First Financial Bankshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company is a Texas-based community banking and financial services holding company; its bank had 78 Texas locations. Unless otherwise indicated, dollar amounts below are in millions.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $89.2 | $72.6 | $259.3 | $213.8 |
| Provision for credit losses | $9.0 | $0.5 | $27.6 | $2.0 |
| Noninterest income | $38.6 | $28.7 | $104.2 | $81.1 |
| Noninterest expense | $55.6 | $48.9 | $164.2 | $144.6 |
| Net earnings | $52.9 | $43.1 | $143.6 | $123.4 |
| Diluted earnings per share | $0.37 | $0.32 | $1.01 | $0.91 |
| Net interest margin, tax-equivalent | 3.75% | 3.94% | 3.81% | 3.97% |
| Efficiency ratio | 42.45% | 47.54% | 44.21% | 48.21% |
- Q3 net earnings rose 22.7%; nine-month earnings rose 16.3%. Return on average assets was 2.01% in Q3 and 1.91% for nine months, down from 2.15% and 2.10%, respectively, in 2019. Return on average equity also declined year over year.
- At September 30, total assets were $10.57 billion, loans held for investment $5.29 billion, available-for-sale securities $4.43 billion, and deposits $8.29 billion. Year-end 2019 balances were $8.26 billion, $4.19 billion, $3.41 billion, and $6.60 billion, respectively. Growth reflects the TB&T acquisition, PPP lending and deposit growth.
- Cash and cash equivalents were $234.0 million, compared with $282.6 million at year-end 2019. Nine-month operating cash flow was $134.9 million versus $144.4 million a year earlier; investing cash use was $1.39 billion and financing cash provided was $1.21 billion.
- Borrowings were $503.2 million, up from $381.4 million at year-end 2019. Shareholders’ equity was $1.62 billion, or 15.33% of assets. Consolidated total risk-based capital was 21.82%, Tier 1 and common equity Tier 1 were each 20.56%, and the leverage ratio was 11.65%; the bank exceeded applicable well-capitalized thresholds.
- The allowance for loan losses was $76.0 million, or 1.44% of held-for-investment loans, versus $52.5 million and 1.25% at year-end 2019. Nonperforming assets were $43.1 million, or 0.81% of loans and foreclosed assets, compared with $25.8 million and 0.61% at year-end.
Material changes and drivers
- On January 1, 2020, the company acquired TB&T Bancshares for 6.28 million shares. The preliminary acquisition accounting recorded $141.9 million of goodwill. Acquired assets included $447.7 million of loans and $94.0 million of securities; acquired deposits were $549.1 million.
- Net interest income increased as earning assets expanded, including from the acquisition and PPP participation. Lower market rates reduced asset yields, but deposit and borrowing costs also fell. Management reported that the tax-equivalent margin contracted 19 basis points in Q3 and 16 basis points for nine months.
- Mortgage gains and fees rose to $15.2 million in Q3 and $32.8 million for nine months, supported by higher originations in a low-rate environment. Trust fees and card-related fees also increased. Deposit service charges fell, which management attributed partly to lower overdraft activity during the pandemic and related stimulus programs.
- Provision for credit losses rose sharply, reflecting pandemic-related economic stress and oil-and-gas price volatility. Noninterest expense increased, including acquisition-related costs; nine-month expenses included $4.4 million of technology contract termination and conversion costs tied to TB&T.
- Unrealized after-tax gains on available-for-sale securities contributed to accumulated other comprehensive income of $152.1 million, up from $67.5 million at year-end 2019.
Outlook, risks and unusual items
- COVID-19 and PPP: The company funded approximately 6,500 PPP loans totaling $703.7 million. It deferred $26.3 million of PPP fees and incurred $3.6 million in direct origination costs; $2.83 million of net deferred amounts was recognized in interest income in each of Q2 and Q3. Unrecognized PPP loan fees were $16.0 million at quarter-end. Approximately 122 other loans totaling $18.7 million were subject to deferral or modification arrangements, excluding PPP loans.
- Credit-loss accounting: The company elected under the CARES Act to defer CECL adoption and continued using the incurred-loss model. It expected to adopt CECL in Q4 2020 with retroactive application to January 1, but could not estimate the September 30 CECL allowance or related provision. Management estimated the January 1 CECL allowance would have been about $52 million, versus $52.5 million under the incurred model.
- Interchange fees: Quarter-end assets exceeded $10 billion, primarily because of PPP-related activity and deposit growth. Management estimated that debit interchange fee limits could reduce annual pretax income by about $14 million once applicable. It was monitoring balance-sheet levels and could pursue strategies to remain below the threshold; the timing and ultimate impact depend on year-end assets and the regulatory effective date.
- Interest-rate sensitivity: The company’s model estimated that a 100- or 200-basis-point rate increase would raise projected 12-month net interest income by 3.93% or 7.81%; equivalent decreases would reduce it by 4.23% or 6.21%. Management cautioned these are assumption-dependent estimates, not forecasts.
- Liquidity and distributions: Management considered liquidity adequate, citing core deposits and available borrowing facilities. The bank had $30 million outstanding from the FHLB and an available FHLB line of $1.77 billion; other federal funds lines were undrawn. The company’s stated long-term dividend target is about 40% of annual earnings, and it did not anticipate a significant policy change.
- There was no specific earnings or financial guidance in the provided filing text. Management identified risks including COVID-19, local and broader economic conditions, oil and gas prices, credit quality, interest rates, competition, regulation, cyber and operational risks, and acquisition integration. The filing reported no material pending legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of loan, deposit and earnings growth reflects TB&T and PPP activity, and how sustainable are the resulting revenues and balances?
- How will CECL adoption change the allowance, provision, retained earnings and capital measures, given the company had not estimated the September-quarter impact?
- Are rising nonaccrual loans and classified exposures—particularly in real estate, oil and gas, and retail/restaurant/hospitality—contained as pandemic conditions evolve?
- Will assets remain above the $10 billion interchange-fee threshold at year-end, and what would the resulting timing and earnings impact be?
- Can the company sustain its net interest margin and mortgage-related income if rates, mortgage volumes or PPP fee recognition change?
- Confirm the company’s actual liquidity, borrowing needs, capital ratios and dividend capacity against subsequent filings; the quarter-end figures are not forward projections.