First Financial Bankshares, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The consolidated interim financial statements are unaudited. First Financial is a Texas-based multi-bank financial holding company operating primarily in North Central and West Texas.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net interest income | $39.1 million | $38.3 million | $115.9 million | $113.8 million |
| Noninterest income | $15.5 million | $13.9 million | $42.3 million | $38.6 million |
| Noninterest expense | $27.2 million | $26.3 million | $80.4 million | $78.4 million |
| Net earnings | $19.8 million | $18.1 million | $55.9 million | $50.9 million |
| Diluted earnings per share | $0.63 | $0.57 | $1.78 | $1.62 |
| Net interest margin, tax-equivalent | 4.26% | 4.62% | 4.32% | 4.68% |
| Efficiency ratio | 46.61% | 47.48% | 47.55% | 48.39% |
- Profitability: Net earnings increased 9.5% year over year in Q3 and 9.8% for the nine-month period. Return on average assets was 1.84% for Q3 and 1.78% for nine months; return on average equity was 14.53% and 14.12%, respectively.
- Balance sheet at September 30: Assets were $4.31 billion, up from $3.94 billion a year earlier. Loans held for investment were $1.99 billion versus $1.72 billion; deposits were $3.44 billion versus $3.19 billion. Shareholders’ equity was $549.9 million.
- Cash flow: Nine-month operating cash flow was $78.2 million, investing cash flow was negative $285.4 million, and financing cash flow was positive $134.0 million. Cash and cash equivalents ended at $177.6 million, down from $250.8 million at year-end 2011.
- Credit and provision: The allowance for loan losses was $34.9 million, or 1.74% of loans, compared with 1.92% at year-end 2011. Provision expense was $0.8 million in Q3 and $2.8 million year to date, below the respective 2011 periods.
- Debt and liquidity: Short-term borrowings totaled $254.5 million, compared with $207.8 million at year-end 2011; no balance was outstanding on the company’s $25 million unsecured revolving line. Management considered liquidity adequate. Regulatory capital ratios were 18.92% total risk-based, 17.66% Tier 1 risk-based, and 10.49% leverage, all above the stated “well capitalized” thresholds.
Material changes versus comparable periods
- Higher loan and securities volumes supported net interest income, but lower asset yields pressured margins. Tax-equivalent net interest income rose to $42.9 million in Q3 from $41.5 million, while the net interest margin declined 36 basis points year over year.
- Q3 noninterest income grew $1.6 million, including a $1.4 million increase in securities gains. Trust fees, mortgage operations, and card fees also increased; deposit service charges declined. Nine-month securities gains were $2.2 million versus $0.3 million in 2011.
- Loan balances increased $217.9 million from year-end 2011, led by real estate loans. Non-accrual loans rose to $24.3 million from $20.0 million at year-end; total nonperforming assets were $30.7 million, or 1.53% of loans and foreclosed assets, compared with $29.5 million and 1.64% at year-end.
- Noninterest expense rose 3.4% in Q3 and 2.6% for nine months. Salaries, equipment, and card-related expenses increased; lower FDIC premiums and professional fees partly offset the increases.
Outlook, risks, contingencies, and unusual items
- Management said it expected interest rates to remain near then-current low levels until 2014, continuing pressure on interest margins. Its interest-rate simulation estimated net interest income changes over 12 months of +0.36% for a 100-basis-point rate increase, +0.65% for a 200-basis-point increase, and −2.39% for a 50-basis-point decrease. Management cautioned that these are estimates dependent on assumptions.
- On October 18, 2012, the company announced plans, subject to regulatory approval, to consolidate its eleven bank charters into one at year-end 2012, citing compliance, technology, and potential cost-saving considerations.
- Management identified economic and real-estate conditions, employment, loan demand and credit quality, interest rates, securities valuations, regulation, deposit gathering, liquidity, competition, and technology or cybersecurity events as risks. It reported operational losses associated with recurring debit-card losses and a cyberattack on a customer’s computer system, and said it was evaluating added safeguards and insurance.
- Two restructured loans totaling $221,000 defaulted on modified terms during the first nine months of 2012. The filing states there were no material pending legal proceedings and no material change to previously disclosed risk factors.
- Available-for-sale securities had $97.2 million of gross unrealized gains and $1.3 million of gross unrealized losses at quarter-end. Management attributed the losses primarily to interest rates and did not consider them other-than-temporary. Q3 included $1.5 million of net gains on available-for-sale securities.
- No formal earnings or revenue guidance is provided. Management said it did not anticipate a significant change in dividend policy; the stated long-term payout objective was 40%–55% of net earnings.
Most important facts for investors to verify
- Whether the increase in non-accrual loans, particularly real estate, leads to higher charge-offs, provisions, or collateral write-downs.
- How sustainable earnings are if lower asset yields continue and securities-sale gains are not repeated.
- Whether deposit and loan growth, short-term borrowing levels, and available liquidity facilities remain consistent with management’s liquidity assessment.
- Regulatory approval, timing, implementation costs, and realized savings from the planned bank-charter consolidation.
- Whether the reported interest-rate sensitivity and securities fair values remain reasonable as rates and market conditions change.