First Financial Bankshares, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company is a Texas-based financial holding company operating a commercial bank and trust business, primarily in Texas.
Financial performance and condition
Amounts are in millions, except per-share data, percentages, and where noted.
| Metric | Q1 2018 | Comparable period / change |
|---|---|---|
| Net interest income | $65.45 | $57.02 in Q1 2017; up 14.8%. Tax-equivalent net interest income was $67.92, versus $63.57. |
| Net interest margin | 3.88% | 4.03% in Q1 2017; down 15 basis points. |
| Noninterest income | $24.42 | $21.29 in Q1 2017; up $3.14. |
| Noninterest expense | $47.80 | $42.15 in Q1 2017; up $5.65. |
| Net earnings / diluted EPS | $34.52 / $0.51 | $26.60 / $0.40 in Q1 2017. Management said earnings excluding the tax legislation effect would have been $30.26 and adjusted basic EPS $0.45. |
| Return on average assets / equity | 1.84% / 14.74% | 1.57% / 12.74% in Q1 2017. |
| Cash flow from operations | $45.13 | $66.96 in Q1 2017. Cash and cash equivalents ended the quarter at $198.04, down $174.31 during the quarter. |
| Total assets | $7,567.45 | $6,930.37 at March 31, 2017; $7,254.72 at December 31, 2017. |
| Loans held for investment | $3,730.05 | Up $244.48 from year-end 2017; $3,372.51 at March 31, 2017. |
| Total deposits | $6,190.76 | Up from $5,661.97 a year earlier; down from $5,962.96 at year-end. |
| Borrowings | $372.16 | $360.26 at March 31, 2017; $331.00 at year-end. |
The allowance for loan losses was $49.50, or 1.32% of held-for-investment loans, compared with 1.36% a year earlier and 1.38% at year-end. Provision expense was $1.31, versus $1.95 in Q1 2017; net charge-offs were zero on an annualized basis. Nonperforming assets were $24.87, or 0.66% of loans and foreclosed assets, compared with $30.52 (0.90%) a year earlier and $20.12 (0.57%) at year-end.
Shareholders’ equity was $969.81, or 12.82% of assets. Regulatory capital ratios remained strong: consolidated total capital 19.58%, Tier 1 18.43%, common equity Tier 1 18.43%, and leverage 10.90%. The filing reports no outstanding advances on the FHLB line or draws on the bank’s federal funds lines; the $25 million parent-company revolving line was also undrawn.
Material changes and notable items
- Acquisition: Commercial Bancshares and Commercial State Bank closed on January 1, 2018. The company issued 1,289,371 shares; the acquired bank contributed $266.3 million of loans and $341.9 million of deposits at acquisition, and $31.6 million of goodwill was recorded. Its results are included from the closing date.
- Tax legislation: The U.S. corporate tax rate fell from 35% to 21%. The effective tax rate was 15.32%, versus 22.23% in Q1 2017. Management attributes much of reported earnings growth to the tax change and the acquisition. A $5.76 million tax-effect reclassification from accumulated other comprehensive income to retained earnings was made under early adoption of ASU 2018-02.
- Interest-rate and securities effects: Available-for-sale securities were $3.28 billion. The quarter recorded a $43.93 million pretax comprehensive loss from securities valuation changes and a $5.58 million after-tax comprehensive gain overall, versus $32.60 million comprehensive earnings in Q1 2017. Accumulated other comprehensive earnings moved from $26.79 million at year-end to a $2.16 million loss. Management characterized the unrealized securities losses as interest-rate-related, not credit-related, and did not consider them other-than-temporary.
- Revenue and costs: Trust fees, deposit service charges, and card fees increased year over year. Securities-sale gains were $1.22 million versus $0.003 million. Mortgage revenue declined to $2.93 million from $3.42 million, attributed to slower refinancing and the 2017 mortgage servicing portfolio sale. Expense growth included $1.55 million of technology termination and conversion costs related to the acquisition; the efficiency ratio rose to 51.76% from 49.67%.
Outlook, risks, and contingencies
- Management expects interest rates to remain relatively low despite anticipated Federal Reserve increases, continuing pressure on net interest margin. Its model estimated net interest income changes over 12 months of +0.26% under a 100-basis-point increase, +0.10% under a 200-basis-point increase, and -3.39% under a 100-basis-point decrease; management cautioned these are estimates based on assumptions, not forecasts.
- Hurricane Harvey-related credit and collateral evaluations continued. The company reported $455.43 million in loans in its Conroe region and $394.35 million in Southeast Texas/Orange, and $434.04 million of municipal bonds in affected counties, of which $87.75 million were uninsured. Management reported no identified municipal bond credit losses and said uninsured physical damage at its Mauriceville branch did not appear significant.
- Oil-and-gas-related loans were $86.22 million, 2.30% of gross loans, up from $60.16 million at year-end, primarily due to the acquisition. Classified oil-and-gas loans were $10.49 million; nonaccrual balances were $1.46 million.
- Key stated risks include local economic and real-estate conditions, severe weather, interest-rate and market movements, loan demand and credit quality, deposit competition, regulatory changes, cybersecurity, and successful acquisition integration. The company said there was no material change to previously disclosed risk factors, no material pending legal proceedings, and no known liquidity event expected to materially adversely affect operations.
- Commercial commitments totaled $945.61 million, including $612.56 million of unfunded lines, $306.09 million of unfunded commitments to extend credit, and $26.96 million of standby letters of credit; these amounts are not necessarily expected cash requirements.
- The board declared a second-quarter dividend of $0.21 per share, up 10.53% from the prior-year amount. No shares had been repurchased under the authorization through March 31, 2018.
Important facts for investors to verify
- Separate reported earnings growth attributable to the lower tax rate and Commercial Bancshares from underlying operating performance; review the acquisition’s continuing contribution and integration costs.
- Track net interest margin, deposit pricing, funding mix, and the sensitivity of earnings to rate changes.
- Monitor the sizable securities portfolio, its unrealized losses and duration, and management’s assumptions supporting its no-impairment conclusion.
- Review credit trends after the acquisition, including nonperforming assets, real-estate concentrations, Harvey-affected exposures, and oil-and-gas loans.
- Reconcile cash-flow changes and deposit movements with reported liquidity sources and commitments.
- Confirm two apparent source-text inconsistencies: the equity statement shows cash dividends declared as “$.019 per share,” while the earnings statement reports $0.19; and the MD&A appears to label Q1 2018 noninterest expense as Q1 2017 in one sentence.