First Financial Bankshares, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. The company is a Texas-based, multi-bank financial holding company operating mainly in North Central and West Texas. Unless noted otherwise, financial statement amounts below are in millions of dollars.
Key financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $38.6 | $38.2 | $76.8 | $75.5 |
| Provision for loan losses | $0.8 | $1.9 | $2.1 | $4.1 |
| Noninterest income | $13.5 | $11.9 | $26.8 | $24.7 |
| Noninterest expense | $26.7 | $25.9 | $53.2 | $52.0 |
| Net earnings | $18.4 | $16.5 | $36.1 | $32.8 |
| Basic EPS | $0.58 | $0.53 | $1.15 | $1.04 |
| Net interest margin | 4.33% | 4.69% | 4.36% | 4.71% |
| Efficiency ratio | 48.02% | 48.65% | 48.05% | 48.86% |
- Q2 net earnings increased 11.1% year over year; six-month earnings increased 10.0%. Management attributed higher net interest income primarily to growth in earning assets, which more than offset lower yields.
- Q2 return on average assets was 1.75% and return on average equity was 14.01%; six-month figures were 1.74% and 13.90%, respectively.
- Tax-equivalent net interest income was $42.2 million in Q2 and $84.0 million for six months. Tax-equivalent NIM fell 36 basis points and 35 basis points, respectively, versus 2011.
Balance sheet, cash flow, and funding
- At June 30, 2012, total assets were $4.29 billion, up from $4.12 billion at year-end 2011. Loans held for investment were $1.91 billion, up $132.7 million from year-end; real estate loans drove most of the increase.
- Total deposits were $3.39 billion, versus $3.33 billion at year-end. Noninterest-bearing deposits were $1.16 billion. Short-term borrowings were $251.4 million, up from $207.8 million at year-end; these principally comprise federal funds purchased and repurchase agreements.
- Cash and cash equivalents were $158.4 million, down from $250.8 million at year-end. For the first six months, operating cash flow was $56.0 million, investing cash flow was negative $234.8 million, and financing cash flow was positive $86.4 million. Investing outflows included $314.8 million of securities purchases and $134.7 million of net loan growth.
- Available-for-sale securities totaled $1.96 billion at fair value, compared with $1.84 billion at year-end. The portfolio recorded net unrealized gains in shareholders’ equity; management said identified unrealized losses were interest-rate-related and not other-than-temporary.
- Shareholders’ equity was $534.3 million, or 12.45% of assets. Regulatory capital ratios were 18.48% total risk-based, 17.23% Tier 1 risk-based, and 10.36% leverage; management reported each exceeded “well capitalized” minimums.
- The company reported $297.7 million in unfunded credit lines, $68.9 million in commitments to extend credit, and $24.4 million in standby letters of credit. Management considered liquidity adequate, citing core deposits, available credit lines, and subsidiary dividend capacity.
Material changes and asset quality
- Loans grew, while credit indicators weakened: nonperforming assets were $33.9 million, or 1.76% of loans and foreclosed assets, versus $29.5 million and 1.64% at year-end 2011. Nonaccrual loans rose to $26.6 million from $20.0 million at year-end and $18.6 million a year earlier.
- The allowance for loan losses was $34.7 million, or 1.81% of period-end loans, compared with 1.92% at year-end 2011. Six-month net charge-offs were $1.6 million versus $1.8 million in 2011. Management cited lower classified loans and charge-offs as reasons for reduced provisions, while noting continued elevated nonperforming assets.
- Trust fees, card-related fees, mortgage operations, and securities gains increased. Deposit service charges declined, which management attributed mainly to lower overdraft usage and regulatory changes. Management noted possible future pressure on interchange revenue from regulation.
- Unrealized after-tax gains on available-for-sale securities contributed to accumulated other comprehensive earnings of $51.6 million, up from $47.2 million at year-end.
Outlook, risks, and contingencies
- Management expected low interest rates to persist until 2014, continuing pressure on net interest margin. Its rate model projected net interest income changes of positive 0.17% and 0.27% under immediate 100- and 200-basis-point increases, and negative 2.40% under a 50-basis-point decrease, relative to its base case. Management cautioned that model assumptions limit predictive value.
- Management said results may vary with economic and real estate conditions, employment, loan quality, interest rates, regulation, deposit trends, and other factors; interim results are not necessarily indicative of full-year results. No specific earnings guidance was provided.
- A cyber attack on a customer’s computer system and recurring customer debit-card losses contributed to higher operational and other losses. The company reported implementing or considering additional security measures, contractual protections, and insurance.
- During the first half, 42 loans totaling $8.8 million were modified as troubled debt restructurings; the filing reported no defaults during the period among loans modified as TDRs in the prior 12 months. The company also reported $7.1 million of foreclosed assets and Q2 write-downs on other real estate owned.
- The company had an unsecured $25 million revolving credit line with no balance outstanding at June 30, 2012, maturing June 30, 2013, subject to financial and operating covenants. Management reported compliance at quarter-end. Certain subsidiary bank loans were pledged under Federal Home Loan Bank lines; $80.7 million of related letters of credit were outstanding.
- Management reported disclosure controls and procedures effective at the reasonable-assurance level and no significant second-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the rise in nonaccrual loans and nonperforming assets continues, particularly in real estate lending, and whether the allowance remains adequate.
- Whether loan growth can sustain earnings as asset yields and net interest margin face low-rate pressure.
- How deposits, short-term borrowings, and cash levels evolve as the company funds loan growth and securities purchases.
- Whether card interchange and overdraft-related regulatory or customer behavior changes further reduce fee income, and whether cyber-related losses or safeguards change materially.
- Any changes to the $25 million credit facility, covenant compliance, regulatory capital, or the company’s dividend policy.