First Financial Bankshares, Inc. — Q3 2019 Form 10-Q
Business context and reporting period. Texas-based financial holding company operating 73 financial centers. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Dollar amounts below are in millions, except per-share data.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $72.6 | $69.4 | $213.8 | $202.5 |
| Provision for loan losses | $0.5 | $1.5 | $2.0 | $3.9 |
| Noninterest income | $28.7 | $27.1 | $81.1 | $77.0 |
| Noninterest expense | $48.9 | $47.5 | $144.6 | $142.4 |
| Net earnings | $43.1 | $40.1 | $123.4 | $112.2 |
| Basic EPS | $0.32 | $0.30 | $0.91 | $0.83 |
| Net interest margin (tax-equivalent) | 3.94% | 4.01% | 3.97% | 3.94% |
- Q3 earnings rose about 7.6%; nine-month earnings rose about 10.0%. Tax-equivalent net interest income increased to $74.2 million for Q3 and $218.8 million year to date.
- Efficiency ratio improved to 47.54% in Q3 from 48.12%, and to 48.21% for the first nine months from 49.73%.
- Mortgage operations revenue and interest on loan recoveries supported noninterest income growth; lower trust fees and securities-sale gains partly offset increases. Salaries and benefits were higher, while FDIC premiums declined.
- At September 30, total assets were $8.11 billion, loans held for investment $4.10 billion, deposits $6.40 billion, and borrowings $400.2 million. Compared with year-end 2018, loans increased $146.7 million and deposits increased $217.3 million; borrowings declined $68.6 million. Cash and cash equivalents were $230.3 million.
- Nine-month operating cash flow was $145.7 million, versus $158.9 million in 2018. Investing activities used $271.5 million, while financing activities provided $107.5 million; cash declined $18.4 million over the period.
- Shareholders’ equity was $1.21 billion, 14.85% of assets. Consolidated total risk-based capital was 21.14%, common equity Tier 1 was 20.05%, and leverage ratio was 12.58%.
Material changes and notable items
- Loans held for investment grew 3.7% from December 2018; real estate loans were about 67% of the portfolio. Nonperforming assets were $27.2 million, or 0.66% of loans and foreclosed assets, down from 0.75% at year-end 2018. The allowance was $51.9 million, or 1.25% of loans, compared with 1.29% at year-end.
- Available-for-sale securities totaled $3.40 billion, up from $3.16 billion at year-end. Improved market values contributed to accumulated other comprehensive earnings of $72.2 million, versus a $27.976 million accumulated loss at September 2018. Management attributed unrealized securities losses to interest rates, not credit concerns.
- A two-for-one stock split was distributed June 3, 2019; reported per-share data reflect the split. The company declared $0.12 per share in Q3, versus $0.11 in Q3 2018.
- Nine-month expense included a $0.9 million pension-plan merger/settlement charge. The company is terminating its frozen pension plan; final settlement was expected in Q4 2019 or Q1 2020, subject to regulatory approval.
Outlook, risks and contingencies
- No formal earnings or margin guidance is provided. Management cited margin pressure from lower short-term rates, a flat or inverted yield curve, and the reduced value of tax-exempt income following the federal tax-rate change. The Federal Reserve cut rates by 50 basis points during Q3. Company simulations estimated that a 100- or 200-basis-point rate increase would raise 12-month net interest income by 2.69% or 4.43%; equivalent decreases would lower it by 2.84% or 5.67%. These are model estimates, not forecasts.
- The company agreed to acquire TB&T Bancshares, with 6.28 million shares to be issued. Subject to regulatory and shareholder approvals, closing was expected in Q1 2020. At June 30, 2019, the target reported $624.5 million in assets, $538.2 million in deposits, and $445.6 million in gross loans.
- CECL credit-loss accounting was scheduled to take effect January 1, 2020. The company was developing implementation processes and models; adoption impact remained under evaluation.
- Liquidity sources included a $1.24 billion FHLB line, with $35 million drawn; $130 million in undrawn correspondent-bank federal-funds lines; and an undrawn $25 million parent-company revolver. Management considered liquidity adequate and reported compliance with the revolver’s covenants. Customer credit commitments totaled $1.11 billion, including $695.7 million of unfunded lines and $35.9 million of standby letters of credit.
- Principal stated risks include economic and credit conditions, interest-rate and market movements, oil and gas and other commodity prices, deposit competition, regulatory changes, cyber and operational risks, and acquisition execution. The filing reported no material pending legal proceedings and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Track deposit pricing and funding costs against asset yields: interest expense rose faster than interest income in Q3, and the tax-equivalent margin declined year over year.
- Review loan growth, criticized and nonaccrual credits, oil-and-gas exposure, and allowance adequacy; oil-and-gas loans were $122.9 million, with classified balances increasing from year-end.
- Assess the sensitivity of the large securities portfolio and accumulated other comprehensive earnings to interest rates, including collateral pledges of $2.11 billion of securities.
- Confirm TB&T transaction approvals, final terms, timing, integration plans, and resulting share dilution; monitor CECL implementation and pension-plan settlement costs.
- Consider the assumptions and limitations in management’s interest-rate simulations and its statements that liquidity and asset quality are manageable.