First Financial Bankshares, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. First Financial is a Texas-based multi-bank financial holding company, with 52 financial centers across Texas. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $38.3m | $33.9m | $113.8m | $100.0m |
| Noninterest income | $13.9m | $12.9m | $38.6m | $36.6m |
| Net earnings | $18.1m | $16.2m | $50.9m | $44.1m |
| Diluted EPS | $0.57 | $0.52 | $1.62 | $1.41 |
| Provision for loan losses | $1.4m | $2.0m | $5.4m | $7.0m |
| Noninterest expense | $26.3m | $24.7m | $78.4m | $72.0m |
- Total revenue, measured as net interest income plus noninterest income, was $52.2m in Q3 and $152.5m for the first nine months, increases of approximately 11.5% and 11.6%, respectively.
- Reported net earnings rose 11.4% in Q3 and 15.3% year to date. Comparisons are affected by a $1.3m after-tax extraordinary gain in 2010; excluding that item, earnings increased approximately 21.1% in Q3 and 18.8% year to date.
- Net interest margin was 4.62% in Q3, down from 4.67%; it was 4.68% for both nine-month periods. Tax-equivalent net interest income increased to $41.5m in Q3 from $36.6m and to $123.3m from $108.0m year to date, mainly reflecting growth in earning assets.
- Q3 return on average assets was 1.87% and return on average equity 14.79%; nine-month figures were 1.79% and 14.65%. The efficiency ratio was 47.48% for Q3 and 48.39% year to date.
Balance sheet, liquidity and capital
- At September 30, 2011, assets were $3.94bn, loans $1.73bn, deposits $3.19bn and shareholders’ equity $499.2m. Versus September 30, 2010, assets, loans and deposits increased approximately 14%, 12% and 16%, respectively. Loan growth from December 2010 was concentrated in mortgage real estate and consumer loans.
- Cash and cash equivalents were $301.3m, down from $329.2m at September 30, 2010 and $368.0m at December 31, 2010. For the first nine months, operating cash flow was $81.5m; investing activities used $202.9m and financing activities provided $54.7m, producing a $66.7m decrease in cash.
- Available-for-sale securities were $1.73bn; total deposits were the primary funding source. Short-term borrowings were $180.8m. The $25m parent-company revolving credit line had no balance outstanding; management reported compliance with its covenants. The company also reported $203.8m of available Federal Home Loan Bank lines at six subsidiaries.
- Equity was 12.68% of assets. Regulatory total risk-based and leverage capital ratios were 19.14% and 10.45%, respectively; management said capital remained well above regulatory requirements for “well capitalized” status.
- Management considered liquidity adequate, citing core deposits, available borrowing lines and $56.3m of subsidiary-bank dividends available without prior regulatory approval. The filing lists $372.9m of commercial commitments, including unfunded lines, commitments to extend credit and standby letters of credit.
Changes, credit quality and unusual items
- Nonperforming assets were $27.9m, or 1.60% of loans and foreclosed assets, versus $22.4m and 1.45% a year earlier. Nonaccrual loans rose to $17.6m from $14.1m; foreclosed assets were $10.3m. Management attributed the increase in nonperforming assets to continued weakness in real estate markets and the general economy.
- The allowance for loan losses was $34.3m, 1.98% of period-end loans, versus $30.0m and 1.95% a year earlier. Coverage of nonaccrual, 90-days-past-due accruing and restructured loans was 194.3%, down from 211.7%. Net charge-offs were lower year over year, at 0.11% of average loans in Q3 and 0.17% year to date.
- Unrealized gains on available-for-sale securities were $82.6m before tax, compared with $40.2m at December 31, 2010. The company reported $455,000 of unrealized losses across 24 securities positions and judged the losses interest-rate-related, not other-than-temporary. Changes in market rates and security valuations can affect reported equity and results.
- Q3 2010 included the $1.3m after-tax extraordinary gain from TXDOT’s taking of property at the former Southlake location. That location was sold in August 2011; Q3 2011 other income included $466,000 from the sale. Year-to-date foreclosed-asset losses included a $1.0m real-estate write-down.
- The company completed a three-for-two stock split in June 2011; reported share and per-share amounts reflect the split. On October 26, 2011, it announced plans to repurchase up to 750,000 shares through September 30, 2014, with no minimum required repurchase.
Outlook, management commentary and risks
- The filing provides no earnings or revenue guidance. Management said low interest rates were expected to persist at least through mid-2013 and could pressure margins because further reductions in deposit costs may be limited. Its interest-rate simulations estimated net interest income changes over the following 12 months of +0.38% and +1.01% for rate increases of 100 and 200 basis points, and −2.18% for a 50-basis-point decrease; management cautioned that actual results may differ materially.
- Management cited potential future revenue and expense effects from regulatory changes, including Dodd-Frank and debit-card interchange rules, as well as overdraft-program changes. Deposit competition, loan demand and credit quality, collateral values, real estate and employment conditions, interest rates, regulatory requirements, and securities valuations are among the stated risks.
- The filing cautions that interim results are not necessarily indicative of full-year results. It identifies the allowance for loan losses and securities valuation as critical accounting estimates. Management reported disclosure controls were effective at the reasonable-assurance level and no material third-quarter change in internal controls.
Important facts for investors to verify
- Whether nonperforming assets, foreclosed assets and the allowance for loan losses improve or deteriorate in subsequent periods, particularly given real-estate exposure.
- Whether reported earnings growth persists after considering the 2010 extraordinary gain, the 2011 asset-sale gain and foreclosed-asset write-downs.
- How sustained low rates, deposit pricing and securities reinvestment affect net interest margin and earnings.
- Whether the announced share repurchase is executed, and its effect on capital, liquidity and shares outstanding.
- Whether regulatory changes, interchange revenue and overdraft fees materially affect noninterest income and expenses.