First Financial Bankshares, Inc. — Q1 2019 Form 10-Q
Business context and period. The Texas-based financial holding company operates a full-service commercial bank, primarily in Texas, with 73 financial centers at March 31, 2019. This unaudited report covers the three months ended March 31, 2019; comparative results are for Q1 2018 unless noted. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / date |
|---|---|---|
| Net earnings | $38.3 million | $34.5 million; up 10.8% |
| Basic / diluted EPS | $0.28 / $0.28 | $0.26 / $0.25 |
| Net interest income | $69.5 million; tax-equivalent $71.3 million | $65.4 million; tax-equivalent $67.9 million |
| Net interest margin | 4.00% | 3.88% |
| Noninterest income / expense | $24.4 million / $47.4 million | $24.4 million / $47.8 million |
| Efficiency ratio | 49.46% | 51.76% |
| Return on average assets / equity | 2.00% / 14.51% | 1.84% / 14.74% |
| Operating cash flow | $72.3 million | $45.1 million |
At March 31, 2019, total assets were $7.95 billion, loans held for investment were $3.99 billion, deposits were $6.35 billion, and shareholders’ equity was $1.11 billion. Cash and cash equivalents were $386.9 million, up from $248.6 million at year-end 2018. Borrowings totaled $382.7 million, primarily repurchase agreements; there were no FHLB advances at quarter-end. The company reported $72.4 million of net financing cash inflow and $6.4 million of net investing cash outflow.
Credit metrics: allowance for loan losses was $51.6 million, or 1.29% of loans; Q1 provision was $965,000 and annualized net charge-offs were 0.06% of average loans. Nonperforming assets were $29.7 million, 0.74% of loans and foreclosed assets, versus $24.9 million and 0.66% a year earlier. Consolidated total risk-based capital was 21.00%, common equity Tier 1 was 19.86%, and leverage was 12.08%.
Material changes and notable items
- Net interest income increased mainly with growth in earning assets. Average loans rose $224.6 million year over year; loan interest yield increased, while deposit and borrowing costs also rose. Management reported continued pressure on margin from the lower tax benefit of tax-exempt assets and changing interest rates.
- Loan balances increased 6.9% year over year. Nonaccrual loans rose to $28.5 million from $22.8 million at March 2018, although they were close to year-end levels. Real estate loans account for the majority of the loan portfolio.
- Noninterest income was broadly flat: mortgage operations and deposit service charges grew, offset by the absence of $1.2 million of securities-sale gains recorded in Q1 2018. Noninterest expense declined modestly, and the efficiency ratio improved.
- Comprehensive earnings were $65.9 million versus $5.6 million in Q1 2018, principally reflecting a $35.0 million pretax increase in unrealized available-for-sale securities gains in Q1 2019, compared with a substantial unrealized loss in the prior-year quarter.
- Q1 2019 expense included $900,000 related to the merger of the frozen Orange Savings Bank pension plan into the company plan. The company began steps to terminate its remaining frozen pension obligation; final settlement was expected in Q1 or Q2 2020, subject to regulatory approval, interest rates, and funding needs.
- After quarter-end, the board declared a two-for-one stock split as a 100% stock dividend, with shares scheduled for distribution June 3, 2019. Reported per-share amounts have been restated for the split.
Outlook, risks, and contingencies
The filing gives no numerical earnings or revenue guidance. Management said it did not anticipate a significant change in dividend policy, which targets cash dividends of approximately 40% of annual net earnings; the Q1 payout ratio was 37.24%. The company described liquidity as adequate and reported no material adverse liquidity, capital, or operational events known to management. It had no amounts drawn on its $25 million Frost Bank revolving line, which matured June 30, 2019, and was in compliance with its covenants at quarter-end. Available FHLB and correspondent-bank facilities provide additional funding capacity.
Key risks include economic and Texas real estate conditions; borrower credit quality and collateral values; interest-rate movements, which affect both net interest income and securities valuations; deposit competition and liquidity; regulatory and accounting changes; cyber and information-system risks; and acquisition and integration risks. The company said a 100- or 200-basis-point rate increase would raise modeled 12-month net interest income by 2.77% or 4.97%, while equivalent decreases would reduce it by 2.88% or 7.33%; management cautioned these are assumption-dependent estimates, not forecasts. The expected-credit-loss standard (CECL) was scheduled to take effect for the company January 1, 2020; its impact was still under evaluation. Management considered securities’ unrealized losses interest-rate-related and not other-than-temporary, citing no intent or expected need to sell before recovery or maturity.
The filing reports no material pending legal proceedings and no material change in previously disclosed risk factors. Off-balance-sheet commercial commitments totaled $990.0 million, including $620.4 million in unfunded lines, $339.4 million in loan commitments, and $30.2 million in standby letters of credit; these amounts are not necessarily expected cash outflows.
Important facts for investors to verify
- Whether the increase in nonaccrual loans and nonperforming assets persists, and whether the allowance remains adequate as lending grows.
- How rising funding costs and changes in market rates affect net interest margin, deposit retention, and securities’ fair value.
- The actual funding, timing, and regulatory approval for termination and settlement of the remaining pension obligation.
- The company’s CECL implementation progress and eventual impact on provision expense and capital.
- The June 2019 maturity and renewal or repayment status of the Frost Bank line, and the realization of committed off-balance-sheet lending.
- That EPS and other per-share comparisons reflect the two-for-one stock split; Q1 results are not necessarily indicative of full-year performance.