First Financial Bankshares, Inc. — Q2 2014 Form 10-Q
Business context and period. Texas-based financial holding company operating a full-service commercial bank, with 60 financial centers across Texas and trust and other financial services subsidiaries. This unaudited filing covers the quarter and six months ended June 30, 2014; dollar amounts below are in millions unless stated otherwise. The 2013 comparison includes Orange Savings Bank only from its May 31, 2013 acquisition date, affecting comparability. A two-for-one stock split was distributed June 2, 2014; per-share figures were restated.
Financial performance and position
| Metric | Q2 or June 30, 2014 | Comparable period |
|---|---|---|
| Net interest income | Q2 $48.2; H1 $95.4 | Q2 2013 $41.5; H1 2013 $80.2 |
| Net earnings | Q2 $21.2; H1 $43.5 | Q2 2013 $19.5; H1 2013 $38.1 |
| Basic and diluted EPS | Q2 $0.33; H1 $0.68 | Q2 2013 $0.31; H1 2013 $0.60 |
| Net interest margin, tax-equivalent | Q2 4.24%; H1 4.28% | Q2 2013 4.18%; H1 2013 4.18% |
| Efficiency ratio | Q2 50.84%; H1 49.22% | Q2 2013 49.25%; H1 2013 48.98% |
| Total assets | $5,446.4 | June 30, 2013: $4,982.6 |
| Loans held for investment | $2,773.1 | June 30, 2013: $2,560.9 |
| Total deposits | $4,318.5 | June 30, 2013: $3,917.6 |
| Available-for-sale securities | $2,173.8 | June 30, 2013: $1,974.6 |
| Shareholders’ equity | $640.0; 11.75% of assets | June 30, 2013: $575.9; 11.56% of assets |
Q2 net earnings rose 8.8% year over year and first-half earnings rose 14.4%. Management attributed higher net interest income chiefly to growth in earning-asset volume; average loans and average earning assets increased substantially year over year. Q2 return on average assets was 1.59% versus 1.67%, and return on average equity was 13.46% versus 13.53%. First-half figures were 1.66% and 14.22%, respectively, versus 1.69% and 13.47%.
For the six months, operating cash flow was $60.4, investing cash outflow was $173.1, financing cash inflow was $138.3, and cash and cash equivalents increased $25.7 to $237.7. The filing reports $434.6 of short-term borrowings at June 30. The bank had $111.1 of FHLB advances outstanding and $7.0 of FHLB letters of credit; available FHLB capacity was reported at $908.5. Additional disclosed facilities included $100.0 of undrawn federal-funds lines and a $25.0 undrawn parent-company revolver.
Credit indicators improved from year-end: non-accrual loans were $23.6 versus $27.9, and nonperforming loans, past-due loans, restructured loans and foreclosed assets totaled $26.0 versus $31.1. The allowance for loan losses was $35.9, or 1.29% of held-for-investment loans; the ratio was 1.26% at year-end and 1.32% a year earlier. First-half provision expense increased to $2.8 from $1.2, while first-half net charge-offs were 0.06% of average loans versus 0.18%.
Material changes and unusual items
- First-half noninterest income increased $3.2 to $32.3, led by trust fees and ATM, interchange and card fees. Management cited trust growth, mineral management activity, more accounts and the Orange acquisition. First-half income also included a $0.6 gain on settlement of a bank-owned life insurance contract and $0.5 of gains on foreclosed-asset sales, compared with losses on such sales in 2013.
- Noninterest expense rose 17.5% in the first half to $67.4. Management cited staffing, wage and health-care costs, acquisition-related expenses, and $2.39 related to a litigation settlement and the deductible for hail damage in Abilene. The filing does not clearly allocate that $2.39 between the settlement and storm deductible. The higher expenses contributed to a worse efficiency ratio.
- Unrealized gains on available-for-sale securities increased accumulated other comprehensive earnings; the portfolio’s fair value was $2,173.8 at June 30. The company reported $9.4 of gross unrealized losses and said it considered them interest-rate-related, not other-than-temporary, with no intent or expected need to sell before recovery or maturity.
- The company declared a post-split quarterly dividend of $0.14 per share, paid July 1, 2014. The company reported no shares repurchased under its existing authorization.
Outlook, risks and contingencies
No quantitative earnings or revenue guidance was provided. Management said historically low rates were expected to continue and would keep pressure on margins, while describing recent margin improvement from loan pricing and floors, lower deposit costs and securities reinvestment. Interest-rate simulations estimated net interest income declines of 0.14% and 0.42% under rate increases of 100 and 200 basis points, and a 2.16% decline under a 50-basis-point decrease, relative to the base case over 12 months. Management cautioned that these are estimates dependent on assumptions.
Principal disclosed risks include economic and Texas real-estate conditions, employment, loan demand and collateral values, credit-loss estimates, interest-rate and securities valuation changes, competition, regulation, liquidity and deposit gathering, and acquisition integration. The company said its capital ratios exceeded “well capitalized” regulatory thresholds; consolidated total risk-based, Tier 1 risk-based and leverage ratios were 17.30%, 16.15% and 9.99%, respectively. Management considered liquidity adequate and reported compliance with the Frost Bank facility covenants. The filing disclosed $600.8 of commercial commitments: $448.7 in unfunded lines, $125.7 in commitments to extend credit and $26.5 in standby letters of credit. It reported no material pending legal proceedings and no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of the earnings improvement reflects sustainable loan and deposit growth versus acquisition effects and one-time items?
- What specifically comprises the $2.39 expense related to the litigation settlement and Abilene hail damage, and are further costs expected?
- Whether credit quality and allowance levels remain appropriate as the loan portfolio grows, particularly in real estate lending.
- How the large securities portfolio may respond to rate changes, including potential effects on earnings, liquidity and accumulated other comprehensive earnings.
- Availability and terms of disclosed borrowing facilities, covenant restrictions, and potential draws on off-balance-sheet commitments.