FIRST FINANCIAL BANKSHARES INC quarterly report, Q2 FY2010

First Financial Bankshares, Inc. — Q2 2010 Form 10-Q

Reporting period: Three and six months ended June 30, 2010; balance-sheet figures are as of June 30, 2010. The company is a Texas bank holding company operating 50 financial centers, primarily in North Central and West Texas. Unless noted otherwise, financial amounts below are in U.S. dollars.

Financial performance

MetricQ2 2010Q2 2009First half 2010First half 2009
Net interest income$33.5 million$32.1 million$66.1 million$64.0 million
Provision for loan losses$3.0 million$1.6 million$5.0 million$3.3 million
Noninterest income$12.6 million$12.1 million$23.7 million$23.7 million
Noninterest expense$24.0 million$24.4 million$47.3 million$47.3 million
Net earnings$14.2 million$13.6 million$27.9 million$27.3 million
Diluted earnings per share$0.68$0.65$1.34$1.31
Net interest margin, tax-equivalent4.69%4.88%4.69%4.82%
Efficiency ratio49.21%52.17%49.77%51.21%
  • Q2 net earnings increased 4.7%; first-half earnings rose 2.4%. Return on average assets was 1.70% for Q2 and 1.69% for the first half, down from 1.77% and 1.76%, respectively. Return on average equity also declined year over year.
  • Tax-equivalent net interest income was $36.1 million in Q2 and $71.3 million for the first half, up from $34.6 million and $68.7 million. Growth in average earning assets and lower funding costs supported the increase, while lower asset yields pressured margins.
  • At June 30, total assets were $3.34 billion, loans $1.52 billion, deposits $2.71 billion, shareholders’ equity $431.0 million, and short-term borrowings $159.5 million. Compared with June 30, 2009, assets, loans, deposits and equity were higher; short-term borrowings were lower.
  • Cash and cash equivalents were $240.2 million, down from $321.5 million at year-end 2009. For the first half, operating cash flow was $40.1 million, investing cash flow was negative $142.7 million, financing cash flow was positive $21.3 million, and cash declined $81.3 million.
  • Regulatory capital ratios at June 30 were 19.48% total risk-based capital and 10.63% leverage; management stated the company remained well capitalized. Total shareholders’ equity was 12.92% of total assets.

Material changes and asset quality

  • The allowance for loan losses rose to $29.0 million, or 1.91% of period-end loans, from $23.2 million and 1.57% a year earlier. First-half net charge-offs increased to $3.6 million from $1.6 million; the company cited a $1.8 million charge-off related to one commercial customer.
  • Nonperforming assets were $22.5 million, or 1.48% of loans and foreclosed assets, versus $14.1 million and 0.95% a year earlier. Nonaccrual loans were $14.2 million and foreclosed assets $8.3 million. Management attributed deterioration to the recession and slower real estate markets, with many nonaccrual loans in markets near Dallas-Fort Worth.
  • Q2 and first-half provisions increased because of recession concerns, higher nonperforming assets and charge-offs. Management considered the allowance adequate but warned that economic weakness, unemployment or regulatory review could require additional provisions.
  • Expense comparisons benefited from the absence of the 2009 FDIC special assessment; FDIC premiums fell $1.3 million for both Q2 and the first half. Higher profit-sharing costs partially offset the savings. First-half noninterest income was nearly flat, including the absence of a $616,000 student-loan sale gain recorded in 2009; the company had exited student-loan originations and held no student loans at period-end.
  • Available-for-sale securities totaled $1.40 billion. The company reported $500,000 of unrealized losses across 53 positions and considered these interest-rate-related, not other-than-temporary. It reported no trading securities at June 30, 2010, compared with $31.2 million at June 30, 2009.

Outlook, liquidity and risks

  • No earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year performance and identified economic conditions, credit quality, interest rates, regulation, competition, deposit gathering and loan demand as key uncertainties.
  • Management anticipated continued pressure on net interest margin if low short-term rates persisted. Its rate simulation estimated that +100 and +200 basis-point rate shocks would reduce projected net interest income by 0.38% and 0.01%, respectively, while a 50-basis-point decrease would increase it by 0.16%; these are model estimates subject to assumptions and limitations.
  • Management characterized liquidity as adequate, citing core deposits, cash and short-term investments, subsidiary-bank dividend capacity, and borrowing access. The company had an undrawn $25 million parent-company credit line maturing June 30, 2011, plus $60 million in subsidiary-bank Federal funds lines with no amount outstanding. The parent line includes financial and operating covenants, including a restriction on dividends above 55% of consolidated net income; management said it was in compliance.
  • Commercial commitments totaled $391.7 million: $310.1 million in unfunded lines, $60.2 million in commitments to extend credit and $21.3 million in standby letters of credit. Many commitments may expire undrawn. The filing states the fair value of these off-balance-sheet obligations was not material.
  • Management expected recently enacted financial reforms, including the Dodd-Frank Act, to reduce revenues and increase expenses over time, while noting that effects and required responses remained under review. The defined-benefit pension plan is frozen; the company contributed $1.0 million in March 2010 and is evaluating future funding needs.

Most important facts for investors to verify

  • Whether rising nonperforming assets, charge-offs and foreclosed real estate continue to increase, and whether reserve coverage remains adequate.
  • How low interest rates and balance-sheet repricing affect net interest margin and earnings.
  • Whether growth in deposits and liquid assets is sustained and how the securities portfolio performs, including unrealized values and interest-rate exposure.
  • Future effects of Dodd-Frank implementation, FDIC assessments, pension funding and credit-line covenants on costs, dividends and capital flexibility.
  • The filing reports the 2010 six-month margin as 4.69% versus 4.82% for 2009; its narrative contains an apparent period-label error in one sentence, so verify the comparison against the table.