First Financial Bankshares, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; balance-sheet figures are as of June 30, 2010. The company is a Texas bank holding company operating 50 financial centers, primarily in North Central and West Texas. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net interest income | $33.5 million | $32.1 million | $66.1 million | $64.0 million |
| Provision for loan losses | $3.0 million | $1.6 million | $5.0 million | $3.3 million |
| Noninterest income | $12.6 million | $12.1 million | $23.7 million | $23.7 million |
| Noninterest expense | $24.0 million | $24.4 million | $47.3 million | $47.3 million |
| Net earnings | $14.2 million | $13.6 million | $27.9 million | $27.3 million |
| Diluted earnings per share | $0.68 | $0.65 | $1.34 | $1.31 |
| Net interest margin, tax-equivalent | 4.69% | 4.88% | 4.69% | 4.82% |
| Efficiency ratio | 49.21% | 52.17% | 49.77% | 51.21% |
- Q2 net earnings increased 4.7%; first-half earnings rose 2.4%. Return on average assets was 1.70% for Q2 and 1.69% for the first half, down from 1.77% and 1.76%, respectively. Return on average equity also declined year over year.
- Tax-equivalent net interest income was $36.1 million in Q2 and $71.3 million for the first half, up from $34.6 million and $68.7 million. Growth in average earning assets and lower funding costs supported the increase, while lower asset yields pressured margins.
- At June 30, total assets were $3.34 billion, loans $1.52 billion, deposits $2.71 billion, shareholders’ equity $431.0 million, and short-term borrowings $159.5 million. Compared with June 30, 2009, assets, loans, deposits and equity were higher; short-term borrowings were lower.
- Cash and cash equivalents were $240.2 million, down from $321.5 million at year-end 2009. For the first half, operating cash flow was $40.1 million, investing cash flow was negative $142.7 million, financing cash flow was positive $21.3 million, and cash declined $81.3 million.
- Regulatory capital ratios at June 30 were 19.48% total risk-based capital and 10.63% leverage; management stated the company remained well capitalized. Total shareholders’ equity was 12.92% of total assets.
Material changes and asset quality
- The allowance for loan losses rose to $29.0 million, or 1.91% of period-end loans, from $23.2 million and 1.57% a year earlier. First-half net charge-offs increased to $3.6 million from $1.6 million; the company cited a $1.8 million charge-off related to one commercial customer.
- Nonperforming assets were $22.5 million, or 1.48% of loans and foreclosed assets, versus $14.1 million and 0.95% a year earlier. Nonaccrual loans were $14.2 million and foreclosed assets $8.3 million. Management attributed deterioration to the recession and slower real estate markets, with many nonaccrual loans in markets near Dallas-Fort Worth.
- Q2 and first-half provisions increased because of recession concerns, higher nonperforming assets and charge-offs. Management considered the allowance adequate but warned that economic weakness, unemployment or regulatory review could require additional provisions.
- Expense comparisons benefited from the absence of the 2009 FDIC special assessment; FDIC premiums fell $1.3 million for both Q2 and the first half. Higher profit-sharing costs partially offset the savings. First-half noninterest income was nearly flat, including the absence of a $616,000 student-loan sale gain recorded in 2009; the company had exited student-loan originations and held no student loans at period-end.
- Available-for-sale securities totaled $1.40 billion. The company reported $500,000 of unrealized losses across 53 positions and considered these interest-rate-related, not other-than-temporary. It reported no trading securities at June 30, 2010, compared with $31.2 million at June 30, 2009.
Outlook, liquidity and risks
- No earnings or revenue guidance was provided. Management cautioned that interim results may not indicate full-year performance and identified economic conditions, credit quality, interest rates, regulation, competition, deposit gathering and loan demand as key uncertainties.
- Management anticipated continued pressure on net interest margin if low short-term rates persisted. Its rate simulation estimated that +100 and +200 basis-point rate shocks would reduce projected net interest income by 0.38% and 0.01%, respectively, while a 50-basis-point decrease would increase it by 0.16%; these are model estimates subject to assumptions and limitations.
- Management characterized liquidity as adequate, citing core deposits, cash and short-term investments, subsidiary-bank dividend capacity, and borrowing access. The company had an undrawn $25 million parent-company credit line maturing June 30, 2011, plus $60 million in subsidiary-bank Federal funds lines with no amount outstanding. The parent line includes financial and operating covenants, including a restriction on dividends above 55% of consolidated net income; management said it was in compliance.
- Commercial commitments totaled $391.7 million: $310.1 million in unfunded lines, $60.2 million in commitments to extend credit and $21.3 million in standby letters of credit. Many commitments may expire undrawn. The filing states the fair value of these off-balance-sheet obligations was not material.
- Management expected recently enacted financial reforms, including the Dodd-Frank Act, to reduce revenues and increase expenses over time, while noting that effects and required responses remained under review. The defined-benefit pension plan is frozen; the company contributed $1.0 million in March 2010 and is evaluating future funding needs.
Most important facts for investors to verify
- Whether rising nonperforming assets, charge-offs and foreclosed real estate continue to increase, and whether reserve coverage remains adequate.
- How low interest rates and balance-sheet repricing affect net interest margin and earnings.
- Whether growth in deposits and liquid assets is sustained and how the securities portfolio performs, including unrealized values and interest-rate exposure.
- Future effects of Dodd-Frank implementation, FDIC assessments, pension funding and credit-line covenants on costs, dividends and capital flexibility.
- The filing reports the 2010 six-month margin as 4.69% versus 4.82% for 2009; its narrative contains an apparent period-label error in one sentence, so verify the comparison against the table.