First Financial Bankshares, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. The company operates community banking businesses in Texas. Comparisons are affected by the January 1, 2020 acquisition of TB&T Bancshares and participation in the federal Paycheck Protection Program (PPP). Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2020 | Comparable period / change |
|---|---|---|
| Net earnings | $53.5 | $42.1 in Q2 2019; up 27% |
| Diluted earnings per share | $0.38 | $0.31 in Q2 2019 |
| Net interest income | $89.2 reported; $92.1 tax-equivalent | $71.6 reported; $73.3 tax-equivalent in Q2 2019 |
| Net interest margin | 3.78% | 3.98% in Q2 2019 |
| Provision for loan losses | $8.7 | $0.6 in Q2 2019 |
| Noninterest income | $36.9 | $28.0 in Q2 2019 |
| Noninterest expense | $53.3 | $48.3 in Q2 2019; efficiency ratio 41.32%, versus 47.71% |
For the six months, net earnings were $90.7 million versus $80.3 million, and diluted EPS was $0.64 versus $0.59. Tax-equivalent net interest margin was 3.84%, down from 3.99%. The six-month efficiency ratio was 45.17%, versus 48.56%.
| Balance-sheet measure | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $10,339.8 | $8,262.2 |
| Loans held for investment | $5,253.1 | $4,195.0 |
| Available-for-sale securities | $4,118.9 | $3,413.3 |
| Total deposits | $8,157.6 | $6,603.8 |
| Borrowings | $449.2 | $381.4 |
| Cash and cash equivalents | $384.8 | $282.6 |
| Shareholders’ equity | $1,582.4 | $1,227.2 |
Six-month operating cash flow was $113.9 million; investing cash flow was a use of $1,045.4 million, chiefly reflecting securities purchases and loan growth; financing cash flow was $1,033.7 million. Cash and cash equivalents increased $102.2 million. The filing reports no outstanding advances on available credit lines at quarter-end; borrowings primarily comprised repurchase agreements and federal funds purchased.
At June 30, the allowance for loan losses was $68.9 million, or 1.30% of loans. Nonperforming assets were $39.7 million, 0.75% of loans and foreclosed assets, compared with $25.8 million and 0.61% at year-end 2019. Total capital to risk-weighted assets was 22.03%, common equity Tier 1 was 20.78%, and the leverage ratio was 11.25% at the consolidated level. The company declared a Q2 dividend of $0.13 per share.
Material changes and notable items
- TB&T Bancshares was acquired effective January 1 for 6.28 million shares. The preliminary purchase accounting recorded $141.9 million of goodwill; acquired loans had a fair value of $447.7 million. The acquisition expanded the company’s Bryan/College Station-area presence.
- PPP participation resulted in approximately 6,500 loans and $703.12 million funded by June 30. The company deferred $26.07 million of fees and $3.62 million of direct origination costs, and recognized $2.83 million of net amounts in Q2 interest income.
- Management attributed higher loan-loss provisions to COVID-19-related economic stress, unemployment and lower oil and gas prices. The allowance was recorded under the incurred-loss method: the company elected the CARES Act option to delay CECL adoption.
- About 2,200 customer loans totaling $468.5 million, excluding PPP loans, were subject to COVID-related payment deferrals or modifications at June 30. These CARES Act accommodations were not reported as troubled debt restructurings when eligible.
- Mortgage income rose substantially with higher origination volumes; service charges on deposits declined amid reduced economic activity. Q2 efficiency benefited from deferring PPP origination costs. Six-month acquisition-related technology conversion and termination costs were $4.39 million.
- Unrealized gains on available-for-sale securities contributed to accumulated other comprehensive income of $151.2 million, versus $67.5 million at year-end 2019. Q2 included $1.5 million in gains on securities sales.
Outlook, risks and contingencies
The filing gives no formal earnings or revenue guidance. Management described liquidity as adequate, citing core deposits and available borrowing capacity, and stated it knew of no event expected to have a material adverse effect on liquidity, capital or operations. Its dividend policy targets approximately 40% of annual net earnings, subject to capital, regulatory and loan-covenant limits.
Management identified COVID-19, economic conditions, oil and gas prices, loan demand and credit quality, interest rates, acquisition integration, regulatory changes, and cybersecurity and operational risks as factors that could affect results. Nonperforming loans increased, including classified oil and gas exposure. Retail, restaurant and hospitality loans were $338.8 million, or 7.34% of loans excluding PPP, with $15.8 million classified and $5.8 million nonaccrual.
Total assets exceeded $10 billion at June 30, largely due to PPP participation. Management estimated that debit interchange-fee limits could reduce annual pretax income by approximately $12 million once applicable; it said it would monitor assets and consider actions to mitigate the effect. The filing also reports interest-rate sensitivity estimates: modeled net interest income rises 4.43% under a 100-basis-point rate increase and falls 3.05% under a 100-basis-point decrease over 12 months; management cautioned that actual outcomes may differ materially. No material change to previously disclosed risk factors was reported. There were no material pending legal proceedings, and disclosure controls were considered effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether PPP loan forgiveness, fee amortization and deposit balances sustain or reverse the reported revenue and funding effects.
- Subsequent trends in deferrals, delinquencies, nonperforming loans, charge-offs and allowance needs as pandemic-related conditions evolve.
- TB&T integration progress, realized cost savings, acquired-loan performance and potential goodwill impairment risk.
- The timing and financial impact of any interchange-fee limits if assets remain above the $10 billion threshold.
- Net interest margin sensitivity to low rates, deposit repricing, securities purchases and changes in the yield curve.