FIRST FINANCIAL BANKSHARES INC quarterly report, Q1 FY2017

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First Financial Bankshares, Inc. — Q1 2017 Form 10-Q

Business context and period. Texas-based financial holding company operating a full-service commercial bank and trust, investment and insurance businesses. The unaudited quarter ended March 31, 2017; comparisons below are with Q1 2016 unless noted. Dollar amounts are in millions unless stated otherwise.

Financial performance and position

  • Earnings: Net earnings were $26.60 million, up 3.5%; diluted EPS was $0.40 versus $0.39. Pretax earnings were $34.20 million. Return on average assets was 1.57% versus 1.58%; return on average equity was 12.74% versus 12.55%.
  • Revenue and margins: Net interest income under GAAP was $57.02 million, essentially unchanged. Tax-equivalent net interest income rose to $63.57 million from $63.14 million, while net interest margin declined to 4.03% from 4.15%. Noninterest income increased 7.4% to $21.29 million, led by trust fees, card fees and mortgage operations.
  • Costs and credit provision: Noninterest expense rose 2.6% to $42.15 million; the efficiency ratio edged up to 49.67% from 49.52%. Provision for loan losses declined to $1.95 million from $2.33 million. Annualized net charge-offs were 0.18% of average loans versus 0.02%.
  • Balance sheet at March 31: Total assets were $6.93 billion, up from $6.53 billion a year earlier. Deposits were $5.66 billion versus $5.06 billion; loans held for investment were $3.37 billion versus $3.28 billion. Shareholders’ equity was $859.35 million.
  • Liquidity, funding and debt: Cash and cash equivalents were $222.68 million. Borrowings totaled $360.26 million, down from $525.34 million a year earlier; they consisted primarily of repurchase agreements and federal funds purchased, with no FHLB advances outstanding. Operating cash flow was $66.96 million; investing cash flow was negative $187.36 million, mainly reflecting securities purchases; financing cash flow was positive $86.59 million. Cash declined $33.81 million during the quarter.
  • Capital: Consolidated total risk-based capital was 18.72%, Tier 1 and common equity Tier 1 ratios were each 17.56%, and the leverage ratio was 10.60%. The bank’s ratios also exceeded applicable “well-capitalized” thresholds.

Material changes and key developments

  • Average earning assets increased $292.40 million year over year, but asset yield fell 10 basis points and the rate paid on interest-bearing liabilities rose 4 basis points. Management attributed modest tax-equivalent net interest income growth to higher earning-asset balances, particularly loans and tax-exempt securities.
  • Trust fees rose to $6.02 million from $4.66 million, supported by growth in managed trust assets to $4.54 billion from $4.01 billion. Salaries and benefits increased $0.67 million; operational and other losses increased $0.50 million.
  • Nonperforming assets were $30.52 million, or 0.90% of loans and foreclosed assets, versus $29.03 million and 0.88% a year earlier. The allowance was 1.36% of loans, compared with 1.34%.
  • Oil-and-gas-related loans fell to $75.26 million (2.22% of gross loans) from $92.06 million a year earlier. Classified oil and gas loans were $29.08 million; management said some borrowers remained stressed despite improved commodity prices.
  • Available-for-sale securities totaled $3.02 billion. Unrealized losses were $14.36 million before tax, compared with $1.06 million a year earlier; management attributed them to interest rates and did not consider them other-than-temporary. Securities fair values increased comprehensive earnings by $5.90 million after tax for the quarter.

Outlook, risks and contingencies

  • No quantified earnings or revenue guidance was provided. Management expected interest rates to remain relatively low and said this would continue to pressure net interest margin, notwithstanding Federal Reserve rate increases.
  • Interest-rate simulations projected net interest income declines over the next 12 months of 2.28% under a 100-basis-point increase, 4.88% under a 200-basis-point increase, and 4.06% under a 100-basis-point decrease. Management cautioned that these model estimates rely on assumptions and may differ materially from actual results.
  • Principal risks identified include local economic and real-estate conditions, loan demand and credit quality, oil and gas and other commodity prices, interest rates, deposit competition and liquidity, securities valuation, regulation, cybersecurity and operational systems. The allowance for loan losses and securities valuation are identified as critical accounting estimates.
  • Commercial commitments totaled $852.07 million, including $586.66 million of unfunded lines of credit, $237.59 million of unfunded loan commitments and $27.82 million of standby letters of credit. The company reported available borrowing facilities and stated that liquidity was adequate; no amounts were drawn on specified federal-funds lines or the FHLB line at quarter-end.
  • There were no material pending legal proceedings, and the filing reported no material change to previously disclosed risk factors. Management reported disclosure controls were effective at the reasonable-assurance level and no material adverse liquidity or capital event was known.
  • The company expected the new credit-loss standard (CECL) to increase its allowance but was still evaluating the impact. Adoption was scheduled for 2020. A 14,650-share director restricted-stock grant valued at $0.60 million occurred after quarter-end.

Important facts for investors to verify

  1. Whether net interest margin pressure persists as loan and securities yields, deposit costs and market rates change.
  2. Trends in nonaccrual loans, classified credits, net charge-offs and allowance adequacy, especially in real estate and oil-and-gas exposures.
  3. The drivers and recurrence of higher operational and other losses, and whether expense growth outpaces revenue.
  4. Interest-rate sensitivity and the potential effect of unrealized securities losses, including the substantial securities portfolio pledged as collateral.
  5. Deposit growth, borrowing needs, liquidity commitments and the timing and terms of the $25 million Frost Bank revolving line, which matured June 30, 2017.