed into law H.R. 1, originally known as the Tax Cuts and Jobs
Act. The Company is still in the process of analyzing the Tax Cuts and Jobs Act and its possible effects on the Company. The Tax Cuts and Jobs Act includes a number of provisions, including the lowering of the U.S. corporate tax rate from
35 percent to 21 percent, effective January 1, 2018. There are also provisions that may partially offset the benefit of such rate reduction. Financial statement impacts include adjustments for, among other things, the
re-measurement
of deferred tax assets and liabilities. While there are benefits, there is also substantial uncertainty regarding the details of U.S. Tax Reform. The intended and unintended consequences of Tax Cuts
and Jobs Act on our business and on holders of our common shares is uncertain and could be adverse. The Company anticipates that the impact of Tax Cuts and Jobs Act may be material to our business, financial condition and results of operations.
A new accounting standard will result in a significant change in how we recognize credit losses and may have a material impact on our financial condition
or results of operations
.
In June 2016, the Financial Accounting Standards Board (FASB) issued an accounting standard
update, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which replaces the current incurred loss model for recognizing credit losses with an expected loss
model referred to as the Current Expected Credit Loss (CECL) model. Under the CECL model, we will be required to present certain financial assets carried at amortized cost, such as loans held for investment and
held-to-maturity
debt securities, at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events,
including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet
and periodically thereafter. This differs significantly from the incurred loss model required under current generally accepted accounting principles (GAAP), which delays recognition until it is probable a loss has been
incurred. Accordingly, we expect that the adoption of the CECL model will materially affect how we determine our allowance for loan losses and could require us to significantly increase our allowance. Moreover, the CECL model may create more
volatility in the level of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could adversely affect our business, financial condition and results of
operations.
The new CECL standard will become effective for us for fiscal years beginning after December 15, 2019 and for interim
periods within those fiscal years. We are currently evaluating the impact the CECL model will have on our accounting, but we expect to recognize a
one-time
cumulative-effect adjustment to our allowance for
loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. We cannot yet determine the magnitude of any
such
one-time
cumulative adjustment or of the overall impact of the new standard on our business, financial condition and results of operations.
Our FDIC insurance assessments could increase substantially resulting in higher operating costs.
We have historically paid the lowest premium rate available due to our sound financial position. Should the number of bank failures increase,
FDIC premiums could increase or additional special assessments could be imposed. These increased premiums would have an adverse effect on our net income and results of operations.
We compete with many larger financial institutions which have substantially greater financial resources than we have.
Competition among financial institutions in Texas is intense. We compete with other bank holding companies, state and national commercial
banks, savings and loan associations, consumer financial companies, credit unions, securities brokers, insurance companies, mortgage banking companies, money market mutual funds, asset-based
non-bank
lenders
and other financial institutions. Many of these competitors have substantially greater financial
24
resources, larger lending limits, larger branch networks and less regulatory oversight than we do, and are able to offer a broader range of products and services than we can. Failure to compete
effectively for deposit, loan and other banking customers in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition, results of operations and liquidity.
We are subject to interest rate risk.
Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a
result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are highly sensitive to many factors that are beyond our
control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the
interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial
assets and liabilities, and (iii) the average duration of the Companys securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and investments,
our net interest income, and earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and investments fall more quickly than the interest rates paid on deposits and other borrowings.
Although we have implemented strategies which we believe reduce the potential effects of adverse changes in interest rates on our results
of operations, these strategies may not always be successful. In addition, any substantial and prolonged increase in market interest rates could reduce our customers desire to borrow money from us or adversely affect their ability to repay
their outstanding loans by increasing their credit costs since most of our loans have adjustable interest rates that reset periodically. Any of these events could adversely affect our results of operations, financial condition and liquidity.
We are subject to liquidity risk.
The
Company requires liquidity to meet our deposit and other obligations as they come due. The Companys access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that
affect it specifically or the financial services industry or the general economy. Factors that could reduce its access to liquidity sources include a downturn in the Texas market, difficult credit markets or adverse regulatory actions against the
Company. The Companys access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of the Companys liabilities are demand, savings, interest checking and money market deposits,
which are payable on demand or upon several days notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and
advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Companys
business, financial condition and result of operations.
The value of certain securities in our investment portfolio may be negatively affected by
changes or disruptions in the market for these securities.
Our investment portfolio securities include obligations of, and
mortgage-backed securities guaranteed by, government sponsored enterprises such as the Federal National Mortgage Association, referred to as Fannie Mae, the Government National Mortgage Association, referred to as Ginnie Mae, the Federal Home Loan
Mortgage Corporation, referred to as Freddie Mac, and the Federal Home Loan Bank or otherwise backed by Federal Housing Administration or Veterans Administration guaranteed loans; however, volatility or illiquidity in financial markets may
cause investment securities held within our investment portfolio to fall in value or become less liquid. The FRBs actions to increase interest rates may cause a decline in the value of securities held by the Company. Uncertainty surrounding
the credit risk associated with mortgage collateral or guarantors may cause material discrepancies in valuation estimates obtained from third parties. Volatile market conditions may reduce valuations due to the perception of heightened credit and
liquidity risks in addition to interest rate risk typically associated with these securities. There can be no assurance that declines in market value associated with these disruptions will not result in impairments of these assets, which would lead
to accounting charges that could have a material adverse effect on our results of operations, equity and capital ratios.
25
First Financial Bankshares, Inc. relies on dividends from its subsidiaries for most of its revenue.
First Financial Bankshares
,
Inc. is a separate and distinct legal entity from its subsidiaries. It receives substantially all of its
revenue from dividends paid by its subsidiaries. These dividends are the principal source of funds to pay dividends on the Companys common stock and interest and principal on First Financial Bankshares, Inc. debt (if we had balances
outstanding). Various federal and/or state laws and regulations limit the amount of dividends that our bank and trust subsidiaries may pay to First Financial Bankshares, Inc. In the event our subsidiaries are unable to pay dividends to First
Financial Bankshares, Inc., First Financial Bankshares, Inc. may not be able to service debt, if any, or pay dividends on the Companys common stock. The inability to receive dividends from our subsidiaries could have a material adverse effect
on the Companys business, financial condition, results of operations and liquidity.
To continue our growth, we are affected by our ability to
identify and acquire other financial institutions.
We intend to continue our current growth strategy. This strategy includes opening
new branches and acquiring other banks that serve customers or markets we find desirable. The market for acquisitions remains highly competitive, and we may be unable to find satisfactory acquisition candidates in the future that fit our acquisition
and growth strategy. To the extent that we are unable to find suitable acquisition candidates, an important component of our growth strategy may be lost. Additionally, our completed acquisitions, or any future acquisitions, may not produce the
revenue, earnings or synergies that we anticipated.
We may not be able to complete future acquisitions, may not be successful in realizing the
benefits of any acquisitions that are completed, or may choose not to pursue acquisition opportunities we might find beneficial.
A
substantial part of our historical growth has been a result of acquisitions of other financial institutions, and we may, from time to time, evaluate and engage in the acquisition of other financial institutions. We must generally satisfy a number of
conditions prior to completing any such transaction, including certain bank regulatory approvals. Bank regulators consider a number of factors with regard to all institutions involved in the transaction when determining whether to approve a proposed
transaction, including, among others, the ratings and compliance history, anti-money laundering and Bank Secrecy Act compliance history, CRA examination results and the effect of the proposed transaction on the financial stability of the
institutions involved and the market as a whole.
The process for obtaining required regulatory approvals has become substantially more
difficult, time-consuming and unpredictable as a result of the financial crisis. We may fail to pursue, evaluate or complete strategic and competitively significant business opportunities as a result of our inability, or our perceived inability, to
obtain required regulatory approvals in a timely manner or at all.
Assuming we are able to successfully complete one or more
transactions, we may not be able to successfully integrate and realize the expected synergies from any completed transaction in a timely manner or at all. In particular, we may be charged by federal and state regulators with regulatory and
compliance failures at an acquired business prior to the date of the acquisition, and these failures by the acquired company may have negative consequences for us, including the imposition of formal or informal enforcement actions. Completion and
integration of any transaction may also divert managements attention from other matters, result in additional costs and expenses, or adversely affect our relationships with our customers and employees, any of which may adversely affect our
business or results of operations. As a result, our financial condition may be affected, and we may become more susceptible to general economic conditions and competitive pressures.
Use of our common stock for future acquisitions or to raise capital may be dilutive to existing stockholders.
When we determine that appropriate strategic opportunities exist, we may acquire other financial institutions and related businesses, subject
to applicable regulatory requirements. We may use our common stock for such acquisitions. We may also seek to raise capital through selling additional common stock, although we have not historically done so. It is possible that the issuance of
additional common stock in such acquisition or capital transactions may be dilutive to the interests of our existing shareholders.
26
Our accounting estimates and risk management processes rely on analytical and forecasting models.
The processes we use to estimate our allowance for loan losses and to measure the fair value of financial instruments, as well as the processes
used to estimate the effects of changing interest rates depends upon the use of analytical and forecasting models. In addition, these models are used to calculate fair value of our assets and liabilities when we acquire other financial institutions.
These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws
in their design or their implementation. If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the
models we use for determining our probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models we use to measure the fair value financial instruments is inadequate, the fair
value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what we could realize upon sale or settlement of such financial instruments. Such failure in our analytical or forecasting models could have a material
adverse effect on our business, financial condition and results of operations.
The value of our goodwill and other intangible assets may decline in
the future.
As of December 31, 2017, we had $141.14 million of goodwill and other intangible assets and will add
approximately $31.24 million of goodwill with our acquisition of Commercial Bancshares, Inc. effective January 1, 2018. A significant decline in our financial condition, a significant adverse change in the business climate, slower growth
rates or a significant and sustained decline in the price of our common stock may necessitate taking charges in the future related to the impairment of our goodwill and other intangible assets. If we were to conclude that a future write-down of
goodwill and other intangible assets is necessary, we would record the appropriate charge, which could have a material adverse effect on our financial condition and results of operations.
We rely heavily on our management team, and the unexpected loss of key management or inability to recruit qualified personnel in the future may adversely
affect our operations.
Our success to date has been strongly influenced by our ability to attract and to retain senior management
experienced in banking in the markets we serve. Our ability to retain executive officers and the current management teams will continue to be important to the successful implementation of our strategies. We do not have employment agreements with
these key employees other than executive agreements in the event of a change of control and a confidential information,
non-solicitation
and
non-competition
agreements
related to our stock options. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business and financial results. In addition,
the scope and content of U.S. banking regulators policies on incentive compensation, as well as changes to these policies, could adversely affect our ability to hire, retain and motivate our key employees.
The Companys stock price can be volatile.
Stock price volatility may make it more difficult for our shareholders to resell their common stock when they want and at prices they find
attractive. The Companys stock price can fluctuate significantly in response to a variety of factors including, among other things:
|
|
|
actual or anticipated variations in quarterly results of operations;
|
|
|
|
recommendations by securities analysts;
|
|
|
|
operating and stock price performance of other companies that investors deem comparable to the Company;
|
|
|
|
new reports relating to trends, concerns and other issues in the financial services industry or Texas economy, including oil and gas and cattle prices;
|
27
|
|
|
perceptions in the marketplace regarding the Company and/or its competitors;
|
|
|
|
new technology used, or services offered, by competitors;
|
|
|
|
significant acquisitions or business combinations involving the Company or its competitors; and
|
|
|
|
changes in government regulations, including tax laws.
|
General market fluctuations, industry
factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends could also cause the Companys stock price to decrease regardless of operational results.
We may not continue to pay dividends on our common stock in the future.
Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available
for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividends in the future. This could adversely affect the market price of our
common stock. Also, we are a bank holding company, and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve Board regarding capital adequacy and
dividends.
Certain banking laws may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire us,
even if doing so would be perceived to be beneficial to our shareholders. These provisions effectively inhibit a
non-negotiated
merger or other business combination, which, in turn, could adversely affect the
market price of our common stock.
The trading volume in our common stock is less than other larger financial institutions.
Although the Companys common stock is listed for trading on the Nasdaq Global Select Market, the trading volume in our common stock is
less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the
Companys common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Company has no control. Given the lower trading volume of the Companys
common stock, significant sales of the Companys common stock, or the expectation of these sales, could cause the Companys stock price to fall.
Breakdowns in our internal controls and procedures could have an adverse effect on us.
We believe our internal control system as currently documented and functioning is adequate to provide reasonable assurance over our internal
controls. Nevertheless, because of the inherent limitation in administering a cost effective control system, misstatements due to error or fraud may occur and not be detected. Breakdowns in our internal controls and procedures could occur in the
future, and any such breakdowns could have an adverse effect on us. See Item 9A Controls and Procedures for additional information.
Our operations rely on certain external vendors.
We rely on certain external vendors to provide products and services necessary to maintain our
day-to-day
operations. Accordingly, our operations are exposed to risk that these vendors will not perform in accordance with the contracted agreements under service level agreements. The failure of an
external vendor to perform in accordance with the contracted arrangements under service level agreements, because of changes in the vendors organizational structure, financial condition, support for existing products or services or strategic
focus or for any other reason, could be disruptive to our operations, which could have a material adverse effect on our business and, in turn, our financial condition and results of operations.
28
We compete in an industry that continually experiences technological change, and we may have fewer resources
than many of our competitors to continue to invest in technological improvements.
The financial services industry is undergoing rapid
technological changes, with frequent introductions of new technology-driven products and services. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to
reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for conveniences, as well as to create additional
efficiencies in our operations. Many of our larger competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in
marketing these products and services to our customers.
System failure or cybersecurity breaches of our network security could subject us to increased
operating costs as well as litigation and other potential losses.
The computer systems and network infrastructure we use could be
vulnerable to unforeseen hardware and cybersecurity issues, including hacking and identity theft. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss,
telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are
dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical
break-ins,
cybersecurity breaches
and other disruptive problems caused by the Internet or other users. Such computer
break-ins
and other disruptions would jeopardize the security of information stored in and transmitted through our computer
systems and network infrastructure, which may result in significant liability to us, damage our reputation and inhibit current and potential customers from our Internet banking services. Each year, we add additional security measures to our computer
systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection.
Furthermore, our customers could incorrectly blame the Company and terminate their accounts with the Company for a cyber-incident which
occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.
Our business may be adversely affected by security breaches at third parties.
Our customers interact with their own and other third party systems, which pose operational risks to us. We may be adversely affected by data
breaches at retailers and other third parties who maintain data relating to our customers that involve the theft of customers data, including the theft of customers debit card, merchant credit card, wire transfer and other identifying and/or
access information used to make purchases or payments at such retailers and to other third parties.
In the event of a data breach at one
or more retailers of considerable magnitude, the Companys business, financial condition and results of operations may be adversely affected.
We
are subject to claims and litigation pertaining to intellectual property.
We rely on technology companies to provide information
technology products and services necessary to support our
day-to-day
operations. Technology companies frequently enter into litigation based on allegations of patent
infringement or other violations of intellectual property rights. In addition, patent holding companies seek to monetize patents they have purchased or otherwise obtained. Competitors of our vendors, or other individuals or companies, have from time
to time claimed to hold intellectual property sold to us by its vendors. Such claims may increase in the future as the financial services sector becomes more reliant on information technology vendors. The plaintiffs in these actions frequently seek
injunctions and substantial damages.
29
Regardless of the scope or validity of such patents or other intellectual property rights,
or the merits of any claims by potential or actual litigants, we may have to engage in litigation that could be expensive, time-consuming, disruptive to our operations, and distracting to management. If we are found to infringe one or more patents
or other intellectual property rights, we may be required to pay substantial damages or royalties to a third-party. In certain cases, we may consider entering into licensing agreements for disputed intellectual property, although no assurance can be
given that such licenses can be obtained on acceptable terms or that litigation will not occur. These licenses may also significantly increase our operating expenses. If legal matters related to intellectual property claims were resolved against us
or settled, we could be required to make payments in amounts that could have a material adverse effect on our business, financial condition and results of operations.
An investment in our common stock is not an insured deposit.
Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any
other public or private entity. Investment in our common stock is inherently risky for the reasons described in this Risk Factors section and elsewhere in this Report. As a result, if you acquire our common stock, you may lose some or
all of your investment.
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS
|
None.
Our principal office is located in the First Financial Bank Building at 400
Pine Street in downtown Abilene, Texas. We lease four spaces in buildings owned by First Financial Bank, National Association, Abilene totaling approximately 9,000 square feet. As of December 31, 2017, our subsidiaries collectively own 63
banking facilities, some of which are detached
drive-ins,
and also lease 15 banking facilities and 16 ATM locations. Our management considers all our existing locations to be well-suited for conducting the
business of banking. We believe our existing facilities are adequate to meet our requirements and our subsidiaries requirements for the foreseeable future.
ITEM 3.
|
LEGAL PROCEEDINGS
|
From time to time, we and our subsidiaries are parties to lawsuits
arising in the ordinary course of our banking business. However, there are no material pending legal proceedings to which we, our subsidiaries or our other direct and indirect subsidiaries, or any of their properties, are currently subject. Other
than regular, routine examinations by state and federal banking authorities, there are no proceedings pending or known to be contemplated by any governmental authorities.
ITEM 4.
|
MINE SAFETY DISCLOSURES
|
Not applicable.
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2017 and 2016
(Dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
2017
|
|
|
2016
|
|
CASH AND DUE FROM BANKS
|
|
$
|
209,583
|
|
|
$
|
204,782
|
|
FEDERAL FUNDS SOLD
|
|
|
|
|
|
|
3,130
|
|
INTEREST-BEARING DEPOSITS IN BANKS
|
|
|
162,764
|
|
|
|
48,574
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
372,347
|
|
|
|
256,486
|
|
INTEREST-BEARING TIME DEPOSITS IN BANKS
|
|
|
1,458
|
|
|
|
1,707
|
|
SECURITIES
AVAILABLE-FOR-SALE,
at fair value
|
|
|
3,087,473
|
|
|
|
2,860,837
|
|
SECURITIES
HELD-TO-MATURITY
(fair value of $- and $124 at December 31, 2017 and 2016, respectively)
|
|
|
|
|
|
|
121
|
|
LOANS:
|
|
|
|
|
|
|
|
|
Held for investment
|
|
|
3,485,569
|
|
|
|
3,357,307
|
|
Less allowance for loan losses
|
|
|
(48,156
|
)
|
|
|
(45,779
|
)
|
|
|
|
|
|
|
|
|
|
Net loans held for investment
|
|
|
3,437,413
|
|
|
|
3,311,528
|
|
Held for sale
|
|
|
15,130
|
|
|
|
26,898
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
3,452,543
|
|
|
|
3,338,426
|
|
BANK PREMISES AND EQUIPMENT, net
|
|
|
124,026
|
|
|
|
122,685
|
|
INTANGIBLE ASSETS
|
|
|
141,143
|
|
|
|
143,603
|
|
OTHER ASSETS
|
|
|
75,725
|
|
|
|
86,066
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,254,715
|
|
|
$
|
6,809,931
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
NONINTEREST-BEARING DEPOSITS
|
|
$
|
2,041,650
|
|
|
$
|
1,717,722
|
|
INTEREST-BEARING DEPOSITS
|
|
|
3,921,311
|
|
|
|
3,760,817
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
5,962,961
|
|
|
|
5,478,539
|
|
DIVIDENDS PAYABLE
|
|
|
12,589
|
|
|
|
11,897
|
|
BORROWINGS
|
|
|
331,000
|
|
|
|
445,770
|
|
OTHER LIABILITIES
|
|
|
25,397
|
|
|
|
35,840
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
6,331,947
|
|
|
|
5,972,046
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Common stock $0.01 par value; authorized 120,000,000 shares; 66,260,444 and 66,094,695
shares issued at December 31, 2017 and 2016, respectively
|
|
|
663
|
|
|
|
661
|
|
Capital surplus
|
|
|
378,062
|
|
|
|
372,245
|
|
Retained earnings
|
|
|
517,257
|
|
|
|
446,534
|
|
Treasury stock (shares at cost: 495,964 and 507,409 at December 31, 2017 and 2016,
respectively)
|
|
|
(7,148
|
)
|
|
|
(6,671
|
)
|
Deferred Compensation
|
|
|
7,148
|
|
|
|
6,671
|
|
Accumulated other comprehensive earnings
|
|
|
26,786
|
|
|
|
18,445
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
922,768
|
|
|
|
837,885
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
7,254,715
|
|
|
$
|
6,809,931
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
F-2
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Earnings
December 31, 2017, 2016 and 2015
(Dollars in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
INTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
166,807
|
|
|
$
|
161,018
|
|
|
$
|
151,662
|
|
Interest on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
32,825
|
|
|
|
27,626
|
|
|
|
29,673
|
|
Exempt from federal income tax
|
|
|
44,659
|
|
|
|
43,302
|
|
|
|
40,080
|
|
Interest on federal funds sold and interest-bearing deposits in banks
|
|
|
1,684
|
|
|
|
342
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
245,975
|
|
|
|
232,288
|
|
|
|
221,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
8,213
|
|
|
|
4,503
|
|
|
|
3,642
|
|
Other
|
|
|
1,075
|
|
|
|
948
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
9,288
|
|
|
|
5,451
|
|
|
|
4,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
236,687
|
|
|
|
226,837
|
|
|
|
217,535
|
|
PROVISION FOR LOAN LOSSES
|
|
|
6,530
|
|
|
|
10,212
|
|
|
|
9,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
230,157
|
|
|
|
216,625
|
|
|
|
207,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust fees
|
|
|
23,694
|
|
|
|
19,636
|
|
|
|
19,252
|
|
Service charges on deposit accounts
|
|
|
19,416
|
|
|
|
18,386
|
|
|
|
17,171
|
|
ATM, interchange and credit card fees
|
|
|
25,686
|
|
|
|
23,910
|
|
|
|
21,860
|
|
Real estate mortgage operations
|
|
|
15,109
|
|
|
|
16,086
|
|
|
|
10,409
|
|
Net gain on sale of
available-for-sale
securities (includes $1,828, $1,270 and $432 for the years ended December 31, 2017, 2016 and 2015, respectively, related to accumulated
comprehensive earnings reclassifications)
|
|
|
1,828
|
|
|
|
1,270
|
|
|
|
432
|
|
Net gain (loss) on sale of foreclosed assets
|
|
|
(50
|
)
|
|
|
456
|
|
|
|
538
|
|
Net gain (loss) on sale of assets
|
|
|
(396
|
)
|
|
|
168
|
|
|
|
(820
|
)
|
Interest on loan recoveries
|
|
|
1,128
|
|
|
|
2,112
|
|
|
|
1,050
|
|
Other
|
|
|
4,602
|
|
|
|
3,108
|
|
|
|
3,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
91,017
|
|
|
|
85,132
|
|
|
|
73,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NONINTEREST EXPENSE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
95,287
|
|
|
|
90,739
|
|
|
|
80,999
|
|
Loss from partial settlement of pension plan
|
|
|
|
|
|
|
267
|
|
|
|
|
|
Net occupancy expense
|
|
|
10,521
|
|
|
|
10,420
|
|
|
|
10,314
|
|
Equipment expense
|
|
|
13,765
|
|
|
|
13,479
|
|
|
|
12,222
|
|
FDIC insurance premiums
|
|
|
2,217
|
|
|
|
2,680
|
|
|
|
3,153
|
|
ATM, interchange and credit card expenses
|
|
|
7,452
|
|
|
|
7,231
|
|
|
|
6,384
|
|
Professional and service fees
|
|
|
8,063
|
|
|
|
6,877
|
|
|
|
4,831
|
|
Printing, stationery and supplies
|
|
|
1,989
|
|
|
|
2,093
|
|
|
|
2,278
|
|
Operational and other losses
|
|
|
3,192
|
|
|
|
2,170
|
|
|
|
1,889
|
|
Amortization of intangible assets
|
|
|
613
|
|
|
|
738
|
|
|
|
561
|
|
Other
|
|
|
30,887
|
|
|
|
29,136
|
|
|
|
26,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
173,986
|
|
|
|
165,830
|
|
|
|
149,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS BEFORE INCOME TAXES
|
|
|
147,188
|
|
|
|
135,927
|
|
|
|
131,818
|
|
INCOME TAX EXPENSE (includes $640, $445 and $151 for the years ended December 31, 2017, 2016
and 2015, respectively, related to income tax expense from reclassification items)
|
|
|
26,817
|
|
|
|
31,153
|
|
|
|
31,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS
|
|
$
|
120,371
|
|
|
$
|
104,774
|
|
|
$
|
100,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS PER SHARE, BASIC
|
|
$
|
1.82
|
|
|
$
|
1.59
|
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNINGS PER SHARE, ASSUMING DILUTION
|
|
$
|
1.81
|
|
|
$
|
1.59
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
F-3
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Earnings
Years Ended December 31, 2017, 2016 and 2015
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
NET EARNINGS
|
|
$
|
120,371
|
|
|
$
|
104,774
|
|
|
$
|
100,381
|
|
OTHER ITEMS OF COMPREHENSIVE EARNINGS (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on investment securities
available-for-sale,
before income tax
|
|
|
23,266
|
|
|
|
(44,679
|
)
|
|
|
2,273
|
|
Reclassification adjustment for realized losses (gains) on investment securities included in net
earnings, before income tax
|
|
|
(1,828
|
)
|
|
|
(1,270
|
)
|
|
|
(432
|
)
|
Minimum liability pension adjustment, before income tax
|
|
|
257
|
|
|
|
1,410
|
|
|
|
(1,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other items of comprehensive earnings (losses)
|
|
|
21,695
|
|
|
|
(44,539
|
)
|
|
|
(145
|
)
|
Income tax benefit (expense) related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
(13,774
|
)
|
|
|
16,082
|
|
|
|
(644
|
)
|
Minimum liability pension adjustment
|
|
|
420
|
|
|
|
(493
|
)
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit (expense)
|
|
|
(13,354
|
)
|
|
|
15,589
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE EARNINGS
|
|
$
|
128,712
|
|
|
$
|
75,824
|
|
|
$
|
100,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
F-4
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity
Years Ended December 31, 2017, 2016 and 2015
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Capital
Surplus
|
|
|
Retained
Earnings
|
|
|
Treasury Stock
|
|
|
Deferred
Compensation
|
|
|
Accumulated
Other
Comprehensive
Earnings
(Losses)
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
Shares
|
|
|
Amounts
|
|
|
|
|
BALANCE, December 31, 2014
|
|
|
64,089,921
|
|
|
$
|
641
|
|
|
$
|
305,429
|
|
|
$
|
327,978
|
|
|
|
(529,563
|
)
|
|
$
|
(5,878
|
)
|
|
$
|
5,878
|
|
|
$
|
47,489
|
|
|
$
|
681,537
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,381
|
|
Stock issued in acquisition of FBC Bancshares, Inc.
|
|
|
1,755,374
|
|
|
|
18
|
|
|
|
59,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,648
|
|
Stock option exercises
|
|
|
105,121
|
|
|
|
1
|
|
|
|
1,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,545
|
|
Restricted Stock grant
|
|
|
39,818
|
|
|
|
|
|
|
|
1,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,350
|
|
Cash dividends declared, $0.62 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,353
|
)
|
Minimum liability pension adjustment, net of related income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,291
|
)
|
|
|
(1,291
|
)
|
Change in unrealized gain (loss) in investment securities
available-for-sale,
net of related income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,197
|
|
|
|
1,197
|
|
Additional tax benefit related to directors deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328
|
|
Shares purchased in connection with directors deferred compensation plan, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,912
|
|
|
|
(418
|
)
|
|
|
418
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2015
|
|
|
65,990,234
|
|
|
$
|
660
|
|
|
$
|
368,925
|
|
|
$
|
388,006
|
|
|
|
(520,651
|
)
|
|
$
|
(6,296
|
)
|
|
$
|
6,296
|
|
|
$
|
47,395
|
|
|
$
|
804,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,774
|
|
Stock option exercises
|
|
|
82,871
|
|
|
|
1
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,260
|
|
Restricted Stock grant
|
|
|
21,590
|
|
|
|
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
809
|
|
Cash dividends declared, $0.70 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,246
|
)
|
Minimum liability pension adjustment, net of related income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
|
|
917
|
|
Change in unrealized gain (loss) in investment securities
available-for-sale,
net of related income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,867
|
)
|
|
|
(29,867
|
)
|
Additional tax benefit related to directors deferred compensation plan
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
Shares purchased in connection with directors deferred compensation plan, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,242
|
|
|
|
(375
|
)
|
|
|
375
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2016
|
|
|
66,094,695
|
|
|
$
|
661
|
|
|
$
|
372,245
|
|
|
$
|
446,534
|
|
|
|
(507,409
|
)
|
|
$
|
(6,671
|
)
|
|
$
|
6,671
|
|
|
$
|
18,445
|
|
|
$
|
837,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,371
|
|
Stock option exercises
|
|
|
140,250
|
|
|
|
2
|
|
|
|
2,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,935
|
|
Restricted Stock grant
|
|
|
25,499
|
|
|
|
|
|
|
|
1,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,139
|
|
Cash dividends declared, $0.75 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,648
|
)
|
Minimum liability pension adjustment, net of related income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
677
|
|
|
|
677
|
|
Change in unrealized gain (loss) in investment securities
available-for-sale,
net of related income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,664
|
|
|
|
7,664
|
|
Shares purchased (redeemed) in connection with directors deferred compensation plan,
net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,445
|
|
|
|
(477
|
)
|
|
|
477
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, December 31, 2017
|
|
|
66,260,444
|
|
|
$
|
663
|
|
|
$
|
378,062
|
|
|
$
|
517,257
|
|
|
|
(495,964
|
)
|
|
$
|
(7,148
|
)
|
|
$
|
7,148
|
|
|
$
|
26,786
|
|
|
$
|
922,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
F-5
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 2017, 2016 and 2015
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
120,371
|
|
|
$
|
104,774
|
|
|
$
|
100,381
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
12,916
|
|
|
|
11,573
|
|
|
|
11,145
|
|
Provision for loan losses
|
|
|
6,530
|
|
|
|
10,212
|
|
|
|
9,685
|
|
Securities premium amortization, net
|
|
|
30,310
|
|
|
|
29,005
|
|
|
|
27,705
|
|
Gain on sale of assets, net
|
|
|
(1,167
|
)
|
|
|
(1,894
|
)
|
|
|
(150
|
)
|
Deferred federal income tax expense (benefit)
|
|
|
(53
|
)
|
|
|
673
|
|
|
|
320
|
|
Change in loans held for sale
|
|
|
11,769
|
|
|
|
6,645
|
|
|
|
(24,739
|
)
|
Change in other assets
|
|
|
9,313
|
|
|
|
2,397
|
|
|
|
(16,919
|
)
|
Change in other liabilities
|
|
|
285
|
|
|
|
(2,643
|
)
|
|
|
1,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
69,903
|
|
|
|
55,968
|
|
|
|
8,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
190,274
|
|
|
|
160,742
|
|
|
|
109,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for asset acquisition of 4Trust Mortgage, Inc., net
|
|
|
|
|
|
|
|
|
|
|
(1,931
|
)
|
Cash received in acquisition of FBC Bancshares, Inc., net
|
|
|
|
|
|
|
|
|
|
|
65,197
|
|
Net decrease in interest-bearing time deposits in banks
|
|
|
249
|
|
|
|
1,788
|
|
|
|
13,507
|
|
Activity in
available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
120,576
|
|
|
|
40,510
|
|
|
|
35,580
|
|
Maturities
|
|
|
4,392,131
|
|
|
|
3,509,113
|
|
|
|
2,717,724
|
|
Purchases
|
|
|
(4,768,420
|
)
|
|
|
(3,737,865
|
)
|
|
|
(3,055,117
|
)
|
Activity in
held-to-maturity
securities maturities
|
|
|
124
|
|
|
|
157
|
|
|
|
163
|
|
Net increase in loans
|
|
|
(134,627
|
)
|
|
|
(48,836
|
)
|
|
|
(144,320
|
)
|
Purchases of bank premises and equipment and other assets
|
|
|
(14,162
|
)
|
|
|
(20,399
|
)
|
|
|
(17,433
|
)
|
Proceeds from sale of bank premises and equipment and other assets
|
|
|
6,085
|
|
|
|
3,572
|
|
|
|
2,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(398,044
|
)
|
|
|
(251,960
|
)
|
|
|
(384,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in noninterest-bearing deposits
|
|
|
323,928
|
|
|
|
(28,230
|
)
|
|
|
23,473
|
|
Net increase in interest-bearing deposits
|
|
|
160,494
|
|
|
|
316,600
|
|
|
|
72,857
|
|
Net increase (decrease) in borrowings
|
|
|
(114,770
|
)
|
|
|
(169,905
|
)
|
|
|
235,440
|
|
Common stock transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from stock issuances
|
|
|
2,934
|
|
|
|
1,260
|
|
|
|
1,545
|
|
Dividends paid
|
|
|
(48,955
|
)
|
|
|
(44,907
|
)
|
|
|
(38,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
323,631
|
|
|
|
74,818
|
|
|
|
294,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
115,861
|
|
|
|
(16,400
|
)
|
|
|
19,415
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
256,486
|
|
|
|
272,886
|
|
|
|
253,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
372,347
|
|
|
$
|
256,486
|
|
|
$
|
272,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
F-6
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
First Financial Bankshares, Inc. (a Texas corporation) (Bankshares, Company, we or us) is a financial holding
company which owns all of the capital stock of one bank with 69 locations located in Texas as of December 31, 2017. The subsidiary bank is First Financial Bank, National Association, Abilene. The banks primary source of revenue is
providing loans and banking services to consumers and commercial customers in the market area in which the subsidiary is located. In addition, the Company also owns First Financial Trust & Asset Management Company, National Association,
First Financial Insurance Agency, Inc., and First Technology Services, Inc.
A summary of significant accounting policies of Bankshares and its
subsidiaries applied in the preparation of the accompanying consolidated financial statements follows. The accounting principles followed by the Company and the methods of applying them are in conformity with both U.S. GAAP and prevailing practices
of the banking industry.
The Company evaluated subsequent events for potential recognition through the date the consolidated financial statements were
issued.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The
Companys significant estimates include its allowance for loan losses and its valuation of financial instruments.
Consolidation
The accompanying consolidated financial statements include the accounts of Bankshares and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated.
Stock Repurchase
On June 25, 2017, the Companys Board of Directors authorized the repurchase of up to 2,000,000 common shares through September 30, 2020.
Previously, the Board of Directors had authorized the repurchase of up to 1,500,000 common shares through September 30, 2017. The stock buyback plan authorizes management to repurchase the stock at such time as repurchases are considered
beneficial to stockholders. Any repurchase of stock will be made through the open market, block trades or in privately negotiated transactions in accordance with applicable laws and regulations. Under the repurchase plan, there is no minimum number
of shares that the Company is required to repurchase. For the years ended December 31, 2017, 2016 and 2015, no shares were repurchased under this or the prior authorization that expired September 30, 2017.
Acquisitions and Asset Purchase
On July 31, 2015,
the Company acquired 100% of the outstanding capital stock of FBC Bancshares, Inc. through the merger of a wholly-owned subsidiary with and into FBC Bancshares, Inc. Following such merger, FBC Bancshares, Inc. and its wholly-owned subsidiary, First
Bank, N.A. were merged into the Company and First Financial Bank, National Association, respectively. The results of operations of FBC Bancshares, Inc. subsequent to the acquisition date, are included in the consolidated earnings of the Company. See
Note 18 for additional information.
On June 1, 2015, the Company completed the asset purchase of 4Trust Mortgage, Inc. The results of operation of
4Trust Mortgage Inc. subsequent to the asset purchase date, are included in the consolidated earnings of the Company. See Note 18 for additional information.
F-7
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Increase in Authorized Shares
On April 28, 2015, the Companys shareholders approved an amendment to the Companys Amended and Restated Certificate of Formation to increase
the number of authorized common shares to 120,000,000.
Investment Securities
Management classifies debt and equity securities as
held-to-maturity,
available-for-sale,
or trading based on its intent. Debt securities that management has the positive intent and ability to hold to maturity are classified as
held-to-maturity
and recorded at cost, adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income using the
interest method. Securities not classified as
held-to-maturity
or trading are classified as
available-for-sale
and recorded at fair value, with all unrealized gains and unrealized losses judged to be temporary, net of deferred income taxes, excluded from
earnings and reported in the consolidated statements of comprehensive earnings.
Available-for-sale
securities that have unrealized gains and losses are excluded from
earnings and reported net of tax in accumulated other comprehensive income until realized. Declines in the fair value of
available-for-sale
securities below their
cost that are deemed to be other-than-temporary are reflected in earnings as a realized loss if there is no ability or intent to hold to recovery. If the Company does not intend to sell and will not be required to sell prior to recovery of its
amortized cost basis, only the credit component of the impairment is reflected in earnings as a realized loss with the noncredit portion recognized in other comprehensive income. In estimating other-than-temporary impairment losses, we consider
(1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) our intent and ability to retain our investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
The Company records its
available-for-sale
and trading securities portfolio at fair value. Fair values of these securities are determined based on methodologies in accordance with current authoritative accounting guidance. Fair
values are volatile and may be influenced by a number of factors, including market interest rates, prepayment speeds, discount rates, credit ratings and yield curves. Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on the quoted prices of similar instruments or an estimate of fair value by using a range of fair value estimates in the market place as a result of the illiquid market
specific to the type of security.
When the fair value of a security is below its amortized cost, and depending on the length of time the condition exists
and the extent the fair value is below amortized cost, additional analysis is performed to determine whether an other-than-temporary impairment condition exists.
Available-for-sale
and
held-to-maturity
securities are analyzed quarterly for possible
other-than-temporary impairment. The analysis considers (i) whether we have the intent to sell our securities prior to recovery and/or maturity, (ii) whether it is more likely than not that we will have to sell our securities prior to
recovery and/or maturity, (iii) the length of time and extent to which the fair value has been less than amortized cost, and (iv) the financial condition of the issuer. Often, the information available to conduct these assessments is
limited and rapidly changing, making estimates of fair value subject to judgment. If actual information or conditions are different than estimated, the extent of the impairment of the security may be different than previously estimated, which could
have a material effect on the Companys results of operations and financial condition.
The Companys investment portfolio consists of U.S.
Treasury securities, obligations of U.S. government sponsored enterprises and agencies, obligations of state and political subdivisions, mortgage pass-through securities, corporate bonds and general obligation or revenue based municipal bonds.
Pricing for such securities is generally readily available and transparent in the market. The Company utilizes independent third party pricing services to value its investment securities, which the Company reviews as well as the underlying pricing
methodologies for reasonableness and to ensure such prices are aligned with pricing matrices. The Company validates quarterly, on a sample basis, prices supplied by the independent pricing services by comparison to prices obtained from other third
party sources.
Loans and Allowance for Loan Losses
Loans held for investment are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is
calculated by using the simple interest method on daily balances of
F-8
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
the principal amounts outstanding. The Company defers and amortizes net loan origination fees and costs as an adjustment to yield. The allowance for loan losses is established through a provision
for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes the collectability of the principal is unlikely.
The allowance for loan losses is an amount which represents managements best estimate of probable losses that are inherent in the Companys loan
portfolio as of the balance sheet date. The allowance for loan losses is comprised of three elements: (i) specific reserves determined based on probable losses on specific classified loans; (ii) a historical valuation reserve component
that considers historical loss rates and estimated loss emergence periods; and (iii) qualitative reserves based upon general economic conditions and other qualitative risk factors both internal and external to the Company. The allowance for
loan losses is increased by charges to income and decreased by
charge-offs
(net of recoveries). Managements periodic evaluation of the appropriateness of the allowance is based on general economic
conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. For purposes of determining our historical valuation reserve, the
loan portfolio, less cash secured loans, government guaranteed loans and classified loans, is multiplied by the Companys historical loss rate. Specific allocations are increased or decreased in accordance with deterioration or improvement in
credit quality and a corresponding increase or decrease in risk of loss on a particular loan. In addition, we adjust our allowance for qualitative factors such as current local economic conditions and trends, including, without limitations,
unemployment, oil and gas prices, drought conditions, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. This
qualitative reserve serves to estimate for additional areas of losses inherent in our portfolio that are not reflected in our historic loss factors.
Although we believe we use the best information available to make loan loss allowance determinations, future adjustments could be necessary if circumstances
or economic conditions differ substantially from the assumptions used in making our initial determinations. A decline in the economy and employment could result in increased levels of
non-performing
assets and
charge-offs, increased loan provisions and reductions in income. Additionally, bank regulatory agencies periodically review our allowance for loan losses and methodology and could require, in accordance with U.S. GAAP, additional provisions to the
allowance for loan losses based on their judgment of information available to them at the time of their examination as well as changes to our methodology.
Accrual of interest is discontinued on a loan and payments are applied to principal when management believes, after considering economic and business
conditions and collection efforts, the borrowers financial condition is such that collection of interest is doubtful. Except consumer loans, generally all loans past due greater than 90 days, based on contractual terms, are placed on
non-accrual.
Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Consumer loans are generally
charged-off
when a loan becomes past due 90 days. For other loans in the portfolio, facts and circumstances are evaluated in making
charge-off
decisions.
Loans are considered impaired when, based on current information and events, management determines that it is probable we will be unable to collect all
amounts due in accordance with the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to
principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectable.
The Companys policy requires measurement of the allowance for an impaired, collateral dependent loan based on the fair value of the collateral less cost
to sell. Other loan impairments for
non-collateral
dependent loans are measured based on the present value of expected future cash flows or the loans observable market price. At December 31, 2017
and 2016, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral less cost to sell.
From time to time, the Company modifies its loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions
are met: (i) the borrower is experiencing financial difficulty and (ii) concessions are made by the Company that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may
include a lower interest rate, a reduction of principal, or a
F-9
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
longer term to maturity. For all impaired loans, including the Companys troubled debt restructurings, the Company performs a periodic, well-documented credit evaluation of the
borrowers financial condition and prospects for repayment to assess the likelihood that all principal and interest payments required under the terms of the agreement will be collected in full. When doubt exists about the ultimate
collectability of principal and interest, the troubled debt restructuring remains on
non-accrual
status and payments received are applied to reduce principal to the extent necessary to eliminate such doubt.
This determination of accrual status is judgmental and is based on facts and circumstances related to each troubled debt restructuring. Each of these loans is individually evaluated for impairment and a specific reserve is recorded based on probable
losses, taking into consideration the related collateral, modified loan terms and cash flow. As of December 31, 2017 and 2016, substantially all of the Companys troubled debt restructured loans are included in the
non-accrual
totals.
The Company originates certain mortgage loans for sale in the secondary market. Accordingly, these
loans are classified as
held-for-sale
and are carried at the lower of cost or fair value on an aggregate basis. The mortgage loan sales contracts contain indemnification
clauses should the loans default, generally in the first three to six months, or if documentation is determined not to be in compliance with regulations. The Companys historic losses as a result of these indemnities have been insignificant.
Loans acquired, including loans acquired in a business combination, are initially recorded at fair value with no valuation allowance. Acquired loans are
segregated between those considered to be credit impaired and those deemed performing. To make this determination, management considers such factors as past due status,
non-accrual
status and credit risk
ratings. The fair value of acquired performing loans is determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances at acquisition
date, the fair value discount, is accreted into interest income over the estimated life of the acquired portfolio.
Purchased credit impaired loans are
those loans that showed evidence of deterioration of credit quality since origination and for which it is probable, at acquisition, that the Company will be unable to collect all amounts contractually owed. Their acquisition fair value, which
includes a credit component at the acquisition date, was based on the estimate of cash flows, both principal and interest, expected to be collected or estimated collateral values if cash flows are not estimable, discounted at prevailing market rates
of interest. The difference between the discounted cash flows expected at acquisition and the investment in the loan is recognized as interest income on a level-yield method over the life of the loan, unless management was unable to reasonably
forecast cash flows in which case the loans were placed on nonaccrual. Subsequent to the acquisition date, increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan loss, to the extent
applicable, and/or a reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. Decreases in expected cash flows subsequent to acquisition are recognized as impairment. Valuation allowances
on these impaired loans reflect only losses incurred after the acquisition. The carrying amount of purchased credit impaired loans at December 31, 2017 and 2016 were $618,000 and $1,256,000, respectively, compared to a contractual balance of
$755,000 and $1,865,000, respectively. Other purchased credit impaired loan disclosures were omitted due to immateriality.
Other Real Estate
Other real estate owned is foreclosed property held pending disposition and is initially recorded at fair value, less estimated costs to sell. At
foreclosure, if the fair value of the real estate, less estimated costs to sell, is less than the Companys recorded investment in the related loan, a write-down is recognized through a charge to the allowance for loan losses. Any subsequent
reduction in value is recognized by a charge to income. Operating and holding expenses of such properties, net of related income, and gains and losses on their disposition are included in net gain (loss) on sale of foreclosed assets as incurred.
Bank Premises and Equipment
Bank premises and
equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized
over the life of the respective lease or the estimated useful lives of the improvements, whichever is shorter.
F-10
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Business Combinations, Goodwill and Other Intangible Assets
The Company accounts for all business combinations under the purchase method of accounting. Tangible and intangible assets and liabilities of the acquired
entity are recorded at fair value. Intangible assets with finite useful lives represent the future benefit associated with the acquisition of the core deposits and are amortized over seven years, utilizing a method that approximates the expected
attrition of the deposits. Goodwill with an indefinite life is not amortized, but rather tested annually for impairment as of June 30 each year and totaled $139,971,000 at both December 31, 2017 and 2016. There was no impairment recorded
for the years ended December 31, 2017, 2016 and 2015.
The carrying amount of goodwill arising from acquisitions that qualify as an asset purchase
for federal income tax purposes was $74,376,000 both at December 31, 2017 and 2016, and is deductible for federal income tax purposes.
Also included
in other intangible assets are mortgage servicing rights totaling $1,795,000 at December 31, 2016. These servicing rights were sold to an unrelated third party in 2017 resulting in a loss on sale of approximately $215,000.
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase, which are classified as borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of the cash received in connection with the transaction. The Company may be required to provide additional collateral based on the estimated fair value of the underlying
securities.
Segment Reporting
The Company has
determined that its banking regions meet the aggregation criteria of the current authoritative accounting guidance since each of its banking regions offer similar products and services, operate in a similar manner, have similar customers and report
to the same regulatory authority, and therefore operate one line of business (community banking) located in a single geographic area (Texas).
Statements of Cash Flows
For purposes of reporting cash
flows, cash and cash equivalents includes cash on hand, amounts due from banks, including interest-bearing deposits in banks with original maturity of 90 days or less, and federal funds sold.
Accumulated Other Comprehensive Income (Loss)
Unrealized
net gains on the Companys
available-for-sale
securities (after applicable income tax expense) totaling $29,156,000 and $21,492,000 at December 31, 2017 and
2016, respectively, and the minimum pension liability (after applicable income tax benefit) totaling $2,370,000 and $3,047,000 at December 31, 2017 and 2016, respectively, are included in accumulated other comprehensive income.
Income Taxes
The Companys provision for income
taxes is based on income before income taxes adjusted for permanent differences between financial reporting and taxable income. Deferred tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the
net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and
laws.
Stock Based Compensation
The Company grants
stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the grant date. The Company recorded stock option expense totaling $1,745,000, $882,000, and $644,000 for the years ended
December 31, 2017, 2016 and 2015, respectively.
F-11
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
The Company also grants restricted stock for a fixed number of shares. The Company recorded expenses
associated with its director and officer restricted stock grants totaling $483,000 and $562,000, respectively, for the year ended December 31, 2017, $278,000 and $381,000, respectively, for the year ended December 31, 2016, and $139,000
and $62,000, respectively, for the year ended December 31, 2015.
See Note 15 for further information.
Advertising Costs
Advertising costs are expensed as
incurred.
Per Share Data
Net earnings per share
(EPS) are computed by dividing net earnings by the weighted average number of common stock shares outstanding during the period. The Company calculates dilutive EPS assuming all outstanding stock options to purchase common stock have
been exercised at the beginning of the year (or the time of issuance, if later.) The dilutive effect of the outstanding options and restricted stock is reflected by application of the treasury stock method, whereby the proceeds from the exercised
options and restricted stock are assumed to be used to purchase common stock at the average market price during the respective year. For the year ended December 31, 2015, 442,368 weighted average outstanding stock options were anti-dilutive and
have been excluded from the EPS calculations. There were no such anti-dilutive stock options for the years ended December 31, 2017 and 2016. The following table reconciles the computation of basic EPS to dilutive EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings
(in thousands)
|
|
|
Weighted
Average
Shares
|
|
|
Per Share
Amount
|
|
For the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic
|
|
$
|
120,371
|
|
|
|
66,126,863
|
|
|
$
|
1.82
|
|
Effect of stock options and stock grants
|
|
|
|
|
|
|
197,467
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, assuming dilution
|
|
$
|
120,371
|
|
|
|
66,324,330
|
|
|
$
|
1.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic
|
|
$
|
104,774
|
|
|
|
66,013,004
|
|
|
$
|
1.59
|
|
Effect of stock options and stock grants
|
|
|
|
|
|
|
89,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, assuming dilution
|
|
$
|
104,774
|
|
|
|
66,102,886
|
|
|
$
|
1.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, basic
|
|
$
|
100,381
|
|
|
|
64,892,934
|
|
|
$
|
1.55
|
|
Effect of stock options and stock grants
|
|
|
|
|
|
|
175,096
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per share, assuming dilution
|
|
$
|
100,381
|
|
|
|
65,068,030
|
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recently Issued Authoritative Accounting Guidance
Accounting Standards Update (ASU)
2014-09,
Revenue from Contracts with Customers.
ASU
2014-09
implements a comprehensive new revenue recognition standard that will supersede substantially all existing revenue recognition guidance. The new standards core principle is that a company will
recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity
should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the
performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU
2015-4
Revenue from Contracts with Customers Deferral of the
Effective Date deferred the effective date of ASU
2014-09
by one year and as a result, the new standard will be effective the first quarter of 2018. The Companys revenue is comprised of net
interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU
2014-09,
and
non-interest
income. Based on the
Companys analysis of the effect of the new standard on its recurring revenue streams, the Company did not expect and did not experience an impact on the Companys financial statements upon adoption in the first quarter of 2018. No
adjustments to opening retained earnings was recorded on January 1, 2018.
F-12
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
ASU
2014-15,
Presentation of Financial Statements
Going Concern.
ASU
2014-15
requires management to evaluate an entitys ability to continue as a going concern within one year after the date that the financial statements are issued. Management
must evaluate whether conditions and events raise substantial doubt about an entitys ability to continue as a going concern and then whether its plans alleviate that doubt. ASU
2014-15
was effective in
2016 and management has performed and continues to perform such required evaluation and has concluded there were no such conditions or events that raised substantial doubt about the Companys ability to continue as a going concern.
ASU
2015-01,
Income Statement Extraordinary and Unusual Items.
ASU
2015-01
eliminated from U.S. GAAP the concept of extraordinary items, which, among other things, required an entity to show the item separately in the income statement, net of tax, after income from continuing
operations. The new guidance became effective for the Company beginning January 1, 2016, and did not have a significant impact on the Companys financial statements.
ASU
2015-05,
Intangibles Goodwill and Other
Internal-Use
Software Customers Accounting for Fees Paid in a Cloud Computing Arrangement.
ASU
2015-05
addresses accounting for fees paid by a
customer in cloud computing arrangements such as (i) software as a service, (ii) platform as a service, (iii) infrastructure as a service and (iv) other similar hosting arrangements. ASU
2015-05
provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account
for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service
contract. ASU
2015-05
became effective on January 1, 2016 and did not have a significant impact on the Companys financial statements.
ASU
2015-16,
Business Combinations Simplifying the Accounting Measurement Period
Adjustments.
ASU
2015-16
amended business combination guidance to require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the
reporting period in which the adjustment amounts are determined. The acquirer must record, in the same periods financial statements, the effect of earnings on changes in depreciation, amortization, or other income effects, if any, as a result
of the changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Additionally, the entity is required to present separately on the face of the income statement or disclose in the notes the
portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amended guidance
became effective for the Company on January 1, 2016, and did not have a significant impact on the Companys financial statements.
ASU
2016-1,
Financial Instruments Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU
2016-1,
among other things,
(i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair
values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be
disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes,
(v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure
the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance
sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to
available-for-sale
securities. ASU
2016-1
became effective on January 1, 2018 and did not have a significant impact on the
Companys financial statements.
ASU
2016-02,
Leases.
ASU
2016-02
will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessees obligation to make lease payments arising from a lease, measured on a discounted
basis, and (ii) a
right-of-use
asset, which is an asset that represents the lessees right to use, or control the use of, a
F-13
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
specified asset for the lease term. ASU
2016-02
does not significantly change lease accounting requirements applicable to lessors; however, certain changes
were made to align, where necessary, lessor accounting with the lessee accounting model. The amended guidance will be effective in the first quarter of 2019 and will require transition using a modified retrospective approach for leases existing at,
or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company continues to evaluate the provision of the new lease standard but, due to the small number of lease agreements presently in
effect for the Company, does not expect the new guidance will have a significant impact on the Companys financial statements.
ASU
2016-09,
Compensation Stock Compensation: Improvements to Employee Share-Based Payment Accounting.
ASU
2016-09
will amend current guidance such that all
excess tax benefits and tax deficiencies related to share-based payment awards will be recognized as income tax expense or benefit in the income statement during the period in which they occur. Additionally, excess tax benefits will be classified
along with other income tax cash flows as an operating activity rather than a financing activity. ASU
2016-09
also provides that any entity can make an entity-wide accounting policy election to either estimate
the number of awards that are expected to vest, which is the current requirement, or account for forfeitures when they occur. ASU
2016-09
became effective January 1, 2017 and did not have a significant
impact on the Companys financial statements.
ASU
2016-13,
Financial Instruments Credit
Losses.
ASU
2016-13
implements a comprehensive change in estimating the allowances for loan losses from the current model of losses inherent in the loan portfolio to a current expected credit loss
model that generally is expected to result in earlier recognition of allowances for losses. Additionally, purchase accounting rules have been modified as well as credit losses on
held-to-maturity
debt securities. ASU
2016-13
will be effective in the first quarter of 2020. While the Company generally expects
that the implementation of ASU
2016-13
will increase their allowance for loan losses balance, the Company is continuing to evaluate the potential impact on the Companys financial statements.
ASU
2017-04,
Intangibles Goodwill and Other.
ASU
2017-04
will amend and simplify current goodwill impairment testing to eliminate Step 2 from the current provisions. Under the new guidance, an entity should perform the goodwill impairment test by comparing
the fair value of a reporting unit with its carrying value and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value. An entity still has the option to perform the quantitative
assessment for a reporting unit to determine if a quantitative impairment test is necessary. ASU
2017-04
will be effective for the Company on January 1, 2020 and is not expected to have a significant
impact on the Companys financial statements.
ASU
2017-07,
Compensation Retirement Benefits,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost.
ASU
2017-17
will require employers that sponsor defined benefit pension plans to present the
service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost will be presented
separately from the service cost component. ASU
2017-17
became effective in 2018 and, as the Company froze its defined benefit pension plan in 2004, there is no service cost component of its net periodic
benefit cost and therefore the new standard had no impact on the Companys financial statements.
ASU
2017-08,
Receivables Nonrefundable Fees and Other Cost: Premium Amortization on Purchased Callable Debt Securities.
ASU
2017-08
addresses the
amortization method for all callable bonds purchased at a premium to par. Under the revised guidance, entities will be required to amortize premiums on callable bonds to the earliest call date. ASU
2017-08
is
effective in 2019 although early adoption is permitted. The Company elected to early adopt ASU
2017-08
in the first quarter of 2017. The adoption of this guidance did not have a material impact on the
Companys financial statements.
ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income.
ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing
due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the Tax Cuts and Jobs Act on December 22, 2017 that changed the Companys income tax rate from 35% to 21%.
The ASU changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU is effective for periods beginning after December 15, 2018 although early
adoption is permitted. The Company determined it will early adopt ASU 2018-02 in the first quarter of 2018 and will reclassify its stranded tax debit of $5,761,000 within accumulated other comprehensive income to retained earnings at March 31, 2018.
F-14
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
2.
INTEREST-BEARING TIME DEPOSITS IN BANKS AND SECURITIES:
Interest-bearing time deposits in banks totaled $1,458,000 and $1,707,000 at December 31, 2017 and 2016, respectively, and have original maturities
generally ranging from one to three years.
A summary of the Companys
available-for-sale
securities as of December 31, 2017 and 2016 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Estimated
Fair Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored enterprises and agencies
|
|
$
|
60,516
|
|
|
$
|
|
|
|
$
|
(186
|
)
|
|
$
|
60,330
|
|
Obligations of state and political subdivisions
|
|
|
1,369,295
|
|
|
|
52,491
|
|
|
|
(936
|
)
|
|
|
1,420,850
|
|
Corporate bonds and other
|
|
|
11,421
|
|
|
|
43
|
|
|
|
(5
|
)
|
|
|
11,459
|
|
Residential mortgage-backed securities
|
|
|
1,223,452
|
|
|
|
4,561
|
|
|
|
(8,916
|
)
|
|
|
1,219,097
|
|
Commercial mortgage-backed securities
|
|
|
377,934
|
|
|
|
263
|
|
|
|
(2,460
|
)
|
|
|
375,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
3,042,618
|
|
|
$
|
57,358
|
|
|
$
|
(12,503
|
)
|
|
$
|
3,087,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Amortized
Cost Basis
|
|
|
Gross
Unrealized
Holding
Gains
|
|
|
Gross
Unrealized
Holding
Losses
|
|
|
Estimated
Fair Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,649
|
|
|
$
|
19
|
|
|
$
|
|
|
|
$
|
10,668
|
|
Obligations of U.S. government sponsored enterprises and agencies
|
|
|
113,450
|
|
|
|
253
|
|
|
|
|
|
|
|
113,703
|
|
Obligations of state and political subdivisions
|
|
|
1,534,095
|
|
|
|
40,194
|
|
|
|
(10,013
|
)
|
|
|
1,564,276
|
|
Corporate bonds and other
|
|
|
51,920
|
|
|
|
476
|
|
|
|
(3
|
)
|
|
|
52,393
|
|
Residential mortgage-backed securities
|
|
|
848,614
|
|
|
|
8,260
|
|
|
|
(5,513
|
)
|
|
|
851,361
|
|
Commercial mortgage-backed securities
|
|
|
269,044
|
|
|
|
622
|
|
|
|
(1,230
|
)
|
|
|
268,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
available-for-sale
|
|
$
|
2,827,772
|
|
|
$
|
49,824
|
|
|
$
|
(16,759
|
)
|
|
$
|
2,860,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosures related to the Companys
held-to-maturity
securities, which totaled $121,000 at December 31, 2016, have not been presented due to insignificance. There were no
held-to-maturity
securities owned by the Company at December 31, 2017.
F-15
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
The Company invests in mortgage-backed securities that have expected maturities that differ from their
contractual maturities. These differences arise because borrowers may have the right to call or prepay obligations with or without a prepayment penalty. These securities include collateralized mortgage obligations (CMOs) and other asset backed
securities. The expected maturities of these securities at December 31, 2017, were computed by using scheduled amortization of balances and historical prepayment rates. At December 31, 2017 and 2016, the Company did not hold any CMOs that
entail higher risks than standard mortgage-backed securities.
The amortized cost and estimated fair value of
available-for-sale
securities at December 31, 2017, by contractual and expected maturity, are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost Basis
|
|
|
Estimated
Fair Value
|
|
Due within one year
|
|
$
|
184,538
|
|
|
$
|
185,547
|
|
Due after one year through five years
|
|
|
631,376
|
|
|
|
654,092
|
|
Due after five years through ten years
|
|
|
623,628
|
|
|
|
650,923
|
|
Due after ten years
|
|
|
1,690
|
|
|
|
2,077
|
|
Mortgage-backed securities
|
|
|
1,601,386
|
|
|
|
1,594,834
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,042,618
|
|
|
$
|
3,087,473
|
|
|
|
|
|
|
|
|
|
|
The following tables disclose, as of December 31, 2017 and 2016, the Companys investment securities that have been
in a continuous
unrealized-loss
position for less than 12 months and for 12 or more months (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
December 31, 2017
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
Obligations of U.S. government sponsored enterprises and agencies
|
|
$
|
60,329
|
|
|
$
|
186
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
60,329
|
|
|
$
|
186
|
|
Obligations of state and political subdivisions
|
|
|
66,361
|
|
|
|
219
|
|
|
|
44,938
|
|
|
|
717
|
|
|
|
111,299
|
|
|
|
936
|
|
Corporate bonds and other
|
|
|
224
|
|
|
|
2
|
|
|
|
237
|
|
|
|
3
|
|
|
|
461
|
|
|
|
5
|
|
Residential mortgage-backed securities
|
|
|
701,252
|
|
|
|
3,988
|
|
|
|
239,641
|
|
|
|
4,928
|
|
|
|
940,893
|
|
|
|
8,916
|
|
Commercial mortgage-backed securities
|
|
|
239,548
|
|
|
|
1,500
|
|
|
|
92,549
|
|
|
|
960
|
|
|
|
332,097
|
|
|
|
2,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,067,714
|
|
|
$
|
5,895
|
|
|
$
|
377,365
|
|
|
$
|
6,608
|
|
|
$
|
1,445,079
|
|
|
$
|
12,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
December 31, 2016
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
|
Fair Value
|
|
|
Unrealized
Loss
|
|
Obligations of state and political subdivisions
|
|
$
|
446,052
|
|
|
$
|
9,997
|
|
|
$
|
1,209
|
|
|
$
|
16
|
|
|
$
|
447,261
|
|
|
$
|
10,013
|
|
Corporate bonds and other
|
|
|
244
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
3
|
|
Residential mortgage-backed securities
|
|
|
372,331
|
|
|
|
4,532
|
|
|
|
33,227
|
|
|
|
981
|
|
|
|
405,558
|
|
|
|
5,513
|
|
Commercial mortgage-backed securities
|
|
|
193,495
|
|
|
|
1,180
|
|
|
|
13,263
|
|
|
|
50
|
|
|
|
206,758
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,012,122
|
|
|
$
|
15,712
|
|
|
$
|
47,699
|
|
|
$
|
1,047
|
|
|
$
|
1,059,821
|
|
|
$
|
16,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The number of investments in an unrealized loss position totaled 338 at December 31, 2017. We do not believe these
unrealized losses are other-than-temporary. In estimating other-than-temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the
financial condition and near-term prospects of the issuer. Additionally management does not (i) have the intent to sell our securities prior to recovery and/or maturity and, (ii) it is more likely than not that we will not have to sell our
securities prior to recovery and/or maturity and (iii) that the length of time and extent that fair value has been
F-16
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
less than cost is not indicative of recoverability. The unrealized losses noted are interest rate related due to the level of interest rates at December 31, 2017 compared to the time of
purchase. We have reviewed the ratings of the issuers and have not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. Our mortgage related securities are backed by GNMA,
FNMA and FHLMC or are collateralized by securities backed by these agencies. At December 31, 2017, 82.98% of our
available-for-sale
securities that are
obligations of states and political subdivisions were issued within the State of Texas, of which 31.21% are guaranteed by the Texas Permanent School Fund.
Securities, carried at approximately $2,018,420,000 and $1,940,460,000 at December 31, 2017 and 2016, respectively, were pledged as collateral for public
or trust fund deposits, repurchase agreements and for other purposes required or permitted by law.
During 2017, 2016 and 2015, sales of investment
securities that were classified as
available-for-sale
totaled $120,576,000, $40,510,000 and $35,580,000. Gross realized gains from 2017, 2016 and 2015, securities sales
were $2,643,000, $1,579,000 and $443,000, respectively. Gross realized losses from 2017, 2016 and 2015 securities sales were $815,000, $309,000 and $11,000, respectively. The specific identification method was used to determine cost in order to
compute the realized gains and losses.
3.
LOANS AND ALLOWANCE FOR LOAN LOSSES:
Loans
held-for-investment
by class of financing receivables are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Commercial
|
|
$
|
684,099
|
|
|
$
|
674,410
|
|
Agricultural
|
|
|
94,543
|
|
|
|
84,021
|
|
Real estate
|
|
|
2,302,998
|
|
|
|
2,189,844
|
|
Consumer
|
|
|
403,929
|
|
|
|
409,032
|
|
|
|
|
|
|
|
|
|
|
Total loans
held-for-investment
|
|
$
|
3,485,569
|
|
|
$
|
3,357,307
|
|
|
|
|
|
|
|
|
|
|
Loans
held-for-sale
totaled $15,130,000 and
$26,898,000 at December 31, 2017 and 2016, respectively, which are valued using the lower of cost or fair value.
The Companys
non-accrual
loans, loan still accruing and past due 90 days or more and restructured loans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Non-accrual
loans*
|
|
$
|
17,670
|
|
|
$
|
27,371
|
|
Loans still accruing and past due 90 days or more
|
|
|
288
|
|
|
|
284
|
|
Troubled debt restructured loans**
|
|
|
627
|
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,585
|
|
|
$
|
28,356
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes $618,000 and $1,256,000, respectively, of purchased credit impaired loans as of December 31, 2017 and 2016.
|
F-17
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
**
|
Our troubled debt restructured loans of $4,629,000 and $6,863,000, whose interest collection, after considering economic and business conditions and collection efforts, is doubtful are included in
non-accrual
loans as of December 31, 2017 and 2016, respectively.
|
The Companys recorded
investment in impaired loans and the related valuation allowance are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Recorded Investment
|
|
|
Valuation Allowance
|
|
|
Recorded Investment
|
|
|
Valuation Allowance
|
|
|
$17,670
|
|
|
$
|
3,996
|
|
|
$
|
27,371
|
|
|
$
|
5,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had $20,117,000 and $29,000,000 in
non-accrual,
past due 90 days or more
and still accruing, restructured loans and foreclosed assets at December 31, 2017 and 2016, respectively.
Non-accrual
loans totaled $17,670,000 and $27,371,000 at December 31, 2017 and 2016,
respectively, and consisted of the following amounts by type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Commercial
|
|
$
|
3,612
|
|
|
$
|
7,284
|
|
Agricultural
|
|
|
134
|
|
|
|
99
|
|
Real Estate
|
|
|
12,838
|
|
|
|
18,754
|
|
Consumer
|
|
|
1,086
|
|
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,670
|
|
|
$
|
27,371
|
|
|
|
|
|
|
|
|
|
|
No significant additional funds are committed to be advanced in connection with impaired loans as of December 31, 2017.
The Companys impaired loans and related allowance as of December 31, 2017 and 2016 are summarized in the following tables by class of
financing receivables (in thousands). No interest income was recognized on impaired loans subsequent to their classification as impaired.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment
With No
Allowance*
|
|
|
Recorded
Investment
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
12 Month
Average
Recorded
Investment
|
|
Commercial
|
|
$
|
5,597
|
|
|
$
|
518
|
|
|
$
|
3,094
|
|
|
$
|
3,612
|
|
|
$
|
1,194
|
|
|
$
|
4,849
|
|
Agricultural
|
|
|
147
|
|
|
|
|
|
|
|
134
|
|
|
|
134
|
|
|
|
31
|
|
|
|
120
|
|
Real Estate
|
|
|
16,823
|
|
|
|
2,348
|
|
|
|
10,490
|
|
|
|
12,838
|
|
|
|
2,316
|
|
|
|
13,835
|
|
Consumer
|
|
|
1,284
|
|
|
|
143
|
|
|
|
943
|
|
|
|
1,086
|
|
|
|
455
|
|
|
|
1,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,851
|
|
|
$
|
3,009
|
|
|
$
|
14,661
|
|
|
$
|
17,670
|
|
|
$
|
3,996
|
|
|
$
|
20,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes $618,000 of purchased credit impaired loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Unpaid
Contractual
Principal
Balance
|
|
|
Recorded
Investment
With No
Allowance*
|
|
|
Recorded
Investment
With
Allowance
|
|
|
Total
Recorded
Investment
|
|
|
Related
Allowance
|
|
|
12 Month
Average
Recorded
Investment
|
|
Commercial
|
|
$
|
13,389
|
|
|
$
|
1,148
|
|
|
$
|
6,136
|
|
|
$
|
7,284
|
|
|
$
|
2,128
|
|
|
$
|
4,921
|
|
Agricultural
|
|
|
103
|
|
|
|
|
|
|
|
99
|
|
|
|
99
|
|
|
|
25
|
|
|
|
50
|
|
Real Estate
|
|
|
23,466
|
|
|
|
6,229
|
|
|
|
12,525
|
|
|
|
18,754
|
|
|
|
2,428
|
|
|
|
16,170
|
|
Consumer
|
|
|
1,421
|
|
|
|
280
|
|
|
|
954
|
|
|
|
1,234
|
|
|
|
431
|
|
|
|
914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,379
|
|
|
$
|
7,657
|
|
|
$
|
19,714
|
|
|
$
|
27,371
|
|
|
$
|
5,012
|
|
|
$
|
22,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes $1,256,000 of purchased credit impaired loans.
|
F-18
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
The Company recognized interest income on impaired loans prior to being recognized as impaired of
approximately $624,000, $829,000 and $922,000 during the years ended December 31, 2017, 2016 and 2015, respectively.
From a credit risk standpoint,
the Company rates its loans in one of four categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans rated as loss are
charged-off.
The ratings of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on our credits as part
of our
on-going
monitoring of the credit quality of our loan portfolio. Ratings are adjusted to reflect the degree of risk and loss that are felt to be inherent in each credit as of each reporting period. Our
methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a
corresponding decrease in risk and loss).
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness,
however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as
prominent as credits rated more harshly.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been,
jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action
is therefore required to strengthen the Companys position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the
secondary support to the credit is performed.
Credits rated doubtful are those in which full collection of principal appears highly questionable, and
which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required
to avert or minimize loss. Credits rated doubtful are generally also placed on
non-accrual.
The following
summarizes the Companys internal ratings of its loans
held-for-investment
by class of financing receivables and portfolio segments, which classes are the same, at
December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
$
|
649,166
|
|
|
$
|
6,282
|
|
|
$
|
28,651
|
|
|
$
|
|
|
|
$
|
684,099
|
|
Agricultural
|
|
|
90,457
|
|
|
|
1,527
|
|
|
|
2,559
|
|
|
|
|
|
|
|
94,543
|
|
Real Estate
|
|
|
2,227,302
|
|
|
|
29,089
|
|
|
|
46,607
|
|
|
|
|
|
|
|
2,302,998
|
|
Consumer
|
|
|
401,434
|
|
|
|
181
|
|
|
|
2,314
|
|
|
|
|
|
|
|
403,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,368,359
|
|
|
$
|
37,079
|
|
|
$
|
80,131
|
|
|
$
|
|
|
|
$
|
3,485,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Pass
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
Commercial
|
|
$
|
629,756
|
|
|
$
|
5,769
|
|
|
$
|
38,885
|
|
|
$
|
|
|
|
$
|
674,410
|
|
Agricultural
|
|
|
81,620
|
|
|
|
715
|
|
|
|
1,686
|
|
|
|
|
|
|
|
84,021
|
|
Real Estate
|
|
|
2,111,947
|
|
|
|
18,091
|
|
|
|
59,806
|
|
|
|
|
|
|
|
2,189,844
|
|
Consumer
|
|
|
406,182
|
|
|
|
212
|
|
|
|
2,638
|
|
|
|
|
|
|
|
409,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,229,505
|
|
|
$
|
24,787
|
|
|
$
|
103,015
|
|
|
$
|
|
|
|
$
|
3,357,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
At December 31, 2017 and 2016, the Companys past due loans are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
15-59
Days
Past
Due*
|
|
|
60-89
Days
Past
Due
|
|
|
Greater
Than
90
Days
|
|
|
Total
Past Due
|
|
|
Total
Current
|
|
|
Total Loans
|
|
|
Total 90
Days
Past Due
Still
Accruing
|
|
Commercial
|
|
$
|
2,039
|
|
|
$
|
1,104
|
|
|
$
|
1,081
|
|
|
$
|
4,224
|
|
|
$
|
679,875
|
|
|
$
|
684,099
|
|
|
$
|
7
|
|
Agricultural
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
640
|
|
|
|
93,903
|
|
|
|
94,543
|
|
|
|
|
|
Real Estate
|
|
|
12,308
|
|
|
|
511
|
|
|
|
1,198
|
|
|
|
14,017
|
|
|
|
2,288,981
|
|
|
|
2,302,998
|
|
|
|
216
|
|
Consumer
|
|
|
1,360
|
|
|
|
361
|
|
|
|
135
|
|
|
|
1,856
|
|
|
|
402,073
|
|
|
|
403,929
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,347
|
|
|
$
|
1,976
|
|
|
$
|
2,414
|
|
|
$
|
20,737
|
|
|
$
|
3,464,832
|
|
|
$
|
3,485,569
|
|
|
$
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
15-59
Days
Past
Due*
|
|
|
60-89
Days
Past
Due
|
|
|
Greater
Than
90
Days
|
|
|
Total
Past Due
|
|
|
Total
Current
|
|
|
Total Loans
|
|
|
Total 90
Days
Past Due
Still
Accruing
|
|
Commercial
|
|
$
|
3,908
|
|
|
$
|
1,122
|
|
|
$
|
2,220
|
|
|
$
|
7,250
|
|
|
$
|
667,160
|
|
|
$
|
674,410
|
|
|
$
|
10
|
|
Agricultural
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
185
|
|
|
|
83,836
|
|
|
|
84,021
|
|
|
|
|
|
Real Estate
|
|
|
13,172
|
|
|
|
1,301
|
|
|
|
5,268
|
|
|
|
19,741
|
|
|
|
2,170,103
|
|
|
|
2,189,844
|
|
|
|
272
|
|
Consumer
|
|
|
1,845
|
|
|
|
368
|
|
|
|
122
|
|
|
|
2,335
|
|
|
|
406,697
|
|
|
|
409,032
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,110
|
|
|
$
|
2,791
|
|
|
$
|
7,610
|
|
|
$
|
29,511
|
|
|
$
|
3,327,796
|
|
|
$
|
3,357,307
|
|
|
$
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The Company monitors commercial, agricultural and real estate loans after such loans are 15 days past due. Consumer loans are monitored after such loans are 30 days past due.
|
The following table details the allowance for loan losses at December 31, 2017 and 2016 by portfolio segment (in thousands). There were no allowances for
purchased credit impaired loans at December 31, 2017 or 2016. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
1,194
|
|
|
$
|
31
|
|
|
$
|
2,316
|
|
|
$
|
455
|
|
|
$
|
3,996
|
|
Loan collectively evaluated for impairment
|
|
|
9,671
|
|
|
|
1,274
|
|
|
|
27,580
|
|
|
|
5,635
|
|
|
|
44,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,865
|
|
|
$
|
1,305
|
|
|
$
|
29,896
|
|
|
$
|
6,090
|
|
|
$
|
48,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
2,128
|
|
|
$
|
25
|
|
|
$
|
2,428
|
|
|
$
|
431
|
|
|
$
|
5,012
|
|
Loan collectively evaluated for impairment
|
|
|
9,579
|
|
|
|
1,076
|
|
|
|
24,436
|
|
|
|
5,676
|
|
|
|
40,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,707
|
|
|
$
|
1,101
|
|
|
$
|
26,864
|
|
|
$
|
6,107
|
|
|
$
|
45,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in the allowance for loan losses for the years ended December 31, 2017 and 2016 are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Total
|
|
Beginning balance
|
|
$
|
11,707
|
|
|
$
|
1,101
|
|
|
$
|
26,864
|
|
|
$
|
6,107
|
|
|
$
|
45,779
|
|
Provision for loan losses
|
|
|
1,233
|
|
|
|
243
|
|
|
|
4,055
|
|
|
|
999
|
|
|
|
6,530
|
|
Recoveries
|
|
|
943
|
|
|
|
32
|
|
|
|
192
|
|
|
|
501
|
|
|
|
1,668
|
|
Charge-offs
|
|
|
(3,018
|
)
|
|
|
(71
|
)
|
|
|
(1,215
|
)
|
|
|
(1,517
|
)
|
|
|
(5,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
10,865
|
|
|
$
|
1,305
|
|
|
$
|
29,896
|
|
|
$
|
6,090
|
|
|
$
|
48,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real
Estate
|
|
|
Consumer
|
|
|
Total
|
|
Beginning balance
|
|
$
|
12,644
|
|
|
$
|
1,191
|
|
|
$
|
24,375
|
|
|
$
|
3,667
|
|
|
$
|
41,877
|
|
Provision for loan losses
|
|
|
5,101
|
|
|
|
104
|
|
|
|
1,150
|
|
|
|
3,857
|
|
|
|
10,212
|
|
Recoveries
|
|
|
952
|
|
|
|
25
|
|
|
|
2,021
|
|
|
|
508
|
|
|
|
3,506
|
|
Charge-offs
|
|
|
(6,990
|
)
|
|
|
(219
|
)
|
|
|
(682
|
)
|
|
|
(1,925
|
)
|
|
|
(9,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,707
|
|
|
$
|
1,101
|
|
|
$
|
26,864
|
|
|
$
|
6,107
|
|
|
$
|
45,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys recorded investment in loans as of December 31, 2017 and 2016 related to the balance in the allowance
for loan losses on the basis of the Companys impairment methodology was as follows (in thousands). Purchased credit impaired loans of $618,000 and $1,256,000, respectively, at December 31, 2017 and 2016 are included in loans individually
evaluated for impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
3,612
|
|
|
$
|
134
|
|
|
$
|
12,838
|
|
|
$
|
1,086
|
|
|
$
|
17,670
|
|
Loan collectively evaluated for impairment
|
|
|
680,487
|
|
|
|
94,409
|
|
|
|
2,290,160
|
|
|
|
402,843
|
|
|
|
3,467,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
684,099
|
|
|
$
|
94,543
|
|
|
$
|
2,302,998
|
|
|
$
|
403,929
|
|
|
$
|
3,485,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Commercial
|
|
|
Agricultural
|
|
|
Real Estate
|
|
|
Consumer
|
|
|
Total
|
|
Loans individually evaluated for impairment
|
|
$
|
7,284
|
|
|
$
|
99
|
|
|
$
|
18,754
|
|
|
$
|
1,234
|
|
|
$
|
27,371
|
|
Loan collectively evaluated for impairment
|
|
|
667,126
|
|
|
|
83,922
|
|
|
|
2,171,090
|
|
|
|
407,798
|
|
|
|
3,329,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
674,410
|
|
|
$
|
84,021
|
|
|
$
|
2,189,844
|
|
|
$
|
409,032
|
|
|
$
|
3,357,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys loans that were modified in the years ended December 31, 2017 and 2016, and considered troubled debt
restructurings are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2017
|
|
|
Year Ended December 31, 2016
|
|
|
|
Number
|
|
|
Pre-Modification
Recorded
Investment
|
|
|
Post-
Modification
Recorded
Investment
|
|
|
Number
|
|
|
Pre-Modification
Recorded
Investment
|
|
|
Post-
Modification
Recorded
Investment
|
|
Commercial
|
|
|
11
|
|
|
$
|
895
|
|
|
$
|
895
|
|
|
|
15
|
|
|
$
|
3,208
|
|
|
$
|
3,208
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
5
|
|
|
|
625
|
|
|
|
625
|
|
|
|
6
|
|
|
|
1,460
|
|
|
|
1,460
|
|
Consumer
|
|
|
1
|
|
|
|
25
|
|
|
|
25
|
|
|
|
7
|
|
|
|
189
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17
|
|
|
$
|
1,545
|
|
|
$
|
1,545
|
|
|
|
28
|
|
|
$
|
4,857
|
|
|
$
|
4,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balances below provide information as to how the loans were modified as troubled debt restructured loans during the years
ended December 31, 2017 and 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31, 2017
|
|
|
Year Ended December 31, 2016
|
|
|
|
Adjusted
Interest
Rate
|
|
|
Extended
Maturity
|
|
|
Combined
Rate and
Maturity
|
|
|
Adjusted
Interest
Rate
|
|
|
Extended
Maturity
|
|
|
Combined
Rate and
Maturity
|
|
Commercial
|
|
$
|
|
|
|
$
|
195
|
|
|
$
|
700
|
|
|
$
|
|
|
|
$
|
2,560
|
|
|
$
|
648
|
|
Agricultural
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
312
|
|
|
|
313
|
|
|
|
|
|
|
|
298
|
|
|
|
1,162
|
|
Consumer
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
532
|
|
|
$
|
1,013
|
|
|
$
|
|
|
|
$
|
2,928
|
|
|
$
|
1,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
During the years ended December 31, 2017 and 2016, certain loans were modified as a troubled debt
restructured loans within the previous 12 months and for which there was a payment default. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past or more due or results in the
foreclosure and repossession of the applicable collateral. The loans with payment default are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2017
|
|
|
Year Ended
December 31, 2016
|
|
|
|
Number
|
|
|
Balance
|
|
|
Number
|
|
|
Balance
|
|
Commercial
|
|
|
2
|
|
|
$
|
88
|
|
|
|
4
|
|
|
$
|
1,690
|
|
Agriculture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
921
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
88
|
|
|
|
7
|
|
|
$
|
2,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017, the Company has no commitments to lend additional funds to loan customers whose terms have been
modified in troubled debt restructurings.
An analysis of the changes in loans to officers, directors, principal shareholders, or associates of such
persons for the year ended December 31, 2017 (determined as of each respective
year-end)
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
Additional
Loans
|
|
Payments
|
|
Ending
Balance
|
Year ended December 31, 2017
|
|
$44,429
|
|
$58,420
|
|
$46,945
|
|
$55,904
|
In the opinion of management, those loans are on substantially the same terms, including interest rates and collateral
requirements, as those prevailing at the time for comparable transactions with unaffiliated persons.
Our subsidiary bank has established a line of credit
with the Federal Home Loan Bank of Dallas (FHLB) to provide liquidity and meet pledging requirements for those customers eligible to have securities pledged to secure certain uninsured deposits. At December 31, 2017, $2,163,425,000 in loans
held by our bank subsidiary were subject to blanket liens as security for this line of credit. At December 31, 2017, there was no balance outstanding under this line of credit.
4.
BANK PREMISES AND EQUIPMENT
:
The following is a
summary of bank premises and equipment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
December 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
Land
|
|
|
|
$
|
29,508
|
|
|
$
|
28,266
|
|
Buildings
|
|
20 to 40 years
|
|
|
119,728
|
|
|
|
115,566
|
|
Furniture and equipment
|
|
3 to 10 years
|
|
|
58,672
|
|
|
|
58,145
|
|
Leasehold improvements
|
|
Lesser of lease term or 5 to 15 years
|
|
|
4,118
|
|
|
|
4,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,026
|
|
|
|
206,760
|
|
Less-accumulated depreciation and amortization
|
|
|
(88,000
|
)
|
|
|
(84,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Bank Premises and Equipment
|
|
$
|
124,026
|
|
|
$
|
122,685
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Depreciation expense for the years ended December 31, 2017, 2016 and 2015 amounted to $9,810,000,
$9,390,000, and $9,125,000, respectively, and is included in the captions net occupancy expense and equipment expense in the accompanying consolidated statements of earnings.
The Company is lessor for portions of its banking premises. Total rental income for all leases included in net occupancy expense is approximately $2,367,000,
$2,139,000 and $1,949,000, for the years ended December 31, 2017, 2016 and 2015, respectively.
During the years ended December 31, 2017, 2016
and 2015, the Company recorded gains (losses) on sale of the bank premises and equipment totaling ($396,000), $168,000 and ($820,000). In 2017, the Company sold its San Angelo main region branch building for $1,586,000 and recorded a gain of
$210,000 and cancelled its San Angelo grocery store branch lease and recorded a write off of leasehold improvements of $360,000. In 2016, the Company sold its Weatherford and Orange main region branch building for $1,385,000 and $2,000,000 and
recorded a gain of $560,000 and a loss of $31,000, respectively. The Company recorded a write down of $1,000,000 in 2015 in anticipation of the Orange branch building sale.
5.
DEPOSITS AND BORROWINGS:
Time deposits of $250,000 or
more totaled approximately $115,203,000 and $130,385,000 at December 31, 2017 and 2016, respectively.
At December 31, 2017, the scheduled
maturities of time deposits (in thousands) were, as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
2018
|
|
$
|
384,668
|
|
2019
|
|
|
38,031
|
|
2020
|
|
|
14,607
|
|
2021
|
|
|
6,645
|
|
2022
|
|
|
7,304
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
451,255
|
|
|
|
|
|
|
Deposits received from related parties at December 31, 2017 and 2016 totaled $74,270,000 and $114,513,000, respectively.
Borrowings at December 31, 2017 and 2016 consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Securities sold under agreements with customers to repurchase
|
|
$
|
320,450
|
|
|
$
|
360,820
|
|
Federal funds purchased
|
|
|
10,550
|
|
|
|
9,950
|
|
Advances from Federal Home Loan Bank of Dallas
|
|
|
|
|
|
|
75,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
331,000
|
|
|
$
|
445,770
|
|
|
|
|
|
|
|
|
|
|
Securities sold under repurchase agreements are generally with significant customers of the Company that require short-term
liquidity for their funds for which the Company pledges certain securities that have a fair value equal to at least the amount of the borrowings. The agreements mature daily and therefore the risk arising from a decline in the fair value of the
collateral pledged is minimal. The securities pledged are mortgage-backed securities. These agreements do not include right of
set-off
provisions and therefore the Company does not offset such
agreements for financial reporting purposes.
F-23
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
At December 31, 2016, the Company had advances from the Federal Home Loan Bank of Dallas of $75,000,000
that were repaid in 2017. The interest rate on this advance was 0.46% at December 31, 2016. There were no such advances outstanding at December 31, 2017.
6.
LINE OF CREDIT:
The Company renewed its loan
agreement, effective June 30, 2017, with Frost Bank. Under the loan agreement, as renewed and amended, we are permitted to draw up to $25,000,000 on a revolving line of credit. Prior to June 30, 2019, interest is paid quarterly at
The
Wall Street Journal
Prime Rate and the line of credit matures June 30, 2019. If a balance exists at June 30, 2019, the principal balance converts to a term facility payable quarterly over five years and interest is paid quarterly at
our election at
The Wall Street
Journal
Prime Rate plus 50 basis points or LIBOR plus 250 basis points. The line of credit is unsecured. Among other provisions in the credit agreement, we must satisfy certain financial covenants during
the term of the loan agreement, including, without limitation, covenants that require us to maintain certain capital, tangible net worth, loan loss reserve,
non-performing
asset and cash flow coverage ratios.
In addition, the credit agreement contains certain operational covenants, which among others, restricts the payment of dividends above 55% of consolidated net income, limits the incurrence of debt (excluding any amounts acquired in an acquisition)
and prohibits the disposal of assets except in the ordinary course of business. Since 1995, we have historically declared dividends as a percentage of our consolidated net income in a range of 37% (low) in 1995 to 53% (high) in 2003 and 2006. The
Company was in compliance with the financial and operational covenants at December 31, 2017. There was no outstanding balance under the line of credit as of December 31, 2017 or 2016.
7.
INCOME TAXES:
On December 22, 2017 the Tax Cuts
and Jobs Act was signed into law with sweeping modifications to the Internal Revenue Code. The primary change for the Company was to lower the corporate income tax rate to 21% from 35%. The Companys deferred tax assets and liabilities were
re-measured
based on the income tax rates at which they are expected to reverse in the future, which is generally 21%. However, the Company continues to analyze certain aspects of the Act resulting in refinement of
the calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the
re-measurement
of the
Companys deferred tax balance was $7,650,000, a reduction of income tax expense for the year ended December 31, 2017.
The Company files a
consolidated federal income tax return. Income tax expense is comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current federal income tax
|
|
$
|
34,421
|
|
|
$
|
30,381
|
|
|
$
|
31,014
|
|
Current state income tax
|
|
|
99
|
|
|
|
99
|
|
|
|
103
|
|
Deferred federal income tax expense (benefit)
|
|
|
(53
|
)
|
|
|
673
|
|
|
|
320
|
|
Restatement of net deferred tax liability due to change in income tax rate
|
|
|
(7,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
26,817
|
|
|
$
|
31,153
|
|
|
$
|
31,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Income tax expense, as a percentage of pretax earnings, differs from the statutory federal income tax rate as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a Percent of Pretax
Earnings
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Restatement of net deferred tax liability due to change in income tax rate
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
Reductions in tax rate resulting from interest income exempt from federal income tax
|
|
|
(11.5
|
)
|
|
|
(12.1
|
)
|
|
|
(11.4
|
)
|
Effect of state income tax
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.1
|
|
ESOP tax deduction
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
18.2
|
%
|
|
|
22.9
|
%
|
|
|
23.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The approximate effects of each type of difference that gave rise to the Companys deferred tax assets and liabilities at
December 31, 2017 and 2016 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax basis of loans in excess of financial statement basis
|
|
$
|
10,550
|
|
|
$
|
17,006
|
|
Minimum liability in defined benefit plan
|
|
|
766
|
|
|
|
1,641
|
|
Recognized for financial reporting purposes but not yet for tax purposes:
|
|
|
|
|
|
|
|
|
Deferred compensation
|
|
|
1,818
|
|
|
|
2,807
|
|
Write-downs and adjustments to other real estate owned and repossessed assets
|
|
|
11
|
|
|
|
9
|
|
Other deferred tax assets
|
|
|
79
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
13,224
|
|
|
$
|
21,689
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Financial statement basis of fixed assets in excess of tax basis
|
|
$
|
3,343
|
|
|
|
5,870
|
|
Intangible asset amortization deductible for tax purposes, but not for financial reporting
purposes
|
|
|
9,926
|
|
|
|
15,191
|
|
Recognized for financial reporting purposes but not yet for tax purposes:
|
|
|
|
|
|
|
|
|
Accretion on investment securities
|
|
|
1,039
|
|
|
|
1,788
|
|
Pension plan contributions
|
|
|
1,086
|
|
|
|
1,799
|
|
Net unrealized gain on investment securities
available-for-sale
|
|
|
9,420
|
|
|
|
11,573
|
|
Other deferred tax liabilities
|
|
|
31
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
24,845
|
|
|
$
|
36,304
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(11,621
|
)
|
|
$
|
(14,615
|
)
|
|
|
|
|
|
|
|
|
|
At December 31, 2017 and 2016, management believes that it is more likely than not that all of the deferred tax amounts
shown above will be realized and therefore no valuation allowance was recorded.
Current authoritative accounting guidance prescribes a
recognition
threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it
is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the
more-likely-than-not
recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the
more-likely-than-not
recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously
F-25
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
recognized tax positions that no longer meet the
more-likely-than-not
recognition threshold should be derecognized in the first subsequent financial
reporting period in which that threshold is no longer met. Current authoritative accounting guidance also provides guidance on the accounting for and disclosure of unrecognized tax benefits, interest and penalties. The Company concluded the tax
benefits of positions taken and expected to be taken on its tax returns should be recognized in the financial statements under this guidance. The Company files income tax returns in the U.S. federal jurisdiction and several U.S. state jurisdictions.
We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2014 or Texas state tax examinations by tax authorities for years before 2013. As of December 31, 2017 and 2016, the Company believes that
there are no uncertain tax positions.
8.
FAIR VALUE DISCLOSURES:
The authoritative accounting guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a
principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly
transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced
transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.
The authoritative accounting guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the
cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as
cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be
consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in
pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entitys own assumptions about the assumptions market participants would use in pricing
the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in
active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
|
|
|
Level 1 Inputs Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
|
|
|
|
Level 2 Inputs Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities,
prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
|
Level 3 Inputs Significant unobservable inputs that reflect an entitys own assumptions that market participants would use in pricing the assets or liabilities.
|
A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy, is set forth below.
In general, fair value is based upon quoted market prices, where available. If such quoted
market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair
F-26
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
value. While management believes the Companys valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Securities classified
as
available-for-sale
and trading are reported at fair value utilizing Level 1 and Level 2 inputs. For these securities, the Company obtains fair value
measurements from an independent pricing service. The fair value measurements consider observable data that may include market spreads, cash flows, the United States Treasury yield curve, live trading levels, trade execution data, dealer quotes,
market consensus prepayments speeds, credit information and the securitys terms and conditions, among other items.
There were no transfers between
Level 2 and Level 3 during the year ended December 31, 2017, 2016 and 2015.
The following table summarizes financial assets and financial
liabilities measured at fair value on a recurring basis as of December 31, 2017 and 2016 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
Available-for-sale
investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. government sponsored enterprises and agencies
|
|
$
|
|
|
|
$
|
60,330
|
|
|
$
|
|
|
|
$
|
60,330
|
|
Obligations of state and political subdivisions
|
|
|
|
|
|
|
1,420,850
|
|
|
|
|
|
|
|
1,420,850
|
|
Corporate bonds
|
|
|
|
|
|
|
7,031
|
|
|
|
|
|
|
|
7,031
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
1,219,097
|
|
|
|
|
|
|
|
1,219,097
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
375,737
|
|
|
|
|
|
|
|
375,737
|
|
Other securities
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,428
|
|
|
$
|
3,083,045
|
|
|
$
|
|
|
|
$
|
3,087,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
Available-for-sale
investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$
|
10,668
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,668
|
|
Obligations of U.S. government sponsored enterprises and agencies
|
|
|
|
|
|
|
113,703
|
|
|
|
|
|
|
|
113,703
|
|
Obligations of state and political subdivisions
|
|
|
|
|
|
|
1,564,276
|
|
|
|
|
|
|
|
1,564,276
|
|
Corporate bonds
|
|
|
|
|
|
|
47,965
|
|
|
|
|
|
|
|
47,965
|
|
Residential mortgage-backed securities
|
|
|
|
|
|
|
851,361
|
|
|
|
|
|
|
|
851,361
|
|
Commercial mortgage-backed securities
|
|
|
|
|
|
|
268,436
|
|
|
|
|
|
|
|
268,436
|
|
Other securities
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
4,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,096
|
|
|
$
|
2,845,741
|
|
|
$
|
|
|
|
$
|
2,860,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, that is, the
instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value
on a
non-recurring
basis include the following at December 31, 2017:
Impaired Loans
Impaired loans are reported at the fair value of the underlying collateral less selling costs if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data. At
December 31, 2017, impaired loans with a carrying value of $17,670,000 were reduced by specific valuation reserves totaling $3,996,000 resulting in a net fair value of $13,674,000.
Loans
Held-for-Sale
Loans
held-for-sale
are reported at the lower of cost or fair value. The Company originates conforming loans that are sold in the secondary market in which loan pricing is
available. In
F-27
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
determining whether the fair value of loans
held-for-sale
is less than cost and quoted prices are available for
similar assets. These loans are considered Level 2 of the fair value hierarchy. At December 31, 2017, the Companys mortgage loans
held-for-sale
was
recorded at cost as fair value exceeded cost.
Certain
non-financial
assets and
non-financial
liabilities measured at fair value on a
non-recurring
basis include other real estate owned, goodwill and other intangible assets and other
non-financial
long-lived assets.
Non-financial
assets measured at fair value on a
non-recurring
basis during the year ended
December 31, 2017 and 2016 include other real estate owned which, subsequent to their initial transfer to other real estate owned from loans, were
re-measured
at fair value through a write-down included
in gain (loss) on sale of foreclosed assets. During the reported periods, all fair value measurements for foreclosed assets utilized Level 2 inputs based on observable market data, generally third-party appraisals, or Level 3 inputs based
on customized discounting criteria. These appraisals are evaluated individually and discounted as necessary due to the age of the appraisal, lack of comparable sales, expected holding periods of property or special use type of the property. Such
discounts vary by appraisal based on the above factors but generally range from 5% to 25% of the appraised value. Reevaluation of other real estate owned is performed at least annually as required by regulatory guidelines or more often if particular
circumstances arise. The following table presents other real estate owned that were
re-measured
subsequent to their initial transfer to other real estate owned (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Carrying value of other real estate owned prior to
re-measurement
|
|
$
|
1,067
|
|
|
$
|
|
|
Write-downs included in gain (loss) on sale of other real estate owned
|
|
|
(306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
|
|
$
|
761
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017 and 2016, other real estate owned totaled $1,347,000 and $413,000, respectively.
The Company is required under current authoritative accounting guidance to disclose the estimated fair value of their financial instrument assets and
liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments. Many of the Companys financial
instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.
The
estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.
In addition, reasonable comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater
degree of subjectivity to these estimated fair values.
Cash and due from banks, federal funds sold, interest-bearing deposits and time deposits in banks
and accrued interest receivable and payable are liquid in nature and considered Levels 1 or 2 of the fair value hierarchy.
Financial instruments with
stated maturities have been valued using a present value discounted cash flow with a discount rate approximating current market for similar assets and liabilities and are considered Levels 2 and 3 of the fair value hierarchy. Financial instrument
liabilities with no stated maturities have an estimated fair value equal to both the amount payable on demand and the carrying value and are considered Level 1 of the fair value hierarchy.
F-28
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
The carrying value and the estimated fair value of the Companys contractual
off-balance-sheet
unfunded lines of credit, loan commitments and letters of credit, which are generally priced at market at the time of funding, are not material.
The estimated fair values and carrying values of all financial instruments under current authoritative guidance at December 31, 2017 and 2016, were as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Fair Value
Hierarchy
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Value
|
|
|
Estimated
Fair Value
|
|
|
Cash and due from banks
|
|
$
|
209,583
|
|
|
$
|
209,583
|
|
|
$
|
204,782
|
|
|
$
|
204,782
|
|
|
Level 1
|
Federal funds sold
|
|
|
|
|
|
|
|
|
|
|
3,130
|
|
|
|
3,130
|
|
|
Level 1
|
Interest-bearing deposits in banks
|
|
|
162,764
|
|
|
|
162,764
|
|
|
|
48,574
|
|
|
|
48,574
|
|
|
Level 1
|
Interest-bearing time deposits in banks
|
|
|
1,458
|
|
|
|
1,458
|
|
|
|
1,707
|
|
|
|
1,709
|
|
|
Level 2
|
Available-for-sale
securities
|
|
|
3,087,473
|
|
|
|
3,087,473
|
|
|
|
2,860,837
|
|
|
|
2,860,837
|
|
|
Levels 1 and 2
|
Held-to-maturity
securities
|
|
|
|
|
|
|
|
|
|
|
121
|
|
|
|
124
|
|
|
Level 2
|
Loans
|
|
|
3,452,543
|
|
|
|
3,470,133
|
|
|
|
3,338,426
|
|
|
|
3,361,735
|
|
|
Level 3
|
Accrued interest receivable
|
|
|
36,081
|
|
|
|
36,081
|
|
|
|
36,469
|
|
|
|
36,469
|
|
|
Level 2
|
Deposits with stated maturities
|
|
|
451,255
|
|
|
|
452,000
|
|
|
|
508,996
|
|
|
|
510,304
|
|
|
Level 2
|
Deposits with no stated maturities
|
|
|
5,511,706
|
|
|
|
5,511,706
|
|
|
|
4,969,543
|
|
|
|
4,969,543
|
|
|
Level 1
|
Borrowings
|
|
|
331,000
|
|
|
|
331,000
|
|
|
|
445,770
|
|
|
|
445,770
|
|
|
Level 2
|
Accrued interest payable
|
|
|
197
|
|
|
|
197
|
|
|
|
225
|
|
|
|
225
|
|
|
Level 2
|
9.
COMMITMENTS AND CONTINGENCIES:
The Company is engaged in legal actions arising from the normal course of business. In managements opinion, the Company has adequate legal defenses with
respect to these actions, and as of December 31, 2017 the resolution of these matters is not expected to have material adverse effects upon the results of operations or financial condition of the Company.
The Company leases a portion of its bank premises and equipment under operating leases. At December 31, 2017, future minimum lease commitments were: 2018
$385,000, 2019 $303,000, 2020 $173,000, 2021 $41,000 and 2022 $7,000.
10.
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET
RISK:
We are a party to financial instruments with
off-balance-sheet
risk in the normal course of business to meet the financing needs of our customers. These financial instruments include unfunded lines of credit, commitments to extend credit and federal
funds sold to correspondent banks and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
F-29
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Our exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument
for unfunded lines of credit, commitments to extend credit and standby letters of credit is represented by the contractual notional amount of these instruments. We generally use the same credit policies in making commitments and conditional
obligations as we do for
on-balance-sheet
instruments.
|
|
|
|
|
|
|
Total Notional
Amounts Committed
December 31, 2017
(in thousands)
|
|
Financial instruments whose contract amounts represent credit risk:
|
|
|
|
|
Unfunded lines of credit
|
|
$
|
534,468
|
|
Unfunded commitments to extend credit
|
|
|
244,658
|
|
Standby letters of credit
|
|
|
28,858
|
|
|
|
|
|
|
Total commercial commitments
|
|
$
|
807,984
|
|
|
|
|
|
|
Unfunded lines of credit and commitments to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customers creditworthiness on a
case-by-case
basis. The
amount of collateral obtained, as we deem necessary upon extension of credit, is based on our credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment and
income-producing commercial properties.
Standby letters of credit are conditional commitments we issue to guarantee the performance of a customer to a
third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The average collateral value held on letters of credit usually exceeds the contract amount.
We believe we have no other
off-balance
sheet arrangements or transactions with unconsolidated, special purpose
entities that would expose us to liability that is not reflected on the face of the financial statements.
11.
CONCENTRATION OF CREDIT RISK:
The Company grants commercial, retail, agriculture and residential real estate loans to customers primarily in North Central, Southeastern and West Texas.
Although the Company has a diversified loan portfolio, a substantial portion of its borrowers ability to honor their commitments is dependent upon each local economic sector. In addition, the Company holds mortgage related securities which are
guaranteed by GNMA, FNMA or FHLMC or are collateralized by loans backed by these agencies.
12.
PENSION AND PROFIT SHARING PLANS:
The Companys defined benefit pension plan was frozen effective January 1, 2004, whereby no new participants will be added to the Plan and no
additional years of service will accrue to participants, unless the pension plan is reinstated at a future date. The pension plan covered substantially all of the Companys employees at the time. The benefits for each employee were based on
years of service and a percentage of the employees qualifying compensation during the final years of employment. The Companys funding policy was and is to contribute annually the amount necessary to satisfy the Internal Revenue
Services funding standards. Contributions to the pension plan, prior to freezing the plan, were intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. As a result of the
Pension Protection Act of 2006 (the Protection Act), the Company will be required to contribute amounts in future years to fund any shortfalls. The Company has evaluated the provisions of the Protection Act as well as the Internal
Revenue Services funding standards to develop a plan for funding in future years. As a result, the Company made no contribution in 2017 and made a contribution totaling $500,000 in 2016, and is continuing to evaluate future funding amounts.
F-30
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Using an actuarial measurement date of December 31, 2017 and 2016, benefit obligation activity and fair
value of plan assets for the years ended December 31, 2017 and 2016, and a statement of the funded status as of December 31, 2017 and 2016, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Reconciliation of benefit obligations:
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
15,453
|
|
|
$
|
16,002
|
|
Interest cost on projected benefit obligation
|
|
|
635
|
|
|
|
665
|
|
Actuarial loss
|
|
|
486
|
|
|
|
139
|
|
Benefits paid, including partial settlement of certain participant balances
|
|
|
(1,043
|
)
|
|
|
(1,353
|
)
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31
|
|
$
|
15,531
|
|
|
$
|
15,453
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
15,787
|
|
|
$
|
14,820
|
|
Actual return on plan assets
|
|
|
2,302
|
|
|
|
1,820
|
|
Employer contributions
|
|
|
|
|
|
|
500
|
|
Benefits paid, including partial settlement of certain participant balances
|
|
|
(1,043
|
)
|
|
|
(1,353
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
|
17,046
|
|
|
|
15,787
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
1,515
|
|
|
$
|
334
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized as a component of accumulated other comprehensive earnings as of
year-end
that have not been recognized as a component of the net period benefit cost of the Companys defined benefit pension plan are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Net actuarial loss
|
|
$
|
(3,597
|
)
|
|
$
|
(4,688
|
)
|
Deferred tax benefit
|
|
|
1,227
|
|
|
|
1,641
|
|
|
|
|
|
|
|
|
|
|
Amounts included in accumulated other comprehensive earnings, net of tax
|
|
$
|
(2,370
|
)
|
|
$
|
(3,047
|
)
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost for the years ended December 31, 2017, 2016 and 2015, are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Service cost benefits earned during the period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest cost on projected benefit obligation
|
|
|
635
|
|
|
|
665
|
|
|
|
622
|
|
Expected return on plan assets
|
|
|
(974
|
)
|
|
|
(912
|
)
|
|
|
(948
|
)
|
Amortization of unrecognized net loss
|
|
|
249
|
|
|
|
375
|
|
|
|
222
|
|
Recognized loss on partial settlement of certain participant balances
|
|
|
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit expense (benefit)
|
|
$
|
(90
|
)
|
|
$
|
395
|
|
|
$
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the rates used in the actuarial calculations of the present value of benefit obligations and
net periodic pension cost and the rate of return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted average discount rate
|
|
|
3.50
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
Expected long-term rate of return on assets
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
|
|
6.25
|
%
|
F-31
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
The weighted average discount rate is estimated based on setting a discount rate to establish an obligation
for pension benefits equivalent to an amount that, if invested in high quality fixed income securities, would produce a return that matches the expected benefit payment stream. The expected long-term rate of return on plan assets is based on
historical returns and expectations of future returns based on asset mix, after consultation with our investment advisors and actuaries.
The major type
of plan assets in the pension plan and the targeted allocation percentage as of December 31, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
Allocation
|
|
|
December 31,
2016
Allocation
|
|
|
Targeted
Allocation
|
|
Equity securities
|
|
|
75
|
%
|
|
|
77
|
%
|
|
|
75
|
%
|
Debt securities
|
|
|
24
|
%
|
|
|
22
|
%
|
|
|
25
|
%
|
Cash and equivalents
|
|
|
1
|
%
|
|
|
1
|
%
|
|
|
|
|
The range and weighted average final maturities of debt securities held in the pension plan as of December 31, 2017 are
1.52 to 19.76 years and approximately 5.64 years, respectively. Assets held in the pension plan are considered either Level 1 consisting of the money market funds, publicly traded common stocks and publicly traded mutual funds or Level 2
consisting of obligations of state and political subdivisions, corporate bonds and mortgage-backed securities. There were no Level 3 securities. See note 8 for a discussion of the fair value hierarchy. The breakdown by level is as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
Inputs
|
|
|
Level 2
Inputs
|
|
|
Level 3
Inputs
|
|
|
Total Fair
Value
|
|
Money market fund
|
|
$
|
274
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
274
|
|
U.S. Treasury notes
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
149
|
|
Obligations of state and political subdivisions
|
|
|
|
|
|
|
634
|
|
|
|
|
|
|
|
634
|
|
Corporate bonds
|
|
|
|
|
|
|
868
|
|
|
|
|
|
|
|
868
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
1,130
|
|
|
|
|
|
|
|
1,130
|
|
Corporate stocks and mutual funds
|
|
|
13,991
|
|
|
|
|
|
|
|
|
|
|
|
13,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,265
|
|
|
$
|
2,781
|
|
|
|
|
|
|
$
|
17,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Financial Trust & Asset Management Company, National Association, a wholly owned subsidiary of the Company,
manages the pension plan assets as well as the profit sharing plan assets (see below). The investment strategy and targeted allocations are based on similar strategies First Financial Trust & Asset Management Company, National Association
employs for most of its managed accounts whereby appropriate diversification is achieved. First Financial Trust & Asset Management Company, National Association is prohibited from holding investments deemed to be high risk by the Office of
the Comptroller of the Currency.
An estimate of the undiscounted projected future payments to eligible participants for the next five years and the
following five years in the aggregate is as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2018
|
|
$
|
1,064
|
|
2019
|
|
$
|
1,018
|
|
2020
|
|
$
|
1,036
|
|
2021
|
|
$
|
1,077
|
|
2022
|
|
$
|
1,063
|
|
2023 forward
|
|
$
|
5,309
|
|
F-32
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
As of December 31, 2017 and 2016, the pension plans total assets included First Financial
Bankshares, Inc. common stock valued at approximately $2,776,000 and $2,786,000, respectively.
The Company also provides a profit sharing plan, which
covers substantially all full-time employees. The profit sharing plan is a defined contribution plan and allows employees to contribute a percentage of their base annual salary. Employees are fully vested to the extent of their contributions and
become fully vested in the Companys contributions over a
six-year
vesting period. Costs related to the Companys defined contribution plan totaled approximately $4,735,000, $3,221,000 and $5,455,000
in 2017, 2016 and 2015, respectively, and are included in salaries and employee benefits in the accompanying consolidated statements of earnings. As of December 31, 2017 and 2016, the profit sharing plans assets included First Financial
Bankshares, Inc. common stock valued at approximately $55,796,000 and $60,270,000, respectively.
In 2004, after freezing our pension plan, we added a
safe harbor match to the 401(k) plan. We match a maximum of 4% on employee deferrals of 5% of their employee compensation. Total expense for this matching in 2017, 2016 and 2015 was $2,392,000, $2,331,000 and $2,043,000, respectively, and is
included in salaries and employee benefits in the statements of earnings.
The Company has a directors deferred compensation plan whereby the
directors may elect to defer up to 100% of their directors fees. All deferred compensation is invested in the Companys common stock held in a rabbi trust. The stock is held in nominee name of the trustee, and the principal and earnings
of the trust are held separate and apart from other funds of the Company, and are used exclusively for the uses and purposes of the deferred compensation agreement. The accounts of the trust have been consolidated in the financial statements of the
Company.
13.
DIVIDENDS FROM SUBSIDIARIES:
At
December 31, 2017, approximately $205,751,000 was available for the declaration of dividends by the Companys subsidiaries without the prior approval of regulatory agencies.
14.
REGULATORY MATTERS:
Banking regulators measure
capital adequacy by means of the risk-based capital ratios and the leverage ratio under the Basel III regulatory capital framework and prompt corrective action regulations. The risk-based capital rules provide for the weighting of assets and
off-balance-sheet
commitments and contingencies according to prescribed risk categories. Regulatory capital is then divided by risk-weighted assets to determine the risk-adjusted capital ratios. The leverage ratio
is computed by dividing shareholders equity less intangible assets by
quarter-to-date
average assets less intangible assets.
Beginning in January 2016, under the Basel III regulatory capital framework, the implementation of the capital conservation buffer was effective for the
Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased
capital levels for the purpose of capital distributions and other payments. Failure to meet the amount of the buffer will result in restrictions on the Companys ability to make capital distributions, including dividend payments and stock
repurchases, and to pay discretionary bonuses to executive officers.
As of December 31, 2017 and 2016, we had a total risk-based capital ratio of
19.85% and 18.45%, a Tier 1 capital to risk-weighted assets ratio of 18.66% and 17.30%; a common equity Tier 1 capital to risk-weighted assets ratio of 18.66% and 17.30%, and a Tier 1 leverage ratio of 11.09% and 10.71%, respectively. The regulatory
capital ratios as of December 31, 2017 and 2016 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.
F-33
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
As of December 31, 2017 and 2016, the regulatory capital ratios of the Company and Bank under the Basel
III regulatory capital framework are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Minimum Capital
Required Under
Basel III
Phase-In
|
|
|
Minimum Capital
Required-Basel III
Fully
Phased-In
|
|
|
Required to be
Considered Well-
Capitalized
|
|
As of December 31, 2017:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
814,634
|
|
|
|
19.85
|
%
|
|
$
|
379,578
|
|
|
|
9.250
|
%
|
|
$
|
430,872
|
|
|
|
10.50
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
723,563
|
|
|
|
17.68
|
%
|
|
$
|
378,614
|
|
|
|
9.250
|
%
|
|
$
|
429,777
|
|
|
|
10.50
|
%
|
|
$
|
409,312
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
765,882
|
|
|
|
18.66
|
%
|
|
$
|
297,507
|
|
|
|
7.250
|
%
|
|
$
|
348,801
|
|
|
|
8.50
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
674,811
|
|
|
|
16.49
|
%
|
|
$
|
296,751
|
|
|
|
7.250
|
%
|
|
$
|
347,915
|
|
|
|
8.50
|
%
|
|
$
|
327,450
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
765,882
|
|
|
|
18.66
|
%
|
|
$
|
235,954
|
|
|
|
5.750
|
%
|
|
$
|
287,248
|
|
|
|
7.00
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
674,811
|
|
|
|
16.49
|
%
|
|
$
|
235,354
|
|
|
|
5.750
|
%
|
|
$
|
286,518
|
|
|
|
7.00
|
%
|
|
$
|
266,053
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
765,882
|
|
|
|
11.09
|
%
|
|
$
|
276,296
|
|
|
|
4.000
|
%
|
|
$
|
276,296
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
674,811
|
|
|
|
9.80
|
%
|
|
$
|
275,320
|
|
|
|
4.000
|
%
|
|
$
|
275,320
|
|
|
|
4.00
|
%
|
|
$
|
344,151
|
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Minimum Capital
Required Under
Basel III
Phase-In
|
|
|
Minimum Capital
Required-Basel III
Fully
Phased-In
|
|
|
Required to be
Considered Well-
Capitalized
|
|
As of December 31, 2016:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
739,959
|
|
|
|
18.45
|
%
|
|
$
|
345,827
|
|
|
|
8.625
|
%
|
|
$
|
421,007
|
|
|
|
10.50
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
633,403
|
|
|
|
15.84
|
%
|
|
$
|
344,930
|
|
|
|
8.625
|
%
|
|
$
|
419,915
|
|
|
|
10.50
|
%
|
|
$
|
399,919
|
|
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
Tier 1 Capital to Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
693,584
|
|
|
|
17.30
|
%
|
|
$
|
265,635
|
|
|
|
6.625
|
%
|
|
$
|
340,815
|
|
|
|
8.50
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
587,028
|
|
|
|
14.68
|
%
|
|
$
|
264,946
|
|
|
|
6.625
|
%
|
|
$
|
339,931
|
|
|
|
8.50
|
%
|
|
$
|
319,935
|
|
|
|
8.00
|
%
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Capital
to
Risk-Weighted Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
693,584
|
|
|
|
17.30
|
%
|
|
$
|
205,491
|
|
|
|
5.125
|
%
|
|
$
|
280,671
|
|
|
|
7.00
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
587,028
|
|
|
|
14.68
|
%
|
|
$
|
204,959
|
|
|
|
5.125
|
%
|
|
$
|
279,943
|
|
|
|
7.00
|
%
|
|
$
|
259,947
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
Leverage Ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
693,584
|
|
|
|
10.71
|
%
|
|
$
|
258,978
|
|
|
|
4.00
|
%
|
|
$
|
258,978
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
N/A
|
|
First Financial Bank, N.A
|
|
$
|
587,028
|
|
|
|
9.10
|
%
|
|
$
|
257,941
|
|
|
|
4.00
|
%
|
|
$
|
257,941
|
|
|
|
4.00
|
%
|
|
$
|
322,426
|
|
|
|
5.00
|
%
|
We have performed a preliminary assessment using the regulatory capital estimation tool made available by the OCC and believe
the Company and Bank are prepared to meet the new requirements upon full adoption of Basel III that will be effective December 31, 2019.
In
connection with the adoption of the Basel III regulatory capital framework, our subsidiary bank made the election to continue to exclude most accumulated other comprehensive income (AOCI) from capital in connection with its
March 31, 2015 quarterly financial filing and, in effect, to retain the AOCI treatment under the prior capital rules.
In connection with the First
Financial Trust & Asset Management Company, National Associations (the Trust Company) application to obtain our trust charter, the Trust Company is required to maintain tangible net assets of $2,000,000 at all times. As of
December 31, 2017, our Trust Company had tangible net assets totaling $16,602,000.
F-34
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Our subsidiary bank may be required at times to maintain reserve balances with the Federal Reserve Bank. At
December 31, 2017 and 2016, the subsidiary banks reserve balances were $11,504,000 and $4,340,000, respectively.
15.
STOCK OPTION PLAN AND
RESTRICTED STOCK PLAN:
The Company has an incentive stock plan to provide for the granting of options to employees of the Company at prices not less
than market at the date of grant. At December 31, 2017, the Company had allocated 3,180,000 shares of stock for issuance under the plan. The plan provides that options granted are exercisable after two years from date of grant at a rate of 20%
each year cumulatively during the
10-year
term of the option. Shares are issued under the stock option plan from available authorized shares. An analysis of stock option activity for the year ended
December 31, 2017 is presented in the table and narrative below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted-
Average
Ex. Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Outstanding, beginning of year
|
|
|
1,094,035
|
|
|
$
|
27.40
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
452,450
|
|
|
|
42.35
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(140,250
|
)
|
|
|
20.92
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(80,270
|
)
|
|
|
30.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
1,325,965
|
|
|
|
33.01
|
|
|
|
7.12
|
|
|
$
|
15,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
458,715
|
|
|
$
|
23.94
|
|
|
|
4.66
|
|
|
$
|
9,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The options outstanding at December 31, 2017 had exercise prices ranging between $16.78 and $42.35. Stock options have
been adjusted retroactively for the effects of stock dividends and splits.
The following table summarizes information concerning outstanding and vested
stock options as of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Number Outstanding
|
|
|
Remaining Contracted
Life (Years)
|
|
Number Vested
|
|
$16.78
|
|
|
87,640
|
|
|
1.4
|
|
|
87,640
|
|
15.73
|
|
|
142,620
|
|
|
3.8
|
|
|
142,620
|
|
30.85
|
|
|
270,505
|
|
|
5.8
|
|
|
156,225
|
|
33.89
|
|
|
382,750
|
|
|
7.8
|
|
|
72,230
|
|
$42.35
|
|
|
442,450
|
|
|
9.5
|
|
|
|
|
The fair value of the options granted during 2017 and 2015 were estimated using the Black-Scholes options pricing model with
the following weighted-average assumptions: risk-free interest rates of 1.89% and 1.89%; expected dividend yields of 1.79% and 1.89%; expected lives of 6.24 years and 5.78 years; and expected volatilities of 26.51% and 23.36%, respectively.
The weighted-average grant-date fair value of options granted during 2017 and 2015 was $9.90 and $6.72, respectively. There were no grants during 2016. The
total intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015, was $3,082,000, $1,226,000 and $1,539,000, respectively.
As of December 31, 2017, there was $5,031,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted
under the Plan. That cost is expected to be recognized over a weighted-average period of 2.21 years. The total fair value of shares vested during the years ended December 31, 2017, 2016 and 2015 was $1,246,000, $592,000 and $810,000.
The aggregate intrinsic value of vested stock options at December 31, 2017 totaled $10,981,000.
F-35
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
On April 28, 2015, shareholders of the Company approved a restricted stock plan for selected employees,
officers,
non-employee
directors and consultants. At December 31, 2017, the Company had allocated 413,000 shares of stock for issuance under the plan.
On July 21, 2015, 7,070 shares were granted to the ten
non-employee
directors. Total value of these shares
totaled $250,000 and was expensed over the period from grant date to April 26, 2016, the next scheduled annual shareholders meeting at which the directors current term expired. On April 26, 2016, upon
re-election
of existing directors, 7,660 shares with a total value of $250,000 were granted to the ten
non-employee
directors and was expensed over the period from grant day
to April 25, 2017, the next scheduled annual shareholders meeting at which the directors current term expired. On April 25, 2017, upon
re-election
of existing directors, 14,650 restricted
shares with a total value of $600,000 were granted to the ten
non-employee
directors and is being expensed over the period from grant day to April 24, 2018, the Companys next shareholders
meeting at which the directors term expires. The Company recorded director expense related to these restricted stock grants of $483,000, $278,000 and $139,000 for the year ended December 31, 2017, 2016, and 2015, respectively.
On October 27, 2015, the Company granted 31,273 shares with a total value of $1,060,000 to certain officers that is being expensed over the vesting
period of three years. On October 25, 2016, the Company granted 15,405 shares with a total value of $560,000 to certain officers that is being expensed over the vesting period of three years. On October 24, 2017, the Company granted 14,191
restricted shares with a total value of $655,000 to certain officers that is being expensed over the vesting period of one to three years. The Company recorded restricted stock expense for officers of $562,000, $381,000 and $62,000, respectively,
for the year ended December 31, 2017, 2016 and 2015.
16.
CONDENSED FINANCIAL INFORMATIONPARENT COMPANY:
Condensed Balance Sheets-December 31, 2017 and 2016
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash in subsidiary bank
|
|
$
|
14,272
|
|
|
$
|
15,070
|
|
Cash in unaffiliated banks
|
|
|
2
|
|
|
|
2
|
|
Interest-bearing deposits in subsidiary bank
|
|
|
64,195
|
|
|
|
78,179
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
78,469
|
|
|
|
93,251
|
|
Securities
available-for-sale,
at fair value
|
|
|
8,515
|
|
|
|
11,593
|
|
Investment in and advances to subsidiaries, at equity
|
|
|
847,445
|
|
|
|
744,971
|
|
Intangible assets
|
|
|
723
|
|
|
|
723
|
|
Other assets
|
|
|
2,654
|
|
|
|
2,668
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
937,806
|
|
|
$
|
853,206
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
15,038
|
|
|
$
|
15,321
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
663
|
|
|
|
661
|
|
Capital surplus
|
|
|
378,062
|
|
|
|
372,245
|
|
Retained earnings
|
|
|
517,257
|
|
|
|
446,534
|
|
Treasury stock
|
|
|
(7,148
|
)
|
|
|
(6,671
|
)
|
Deferred compensation
|
|
|
7,148
|
|
|
|
6,671
|
|
Accumulated other comprehensive earnings
|
|
|
26,786
|
|
|
|
18,445
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
922,768
|
|
|
|
837,885
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
937,806
|
|
|
$
|
853,206
|
|
|
|
|
|
|
|
|
|
|
F-36
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Condensed Statements of Earnings-
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends from subsidiaries
|
|
$
|
30,800
|
|
|
$
|
48,800
|
|
|
$
|
51,200
|
|
Excess of earnings over dividends of subsidiaries
|
|
|
92,929
|
|
|
|
58,809
|
|
|
|
52,911
|
|
Other
|
|
|
6,590
|
|
|
|
4,184
|
|
|
|
4,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income
|
|
|
130,319
|
|
|
|
111,793
|
|
|
|
108,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
8,606
|
|
|
|
5,655
|
|
|
|
6,067
|
|
Other operating expenses
|
|
|
3,871
|
|
|
|
3,531
|
|
|
|
4,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Expense
|
|
|
12,477
|
|
|
|
9,186
|
|
|
|
10,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
117,842
|
|
|
|
102,607
|
|
|
|
97,790
|
|
Income tax benefit
|
|
|
2,529
|
|
|
|
2,167
|
|
|
|
2,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
120,371
|
|
|
$
|
104,774
|
|
|
$
|
100,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
Condensed Statements of Cash Flows-
For the Years Ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
120,371
|
|
|
$
|
104,774
|
|
|
$
|
100,381
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of earnings over dividends of subsidiary bank
|
|
|
(92,929
|
)
|
|
|
(58,809
|
)
|
|
|
(52,911
|
)
|
Depreciation and amortization, net
|
|
|
207
|
|
|
|
208
|
|
|
|
197
|
|
Decrease (increase) in other assets
|
|
|
438
|
|
|
|
1,702
|
|
|
|
507
|
|
Increase (decrease) in other liabilities
|
|
|
183
|
|
|
|
(1,374
|
)
|
|
|
3,743
|
|
Other
|
|
|
2
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
28,272
|
|
|
|
46,509
|
|
|
|
51,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received in connection with acquisition of banks
|
|
|
|
|
|
|
|
|
|
|
13,125
|
|
Maturity of
available-for-sale
security
|
|
|
2,997
|
|
|
|
|
|
|
|
|
|
Purchases of bank premises and equipment
|
|
|
(30
|
)
|
|
|
(94
|
)
|
|
|
(107
|
)
|
Repayment from investment in and advances to subsidiaries, net
|
|
|
|
|
|
|
|
|
|
|
5,800
|
|
Other
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in (provided by) investing activities
|
|
|
2,967
|
|
|
|
(84
|
)
|
|
|
18,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
(13,125
|
)
|
Proceeds of stock issuances
|
|
|
2,934
|
|
|
|
1,260
|
|
|
|
1,545
|
|
Cash dividends paid
|
|
|
(48,955
|
)
|
|
|
(44,907
|
)
|
|
|
(38,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(46,021
|
)
|
|
|
(43,647
|
)
|
|
|
(50,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(14,782
|
)
|
|
|
2,778
|
|
|
|
20,388
|
|
Cash and cash equivalents, beginning of year
|
|
|
93,251
|
|
|
|
90,473
|
|
|
|
70,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
78,469
|
|
|
$
|
93,251
|
|
|
$
|
90,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
17.
CASH FLOW INFORMATION:
Supplemental information on cash flows and noncash transactions is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
9,316
|
|
|
$
|
5,465
|
|
|
$
|
4,085
|
|
Federal income taxes paid
|
|
|
29,695
|
|
|
|
28,348
|
|
|
|
29,674
|
|
Schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired through foreclosure
|
|
|
2,211
|
|
|
|
2,269
|
|
|
|
203
|
|
Investment securities purchased but not settled
|
|
|
|
|
|
|
12,381
|
|
|
|
|
|
Restricted stock grant to officers and directors
|
|
|
1,139
|
|
|
|
810
|
|
|
|
1,310
|
|
18.
ACQUISITIONS AND ASSET PURCHASE:
On April 1, 2015, we entered into an agreement and plan of reorganization to acquire FBC Bancshares, Inc. and its wholly owned bank subsidiary, First
Bank, N.A., Conroe, Texas. On July 31, 2015, the transaction was completed. Pursuant to the agreement, we issued 1,755,374 shares of the Companys common stock in exchange for all of the outstanding shares of FBC Bancshares, Inc. At
closing, FBC Bancshares, Inc. was merged into the Company and First Bank, N.A., Conroe, Texas, was merged into First Financial Bank, National Association, Abilene, Texas, a wholly owned subsidiary of the Company. The primary purpose of the
acquisition was to expand the Companys market share along Interstate Highway 45 in southern Texas, north of Houston. Factors that contributed to a purchase price resulting in goodwill include First Bank, N.A.s historic record of
earnings, strong local economic environment and opportunity for growth. The results of operations from this acquisition are included in the consolidated earnings of the Company commencing August 1, 2015.
The assets acquired and liabilities assumed were recorded on the consolidated balance sheet at estimated fair value on the acquisition date. The acquisition
was not considered to be a significant business combination. The following table presents the amounts recorded on the consolidated balance sheet on the acquisition date (dollars in thousands):
|
|
|
|
|
Fair value of consideration paid:
|
|
|
|
|
Common stock issued (1,755,374 shares)
|
|
$
|
59,648
|
|
|
|
|
|
|
Fair value of identifiable assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
|
65,197
|
|
Securities
available-for-sale
|
|
|
42,903
|
|
Loans
|
|
|
248,380
|
|
Identifiable intangible assets
|
|
|
2,343
|
|
Other assets
|
|
|
15,262
|
|
|
|
|
|
|
Total identifiable assets acquired
|
|
|
374,085
|
|
|
|
|
|
|
Fair value of liabilities assumed:
|
|
|
|
|
Deposits
|
|
|
343,583
|
|
Subordinated debt
|
|
|
13,125
|
|
Other liabilities
|
|
|
1,651
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
358,359
|
|
|
|
|
|
|
Fair value of net identifiable assets acquired
|
|
|
15,726
|
|
|
|
|
|
|
Goodwill resulting from acquisition
|
|
$
|
43,922
|
|
|
|
|
|
|
Goodwill recorded in the acquisition was accounted for in accordance with the authoritative business combination guidance.
Accordingly, goodwill will not be amortized, but will be tested for impairment annually. The goodwill recorded is not deductible for federal income tax purposes.
F-39
FIRST FINANCIAL BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
The subordinated debt of $13,125,000 was paid off August 3, 2015, subsequent to closing.
The fair value of total loans acquired was $248,380,000 at acquisition compared to contractual amounts of $252,458,000. The fair value of purchased credit
impaired loans at acquisition was $1,398,000 compared to contractual amounts of $1,704,000. Additional purchased credit impaired loan disclosures were omitted due to immateriality. All other acquired loans were considered performing loans.
First Bank, N.A. had branches in Conroe, Magnolia, Tomball, Willis, Cut and Shoot and Huntsville, all located north of Houston, Texas. In February 2016, the
Company closed First Banks Huntsville location and consolidated the branch with the Companys existing Huntsville location.
On April 8,
2015, the Company announced that it had entered into an asset purchase agreement with 4Trust Mortgage, Inc. for a cash purchase price of $1,900,000. The asset purchase was finalized on June 1, 2015. The total asset purchase price exceeded the
estimated fair value of assets purchased by approximately $1,750,000 and the Company recorded such excess as goodwill.
19.
SUBSEQUENT EVENT
On January 1, 2018, the Company acquired 100% of the outstanding capital stock of Commercial Bancshares, Inc. through the merger of a wholly owned
subsidiary with and into Commercial Bancshares, Inc. Following such merger, Commercial Bancshares, Inc. and its wholly owned subsidiary, Commercial State Bank, Kingwood, Texas, were merged into the Company and First Financial Bank, National
Association, respectively. Considerations paid to the shareholders of Commercial Bancshares, Inc. totaled 1,289,371 shares of the companys common stock with an aggregate value of $59,400,000 at January 1, 2018.
In addition, Commercial Bancshares, Inc. made a $22,075,000 special dividend to its shareholders prior to closing of the transaction, which was increased for
the amount by which Commercial Bancshares, Inc.s consolidated shareholders equity as of January 1, 2018 exceeded $42,402,000, after certain adjustments per the merger agreement. At December 31, 2017, Commercial State Bank,
Kingwood, Texas had gross loans totaling $271,533,000, total deposits of $345,908,000 and total assets of $390,112,000.
F-40
First Financial Bankshares (NASDAQ:FFIN)
Historical Stock Chart
From Mar 2024 to Apr 2024
First Financial Bankshares (NASDAQ:FFIN)
Historical Stock Chart
From Apr 2023 to Apr 2024