First Financial Bankshares, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The Texas-based financial holding company operates full-service commercial banks and related businesses, primarily in Texas. Unless noted otherwise, dollar amounts below are in millions. Per-share figures reflect the three-for-two stock split distributed June 1, 2011.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $38.2 | $33.5 | $75.5 | $66.1 |
| Provision for loan losses | $1.9 | $3.0 | $4.1 | $5.0 |
| Noninterest income | $11.9 | $12.6 | $24.7 | $23.7 |
| Noninterest expense | $25.9 | $24.0 | $52.0 | $47.3 |
| Net earnings | $16.5 | $14.2 | $32.8 | $27.9 |
| Basic earnings per share | $0.53 | $0.45 | $1.04 | $0.89 |
| Net interest margin | 4.69% | 4.69% | 4.71% | 4.69% |
- Net earnings increased 16.4% in Q2 and 17.6% for the first half. Management reported return on average assets/equity of 1.74%/14.29% in Q2 and 1.75%/14.57% for the first half.
- Tax-equivalent net interest income was $41.3 million in Q2 and $81.8 million for the first half. Growth in average earning assets, including the Huntsville acquisition, drove the increase; lower asset yields were largely offset by lower funding costs.
- The Q2 efficiency ratio improved to 48.65% from 49.21%; the first-half ratio improved to 48.86% from 49.77%.
Balance sheet, liquidity and credit
- At June 30, total assets were $3.841 billion, loans $1.719 billion, deposits $3.119 billion, and shareholders’ equity $477.7 million. Compared with June 30, 2010, assets, loans and deposits were higher; the filing attributes part of growth to the November 2010 Huntsville bank acquisition.
- Cash and cash equivalents were $302.8 million. Short-term borrowings were $192.4 million. The company reported no outstanding balance on its $25 million unsecured revolving line or on subsidiary-bank Federal Home Loan Bank lines at quarter-end.
- First-half cash flow: $56.7 million provided by operating activities, $128.6 million used in investing, and $6.7 million provided by financing; cash and equivalents decreased $65.2 million from year-end 2010.
- Capital remained above regulatory requirements: total risk-based capital ratio 19.22% and leverage ratio 10.22%. Shareholders’ equity was 12.44% of total assets.
- Nonperforming assets were $27.4 million, or 1.58% of loans and foreclosed assets, versus $22.5 million and 1.48% at June 30, 2010. Nonaccrual loans rose to $18.6 million from $14.2 million a year earlier, chiefly in real estate.
- The allowance for loan losses was $33.4 million, or 1.94% of loans. First-half net charge-offs were $1.75 million (0.21% of average loans, annualized), down from $3.64 million (0.49%) a year earlier.
- Commercial commitments totaled $406.4 million, including $319.9 million in unfunded lines, $64.2 million in commitments to extend credit, and $22.3 million in standby letters of credit. Management said these commitments generally may expire undrawn.
Changes, outlook and risks
- Growth in net interest income and loan balances supported earnings, while lower loan-loss provisions and improved net charge-offs also helped. The Huntsville acquisition contributed to earning-asset growth and higher expenses.
- Q2 noninterest income fell $0.7 million year over year, primarily because of a $1.1 million loss on sale and write-down of foreclosed assets, including a $1.0 million real-estate write-down, and lower deposit service charges. Trust and ATM/card fees increased. First-half noninterest income rose $1.1 million overall.
- Management gave no specific earnings forecast. It cautioned that results may vary with seasonality, economic conditions, credit quality, interest rates, regulation and other factors. It noted potential margin pressure if low rates persist and limited further reductions in deposit costs are available.
- Interest-rate simulations estimated net interest income changes over the next 12 months of +0.14% for a 100-basis-point rate increase, +0.75% for a 200-basis-point increase, and −1.64% for a 50-basis-point decrease versus the base case. Management stressed that these are assumption-dependent estimates, not forecasts.
- Risks highlighted include local and national economic and real-estate weakness, borrower and collateral deterioration, funding and deposit changes, interest-rate movements, regulatory reforms (including Dodd-Frank and Basel III), interchange-fee rules, competition, and acquisition or integration risks. Management considered liquidity adequate and reported compliance with covenants on the revolving line.
- The board declared a three-for-two stock split, distributed June 1, 2011. The Huntsville acquisition was completed November 1, 2010. Management reported no goodwill impairment in its second-quarter evaluation. Disclosure controls were concluded effective at a reasonable-assurance level; no material control changes were reported.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and nonperforming assets continues, especially in real estate, and whether the allowance remains adequate.
- How loan growth, deposit mix and acquisition-related balances affect margins, funding costs and capital.
- Whether foreclosed-asset losses, service-charge declines and forthcoming interchange-fee rules materially affect noninterest income.
- The assumptions behind the interest-rate sensitivity estimates and the availability of liquidity under changing deposit or loan-demand conditions.
- Compliance with the revolving credit facility’s financial and operational covenants, including its dividend restriction, and the potential effects of regulatory changes.