First Financial Bankshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company is a Texas-based commercial banking and financial services holding company, operating primarily in Texas. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and condition
- Q3 earnings: Net earnings were $19.6 million, down 1.2% from $19.8 million a year earlier; diluted EPS was $0.61 versus $0.63. For the first nine months, net earnings rose 3.1% to $57.6 million and diluted EPS was $1.81 versus $1.78.
- Net interest income: GAAP net interest income was $45.5 million for Q3, up 16.3%, and $125.6 million for nine months, up 8.3%. On a tax-equivalent basis, the respective amounts were $49.8 million and $137.8 million. Net interest margin was 4.25% in Q3, down 1 basis point, and 4.21% year to date, down 11 basis points.
- Other income and expenses: Noninterest income increased 10.2% to $17.1 million in Q3 and 9.5% to $46.3 million for nine months. Noninterest expense increased 30.6% to $35.5 million in Q3 and 15.5% to $92.9 million for nine months. Efficiency ratios were 53.10% and 50.47%, respectively, versus 46.61% and 47.55% in the comparable 2012 periods.
- Returns: Q3 return on average assets was 1.56% and return on average equity was 13.64%, compared with 1.84% and 14.53% a year earlier. Nine-month returns were 1.64% and 13.53%, versus 1.78% and 14.12%.
- Balance sheet: At September 30, total assets were $5.08 billion, loans held for investment were $2.61 billion, deposits were $4.00 billion, and shareholders’ equity was $568.2 million. Compared with September 30, 2012, assets, loans and deposits increased from $4.31 billion, $1.99 billion and $3.44 billion, respectively; the filing attributes significant growth in part to the Orange Savings Bank acquisition.
- Credit quality: The allowance for loan losses was $34.8 million, or 1.33% of period-end loans, versus 1.74% a year earlier. Nonaccrual loans were $22.8 million; nonperforming loans and foreclosed assets totaled $28.5 million, or 1.09% of loans and foreclosed assets, compared with $30.7 million and 1.53% a year earlier. Nine-month net charge-offs were 0.15% of average loans, versus 0.16%.
- Cash flow and liquidity: Nine-month operating cash flow was $94.3 million; investing activities used $401.6 million and financing activities provided $174.2 million. Cash and cash equivalents decreased $133.1 million to $227.6 million. Management said liquidity was adequate. Short-term borrowings were $466.5 million at quarter-end, including $161.1 million in FHLB advances; no balance was outstanding on the company’s $25 million Frost Bank revolving line.
- Capital: Shareholders’ equity was 11.20% of total assets. Regulatory capital ratios were 16.49% total risk-based, 15.37% Tier 1 risk-based and 9.77% leverage; management stated these were above “well-capitalized” thresholds.
Material changes and unusual items
- The company acquired Orange Savings Bank, SSB on May 31, 2013, paying $39.2 million in cash and issuing 420,000 shares valued at $23.1 million. The acquisition added approximately $293.3 million of loans and $386.0 million of deposits at acquisition and generated $23.0 million of goodwill. Its results were included from June 1.
- Q3 noninterest expense included $3.4 million of pretax technology contract termination and conversion costs associated with the acquisition. Acquisition-related staffing and other operating expenses also contributed to expense growth.
- Available-for-sale securities generated a Q3 loss of $108,000, compared with a $1.5 million gain in Q3 2012. Nine-month gains were $147,000, down from $2.2 million. Unrealized losses on available-for-sale securities drove comprehensive earnings down to $0.3 million in Q3 and $10.9 million for nine months, despite positive net earnings. Management attributed the unrealized losses primarily to interest rates and did not consider them other-than-temporary.
- Loans held for investment rose $531.9 million from December 31, 2012; real estate loans accounted for most of the increase. The allowance ratio also reflects acquired loans initially recorded at fair value without an allowance.
Outlook, risks and contingencies
- The company provided no specific earnings or revenue guidance. Management expected low interest rates to persist until at least 2015, continuing to pressure margins; it cited loan floors, improved loan pricing and lower deposit costs as partial mitigants.
- Interest-rate simulations estimated net interest income decreases of 0.89% and 1.86% under instantaneous 100- and 200-basis-point rate increases, and a 1.79% decrease under a 50-basis-point decrease. Management cautioned that assumptions may not reflect actual results.
- Key stated risks include economic and real estate conditions, borrower repayment and collateral values, interest-rate and securities valuation changes, deposit and liquidity conditions, regulatory and legislative changes, competition, and acquisition integration or goodwill impairment. Management identified the allowance for loan losses and securities valuation as critical accounting estimates.
- Off-balance-sheet commitments totaled $658.9 million: $478.7 million in unfunded lines, $150.4 million in commitments to extend credit and $29.8 million in standby letters of credit. The company reported no material pending legal proceedings, no material change to previously disclosed risk factors, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether the $3.4 million acquisition-related technology cost is nonrecurring and whether Orange integration delivers expected growth and cost benefits.
- How rapid loan growth, particularly in real estate, affects credit quality, nonperforming assets and adequacy of the allowance.
- The effect of interest rates on net interest margin and the substantial available-for-sale securities portfolio, including future unrealized gains or losses.
- The drivers and sustainability of higher noninterest expenses and the deterioration in the efficiency ratio.
- Funding and liquidity trends, including increased short-term borrowings and use of FHLB capacity.