First Financial Bankshares, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are primarily with December 31, 2012 and Q1 2012. The company is a Texas-based financial holding company operating 56 financial centers, primarily in Central, North Central and West Texas. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2013 / March 31, 2013 | Comparable period / date |
|---|---|---|
| Net interest income | $38.7 reported; $42.5 tax-equivalent | $38.3 reported; $41.8 tax-equivalent in Q1 2012 |
| Net interest margin | 4.19% | 4.39% in Q1 2012 |
| Noninterest income | $14.0 | $13.3 in Q1 2012 |
| Noninterest expense | $27.5 | $26.5 in Q1 2012 |
| Net earnings / diluted EPS | $18.6 / $0.59 | $17.8 / $0.56 in Q1 2012 |
| Assets | $4,456 | $4,502 at December 31, 2012 |
| Loans held for investment | $2,128 | $2,077 at December 31, 2012; $1,793 at March 31, 2012 |
| Total deposits | $3,550 | $3,633 at December 31, 2012; $3,398 at March 31, 2012 |
| Shareholders’ equity | $564; 12.66% of assets | $557 at December 31, 2012; $517 and 12.23% at March 31, 2012 |
- Net earnings increased 4.6% year over year. Return on average assets was 1.71% (1.73% in Q1 2012); return on average equity was 13.41% (13.79%).
- The lower net interest margin reflected declining asset yields: earning-asset yield fell 27 basis points year over year, while the rate paid on interest-bearing liabilities fell 11 basis points. Lower funding costs helped support net interest income.
- The efficiency ratio rose to 48.68% from 48.08%. Salaries and benefits increased $1.0 million, largely with staffing for new branches and annual pay increases.
- The loan-loss provision was $0.4 million, down from $1.3 million. The allowance was $34.7 million, or 1.62% of loans, versus 1.67% at year-end and 1.92% a year earlier. Annualized net charge-offs were 0.11% of average loans, compared with 0.24%.
- Nonaccrual loans were $22.5 million, up from $21.8 million at year-end and $21.0 million a year earlier. Nonperforming loans and foreclosed assets totaled $25.7 million, or 1.20% of loans and foreclosed assets, versus $25.5 million and 1.22% at year-end. Real estate represented most nonaccrual loans.
- Available-for-sale securities were $1,958 million at fair value. Q1 comprehensive earnings were $14.5 million, below net earnings of $18.6 million, principally reflecting an after-tax decline in unrealized securities gains.
Cash flow, debt and liquidity
- Operating cash flow was $42.6 million; investing activities used $188.0 million, including $237.0 million of securities purchases and $51.5 million of net loan growth. Financing activities used $78.2 million, including net deposit outflows. Cash and cash equivalents declined $223.5 million to $137.2 million from $360.7 million at year-end.
- Short-term borrowings were $263.3 million, compared with $259.7 million at year-end. The filing reports no balance on the $25 million Frost Bank revolving line or the two $80 million aggregate correspondent-bank federal-funds lines. FHLB Dallas lines totaled $424.7 million; $68.6 million of letters of credit were outstanding under them, with no short-term borrowings under those lines.
- Management considered liquidity adequate, citing core deposits, available credit facilities, and subsidiary dividend capacity. The company reported $43.6 million available for subsidiary dividends without prior regulatory approval. The Frost line matures June 30, 2013; management said the company was in covenant compliance at quarter-end.
- Regulatory capital ratios were 18.80% total risk-based, 17.54% Tier 1 risk-based, and 10.69% leverage; management stated these exceeded well-capitalized thresholds.
Material changes, outlook and risks
- Loans held for investment grew $50.8 million during the quarter and $334.8 million year over year; deposits were down $82.5 million from year-end but up $152.1 million year over year.
- Trust fees and mortgage operations supported noninterest-income growth. Management attributed stronger mortgage activity to housing-market conditions and increased market share. A $0.3 million loss on sale of foreclosed assets partly offset gains elsewhere.
- Management expected low interest rates to persist until 2015, as then indicated by the Federal Reserve, and said this could continue to pressure margins. Interest-rate simulations estimated net interest income 0.92% and 1.84% above base case under immediate 100- and 200-basis-point increases, respectively, and 2.76% below base case under a 50-basis-point decrease. The filing cautions that these are assumption-dependent estimates, not forecasts.
- The company signed a definitive agreement to acquire Orange Savings Bank, SSB, for an expected combination of cash and stock totaling approximately $56 million. Closing was expected in Q2 2013, subject to regulatory and shareholder approval; Q1 included $143,000 of related costs.
- The company consolidated eleven bank charters into one effective December 30, 2012, citing regulatory, compliance and technology complexity and potential cost savings, while intending to retain local management and decision-making.
- Key risks include loan-credit quality and collateral values, local economic and real-estate conditions, interest-rate and securities valuation changes, deposit and liquidity conditions, regulatory changes, and acquisition execution and integration. Management said nonperforming assets remained manageable but reflected continuing weakness in real estate markets and the national economy.
- No material change to previously disclosed risk factors was reported; the company reported no material pending legal proceedings. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no materially affecting changes to internal control over financial reporting.
- No formal earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether loan growth can be sustained without deterioration in nonaccrual loans, past-due balances, charge-offs or allowance adequacy—especially in real estate lending.
- Whether deposit trends and the substantial Q1 cash decline affect liquidity, funding costs or planned lending and acquisition capacity.
- How margins respond to continued low rates, securities reinvestment yields and changing loan and deposit pricing.
- Whether Orange Savings Bank receives approvals and closes on the expected terms, and the eventual integration costs and benefits.
- Whether the securities portfolio’s unrealized valuation changes, capital ratios, and available borrowing capacity remain consistent with management’s liquidity and capital assessments.