First Financial Bankshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The Texas-based community banking company operated 78 locations. Results include TB&T Bancshares from its January 1, 2020 acquisition, so year-over-year comparisons reflect both acquisition-related growth and operating changes.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net interest income | $80.9 million | $69.5 million; up 16.4% |
| Tax-equivalent net interest income | $82.7 million | $71.3 million |
| Net interest margin | 3.91% | 4.00%; down 9 basis points |
| Provision for loan losses | $9.85 million | $0.97 million |
| Noninterest income | $28.7 million | $24.4 million |
| Noninterest expense | $55.3 million | $47.4 million |
| Pretax earnings | $44.5 million | $45.6 million |
| Net earnings | $37.2 million | $38.3 million; down 2.7% |
| Basic and diluted EPS | $0.26 | $0.28 |
| Dividend per share | $0.12 | $0.11 |
| Return on average assets / equity | 1.63% / 10.11% | 2.00% / 14.51% |
| Efficiency ratio | 49.63% | 49.46% |
Net interest income growth was primarily volume-driven, including the acquisition; yields on earning assets declined 17 basis points year over year. Noninterest income included a $2.06 million securities-sale gain. Noninterest expense included $3.81 million of acquisition-related technology contract termination and conversion costs.
Balance sheet, credit, and liquidity
- Assets: $9.70 billion at March 31, up from $8.26 billion at December 31, 2019. The acquisition materially expanded the balance sheet.
- Loans: $4.64 billion held for investment, up $444 million from year-end; deposits were $7.21 billion, up $607 million. The company reported $42.0 million of loans held for sale.
- Credit quality: Allowance for loan losses was $60.4 million, or 1.29% of period-end loans, versus $52.5 million and 1.24% at year-end. Nonperforming assets were $40.4 million, or 0.86% of loans and foreclosed assets, compared with $25.8 million and 0.61% at year-end. Nonaccrual loans were $39.2 million.
- Provision and charge-offs: The $9.85 million provision reflected loan growth, higher problem assets and charge-offs, and expected economic stress from COVID-19 and lower oil and gas prices. Annualized net charge-offs were 0.16% of average loans, versus 0.06% in Q1 2019.
- Funding and borrowings: Total liabilities were $8.17 billion. Borrowings were $857.9 million, versus $381.4 million at year-end, including $446 million of Federal Home Loan Bank advances used in part to fund securities purchases. The company also had $410.1 million in repurchase-agreement borrowings.
- Cash and securities: Cash and cash equivalents were $267.9 million. Available-for-sale securities were $4.11 billion at fair value; after-tax unrealized gains in accumulated other comprehensive income were $123.6 million.
- Cash flows: Operating activities provided $31.6 million, investing activities used $567.0 million, and financing activities provided $520.7 million. The investing outflow principally reflected $2.33 billion of securities purchases, partly offset by maturities and acquisition cash; financing inflows included a $476.5 million net increase in borrowings.
- Capital and liquidity: Shareholders’ equity was $1.53 billion, or 15.73% of assets. Consolidated total risk-based capital was 20.65%, Tier 1 and common equity Tier 1 were each 19.55%, and the leverage ratio was 12.49%. Management described liquidity as adequate; $446 million was drawn on a $933.7 million FHLB line, while listed federal funds lines and the $25 million Frost Bank revolver were undrawn.
Material changes and unusual items
- On January 1, the company acquired TB&T Bancshares for 6.28 million shares valued at $220.3 million. The acquisition added $447.7 million of loans and $548.4 million of deposits at fair value and generated $141.3 million of goodwill, which is not tax-deductible.
- COVID-19 and falling oil and gas prices prompted a sharp increase in the loan-loss provision. The company reported $117.2 million of oil-and-gas-related loans (2.50% of loans); classified exposures in that sector rose to $22.0 million from $7.0 million at year-end, and nonaccrual exposures rose to $3.5 million from $0.5 million.
- The company elected under the CARES Act to defer CECL adoption and continued using the incurred-loss model for Q1. Management could not estimate the allowance that would have resulted under CECL at March 31. It had previously estimated an approximately $52 million allowance at January 1 under CECL, compared with $52.5 million under the existing model at year-end.
- Through April 23, after quarter-end, the company reported more than 4,900 Paycheck Protection Program applications and over $640 million funded. It also repurchased 263,464 shares for $6.48 million through April 21, after no repurchases through quarter-end.
- Quarterly comprehensive earnings were $93.3 million, including a substantial after-tax increase in unrealized available-for-sale securities gains; this is distinct from net earnings of $37.2 million.
Outlook, commentary, and risks
The filing provides no numerical earnings guidance. Management cited continued pressure on net interest margin from low short-term rates and a flat or inverted yield curve, partly mitigated through loan pricing and deposit-cost management. The Federal Reserve cut its target rate to 0%–0.25% during Q1. Management said it was monitoring the pandemic and oil-price effects and was unable to provide a March 31 CECL estimate.
Key disclosed risks include worsening borrower repayment and collateral values, especially from pandemic-related economic disruption and oil-and-gas weakness; potential increases in credit-line draws and funding needs; interest-rate volatility; operational and cybersecurity risks from remote work and third-party disruptions; and execution and goodwill-impairment risks associated with acquisitions. The company had $1.40 billion in unfunded commercial commitments, including $795.1 million of lines of credit, $572.1 million of commitments to extend credit, and $35.6 million of standby letters of credit. COVID-related loan extensions and deferrals were available for eligible borrowers, and the company elected CARES Act relief from treating qualifying modifications as troubled debt restructurings. Management reported no material pending legal proceedings and stated disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- How much of loan and deposit growth, earnings, and expenses reflects TB&T, and how integration costs and expected synergies evolve.
- Whether nonperforming loans, classified credits, charge-offs, and the allowance adequately reflect pandemic and oil-and-gas risks, including acquired loans recorded at fair value without an initial allowance.
- The eventual CECL adoption date and its measured impact on the allowance, earnings, and regulatory capital.
- PPP loan balances, forgiveness and servicing economics, and any associated funding or credit exposure after quarter-end.
- Effects of rate changes, securities portfolio duration and unrealized gains, and increased FHLB and repurchase-agreement funding on margin and liquidity.
- Whether the post-quarter share repurchases, dividend policy, and capital ratios remain consistent with regulatory requirements and credit-agreement covenants.