First Financial Bankshares, Inc. — 2015 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is a Texas-based financial holding company operating primarily in Texas through its bank and other financial subsidiaries. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $56.1 | $48.9 | $159.5 | $144.3 |
| Noninterest income | $20.4 | $17.3 | $54.2 | $49.6 |
| Provision for loan losses | $2.7 | $0.9 | $5.5 | $3.7 |
| Noninterest expense | $40.0 | $34.0 | $109.1 | $101.5 |
| Net earnings | $25.9 | $23.4 | $75.2 | $67.0 |
| Diluted earnings per share | $0.40 | $0.36 | $1.16 | $1.04 |
- Net earnings increased 10.5% in the quarter and 12.3% for the nine-month period. Growth reflected higher net interest income and noninterest income, partly offset by higher expenses and loan-loss provisions.
- Tax-equivalent net interest income was $62.1 million for Q3 and $176.4 million for the nine months. Net interest margin was 4.13% and 4.10%, respectively, down 5 and 15 basis points from the comparable 2014 periods.
- Q3 return on average assets was 1.61% versus 1.71%; return on average equity was 13.63% versus 14.27%. For nine months, the respective figures were 1.64% versus 1.68% and 13.99% versus 14.24%.
- The efficiency ratio was 48.44% for Q3 versus 47.93%; for nine months it improved to 47.34% from 48.78%.
- Operating cash flow for nine months was $93.9 million, compared with $99.6 million. Investing activities used $304.2 million and financing activities provided $97.2 million; cash and cash equivalents declined $113.1 million to $140.4 million.
Financial position and material changes
- At September 30, total assets were $6.468 billion, loans held for investment were $3.267 billion, deposits were $5.097 billion, and shareholders’ equity was $792.0 million. Compared with December 31, 2014, assets grew $619.4 million and loans grew $337.6 million.
- Available-for-sale securities were $2.737 billion, up from $2.416 billion at year-end. The portfolio had $82.1 million of net unrealized gains before tax. Management attributed unrealized loss positions primarily to interest rates and did not consider them other-than-temporary.
- Short-term borrowings were $500.9 million, up from $367.1 million at year-end, including $170.0 million of Federal Home Loan Bank advances. The company also reported a $25 million undrawn revolving credit line and additional available bank and FHLB borrowing capacity.
- Regulatory capital ratios at quarter-end included total risk-based capital of 16.78%, Tier 1 risk-based capital of 15.73%, and Tier 1 leverage of 9.96%. Management reported capital above applicable minimum requirements.
- First Financial completed its acquisition of FBC Bancshares and First Bank, N.A. on July 31, issuing 1.755 million shares. The acquired business contributed $248.4 million of loans and $43.6 million of goodwill; its results were included from August 1. The acquired bank’s $13.1 million subordinated debt was repaid August 3. The company also completed its $1.9 million asset purchase of 4Trust Mortgage in May.
Management commentary, outlook, and risks
- Management attributed higher net interest income primarily to growth in earning-asset volume, while asset yields and net interest margin declined. Management expected low interest rates to continue pressuring margin.
- Mortgage fees benefited from a stronger mortgage market and the 4Trust acquisition. ATM, interchange, and card-fee growth was associated in part with additional accounts and the First Bank acquisition. Trust-fee growth was partly offset by lower oil- and gas-related fees.
- Higher expenses reflected staffing and annual pay increases, acquired operations, new branches, and $1.14 million of technology termination and conversion costs related to the First Bank acquisition. Management reported no specific earnings guidance.
- Credit quality measures included $21.8 million of nonaccrual loans and $22.7 million of nonperforming loans, past-due/restructured loans, and foreclosed assets combined. The latter was 0.69% of loans and foreclosed assets, versus 0.74% at year-end. The allowance was $40.4 million, or 1.23% of loans; nine-month net charge-offs were 0.08% of average loans.
- Management cited oil and gas prices, drought, economic and employment conditions, collateral values, interest rates, deposit and liquidity conditions, competition, regulation, and acquisition integration and goodwill impairment as risks. Direct oil and gas industry exposure was approximately 2.8% of loans.
- The bank reported effective disclosure controls as of September 30 and no material change in risk factors from its 2014 Form 10-K. The filing reported no material pending legal proceedings.
Important facts for investors to verify
- Whether acquired FBC and 4Trust operations sustain revenue growth and whether integration costs, staffing, and other expenses moderate.
- Whether margin pressure continues as rates and asset yields change, and how loan and securities growth affects funding costs and liquidity.
- Trends in criticized loans, nonaccruals, charge-offs, oil-and-gas-related credit exposure, and the adequacy of the loan-loss allowance.
- The composition, valuation sensitivity, and collateral pledging of the securities portfolio, along with the company’s reliance on short-term borrowings.
- Future capital and dividend capacity, including compliance with credit-line covenants and the effect of acquisition-related goodwill.