First Financial Bankshares, Inc. — Q3 2014 Form 10-Q
Business and period. Texas-based bank holding company operating 62 financial centers, primarily in Texas, with trust and other financial subsidiaries. This unaudited filing covers the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. Financial amounts below are in millions of dollars unless noted. Per-share amounts reflect the June 2014 two-for-one stock split.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $48.9 | $45.5 | $144.3 | $125.6 |
| Noninterest income | $17.3 | $17.1 | $49.6 | $46.3 |
| Provision for loan losses | $0.9 | $1.3 | $3.7 | $2.6 |
| Noninterest expense | $34.0 | $35.5 | $101.5 | $92.9 |
| Net earnings | $23.4 | $19.6 | $67.0 | $57.6 |
| Diluted EPS | $0.36 | $0.30 | $1.04 | $0.90 |
- Net earnings rose 19.8% in Q3 and 16.2% for the first nine months. Q3 return on average assets was 1.71% and return on average equity was 14.27%; nine-month figures were 1.68% and 14.24%, respectively.
- Tax-equivalent net interest income increased to $53.7 million in Q3 and $158.5 million year to date, primarily reflecting higher average earning-asset volumes. Tax-equivalent net interest margin was 4.18% in Q3, down 7 basis points year over year, and 4.25% for nine months, up 4 basis points.
- Q3 noninterest income was nearly flat. Year-to-date increases included trust fees and ATM/interchange/card fees; lower mortgage activity reduced mortgage income. Nine-month noninterest income also included a $0.6 million gain from settlement of a bank-owned life insurance contract and gains on foreclosed-property sales.
- Q3 noninterest expense declined 4.2%, partly because 2013 included $3.4 million of Orange acquisition technology-contract termination costs. Nine-month expense increased 9.2%, including a $2.39 million litigation settlement and hail-damage deductible, alongside higher staffing and branch-related costs. Efficiency ratio improved to 47.93% for Q3 and 48.78% year to date.
Balance sheet, credit, capital and liquidity
- At September 30, total assets were $5.58 billion, loans held for investment were $2.83 billion, net loans were $2.80 billion, and available-for-sale securities were $2.25 billion. Compared with December 31, 2013, loans held for investment increased $144 million and total deposits increased $329 million to $4.46 billion.
- Asset quality improved versus year-end: nonaccrual loans were $22.1 million, down from $27.9 million; nonperforming loans and foreclosed assets totaled $23.6 million, versus $31.1 million. That total was 0.83% of loans and foreclosed assets. The allowance was $36.4 million, or 1.28% of loans, compared with 1.26% at year-end. Year-to-date net charge-offs were 0.06% of average loans, versus 0.15% in 2013.
- Cash and cash equivalents were $238.7 million. Nine-month operating cash flow was $99.6 million; investing activities used $255.6 million, largely reflecting securities purchases and loan growth; financing activities provided $182.8 million. The company reported $341.9 million of short-term borrowings at quarter-end, down from $463.9 million at year-end. No balance was outstanding on the parent’s $25 million Frost Bank line or the bank’s $100 million correspondent-bank lines.
- Shareholders’ equity was $658.8 million, or 11.81% of assets. Consolidated total risk-based, Tier 1 risk-based and leverage ratios were 17.20%, 16.07% and 10.10%, respectively; management said these exceeded “well capitalized” minimums.
- The bank had an $881.6 million FHLB line available, secured by loans and securities; $1.0 million of advances and $7.0 million of letters of credit were outstanding. Management considered liquidity adequate, citing core deposits, cash and available borrowing sources. Securities pledged as collateral totaled $1.43 billion.
Outlook, risks and notable items
- Management expected interest rates to remain low, which it said would continue to pressure margins. Its interest-rate model projected net interest income changes over the next 12 months of +0.31% and +0.46% for rate increases of 100 and 200 basis points, respectively, and -2.32% for a 50-basis-point decrease. Management cautioned that model estimates depend on assumptions and may differ materially from actual results.
- No formal earnings or revenue guidance was provided. Management cited economic conditions, loan demand and credit quality, interest rates, securities valuations, deposit gathering, regulatory changes and acquisition integration among the risks to results.
- The board authorized a new repurchase program on October 28, 2014, permitting repurchases of up to 1.5 million shares through September 30, 2017; no shares had been repurchased under the prior authorization by quarter-end. The company also declared a two-for-one stock split, distributed June 2, 2014.
- In October 2014, the company approved an offer for certain former employees to take lump-sum pension payments; management did not expect a significant financial-statement impact. The filing reported no material pending legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and increased earning-asset volume can continue to offset low-rate pressure on net interest margin.
- Credit trends, especially real-estate exposure, nonaccrual loans, troubled restructurings, allowance adequacy and the effect of further economic deterioration.
- The repeatability of earnings contributions from foreclosed-asset sales and other unusual items, and the cost impact of litigation, storm damage and expansion.
- Liquidity and funding needs, including short-term borrowings, pledged collateral, deposit growth and the terms and covenants of available credit facilities.
- The effects of securities valuation changes on accumulated other comprehensive income and equity; unrealized securities losses were attributed by management primarily to interest rates and were not judged other-than-temporary.