First Financial Bankshares, Inc. — Q1 2011 Form 10-Q
Business context and reporting period
Unaudited consolidated results for the three months ended March 31, 2011, compared with Q1 2010; balance-sheet figures are as of March 31, 2011 unless noted. The Texas-based financial holding company operates 52 financial centers through its subsidiary banks and also provides trust and related services. Amounts below are in millions of dollars unless otherwise indicated.
Financial performance and position
- Earnings: Net earnings were $16.3 million, up 18.8% from $13.7 million. Diluted EPS was $0.52 versus $0.44; reported per-share figures reflect the subsequent three-for-two stock split. Pretax earnings were $21.9 million.
- Revenue and margins: GAAP net interest income rose to $37.3 million from $32.6 million; tax-equivalent net interest income was $40.5 million versus $35.2 million. Net interest margin was 4.72%, up 3 basis points. Noninterest income increased 15.6% to $12.8 million. Noninterest expense rose 12.1% to $26.2 million; the efficiency ratio improved to 49.07% from 50.36%.
- Profitability: Return on average assets was 1.76% versus 1.68%; return on average equity was 14.86% versus 13.30%. Effective tax rate was 25.5% in both periods.
- Loans and credit: Period-end loans were $1.682 billion, compared with $1.690 billion at year-end 2010 and $1.499 billion a year earlier. The allowance for loan losses was $32.5 million, or 1.93% of loans, versus $31.1 million and 1.84% at year-end. Q1 provision was $2.1 million; net charge-offs were $0.7 million, or 0.18% of average loans annualized.
- Asset quality: Nonperforming assets were $24.3 million (1.44% of loans and foreclosed assets), versus $22.5 million (1.50%) a year earlier and $26.0 million at year-end. Nonaccrual loans were $15.4 million. Management attributed the year-over-year increase in nonperforming assets to continued weakness in real estate markets and the broader economy.
- Liquidity and funding: Cash and cash equivalents were $313.9 million, down from $368.0 million at year-end. Deposits were $3.132 billion, versus $3.113 billion at year-end and $2.690 billion a year earlier. Short-term borrowings were $192.2 million; no amount was outstanding on the company’s $25 million revolving credit line. Management considered liquidity adequate.
- Cash flows: Operating activities provided $37.5 million; investing activities used $117.3 million; financing activities provided $25.8 million. Cash and cash equivalents decreased $54.0 million during the quarter.
- Capital: Shareholders’ equity was $456.2 million, or 11.92% of assets. At March 31, regulatory total risk-based and leverage capital ratios were 18.86% and 10.03%, respectively; management said the company remained well capitalized.
Material changes versus the prior comparable period
- Higher earning-asset volumes were the principal driver of higher net interest income: average earning assets increased $428.0 million year over year. The yield on earning assets fell 18 basis points, while the rate paid on interest-bearing liabilities fell 32 basis points.
- Noninterest income growth reflected higher trust fees, ATM and card fees, mortgage operations, and securities gains. Deposit service charges declined $0.5 million, partly because of reduced overdraft use and regulatory changes.
- Expense growth was led by salaries and benefits, up $1.6 million, reflecting the Huntsville acquisition and higher profit-sharing expense. The acquisition was completed November 1, 2010; its results are included in Q1 2011 but not Q1 2010.
- Available-for-sale securities were $1.656 billion, up from $1.537 billion at year-end. The quarter’s increase in unrealized securities gains contributed to comprehensive earnings of $21.0 million, versus $14.6 million a year earlier.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cautioned that low rates may pressure investment yields and that margin pressure could persist if rates remain low; rapid rate increases could also create pressure because deposit costs may be difficult to adjust further.
- Interest-rate simulations estimated that parallel increases of 100 and 200 basis points would raise next-12-month net interest income by 0.26% and 1.16%, respectively, versus the base case; a 50-basis-point decrease would reduce it by 1.55%. Management emphasized these are model estimates subject to assumptions and actual results may differ materially.
- Key stated risks include local and national economic and real-estate conditions, employment, borrower repayment and collateral values, deposit attraction, market and interest-rate movements, regulation (including Dodd-Frank and Basel III), competition, and acquisition integration. Management expected new regulations could reduce revenue and increase expenses.
- Available-for-sale securities had $4.1 million of gross unrealized losses across 196 positions. Management considered the losses interest-rate-related, not other-than-temporary, and said it did not intend, nor was it more likely than not, that it would need to sell before recovery or maturity.
- Off-balance-sheet commitments totaled $361.6 million: $289.6 million of unfunded lines, $52.7 million of commitments to extend credit, and $19.4 million of standby letters of credit. The filing says such commitments generally may expire undrawn.
- The Frost National Bank revolving line of credit was $25 million, unsecured, undrawn, and scheduled to mature June 30, 2011. It includes financial and operational covenants; management reported compliance at March 31, 2011. The company’s stated dividend policy targets 40%–55% of net earnings; Q1 payout was 43.7%.
- On April 26, 2011, the board declared a three-for-two stock split as a 50% stock dividend, for holders of record May 16 and distribution June 1. The quarter’s per-share figures were restated for the split.
Important facts for investors to verify
- Loan balance discrepancy: The MD&A says loans increased $182.8 million from December 31, 2010, but the balance-sheet and loan tables show a decrease from $1.690 billion to $1.682 billion. Confirm the correct comparison and intended figure.
- Assess whether loan growth, credit quality, foreclosed assets, and the $32.5 million allowance remain consistent with management’s loss assumptions; note real estate loans comprise a substantial share of the portfolio.
- Track whether acquisition-related revenue and costs, especially Huntsville integration expenses, persist or change in subsequent quarters.
- Monitor deposit pricing, net interest margin sensitivity, and the June 30, 2011 credit-line maturity and covenant terms.
- Review subsequent filings for the stock split’s completion and for any material changes in regulatory capital, liquidity, or the securities portfolio.