First Financial Bankshares(FFIN) - 2022 Q4 - Annual Report

PART I Cautionary Statement Regarding Forward-Looking Statements The report contains forward-looking statements based on current information, and actual results may differ due to various factors - Forward-looking statements are subject to material differences from actual results due to factors like general economic conditions, monetary policies, government intervention, competitive environment, accounting policy changes, COVID-19 impact, and geopolitical events[18][19][21][23] - The company does not commit to publicly update or revise any forward-looking statements unless required by law[22] ITEM 1. Business The company is a Texas-based financial holding company focused on community banking, trust services, and strategic growth - First Financial Bankshares, Inc. is a financial holding company operating a full-service commercial banking business through its subsidiaries, primarily in Central, North Central, Southeast, and West Texas[24][25] - The company maintains a community-focused approach with local advisory boards and decision-making, while consolidating non-customer-facing operations for efficiency[26][30] - Texas population grew 17.09% from 2011-2021, with key operating cities showing significant growth (e.g., Conroe and Montgomery County at 37.6%, Weatherford area at 32.5%)[27][29] - The company has grown organically, by opening new branches, and through 14 bank acquisitions since 1997, increasing total assets from $1.57 billion to $12.97 billion as of December 31, 2022[31][32] - Acquisition strategy targets well-managed, profitable banks with assets between $500 million and $3.0 billion in growing non-metropolitan Texas markets[33] - The company offers general commercial banking services, including checking, savings, loans, ATMs, internet/mobile banking, and full-service trust and wealth management activities[38][39] - Commercial banking in Texas is highly competitive, with the company holding less than 1% of the state's deposits, competing against larger banks, thrifts, credit unions, and Fintech firms[40] - The Federal Reserve aggressively raised the federal funds target rate to 4.25-4.50% by the end of 2022, positively impacting net interest income in 2022 but potentially negatively impacting loan customers in a slowing economy[44] - The company funded approximately 9,700 Paycheck Protection Program (PPP) loans totaling $970.87 million during 2020 and 2021, with an outstanding balance of $169 thousand at December 31, 2022[46] - As of December 31, 2022, the company employed 1,501 employees (1,400 full-time, 100 part-time) in Texas, with an average employee tenure of approximately six years[52][57] - First Financial Bankshares, Inc. is a financial holding company supervised by the Federal Reserve Board and other regulators, subject to extensive federal and state laws primarily intended to protect depositors and the deposit insurance fund[60][62][68] - As a financial holding company, the company has broad discretion to affiliate with securities and insurance firms and engage in other financial activities, provided its subsidiary bank remains well-capitalized and well-managed[63][64] - The company's subsidiary bank is a member of the FDIC, with deposit insurance covering up to $250,000 per depositor, and pays risk-based assessments[69][70] - Dividends from subsidiaries are the primary revenue source for the parent company, subject to regulatory capital guidelines and restrictions. In 2022, subsidiaries paid $67.50 million in dividends, with $437.16 million available without regulatory approval[75][79][143] - The company and its bank subsidiary must comply with Basel III capital adequacy standards, including minimum CET1, Tier 1, Total Capital, and Leverage ratios, plus a capital conservation buffer[83][86] Regulatory Capital Ratios (as of December 31, 2022) | Ratio | Company | | :--- | :--- | | Total Risk-Based Capital Ratio | 19.29% | | Tier 1 Capital to Risk-Weighted Assets Ratio | 18.22% | | Common Equity Tier 1 Capital to Risk-Weighted Assets Ratio | 18.22% | | Tier 1 Leverage Ratio | 10.96% | - The subsidiary bank was 'well capitalized' as of December 31, 2022, under current regulations[92] - The Dodd-Frank Act imposed additional requirements on banks with $10 billion or more in assets, including CFPB supervision and debit card interchange fee restrictions (Durbin Amendment), which became effective for the company in July 2022, reducing interchange income[112][121][192][193] ITEM 1A. Risk Factors The company faces risks from interest rates, credit, liquidity, operations, economic conditions, and regulatory changes - Profitability is highly dependent on net interest income, making the company sensitive to changes in monetary policy and interest rates, which can affect loan demand, deposit costs, and asset values[125][127] - The transition from LIBOR as a reference rate poses risks, including potential disputes and litigation, though the company has transitioned to AMERIBOR and SOFR for new loans. As of December 31, 2022, 13 loans totaling $47.16 million are still indexed to LIBOR[128][129][130] - The company is exposed to credit risk from borrower defaults and insufficient collateral, with significant loan losses potentially impacting operating results and financial condition[131] - The allowance for credit losses relies on management's estimates and assumptions, which if incorrect, could lead to material additions to the allowance and decreased net income[132][133] - The company is subject to liquidity risk, as a substantial majority of its liabilities (deposits) are payable on demand, while assets (loans) are less liquid, potentially impairing access to funding[138] - The company's accounting estimates and risk management processes depend on analytical and forecasting models, which may be inaccurate, especially during market stress, potentially leading to increased losses or insufficient allowances[139] - As of December 31, 2022, the company had $315.53 million in goodwill and other intangible assets, which could be subject to impairment charges in the future, adversely affecting financial condition[140] - The company relies heavily on its management team, and the unexpected loss of key personnel or inability to recruit qualified staff could adversely impact operations[145] - World events like the Russia-Ukraine conflict and the COVID pandemic may adversely impact business and financial results through disruptions in the global economy, financial markets, and supply chains[147] - System failures or cybersecurity breaches could lead to increased operating costs, litigation, reputational damage, and potential financial losses[148][149] - The company's business is concentrated in Texas, making it vulnerable to economic downturns in the state, particularly in local real estate, oil and gas, and other commodity prices[163][164] - Inflationary pressures and sustained higher interest rates could increase customer costs, making loan repayment more difficult, and potentially leading to increased loan delinquencies and non-performing assets[174][175] - The company may need to raise additional capital in the future, and the availability of such funds on reasonable terms depends on capital and financial market conditions, which are outside its control[177] - Climate change and related legislative/regulatory initiatives have the potential to disrupt business operations, negatively affect customer creditworthiness, and increase compliance costs[178][179][180] - Competition from larger financial institutions with greater resources, larger lending limits, and broader product ranges poses a risk to market share and growth[181] - The company is subject to more stringent capital and liquidity requirements under Basel III, which could impact net income and future growth if higher regulatory capital levels are required[182][184] - The market for acquisitions is highly competitive, and the company may struggle to find suitable candidates or successfully integrate acquired businesses, potentially hindering growth and diverting management attention[196][197][199] - Future acquisitions or capital raises using common stock may be dilutive to existing shareholders[200] - The company's common stock has lower trading volume than larger financial institutions, and significant sales could cause the stock price to fall[201] - The company may not continue to pay dividends on its common stock in the future, as dividend payments are not guaranteed and are subject to regulatory considerations and capital adequacy[205] ITEM 1B. Unresolved Staff Comments This section confirms there are no unresolved comments from regulatory staff - There are no unresolved staff comments[210] ITEM 2. Properties The company's subsidiaries own and lease numerous banking facilities primarily in Texas - The principal office is at 400 Pine Street, Abilene, Texas[211] - As of December 31, 2022, subsidiaries own 74 facilities and lease 15 banking facilities and 15 ATM locations[211] - Two new branch locations are being constructed in Huntsville and Bryan, Texas, to replace existing facilities[211] ITEM 3. Legal Proceedings The company is not currently subject to any material legal proceedings outside the ordinary course of business - The company is a party to lawsuits in the ordinary course of business, but there are no material pending legal proceedings[212] - No proceedings are pending or contemplated by governmental authorities, other than routine examinations[212] ITEM 4. Mine Safety Disclosures This section is not applicable to the company's operations - This item is not applicable[213] PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, and this section includes shareholder information and a performance graph - Common stock trades on the Nasdaq Global Select Market under the symbol "FFIN"[4][216] - As of February 1, 2023, there were 905 registered shareholders of record[217] Cumulative Total Shareholder Returns (December 31, 2017 to December 31, 2022) | Index | 12/31/17 | 12/31/18 | 12/31/19 | 12/31/20 | 12/31/21 | 12/31/22 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | First Financial Bankshares, Inc. | 100.00 | 129.95 | 160.46 | 168.29 | 239.36 | 164.65 | | Russell 3000 Index | 100.00 | 94.76 | 124.15 | 150.08 | 188.60 | 152.37 | | S&P U.S. BMI Banks Index | 100.00 | 83.54 | 114.74 | 100.10 | 136.10 | 112.89 | ITEM 6. [Reserved] This item is reserved and contains no information - This item is reserved[224] ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes financial condition and results of operations, covering key performance metrics and balance sheet components - The company generates most revenue from interest on loans and investments, trust fees, gain on sale of mortgage loans, and service charges on deposit accounts, with deposits as the primary funding source[226] - Critical accounting policies include the allowance for credit losses and valuation of financial instruments[230] - The company completed the acquisition of TB&T Bancshares, Inc. on January 1, 2020, issuing 6.28 million common shares for a total purchase price of $220.27 million, resulting in $141.92 million in goodwill[231][640][643] - The Board authorized the repurchase of up to 5,000,000 common shares through July 31, 2023. As of December 31, 2022, 244,559 shares were repurchased and retired at an average price of $38.61[232][414] - The company adopted ASC 326 (CECL methodology) effective January 1, 2020, with a transition charge to retained earnings of $589 thousand ($466 thousand net of taxes)[233][234][418][419] Summary Income Statement Information (2022, 2021, 2020) | Metric (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Interest income | $432,854 | $376,405 | $364,128 | | Interest expense | $31,440 | $6,042 | $14,243 | | Net interest income | $401,414 | $370,363 | $349,885 | | Provision for credit losses | $17,427 | $(1,139) | $19,517 | | Noninterest income | $131,665 | $142,176 | $139,935 | | Noninterest expense | $234,778 | $241,708 | $227,938 | | Net earnings | $234,475 | $227,562 | $202,034 | | Diluted EPS | $1.64 | $1.59 | $1.42 | - Net earnings for 2022 increased by 3.04% to $234.48 million, primarily due to growth in net interest income from earning assets[245] - The provision for credit losses increased in 2022 to $17.43 million (from a $1.14 million reversal in 2021) due to strong organic loan growth, increased unfunded commitments, and a slight decline in economic forecasts[245][293] - Tax-equivalent net interest income increased to $410.49 million in 2022 (from $385.05 million in 2021), driven by a $1.13 billion increase in average earning assets[248] - The net interest margin decreased by eleven basis points to 3.29% in 2022, influenced by historically low short-term interest rates in early 2022, but loan rates on variable loans increased with Federal Reserve rate hikes[252][253] Noninterest Income (in thousands) | Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Trust fees | $39,995 | $36,145 | $29,531 | | Service charges on deposit accounts | $24,540 | $21,156 | $20,572 | | Debit card fees | $30,280 | $35,905 | $30,298 | | Gain on sale and fees of mortgage loans | $19,035 | $33,245 | $43,872 | | Net gain on sale of AFS securities | $2,144 | $815 | $3,633 | - Noninterest income decreased by 7.39% to $131.67 million in 2022, mainly due to a $14.21 million decrease in mortgage loan gains and a $5.63 million decrease in debit card fees (due to Durbin Amendment). Trust fees increased by $3.85 million[259] - Total noninterest expense decreased by 2.87% to $234.78 million in 2022, leading to an improved efficiency ratio of 43.30% (from 45.84% in 2021)[265] - Salaries and employee benefits decreased by $7.91 million in 2022, primarily due to lower profit sharing and mortgage compensation expenses[266] Summary Balance Sheet Data (Period-end, in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Securities | $5,474,359 | $6,573,179 | $4,393,029 | | Loans, held-for-investment | $6,441,868 | $5,388,972 | $5,171,033 | | Total assets | $12,974,066 | $13,102,461 | $10,904,500 | | Deposits | $11,005,507 | $10,566,488 | $8,675,817 | | Total liabilities | $11,708,329 | $11,343,237 | $9,226,310 | | Total shareholders' equity | $1,265,737 | $1,759,224 | $1,678,190 | - Total loans held-for-investment (HFI) increased by $1.05 billion to $6.44 billion as of December 31, 2022, with significant growth in real estate loans ($781.48 million) and consumer loans ($169.14 million)[272][273] Composition of Loans Held-For-Investment (in thousands) | Category | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Commercial | $1,138,407 | $1,014,980 | $1,312,707 | | Agricultural | $76,947 | $98,089 | $94,864 | | Real Estate | $4,527,995 | $3,746,519 | $3,319,265 | | Consumer | $698,519 | $529,384 | $444,197 | | Total | $6,441,868 | $5,388,972 | $5,171,033 | - Nonperforming assets decreased to $24.33 million (0.38% of loans HFI and foreclosed assets) at December 31, 2022, from $34.16 million (0.63%) in 2021, indicating improved asset quality[288][289] - The allowance for credit losses as a percent of loans HFI remained at 1.18% at December 31, 2022, consistent with 2021[294] - Securities available-for-sale decreased to $5.47 billion at December 31, 2022, from $6.57 billion in 2021, and included an unrealized loss of $677.99 million (net of taxes) in 2022, compared to unrealized gains in prior years[300][315] - Total deposits increased to $11.01 billion at December 31, 2022, from $10.57 billion in 2021, serving as the primary funding source[304] - Borrowings decreased to $642.51 million at December 31, 2022, from $671.15 million in 2021[307] - The company's interest rate risk position is asset sensitive, meaning net interest income is estimated to increase with rising interest rates and decrease with falling rates[311] Estimated Impact on Net Interest Income from Interest Rate Changes (December 31, 2022) | Change in interest rates (in basis points) | Percentage change in net interest income | | :--- | :--- | | +400 | 5.13% | | +300 | 3.86% | | +200 | 3.13% | | +100 | 2.09% | | -100 | (2.66)% | | -200 | (5.47)% | | -300 | (8.54)% | | -400 | (10.31)% | - Total shareholders' equity decreased to $1.27 billion (9.76% of total assets) at December 31, 2022, from $1.76 billion (13.43%) in 2021, primarily due to unrealized losses on AFS investment securities[315] Regulatory Capital Ratios (as of December 31, 2022) | Ratio | Consolidated Actual | Minimum Required-Basel III Fully Phased-In | Required to be Considered Well Capitalized | | :--- | :--- | :--- | :--- | | Total Capital to Risk-Weighted Assets | 19.29% | 10.50% | 10.00% | | Tier 1 Capital to Risk-Weighted Assets | 18.22% | 8.50% | 6.00% | | Common Equity Tier 1 Capital to Risk-Weighted Assets | 18.22% | 7.00% | 6.50% | | Leverage Ratio | 10.96% | 4.00% | 5.00% | - The company's liquidity is supported by cash, marketable assets, core deposits, correspondent banks, and available lines of credit, including $2.34 billion with the FHLB[320] - Off-balance sheet commitments, including unfunded lines of credit and standby letters of credit, totaled $2.06 billion at December 31, 2022, with a reserve for unfunded commitments of $12.32 million[326][590] - The long-term dividend policy is to pay 35% to 40% of annual net earnings, while maintaining adequate capital. The payout ratios were 40.18% in 2022, 36.30% in 2021, and 35.88% in 2020[333] ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk This section refers to Item 7 for disclosures regarding market risk, specifically interest rate risk - Management considers interest rate risk to be a significant market risk for the Company[336] - Quantitative and qualitative disclosures about market risk are provided in "Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Risk"[336] ITEM 8. Financial Statements and Supplementary Data This item incorporates the consolidated financial statements and provides unaudited quarterly results of operations - The consolidated financial statements and the report of the independent registered public accounting firm begin on page F-1[337][370] Quarterly Results of Operations (2022, in thousands, except per share amounts) | Metric | Q4 2022 | Q3 2022 | Q2 2022 | Q1 2022 | | :--- | :--- | :--- | :--- | :--- | | Interest income | $121,137 | $112,728 | $101,981 | $97,009 | | Interest expense | $17,100 | $9,572 | $3,199 | $1,570 | | Net interest income | $104,037 | $103,156 | $98,782 | $95,439 | | Provision for credit losses | $4,075 | $3,221 | $5,350 | $4,782 | | Noninterest income | $28,393 | $30,609 | $35,669 | $34,850 | | Noninterest expense | $57,778 | $59,442 | $58,333 | $59,225 | | Net earnings | $58,668 | $59,341 | $60,494 | $55,972 | | Diluted EPS | $0.41 | $0.41 | $0.42 | $0.39 | | Cash dividends declared | $0.17 | $0.17 | $0.17 | $0.15 | Quarterly Results of Operations (2021, in thousands, except per share amounts) | Metric | Q4 2021 | Q3 2021 | Q2 2021 | Q1 2021 | | :--- | :--- | :--- | :--- | :--- | | Interest income | $95,995 | $97,198 | $92,602 | $90,610 | | Interest expense | $1,187 | $1,416 | $1,653 | $1,786 | | Net interest income | $94,808 | $95,782 | $90,949 | $88,824 | | Provision for credit losses | $2,064 | $0 | $(1,206) | $(1,997) | | Noninterest income | $34,902 | $37,725 | $34,668 | $34,066 | | Noninterest expense | $61,672 | $62,939 | $59,374 | $57,723 | | Net earnings | $55,337 | $58,928 | $56,379 | $56,918 | | Diluted EPS | $0.39 | $0.41 | $0.39 | $0.40 | | Cash dividends declared | $0.15 | $0.15 | $0.15 | $0.13 | ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This section confirms no changes in or disagreements with the company's accountants - There are no changes in or disagreements with accountants on accounting and financial disclosure[342] ITEM 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2022[344] - Internal control systems have inherent limitations, meaning misstatements due to error or fraud may occur and not be detected[344][347] - Ernst & Young LLP issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[349][352] - The critical audit matter identified was the Allowance for Loan Losses, due to the complexity of models and highly judgmental qualitative adjustments[389][390][391] ITEM 9B. Other Information This section states there is no other information to report - There is no other information to report[360] ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - This item is not applicable[361] PART III ITEM 10. Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2023 proxy statement - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[363] ITEM 11. Executive Compensation Required information is incorporated by reference from the company's 2023 proxy statement - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[364] ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership data by reference and details equity compensation plan information - Information on security ownership is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[365] Aggregate Equity Compensation Plan Information (as of December 31, 2022) | Category | Number of Shares To be Issued Upon Exercise or Vesting of Outstanding Awards | Weighted Average Exercise Price of Outstanding Awards | Number of Shares Remaining Available For Future Issuance Under Equity Compensation Plans | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,649,047 | $29.99 | 1,877,004 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 1,649,047 | $29.99 | 1,877,004 | ITEM 13. Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's 2023 proxy statement - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[367] ITEM 14. Principal Accountant Fees and Services Required information is incorporated by reference from the company's 2023 proxy statement - Information is incorporated by reference from the 2023 Annual Meeting of Shareholders proxy statement[368] PART IV ITEM 15. Exhibit and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the 10-K report - The report includes audited consolidated financial statements: Balance Sheets, Statements of Earnings, Comprehensive Earnings, Shareholders' Equity, and Cash Flows for the years ended December 31, 2022, 2021, and 2020[370] - The report lists various exhibits, including the Amended and Restated Certificate of Formation, Bylaws, Loan Agreements with Frost Bank, Incentive Stock Option Plans, and certifications[372][375] ITEM 16. Form 10-K Summary The registrant has opted not to provide summary information in this item - The registrant has not selected the option to provide summary information in this item[376]