First Financial Bankshares, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. The Texas-based financial holding company operated 50 financial centers and provided commercial banking and trust services, primarily in North Central and West Texas. Dollar amounts below are in millions unless stated otherwise.
Financial results and key metrics
- Third-quarter earnings: Net earnings were $16.2 million, up 16.0% from $14.0 million. This included a $1.3 million after-tax extraordinary gain; excluding it, earnings were $14.9 million, up 6.8%. Diluted EPS was $0.78, or $0.72 before the extraordinary item.
- Nine-month earnings: Net earnings were $44.1 million, up 7.0% from $41.3 million; earnings before the extraordinary item were $42.8 million, up 3.9%. Diluted EPS was $2.12, or $2.06 before the item. Dividends were $1.02 per share, unchanged from 2009.
- Interest income and margins: Q3 net interest income was $33.9 million, up 4.1%; nine-month net interest income was $100.0 million, up 3.5%. Tax-equivalent net interest margin declined to 4.67% for Q3 from 4.92%, and to 4.68% for nine months from 4.85%. Management attributed margin pressure to persistently low rates.
- Other income and expenses: Noninterest income was $12.9 million in Q3 and $36.6 million for nine months, essentially flat year over year. Nine-month trust fees rose $1.3 million and ATM/card fees rose $1.2 million, while service charges fell $1.0 million and securities gains fell $1.6 million. Noninterest expense rose 7.3% in Q3 to $24.7 million and 2.4% for nine months to $72.0 million. The nine-month efficiency ratio improved to 49.12% from 50.08% (2010 ratio includes the extraordinary gain).
- Balance sheet and funding: Total assets were $3.45 billion, up from $3.08 billion at September 2009 and $3.28 billion at year-end 2009. Loans totaled $1.54 billion, up 5.7% year over year; deposits were $2.74 billion, up 11.4% year over year. Cash and cash equivalents were $329.2 million. Available-for-sale securities were $1.41 billion.
- Credit quality: The allowance for loan losses was $30.0 million, or 1.95% of loans, versus $25.5 million and 1.76% a year earlier. Nonperforming assets were $22.4 million, or 1.45% of loans and foreclosed assets, versus $19.0 million and 1.30% a year earlier. Foreclosed assets rose to $8.2 million from $4.4 million. Nine-month net charge-offs were $4.6 million versus $3.1 million, including a $1.8 million charge-off to one commercial customer.
- Cash flow: Nine-month operating cash flow was $61.8 million, compared with $163.8 million in 2009; investing cash use was $119.4 million, versus $38.3 million provided in 2009, largely reflecting securities purchases and loan growth. Financing provided $65.3 million, versus $219.7 million used in 2009. Cash and equivalents increased $7.6 million.
- Capital, debt and liquidity: Shareholders’ equity was $450.9 million, or 13.08% of assets. Regulatory total risk-based capital and leverage ratios were 19.45% and 10.89%, respectively; management said capital remained well above requirements. Short-term borrowings were $178.1 million. The $25 million parent-company revolving credit line had no balance outstanding; management reported compliance with its covenants. Management considered liquidity adequate.
Material changes and unusual items
- Q3 earnings benefited from higher net interest income, a $1.7 million lower loan-loss provision and the extraordinary gain, partly offset by higher noninterest expense.
- TXDOT expropriated part of the Southlake bank property for highway access. The company recorded a $2.0 million pretax net gain, or $1.3 million after tax, and announced construction of a replacement location; it plans to hold the existing location for sale.
- On November 1, 2010, after quarter-end, the company acquired Sam Houston Financial Corp., parent of The First State Bank in Huntsville, Texas, for $22.2 million in cash and stock. At September 30, the bank had $104.8 million of loans and $145.5 million of deposits.
- Available-for-sale securities increased to $1.41 billion from $1.27 billion at year-end 2009. Unrealized gains were primarily attributed to market interest rates; management did not consider the reported losses other-than-temporary.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management cautioned that sustained low interest rates could further pressure net interest margin.
- Management identified economic and real-estate weakness, unemployment, loan demand and collateral values, interest-rate changes, regulatory and legislative reforms, deposit competition, FDIC assessments, and acquisition integration as risks. It expected new regulation, including Dodd-Frank-related requirements, to reduce revenue and increase expenses over time.
- Management stated that weaker economic conditions or higher unemployment could increase nonperforming assets, charge-offs and loan-loss provisions; regulators may also require additional reserves. The allowance is based on estimates and could require adjustment.
- Off-balance-sheet commercial commitments totaled $382.0 million: $303.8 million in unfunded lines, $58.6 million in commitments to extend credit and $19.6 million in standby letters of credit. The filing notes these amounts do not necessarily represent future cash requirements.
- Approximately $766 million of securities were pledged as collateral. Certain subsidiary-bank loans were subject to blanket liens supporting letters of credit. The company also noted future pension funding requirements; it contributed $1.0 million in March 2010 to its frozen defined-benefit plan.
- Management stated that disclosure controls were effective at the reasonable-assurance level and that no significant subsequent changes to internal controls were identified.
Important facts for investors to verify
- How credit performance evolves, particularly foreclosed assets, commercial charge-offs and the allowance relative to nonperforming loans.
- Whether low interest rates continue to compress net interest margin and how asset and deposit repricing affect earnings.
- The final costs, integration progress and acquired credit quality of the Huntsville bank acquisition.
- The effect of Southlake replacement construction and the sale and proceeds of the existing property.
- Whether regulatory changes, deposit pricing, FDIC costs and the disclosed commitments affect profitability or liquidity.