FIRST FINANCIAL BANKSHARES INC quarterly report, Q2 FY2013

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First Financial Bankshares, Inc. — Q2 2013 Form 10-Q

Reporting period: Three and six months ended June 30, 2013; balance-sheet comparisons are to June 30, 2012 and December 31, 2012. The company is a Texas-based bank holding company operating primarily in Texas. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.

Financial performance and condition

  • Q2 earnings: Net earnings rose 6.2% to $19.49 million from $18.35 million. Diluted EPS was $0.61 versus $0.58; basic EPS was $0.62 versus $0.58.
  • First-half earnings: Net earnings increased 5.4% to $38.07 million from $36.11 million. Basic and diluted EPS were both $1.20, versus $1.15 a year earlier.
  • Revenue and net interest: Q2 interest income was $42.45 million and noninterest income was $15.15 million; net interest income was $41.50 million after $0.95 million of interest expense. First-half net interest income was $80.17 million and noninterest income was $29.11 million. On a tax-equivalent basis, net interest income increased to $45.58 million in Q2 and $88.05 million for the first half.
  • Margins and returns: Net interest margin was 4.18% in both Q2 and the first half, down 15 basis points and 18 basis points, respectively, from the comparable 2012 periods. Q2 return on average assets/equity was 1.67%/13.53%, versus 1.75%/14.01%; first-half returns were 1.69%/13.47%, versus 1.74%/13.90%.
  • Expenses: Q2 noninterest expense increased 11.8% to $29.91 million; first-half expense rose 7.8% to $57.38 million. Efficiency ratios worsened to 49.25% for Q2 and 48.98% for the first half, compared with 48.02% and 48.05% in 2012.
  • Assets, loans and deposits: Total assets were $4.98 billion at June 30, up from $4.50 billion at year-end 2012. Loans held for investment grew to $2.56 billion from $2.08 billion at year-end, with real estate loans the largest category. Deposits were $3.92 billion, versus $3.63 billion at year-end.
  • Credit quality: The allowance for loan losses was $34.10 million, or 1.32% of loans, versus $34.84 million and 1.67% at year-end. Nonaccrual loans were $26.30 million; nonperforming loans and foreclosed assets totaled $31.07 million, or 1.20% of loans and foreclosed assets, compared with $25.46 million and 1.22% at year-end. Net charge-offs were 0.24% of average loans annualized in Q2, versus 0.12% in Q2 2012.
  • Cash flow and liquidity: First-half operating cash flow was $45.90 million, compared with $55.97 million in 2012. Investing used $310.22 million, including $194.00 million of net loan growth and $25.71 million net cash paid for the Orange Savings Bank acquisition; financing provided $64.31 million. Cash and cash equivalents declined $200.00 million to $160.74 million.
  • Funding and capital: Short-term borrowings were $431.58 million at June 30, up from $259.70 million at year-end. Shareholders’ equity was $575.86 million. Regulatory total risk-based, Tier 1 risk-based and leverage ratios were 16.31%, 15.20% and 10.32%, respectively; management said these exceeded “well capitalized” thresholds.

Material changes and unusual items

  • On May 31, 2013, the company completed its acquisition of Orange Savings Bank, SSB, for $39.20 million cash plus 420,000 shares valued at $23.10 million. The acquisition added $293.29 million of loans and $385.95 million of deposits at fair value, and generated $23.02 million of goodwill. Its results were included from June 1, so the current-period comparison includes only one month of acquired operations.
  • Management attributed higher net interest income mainly to increased earning-asset volume, including loan growth, while lower asset yields pressured margins. Management expected low interest rates to persist at least through 2015, continuing pressure on net interest margin.
  • Q2 noninterest income growth reflected higher trust fees and mortgage operations, partly offset by lower securities-sale gains. Trust assets under management were $3.05 billion, compared with $2.65 billion a year earlier. Acquisition and database-consolidation technology costs included in Q2 expenses were $232,000 and $226,000, respectively.
  • Unrealized available-for-sale securities losses reduced Q2 comprehensive earnings to a loss of $3.92 million despite positive net earnings of $19.49 million. For the first half, comprehensive earnings were $10.54 million versus $40.48 million in 2012. The company reported $14.07 million of gross unrealized losses on available-for-sale securities at June 30 and attributed them to interest rates, not credit concerns; management did not consider them other-than-temporary.

Outlook, risks and contingencies

  • The filing gives no specific earnings or revenue guidance. Management stated that interim results are not necessarily indicative of full-year results and identified seasonality, economic and loan-credit conditions, interest rates, and regulatory changes as factors.
  • Interest-rate sensitivity simulations projected net interest income below the base case by 0.50% and 0.90% under immediate 100- and 200-basis-point rate increases, and by 2.02% under a 50-basis-point decrease. Management cautioned that these estimates depend on assumptions and may differ materially from actual results.
  • Credit risks include real estate and economic weakness, collateral values, borrower repayment capacity, and the accuracy of loan-loss estimates. The allowance is a significant management estimate; regulators may require additional reserves. Five loans modified as troubled debt restructurings, totaling $245,000, defaulted during the first half.
  • At June 30, commercial commitments totaled $638.21 million, including $401.17 million of unfunded lines, $210.14 million of unfunded commitments to extend credit and $26.90 million of standby letters of credit. The filing notes these commitments may not all be drawn.
  • The company reported adequate liquidity, citing core deposits and available credit facilities. It had $176.17 million outstanding under FHLB lines, plus $58.60 million of FHLB letters of credit; its $25 million unsecured Frost Bank revolver had no balance outstanding. Management said the company complied with the Frost Bank covenants.
  • No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were judged effective at the reasonable-assurance level; no significant second-quarter changes in internal control over financial reporting were reported.

Most important facts for investors to verify

  • How much of the loan, deposit and earnings growth reflects the Orange Savings Bank acquisition versus organic growth, and how integration costs and purchase accounting evolve.
  • Whether loan performance improves or deteriorates, particularly nonaccrual real estate loans, past-due loans, charge-offs and coverage from the allowance.
  • Whether continued loan growth can offset margin pressure from low rates, and how interest-rate movements affect net interest income and securities values.
  • Whether higher operating expenses and the efficiency ratio improve as acquisition and technology costs subside.
  • How available-for-sale securities’ unrealized losses, liquidity sources, short-term borrowings and regulatory capital ratios change in subsequent filings.