First Financial Bankshares, Inc. — Q2 2016 Form 10-Q
Business context and period. Texas-based financial holding company operating through its bank and other subsidiaries, with 69 financial centers. This unaudited report covers the three and six months ended June 30, 2016; balance-sheet comparisons are to June 30, 2015 and December 31, 2015. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income, GAAP | $56.55 | $52.34 | $113.57 | $103.44 |
| Net interest income, tax-equivalent | $62.72 | $57.97 | $125.86 | $114.28 |
| Noninterest income | $21.44 | $17.81 | $41.26 | $33.71 |
| Provision for loan losses | $2.06 | $1.55 | $4.39 | $2.84 |
| Noninterest expense | $40.76 | $35.20 | $81.84 | $69.15 |
| Net earnings | $26.81 | $25.31 | $52.51 | $49.30 |
| Basic EPS | $0.41 | $0.39 | $0.80 | $0.77 |
| Net interest margin, tax-equivalent | 4.12% | 4.07% | 4.14% | 4.09% |
| Efficiency ratio | 48.43% | 46.46% | 48.97% | 46.73% |
- Q2 net earnings increased 5.94%; first-half net earnings increased 6.49%. First-half basic EPS rose 3.90%.
- Returns moderated despite higher earnings: Q2 return on average assets was 1.65% versus 1.67%, and return on average equity was 12.76% versus 14.38%. First-half figures were 1.61% and 12.65%, respectively, versus 1.66% and 14.19%.
- Revenue gains reflected loan growth, tax-exempt securities income, higher mortgage operations, and fee growth. Mortgage operations revenue rose to $4.01 million in Q2 and $7.15 million for the half, primarily reflecting 4Trust Mortgage production. Expense growth—especially compensation and employee costs—outpaced revenue growth and weakened the efficiency ratio.
Financial position, cash flow and capital
- Balance sheet at June 30: assets $6,615 million; loans held for investment $3,284 million; total deposits $5,056 million; shareholders’ equity $866 million, or 13.09% of assets. Year over year, assets rose from $6,115 million, loans from $2,942 million, deposits from $4,727 million, and equity from $701 million. Versus year-end 2015, loans and deposits declined from $3,317 million and $5,190 million, respectively.
- Liquidity and borrowings: cash and cash equivalents were $206 million, down from $273 million at year-end. Short-term borrowings were $557 million, down from $616 million at year-end, comprising $340 million in repurchase agreements, $210 million in FHLB advances, and $7 million in federal funds purchased. The filing reports $963 million of FHLB credit capacity, with $210 million outstanding, and $130 million of correspondent-bank federal funds lines, of which $3 million was drawn. A $25 million Frost Bank revolver was undrawn; the company reported covenant compliance.
- Cash flows, first half: operating activities provided $91.0 million; investing activities provided $54.7 million; financing activities used $212.8 million. Cash and cash equivalents decreased $67.1 million.
- Capital: consolidated total risk-based capital was 17.79%, Tier 1 and common equity Tier 1 were each 16.64%, and leverage was 10.50%. Management said it believes the company and bank are prepared to meet fully phased-in Basel III requirements. The quarterly dividend was $0.18 per share, up 12.5% year over year.
Material changes, outlook and risks
- The July 2015 First Bank acquisition contributed to larger average earning assets and loan volume, fee income, and expenses; the 4Trust asset purchase also lifted mortgage production. Management attributed much of the year-over-year net interest income increase to First Bank. The First Bank Huntsville branch was consolidated with the company’s existing Huntsville location in February 2016.
- Asset quality deteriorated from prior comparisons. Nonperforming assets, including foreclosed assets, were $40.4 million, or 1.22% of loans and foreclosed assets, versus $18.1 million and 0.61% a year earlier and $29.8 million and 0.89% at year-end. Nonaccrual loans rose to $38.9 million from $16.9 million a year earlier. Management attributed the quarter-end increase primarily to one commercial loan. The allowance was $45.1 million, or 1.36% of held-for-investment loans; the six-month provision rose to $4.4 million.
- Oil and gas loans were $87.9 million, or 2.65% of gross loans. The company reported continued stress from depressed prices; $32.7 million was classified and $5.8 million was nonaccrual. Management said it had increased monitoring and classified, downgraded, or charged off loans as appropriate.
- Management expects low interest rates to continue to pressure net interest margin. Its interest-rate model projected net interest income changes over the next 12 months of +0.63% for a 100-basis-point increase, +0.46% for a 200-basis-point increase, and -2.22% for a 50-basis-point decrease. These are model estimates, not forecasts, and rely on stated assumptions.
- Other risks cited include economic and real-estate conditions, loan demand and credit quality, interest-rate and commodity-price movements, liquidity, regulation, competition, cybersecurity and systems, and acquisition integration. The filing provides no earnings or revenue guidance. Management stated current liquidity was adequate and reported no known event expected to materially adversely affect liquidity, capital, or operations. It reported no material pending legal proceedings and no material change to previously disclosed risk factors.
- Unusual items include $0.91 million of securities-sale gains in the first half and a significant rise in unrealized available-for-sale securities gains reflected in comprehensive income and equity. Management reported no goodwill or intangible-asset impairment. It also cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether elevated nonaccrual loans, commercial credit issues, and oil-and-gas stress lead to further provisions, charge-offs, or weaker asset quality.
- How much earnings growth is sustainable from underlying operations versus acquisition-related scale, mortgage activity, and securities-sale gains—and whether expense growth continues to pressure efficiency and returns.
- Deposit trends, reliance on short-term borrowings, available and pledged collateral, and the company’s ability to preserve liquidity and capital while maintaining dividends.
- Sensitivity of net interest income and securities values to changing rates, including the assumptions behind management’s rate simulations and the effect of available-for-sale valuation changes.
- Acquisition integration and the future effects of the disclosed accounting-standard changes, particularly the expected-loss credit allowance standard.